1
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 March 31, 1998
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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)
(216) 329-6000
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(Registrant's telephone number, including area code)
899 Cleveland Street, P.O. Box 4028, Elyria, Ohio 44036
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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
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date:
As of May 12, 1998 the company had 28,469,771 Common Shares and 1,433,107 Class
B Common Shares outstanding.
2
INVACARE CORPORATION
INDEX
Part I. FINANCIAL INFORMATION: Page No.
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheet -
March 31, 1998 and December 31, 1997........................3
Condensed Consolidated Statement of Earnings -
Three Months Ended March 31, 1998 and 1997..................4
Condensed Consolidated Statement of Cash Flows -
Three Months Ended March 31, 1998 and 1997..................5
Notes to Condensed Consolidated Financial
Statements - March 31, 1998.................................6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations...............7
Part II. OTHER INFORMATION:
Item 6. Exhibits and Reports on Form 8-K....................................12
SIGNATURES...................................................................13
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Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
INVACARE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheet - (unaudited)
March 31, December 31,
1998 1997
(In thousands)
--------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 7,713 $ 5,696
Marketable securities 3,336 3,501
Trade receivables, net 136,970 114,410
Installment receivables, net 49,652 49,298
Inventories 89,024 75,708
Deferred income taxes 19,424 18,855
Other current assets 5,993 7,743
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TOTAL CURRENT ASSETS 312,112 275,211
OTHER ASSETS 62,128 56,567
PROPERTY AND EQUIPMENT, NET 97,239 90,577
GOODWILL, NET 228,577 107,568
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TOTAL ASSETS $700,056 $529,923
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 55,723 $ 42,497
Accrued expenses 66,015 59,998
Accrued income taxes 3,570 1,872
Current maturities of long-term obligations 5,125 5,186
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TOTAL CURRENT LIABILITIES 130,433 109,553
LONG-TERM OBLIGATIONS 326,386 183,955
SHAREHOLDERS' EQUITY
Preferred shares 0 0
Common shares 7,237 7,182
Class B common shares 358 359
Additional paid-in-capital 77,611 74,954
Retained earnings 174,820 167,649
Accumulated other comprehensive earnings (7,966) (6,506)
Treasury shares (8,823) (7,223)
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TOTAL SHAREHOLDERS' EQUITY 243,237 236,415
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TOTAL LIABILITIES
AND SHAREHOLDERS' EQUITY $700,056 $529,923
========== ===========
See notes to condensed consolidated financial statements.
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INVACARE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statement of Earnings - (unaudited)
Three Months Ended
March 31,
1998 1997
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Net sales $181,066 $151,524
Cost of products sold 129,613 107,306
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Gross profit 51,453 44,218
Selling, general and administrative expense 37,352 31,693
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Income from operations 14,101 12,525
Interest income 2,347 2,492
Interest expense (4,083) (3,187)
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Earnings before income taxes 12,365 11,830
Income taxes 4,823 4,610
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NET EARNINGS $ 7,542 $ 7,220
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DIVIDENDS DECLARED PER COMMON SHARE .0125 .0125
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Net earnings per share - basic $ 0.25 $ 0.24
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Weighted average shares outstanding - basic 29,779 29,486
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Net earnings per share - assuming dilution $ 0.25 $ 0.24
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Weighted average shares outstanding - assuming dilution 30,461 30,412
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See notes to condensed consolidated financial statements.
