q20810q.htm
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 June 30, 2008 

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 is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” 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 August 1, 2008, the registrant had 30,947,388 Common Shares and 1,109,685 Class B Common Shares outstanding.
 
 
 

 

INVACARE CORPORATION

INDEX


 
Page No.
 
     
   
3
 
   
4
 
   
5
 
   
6
 
   
20
 
   
29
 
   
29
 
       
   
29
 
   
29
 
   
29
 
   
30
 
   
30
 


 



 

INVACARE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets

   
June 30, 2008
   
December 31,
2007
 
     
(unaudited)
         
ASSETS
 
(In thousands)
 
CURRENT ASSETS
           
Cash and cash equivalents
 
$
39,961
   
$
62,200
 
Marketable securities
   
124
     
255
 
Trade receivables, net
   
308,375
     
264,143
 
Installment receivables, net
   
3,436
     
4,057
 
Inventories, net
   
213,140
     
195,604
 
Deferred income taxes
   
2,554
     
2,478
 
Other current assets
   
66,229
     
62,348
 
TOTAL CURRENT ASSETS
   
633,819
     
591,085
 
                 
OTHER ASSETS
   
72,894
     
91,662
 
OTHER INTANGIBLES
   
104,130
     
104,736
 
PROPERTY AND EQUIPMENT, NET
   
169,514
     
169,376
 
GOODWILL
   
571,374
     
543,183
 
TOTAL ASSETS
 
$
1,551,731
   
$
1,500,042
 
                 
LIABILITIES AND SHAREHOLDERS' EQUITY
               
CURRENT LIABILITIES
               
Accounts payable
 
$
164,112
   
$
150,170
 
Accrued expenses
   
147,157
     
145,958
 
Accrued income taxes
   
3,859
     
5,973
 
Short-term debt and current maturities of long-term obligations
   
39,893
     
24,510
 
TOTAL CURRENT LIABILITIES
   
355,021
     
326,611
 
                 
LONG-TERM DEBT
   
486,300
     
513,342
 
OTHER LONG-TERM OBLIGATIONS
   
107,617
     
106,046
 
SHAREHOLDERS' EQUITY
               
Preferred shares
   
-
     
-
 
Common shares
   
8,096
     
8,034
 
Class B common shares
   
278
     
278
 
Additional paid-in-capital
   
154,257
     
147,295
 
Retained earnings
   
284,895
     
276,344
 
Accumulated other comprehensive earnings
   
203,266
     
164,969
 
Treasury shares
   
(47,999
)
   
(42,877
)
TOTAL SHAREHOLDERS' EQUITY
   
602,793
     
554,043
 
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
 
$
1,551,731
   
$
1,500,042
 
 
See notes to condensed consolidated financial statements.

 




INVACARE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statement of Operations - (unaudited)

   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
(In thousands except per share data)
 
2008
   
2007
   
2008
   
2007
 
Net sales
 
$
447,152
   
$
393,267
   
$
863,430
   
$
768,172
 
Cost of products sold
   
322,979
     
283,321
     
626,049
     
559,170
 
Gross profit
   
124,173
     
109,946
     
237,381
     
209,002
 
Selling, general and administrative expense
   
104,520
     
93,851
     
202,215
     
181,617
 
Charge related to restructuring activities
   
859
     
1,661
     
1,370
     
4,813
 
Charges, interest and fees associated with debt refinancing
   
-
     
8
     
-
     
13,381
 
Interest expense
   
9,679
     
11,770
     
19,696
     
22,113
 
Interest income
   
(892
)
   
(523
)
   
(1,590
)
   
(997
)
Earnings (loss) before income taxes
   
10,007
     
3,179
     
15,690
     
(11,925
)
Income taxes
   
3,750
     
3,125
     
6,340
     
5,525
 
NET EARNINGS (LOSS)
 
$
6,257
   
$
54
   
$
9,350
   
$
(17,450
)
DIVIDENDS DECLARED PER COMMON SHARE
   
.0125
     
.0125
     
.0250
     
.0250
 
Net earnings (loss) per share – basic
 
$
0.20
   
$
0.00
   
$
0.29
   
$
(0.55
)
Weighted average shares outstanding - basic
   
31,905
     
31,838
     
31,890
     
31,832
 
Net earnings (loss) per share – assuming dilution
 
$
0.20
   
$
0.00
   
$
0.29
   
$
(0.55
)
Weighted average shares outstanding - assuming dilution
   
31,916
     
31,844
     
31,946
     
31,832
 

See notes to condensed consolidated financial statements.
 
 
 


INVACARE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statement of Cash Flows - (unaudited)
   
Six Months Ended
 June 30,
 
   
2008
   
2007
 
OPERATING ACTIVITIES
 
(In thousands)
 
Net earnings (loss)
 
$
9,350
   
$
(17,450
)
Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:
               
Debt finance charges, interest and fees associated with debt refinancing
   
-
     
13,381
 
Depreciation and amortization
   
22,552
     
21,880
 
Provision for losses on trade and installment receivables
   
6,622
     
4,100
 
Provision for other deferred liabilities
   
1,584
     
1,371
 
Provision (benefit) for deferred income taxes
   
(787
)
   
1,583
 
Provision for stock-based compensation
   
1,279
     
1,077
 
Gain on disposals of property and equipment
   
227
     
281
 
Changes in operating assets and liabilities:
               
Trade receivables
   
(30,847
)
   
(2,299
)
Installment sales contracts, net
   
(2,390
)
   
(4,192
)
Inventories
   
(14,065
)
   
7,874
 
Other current assets
   
(1,311
)
   
21,126
 
Accounts payable
   
11,502
     
(25,061
)
Accrued expenses
   
(4,680
)
   
(26,264
)
Other deferred liabilities
   
(2,004
)
   
