XNYS:IVC Invacare Corp Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2012
OR
[    ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from            to            
Commission File Number 001-15103
INVACARE CORPORATION
(Exact name of registrant as specified in its charter)
 
 
 
Ohio
95-2680965
(State or other jurisdiction of
incorporation or organization)
(IRS Employer Identification No.)
 
 
One Invacare Way, P.O. Box 4028, Elyria, Ohio
44036
(Address of principal executive offices)
(Zip Code)
(440) 329-6000
(Registrant's telephone number, including area code)
 
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 (the “Exchange Act”) during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “small reporting company” in Rule 12b-2 of the Exchange Act. (Check One):    Large accelerated filer x    Accelerated filer ¨  Non-accelerated filer  ¨ (Do not check if a smaller reporting company) Smaller reporting company ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes ¨  No  x
As of May 4, 2012, the registrant had 30,735,171 Common Shares and 1,084,747 Class B Common Shares outstanding.

 
 
 
 
 



INVACARE CORPORATION
INDEX
 
 
 
 
Item
 
Page
PART I: FINANCIAL INFORMATION
1
 
 
 
 
 
2
3
4
 
 
 
PART II: OTHER INFORMATION
1
1A.
2
6






Part I.    FINANCIAL INFORMATION
Item 1.    Financial Statements.

INVACARE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statement of Comprehensive Income (unaudited)

 
 
For the Three Months Ended
 
March 31,
 
 
2012
 
2011
 
 
(In thousands, except per share data)
Net sales
$
433,564

 
$
428,498

 
Cost of products sold
313,995

 
305,492

 
Gross Profit
119,569

 
123,006

 
Selling, general and administrative expenses
107,499

 
105,777

 
Charges related to restructuring activities
548

 

 
Loss on debt extinguishment including debt finance charges and associated fees

 
4,881

 
Interest expense
1,476

 
2,611

 
Interest income
(337
)
 
(267
)
 
Earnings before Income Taxes
10,383

 
10,004

 
Income taxes
2,150

 
2,550

 
Net Earnings
$
8,233

 
$
7,454

 
Net Earnings per Share—Basic
$
0.26

 
$
0.23

 
Weighted Average Shares Outstanding—Basic
31,819

 
32,174

 
Net Earnings per Share—Assuming Dilution
$
0.26

 
$
0.23

 
Weighted Average Shares Outstanding—Assuming Dilution
31,822

 
33,015

 
 
 
 
 
 
Net Earnings
$
8,233

 
$
7,454

 
Other comprehensive income:
 
 
 
 
Foreign currency translation adjustments
334

 
35,433

 
Defined Benefit Plans:
 
 
 
 
Amortization of prior service costs and unrecognized gains (losses)
228

 
(25
)
 
Amounts arising during the year, primarily due to the addition of new participants
(35
)
 
(204
)
 
Deferred tax adjustment resulting from defined benefit plan activity
(11
)
 
35

 
Valuation reserve (reversal) associated with defined benefit plan activity
11

 
(17
)
 
Current period unrealized gain (loss) on cash flow hedges
793

 
(1,315
)
 
Deferred tax benefit (loss) related to unrealized gain (loss) on cash flow hedges
(134
)
 
31

 
Other Comprehensive Income
1,186

 
33,938

 
 
 
 
 
 
Comprehensive Income
$
9,419

 
$
41,392

 

See notes to condensed consolidated financial statements.


FS-1


INVACARE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (unaudited)
 

 
March 31,
2012
 
December 31,
2011
 
(In thousands)
Assets
 
 
 
Current Assets
 
 
 
Cash and cash equivalents
$
32,668

 
$
34,924

Trade receivables, net
255,359

 
247,974

Installment receivables, net
4,542

 
6,671

Inventories, net
214,155

 
192,761

Deferred income taxes
1,038

 
1,620

Other current assets
46,096

 
44,820

Total Current Assets
553,858

 
528,770

Other Assets
42,834

 
42,647

Other Intangibles
80,577

 
83,320

Property and Equipment, net
128,185

 
129,712

Goodwill
495,095

 
496,605

Total Assets
$
1,300,549

 
$
1,281,054

Liabilities and Shareholders’ Equity
 
 
 
Current Liabilities
 
 
 
Accounts payable
$
160,974

 
$
148,805

Accrued expenses
124,991

 
132,595

Accrued income taxes
150

 
1,495

Short-term debt and current maturities of long-term obligations
7,371

 
5,044

Total Current Liabilities
293,486

 
287,939

Long-Term Debt
260,276

 
260,440

Other Long-Term Obligations
109,706

 
106,150

Shareholders’ Equity
 
 
 
Preferred Shares (Authorized 300 shares; none outstanding)

 

Common Shares (Authorized 100,000 shares; 33,836 and 33,835 issued in 2012 and 2011, respectively)—no par
8,471

 
8,471

Class B Common Shares (Authorized 12,000 shares; 1,086 and 1,086, issued and outstanding in 2012 and 2011, respectively)—no par
272

 
272

Additional paid-in-capital
222,943

 
221,409

Retained earnings
372,136

 
364,300

Accumulated other comprehensive earnings
126,062

 
124,876

Treasury shares
(92,803
)
 
(92,803
)
Total Shareholders’ Equity
637,081

 
626,525

Total Liabilities and Shareholders’ Equity
$
1,300,549

 
$
1,281,054


See notes to condensed consolidated financial statements.
 

FS-2


INVACARE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statement of Cash Flows (unaudited)
 
 
For the Three Months Ended
 
March 31,
 
2012
 
2011
 
Operating Activities
(In thousands)
Net earnings
$
8,233

 
$
7,454

 
Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
9,632

 
8,795

 
Provision for losses on trade and installment receivables
1,440

 
3,392

 
Provision (Benefit) for deferred income taxes
41

 
(233
)
 
Provision for other deferred liabilities
220

 
694

 
Provision for stock-based compensation
1,534

 
1,412

 
Loss on disposals of property and equipment
7

 
158

 
Loss on debt extinguishment including debt finance charges and associated fees

 
4,881

 
Amortization of convertible debt discount
141

 
593

 
Changes in operating assets and liabilities:
 
 
 
 
Trade receivables
(7,967
)
 
1,412

 
Installment sales contracts, net
2,060

 
(320
)
 
Inventories
(20,615
)
 
(4,660
)
 
Other current assets
596

 
(316
)
 
Accounts payable
11,805

 
(575
)
 
Accrued expenses
(9,394
)
 
(15,278
)
 
Other long-term liabilities
1,442

 
1,534

 
Net Cash Provided (Used) by Operating Activities
(825
)
 
8,943

 
Investing Activities
 
 
 
 
Purchases of property and equipment
(4,681
)
 
(3,353
)
 
Proceeds from sale of property and equipment
45

 
14

 
(Increase) Decrease in other long-term assets
(11
)
 
(206
)
 
Other
20

 
(161
)
 
Net Cash Used for Investing Activities
(4,627
)
 
(3,706
)
 
Financing Activities
 
 
 
 
Proceeds from revolving lines of credit and long-term borrowings
75,508

 
112,292

 
Payments on revolving lines of credit and long-term borrowings
(72,480
)
 
(117,558
)
 
Proceeds from exercise of stock options

 
2,068

 
Payment of financing costs

 
(4,507
)
 
Payment of dividends
(397
)
 
(401
)
 
Purchase of treasury stock

 
(14,644
)
 
Net Cash Provided (Used) by Financing Activities
2,631

 
(22,750
)
 
Effect of exchange rate changes on cash
565

 
1,683

 
Increase (Decrease) in cash and cash equivalents
(2,256
)
 
(15,830
)
 
Cash and cash equivalents at beginning of year
34,924

 
48,462

 
Cash and cash equivalents at end of year
$
32,668

 
$
32,632

 

See notes to condensed consolidated financial statements.