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INVACARE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statement of Cash Flows - (unaudited)
Three Months Ended
March 31,
1998 1997
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(In thousands)
OPERATING ACTIVITIES
Net earnings $7,542 $7,220
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 5,690 4,855
Provision for losses on receivables (360) 551
Provision for deferred income taxes (1,642) (255)
Provision for other deferred liabilities 265 1,190
Changes in operating assets and liabilities:
Trade receivables (10,087) 1,358
Inventories (5,355) 2,520
Other current assets 1,171 (241)
Accounts payable 8,185 1,897
Accrued expenses (3,320) (6,816)
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NET CASH PROVIDED BY OPERATING ACTIVITIES 2,089 12,279
INVESTING ACTIVITIES
Purchases of property and equipment (9,811) (5,875)
Proceeds from sale of property and equipment 24 66
Installment sales contracts written (15,944) (16,956)
Payments received on installment sales contracts 15,114 17,284
Marketable securities purchased (72) (1,789)
Marketable securities sold 250 2,875
Increase in other investments (133) (328)
Increase in other long term assets (3,103) (2,315)
Business acquisitions, net of cash acquired (129,318) 0
Other (273) (1,114)
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NET CASH REQUIRED BY INVESTING ACTIVITIES (143,266) (8,152)
FINANCING ACTIVITIES
Proceeds from revolving lines of credit and long-term borrowings 258,760 9,581
Principal payments on revolving lines of credit, long-term debt
and capital lease obligations (117,066) (12,562)
Proceeds from exercise of stock options 2,471 941
Dividends paid (370) (367)
Purchase of treasury stock (498) 0
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NET CASH PROVIDED/(REQUIRED) BY FINANCING
ACTIVITIES
143,297 (2,407)
Effect of exchange rate changes on cash (103) (111)
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Increase in cash and cash equivalents 2,017 1,609
Cash and cash equivalents at beginning of period 5,696 4,431
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Cash and cash equivalents at end of period $ 7,713 $ 6,040
=========== ========
See notes to condensed consolidated financial statements.
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INVACARE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated
Financial Statements
(Unaudited)
Nature of Operations -- Invacare Corporation and its subsidiaries (the
"company") is the leading home medical equipment manufacturer in the world based
on its distribution channels, the breadth of its product line and sales. The
company designs, manufactures and distributes an extensive line of medical
equipment for the home health care and extended care markets. The company's
products include standard manual wheelchairs, motorized and lightweight
prescription wheelchairs, motorized scooters, patient aids, home care and
institutional beds, low air loss therapy products, home respiratory products,
ambulatory infusion pumps, seating and positioning products, bathing equipment
and distributed products.
Principles of Consolidation -- In the opinion of the company, the accompanying
unaudited condensed consolidated financial statements are prepared in accordance
with generally accepted accounting principles which require management to make
estimates and assumptions that affect the amounts reported in the financial
statements. Actual results may differ from these estimates. The accompanying
financial statements include all adjustments, which were of a normal recurring
nature, necessary to present fairly the financial position of the company as of
March 31, 1998 and December 31, 1997, and the results of its operations for the
three months ended March 31, 1998 and 1997 and changes in its cash flows for the
three months ended March 31, 1998 and 1997. The results of operations for the
three months ended March 31, 1998, are not necessarily indicative of the results
to be expected for the full year.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission. These condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements contained in the company's annual financial statements and notes.
Comprehensive Income -- In June 1997, the Financial Accounting Standards Board
issued SFAS No. 130, Reporting Comprehensive Income, which requires that an
enterprise classify items of other comprehensive income, as defined therein, by
their nature in a financial statement and display the accumulated balance of
other comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of the balance sheet. The company adopted
SFAS No. 130 in the first quarter of 1998. The company's total comprehensive
earnings were as follows (in thousands):
Three Months Ended
March 31,
1998 1997
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Net earnings 7,542 7,220
Foreign currency translation (1,545) (4,670)
Unrealized gain or (loss)on available for sale securities 85 2,076
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Total comprehensive earnings 6,082 4,626
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Net Income Per Common Share -- Net income per common share has been computed in
accordance with Statement of Financial Accounting Standards (SFAS) No. 128,
adopted by the company in the quarter ended December 31, 1997. All net income
per share amounts shown for periods prior to adoption have been restated to
conform to the provisions of SFAS No. 128. For the periods ended March 31, 1998
and 1997 there was no effect on net income per share from SFAS No. 128.