335
 
NET CASH USED BY OPERATING ACTIVITIES
   
(2,968
)
   
(2,258
)
                 
INVESTING ACTIVITIES
               
Purchases of property and equipment
   
(11,636
)
   
(7,770
)
Proceeds from sale of property and equipment
   
36
     
462
 
Other long term assets
   
4,550
     
(187
)
Business acquisitions, net of cash acquired
   
(2,152
)
   
-
 
Other
   
1,509
     
(1,590
)
NET CASH USED FOR INVESTING ACTIVITIES
   
(7,693
)
   
(9,085
)
                 
FINANCING ACTIVITIES
               
Proceeds from revolving lines of credit, securitization facility and long-term borrowings
   
177,617
     
550,940
 
Payments on revolving lines of credit, securitization facility and long-term debt and capital lease obligations
   
(190,536
)
   
(566,215
)
Proceeds from exercise of stock options
   
821
     
-
 
Payment of financing costs
   
-
     
(20,384
)
Payment of dividends
   
(799
)
   
(798
)
NET CASH USED BY FINANCING ACTIVITIES
   
(12,897
)
   
(36,457
)
Effect of exchange rate changes on cash
   
1,319
     
1,143
 
Decrease in cash and cash equivalents
   
(22,239
)
   
(46,657
)
Cash and cash equivalents at beginning of period
   
62,200
     
82,203
 
Cash and cash equivalents at end of period
 
$
39,961
   
$
35,546
 
 
See notes to condensed consolidated financial statements.
 
 


INVACARE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated
Financial Statements
(Unaudited)
June 30, 2008

Nature of Operations - Invacare Corporation is the world’s leading manufacturer and distributor in the $8.0 billion worldwide market for medical equipment used in the home based upon our 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, its majority owned subsidiaries and a variable interest entity for which the company was the primary beneficiary in 2007 and includes all adjustments, which were of a normal recurring nature, necessary to present fairly the financial position of the company as June 30, 2008, the results of its operations for the six months ended June 30, 2008 and 2007, respectively, and changes in its cash flows for the six months ended June 30, 2008 and 2007, respectively.  Certain foreign subsidiaries, represented by the European segment, are consolidated using a May 31 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. The results of operations for the six months ended June 30, 2008 are not necessarily indicative of the results to be expected for the full year.  All significant intercompany transactions are eliminated.

Reclassifications - Certain reclassifications have been made to the prior years’ consolidated financial statements to conform to the presentation used for the period ended June 30, 2008, including the proper presentation of the provision for stock option and award expense on the Consolidated Statement of Cash Flows, which had no net effect on operating cash flows for the quarter ended June 30, 2007.

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

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

The NA/HME segment sales consist of Rehab (power wheelchairs, custom manual wheelchairs, personal mobility and seating and positioning), Standard (manual wheelchairs, personal care, home care beds, low air loss therapy and patient transport) and Respiratory (oxygen concentrators, HomeFill® transfilling systems, sleep apnea products, aerosol therapy and associated respiratory products) product lines.    

Invacare Supply Group distributes numerous lines of branded medical supplies including ostomy, incontinence, diabetic, interals, wound care and urology products as well as home medical equipment, including aids for daily living.

Institutional Products Group is a manufacturer and distributor of healthcare furnishings including beds, case goods and patient handling equipment for the long-term care markets, specialty clinical recliners for dialysis and oncology clinics and certain other home medical equipment and accessory products.

The Asia/Pacific segment consists of Invacare Australia, which distributes the Invacare range of products which includes:  manual and power wheelchairs, lifts, ramps, beds, furniture and pressure care products; Dynamic Controls, a manufacturer of electronic operating components used in power wheelchairs, scooters and other products; Invacare New Zealand, a distributor of a wide range of home medical equipment; and Invacare Asia, which imports and distributes home medical equipment to the Asian markets.

Europe sells a wide range of product lines, which continues to broaden and more closely resemble those of NA/HME.  Each business segment may sell 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.

 


The information by segment is as follows (in thousands):

   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2008
   
2007
   
2008
   
2007
 
Revenues from external customers
                       
     North America / HME
 
$
187,163
   
$
166,601
   
$
362,944
   
$
328,364
 
     Invacare Supply Group
   
64,523
     
62,696
     
129,779
     
124,372
 
     Institutional Products Group
   
23,177
     
21,496
     
48,474
     
44,989
 
     Europe
   
145,977
     
119,213
     
271,980
     
226,243
 
     Asia/Pacific
   
26,312
     
23,261
     
50,253
     
44,204
 
     Consolidated
 
$
447,152
   
$
393,267
   
$
863,430
   
$
768,172
 
Intersegment Revenues
                               
     North America / HME
 
$
15,310
   
$
11,098
   
$
28,387
   
$
22,389
 
     Invacare Supply Group
   
159
     
35
     
235
     
121
 
     Institutional Products Group
   
728
     
-
     
1,383
     
-
 
     Europe
   
4,183
     
2,496
     
7,139
     
4,904
 
     Asia/Pacific
   
7,679
     
7,409
     
15,870
     
13,498
 
     Consolidated
 
$
28,059
   
$
21,038
   
$
53,014
   
$
40,912
 
Charge related to restructuring before income taxes
                               
     North America / HME
 
$
29
   
$
381
   
$
255
   
$
2,811
 
     Invacare Supply Group
   
-
     
(29
)
   
