Exhibit 99.1
Investor Inquiries:
Gregory C. Thompson
(440) 329-6111
INVACARE CORPORATION REPORTS RESULTS IN LINE WITH RECENT GUIDANCE
ELYRIA, Ohio - (February 1, 2007) - Invacare Corporation (NYSE: IVC) today
announced its financial results for the fourth quarter and twelve months ended
December 31, 2006.
CONSOLIDATED RESULTS
Adjusted earnings per share* was $0.33 for the fourth quarter of 2006 which was
equal to the fourth quarter of last year. Loss per share on a GAAP basis was
$10.61 ($337.6 million net loss after-tax) as compared to earnings per share
last year of $0.22 ($7.1 million net income after-tax). Adjusted earnings per
share* excludes the impact of the following: restructuring charges, fourth
quarter finance charges, interest and fees related to debt covenant violations,
incremental reserve against accounts receivable due to Medicare reimbursement
reductions and an impairment charge related to goodwill and intangible assets.
All of these items are discussed in further detail in this release. Adjusted net
earnings** for the quarter, excluding these items, were $10.4 million versus
$10.5 million last year. Fourth quarter adjusted earnings per share* includes
the benefit of a lower than normal tax rate to adjust to the full year 2006
effective tax rate of 12% versus a 2005 full year rate of 31%. Net sales for the
quarter increased 4.9% to $385.1 million versus $367.3 million last year.
Acquisitions contributed one percentage point of the increase and foreign
currency translation contributed two percentage points.
The Adjusted earnings per share* for the quarter excludes the impact of:
o $11.3 million pre-tax charge ($8.0 million after tax) compared to a
pre-tax $4.8 million charge last year ($3.4 million after tax) related
to restructuring activities.
o $3.7 million pre-tax expense related to finance charges, interest and
fees associated with the Company's previously reported debt covenant
violations ($2.4 million after tax).
o $26.8 million pre-tax expense related to accounts receivable
collectibility issues arising primarily from Medicare reimbursement
reductions for power wheelchairs announced on November 15, 2006 ($26.8
million after tax).
o $300.4 million pre-tax expense for an impairment charge related to the
write-down of goodwill and other intangible assets ($300.4 million
after tax).
As the Company previously disclosed, throughout 2006 Medicare proposed several
significant changes to durable medical equipment and oxygen reimbursement, which
dramatically impacted the Company's results and the profitability of our U.S.
customers. The many changes to reimbursement, which were finalized in the fourth
quarter of 2006, have added complexity and uncertainty to the claims process and
have eroded our customers' ability to provide quality solutions. Given these
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market dynamics and the resulting challenges to business models, our customers
have moved aggressively to lower-cost product solutions to preserve their
financial stability, which has caused increased competitive pricing pressure. As
a result, the Company experienced lower fourth quarter gross margins. The
Company's new, lower cost products introduced in Q4 2006 will begin shipping in
volume in early 2007 and, along with the significant cost reduction actions
discussed below, should allow Invacare to improve operating margins in 2007.
As a result of these changes in reimbursement, the Company performed a review of
customers most vulnerable to changes in the reimbursement for power mobility
products and, as part of its 2006 fourth quarter financial results, the Company
recorded an incremental reserve against accounts receivable of approximately
$26.8 million pre-tax. In response to these regulatory changes, the Company is
implementing tighter credit policies and is working with certain customers in an
effort to help them reduce costs and improve their financial viability.
While the Company continued to make progress with the restructuring initiatives
that it began in 2005 to drive cost reductions and improve profitability, the
quarter was impacted by reduced margins as a result of continued competitive
pricing pressures and product mix shift toward lower margin product, primarily
in the U.S. Restructuring expenses incurred in the fourth quarter totaled
pre-tax $11.3 million and related primarily to severance costs and the
elimination of certain product lines. Since cost reduction initiatives were
first announced in 2005, approximately 600 positions have been eliminated,
several facilities were exited, and the Company continues to increase
manufacturing capability in China, as well as reduce freight and general
expenses.