FS-3

INVACARE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (unaudited) - March 31, 2012


Accounting Policies

Nature of Operations: Invacare Corporation is the world’s leading manufacturer and distributor in the estimated $11.0 billion worldwide market for medical equipment and supplies used in the home based upon the company’s distribution channels, breadth of product line and net sales. The company designs, manufactures and distributes an extensive line of health care products for the non-acute care environment, including the home health care, retail and extended care markets.

Principles of Consolidation: The consolidated financial statements include the accounts of the company and its wholly owned subsidiaries and include all adjustments, which were of a normal recurring nature, necessary to present fairly the financial position of the company as of March 31, 2012, the results of its operations for the three months ended March 31, 2012 and changes in its cash flow for the three months ended March 31, 2012 and 2011, respectively. Certain foreign subsidiaries, represented by the European segment, are consolidated using a February 29 quarter end in order to meet filing deadlines. No material subsequent events have occurred related to the European segment, which would require disclosure or adjustment to the company's financial statements. All significant intercompany transactions are eliminated.  The results of operations for the three months ended March 31, 2012 are not necessarily indicative of the results to be expected for the full year.

Use of Estimates: The consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States, which require management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results may differ from these estimates.

Stock-Based Compensation Plans: The company accounts for share-based compensation under the provisions of Compensation-Stock Compensation, ASC 718. The company has not made any modifications to the terms of any previously granted options and no significant changes have been made regarding the valuation methodologies used to determine the fair value of options granted and the company continues to use a Black-Scholes valuation model.
The substantial majority of the options awarded have been granted at exercise prices equal to the market value of the underlying stock on the date of grant. Restricted stock awards granted without cost to the recipients are expensed on a straight-line basis over the vesting periods.
The amounts of stock-based compensation expense recognized were as follows (in thousands):
 
For the Three Months Ended
 
March 31,
 
2012
 
2011
 
Stock-based compensation expense recognized as part of selling, general and administrative expense
$
1,534

 
$
1,412

 
The amounts above reflect compensation expense related to restricted stock awards and nonqualified stock options awarded under the 2003 Performance Plan (the “2003 Plan”). Stock-based compensation is not allocated to the business segments, but is reported as part of All Other as shown in the company's Business Segment Note to the Consolidated Financial Statements.

Recent Accounting Pronouncements: In June 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2011-05, Presentation of Comprehensive Income (ASU 2011-05 or the ASU). ASU 2011-05 requires comprehensive income to be reported in either a single statement or in two consecutive statements reporting net income and other comprehensive income (OCI). The ASU does not change what is required to be reported in OCI. The company adopted ASU 2011-05 in this first quarter 2012 Form 10-Q with no impact on the company's financial position, results of operations or cash flows other than the modification to the company's Consolidated Statement of Earnings.

Receivables

Accounts receivable are reduced by an allowance for amounts that may become uncollectible in the future. Substantially all of the company’s receivables are due from health care, medical equipment providers and long term care facilities located throughout the United States, Australia, Canada, New Zealand and Europe. A significant portion of products sold to providers, both foreign and domestic, is ultimately funded through government reimbursement programs such as Medicare and Medicaid in the U.S. As a consequence, changes in these programs can have an adverse impact on dealer liquidity and profitability.



FS-4

INVACARE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (unaudited) - March 31, 2012

The estimated allowance for uncollectible amounts ($25,376,000 at March 31, 2012 and $27,947,000 at December 31, 2011) is based primarily on management’s evaluation of the financial condition of specific customers. In addition, as a result of the third party financing arrangement with DLL, a third party financing company which the company has worked with since 2000, management monitors the collection status of these contracts in accordance with the company’s limited recourse obligations and provides amounts necessary for estimated losses in the allowance for doubtful accounts and establishing reserves for specific customers as needed. The company charges off uncollectible trade accounts receivable after such receivables are moved to collection status and legal remedies are exhausted. See Concentration of Credit Risk in the Notes to the Consolidated Financial Statements for a description of the financing arrangement. Long-term installment receivables are included in “Other Assets” on the consolidated balance sheet.

The company’s U.S. customers electing to finance their purchases can do so using DLL. In addition, Invacare often provides financing directly for its Canadian customers for which DLL is not an option, as DLL typically provides financing to Canadian customers only on a limited basis. The installment receivables recorded on the books of the company represent a single portfolio segment of finance receivables to the independent provider channel. The portfolio segment is comprised of two classes of receivables distinguished by geography and credit quality. The U.S. installment receivables are the first class and represent installment receivables re-purchased from DLL because the customers were in default. Default with DLL is defined as a customer being delinquent by three payments. The Canadian installment receivables represent the second class of installment receivables which were originally financed by Invacare because third party financing was not available to the HME providers. The Canadian installment receivables are typically financed for twelve months and historically have had a very low risk of default.

The estimated allowance for uncollectible amounts and evaluation for impairment for both classes of installment receivables is based on the company’s quarterly review of the financial condition of each individual customer with the allowance for doubtful accounts adjusted accordingly. Installments are individually and not collectively reviewed for impairment. The company assesses the bad debt reserve levels based upon the status of the customer’s adherence to a legally negotiated payment schedule and the company’s ability to enforce judgments, liens, etc.

For purposes of granting or extending credit, the company utilizes a scoring model to generate a composite score that considers each customer’s consumer credit score and or D&B credit rating, payment history, security collateral and time in business. Additional analysis is performed for customers desiring credit greater than $250,000 which includes a detailed review of the customer’s financials as well as consideration of other factors such as exposure to changing reimbursement laws.

Interest income is recognized on installment receivables based on the terms of the installment agreements. Installment accounts are monitored and if a customer defaults on payments and is moved to collection, interest income is no longer recognized. Subsequent payments received once an account is put on non-accrual status are generally first applied to the principal balance and then to the interest. Accruing of interest on collection accounts would only be restarted if the account became current again. All installment accounts are accounted for using the same methodology regardless of the duration of the installment agreements. When an account is placed in collection status, the company goes through a legal process of adjudication which typically approximates 18 months. Any write-offs are made after the legal process has been completed. The company has not made any changes to either its accounting policies or methodology to estimation allowances for doubtful accounts in the last twelve months.
Installment receivables consist of the following (in thousands):
 
March 31, 2012
 
December 31, 2011
 
Current
 
Long-
Term
 
Total
 
Current
 
Long-
Term
 
Total
Installment receivables
$
7,213

 
$
2,211

 
$
9,424

 
$
8,990

 
$
2,931

 
$
11,921

Less:
 
 
 
 
 
 
 
 
 
 
 
Unearned interest
(140
)
 

 
(140
)
 
(171
)
 

 
(171
)
 
7,073

 
2,211

 
9,284

 
8,819

 
2,931

 
11,750

Allowance for doubtful accounts
(2,531
)
 
(1,578
)
 
(4,109
)
 
(2,148
)
 
(2,125
)
 
(4,273
)
 
$
4,542

 
$
633

 
$
5,175

 
$
6,671

 
$
806

 
$
7,477


Installment receivable purchased from DLL during the three months ended March 31, 2012 increased the gross installment receivables balance by $1,000. No sales of installment receivables were made by the company during the quarter.