-
     
14
 
     Institutional Products Group
   
115
     
5
     
115
     
9
 
     Europe
   
557
     
1,155
     
783
     
1,941
 
     Asia/Pacific
   
218
     
277
     
288
     
283
 
     Consolidated
 
$
919
   
$
1,789
   
$
1,441
   
$
5,058
 
Earnings (loss) before income taxes
                               
     North America / HME
 
$
7,607
   
$
2,591
   
$
12,432
   
$
(117
)
     Invacare Supply Group
   
204
     
556
     
793
     
1,611
 
     Institutional Products Group
   
371
     
288
     
1,369
     
683
 
     Europe
   
9,712
     
6,596
     
14,155
     
10,520
 
     Asia/Pacific
   
882
     
(909
)
   
406
     
(2,019
)
     All Other *
   
(8,769
)
   
(5,943
)
   
(13,465
)
   
(22,603
)
     Consolidated
 
$
10,007
   
$
3,179
   
$
15,690
   
$
(11,925
)

 
“All Other” consists of unallocated corporate selling, general and administrative costs, which do not meet the quantitative criteria for determining reportable segments.  In addition, the “All Other” earnings (loss) before income taxes for the first half of 2007 includes charges, interest and fees associated with debt refinancing.

 


Net Earnings Per Common Share - The following table sets forth the computation of basic and diluted net earnings (loss) per common share for the periods indicated (amounts in thousands, except per share amounts).
 
   
Three Months Ended
 June 30,
   
Six Months Ended
 June 30,
 
   
2008
   
2007
   
2008
   
2007
 
   
  (In thousands, except per share data)         
 
Basic
                       
   Average common shares outstanding
   
31,905
     
31,838
     
31,890
     
31,832
 
                                 
   Net earnings (loss)
 
$
6,257
   
$
54
   
$
9,350
   
$
(17,450
)
                                 
   Net earnings (loss) per common share
 
$
.20
   
$
.00
   
$
.29
   
$
(.55
)
                                 
Diluted
                               
   Average common shares outstanding
   
31,905
     
31,838
     
31,890
     
31,832
 
   Stock options and awards
   
11
     
6
     
56
     
-
 
   Average common shares assuming dilution
   
31,916
     
31,844
     
31,946
     
31,832
 
                                 
   Net earnings (loss)
 
$
6,257
   
$
54
   
$
9,350
   
$
(17,450
)
                                 
   Net earnings (loss) per common share
 
$
.20
   
$
.00
   
$
.29
   
$
(.55
)

At June 30, 2008, 3,765,467 and 3,696,544 shares were excluded from the average common shares assuming dilution for the three and six months ended June 30, 2008, respectively, as they were anti-dilutive.  At June 30, 2007, 3,933,034 shares were excluded from the average common shares assuming dilution for the three months ended June 30, 2007 as they were anti-dilutive while all of the company’s shares associated with stock options were anti-dilutive for the six months ended June 30, 2007 because of the company’s net loss in the first half of the year.  For the three and six months ended June 30, 2008, 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 prices of $19.50 and $21.57, respectively. For the three months ended June 30, 2007, the majority of the anti-dilutive shares were granted at exercise prices of $41.87 which was higher than the average fair market value prices of $18.25. 

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. Prior to December 2000, the company financed equipment to certain customers. 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 customers. The DLL agreement provides for direct leasing between DLL and the Invacare customer. The company retains a recourse obligation of $32,412,000 at June 30, 2008 to DLL for events of default under the contracts, which total $93,285,000 at June 30, 2008. FASB Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, requires the company to record a guarantee liability as it relates to the limited recourse obligation. As such, the company has recorded a liability of $830,000 for this guarantee obligation within accrued expenses. 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 SFAS No. 5, Accounting for Contingencies. 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. In addition, 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.

 


Goodwill and Other Intangibles - The change in goodwill reflected on the balance sheet from December 31, 2007 to June 30, 2008 was the result of foreign currency translation and the acquisition for the NA/HME segment of Naylor Medical Sales & Rentals, Inc., which increased goodwill by $1,221,000 and is deductible for tax purposes.  As a result of the acquisition, the company also recorded $100,000 for a non-compete agreement and $200,000 for a customer list.

All of the company’s other intangible assets have definite lives and are amortized over their useful lives, except for $37,728,000 related to trademarks, which have indefinite lives.

As of June 30, 2008 and December 31, 2007, other intangibles consisted of the following (in thousands):

   
June 30, 2008
   
December 31, 2007
 
   
 Historical
 Cost
   
Accumulated Amortization
   
 Historical
 Cost
   
Accumulated Amortization
 
Customer lists
 
$
79,767
   
$
24,943
   
$
77,329
   
$
21,238
 
Trademarks
   
37,728
     
     
36,505
     
 
License agreements
   
4,595
     
4,422
     
4,559
     
4,335
 
Developed technology
   
7,633
     
1,688
     
7,316
     
1,425
 
Patents
   
6,972
     
4,556
     
6,909
     
4,313
 
Other
   
8,799
     
5,755
     
8,650
     
5,221
 
   
$
145,494
   
$
41,364
   
$
141,268
   
$
36,532
 

Amortization expense related to other intangibles was $4,832,000 in the first half of 2008 and is estimated to be $9,416,000 in 2009, $9,032,000 in 2010, $8,572,000 in 2011, $8,173,000 in 2012 and $7,428,000 in 2013.

Investment in Affiliated Company - FASB Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46), which was revised in December 2003, requires consolidation of an entity if the company is subject to a majority of the risk of loss from the variable interest entity’s (VIE) activities or entitled to receive a majority of the entity’s residual returns, or both. A company that consolidates a VIE is known as the primary beneficiary of that entity.

Until the end of 2007, the company consolidated NeuroControl, a company whose product focused on the treatment of post-stroke shoulder pain in the United States. Certain of the company’s officers and directors (or their affiliates) have small minority equity ownership positions in NeuroControl. Based on the provisions of FIN 46 and the company’s analysis, the company had consolidated this investment on a prospective basis since January 1, 2005 and recorded an intangible asset for patented technology of $7,003,000. The other beneficial interest holders have no recourse against the company.
 