Three Months Ended
March 31,
1998 1997
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(In thousands except per share data)
Basic
Average common shares outstanding 29,779 29,486
Net income $ 7,542 $ 7,220
Net income per common share $ .25 $ .24
Diluted
Average common shares outstanding 29,779 29,486
Stock options 682 926
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Average common shares assuming 30,461 30,412
dilution
Net income $ 7,542 $ 7,220
Net income per common share $ .25 $ .24
Recently Issued Accounting Pronouncements -- In June 1997, the Financial
Accounting Standards Board issued SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information. This statement establishes standards for
reporting financial and descriptive information about operating segments. Under
SFAS No. 131, information pertaining to the company's operating segments will be
reported on the basis that is used internally for evaluating segment performance
and making resource allocation determinations. Management is currently studying
the potential effects of adoption of this statement, which is required in 1998.
In February 1998, the Financial Accounting Standards Board issued SFAS No. 132,
Employers' Disclosures about Pensions and Other Postretirement Benefits. This
statement does not change the recognition or measurement of pension and
postretirement benefit plans, but standardizes disclosure requirements for
pensions and other postretirement benefits, eliminates certain disclosures and
requires certain additional information. SFAS No. 132 is effective for fiscal
years beginning after December 15, 1997.
Statement of Cash Flows -- The company made payments (in thousands) of :
Three Months Ended
March 31,
1998 1997
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Interest $4,192 $3,337
Income taxes 2,052 2,306
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Inventories -- Inventories consist of the following components (in thousands):
March 31, December 31,
1998 1997
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Raw materials $ 25,070 $ 23,704
Work in process 13,082 11,676
Finished goods 50,872 40,328
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$ 89,024 $ 75,708
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The inventory determination under the LIFO method can only be 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.
Property and Equipment -- Property and equipment consist of the following (in
thousands):
March 31, December 31,
1998 1997
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Land, buildings and improvements $ 39,999 $ 40,026
Machinery and equipment 121,375 111,959
Furniture and fixtures 9,928 9,649
Leasehold improvements 7,321 6,979
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178,623 168,613
Less allowance for depreciation (81,384) (78,036)
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$ 97,239 $ 90,577
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS
NET SALES
Net sales for the three months ended March 31, 1998 increased by 19.5% over the
same period a year ago with acquisitions accounting for 14.4% of the increase
while currency translation negatively impacted sales by 2.4%. Sales for the
three months ended March 31, 1998 were also negatively impacted by reduced sales
to the Company's largest customer. The reduction in sales to this customer
impacted reported sales growth by approximately 2.9% for the quarter. Power,
respiratory and personal care product lines posted the largest increases for the
quarter. Sales increased principally due to higher unit volumes. The volume
increases were partially offset by the effects of a continuing competitive
pricing environment.
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North American Operations
Rehab Products Group. Sales of the Rehab Products Group, which consists of the
power wheelchairs, custom manual wheelchairs and seating and positioning
business units, increased 34.6% for the quarter. The increase was primarily a
result of the new Power mid-wheel drive wheelchairs, the new Action Orbit(TM)
Pediatric Tilt-In-Space Chair and the strong volume increase of the second
generation Power Storm Arrow(R). This group has been effected the least by
competitive pricing activities.
Standard Products Group. Sales of the Standard Products Group, which consists of
the manual wheelchairs, personal care, beds, low air loss therapy, and retail
business units, decreased 2.3%. The personal care, low air loss therapy and
retail product lines each posted sales increases which were offset by volume
decreases in manual wheelchairs and beds. Overall unit volume increased, but
price declines principally in manual wheelchairs and beds, led to a decline in
dollar sales.
Continuing Care / Distributed Products Group. Sales of the Continuing Care /
Distributed Products Group, which consists of Invacare Health Care Furnishings,
patient transport and distributed products increased 2.2%, excluding the impact
of acquisitions. Acquisitions increased sales by $21,736,000 for the quarter
primarily as a result of the Suburban Ostomy Supply Company acquisition
consummated on January 28, 1998. This groups sales increase was negatively
impacted by the termination of a contract to produce home care beds for a major
competitor in October, 1997.