Gross margin as a percentage of net sales for the fourth quarter excluding
restructuring charges was lower by 2.5 percentage points compared to last year's
fourth quarter and by 3.1 percentage points compared to this year's third
quarter, primarily due to competitive pricing pressures in the U.S. and an
unfavorable change in product mix away from high-end options in the U.S. Rehab
business as a result of the reimbursement changes which were announced in
November. Selling, General and Administrative expense (SG&A) increased 36.4% to
$113.5 million compared to $83.2 million in the fourth quarter last year; and
$88.4 million in the third quarter of 2006. The fourth quarter 2006 SG&A
includes an incremental reserve related to accounts receivable of approximately
$26.8 million pre-tax. Foreign currency translation and acquisitions each
increased SG&A expense by two percentage points. Excluding foreign currency
translation, acquisitions and the incremental reserve related to accounts
receivable, SG&A expense increased 1% compared to last year. Results for the
quarter were negatively impacted by increased interest expense due to increases
in interest rates, but benefited from a reduced effective tax rate.
Adjusted earnings per share* for the year were $1.18 versus $1.66 last year,
which excludes the impact of a pre-tax $21.3 million restructuring charge in
2006 ($15.5 million after tax) and a pre-tax $7.5 million restructuring charge
in 2005 ($5.2 million after tax). Loss per share on a GAAP basis was $10.00
($317.8 million net loss after-tax) as compared to earnings per share last year
of $1.51 ($48.9 million net income after-tax). The 2006 adjusted results for the
year also exclude the above described fourth quarter finance charges, interest
and fees related to debt covenant violations, incremental reserve against
<page>
accounts receivable due to Medicare reimbursement reductions and the estimated
impairment charge related to goodwill and intangible assets.
Adjusted net earnings**, excluding restructuring charges, fourth quarter finance
charges, interest and fees related to debt covenant violations, incremental
write-down of accounts receivable due to Medicare reimbursement reductions and
an impairment charge related to goodwill and intangible assets, were $37.8
million versus $54.0 million last year. Net sales for the year decreased 2.1% to
$1.50 billion versus $1.53 billion last year. Acquisitions contributed one
percentage point to net sales while foreign currency translation decreased net
sales by less than one percentage point. Results for the year benefited from a
reduced effective tax rate, which was more than offset by reduced net sales and
gross margins, and higher SG&A and interest expense.
A. Malachi Mixon, III, chairman and chief executive officer, stated, "Although
the adjusted result for the quarter was within recent guidance, our overall
results for the year were disappointing. Proposed changes to U.S. oxygen and
equipment reimbursement and continued uncertainty proved a disruptive force to
our Company and our U.S. customers. Although we were successful in our efforts
and recommendations to modify the reimbursement proposals from their original
form, nonetheless, significant reductions in reimbursement were implemented.
Major cost reduction initiatives are underway and will continue in order to
combat these reimbursement realities. Despite the numerous U.S. reimbursement
challenges, the portions of our businesses not impacted by these U.S. Medicare
challenges continue to do well. In particular, our international businesses
produced modest sales growth which, coupled with our restructuring and cost
reduction efforts, have continued to strengthen margins outside the U.S. On a
positive note, free cash flow*** continued to strengthen during the course of
2006 as we gained traction with working capital controls. Free cash flow***
totaled $22.7 million for the quarter and $52.2 million for the year, exceeding
our guidance."
NORTH AMERICA
Effective with its 2006 Annual Report on Form 10-K, the Company will expand its
disclosures for North America to include three separate business segments: North
America/Home Medical Equipment (NA/HME), Invacare Supply Group (ISG), and
Institutional Products Group (IPG).
For the quarter, NA/HME net sales increased 1.9% to $165.1 million compared to
$162.0 million last year, driven primarily by Rehab and Standard product lines.
Last year's results were hampered by disruptions arising out of the enterprise
resource planning system (ERP) implementation during the fourth quarter. Rehab
product line net sales increased by 2.2% driven by volume increases in Consumer
Power and Custom Power, which were largely offset by price reductions due to
competitive pressures and a shift away from high-end options that normally drive
higher average selling prices and margins. Standard product line net sales
increased 1.3% driven by increased volumes, particularly in manual wheelchairs.
Respiratory product line net sales declined 1% for the quarter, primarily
attributable to lower pricing on oxygen concentrators. HomeFill(TM) II oxygen
system net sales increased for the quarter by 3% due to increased purchases from
national providers.
<page>
ISG net sales for the quarter increased 8.6% to $60.0 million compared to $55.3
million last year driven by volume increases primarily in diabetic and
incontinence products lines. IPG net sales for the quarter increased by 17.4% to
$24.5 million compared to $20.9 million last year due to increased volumes in
its core bed products, along with increases in other offerings such as bathing
products.