In the fourth quarter of 2006, the company’s board of directors made a decision to no longer fund the cash needs of NeuroControl. Based upon that decision, NeuroControl’s directors decided to commence a liquidation process and cease operations. Therefore, funding of this investment ceased on December 31, 2006. As a result of this decision, the company established a valuation reserve related to the NeuroControl intangible asset of $5,601,000 to fully reserve against the patented technology intangible as it was deemed to be impaired. In the fourth quarter of 2007, the company recognized a one-time gain of $3,981,000 due to the cancellation of debt owed by NeuroControl to two third parties.  As of December 31, 2007, all operations of NeuroControl had ceased.

Accounting for Stock-Based Compensation - Effective January 1, 2006, the company adopted SFAS No. 123R using the modified prospective application method. Under the modified prospective method, compensation cost has been recognized for: 1) all stock-based payments granted subsequent to January 1, 2006 based upon the grant-date fair value calculated in accordance with SFAS No. 123R, and 2) all stock-based payments granted prior to, but not vested as of, January 1, 2006 based upon grant-date fair value as calculated for previously presented pro forma footnote disclosures in accordance with the original provisions of SFAS No. 123, Accounting for Stock Based Compensation. The amounts of stock-based compensation expense recognized were as follows (in thousands):

   
Three Months Ended
June 30,
   
Six Months Ended
 June 30,
 
   
2008
   
2007
   
2008
   
2007
 
Stock-based compensation expense recognized as part of selling, general and administrative expense
 
$
614
   
$
467
   
$
1,279
   
$
1,077
 


The 2008 and 2007 amounts above reflect compensation expense related to restricted stock awards and nonqualified stock options awarded under the 2003 Performance 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.

Stock Incentive Plans - The 2003 Performance Plan (the “2003 Plan”) allows the Compensation, Management Development and Corporate Governance Committee of the Board of Directors (the “Committee”) to grant up to 3,800,000 Common Shares in connection with incentive stock options, non-qualified stock options, stock appreciation rights and stock awards (including the use of restricted stock).  The Committee has the authority to determine which employees and directors will receive awards, the amount of the awards and the other terms and conditions of the awards.  During the first half of 2008, the Committee granted 32,500 non-qualified stock options for a term of ten years at the market value of the company’s Common Shares on the date of grant under the 2003 Plan.

Under the terms of the company’s outstanding restricted stock awards, all of the shares granted vest ratably over the four years after the grant date.  Compensation expense of $560,000 was recognized in the first half of 2008 compared to $650,000 in the first half of 2007 and as of June 30, 2008, outstanding restricted stock awards totaling 146,712 were not yet vested.  Restricted stock awards totaling 2,500 were granted in the first half of 2008.

Stock option activity during the six months ended June 30, 2008 was as follows:

   
2008
   
Weighted Average
Exercise Price
 
Options outstanding at January 1
   
4,732,965
   
$
30.02
 
Granted
   
32,500
     
22.00
 
Exercised
   
(243,357
)
   
23.60
 
Canceled
   
(254,786
)
   
34.60
 
Options outstanding at June 30
   
4,267,322
   
$
30.05
 
                 
Options price range at June 30
 
$
16.03 to
         
   
$
47.80
         
Options exercisable at June 30
   
3,461,872
         
Options available for grant at June 30*
   
1,490,6 02
         

* Options available for grant as of June 30, 2008 reduced by net restricted stock award activity of 197,463.

The following table summarizes information about stock options outstanding at June 30, 2008:
                                 
     
Options Outstanding
   
Options Exercisable
 
           
Weighted
                   
     
Number Outstanding
   
Average Remaining
   
Weighted Average
   
Number Exercisable
   
Weighted Average
 
Exercise Prices
   
At 6/30/08
   
Contractual Life
   
Exercise Price
   
At 6/30/08
   
Exercise Price
 
$
16.03 - $23.71
     
1,953,868
   
4.5 years
   
$
22.25
     
1,189,893
   
$
21.78
 
$
24.43 - $36.40
     
1,082,771
     
3.7
   
$
30.96
     
1,041,296
   
$
30.97
 
$
37.70 - $47.80
     
1,230,683
     
6.2
   
$
41.61
     
1,230,683
   
$
41.61
 
Total
     
4,267,322
     
4.8
   
$
30.05
     
3,461,872
   
$
31.59
 

The stock options awarded 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 the following weighted-average assumptions:

   
2008
 
Expected dividend yield
   
.2
%
Expected stock price volatility
   
30.5
%
Risk-free interest rate
   
2.3
%
Expected life (years)
   
3.7
 

 
10 


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 weighted-average fair value of options granted during the first half of 2008 was $5.62.  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 participants to exchange shares for payment of withholding taxes, which results in the company acquiring treasury shares.
 
As of June 30, 2008 there was $7,631,000 of total unrecognized compensation cost from stock-based compensation arrangements granted under the company’s plans, which is related to non-vested shares and includes $2,934,000 related to restricted stock awards.  The company expects the compensation expense to be recognized over approximately 4 years.

Warranty Costs - Generally, the company’s products are covered by warranties against defects in material and workmanship for periods of up to six years from the date of sale to the customer.  Certain components carry a lifetime warranty.  A provision for estimated warranty cost is recorded at the time of sale based upon actual experience.  The company continuously assesses the adequacy of its product warranty accrual and makes adjustments as needed.  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.  No material adjustments to warranty reserves based on other events were necessary in the first half of 2008.

