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 June 30, 2003
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Commission File Number 0-12938
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Invacare Corporation
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(Exact name of registrant as specified in its charter)
Ohio 95-2680965
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(State or other jurisdiction of (IRS Employer Identification No)
incorporation or organization)
One Invacare Way, P.O. Box 4028, Elyria, Ohio 44036
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(Address of principal executive offices)
(440)329-6000
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(Registrant's telephone number, including area code)
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(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 (the
"Exchange Act") during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No___
Indicate by check mark if the registrant is an accelerated filer (as defined in
Rule 12b-2 of the Act). 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 August 4, 2003, the company had 29,787,577 Common Shares and 1,112,023
Class B Common Shares outstanding.
<page>
INVACARE CORPORATION
INDEX
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Part I. FINANCIAL INFORMATION: Page No.
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Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheet -
June 30, 2003 and December 31, 2002.........................3
Condensed Consolidated Statement of Earnings -
Three and Six Months Ended June 30, 2003 and 2002...........4
Condensed Consolidated Statement of Cash Flows -
Six Months Ended June 30, 2003 and 2002.....................5
Notes to Condensed Consolidated Financial
Statements - June 30, 2003..................................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:
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Item 4. Result of Votes of Security Holders..................................15
Item 6. Exhibits and Reports on Form 8-K.....................................15
SIGNATURES....................................................................16
2
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
<table>
<caption>
INVACARE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheet
June 30, December 31,
2003 2002
<s> <c> <c>
---- ----
(unaudited)
ASSETS (In thousands)
- ------
CURRENT ASSETS
..........Cash and cash equivalents $7,739 $13,086
..........Marketable securities 1,503 1,350
..........Trade receivables, net 225,368 200,388
..........Installment receivables, net 12,308 20,953
..........Inventories, net 125,539 111,382
..........Deferred income taxes 27,754 26,053
..........Other current assets 22,604 25,600
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.......... TOTAL CURRENT ASSETS 422,815 398,812
OTHER ASSETS 56,545 51,031
OTHER INTANGIBLES 3,695 4,779
PROPERTY AND EQUIPMENT, NET 136,518 130,963
GOODWILL, NET 355,991 321,118
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.......... TOTAL ASSETS $975,564 $906,703
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
..........Accounts payable $95,189 $80,511
..........Accrued expenses 79,213 66,414
..........Accrued income taxes 13,662 16,049
..........Current maturities of long-term obligations 2,785 4,479
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.......... TOTAL CURRENT LIABILITIES 190,849 167,453
LONG-TERM DEBT 210,107 234,134
OTHER LONG-TERM OBLIGATIONS 26,949 24,804
SHAREHOLDERS' EQUITY
..........Preferred shares - -
..........Common shares 7,629 7,580
..........Class B common shares 278 278
..........Additional paid-in-capital 103,181 98,995
..........Retained earnings 434,182 407,235
..........Accumulated other comprehensive earnings (loss) 27,883 (18,729)
..........Treasury shares (23,686) (13,843)
..........Unearned compensation on stock awards (1,808) (1,204)
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.......... TOTAL SHAREHOLDERS' EQUITY 547,659 480,312
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $975,564 $906,703
======== ========
</table>
See notes to condensed consolidated financial statements.
3
<page>
<table>
<caption>
INVACARE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statement of Earnings - (unaudited)
Three Months Ended Six Months Ended
(In thousands except per share data) June 30, June 30,
2003 2002 2003 2002
<s> <c> <c> <c> <c>
------------------------ ------------------------
Net sales $300,114 $271,846 $576,787 $526,927
Cost of products sold 212,280 191,228 408,502 371,675
------- ------- ------- -------
Gross profit 87,834 80,618 168,285 155,252
Selling, general and administrative expense 63,589 53,631 124,109 107,048
Interest income 1,433 1,143 2,469 2,072
Interest expense 2,656 4,138 5,356 8,606
------- ------- ------- -------
Earnings before income taxes 23,022 23,992 41,289 41,670
Income taxes 7,575 7,890 13,585 13,700
------- ------- ------- -------
NET EARNINGS $ 15,447 $ 16,102 $ 27,704 $ 27,970
======= ======= ======= =======
DIVIDENDS DECLARED PER
COMMON SHARE .0125 .0125 .0250 .0250
======= ======= ======= =======
Net earnings per share - basic $ 0.50 $ 0.52 $ 0.90 $ 0.91
======= ======= ======= =======
Weighted average shares outstanding - basic 30,799 30,890 30,815 30,814
======= ======= ======= =======
Net earnings per share - assuming dilution $ 0.49 $ 0.51 $ 0.88 $ 0.88
======= ======= ======= =======
Weighted average shares outstanding -
assuming dilution 31,507 31,807 31,527 31,677
======= ======= ======= =======
</table>
See notes to condensed consolidated financial statements.