For the quarter, NA/HME loss before income taxes was $337.3 million, excluding
restructuring charges of $3.6 million pre-tax, as compared to earnings before
income taxes of $7.2 million last year, excluding restructuring charges of $1.5
million pre-tax. The decline in profit before tax was largely due to the pricing
and competitive industry conditions in Rehab, Standard and Respiratory product
lines, an incremental increase in the accounts receivable reserve related to the
Rehab reimbursement issues of $26.8 million pre-tax recorded in the fourth
quarter of 2006, and a $300.4 million pre-tax impairment charge related to
goodwill and other intangible assets. As previously disclosed in the Company's
September 30, 2006 Form 10-Q, the Company undertakes its annual impairment test
of goodwill and intangible assets in accordance with SFAS No. 142, Goodwill and
Other Intangible Assets, in connection with the preparation of its fourth
quarter results each year. As a result of the reduced profitability of its
NA/HME operating segment, and uncertainty associated with future market
conditions, the Company recorded an impairment charge related to goodwill and
intangible assets of this segment of $300.4 million pre-tax. The Company is in
process of finalizing the underlying valuation associated with this charge in
accordance with SFAS No. 142; however, based on the information known at this
time, this is the Company's best estimate of the impairment.
ISG earnings before income taxes for the quarter decreased to $.8 million,
excluding restructuring charges of $.3 million, as compared to $2.0 million last
year, excluding restructuring charges of $.2 million pre-tax. This reduction is
attributable to reduced margins due to sales increases in lower margin products
(diabetic and incontinence), increased freight costs related to these products
and higher SG&A expenses. IPG earnings before income taxes for the quarter
increased to $.8 million versus $.5 million last year attributable to increased
revenues.
For the year, NA/HME net sales decreased 4.3% to $676.3 million from $706.6
million last year with revenue declines in Rehab, Standard and Respiratory
product lines. ISG net sales increased 3.3% to $228.2 million from $220.9
million last year; and IPG net sales increased 9.4% to $93.5 million from $85.4
million last year. For the year, NA/HME loss before income taxes was $314.5
million excluding restructuring charges of $9.6 million pre-tax, as compared to
a profit before income taxes of $56.9 million last year excluding restructuring
charges of $3.6 million pre-tax. The decline in profit before taxes was largely
due to the pricing and competitive industry conditions in Rehab, Standard and
Respiratory product lines, incremental accounts receivable reserve related to
the Rehab reimbursement issues of $26.8 million pre-tax recorded in the fourth
quarter of 2006, and a $300.4 million pre-tax impairment charge related to
goodwill and other intangible assets. ISG earnings before income taxes decreased
to $4.3 million, excluding restructuring charges of $1.0 million, as compared to
$6.8 million last year, excluding restructuring charges of $.3 million. IPG
earnings before income taxes decreased to $4.8 million from $5.8 million last
year.
<page>
EUROPE
For the quarter, European net sales increased 7.9% to $116.3 million versus
$107.8 million last year. Foreign currency translation contributed five
percentage points of the increase. Strong sales performance in most of the
regions was offset by continued weakness in the German market related to
reimbursement policy. For the quarter, earnings before income taxes were $11.4
million, excluding restructuring charges of $6.4 million pretax, as compared to
$9.9 million last year, excluding restructuring charges of $2.5 million pre-tax.
Increased profits were primarily driven by volume increases and cost reduction
initiatives.
For the year, European net sales were down .4% to $430.4 million versus $432.1
million last year. Foreign currency translation reduced sales by one percentage
point and acquisitions contributed one percentage point. For the year, European
earnings before income taxes were $34.7 million, excluding restructuring charges
of $8.7 million, as compared to $32.0 million last year, excluding restructuring
charges of $2.7 million pre-tax. Increased profits for the year were primarily
driven by cost reduction initiatives.
ASIA/PACIFIC
For the quarter, Asia/Pacific net sales declined 9.9% to $19.2 million versus
$21.3 million last year. Foreign currency increased net sales by less than one
percentage point and acquisitions increased net sales by seventeen percentage
points. 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 and reduced volumes in the Company's Australian distribution
business. For the quarter, earnings before income taxes were $2.7 million,
excluding restructuring charges of $1.0 million pre-tax, as compared to $.5
million last year, excluding restructuring charges of $.5 million pre-tax. The
Company benefited from continued cost reductions in the region.