FS-5

INVACARE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (unaudited) - March 31, 2012


The movement in the installment receivables allowance for doubtful accounts was as follows (in thousands):
 
 
For the Three Months Ended
 
Year Ended
 
March 31, 2012
 
December 31, 2011
Balance as of beginning of period
$
4,273

 
$
4,841

Current period provision
355

 
1,215

Direct write-offs charged against the allowance
(519
)
 
(1,783
)
Balance as of end of period
$
4,109

 
$
4,273

 
Installment receivables by class as of March 31, 2012 consist of the following (in thousands):
 
 
Total
Installment
Receivables
 
Unpaid
Principal
Balance
 
Related
Allowance
for
Doubtful
Accounts
 
Interest
Income
Recognized
U.S.
 
 
 
 
 
 
 
Impaired Installment receivables with a related allowance recorded
$
5,499

 
$
5,499

 
$
3,804

 
$

Canada
 
 
 
 
 
 
 
Non-Impaired Installment receivables with no related allowance recorded
3,620

 
3,480

 

 
27

Impaired Installment receivables with a related allowance recorded
305

 
305

 
305

 

Total Canadian Installment Receivables
$
3,925

 
$
3,785

 
$
305

 
$
27

Total
 
 
 
 
 
 
 
Non-Impaired Installment receivables with no related allowance recorded
3,620

 
3,480

 

 
27

Impaired Installment receivables with a related allowance recorded
5,804

 
5,804

 
4,109

 

Total Installment Receivables
$
9,424

 
$
9,284

 
$
4,109

 
$
27


FS-6

INVACARE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (unaudited) - March 31, 2012


Installment receivables by class as of December 31, 2011 consist of the following (in thousands):
 
Total
Installment
Receivables
 
Unpaid
Principal
Balance
 
Related
Allowance
for
Doubtful
Accounts
 
Interest
Income
Recognized
U.S.
 
 
 
 
 
 
 
Impaired Installment receivables with a related allowance recorded
$
6,116

 
$
6,116

 
$
4,240

 
$

Canada
 
 
 
 
 
 
 
Non-Impaired Installment receivables with no related allowance recorded
5,696

 
5,525

 

 
271

Impaired Installment receivables with a related allowance recorded
109

 
109

 
33

 

Total Canadian Installment Receivables
$
5,805

 
$
5,634

 
$
33

 
$
271

Total
 
 
 
 
 
 
 
Non-Impaired Installment receivables with no related allowance recorded
5,696

 
5,525

 

 
271

Impaired Installment receivables with a related allowance recorded
6,225

 
6,225

 
4,273

 

Total Installment Receivables
$
11,921

 
$
11,750

 
$
4,273

 
$
271


Installment receivables with a related allowance recorded as noted in the table above represent those installment receivables on a non-accrual basis in accordance with ASU 2010-20. As of March 31, 2012, the company had no U.S. installment receivables past due of 90 days or more for which the company is still accruing interest. Individually, all U.S. installment receivables are assigned a specific allowance for doubtful accounts based on management’s review when the company does not expect to receive both the contractual principal and interest payments as specified in the loan agreement. However, while the full balance may be deemed to be impaired, the company does historically collect a large percentage of the principal of its U.S. installment receivables.

In Canada, the company had an immaterial amount of installment receivables which were past due of 90 days or more as of March 31, 2012 and December 31, 2011 for which the company is still accruing interest.

The aging of the company’s installment receivables was as follows (in thousands):
 
 
March 31, 2012
 
December 31, 2011
 
Total
 
U.S.
 
Canada
 
Total
 
U.S.
 
Canada
Current
$
3,431

 
$

 
$
3,431

 
$
5,612

 
$

 
$
5,612

0-30 Days Past Due
122

 

 
122

 
84

 

 
84

31-60 Days Past Due
44

 

 
44

 
42

 

 
42

61-90 Days Past Due
20

 

 
20

 
8

 

 
8

90+ Days Past Due
5,807

 
5,499

 
308

 
6,175

 
6,116

 
59

 
$
9,424

 
$
5,499

 
$
3,925

 
$
11,921

 
$
6,116

 
$
5,805



FS-7

INVACARE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (unaudited) - March 31, 2012


Inventories

Inventories as of March 31, 2012 and December 31, 2011 consist of the following (in thousands):
 
 
March 31,
 
December 31,
 
2012
 
2011
Finished goods
$
124,143

 
$
116,378

Raw materials
75,725

 
63,244

Work in process
14,287

 
13,139

 
$
214,155

 
$
192,761


Property and Equipment

Property and equipment consist of the following (in thousands):
 
 
March 31, 2012
 
December 31, 2011
Machinery and equipment
$
364,321

 
$
360,215

Land, buildings and improvements
95,933

 
95,737

Furniture and fixtures
14,247

 
14,034

Leasehold improvements
16,052

 
15,750

 
490,553

 
485,736

Less allowance for depreciation
(362,368
)
 
(356,024
)
 
$
128,185

 
$
129,712


Acquisitions

In September 2011, the company completed the acquisition of Dynamic Medical Systems (DMS), a solutions-based service organization with a strong presence in the western United States, for $41,465,000, which was paid in cash.  The acquisition gives the company a national rental footprint, which strategically enhances the company's ability to service regional and national long-term care providers. DMS has a clinical solution selling approach for wound therapies, safe patient handling and other rental applications in institutional settings. Pursuant to the purchase agreement, the company agreed to pay contingent consideration of up to $9,000,000 if certain goals were met over the next 24 months, principally earnings projections, for which the company has recorded a liability amount of $8,300,000 based on the company's estimate of the probable payout.

In October 2011, the company acquired a developed technology intangible asset and inventory related to a negative pressure wound therapy product in the United States for $965,000.

Goodwill
The change in goodwill reflected on the balance sheet from December 31, 2011 to March 31, 2012 was the result of foreign currency translation.

Other Intangibles

All of the company’s other intangible assets have been assigned definite lives and continue to be amortized over their useful lives, except for $31,756,000 related to trademarks, which have indefinite lives. The changes in intangible balances reflected on the balance sheet from December 31, 2011 to March 31, 2012 were the result of foreign currency translation and amortization.


FS-8

INVACARE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (unaudited) - March 31, 2012


The company's intangibles consist of the following (in thousands):
 
 
March 31, 2012
 
December 31, 2011
 
Historical
Cost
 
Accumulated
Amortization
 
Historical
Cost
 
Accumulated
Amortization
Customer Lists
$
94,618

 
$
52,958

 
$
94,790

 
$
50,832

Trademarks
31,756

 

 
31,777

 

License agreements
3,203

 
3,203

 
3,160

 
3,160

Developed Technology
9,638

 
4,872

 
9,823

 
4,870

Patents
6,380

 
5,394

 
6,358

 
5,266

Other
7,562

 
6,153

 
7,510

 
5,970

 
$
153,157

 
$
72,580

 
$
153,418

 
$
70,098


Amortization expense related to other intangibles was $2,569,000 in the first three months of 2012 and is estimated to be $9,985,000 in 2012, $9,090,000 in 2013, $8,646,000 in 2014, $7,194,000 in 2015, $5,968,000 in 2016 and $2,374,000 in 2017. Amortized intangibles are being amortized on a straight-line basis for periods from 3 to 20 years with the majority of the intangibles being amortized over a life of between 10 and 13 years.