4
<page>
<table>
<caption>
INVACARE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statement of Cash Flows - (unaudited)
Six Months Ended
June 30,
2003 2002
---- ----
<s> <c> <c>
OPERATING ACTIVITIES (In thousands)
Net earnings $27,704 $27,970
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 13,697 12,495
Provision for losses on trade and installment receivables 6,200 3,259
Provision for deferred income taxes 891 653
Provision for other deferred liabilities 1,319 1,369
Changes in operating assets and liabilities:
Trade receivables (13,745) 5,138
Inventories (5,257) 10,991
Other current assets 2,816 4,585
Accounts payable 8,395 (5,899)
Accrued expenses 2,277 1,753
Other deferred liabilities 979 95
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NET CASH PROVIDED BY OPERATING ACTIVITIES 45,276 62,409
INVESTING ACTIVITIES
Purchases of property and equipment (9,884) (9,195)
Installment sales contracts, net 5,780 6,331
Increase in other long term assets (3,416) (3,648)
Business acquisitions, net of cash acquired (5,808) -
Other (1,526) 82
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NET CASH REQUIRED BY INVESTING ACTIVITIES (14,854) (6,430)
FINANCING ACTIVITIES
Proceeds from revolving lines of credit and long-term borrowings 207,374 109,780
Payments on revolving lines of credit, long-term debt
and capital lease obligations (238,453) (179,040)
Proceeds from exercise of stock options 1,244 4,278
Purchases of treasury stock (8,345) -
Payment of dividends (745) (788)
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NET CASH REQUIRED BY FINANCING ACTIVITIES (38,925) (65,770)
Effect of exchange rate changes on cash 3,156 2,681
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Decrease in cash and cash equivalents (5,347) (7,110)
Cash and cash equivalents at beginning of period 13,086 16,683
------- -------
Cash and cash equivalents at end of period $ 7,739 $ 9,573
======= =======
See notes to condensed consolidated financial statements.
</table>
5
INVACARE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated
Financial Statements
(Unaudited)
June 30, 2003
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, respiratory products and distributed
products.
Principles of Consolidation - The consolidated financial statements include the
accounts of the company and its majority owned subsidiaries and include all
adjustments, which were of a normal recurring nature, necessary to present
fairly the financial position of the company as of June 30, 2003 and the results
of its operations for the three and six months ended June 30, 2003 and 2002,
respectively, and changes in its cash flows for the six months ended June 30,
2003 and 2002, respectively. Certain foreign subsidiaries are consolidated using
a May 31 quarter end. The results of operations for the three and six months
ended June 30, 2003, respectively, are not necessarily indicative of the results
to be expected for the full year. All significant intercompany transactions are
eliminated.
Reclassifications - Certain reclassifications have been made to the prior years'
consolidated financial statements to conform to the presentation used for the
periods ended June 30, 2003.
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 sells each of five primary product lines which
include: standard, rehab, distributed, respiratory, and continuing care
products. Europe and Australasia 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 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 net sales and transfers are not
considered in evaluating segment performance. Intersegment net sales for
reportable segments was $18,863,000 and $34,592,000 for the three and six months
ended June 30, 2003, respectively, and $15,494,000 and $29,652,000 for the same
periods in the preceding year.