The following is a reconciliation of the changes in accrued warranty costs for the reporting period (in thousands):

Balance as of January 1, 2008
 
$
16,616
 
Warranties provided during the period
   
6,051
 
Settlements made during the period
   
(5,655
)
Changes in liability for pre-existing warranties during the period, including expirations
   
435
 
Balance as of June 30, 2008
 
$
17,447
 

Charges Related to Restructuring Activities - Previously, the company announced multi-year cost reductions and profit improvement actions, which included: reducing global headcount, outsourcing improvements utilizing the company’s China manufacturing capability and third parties, shifting substantial resources from product development to manufacturing cost reduction activities and product rationalization, reducing freight exposure through freight auctions and changing the freight policy, general expense reductions and exiting manufacturing and distribution facilities.  The restructuring was necessitated by 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 as a result of outsourcing by competitors to lower cost locations.

To date, the company has made substantial progress on its restructuring activities, including exiting manufacturing and distribution facilities and eliminating positions, which resulted in restructuring charges of $1,441,000 and $5,058,000 incurred in the first half of 2008 and 2007, respectively, of which $71,000 and $245,000, respectively, were recorded in cost of products sold as it relates to inventory markdowns and the remaining charge amount is included on the Charge Related to Restructuring Activities in the Condensed Consolidated Statement of Operations as part of operations.  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, and the company expects to utilize the accruals recorded through June 30, 2008 during 2008.
 

 
11



A progression of the accruals by segment recorded as a result of the restructuring is as follows (in thousands):

   
   Balance at
12/31/06
   
Accruals (Reversals)
   
Payments
   
Balance at
12/31/07
   
Accruals
   
Payments
   
Balance at
6/30/08
 
North America/HME
                                         
Severance
 
$
1,359
   
$
3,705
   
$
(4,362
)
 
$
702
   
$
255
   
$
(507
)
 
$
450
 
Product line discontinuance
   
2,037
     
178
     
(2,183
)
   
32
     
     
(31
)
   
1
 
Contract terminations
   
557
     
(19
)
   
(172
)
   
366
     
     
(97
)
   
269
 
Total
 
$
3,953
   
$
3,864
   
$
(6,717
)
 
$
1,100
   
$
255
   
$
(635
)
 
$
720
 
Invacare Supply Group
                                                       
Severance
 
$
166
   
$
67
   
$
(228
)
 
$
5
   
$
   
$
(5
)
 
$
 
Institutional Products Group
                                                       
Severance
 
$
   
$
19
   
$
(19
)
 
$
   
$
   
$
   
$
 
Contract terminations
   
     
98
     
(98
)
   
     
115
     
(115
)
   
 
Other
   
     
55
     
(55
)
   
     
     
     
 
Total
 
$
   
$
172
   
$
(172
)
 
$
   
$
115
   
$
(115
)
 
$
 
Europe
                                                       
Severance
 
$
3,734
   
$
862
   
$
(4,591
)
 
$
5
   
$
382
   
$
(381
)
 
$
6
 
Product line discontinuance
   
     
386
     
(386
)
   
     
60
     
(60
)
   
 
Other
   
     
3,247
     
(3,202
)
   
45
     
341
     
(288
)
   
98
 
Total
 
$
3,734
   
$
4,495
   
$
(8,179
)
 
$
50
   
$
783
   
$
(729
)
 
$
104
 
Asia/Pacific
                                                       
Severance
 
$
   
$
1,258
   
$
(746
)
 
$
512
   
$
217
   
$
(685
)
 
$
44
 
Product line discontinuance
   
     
1,253
     
(1,253
)
   
     
11
     
(11
)
   
 
Contract terminations
   
122
     
299
     
(382
)
   
39
     
60
     
(99
)
   
 
Other
   
     
     
     
     
     
     
 
Total
 
$
122
   
$
2,810
   
$
(2,381
)
 
$
551
   
$
288
   
$
(795
)
 
$
44
 
Consolidated
                                                       
Severance
 
$
5,259
   
$
5,911
   
$
(9,946
)
 
$
1,224
   
$
854
   
$
(1,578
)
 
$
500
 
Product line discontinuance
   
2,037
     
1,817
     
(3,822
)
   
32
     
71
     
(102
)
   
1
 
Contract terminations
   
679
     
378
     
(652
)
   
405
     
175
     
(311
)
   
269
 
Other
   
     
3,302
     
(3,257
)
   
45
     
341
     
(288
)
   
98
 
Total
 
$
7,975
   
$
11,408
   
$
(17,677
)
 
$
1,706
   
$
1,441
   
$
(2,279
)
 
$
868
 

 
12


Comprehensive Earnings (loss) - Total comprehensive earnings were as follows (in thousands):
 
   
Three Months Ended
 June 30,
   
Six Months Ended
 June 30,
   
   
2008
   
2007
   
2008
   
2007
   
Net earnings (loss)
 
$
6,257
   
$
54
   
$
9,350
   
$
(17,450
)
Foreign currency translation gain
   
14,175
     
21,892
     
37,786
     
25,750
 
Unrealized gain (loss) on available for sale securities
   
(19
)
   
3
     
(79
)
   
54
 
SERP/DBO amortization of prior service costs and unrecognized losses
   
550
     
461
     
1,099
     
1,404
 
Current period unrealized gain (loss) on cash flow hedges
   
2,033
     
(5,188
)
   
(509
)
   
(6,409
)
Total comprehensive earnings
 
$
22,996
   
$
17,222
   
$
47,647
   
$
3,349
 
 
Receivables - On May 12, 2008, the company initiated foreclosure proceedings against the assets of a customer which is in default with respect to amounts due the company.  As of June 30, 2008, the company had gross receivables and other payments due from the customer of approximately $25.2 million, of which, 86% is specifically reserved for by the company’s bad debt allowance.  The matter is now before the court awaiting determination.  While there can be no assurance of the ultimate outcome, based on an evaluation of existing bad debt reserves and estimated values assigned to the assets to be  potentially liquidated, the company believes it has adequate bad debt reserves to cover its exposure on this account.

