Exhibit 99.1
Investor Inquiries:
Gregory C. Thompson
(440) 329-6111
NEWS RELEASE
INVACARE CORPORATION REPORTS SECOND QUARTER EARNINGS; REDUCES 2006 EPS AND
REVENUE GUIDANCE
ELYRIA, Ohio - (July 27, 2006) - Invacare Corporation (NYSE: IVC) today
announced its financial results for the second quarter and six months ended June
30, 2006.
CONSOLIDATED RESULTS
Earnings per share* for the second quarter were $0.24, excluding the impact of a
pre-tax $3.6 million charge related to restructuring activities, versus $0.40
for the second quarter last year. Including the charge, earnings per share were
$0.15 for the quarter. Net earnings* for the quarter, excluding the charge
related to restructuring activities, were $7.6 million versus $12.9 million for
the second quarter last year. Including the charge, net earnings were $5.0
million. Net sales for the quarter decreased 6% to $371.8 million versus $396.3
million last year. Acquisitions added one percentage point to net sales for the
quarter, which was offset by a one percentage point decrease resulting from
foreign currency translation.
The domestic market remains unsettled due to a number of announced changes to
Medicare reimbursement policies, the details of which have not been fully
clarified. While the underlying demand has not changed, customers have taken a
cautious position on purchasing and inventories until details are finalized and
published. This has been most disruptive to the power wheelchair and oxygen
markets. In addition, significant uncertainty amongst customers concerning the
possible outcomes from the Centers for Medicare and Medicaid Services (CMS)
relative to reimbursement levels continues to constrain growth.
The Company's previously announced cost reduction and profit improvement
initiatives are on track through the first half of the year. However, the
revenue volume shortfalls we have experienced in the first half of the year and
now forecast for the second half have reduced the expected benefit of the
volume-dependent portion of the cost reduction and profit improvement actions.
Restructuring charges year to date totaled $7.1 million pre-tax and related
primarily to severance costs and inventory markdowns on discontinued product
lines. Since the company initiated its cost reduction actions in July 2005, it
has eliminated approximately 450 positions. In addition, we continue to increase
our sourcing of products from Asia and transfer of manufacturing to our
facilities in China.
Gross margin as a percentage of net sales for the second quarter was flat
compared to last year's second quarter, but as a result of cost reduction
initiatives, improved by 0.4 percentage points when compared to this year's
first quarter. Selling, general and administrative expense (SG&A expense) on a
reported basis was $88.2 million versus $88.4 million in the second quarter last
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year. Foreign currency reduced SG&A by two percentage points while acquisitions
partially offset this by increasing SG&A one percentage point. SG&A spending for
the first half of 2006 was down slightly versus the same period last year.
Results for the quarter were negatively impacted by increased interest expense
due to increases in costs of borrowing, but benefited from a reduced effective
tax rate.
Earnings per share* for the first six months of this year decreased to $0.47,
excluding the impact of a pre-tax $7.1 million charge related to restructuring
activities, versus $0.81 last year. Including the charge, earnings per share
were $0.32 for the first half. Net earnings*, excluding the charge related to
restructuring activities, were $15.2 million versus $26.5 million last year.
Including the charge, net earnings for the first half were $10.2 million.
Net sales for the first half of the year decreased 4% to $733.5 million versus
$767.2 million last year. Acquisitions contributed one percentage point to net
sales, while foreign currency translation resulted in a decrease of two
percentage points.
A. Malachi Mixon, III, chairman and chief executive officer, stated, " I have
spent a great deal of my time the last quarter traveling in the field. While our
lack of sales growth continues to be disappointing, it is a reflection of the
difficult industry conditions that exist. Providers tell me they have never seen
reimbursement conditions as unsettled and onerous as they are today. Providers
are being attacked from all sides with significant reimbursement changes that
are still not clearly defined by the government. This overhang of uncertainty
has led to excessive caution by our customers for all capital spending,
particularly new technologies like our revolutionary HomeFill oxygen system. A
robust home health care program is good social and fiscal policy. While the
protracted uncertainty is disruptive and unnecessary, these issues will at some
point be resolved and we can again expect organic growth consistent with
underlying demographics. As an industry leader, we will continue to work hard
for the industry to help educate our government as to the benefits of homecare
and bring the numerous reimbursement challenges to a satisfactory conclusion."
NORTH AMERICA
For the quarter, North American net sales decreased 5% to $250.1 million versus
$263.3 million last year. Foreign currency accounted for an increase of one
percentage point and acquisitions also contributed one percentage point for the
quarter.