6
<page>
The information by segment is as follows (in thousands):
<table>
<caption>
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
----- ----- ----- -----
<s> <c> <c> <c> <c>
Revenues from external customers
North America $212,990 $202,121 $413,373 $393,890
Europe 68,742 59,061 131,181 113,396
Australasia 18,382 10,664 32,233 19,641
------- ------ ------ ------
Consolidated $300,114 $271,846 $576,787 $526,927
======= ======== ======== ========
Earnings (loss) before income taxes
North America $17,356 $20,291 $33,464 $37,697
Europe 4,295 3,801 6,615 4,707
Australasia 2,012 1,136 3,278 1,574
All Other * (641) (1,236) (2,068) (2,308)
----- ------- ------- -------
Consolidated $23,022 $23,992 $41,289 $41,670
======= ======= ======= =======
</table>
* Consists of the domestic export unit, unallocated corporate selling,
general and administrative costs, the Invacare captive insurance unit, and
intercompany 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>
<caption>
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
----- ----- ----- -----
<s> <c> <c> <c> <c>
(In thousands, except per share data)
Basic
Average common shares outstanding 30,799 30,890 30,815 30,814
Net earnings $15,447 $16,102 $27,704 $27,970
Net earnings per common share $ .50 $ .52 $ .90 $ .91
Diluted
Average common shares outstanding 30,799 30,890 30,815 30,814
Stock options and awards 708 917 712 863
----- ----- ----- -----
Average common shares assuming dilution 31,507 31,807 31,527 31,677
Net earnings $15,447 $16,102 $27,704 $27,970
Net earnings per common share $ .49 $ .51 $ .88 $ .88
</table>
7
<page>
Goodwill and Other Intangibles - The change in goodwill reflected on the balance
sheet for the year was the result of currency translation, except for goodwill
increases of $1,592,000 in North America and $1,391,000 in Europe as the result
of strategic acquisitions. All of the Company's other intangible assets have
definite lives and are amortized over their useful lives.
As of June 30, 2003 and December 31, 2002, other intangibles consisted of the
following (in thousands):
<table>
<caption>
June 30, 2003 December 31, 2002
----------------- -----------------
Historical Accumulated Historical Accumulated
Cost Amortization Cost Amortization
---------- ------------ ---------- ------------
<s> <c> <c> <c> <c>
License agreements $6,108 $4,165 $6,037 $3,875
Patents 1,718 984 2,396 880
Other 2,688 1,670 2,576 1,475
------- ------- ------- -------
$10,514 $6,819 $11,009 $6,230
======= ====== ======= ======
</table>
Amortization expense related to other intangibles was $294,000 in the second
quarter of 2003, $589,000 for the six months ended June 30, 2003 and is
estimated to be $1,127,000 in 2004, $673,000 in 2005, $224,000 in 2006, $210,000
in 2007 and $210,000 in 2008.
Accounting for Stock-Based Compensation - The company utilizes the
disclosure-only provisions of Statement of Financial Accounting Standards No.
123, Accounting for Stock-Based Compensation (SFAS 123). Accordingly, no
compensation cost has been recognized for non-qualified stock options. However,
expense was recorded for the 90,203 restricted stock awards granted since 2001.
Had compensation cost for the company's stock option plans been determined based
on the fair value at the grant date for awards in 2003 and 2002 consistent with
the provisions of SFAS 123, the company's net earnings and earnings per share
would have been reduced to the pro forma amounts indicated below (in thousands
except per share data):
<table>
<caption>
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
------- ------- ------- -------
<s> <c> <c> <c> <c>
Net earnings - as reported * $15,447 $16,102 $27,704 $27,970
Less: compensation expense determined based on the
fair-value method for all awards granted at
market value, net of related tax effects 1,163 945 2,304 1,987
------- ------- ------- -------
Net earnings - pro forma $14,284 $15,157 $25,400 $25,983
======= ======= ======= =======
Earnings per share as reported - basic $.50 $.52 $.90 $.91
Earnings per share as reported - assuming dilution $.49 $.51 $.88 $.88
Pro forma earnings per share - basic $.46 $.49 $.82 $.84
Pro forma earnings per share - assuming dilution $.45 $.48 $.81 $.82
* Includes stock compensation expense, net of tax, on
restricted awards granted without cost of: $114 $296 $191 $353
</table>
Warranty Costs - Generally, the company's products are covered by warranties
against defects in material and workmanship for periods up to six years from the
date of sale to the customer. Certain components carry a lifetime warranty. A
provision for estimated warranty cost is recorded at the time of sale based upon
actual experience. The company continuously assesses the adequacy of its product
warranty accrual and makes adjustments as needed.