Warranty Costs
Generally, the company's products are covered from the date of sale to the customer by warranties against defects in material and workmanship for various periods depending on the product. Certain components carry a lifetime warranty. A provision for estimated warranty cost is recorded at the time of sale based upon actual experience. The company continuously assesses the adequacy of its product warranty accrual and makes adjustments as needed. Historical analysis is primarily used to determine the company's warranty reserves. Claims history is reviewed and provisions are adjusted as needed. However, the company does consider other events, such as a product recall, which could warrant additional warranty reserve provision. The increase in the liability for pre-existing warranties in 2012 is primarily the result of product recalls.
The following is a reconciliation of the changes in accrued warranty costs for the reporting period (in thousands):
 
 
 
Balance as of January 1, 2012
$
19,842

Warranties provided during the period
3,350

Settlements made during the period
(3,132
)
Changes in liability for pre-existing warranties during the period, including expirations
885

Balance as of March 31, 2012
$
20,945


Long-Term Debt

Debt as of March 31, 2012 and December 31, 2011 consisted of the following (in thousands):
 
March 31, 2012
 
December 31, 2011
$400,000,000 senior secured revolving credit facility, due in October 2015
$
249,438

 
$
247,063

Convertible senior subordinated debentures at 4.125%, due in February 2027
9,938

 
9,797

Other notes and lease obligations
8,271

 
8,624

 
267,647

 
265,484

Less current maturities of long-term debt
(7,371
)
 
(5,044
)
 
$
260,276

 
$
260,440


FS-9

INVACARE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (unaudited) - March 31, 2012


The company's senior secured revolving credit agreement (the “Credit Agreement”), entered into on October 28, 2010, provides for a $400 million senior secured revolving credit facility maturing in October 2015. Pursuant to the terms of the Credit Agreement, the company may from time to time borrow, repay and re-borrow up to an aggregate outstanding amount at any one time of $400 million, subject to customary conditions.

In 2007, the company issued $135,000,000 principal amount of Convertible Senior Subordinated Debentures due 2027. The debentures are unsecured senior subordinated obligations of the company guaranteed by substantially all of the company’s domestic subsidiaries, pay interest at 4.125% per annum on each February 1 and August 1, and are convertible upon satisfaction of certain conditions into cash, common shares of the company, or a combination of cash and common shares of the company, subject to certain conditions, and at the company’s discretion. The debentures allow the company to satisfy the conversion using any combination of cash or stock. The company intends to satisfy the accreted value of the debentures using cash. Assuming adequate cash on hand at the time of conversion, the company also intends to satisfy the conversion spread using cash, as opposed to stock.

The company may from time to time seek to retire or purchase its 4.125% Convertible Senior Subordinated Debentures due 2027, in open market purchases, privately negotiated transactions or otherwise. Such purchases or exchanges, if any, will depend on prevailing market conditions, the company's liquidity requirements, contractual restrictions and other factors. The amounts involved in any such transactions, individually or in the aggregate, may be material.

The liability components of the company’s convertible debt as of March 31, 2012 and December 31, 2011 consist of the following (in thousands):
 
March 31, 2012
 
December 31, 2011
Principal amount of liability component
$
13,850

 
$
13,850

Unamortized discount
(3,912
)
 
(4,053
)
Net carrying amount of liability component
$
9,938

 
$
9,797


The company is a party to interest rate swap agreements to effectively convert a portion of floating rate revolving credit facility debt to fixed rate debt to avoid the risk of changes in market interest rates. Specifically, interest rate swap agreements for notional amounts of $18,000,000 and $22,000,000 through September 2013, $20,000,000 and $25,000,000 through May 2013 and $15,000,000 through February 2013 were entered into that fix the LIBOR component of the interest rate on that portion of the revolving credit facility debt at rates of 0.625%, 0.46%, 1.08%, 0.73% and 1.05%, respectively, for effective aggregate rates of 2.375%, 2.21%, 2.83%, 2.48% and 2.80%, respectively. As of March 31, 2012, the weighted average floating interest rate on borrowing was 2.01% compared to 2.28% as of December 31, 2011.
 
Shareholders’ Equity Transactions

The Amended and Restated 2003 Performance Plan, (the “2003 Plan”), allows the Compensation and Management Development Committee of the Board of Directors (the “Committee”) to grant up to 6,800,000 Common Shares in connection with incentive stock options, non-qualified stock options, stock appreciation rights and stock awards (including the use of restricted stock), which includes the addition of 3,000,000 Common Shares authorized for issuance under the 2003 Plan, as approved by the company’s shareholders on May 21, 2009. The maximum aggregate number of Common Shares that may be granted during the term of the 2003 Plan pursuant to all awards, other than stock options, is 1,300,000 Common Shares. The Committee has the authority to determine which participants will receive awards, the amount of the awards and the other terms and conditions of the awards. 

For the three months ended March 31, 2012, the Committee granted 11,542 non-qualified stock options under the 2003 Plan, each having a term of ten years and generally granted at the fair market value of the company’s Common Shares on the date of grant. In addition, restricted stock awards for 1,000 shares were granted without cost to the recipients which vest ratably over the four years after the award date. Compensation expense of $589,000 was recognized during the quarter ended March 31, 2012 related to restricted stock awards and there were outstanding restricted stock awards totaling 250,499 shares that were not vested.

As of March 31, 2012, there was $14,468,000 of total unrecognized compensation cost from stock-based compensation arrangements granted under the plans, which is related to non-vested options and shares, and includes $4,655,000 related to restricted stock awards. The company expects the compensation expense to be recognized over a weighted-average period of approximately two years. Prior to the adoption of ASC 718, Compensation—Stock Compensation, the company presented all tax

FS-10

INVACARE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (unaudited) - March 31, 2012

benefit deductions resulting from the exercise of stock options as a component of operating cash flows in the Consolidated Statement of Cash Flows. In accordance with ASC 718, any tax benefits resulting from tax deductions in excess of the compensation expense recognized for those options is classified as a component of financing cash flows.

The following table summarizes information about stock option activity for the three months ended March 31, 2012:
 
March 31, 2012
 
Weighted
Average
Exercise
Price
 
Options outstanding at January 1, 2012
4,455,365

 
28.99
 
Granted
11,542

 
17.54
 
Exercised

 
0.00
 
Canceled
(80,162
)
 
27.96
 
Options outstanding at March 31, 2012
4,386,745

 
28.99
 
Options exercise price range at March 31, 2012
10.70 to

 
 
 
 
$
47.80

 
 
 
Options exercisable at March 31, 2012
2,915,989

 
 
 
Options available for grant at March 31, 2012*
1,970,134

 
 
 
 ________________________
 *
Options available for grant as of March 31, 2012 reduced by net restricted stock award activity of 585,007.
 
The following table summarizes information about stock options outstanding at March 31, 2012:
 
Options Outstanding
 
Options Exercisable
Exercise Prices
Number
Outstanding
At 3/31/12
 
Weighted Average
Remaining
Contractual Life
 
Weighted Average
Exercise Price
 
Number
Exercisable
At 3/31/12
 
Weighted Average
Exercise Price
$ 10.70 – $15.00
15,153

 
3.8 years
 
$
12.10

 
10,153

 
$
10.70

$ 15.01 – $25.00
1,835,951

 
7.2
 
22.51

 
926,044

 
22.11

$ 25.01 – $35.00
1,207,050

 
6.7
 
26.24

 
651,201

 
26.83

$ 35.01 – $47.80
1,328,591

 
2.1
 
40.63

 
1,328,591

 
40.63

Total
4,386,745

 
5.5
 
$
28.99

 
2,915,989

 
$
31.56


When stock options are awarded, they generally become exercisable over a four-year vesting period whereby options vest in equal installments each year. Options granted with graded vesting are accounted for as single options. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with assumptions for expected dividend yield, expected stock price volatility, risk-free interest rate and expected life. The assumed expected life is based on the company's historical analysis of option history. The expected stock price volatility is also based on actual historical volatility, and expected dividend yield is based on historical dividends as the company has no current intention of changing its dividend policy.

The 2003 Plan provides that shares granted come from the company's authorized but unissued Common Shares or treasury shares. In addition, the company's stock-based compensation plans allow employee participants to exchange shares for minimum withholding taxes, which results in the company acquiring treasury shares.