For the year, Asia/Pacific net sales decreased 17.8% to $69.6 million versus
$84.7 million last year. Foreign currency accounted for four percentage points
of the net sales decline, while acquisitions increased net sales by five
percentage points. For the year, Asia/Pacific loss before taxes was $1.8
million, excluding restructuring charges of $1.9 million pre-tax, as compared to
a loss of $3.6 million last year, excluding restructuring charges of $.8 million
pre-tax.
FINANCIAL CONDITION AND REPORTING
Total debt outstanding was $573.1 million at the end of the year, resulting in a
debt-to-total-capitalization of 54.1% versus 41.7% at the end of last year. The
increase in the debt-to-capitalization ratio was impacted primarily by the
reduction in equity related to the goodwill and intangible asset write-off
recorded by the Company during the fourth quarter 2006 and the restriction on
the Company's ability to pay down debt as noted below. The Company obtained
waivers of the covenant violation disclosed in its Form 10-Q for the quarter
ended September 30, 2006 from each of its lenders. The waivers are effective
through February 15, 2007. The waivers limit the Company's debt, (excluding $75
million for asset-backed securitization borrowings) to a maximum amount of $521
million and do not allow a pay down of debt below $501 million. At year-end
<page>
2006, the Company's debt, as defined under the waivers, was at the minimum
level. The Company's cash and cash equivalents at the end of 2006 were
approximately $82.4 million as a result of restrictions on debt pay down
included in the debt covenant waivers.
Days sales outstanding improved by two days to 66 days versus 68 days last year,
excluding the impact of the incremental reserve for accounts receivable due to
Medicare reimbursement reductions. Inventory turns were 4.4 versus 4.5 at the
end of last year. The Company generated $22.7 million of free cash flow*** in
the fourth quarter, and $52.2 million for the 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.
DEBT RECAPITALIZATION UPDATE
The Company has obtained a commitment letter for the refinancing of the
Company's existing indebtedness and is working with these lenders to put in
place a long-term capital structure. The Company currently expects to complete
the new financing by mid-February 2007. The new financing is expected to include
a senior secured revolving credit facility and term loans along with additional
senior debt and/or equity-linked financing. This new financing program is
expected to result in total capacity of approximately $700 million and will be
used to refinance the existing revolving credit facility, private placement
notes, asset-backed securitization, and related refinancing fees.
The Company estimates that the weighted average interest rate of the new
facilities and securities combined will be approximately 7.5% to 9.5% versus the
current weighted average interest rate of approximately 5.9%.
OUTLOOK
The Company has undergone an internal review of its operations and is
undertaking additional cost reduction actions in 2007. The Company believes that
the implementation of these new initiatives, along with the previously announced
global, multi-year plans to reduce manufacturing and distribution costs, will
improve the Company's gross margin and result in approximately $38 million of
realized savings in 2007. The Company anticipates restructuring charges of
approximately $20 million in 2007 relating to these actions. Annualized savings
from these initiatives implemented by the end of 2007 should approximate $56
million thereafter. The core initiatives are as follows:
o Product line simplification. The Company plans to simplify its product
lines and pricing processes to reduce costs and improve service
levels.
o Improvement of gross margins and reduction of fixed costs through
further product and sub-assembly outsourcing. The Company expects to
accelerate its outsourcing of commodity products and sub-assemblies.
Asian sourcing is planned to double over the next three years.
<page>
o Rationalization of facilities. Today, Invacare's primary manufacturing
facilities consist of fourteen integrated fabrication plants and two
assembly plants worldwide. Invacare will continue in its strategy to
move from integrated fabrication plants to assembly plants worldwide.
We are finalizing plans to close and/or consolidate several locations
worldwide beginning this year through 2009.
o Standardization of product platforms. To further simplify and reduce
production costs, as well as to leverage development and tooling
investment, the Company has begun the process of standardizing some of
its product platforms globally.
For fiscal year 2007, the Company is providing the following guidance:
o Organic growth in net sales of 0% to 2%, excluding the impact from
acquisitions and foreign currency translation adjustments.
o Adjusted EBITDA**** increase of 4% to 6% over 2006 levels.
o Effective tax rate of 10% to 15%.
o Weighted average interest rate of 7.5% to 9.5% depending on the
results of the debt recapitalization process.
o Free cash flow*** between $40 million and $50 million.