8
<page>
The following is a reconciliation of the changes in accrued warranty costs for
the reporting period (in thousands):
Balance as of January 1, 2003 $ 11,448
Warranties issued during the period 4,411
Settlements made during the period (4,309)
Changes in liability for pre-existing warranties during
the period, including expirations 317
------
Balance as of June 30, 2003 $11,867
======
Comprehensive Earnings - Total comprehensive earnings were as follows (in
thousands):
<table>
<caption>
Three Months Six Months
Ended June 30, Ended June 30,
2003 2002 2003 2002
---- ---- ---- ----
<s> <c> <c> <c> <c>
Net earnings $15,447 $16,102 $27,704 $27,970
Foreign currency translation gain 25,833 16,397 47,392 13,302
Unrealized gain (loss) on available for sale securities 154 (17) 133 (20)
Current period unrealized gain (loss) on cash flow
hedges (61) (681) (913) 123
------- ------- ------- -------
Total comprehensive earnings $ 41,373 $ 31,801 $74,316 $41,375
======= ======= ======= =======
</table>
Statement of Cash Flows - The company made payments of (in thousands):
Six Months Ended
June 30,
2003 2002
------ ------
Interest $4,877 $7,272
Income taxes 16,598 13,390
Inventories - Inventories consist of the following components (in thousands):
June 30, December 31,
2003 2002
------ ------
Raw materials $ 42,978 $ 35,457
Work in process 13,242 12,789
Finished goods 69,319 63,136
------ ------
$125,539 $111,382
======= =======
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.
9
<page>
Property and Equipment - Property and equipment consist of the following (in
thousands):
June 30, December 31,
2003 2002
------- -------
Land, buildings and improvements $ 59,672 $55,232
Machinery and equipment 208,096 199,448
Furniture and fixtures 16,962 15,641
Leasehold improvements 14,241 13,874
------- -------
298,971 284,195
Less allowance for depreciatio (162,453) (153,232)
------- -------
$136,518 $ 130,963
======= =======
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis should be read in conjunction with our
Condensed Consolidated Financial Statements and related notes included elsewhere
in this Quarterly Report on Form 10-Q and our Current Report on Form 8-K filed
on July 17, 2003.
RESULTS OF OPERATIONS
NET SALES
Net sales for the three months ended June 30, 2003 were $300,114,000, compared
to $271,846,000 for the same period a year ago, representing a 10% increase. For
the six months ended June 30, 2003, net sales increased 10% to $576,787,000,
compared to $526,927,000 for the same period a year ago. The impact of foreign
currency translation increased sales by 6% for both the quarter and year to
date. Excluding currency, net sales growth was driven by volume increases in
North America and Australasia.
North American Operations
North American net sales, consisting of Rehab (power wheelchairs, custom manual
wheelchairs, scooters 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 5% for both the quarter and the first half of the
year compared to the same periods a year ago. The increase for the quarter was
principally due to sales volume increases in Respiratory products (41%), Rehab
products (15%) and Distributed products (11%), which was partially offset by
declines in Standard products (12%) and Continuing Care products (8%). The
increase year to date likewise was attributable to sales increases in
Respiratory products (34%), Rehab products (14%) and Distributed products (8%),
which was partially offset by declines in Standard products (9%) and Continuing
Care (7%). Net sales improvements were led by strong sales growth in oxygen
concentrators, the HomeFill(TM) product line and consumer power products while
declines largely were attributable to continued pricing pressures in Standard
products and weaker sales to nursing homes through Invacare Continuing Care
Group primarily due to continued uncertainty surrounding government
reimbursement programs.
10
<page>
European Operations
European net sales increased 16% to $68,742,000 for the three months ended June
30, 2003 from $59,061,000 for the three months ended June 30, 2002 and increased
16% to $131,181,000 for the six months ended June 30, 2003 from $113,396,000 for
the six months ended June 30, 2002. Adjusting for the impact of foreign currency
translation, European net sales decreased 4% for the quarter and the first half
of the year, when compared to the same periods a year ago primarily due to
slower than expected sales in the Nordic region and reimbursement pressures in
Germany.
Australasia Operations
The Australasia operations consists of Invacare Australia, which imports and
distributes the Invacare range of products and manufactures and distributes the
Rollerchair range of custom power wheelchairs, Dynamic Controls, a New Zealand
manufacturer of operating components used in power wheelchairs and Invacare New
Zealand, a distribution business. Australasia net sales increased 72% to
$18,382,000 from $10,664,000 in the second quarter and 64% to $32,233,000 from
$19,641,000 year to date. Adjusting for the impact of foreign currency
translation, Australasia net sales increased 43% for the quarter and 33% for the
first half of the year, when compared to the same periods a year ago. The growth
was primarily the result of increased consumer power product sales and continued
larger purchases by a customer of Dynamic Controls.