Income Taxes

The company had an effective tax rate of 20.7% on earnings before tax for the three month period ended March 31, 2012 compared to an expected rate at the US statutory rate of 35%. The company's effective tax rate for the three months ended March 31, 2012 was lower than the U.S. federal statutory rate, principally due to foreign taxes recognized at rates below the U.S. statutory rate. The company also benefited year to date from countries with valuation allowances included in the combined effective rate due to expected current year profits. The company had an effective tax rate of 25.5% on earnings before tax for the three month period ended March 31, 2011, respectively, compared to an expected rate at the U.S. statutory rate of 35%. The company's effective tax rate for the three months ended March 31, 2011 was lower than the U.S. federal statutory rate as a result of foreign earnings taxed at an effective rate lower than the US statutory rate and a net profit for the quarter related to countries with tax valuation

FS-11

INVACARE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (unaudited) - March 31, 2012

allowances. The company had a domestic profit in the first quarter of 2012, but continued to be in a three-year cumulative loss position in the U.S. principally as a result of recording pre-tax expenses in prior periods related to the extinguishment of convertible debt at a premium and the write-off of goodwill. As a result of the loss position, the majority of the U.S. deferred tax assets continue to be subject to a valuation allowance.

Net Earnings Per Common Share

The following table sets forth the computation of basic and diluted net earnings per common share for the periods indicated. 
 
For the Three Months Ended
(In thousands except per share data)
March 31,
 
2012
 
2011
Basic
 
 
 
Average common shares outstanding
31,819

 
32,174

Net earnings
$
8,233

 
$
7,454

Net earnings per common share
$
0.26

 
$
0.23

Diluted
 
 
 
Average common shares outstanding
31,819

 
32,174

Shares related to convertible debt

 
488

Stock options and awards
3

 
353

Average common shares assuming dilution
31,822

 
33,015

Net earnings
$
8,233

 
$
7,454

Net earnings per common share
$
0.26

 
$
0.23


At March 31, 2012 and 2011, 4,287,922 and 2,163,436 shares associated with stock options, respectively were excluded from the average common shares assuming dilution, as they were anti-dilutive. At March 31, 2012, the majority of the anti-dilutive shares were granted at an exercise price of $24.45, which was higher than the average fair market value price of $16.74 for 2012. At March 31, 2011, the majority of the anti-dilutive shares were granted at an exercise price of $41.87, which was higher than the average fair market value price of $29.74 for 2011. Shares necessary to settle a conversion spread on the convertible notes were included in the common shares assuming dilution as the average market price of the company stock for 2011 did exceed the conversion price, which was not the case in 2012.

Concentration of Credit Risk

The company manufactures and distributes durable medical equipment and supplies to the home health care, retail and extended care markets. The company performs credit evaluations of its customers’ financial condition. In December 2000, Invacare entered into an agreement with De Lage Landen, Inc. (“DLL”), a third party financing company, to provide the majority of future lease financing to Invacare’s North America customers. The DLL agreement provides for direct leasing between DLL and the Invacare customer. The company retains a recourse obligation of $11,435,000 at March 31, 2012 to DLL for events of default under the contracts, which total $68,164,000 at March 31, 2012. The company monitors the collections status of these contracts and has provided amounts for estimated losses in its allowances for doubtful accounts in accordance with Receivables, ASC 310-10-05-4. Credit losses are provided for in the financial statements.

Substantially all of the company’s receivables are due from health care, medical equipment providers and long term care facilities located throughout the United States, Australia, Canada, New Zealand and Europe. A significant portion of products sold to dealers, both foreign and domestic, is ultimately funded through government reimbursement programs such as Medicare and Medicaid. The company has also seen a significant shift in reimbursement to customers from managed care entities. As a consequence, changes in these programs can have an adverse impact on dealer liquidity and profitability. In addition, reimbursement guidelines in the home health care industry have a substantial impact on the nature and type of equipment an end user can obtain as well as the timing of reimbursement and, thus, affect the product mix, pricing and payment patterns of the company’s customers.

FS-12

INVACARE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (unaudited) - March 31, 2012


Derivatives

ASC 815 requires companies to recognize all derivative instruments in the consolidated balance sheet as either assets or liabilities at fair value. The accounting for changes in fair value of a derivative is dependent upon whether or not the derivative has been designated and qualifies for hedge accounting treatment and the type of hedging relationship. For derivatives designated and qualifying as hedging instruments, the company must designate the hedging instrument, based upon the exposure being hedged, as a fair value hedge, cash flow hedge, or a hedge of a net investment in a foreign operation.

Cash Flow Hedging Strategy

The company uses derivative instruments in an attempt to manage its exposure to foreign currency exchange risk and interest rate risk. Foreign forward exchange contracts are used to manage the price risk associated with forecasted sales denominated in foreign currencies and the price risk associated with forecasted purchases of inventory over the next twelve months. Interest rate swaps are, at times, utilized to manage interest rate risk associated with the company’s fixed and floating-rate borrowings.

The company recognizes its derivative instruments as assets or liabilities in the consolidated balance sheet measured at fair value. A majority of the company’s derivative instruments are designated and qualify as cash flow hedges. Accordingly, the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. The remaining gain or loss on the derivative instrument in excess of the cumulative change in the fair value of the hedged item, if any, is recognized in current earnings during the period of change.

During the first three months of 2012 and 2011, the company was a party to interest rate swap agreements that qualified as cash flow hedges and effectively converted floating-rate debt to fixed-rate debt, so the company could avoid the risk of changes in market interest rates. The gains or losses on interest rate swaps are reflected in interest expense on the consolidated statement of operations.

To protect against increases/decreases in forecasted foreign currency cash flows resulting from inventory purchases/sales over the next year, the company utilizes foreign currency forward contracts to hedge portions of its forecasted purchases/sales denominated in foreign currencies. The gains and losses are included in cost of products sold and selling, general and administrative expenses on the consolidated statement of operations. If it is later determined that a hedged forecasted transaction is unlikely to occur, any prospective gains or losses on the forward contracts would be recognized in earnings. The company does not expect any material amount of hedge ineffectiveness related to forward contract cash flow hedges during the next twelve months.

The company has historically not recognized any material amount of ineffectiveness related to forward contract cash flow hedges because the company generally limits its hedges to between 60% and 90% of total forecasted transactions for a given entity’s exposure to currency rate changes and the transactions hedged are recurring in nature. Furthermore, the majority of the hedged transactions are related to intercompany sales and purchases for which settlement occurs on a specific day each month. Forward contracts with a total notional amount in USD of $36,967,000 and $39,381,000 matured during the three months ended March 31, 2012 and 2011, respectively.