Commenting on the Company's anticipated results, Mixon said, "We accelerated the
process of restructuring our core U.S. homecare business in the fourth quarter
of 2006 and are confident that our plans will allow us to overcome industry
challenges and deliver improved operating income in 2007. Staff reductions have
already begun and our first significant cost reduced products, critical to our
new power wheelchair formularies, are beginning to ship.
On the positive side, our HomeFill technology was granted increased
reimbursement by Medicare late in the year with the change effective January 1,
2007. This improved reimbursement has further enhanced the cost advantage this
technology offers our customers. For the first time, national respiratory
providers are considering HomeFill and, effective January 1, 2007; one of these
providers has launched a large-scale implementation. We have also launched
HomeFill in Europe with its first contract and have gained approval for this
technology from the National Health Service in the U.K. We look forward to
generating HomeFill revenues from our European businesses in 2007."
Mixon concluded, "We are confident our restructuring plans are achievable and
will put us back in front of the curve by year end, with net year-over-year
improved operating income."
<page>
*Adjusted earnings per share (EPS) is a non-GAAP financial measure which is
defined as net earnings excluding the impact of restructuring charges, fourth
quarter debt finance charges, interest and fees associated with the Company's
debt covenant violations, incremental write-down of accounts receivable and
asset write-downs related to goodwill and other intangible assets divided by
weighted average shares outstanding - assuming dilution. This financial measure
is reconciled to the related GAAP financial measure in the "Reconciliation"
table included after the Condensed Consolidated Statement of Earnings included
in this press release.
**Adjusted net earnings is a non-GAAP financial measure which is defined as net
earnings excluding the impact of restructuring charges, fourth quarter debt
finance charges, interest and fees associated with the Company's debt covenant
violations, incremental write-down of accounts receivable and asset write-downs
related to goodwill and other intangible assets. This financial measure is
reconciled to the related GAAP financial measure in the "Reconciliation" table
included after the Condensed Consolidated Statement of Earnings included in this
press release.
***Free cash flow is a non-GAAP financial measure, which 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. This financial measure is reconciled to the related
GAAP financial measure in the "Reconciliation" table included after the
Condensed Consolidated Balance Sheets in this press release.
****Adjusted earnings before interest, taxes, depreciation and amortization
(EBITDA) is a non-GAAP financial measure which is defined as net earnings
excluding the following: interest expense, income taxes, depreciation and
amortization, as further adjusted to exclude restructuring charges, fourth
quarter debt finance charges, interest and fees associated with the Company's
debt covenant violations, bank fees classified as SG&A expense, incremental
reserve against accounts receivable, asset write-downs related to goodwill and
other intangible assets and stock option expense. It should be noted that the
Company's definition of Adjusted EBITDA may not be comparable to similar
measures disclosed by other companies because not all companies and analysts
calculate Adjusted EBITDA in the same manner. This financial measure is
reconciled to the related GAAP financial measure in the "Reconciliation" table
included after the Condensed Consolidated Statement of Earnings 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
6,000 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: possible adverse effects of
<page>
being substantially leveraged, which could impact our ability to raise capital,
limit our ability to react to changes in the economy or our industry or expose
us to interest rate risks; changes in government and other third-party payor
reimbursement levels and practices; consolidation of health care customers and
our competitors; ineffective cost reduction and restructuring efforts; inability
to design, manufacture, distribute and achieve market acceptance of new products
with higher functionality and lower costs; extensive government regulation of
our products; lower cost imports; increased freight costs,; failure to comply
with regulatory requirements or receive regulatory clearance or approval for our
products or operations in the United States or abroad; potential product
recalls; uncollectible accounts receivable; difficulties in implementing a new
Enterprise Resource Planning system; legal actions or regulatory proceedings and
governmental investigations; product liability claims; inadequate patents or
other intellectual property protection; incorrect assumptions concerning
demographic trends that impact the market for our products; provisions in our
bank credit agreements or other debt instruments that may prevent or delay a
change in control; the loss of the services of our key management and personnel;
decreased availability or increased costs of raw materials could increase our
costs of producing our products; inability to acquire strategic acquisition
candidates because of limited financing alternatives; risks inherent in managing
and operating businesses in many different foreign jurisdictions; exchange rate
fluctuations, as well as the risks described from time to time in Invacare's
reports as filed with the Securities and Exchange Commission. Except to the
extent required by law, we do not undertake and specifically decline any
obligation to review or update any forward-looking statements or to publicly
announce the results of any revisions to any of such statements to reflect
future events or developments or otherwise.