GROSS PROFIT
Gross profit as a percentage of net sales for the three and six-month periods
ended June 30, 2003 was 29.3% and 29.2% for both periods compared to 29.7% and
29.5%, respectively, in the same periods last year. The overall decrease in
margins as a percentage of net sales is principally the result of a shift in
demand toward lower margin products and pricing pressures, particularly in North
American Standard products. Productivity improvements in the company's
manufacturing facilities continued to partially offset these negatives. North
American margins declined for the first half to 29.1% compared with 29.7% in the
same period in the prior year principally as a result of a shift in product mix
to lower margin products and pricing pressure in the Standard products lines as
a result of increased competition from low cost imports. Gross profit for Europe
improved year to date by 1.9 percentage points primarily due to favorable sales
mix towards higher margin products, cost reductions and favorable foreign
currency translation. Gross margin in Australasia declined by 3.2 percentage
points largely due to unfavorable product mix toward lower margin products in
the company's Dynamic Controls subsidiary.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expense as a percentage of net sales for the
three and six months ended June 30, 2003 was 21.2% and 21.5%, respectively,
compared to 19.7% and 20.3% in the same periods a year ago. The dollar increase
was $9,958,000 and $17,061,000, or 19% and 16%, respectively, for the quarter
and first half of the year. The increase largely was due to foreign currency
translation, additional provisions for bad debts, continued investments in
marketing and branding programs and a significant increase in insurance costs.
Excluding the impact of foreign currency translation, selling, general and
administrative expense increased 11% for the quarter and 9% for the first half
of the year.
North American selling, general and administrative cost increased $7,433,000 or
21.2% for the quarter and $10,312,000 or 14.6% in the first half, compared to
11
<page>
the same periods a year ago, with foreign currency translation accounting for
approximately 1% of the increase in both periods. The overall dollar increase
for the quarter and the year primarily resulted from additional provisions for
bad debts, continued investments in marketing and branding programs and
increases in insurance costs. European selling, general and administrative cost
increased $2,211,000 or 18.0% for the quarter and $2,315,000 or 9.3% in the
first half, compared to the same periods a year ago, excluding the impact of
foreign currency translation. The increase was primarily attributable to added
cost as the result of a strategic acquisition, additional costs for the new
European headquarters in Switzerland and supply chain initiatives. Australasian
selling, general and administrative cost grew at a slower rate than net sales
for the quarter and declined year to date principally as a result of aggressive
expense control.
INTEREST
For the quarter and first half of the year, interest expense decreased by
$1,482,000 and $3,250,000, respectively, compared to the same periods a year
ago, as a result of reduced debt levels and lower overall interest rates.
Interest income for the quarter and first half of the year remained relatively
unchanged compared to the same periods a year ago.
INCOME TAXES
The company had an effective tax rate of 32.9% for the three and six-month
periods ended June 30, 2003, which is the same effective tax rate as for the
same periods a year ago.
LIQUIDITY AND CAPITAL RESOURCES
The company's reported overall level of long-term debt decreased $24.0 million
to $210.1 million for the six months ended June 30, 2003. The company continues
to maintain an adequate liquidity position to fund its working capital and
capital requirements through its bank lines of credit and working capital
management. As of June 30, 2003, the company had approximately $325.0 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 $230.3 million as of June 30, 2003.
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. The company is in compliance
with all covenant requirements.
CAPITAL EXPENDITURES
There were no material capital expenditure commitments outstanding as of June
30, 2003. The company expects to continue to invest in capital projects at a
rate that equals or exceeds depreciation and amortization in order to maintain
and improve the company's competitive position. The company estimates that
capital investments for 2003 will approximate $28 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.
12
<page>
CASH FLOWS
Cash flows provided by operating activities were $45.3 million for the first
half of 2003 compared to $62.4 million for the first half of 2002. The decrease
in operating cash flows is largely due to increases in accounts receivable and
inventory resulting from increased revenues, partially offset by increases in
accounts payable for the first half of the year, compared to the same period a
year ago when accounts receivable and inventory declined.
Cash required by investing activities was $14.9 million for the first half of
2003 compared to $6.4 million in the first half of 2002. The increase is
primarily due to the strategic acquisition of two companies in the first half of
2003.
Cash required by financing activities was $38.9 million for the first half of
2003 compared to cash required of $65.8 million in the first half of 2002.