Respiratory products sales decreased 22% for the quarter, largely due to slower
demand in the HomeFill(TM) oxygen system product line. In addition to
significantly reduced purchases versus last year by National providers, sales to
small providers and independents declined 9% in the quarter. Our proprietary
technology continues to build share in the ambulatory oxygen market, but
providers have slowed purchases of HomeFill until they have a clearer view of
future oxygen reimbursement levels. Uncertainty surrounding the provisions of
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the Deficit Reduction Act, including the 36-month capped rental period, transfer
of title, and ongoing equipment service levels continue to impact the oxygen
market.
Invacare Supply Group (ISG) sales decreased 0.4%. Invacare Continuing Care Group
sales increased by 11% for the quarter due to increased unit volumes.
Sales of standard products decreased by 5% for the quarter, with particular
weakness in manual wheelchairs and patient aids (canes, walkers, bath aids) due
to low-cost Asian imports negatively impacting volumes. However, standard
product revenues improved sequentially over first quarter by 3% as a result of
pricing and product line adjustments, which have been facilitated by the
acceleration of Asian sourcing.
Sales of the rehab products line decreased 3%, due primarily to continued
Medicare power wheelchair eligibility pressures and Medicaid related
reimbursement pressures. Sales of consumer power wheelchairs were down 7% and
continued to be acutely impacted by these reimbursement issues.
For the quarter, earnings before income taxes decreased to $10.6 million,
excluding restructuring charges of $2.0 million pretax, versus $19.8 million
last year, largely due to weakness in the rehab and respiratory products lines
and ongoing pricing pressures in the standard products line.
For the first six months of the year, North American net sales decreased 3% to
$500.1 million versus $514.3 million last year. Foreign currency and
acquisitions each contributed a percentage point. Earnings before income taxes
decreased to $22.6 million, excluding restructuring charges of $4.8 million
pre-tax, versus $40.5 million last year.
EUROPE
For the quarter, European net sales decreased 5% to $104.7 million versus $110.3
million last year. Foreign currency accounted for four percentage points of the
net sales decrease, while acquisitions contributed one percentage point for the
quarter. Reimbursement challenges continue to impact our German business in the
Invacare wheelchair product lines, which was partially offset by strong
performance in a number of other countries. For the quarter, earnings before
income taxes were $7.0 million, excluding restructuring charges of $1.1 million
pre-tax, compared to $7.4 million last year.
For the first six months of this year, European net sales decreased 6% to $200.2
million versus $212.4 million last year. Foreign currency accounted for seven
percentage points of the net sales decrease, while acquisitions contributed two
percentage points. Earnings before income taxes decreased to $11.1 million,
excluding restructuring charges of $1.4 million pre-tax, versus $11.2 million
last year.
ASIA/PACIFIC
For the quarter, Asia/Pacific net sales decreased 25% to $17.0 million versus
$22.6 million last year. Foreign currency accounted for six percentage points of
the net sales decrease, while acquisitions did not impact results for the
quarter. For the quarter, earnings before income taxes improved to a loss of
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$1.5 million, excluding restructuring charges of $0.5 million pre-tax, versus a
loss of $1.8 million last year. Performance in this region continues to be
negatively impacted by U.S. reimbursement uncertainty in the consumer power
wheelchair market, resulting in decreased sales of microprocessor controllers by
Invacare's New Zealand subsidiary.
For the first six months of this year, Asia/Pacific net sales decreased 18% to
$33.2 million versus $40.5 million last year. Foreign currency accounted for
seven percentage points of the net sales decrease, while acquisitions
contributed one percentage point. Earnings before income taxes improved to a
loss of $2.6 million, excluding restructuring charges of $0.8 million pre-tax,
versus a loss of $3.5 million last year.
FINANCIAL CONDITION
At the end of the second quarter, total debt outstanding was $499.9 million,
bringing debt-to-total-capitalization to 38.3%, an improvement over both the
last quarter and the end of last year ratios of 40.7% and 41.7%, respectively.
Days sales outstanding (DSO) were 68 days, the same as year-end, versus 62 days
a year ago. Inventory turns were 4.6 versus 5.0 in the same period last year.
During the quarter, the Company completed a 10-year $150 million fixed rate
senior unsecured note offering, proceeds of which were used to pay revolving
bank debt. The Company generated $14 million of free cash flow** in the quarter
and $20 million year to date versus $19 million year to date in the prior year.