###
<table>
<caption>
INVACARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
Three Months Ended Twelve Months Ended
December 31, December 31,
(In thousands, except per share data) 2006 2005 2006 2005
- ------------------------------------------------------------------- ------------------ ----------- ----------------- --------------
<s> <c> <c> <c> <c>
Net sales $ 385,105 $ 367,251 $ 1,498,035 $1,529,732
Cost of products sold 285,961* 261,617* 1,080,965* 1,083,533*
------- ------- ------- -------
Gross profit 99,144 105,634 417,070 446,199
Selling, general and administrative expense 113,498 ** 83,203 373,846 ** 342,039
Charge related to restructuring activities 8,924 4,535 17,277 7,295
Debt finance charges, interest and fees associated with debt 3,745 - 3,745 -
refinancing
Asset write-downs related to goodwill and other intangibles 300,417 - 300,417 -
Interest expense - net 8,562 7,934 31,309 25,563
------- ------- ------- -------
Earnings (loss) before income taxes (336,002) 9,962 (309,524) 71,302
Income taxes 1,625 2,880 8,250 22,450
------- ------- ------- -------
Net earnings (loss) $ (337,627) $ 7,082 $ (317,774) $ 48,852
======= ======= ======= =======
Net earnings (loss) per share - basic $ (10.61) $ 0.22 $ (10.00) $ 1.55
======= ======= ======= =======
Weighted average shares outstanding - basic 31,824 31,675 31,789 31,555
======= ====== ====== ======
Net earnings (loss) per share - assuming dilution $ (10.61) $ $0.22 $ (10.00) $ 1.51
======= ====== ====== ======
Weighted average shares outstanding - assuming dilution *** 31,824 32,260 31,789 32,452
======= ====== ====== ======
</table>
* Cost of products sold includes inventory markdowns resulting from
restructuring of $2,329 for the three-month period ending December 31, 2006 and
$3,973 for the twelve-month period ending December 31, 2006; as compared to $238
for the three and twelve-month period ending December 31, 2005.
** Includes incremental accounts receivable reserve related to U.S. Rehab
reimbursement exposures of $26.8 million for the three and twelve-month period
ending December 31, 2006.
*** Net earnings (loss) per share assuming dilution calculated for three-months
and twelve-months ended December 31, 2006 utilizing weighted average shares
outstanding - basic as a result of the Company being in a loss situation.
<table>
<caption>
INVACARE CORPORATION AND SUBSIDIARIES
RECONCILIATION OF NET EARNINGS TO ADJUSTED EBITDA (1)
Three Months Ended Twelve Months Ended
December 31, December 31,
(In thousands) 2006 2005 2006 2005
- ------------------------------------------------------------------- ------------------ ----------- ----------------- --------------
<s> <c> <c> <c> <c>
Net earnings (loss) $(337,627) $ 7,082 $(317,774) $ 48,852
Interest expense 9,336 7,093 34,084 27,246
Income taxes 1,625 2,880 8,250 22,450
Depreciation and amortization 10,896 9,826 39,892 40,524
------- ------- ------- -------
EBITDA (315,770) 26,881 (235,548) 139,072
Restructuring charges 11,253 4,773 21,250 7,533
Debt finance charges, interest and fees associated with debt
refinancing 3,745 - 3,745 -
Bank fees classified as SG&A expense 735 700 2,845 2,563
Stock option expense 647 223 1,587 881
Incremental accounts receivable reserve 26,775 - 26,775 -
Asset write-down related to goodwill and other intangible
assets 300,417 - 300,417 -
------- ------- ------- -------
Adjusted EBITDA $ 27,802 $ 32,577 $121,071 $150,049
======= ======= ======= =======
</table>
(1) Adjusted earnings before interest, taxes, depreciation and amortization
(EBITDA) is a non-GAAP financial measure which is defined as net earnings
excluding the following: interest expense, income taxes, depreciation and
amortization, as further adjusted to exclude restructuring charges, fourth
quarter debt finance charges, interest and fees associated with the Company's
debt refinancing, bank fees classified as SG&A expense, incremental reserve
against accounts receivable, asset write-downs related to goodwill and other
intangible assets and stock option expense. It should be noted that the
Company's definition of Adjusted EBITDA may not be comparable to similar
measures disclosed by other companies because not all companies and analysts
calculate Adjusted EBITDA in the same manner. We believe that these types of
exclusions are also recognized by the industry in which we operate as relevant
in computing Adjusted EBITDA as a supplementary non-GAAP financial measure
widely used by financial analysts and others in our industry to meaningfully
evaluate a company's future operating performance and cash flow. Moreover, our
definition of Adjusted EBITDA as presented herein also may be useful in
reflecting certain measurements under our indenture that we anticipate entering
into in connection with our proposed issuance under Rule 144A of senior notes;
although it may be similar to or different than Adjusted EBITDA as defined in
our proposed new senior secured credit facility, which has not yet been
finalized. In addition to these recognized purposes, we also use EBITDA and
Adjusted EBITDA to evaluate our performance.