Inventories - Inventories determined under the first in, first out method consist of the following components (in thousands):
 
   
June 30, 2008
   
December 31, 2007
 
Finished goods
 
$
124,990
   
$
116,808
 
Raw Materials
   
70,685
     
63,815
 
Work in Process
   
17,465
     
14,981
 
   
$
213,140
   
$
195,604
 
 
Property and Equipment - Property and equipment consist of the following (in thousands):

   
June 30, 2008
   
December 31, 2007
 
Machinery and equipment
 
$
326,363
   
$
308,904
 
Land, buildings and improvements
   
101,831
     
97,478
 
Furniture and fixtures
   
32,995
     
33,204
 
Leasehold improvements
   
17,128
     
16,390
 
     
478,317
     
455,976
 
Less allowance for depreciation
   
(308,803
)
   
(286,600
)
   
$
169,514
   
$
169,376
 

Acquisitions– In the second quarter of 2008, the company acquired Naylor Medical Sales & Rentals, Inc., a rental business operating primarily in Kentucky, Tennessee and Arkansas for $2,152,000.

Income Taxes - The company had an effective tax rate of 37.5% and 40.4% on earnings before tax compared to an expected rate at the US statutory rate of 35% for the three and six month periods ended June 30, 2008.  For the three and six month periods ended June 30, 2007, the company had  an effective rate of 98.3% and (46.3%) compared to an expected rate at the US statutory rate of 35%.  The company’s effective tax rate for each of the three and six month periods ended June 30, 2008 and 2007 was higher than the U.S. federal statutory rate or benefit as a result of the company not being able to record tax benefits related to losses in countries which had tax valuation allowances, while normal tax expense was recognized in countries without tax allowances.

 
13 


Fair Value Measurements - In September, 2006, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 157 (FAS 157), Fair Value Measurements, which creates a framework for measuring fair value, clarifies the definition of fair value and expands the disclosures regarding fair value measurements.  FAS 157 does not require any new fair value measurements.  The company adopted the new standard, to the extent required, as of January 1, 2008 and the adoption had no material impact on the company’s financial position, results of operations or cash flows.  The application of FAS 157 for non-financial assets and non-financial liabilities that are recognized or disclosed at fair value on a nonrecurring basis was deferred until January 1, 2009 and the company is currently assessing the impact on its non-financial assets and non-financial liabilities measured at fair value on a nonrecurring basis.

Pursuant to FAS 157, 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 observable.

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
 
   
June 30, 2008
   
Level I
   
Level II
   
Level III
 
Marketable Securities
 
$
124
   
$
124
   
$
-
   
$
-
 
Forward Exchange Contracts
 
$
(382
)
 
$
-
   
$
(382
) 
 
$
-
 
Interest Rate Swaps
 
$
(2,807
)
 
$
-
   
$
(2,807
)
 
$ 
-
 
Total
 
$
(3,065
)
 
$
124
   
$
(3,189
) 
 
$
-
 

Marketable Securities:  The company’s marketable securities are recorded based on quoted prices in active markets multiplied by the number of shares owned without any adjustments for transactional costs or other costs that may be incurred to sell the securities.

Interest Rate Swaps:  The company is a party to interest rate swap agreements, which are entered into in the normal course of business, to reduce exposure to fluctuations in interest rates. The agreements are with major financial institutions, which are expected to fully perform under the terms of the agreements thereby mitigating the credit risk from the transactions. The agreements are contracts to exchange floating rate payments for fixed rate payments without the exchange of the underlying notional amounts. The notional amounts of such agreements are used to measure interest to be paid or received and do not represent the amount of exposure to credit loss. The amounts to be paid or received under the interest rate swap agreements are accrued consistent with the terms of the agreements and market interest rates. Fair value for the company’s interest rate swaps are based on pricing models in which all significant inputs, such as interest rates and yield curves, are observable in active markets.  The company believes that the fair values reported would not be materially different from the amounts that would be realized upon settlement.

The gains and losses that result from the company’s current cash flow hedge interest rate swaps are recognized as part of interest expense.  Swap assets are recorded in either Other Current Assets or Other Assets, while swap liabilities are recorded in Accrued Expenses or Other Long-Term Obligations in the Condensed Consolidated Balance Sheets.

Forward Contracts:  The company operates internationally and as a result is exposed to foreign currency fluctuations. Specifically, the exposure includes intercompany loans and third party sales or payments. In an attempt to reduce this exposure, foreign currency forward contracts are utilized and accounted for as hedging instruments. The forward contracts are used to hedge the following currencies: AUD, GBP, CAD, CHF, DKK, EUR, 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.

 
14 


The gains and losses that result from the majority of the forward contracts are deferred and recognized when the offsetting gains and losses for the identified transactions are recognized.  Gains or losses recognized as the result of the settlement of forward contracts are recognized in cost of products sold for hedges of inventory transactions or selling, general and administrative expenses for other hedged transactions.  The company’s forward contracts are included in Other Current Assets or Accrued Expenses in the Condensed Consolidated Balance Sheets.