Free cash flow is defined as net cash provided by operating activities,
excluding cash related restructuring activities, less purchases of property and
equipment, net of proceeds from sales of property and equipment.
OUTLOOK
Reimbursement uncertainties continue to affect the core North American rehab,
respiratory and standard businesses. The power wheelchair market is likely to
remain under pressure until CMS defines the reimbursement levels for the 64 new
codes announced in early June. This uncertainty has particularly impacted
Medicare power wheelchair sales and will likely continue to pressure results for
the remainder of 2006. Uncertainty also remains in determining the level of
reimbursement for durable medical equipment, oxygen, and oxygen equipment
servicing as part of the Deficit Reduction Act passed earlier in the year, as
well as the questions surrounding transfer of title for both durable and oxygen
equipment. This significant and continuing uncertainty surrounding oxygen
reimbursement has negatively impacted HomeFill sales in particular.
As a result of these conditions, the Company is lowering its full year earnings
per share guidance to between $1.45 and $1.65, excluding restructuring charges,
versus $2.00 to $2.10 previously. The net sales increase is expected to be
between 0% and negative 2%. This new guidance excludes any impact from foreign
currency and acquisitions.
This earnings per share range includes the impact from the stock option
accounting Statement of Financial Accounting Standards No. 123 (Revised 2004),
Share Based Payment ("SFAS 123R") issued by the Financial Accounting Standards
Board. The impact of SFAS 123R on earnings per share for 2006 is estimated to be
$0.05.
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The Company anticipates its free cash flow** for the year will be between $40
million and $55 million, down from our previous guidance of $70 to $80 million.
The Company anticipates that third quarter sales will strengthen sequentially,
but the regulatory overhang will probably prevent a restoration of organic
growth.
Commenting on the Company's anticipated results, Mixon said, "The challenges
from Medicare reimbursement continue to negatively impact performance. Although
we expected these issues to stabilize at this juncture, it is now clear that
they will remain for the foreseeable future. As a result of these market
realities, cost reduction remains as our top priority. We will continue to
execute on the following previously communicated initiatives, which will improve
second half performance:
>> Shifting substantial resources from product development to
manufacturing cost reduction activities, engineered product cost
reductions and product rationalization.
>> Manufacturing cost reduction activities including headcount
reductions.
>> Transferring additional manufacturing to China and increasing the
Asian sourcing of products. We expect the total cost of products
coming from Asia to exceed $200 million in 2006, an increase of over
40% compared to 2005. We continue to achieve approximately 20% savings
from these transfers.
>> Continue to cost reduce the design and engineering of our products to
address the reimbursement and pricing realities.
Despite continued soft sales in the United States, we expect to see significant
benefits in the second half of 2006 from these on-going initiatives and from
normal seasonal increases in international businesses, scheduled new product
introductions and a return to more conventional fourth quarter sales volume from
the abnormally low 2005 level that was principally attributable to the
implementation of a new enterprise resource planning system.
In addition to these actions, the Company is progressing on its global
manufacturing and distribution strategy to exit a number of manufacturing and
distribution locations and reduce costs by $30 million annually by 2008."
Mixon went on to state, "With all of the challenges imposed by the rather
chaotic regulatory environment, we are a stronger company today because:
>> We are in the final stage of fully repositioning our standard product
line with more cost competitive products and closed the second quarter
with good comparative performance and growing momentum.
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>> Our Sleep technology is gaining recognition in the clinical community
and we will be showing a much broader assortment of products at the
industry's trade show in September. In the quarter, two of our
National Accounts agreed to begin carrying our sleep products for the
first time.
>> Our HomeFill line continues to build share in ambulatory oxygen users
and we expect to be launching this technology in Europe before
year-end.
>> In Power Mobility, we will be launching exciting new products
throughout the product range later this year.
While the protracted uncertainty for our dealers has created difficulties for
the entire industry, we have continued to improve our competitive cost
positioning, product offerings and quality. When reimbursement uncertainty is
resolved, we will emerge as a better, stronger company."
Mixon concluded, "In the absence of any further adverse reimbursement changes,
we are confident of significantly improved second half earnings both
sequentially and year over year, and we will enter 2007 with positive momentum.
The fundamentals of the industry are still crystal clear with the graying of the
population and cost benefits of home care. We believe that the disruptions
caused by poor governmental policy decisions even more poorly executed will
ultimately be resolved in a manner that will benefit our industry."