Financing activities for the first six months of 2003 were impacted by the
company's repayment of long-term borrowings by $31.1 million and purchases of
treasury stock of $8.3 million.
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.
DIVIDEND POLICY
On May 21, 2003, the company's Board of Directors declared a quarterly cash
dividend of $.0125 per Common Share to shareholders of record as of July 1,
2003, to be paid on July 18, 2003. 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 its
Form 10-K filed for the year ended December 31, 2002. In addition, no new
critical accounting policies have been adopted in the first six months of 2003.
The Company does not believe that there is a great 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.
Accounting for Stock-Based Compensation
The company accounts for options under its stock-based compensation plans using
the intrinsic value method proscribed in APB Opinion 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
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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
$.04 in the second quarter and $.07 in the first half of 2003 compared to
reductions of $.03 and $.06 for the same periods a year ago.
In December 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 148, Accounting for
Stock-Based Compensation-Transition and Disclosure. This statement provides
guidance for those companies wishing to voluntarily change to the fair value
based method of accounting for stock-based compensation. The statement also
amends the disclosure requirements 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. See Accounting for Stock-Based
Compensation in the Notes to the Condensed Consolidated Financial Statements.
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 June 30, 2003 debt levels, a 1% change in interest rates
would impact interest expense by approximately $1,201,000 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 "Safe Harbor" provisions of the Private Securities
Litigation Reform Act of 1995. Terms such as "will," "should," "achieve,"
"increase," "plan," "can," "expect," "pursue," "benefit," "continue," "exceed,"
"improve," "believe," "estimate," "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
higher functionality and lower costs, the ability to accelerate market
acceptance of and transition to new products, the effect of offering customers
competitive financing terms, Invacare's ability to successfully identify,
acquire and integrate acquisition candidates, the difficulties in managing and
operating businesses in many different foreign jurisdictions, the timely and
efficient completion of facility consolidation, the vagaries of any litigation
or regulatory investigations that the company may be or become involved in at
any time, 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 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 company undertakes no obligation to
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revise or update these forward-looking statements 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 June 30, 2003, 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 June 30, 2003 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 were no changes in the
company's internal control over financial reporting that occurred during the
company's most recent fiscal quarter that have materially affected, or are
reasonably likely to materially affect, the company's internal control over
financial reporting.
Part II. OTHER INFORMATION
Item 4. Result of Votes of Security Holders
On May 21, 2003, the company held its 2003 Annual Meeting of Shareholders to act
on proposals to: 1) fix the size of the Board of Directors at eleven, 2) elect
three Directors to the class whose three-year term will expire in 2006, and 3)
approve and adopt the Invacare Corporation 2003 Performance Plan.
The proposal to fix the size of the Board of Directors at eleven received
34,912,938 affirmative votes, 166,135 negative votes and 46,382 abstained votes.
James C. Boland, Whitney Evans and William M. Weber were each re-elected for a
three-year term of office expiring in 2006 with 33,225,964, 34,253,697 and
33,226,094 affirmative votes and 1,899,491, 871,758 and 1,899,361 votes
withheld, respectively.
Gerald B. Blouch, John R. Kasich, Dan T. Moore, III, Joseph B. Richey, II, A.
Malachi Mixon, III, Michael F. Delaney, C. Martin Harris, M.D. and Bernadine P.
Healy, M.D. are directors with continuing terms.
The proposal to approve and adopt the Invacare Corporation 2003 Performance Plan
received 25,026,898 affirmative votes, 6,754,649 negative votes and 508,464
abstained votes.
Item 6. Exhibits and Reports on Form 8-K
A Exhibits:
Official Exhibit No.
31.1 Certification of the Chief Financial Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002 (filed
herewith).
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31.2 Certification of the Chief Executive Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002 (filed
herewith).
32.1 Certification of the Chief Financial Officer pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
(furnished herewith).
32.2 Certification of the Chief Executive Officer pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
(furnished herewith).
B Reports on Form 8-K:
A Form 8-K was furnished on April 17, 2003 under Item 7,
Financial Statements and Exhibits and Item 9 Regulation FD
Disclosure. The Form 8-K contained Invacare Corporation's
earnings release, dated April 17, 2003, which disclosed the
company's 2003 first quarter results.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INVACARE CORPORATION
By:/s/ Gregory C. Thompson
-----------------------------------------
Gregory C. Thompson
Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: August 6, 2003
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