FS-13

INVACARE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (unaudited) - March 31, 2012


Foreign exchange forward contracts qualifying and designated for hedge accounting treatment were as follows (in thousands USD):
 
March 31, 2012
 
December 31, 2011
 
Notional
Amount
 
Unrealized
Net Gain
(Loss)
 
Notional
Amount
 
Unrealized
Net Gain
(Loss)
USD / AUD
$
2,559

 
$
26

 
$
3,324

 
$
104

USD / CAD
21,482

 
125

 
8,424

 
29

USD / CNY
6,870

 
3

 
8,130

 
(16
)
USD / EUR
41,014

 
576

 
42,267

 
701

USD / GBP
1,396

 
(6
)
 
1,806

 
19

USD / NZD
6,192

 
204

 
8,256

 
86

USD / SEK
9,974

 
149

 
4,520

 
19

USD / MXP
9,298

 
776

 
14,029

 
(146
)
EUR / AUD
866

 
(27
)
 
1,220

 
(48
)
EUR / CAD
1,896

 
9

 

 

EUR / CHF
4,084

 
42

 
5,433

 
(22
)
EUR / GBP
17,148

 
(262
)
 
17,201

 
9

EUR / SEK
1,503

 
(11
)
 

 

EUR / NOK
1,327

 
(12
)
 

 

EUR / NZD
5,837

 
526

 
7,009

 
505

GBP / CHF
731

 
(11
)
 
929

 
(5
)
GBP / SEK
3,166

 
64

 
1,690

 
12

CHF / SEK
318

 
(9
)
 
271

 
(2
)
NOK / CHF
701

 
(15
)
 
436

 
(1
)
 
$
136,362

 
$
2,147

 
$
124,945

 
$
1,244


Fair Value Hedging Strategy

In 2012 and 2011, the company did not utilize any derivatives designated as fair value hedges. However, the company has in the past utilized fair value hedges in the form of forward contracts to manage the foreign exchange risk associated with certain firm commitments and has entered into interest rate swaps to effectively convert fixed-rate debt to floating-rate debt in an attempt to avoid paying higher than market interest rates. For derivative instruments designated and qualifying as fair value hedges, the gain or loss on the derivative instrument as well as the offsetting gain or loss on the hedged item associated with the hedged risk are recognized in the same line item associated with the hedged item in earnings.

Derivatives Not Qualifying or Designated for Hedge Accounting Treatment

The company utilizes foreign currency forward or option contracts that do not qualify for hedge accounting treatment in an attempt to manage the risk associated with the conversion of earnings in foreign currencies into U.S. Dollars. While these derivative instruments do not qualify for hedge accounting treatment in accordance with ASC 815, these derivatives do provide the company with a means to manage the risk associated with currency translation. These instruments are recorded at fair value in the consolidated balance sheet and any gains or losses are recorded as part of earnings in the current period. A gain of $6,000 was recorded by the company for the quarter ended March 31, 2011 related to derivatives not qualifying for hedge accounting treatment.

The company also utilizes foreign currency forward contracts that are not designated as hedges in accordance with ASC 815. These contracts are entered into to eliminate the risk associated with the settlement of short-term intercompany trading receivables and payables between Invacare Corporation and its foreign subsidiaries. The currency forward contracts are entered into at the same time as the intercompany receivables or payables are created so that upon settlement, the gain/loss on the settlement is offset by the gain/loss on the foreign currency forward contract. No material net gain or loss was realized by the company in

FS-14

INVACARE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (unaudited) - March 31, 2012

2012 or 2011 related to these forward contracts and the associated short-term intercompany trading receivables and payables.

Foreign exchange forward contracts not qualifying or designated for hedge accounting treatment entered into in 2012 and 2011, respectively, and outstanding were as follows (in thousands USD):
 
 
March 31, 2012
 
March 31, 2011
 
Notional
Amount
 
Gain
(Loss)
 
Notional
Amount
 
Gain
(Loss)
CAD / USD
$
7,138

 
$
77

 
$
17,131

 
$
404

CHF / USD
3,315

 
63

 

 

DKK / USD
8,137

 
(73
)
 

 

NOK / USD

 

 
5,268

 
157

NZD / USD
1,377

 
7

 

 

CHF / GBP

 

 
7,107

 
256

SEK / CAD
2,483

 
(2
)
 

 

AUD / NZD
1,066

 
11

 

 

EUR / NZD

 

 
145

 
6

 
$
23,516

 
$
83

 
$
29,651

 
$
823


The fair values of the company’s derivative instruments were as follows (in thousands):
 
 
March 31, 2012
 
December 31, 2011
 
Assets
 
Liabilities
 
Assets
 
Liabilities
Derivatives designated as hedging instruments under ASC 815
 
 
 
 
 
 
 
Foreign currency forward contracts
$
2,772

 
$
625

 
$
1,621

 
$
377

Interest rate swap contracts
$

 
$
480

 
$
18

 
$
388

Derivatives not designated as hedging instruments under ASC 815
 
 
 
 
 
 
 
Foreign currency forward contracts
161

 
78

 
64

 
128

Total derivatives
$
2,933

 
$
1,183

 
$
1,703

 
$
893


The fair values of the company’s foreign currency forward assets and liabilities are included in Other Current Assets and Accrued Expenses, respectively in the Consolidated Balance Sheets.
 

FS-15

INVACARE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (unaudited) - March 31, 2012


The effect of derivative instruments on the Statement of Operations and Other Comprehensive Income (OCI) was as follows (in thousands):
Derivatives in ASC 815 cash flow hedge
relationships
Amount of Gain
(Loss) Recognized in
OCI on Derivatives
(Effective Portion)
 
Amount of Gain (Loss)
Reclassified from
Accumulated OCI into
Income (Effective
Portion)
 
Amount of Gain (Loss)
Recognized in Income on
Derivatives  (Ineffective Portion
and Amount Excluded from
Effectiveness Testing)
Three months ended March 31, 2012
 
 
 
 
 
Foreign currency forward contracts
$
10

 
$
779

 
$

Interest rate swap contracts
110

 

 

 
$
120

 
$
779

 
$

Three months ended March 31, 2011
 
 
 
 
 
Foreign currency forward contracts
$
(1,249
)
 
$
62

 
$
6

Interest rate swap contracts
(129
)
 

 

 
$
(1,378
)
 
$
62

 
$
6

 
 
 
 
 
 
Derivatives not designated as hedging
instruments under ASC 815
 
 
 
 
Amount of Gain (Loss)
Recognized in Income on
Derivatives
Three months ended March 31, 2012
 
 
 
 
 
Foreign currency forward contracts
 
 
 
 
$
83

Three months ended March 31, 2011
 
 
 
 
 
Foreign currency forward contracts
 
 
 
 
$
817


The gains or losses recognized as the result of the settlement of cash flow hedge foreign currency forward contracts are recognized in net sales for hedges of inventory sales or cost of product sold for hedges of inventory purchases. For the three months ended March 31, 2012, net sales were increased by $258,000 and cost of product sold was decreased by $564,000 for a net realized gain of $822,000. For the three months ended March 31, 2011, net sales were increased by $213,000 and cost of product sold was increased by $151,000 for a net realized gain of $62,000.

The company recognized incremental expense of $126,000 and $42,000 for the three months ended March 31, 2012 and 2011, respectively related to interest rate swap agreements which are reflected in interest expense on the consolidated statement of operations. Gains of $83,000 and $817,000 were recognized in selling, general and administrative (SG&A) expenses for the three months ended March 31, 2012 and 2011, respectively, on foreign currency forward contracts not designated as hedging instruments which were offset by losses of comparable amounts also recorded in SG&A expenses on the intercompany trade payables for which the derivatives were entered into to offset.

Fair Values of Financial Instruments

Pursuant to ASC 820, the inputs used to derive the fair value of assets and liabilities are analyzed and assigned a level I, II or III priority, with level I being the highest and level III being the lowest in the hierarchy. Level I inputs are quoted prices in active markets for identical assets or liabilities. Level II inputs are quoted prices for similar assets or liabilities in active markets: quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs are observable in active markets. Level III inputs are based on valuations derived from valuation techniques in which one or more significant inputs are unobservable.

 


FS-16

INVACARE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (unaudited) - March 31, 2012


The following table provides a summary of the company’s assets and liabilities that are measured on a recurring basis (in thousands).
 