<table>
<caption>
INVACARE CORPORATION AND SUBSIDIARIES
RECONCILIATION OF NET EARNINGS PER SHARE
TO ADJUSTED EARNINGS PER SHARE (2)
Three Months Ended Twelve Months Ended
December 31, December 31,
(In thousands, except per share data) 2006 2005 2006 2005
- ------------------------------------------------------------------- ------------------ ----------- ----------------- --------------
<s> <c> <c> <c> <c>
Net earnings (loss) per share - assuming dilution $ (10.61) $ 0.22 $ (10.00) $ 1.51
Weighted average shares outstanding- assuming dilution * 31,824 32,260 31,789 32,452
Net earnings (loss) $(337,627) $ 7,082 $ (317,774) $ 48,852
Income taxes 1,625 2,880 8,250 22,450
------- ------- ------- -------
Earnings (loss) before income taxes (336,002) 9,962 (309,524) 71,302
Restructuring charges 11,253 4,773 21,250 7,533
Debt finance charges, interest and fees associated with debt
refinancing 3,745 - 3,745 -
Incremental reserve against accounts receivable 26,775 - 26,775 -
Asset write-downs related to goodwill and other intangible assets 300,417 - 300,417 -
------- ------- ------- -------
Adjusted earnings before income taxes 6,188 14,735 42,663 78,835
Income taxes (benefit) (4,215) 4,258 4,910 24,833
------- ------- ------- -------
Adjusted net earnings 10,403 10,477 37,753 54,002
======= ======= ======= =======
Weighted average shares outstanding- assuming dilution 31,924 32,260 32,061 32,452
======= ======= ======= =======
Adjusted earnings per share - assuming dilution $ 0.33 $ 0.33 $ 1.18 $ 1.66
======= ======= ======= =======
</table>
(2) Adjusted Earnings per share (EPS) is a non-GAAP financial measure which is
defined as net earnings excluding the impact of restructuring charges, debt
finance charges, interest and fees associated with the Company's debt
refinancing, incremental write-down of accounts receivable and asset write-downs
related to goodwill and other intangible assets divided by weighted average
shares outstanding - assuming dilution. It should be noted that the Company's
definition of Adjusted EPS may not be comparable to similar measures disclosed
by other companies because not all companies and analysts calculate Adjusted EPS
in the same manner. We believe that these types of exclusions are also
recognized by the industry in which we operate as relevant in computing Adjusted
EPS as a supplementary non-GAAP financial measure widely used by financial
analysts and others in our industry to meaningfully evaluate a company's
operating performance.
* Net earnings (loss) per share assuming dilution calculated for three-months
and twelve-months, ended December 31, 2006 utilizing weighted average shares
outstanding - basic as a result of the Company being in a loss situation.
Business Segments - The Company operates in five primary business segments based
on geographical area: North America / Home Medical Equipment ("HME"), Invacare
Supply Group, Institutional Products Group, Europe and Asia/Pacific. The five
reportable segments represent operating groups, which offer products to
different geographic regions. Intersegment revenue for reportable segments was
$26,884,000 and $103,539,000 for the Three and Twelve Months Ended December 31,
2006 and $23,660,000 and $96,974,000 for the same periods a year ago.