- --------------------------------------------------------------------------------
*All references to financial measures that exclude the impact of the
restructuring charges are non-GAAP financial measures and are reconciled to the
related GAAP financial measure in the "Reconciliation" table included after the
Free Cash Flow reconciliation in this press release.
**Free cash flow is a non-GAAP financial measure, which is reconciled to the
related GAAP financial measure in the "Reconciliation" table included after the
Condensed Consolidated Balance Sheets in this press release.
Invacare Corporation (NYSE:IVC), headquartered in Elyria, Ohio, is the global
leader in the manufacture and distribution of innovative home and long-term care
medical products that promote recovery and active lifestyles. The Company has
6,100 associates and markets its products in 80 countries around the world. For
more information about the Company and its products, visit Invacare's website at
www.invacare.com.
This press release contains forward-looking statements within the meaning of the
"Safe Harbor" provisions of the Private Securities Litigation Reform Act of
1995. Terms such as "will," "should," "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,
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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, 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 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.
###
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<table>
<caption>
INVACARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
(In thousands, except per share data) 2006 2005 2006 2005
<s> <c> <c> <c> <c>
- ---------------------------------------------------------------------------------------------------------------------
Net sales $371,764 $396,267 $733,468 $767,211
Cost of products sold 265,728* 282,983 525,629* 544,083
------- ------- ------- -------
Gross profit 106,036 113,284 207,839 223,128
Selling, general and administrative expense 88,151 88,352 171,541 172,314
Charge related to restructuring activities 2,840 - 5,997 -
Interest expense - net 8,197 5,974 16,016 11,966
------- ------- ------- -------
Earnings before income taxes 6,848 18,958 14,285 38,848
Income taxes 1,895 6,050 4,125 12,395
------- ------- ------- -------
Net earnings $ 4,953 $12,908 $10,160 $26,453
======= ======= ======= =======
Net earnings per share - basic $0.16 $0.41 $0.32 $0.84
======= ======= ======= =======
Weighted average shares outstanding - basic 31,789 31,553 31,760 31,456
======= ======= ======= =======
Net earnings per share - assuming dilution $0.15 $0.40 $0.32 $0.81
======= ======= ======= =======
Weighted average shares outstanding - assuming dilution 32,113 32,530 32,155 32,533
======= ======= ======= =======
</table>
* Cost of products sold includes inventory markdowns resulting from
restructuring of $776 for the three month period ending June 30, 2006
and $1,072 for the six-month period ending June 30, 2006.
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. Intersegment revenue for reportable segments was
$23,966,000 and $48,846,000 for the three and six months ended June 30, 2006 and
$26,674,000 and $49,432,000 for the same periods a year ago.
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The information by segment is as follows:
<table>
<caption>
Three Months Ended Six Months Ended
June 30, June 30,
(In thousands) 2006 2005 2006 2005
<s> <c> <c> <c> <c>
- ---------------------------------------------------------------------------------------------------------------------
Revenues from external customers
North America $250,106 $263,328 $500,081 $514,268
Europe 104,687 110,331 200,233 212,422
Asia/Pacific 16,971 22,608 33,154 40,521
------- ------- ------- -------
Consolidated $371,764 $396,267 $733,468 $767,211
======= ======= ======= =======
Earnings (loss) before income taxes
North America $ 8,589 $ 19,779 $ 17,759 $ 40,504
Europe 5,941 7,359 9,633 11,241
Asia/Pacific (1,967) (1,827) (3,365) (3,531)
All Other (5,715) (6,353) (9,742) (9,366)
------- ------- ------- -------
Consolidated $ 6,848 $ 18,958 $14,285 $38,848
======= ======= ======= =======
Restructuring charges before income taxes
North America $ 2,034 $ - $ 4,865 $ -
Europe 1,100 - 1,438 -
Asia/Pacific 482 - 766 -
All Other - - - -
------- ------- ------- -------
Consolidated $ 3,616 $ $ 7,069 $
======= ======= ======= =======
Earnings (loss) before income taxes excluding
restructuring charges
North America $ 10,623 $ 19,779 $ 22,624 $ 40,504
Europe 7,041 7,359 11,071 11,241
Asia/Pacific (1,485) (1,827) (2,599) (3,531)
All Other (5,715) (6,353) (9,742) (9,366)
------- ------- ------- -------
Consolidated $10,464 $18,958 $21,354 $38,848
======= ======= ======= =======
</table>
All other consists of unallocated corporate selling, general and administrative
expense and inter-company profits, which do not meet the quantitative criteria
for determining reportable segments.