 
 
Basis for Fair Value Measurements at Reporting Date
 
 
Quoted Prices
in Active
Markets
for Identical
Assets /
(Liabilities)
 
Significant
Other
Observable
Inputs
 
Significant
Other
Unobservable
Inputs
Total
 
Level I
 
Level II
 
Level III
March 31, 2012:
 
 
 
 
 
 
 
Forward Exchange Contracts—net
$
2,230

 

 
$
2,230

 

Interest Rate Swap Agreements—net
(480
)
 


 
(480
)
 


December 31, 2011:
 
 
 
 
 
 
 
Forward Exchange Contracts—net
$
1,180

 

 
$
1,180

 

Interest Rate Swap Agreements—net
(370
)
 
 
 
(370
)
 
 

Forward Contracts: The company operates internationally and as a result is exposed to foreign currency fluctuations. Specifically, the exposure includes intercompany and third party sales or payments as well as intercompany loans. In an attempt to reduce this exposure, foreign currency forward contracts are utilized and accounted for as hedging instruments. The forward contracts are used to hedge the following currencies: AUD, CAD, CHF, CNY, DKK, EUR, GBP, MXP, NOK, NZD, SEK and USD. The company does not use derivative financial instruments for speculative purposes. Fair values for the company’s foreign exchange forward contracts are based on quoted market prices for contracts with similar maturities.

The carrying amounts and fair values of the company’s financial instruments at March 31, 2012 and 2011 are as follows (in thousands):
 
March 31, 2012
 
December 31, 2011
 
Carrying
Value
 
Fair Value
 
Carrying
Value
 
Fair Value
Cash and cash equivalents
$
32,668

 
$
32,668

 
$
34,924

 
$
34,924

Other investments
1,312

 
1,312

 
1,362

 
1,362

Installment receivables, net of reserves
5,175

 
5,175

 
7,477

 
7,477

Long-term debt (including current maturities of long-term debt)
(267,647
)
 
(266,497
)
 
(265,484
)
 
(264,112
)
Forward contracts in Other Current Assets
2,933

 
2,933

 
1,685

 
1,685

Forward contracts in Accrued Expenses
(703
)
 
(703
)
 
(505
)
 
(505
)
Interest Rate Swap Agreements in Other Current Assets

 

 
18

 
18

Interest Rate Swap Agreements in Accrued Expenses
(480
)
 
(480
)
 
(388
)
 
(388
)

The company, in estimating its fair value disclosures for financial instruments, used the following methods and assumptions:

Cash, cash equivalents: The carrying amount reported in the balance sheet for cash, cash equivalents equals its fair value.

Other investments: The company has made other investments in limited partnerships and non-marketable equity securities, which are accounted for using the cost method, adjusted for any estimated declines in value. These investments were acquired in private placements and there are no quoted market prices or stated rates of return and the company does not have the ability to easily sell these investments.



FS-17

INVACARE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (unaudited) - March 31, 2012

Installment receivables: The carrying amount reported in the balance sheet for installment receivables approximates its fair value. The interest rates associated with these receivables have not varied significantly since inception. Management believes that after consideration of the credit risk, the net book value of the installment receivables approximates market value.

Long-term debt: Fair values for the company’s senior notes and convertible debt are based on quoted market prices as of the end of the year, while the revolving credit facility fair values are based upon the company’s estimate of the market for similar borrowing arrangements.

Forward contracts and interest rate swaps: Fair values for the company’s forward contracts are based on quoted market prices, while the fair values of the interest rate swaps are based on model-derived calculations using inputs that are observable in active markets.


Business Segments

The company operates in five primary business segments: North America/Home Medical Equipment (NA/HME), Invacare Supply Group (ISG), Institutional Products Group (IPG), Europe and Asia/Pacific.

The NA/HME segment sells each of three primary product lines, which includes: lifestyle, mobility and seating and respiratory therapy products. Invacare Supply Group sells distributed product and the Institutional Products Group sells or rents long-term care medical equipment, health care furnishings and accessory products. Europe and Asia/Pacific sell the same product lines as NA/HME and IPG. Each business segment sells to the home health care, retail and extended care markets.

The company evaluates performance and allocates resources based on profit or loss from operations before income taxes for each reportable segment. The accounting policies of each segment are the same as those described in the summary of significant accounting policies for the company’s consolidated financial statements. Intersegment sales and transfers are based on the costs to manufacture plus a reasonable profit element. Therefore, intercompany profit or loss on intersegment sales and transfers is not considered in evaluating segment performance except for Asia/Pacific due to its significant intercompany sales volume relative to the segment.

FS-18

INVACARE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (unaudited) - March 31, 2012


The information by segment is as follows (in thousands): 
 
For the Three Months Ended
 
March 31,
 
2012
 
2011
Revenues from external customers
 
 
 
North America/HME
$
176,118

 
$
181,831

Invacare Supply Group
78,465

 
74,046

Institutional Products Group
36,138

 
31,423

Europe
125,303

 
121,387

Asia/Pacific
17,540

 
19,811

Consolidated
$
433,564

 
$
428,498

Intersegment revenues
 
 
 
North America/HME
$
29,130

 
$
20,810

Invacare Supply Group
19

 
16

Institutional Products Group
1,824

 
2,193

Europe
1,978

 
1,846

Asia/Pacific
10,530

 
7,946

Consolidated
$
43,481

 
$
32,811

Restructuring charges before income taxes
 
 
 
North America/HME
$
117

 
$

Invacare Supply Group
(13
)
 

Institutional Products Group
35

 

Europe
291

 

Asia/Pacific
118

 

All Other (1)

 

Consolidated
$
548

 
$

Earnings (loss) before income taxes
 
 
 
North America/HME
$
7,556

 
$
13,249

Invacare Supply Group
1,250

 
1,195

Institutional Products Group
3,378

 
4,124

Europe
5,485

 
4,960

Asia/Pacific
(1,061
)
 
1,051

All Other (1)
(6,225
)
 
(14,575
)
Consolidated
$
10,383

 
$
10,004

   ________________________
(1)
Consists of un-allocated corporate SG&A costs and intercompany profits, which do not meet the quantitative criteria for determining reportable segments. In addition, the “All Other” earnings (loss) before income taxes includes loss on debt extinguishment including debt finance charges, interest and fees.

Charges Related to Restructuring Activities

During the quarter ended March 31, 2012, as part of the company's ongoing globalization initiative to reduce complexity within it's global footprint, the company incurred restructuring charges. The restructuring was undertaken in response to the continued decline in reimbursement by the U.S. government as well as similar reimbursement pressures abroad and continued pricing pressures faced by the company, including as a result of outsourcing by competitors to lower cost locations. As a result, the company recorded restructuring charges of $548,000 in the first quarter of 2012. There have been no material changes in accrued balances related to the charge, either as a result of revisions in the plan or changes in estimates. The majority of the outstanding charge accruals at March 31, 2012 are expected to be paid out within the next twelve months.