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 9 ¾% Senior Notes due 2015 (the “Senior Notes”) with an aggregate principal amount of $175,000,000 and under its 4.125% Convertible Senior Subordinated Debentures due 2027 (the “Debentures”) with an aggregate principal amount of $135,000,000.  The majority of the company’s subsidiaries are not guaranteeing the indebtedness of the Senior Notes or 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 Senior Notes and 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 OPERATIONS

 (in thousands)
 
Three month period ended June 30, 2008
 
The Company (Parent)
   
Combined Guarantor Subsidiaries
   
Combined Non-Guarantor Subsidiaries
   
Eliminations
   
Total
 
Net sales
 
$
90,700
   
$
171,141
   
$
205,471
   
$
(20,160
)
 
$
447,152
 
Cost of products sold
   
69,130
     
137,184
     
136,752
     
(20,087
)
   
322,979
 
Gross Profit
   
21,570
     
33,957
     
68,719
     
(73
)
   
124,173
 
Selling, general and administrative expenses
   
30,587
     
30,194
     
43,739
     
-
     
104,520
 
Charge related to restructuring activities
   
29
     
-
     
830
     
-
     
859
 
Income (loss) from equity investee
   
22,152
     
11,647
     
(4,048
)
   
(29,751
)
   
-
 
Interest expense - net
   
6,425
     
(355
)
   
2,717
     
-
     
8,787
 
Earnings (loss) before Income Taxes
   
6,681
     
15,765
     
17,385
     
(29,824
)
   
10,007
 
Income taxes
   
424
     
300
     
3,026
     
-
     
3,750
 
Net Earnings (loss)
 
$
6,257
   
$
15,465
   
$
14,359
   
$
(29,824
)
 
$
6,257
 
                                         
Three month period ended June 30, 2007
                                       
Net sales
 
$
81,158
   
$
156,578
   
$
169,949
   
$
(14,418
)
 
$
393,267
 
Cost of products sold
   
62,516
     
123,157
     
112,118
     
(14,470
)
   
283,321
 
Gross Profit
   
18,642
     
33,421
     
57,831
     
52
     
109,946
 
Selling, general and administrative expenses
   
29,204
     
25,347
     
39,300
     
-
     
93,851
 
Charge related to restructuring activities
   
155
     
(29
)
   
1,535
     
-
     
1,661
 
Charges, interest and fees associated with debt refinancing
   
(8
)
   
-
     
16
     
-
     
8
 
Income (loss) from equity investee
   
18,341
     
7,377
     
(1,133
)
   
(24,585
)
   
-
 
Interest expense - net
   
7,252
     
320
     
3,675
     
-
     
11,247
 
Earnings (loss) before Income Taxes
   
380
     
15,160
     
12,172
     
(24,533
)
   
3,179
 
Income taxes (benefit)
   
326
     
315
     
2,484
     
-
     
3,125
 
Net Earnings (loss)
 
$
54
   
$
14,845
   
$
9,688
   
$
(24,533
)
 
$
54
 

 
15 


CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS

 (in thousands)
 
Six month period ended June 30, 2008
 
The Company (Parent)
   
Combined Guarantor Subsidiaries
   
Combined Non-Guarantor Subsidiaries
   
Eliminations
   
Total
 
Net sales
 
$
172,580
   
$
340,046
   
$
388,421
   
$
(37,617
)
 
$
863,430
 
Cost of products sold
   
130,388
     
272,878
     
260,441
     
(37,658
)
   
626,049
 
Gross Profit
   
42,192
     
67,168
     
127,980
     
41
     
237,381
 
Selling, general and administrative expenses
   
57,539
     
59,131
     
85,545
     
-
     
202,215
 
Charge related to restructuring activities
   
255
     
-
     
1,115
     
-
     
1,370
 
Income (loss) from equity investee
   
39,009
     
19,351
     
(7,455
)
   
(50,905
)
   
-
 
Interest expense - net
   
13,218
     
(673
)
   
5,561
     
-
     
18,106
 
Earnings (loss) before Income Taxes
   
10,189
     
28,061
     
28,304
     
(50,864
)
   
15,690
 
Income taxes
   
839
     
600
     
4,901
     
-
     
6,340
 
Net Earnings (loss)
 
$
9,350
   
$
27,461
   
$
23,403
   
$
(50,864
)
 
$
9,350
 
                                         
Six month period ended  June 30, 2007
                                       
Net sales
 
$
156,610
   
$
315,532
   
$
324,329
   
$
(28,299
)
 
$
768,172
 
Cost of products sold
   
122,579
     
250,666
     
214,358
     
(28,433
)
   
559,170
 
Gross Profit
   
34,031
     
64,866
     
109,971
     
134
     
209,002
 
Selling, general and administrative expenses
   
54,425
     
53,071
     
74,121
     
-
     
181,617
 
Charge related to restructuring activities
   
2,450
     
14
     
2,349
     
-
     
4,813
 
Debt finance charges, interest and fees associated with debt refinancing
   
13,334
     
-
     
47
     
-
     
13,381
 
Income (loss) from equity investee
   
33,075
     
11,000
     
(4,288
)
   
(39,787
)
   
-
 
Interest expense - net
   
13,891
     
744
     
6,481
     
-
     
21,116
 
Earnings (loss) before Income Taxes
   
(16,994
)
   
22,037
     
22,685
     
(39,653
)
   
(11,925
)
Income taxes
   
456
     
540
     
4,529
     
-
     
5,525
 
Net Earnings (loss)
 
$
(17,450
)
 
$
21,497
   
$
18,156
   
$
(39,653
)
 
$
(17,450
)

 
16 


CONSOLIDATING CONDENSED BALANCE SHEETS

 (in thousands)
 
June 30, 2008
 
The Company (Parent)
   
Combined Guarantor Subsidiaries
   
Combined Non-Guarantor Subsidiaries
   
Eliminations
   
Total
 
Assets
                             
Current Assets
                             
Cash and cash equivalents
 
$
4,777
   
$
2,236
   
$
32,948
   
$
-
   
$
39,961
 
Marketable securities
   
124
     
-
     
-
     
-
     
124
 
Trade receivables, net
   
114,168
     
57,101
     
139,014
     
(1,908
)
   
308,375
 
Installment receivables, net
   
-
     
1,070
     
2,366
     
-
     
3,436
 
Inventories, net
   
58,853
     
39,721
     
116,054
     
(1,488
)
   