Respiratory Products Group. Sales of the Respiratory Products Group, which
consists of the oxygen concentrator, liquid oxygen, aerosol therapy and
associated respiratory products business units, increased 10.6%. The growth was
a result of volume increases in oxygen concentrators and the new Invacare(R)
Venture(TM) HomeFill(TM) product, offset by continued pricing pressure across
the majority of the respiratory product lines.
Other. Other, consisting primarily of the company's Canadian, Australian and New
Zealand operations, aftermarket parts business and ambulatory infusion pumps had
a 4.6% sales increase excluding the negative impact of 7.3% from foreign
currency. Canada continues to show solid growth as a result of strong power,
custom manual and seating product sales.
European Operations
European sales increased 1.8%, excluding the negative impact of 8.5% from
foreign currency translation. Sales continue to be negatively impacted by market
pressures from reduced government spending, especially in Germany.
GROSS PROFIT
Gross profit as a percentage of net sales for the three month period ending
March 31, 1998 was 28.4% compared to 29.2% for the same period last year.
Margins for North American operations declined principally due to the effect of
businesses acquired, particularly Suburban Ostomy Supply Company, as they had
margins lower than those of the company's existing businesses. Continued pricing
pressure also had a negative effect on margins however, operating margins for
North America excluding acquisitions improved slightly in the quarter. European
gross margins decreased as a result of overall price declines, mix changes in
products sold and the continued effects of a strong U.S. dollar.
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SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expense as a percentage of net sales for the
three months ending March 31, 1998 was 20.6% compared to 20.9% in the same
period a year ago. The dollar increase was $5,659,000 or 17.9% with acquisitions
representing $4,663,000 or 14.8% of the increase. Tight expense control in the
company's existing North American operation's resulted in a reduction in the
overall expense as a percentage of sales.
North American selling, general and administrative costs as a percent to sales
grew at a slower rate than sales for the quarter. European operations' selling,
general and administrative costs increased by $637,000 from the same period a
year ago and were up as a percent to sales principally due to the strength of
the U.S. dollar.
NON-RECURRING CHARGE
In 1997, the company announced non-recurring and unusual charges of $61,039,000
($38,839,000 or $1.28 diluted per share after tax). Of these charges,
$37,456,000 had been utilized through March 31, 1998 including $2,500,000 and
$225,677 in the first quarter of 1998 for litigation settlements and business
exits, respectfully. The company expects substantially all of the remaining
charge to be utilized over the next nine months.
INTEREST
Interest income in the three months ended March 31, 1998 declined slightly
compared to the same period a year ago, as decreased volume in installment loans
were offset by an overall increase in the portfolio's effective rate. For the
quarter, interest expense increased due to higher average outstanding borrowings
resulting primarily from the acquisition of Suburban Ostomy Supply Company on
January 28, 1998.
INCOME TAXES
The company had an effective tax rate of 39.0% which is the same effective tax
rate in the same period a year ago.
LIQUIDITY AND CAPITAL RESOURCES
The company's reported overall level of long-term obligations increased $142.4
million to $326.4 million for the three months ended March 31, 1998. Long term
debt increased principally due to acquisition activity. The company continues to
maintain an adequate liquidity position to fund its working capital and capital
requirements through its cash flow from operations and its bank lines. As of
March 31, 1998, the company had approximately $221.7 million available under its
lines of credit. Pursuant to the most restrictive covenant of its debt
arrangements the company could borrow an additional $137 million.
The company's financing arrangements require it to maintain certain
conditions with respect to net worth, working capital, funded debt to
capitalization and interest coverage as defined. The company is in compliance
with all of the conditions.
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CAPITAL EXPENDITURES
There were no material capital expenditure commitments outstanding as of March
31, 1998. The company expects 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 1998 will approximate $26 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.
ACQUISITIONS
In January, 1998 the company acquired for cash all outstanding shares of
Suburban Ostomy Supply Company, Incorporated a leading national direct marketing
wholesaler of medical supplies and related products to the home care industry.
The acquisition was accounted for under the purchase method of accounting.