The information by segment is as follows:
<table>
<caption>
Three Months Ended Twelve Months Ended
December 31, December 31,
(In thousands) 2006 2005 2006 2005
- ------------------------------------------------------------------- ------------------ ----------- ----------------- --------------
<s> <c> <c> <c> <c>
Revenues from external customers
North America / HME $ 165,112 $ 161,995 $ 676,326 $ 706,555
Invacare Supply Group 60,034 55,298 228,236 220,908
Institutional Products Group 24,496 20,869 93,455 85,415
Europe 116,286 107,811 430,427 432,142
Asia/Pacific 19,177 21,278 69,591 84,712
------- ------- ------- -------
Consolidated $ 385,105 $ 367,251 $1,498,035 $1,529,732
======= ======= ======= =======
Earnings (loss) before income taxes
North America / HME $(340,886) $ 5,695 $ (324,137) $ 53,303
Invacare Supply Group 457 1,784 3,291 6,428
Institutional Products Group 816 453 4,789 5,747
Europe 5,011 7,466 26,077 29,255
Asia/Pacific 1,689 (72) (3,737) (4,418)
All Other (3,089) (5,364) (15,807) (19,013)
------- ------- ------- -------
Consolidated $(336,002) $ 9,962 $ (309,524) $ 71,302
======= ======= ======= =======
Restructuring charges before income taxes
North America / HME $ 3,565 $ 1,532 $ 9,614 $ 3,616
Invacare Supply Group 317 233 1,009 338
Institutional Products Group - 5 38 27
Europe 6,372 2,466 8,658 2,718
Asia/Pacific 999 537 1,931 834
All Other - - - -
------- ------- ------- -------
Consolidated $ 11,253 $ 4,773 $ 21,250 $ 7,533
======= ======= ======= =======
Earnings (loss) before income taxes excluding
restructuring charges
North America / HME $(337,321) $ 7,227 $ (314,523) $ 56,919
Invacare Supply Group 774 2,017 4,300 6,766
Institutional Products Group 816 458 4,827 5,774
Europe 11,383 9,932 34,735 31,973
Asia/Pacific 2,688 465 (1,806) (3,584)
All Other (3,089) (5,364) (15,807) (19,013)
------- ------- ------- -------
Consolidated $(324,749) $ 14,735 $ (288,274) $ 78,835
======= ======= ======= =======
</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.
<table>
<caption>
INVACARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, 2006 December 31, 2005
(In thousands) (unaudited)
- ----------------------------------------------------- ---------------------- -----------------------
<s> <c> <c>
Current Assets
Cash, cash equivalents and marketable securities $ 82,393 $ 25,876
Trade receivables - net 261,606 287,955
Inventories - net 201,756 176,925
Deferred income taxes and other current assets 110,003 103,710
------- -------
Total Current Assets 655,758 594,466
Other Assets 170,898 155,227
Plant and equipment - net 173,945 176,206
Goodwill 489,850 720,873
------- -------
Total Assets $1,490,451 $1,646,772
========== ==========
Liabilities and Shareholders' Equity
Current Liabilities
Accounts payable $ 163,041 $ 133,106
Accrued expenses 147,776 130,033
Accrued income taxes 12,916 13,340
Short-term debt and current maturities of long-term
debt 124,036 80,228
------- ------
Total Current Liabilities 447,769 356,707
Long-Term Debt 449,090 457,753
Other Long-Term obligations 106,728 79,624
Shareholders' Equity 486,864 752,688
------- -------
Total Liabilities and Shareholders' Equity $1,490,451 $1,646,772
========== ==========
</table>
<table>
<caption>
INVACARE CORPORATION AND SUBSIDIARIES
RECONCILIATION FROM NET CASH PROVIDED BY
OPERATING ACTIVITIES TO FREE CASH FLOW (UNAUDITED)
Three Months Ended Twelve Months Ended
December 31, December 31,
(In thousands) 2006 2005 2006 2005
- ------------------------------------------------------------------- ------------------ ----------- ----------------- --------------
<s> <c> <c> <c> <c>
Net cash provided by operating activities $24,456 $14,121 $61,737 $77,244
Plus:
Net cash impact related to restructuring 2,228 1,502 9,935 1,837
activities
Less:
Purchases of property and equipment, net (4,002) (6,146) (19,491) (25,559)
------- ------- ------- -------
Free Cash Flow $22,682 $9,477 $52,181 $53,522
======= ======= ======= =======
</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).