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INVACARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<table>
<caption>
June 30, 2006 December 31, 2005 June 30, 2005
(In thousands) (unaudited) (unaudited)
- -----------------------------------------------------------------------------------------------------------------
<s> <c> <c> <c>
Current Assets
Cash, cash equivalents and marketable securities $ 930 $ 25,876 $ 6,604
Trade receivables - net 277,186 287,955 284,931
Inventories - net 189,494 176,925 183,504
Deferred income taxes and other current assets 105,889 103,710 86,188
------- ------- ------
Total Current Assets 573,499 594,466 561,227
Other Assets 169,914 155,227 164,567
Plant and equipment - net 175,554 176,206 181,017
Goodwill 757,889 720,873 720,937
------- ------- -------
Total Assets $1,676,856 $1,646,772 $1,627,748
========== ========== ==========
Liabilities and Shareholders' Equity
Current Liabilities
Accounts payable $148,393 $133,106 $141,044
Accrued expenses 126,589 130,033 111,087
Accrued income taxes 7,861 13,340 4,747
Short-term debt and current maturities of long-term
debt 76,015 80,228 1,707
------- ------- ------
Total Current Liabilities 358,858 356,707 258,585
Long-Term Debt 423,897 457,753 552,760
Other Long-Term obligations 88,461 79,624 75,257
Shareholders' Equity 805,640 752,688 741,146
------- ------- -------
Total Liabilities and Shareholders' Equity $1,676,856 $1,646,772 $1,627,748
========== ========== ==========
</table>
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<table>
<caption>
INVACARE CORPORATION AND SUBSIDIARIES
RECONCILIATION FROM NET CASH PROVIDED BY
OPERATING ACTIVITIES TO FREE CASH FLOW (UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
(In thousands) 2006 2005 2006 2005
<s> <c> <c> <c> <c>
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities $16,284 $32,686 $24,813 $29,191
Plus:
Net cash impact related to restructuring 2,470 - 5,247 -
activities
Less:
Purchases of property and equipment, net (4,750) (1,530) (9,726) (10,437)
------- ------- ------- -------
Free Cash Flow $14,004 $31,156 $20,334 $18,754
======= ======= ======= =======
</table>
Free cash flow is a non-GAAP financial measure that is comprised of net cash
provided by operating activities, excluding net cash impact related to
restructuring activities, less purchases of property and equipment, net of
proceeds from sales of property and equipment. Management believes that this
financial measure provides meaningful information for evaluating the overall
financial performance of the Company and its ability to repay debt or make
future investments (including, for example, acquisitions).
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<table>
<caption>
INVACARE CORPORATION AND SUBSIDIARIES
RECONCILIATION FROM NET EARNINGS AND DILUTED EARNINGS PER SHARE
TO NET EARNINGS AND DILUTED EARNINGS PER SHARE EXCLUDING CHARGE
RELATED TO RESTRUCTURING ACTIVITIES (UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
(In thousands) 2006 2005 2006 2005
<s> <c> <c> <c> <c>
- -------------------------------------------------------------------------------------------------------------------------
Net earnings $ 4,953 $12,908 $10,160 $26,453
Plus:
Inventory markdowns related to restructuring included in cost of
products sold - after tax 561 - 762 -
Charge related to restructuring activities - after tax 2,053 - 4,264 -
------- ------- ------- -------
Total charge related to restructuring activities - after tax $ 2,614 $ - $ 5,026 $ -
------- ------- ------- -------
Net earnings excluding charge related to restructuring activities $ 7,567 $12,908 $15,186 $26,453
======= ======= ======= =======
Weighted average shares outstanding - assuming dilution 32,113 32,530 32,155 32,533
Net earnings per share excluding charge related to restructuring
activities - assuming dilution $0.24 $0.40 $0.47 $0.81
======= ======= ======= =======
Inventory markdowns related to restructuring included in cost of
products sold $ 776 $ - $ 1,072 $ -
Charge related to restructuring activities 2,840 - 5,997 -
------- ------- ------- -------
Total charge related to restructuring activities $ 3,616 $ - $ 7,069 $ -
Tax rate related to charge 27.7% 28.9%
Charge related to restructuring activities - after tax $ 2,614 $ - $ 5,026 $ -
======= ======= ======= =======
</table>
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