Suburban complements Invacare's industry-leading "One Stop Shoppingsm" strategy
and significantly strengthens our industry-leading position by adding a complete
line of medical supplies and soft goods.
CASH FLOWS
Cash flows provided by operating activities were $2.1 million for the first
quarter of 1998 compared to $12.3 million in 1997. Operating cash flow declined
in 1998 due to increased inventory levels required to meet increased sales
volume and the introduction of certain new products. Operating cash flow was
also impacted by increased receivable levels as additional dealer financing
became more important to our customers due to the impact of governmental
reimbursement cuts mandated by the balanced budget act. These increases were
offset somewhat by increased net income.
Cash flows required for investing activities increased by $135.1 million for the
first three months of 1998 when compared to 1997, primarily as a result of the
acquisition of Suburban Ostomy Supply Company and the continued investment in
computer systems and production machinery and equipment. There were no
acquisitions in the same period for 1997.
Cash flows provided by financing activities were $143.3 compared to cash
required from financing of $2.4 million in 1997. The increase in cash provided
by financing activities was primarily a result of an increase in net proceeds
from long-term borrowings which were used to fund the acquisition. In February
1998, the company completed the private placement of $100 million in notes to
fund the acquisition of Suburban Ostomy Supply Company.
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.
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DIVIDEND POLICY
On February 15, 1998, the Board of Directors for Invacare Corporation declared a
quarterly cash dividend of $.0125 per Common Share to shareholders of record as
of April 1, 1998, to be paid on April 15, 1998. At the current rate, the cash
dividend will amount to $.05 per Common Share on an annual basis.
YEAR 2000 ISSUE
The company has developed a plan to modify its existing information technology
in order to recognize the year 2000 and has begun converting its critical data
processing systems. The plan is designed to ensure that there is no adverse
effect on the company's core business operations and that transactions with
customers, suppliers and financial institutions are fully supported. The company
is well under way with these efforts and believes its planning and
implementation efforts will be adequate to address its year 2000 concerns.
Currently, the project is expected to be substantially completed by early 1999
and to cost between $4.0 and $6.0 million. This estimate includes internal costs
and excludes the costs to upgrade and replace systems in the normal course of
business. The company does not expect this project to have a significant effect
on the company's results of operations or financial position.
FORWARD-LOOKING STATEMENTS
The statements contained in this form 10-Q constitute forward-looking statements
based on current expectations which are covered under the "safe harbor"
provision within the Private Securities Litigation Reform Act of 1995. Actual
results and events, including the acceleration of certain strategic initiatives
for which a non-recurring charge has been reported, may differ from those
anticipated as a result of risks and uncertainties which include, but are not
limited to, pricing pressures as a result of the impact of the consolidations of
health care customers and competitors, the availability of strategic acquisition
candidates and Invacare's ability to effectively integrate acquired companies,
and the overall economic, market and industry conditions, as well as the risks
described from time to time in Invacare's reports as filed with the Securities
and Exchange Commission.
Item 6. Exhibits and Reports on Form 8-K
A Exhibits:
Official Exhibit No.
10(au) Note Purchase Agreement dated as of February 27, 1998
for $80,000,000 6.71% Series A Senior Notes Due February 27,
2008 and $20,000,000 6.60% Series B Senior Notes Due February
27, 2005.
27 Financial Data Schedule
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B Reports on Form 8-K:
A report on Form 8-K dated February 6, 1998, was filed related
to an agreement and plan of merger between Invacare
Corporation, Inva Acquisition Corporation and Suburban Ostomy
Supply Company.
A report on Form 8-K dated March 31, 1998, was filed in
connection with the reallocation of part of the non-recurring
and unusual charge reported in the third quarter of 1997 to
the fourth quarter of 1997.
A report on Form 8-K dated April 9, 1998, was filed in
connection with the acquisition of Suburban Ostomy Supply
Company, pursuant to an agreement and plan of merger between
Invacare Corporation, Inva Acquisition Corporation and
Suburban Ostomy Supply Company.
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/ Thomas R. Miklich
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Thomas R. Miklich
Chief Financial Officer
Date: May 15, 1998