FS-19

INVACARE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (unaudited) - March 31, 2012


A progression by reporting segment of the accruals recorded as a result of the restructuring is as follows (in thousands):
 
Severance
 
Product Line
Discontinuance
 
Contract
Terminations
 
Other
 
Total
December 31, 2010 Balance
 
 
 
 
 
 
 
 
 
Total
$

 
$

 
$

 
$

 
$

Charges
 
 
 
 
 
 
 
 
 
NA/HME
4,756

 

 

 
4

 
4,760

IPG
123

 

 

 

 
123

ISG
335

 

 

 

 
335

Europe
3,288

 
277

 
1,788

 
113

 
5,466

Asia/Pacific
186

 

 

 

 
186

Total
8,688

 
277

 
1,788

 
117

 
10,870

Payments
 
 
 
 
 
 
 
 
 
NA/HME
(1,664
)
 

 

 
(4
)
 
(1,668
)
IPG
(52
)
 

 

 

 
(52
)
ISG
(82
)
 

 

 

 
(82
)
Europe
(1,546
)
 
(277
)
 
(1,714
)
 
(113
)
 
(3,650
)
Asia/Pacific
(186
)
 

 

 

 
(186
)
Total
(3,530
)
 
(277
)
 
(1,714
)
 
(117
)
 
(5,638
)
December 31, 2011 Balance
 
 
 
 
 
 
 
 
 
NA/HME
3,092

 

 

 

 
3,092

IPG
71

 

 

 

 
71

ISG
253

 

 

 

 
253

Europe
1,742

 

 
74

 

 
1,816

Asia/Pacific

 

 

 

 

Total
$
5,158

 
$

 
$
74

 
$

 
$
5,232

Charges
 
 
 
 
 
 
 
 
 
NA/HME
117

 

 

 

 
117

IPG
35

 

 

 

 
35

ISG
(13
)
 

 

 

 
(13
)
Europe
257

 

 
34

 

 
291

Asia/Pacific
118

 

 

 

 
118

Total
514

 

 
34

 

 
548

Payments
 
 
 
 
 
 
 
 
 
NA/HME
(1,130
)
 

 

 

 
(1,130
)
IPG
(82
)
 

 

 

 
(82
)
ISG
(99
)
 

 

 

 
(99
)
Europe
(1,541
)
 

 
(56
)
 

 
(1,597
)
Asia/Pacific
(118
)
 

 

 

 
(118
)
Total
(2,970
)
 

 
(56
)
 

 
(3,026
)
March 31, 2012 Balance
 
 
 
 
 
 
 
 
 
NA/HME
2,079

 

 

 

 
2,079

IPG
24

 

 

 

 
24

ISG
141

 

 

 

 
141

Europe
458

 

 
52

 

 
510

Asia/Pacific

 

 

 

 

Total
$
2,702

 
$

 
$
52

 
$

 
$
2,754


FS-20

INVACARE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (unaudited) - March 31, 2012


Contingencies

In the ordinary course of its business, the company is a defendant in a number of lawsuits, primarily product liability actions in which various plaintiffs seek damages for injuries allegedly caused by defective products. All of the product liability lawsuits have been referred to the company’s captive insurance company and/or excess insurance carriers and generally are contested vigorously. The coverage territory of the company’s insurance is worldwide with the exception of those countries with respect to which, at the time the product is sold for use or at the time a claim is made, the U.S. government has suspended or prohibited diplomatic or trade relations. The amount recorded for identified contingent liabilities is based on estimates. Amounts recorded are reviewed periodically and adjusted to reflect additional technical and legal information that becomes available. Actual costs to be incurred in future periods may vary from the estimates, given the inherent uncertainties in evaluating certain exposures.

As a medical device manufacturer, the company is subject to extensive government regulation, including numerous laws directed at preventing fraud and abuse and laws regulating reimbursement under various government programs. The marketing, invoicing, documenting and other practices of health care suppliers and manufacturers are all subject to government scrutiny. Violations of law or regulations can result in administrative, civil and criminal penalties and sanctions, including disqualification from Medicare and other reimbursement programs, which could have a material adverse effect on the company’s business.

Further, the FDA regulates virtually all aspects of the development, testing, manufacturing, labeling, promotion, distribution and marketing of a medical device. The company’s failure to comply with the regulatory requirements of the FDA and other applicable U.S. medical device regulatory requirements may subject the company to administrative or judicially imposed sanctions. These sanctions include warning letters, civil penalties, criminal penalties, injunctions, consent decrees, product seizure or detention, product recalls and total or partial suspension of production.

As part of its regulatory function, the FDA routinely inspects the sites of medical device companies, and in 2011, the FDA inspected certain of the company's facilities. In December 2011, the FDA requested that the company negotiate and agree to a consent decree of injunction related to the company's corporate facility and its wheelchair manufacturing facility in Elyria, Ohio. The FDA's proposed consent decree would require suspension of certain operations at these Elyria facilities until they are certified by an independent, third party auditor and then determined by FDA to be in compliance with FDA's Quality System Regulation. The company is in the process of negotiating the terms of the proposed consent decree with FDA. While the final terms of the consent decree have not been determined, they would result in the suspension of a portion, which could be substantial, of the company's operations at its wheelchair manufacturing facility in Elyria, Ohio. The duration of any such suspension would be dependent upon the company's ability to certify its compliance with FDA regulations and then the FDA's determination of such compliance. A suspension of operations likely would have adverse effects on the company's business, including loss of revenues, harm to the company's reputation and customer dissatisfaction. In addition, in December 2010, the company received a warning letter from the FDA related to quality system processes and procedures at the company's Sanford, Florida facility. The company is devoting additional substantial financial, management and engineering resources to making the systemic improvements necessary to comply with the terms of the consent decree and the warning letter and maintain compliance in the future. The company's diversion of resources could impact other areas of the company's business, such as, for example, delays in new product development and cost reduction and Globalization activities.

The company is cooperating with the FDA in attempting to negotiate the final terms of the consent decree. However, there can be no assurance that negotiations will conclude with mutually agreeable terms of the consent decree which could lead the FDA to pursue judicial, legal or other enforcement action against the company. However, the results of regulatory claims, proceedings, investigations, or litigation are difficult to predict. Such enforcement could include requiring restrictions on the manufacturing, sale or distribution of the company's products, product recalls, or the payment of fines or penalties, which enforcement could result in material adverse consequences to the company.

Any of the above contingencies could have an adverse impact on the company's business, prospects, value, financial condition or results of operations.

FS-21

INVACARE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (unaudited) - March 31, 2012


Supplemental Guarantor Information

Effective February 12, 2007, substantially all of the domestic subsidiaries (the “Guarantor Subsidiaries”) of the company became guarantors of the indebtedness of Invacare Corporation under its 4.125% Convertible Senior Subordinated Debentures due 2027 (the “Debentures”) with an original aggregate principal amount of $135,000,000. The majority of the company’s subsidiaries are not guaranteeing the indebtedness of the Debentures (the “Non-Guarantor Subsidiaries”). Each of the Guarantor Subsidiaries has fully and unconditionally guaranteed, on a joint and several basis, to pay principal, premium, and interest related to the Debentures and each of the Guarantor Subsidiaries are directly or indirectly wholly-owned subsidiaries of the company.

Presented below are the consolidating condensed financial statements of Invacare Corporation (Parent), its combined Guarantor Subsidiaries and combined Non-Guarantor Subsidiaries with their investments in subsidiaries accounted for using the equity method. The company does not believe that separate financial statements of the Guarantor Subsidiaries are material to investors and accordingly, separate financial statements and other disclosures related to the Guarantor Subsidiaries are not presented.

 

CONSOLIDATING CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
 
 
The
Company
(Parent)
 
Combined
Guarantor
Subsidiaries
 
Combined
Non-Guarantor
Subsidiaries
 
Eliminations
 
Total
 
(in thousands)
Three month period ended March 31, 2012
 
 
 
 
 
 
 
 
 
Net sales
$
90,032

 
$
203,117

 
$
173,388

 
$
(32,973
)
 
$
433,564

Cost of products sold
67,952

 
159,397

 
119,415

 
(32,769
)
 
313,995

Gross Profit
22,080

 
43,720

 
53,973

 
(204
)
 
119,569

Selling, general and administrative expenses
32,769

 
29,669

 
45,061

 

 
107,499

Charge related to restructuring activities
6

 
8

 
534

 

 
548

Income (loss) from equity investee
18,246

 
1,044

 
199

 
(19,489
)
 

Interest expense (income)—net
(870
)
 
1,249

 
760

 

 
1,139

Earnings (loss) before Income Taxes
8,421

 
13,838

 
7,817

 
(19,693
)
 
10,383

Income taxes
188

 
87

 
1,875

 

 
2,150

Net Earnings (loss)
$
8,233