213,140
 
Deferred income taxes
   
-
     
-
     
2,554
     
-
     
2,554
 
Other current assets
   
20,581
     
5,463
     
40,185
     
-
     
66,229
 
Total Current Assets
   
198,503
     
105,591
     
333,121
     
(3,396
)
   
633,819
 
Investment in subsidiaries
   
1,469,061
     
659,483
     
-
     
(2,128,544
)
   
-
 
Intercompany advances, net
   
230,675
     
834,174
     
47,696
     
(1,112,545
)
   
-
 
Other Assets
   
60,318
     
11,188
     
1,388
     
-
     
72,894
 
Other Intangibles
   
1,145
     
10,571
     
92,414
     
-
     
104,130
 
Property and Equipment, net
   
54,857
     
10,280
     
104,377
     
-
     
169,514
 
Goodwill
   
-
     
24,762
     
546,612
     
-
     
571,374
 
Total Assets
 
$
2,014,559
   
$
1,656,049
   
$
1,125,608
   
$
(3,244,485
)
 
$
1,551,731
 
                                         
Liabilities and Shareholders’ Equity
                                       
Current Liabilities
                                       
Accounts payable
 
$
75,727
   
$
15,198
   
$
73,187
   
$
-
   
$
164,112
 
Accrued expenses
   
45,167
     
19,783
     
84,115
     
(1,908
)
   
147,157
 
Accrued income taxes
   
500
     
-
     
3,359
     
-
     
3,859
 
Short-term debt and current maturities of long-term obligations
   
39,058
     
-
     
835
     
-
     
39,893
 
Total Current Liabilities
   
160,452
     
34,981
     
161,496
     
(1,908
)
   
355,021
 
Long-Term Debt
   
457,797
     
-
     
28,503
     
-
     
486,300
 
Other Long-Term Obligations
   
58,433
     
2,040
     
47,144
     
-
     
107,617
 
Intercompany advances, net
   
735,084
     
322,484
     
54,977
     
(1,112,545
)
   
-
 
Total Shareholders’ Equity
   
602,793
     
1,296,544
     
833,488
     
(2,130,032
)
   
602,793
 
Total Liabilities and Shareholders’ Equity
 
$
2,014,559
   
$
1,656,049
   
$
1,125,608
   
$
(3,244,485
)
 
$
1,551,731
 

 
 
17 


CONSOLIDATING CONDENSED BALANCE SHEETS

(in thousands)
 
December 31, 2007
 
The Company (Parent)
   
Combined Guarantor Subsidiaries
   
Combined Non-Guarantor Subsidiaries
   
Eliminations
   
Total
 
Assets
                             
Current Assets
                             
Cash and cash equivalents
 
$
27,133
   
$
1,773
   
$
33,294
   
$
-
   
$
62,200
 
Marketable securities
   
255
     
-
     
-
     
-
     
255
 
Trade receivables, net
   
93,533
     
52,996
     
121,431
     
(3,817
)
   
264,143
 
Installment receivables, net
   
-
     
1,841
     
2,216
     
-
     
4,057
 
Inventories, net
   
69,123
     
34,115
     
93,895
     
(1,529
)
   
195,604
 
Deferred income taxes
   
-
     
-
     
2,478
     
-
     
2,478
 
Other current assets
   
20,693
     
6,489
     
36,438
     
(1,272
)
   
62,348
 
Total Current Assets
   
210,737
     
97,214
     
289,752
     
(6,618
)
   
591,085
 
Investment in subsidiaries
   
1,393,220
     
640,178
     
-
     
(2,033,398
)
   
-
 
Intercompany advances, net
   
250,765
     
824,519
     
43,460
     
(1,118,744
)
   
-
 
Other Assets
   
66,616
     
23,482
     
1,564
     
-
     
91,662
 
Other Intangibles
   
934
     
11,315
     
92,487
     
-
     
104,736
 
Property and Equipment, net
   
57,984
     
10,231
     
101,161
     
-
     
169,376
 
Goodwill
   
-
     
23,531
     
519,652
     
-
     
543,183
 
Total Assets
 
$ 
1,980,256
   
$
1,630,470
   
$
1,048,076
   
$
(3,158,760
)
 
$
1,500,042
 
                                         
Liabilities and Shareholders’ Equity
                                       
Current Liabilities
                                       
Accounts payable
 
$
68,786
   
$
12,516
   
$
68,868
   
$
-
   
$
150,170
 
Accrued expenses
   
48,332
     
18,284
     
84,431
     
(5,089
)
   
145,958
 
Accrued income taxes
   
500
     
-
     
5,473
     
-
     
5,973
 
Short-term debt and current maturities of long-term obligations
   
23,500
     
-
     
1,010
     
-
     
24,510
 
Total Current Liabilities
   
141,118
     
30,800
     
159,782
     
(5,089
)
   
326,611
 
Long-Term Debt
   
481,896
     
7
     
31,439
     
-
     
513,342
 
Other Long-Term Obligations
   
61,370
     
-
     
44,676
     
-
     
106,046
 
Intercompany advances, net
   
741,829
     
326,028
     
50,887
     
(1,118,744
)
   
-
 
Total Shareholders’ Equity
   
554,043
     
1,273,635
     
761,292
     
(2,034,927
)
   
554,043
 
Total Liabilities and Shareholders’ Equity
 
$
1,980,256
   
$
1,630,470
   
$
1,048,076
   
$
(3,158,760
)
 
$
1,500,042
 

 
 
18 


CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS

(in thousands)
 
Six month period ended June 30, 2008
 
The Company (Parent)
   
Combined Guarantor Subsidiaries
   
Combined Non-Guarantor Subsidiaries
   
Eliminations
   
Total
 
Net Cash Provided (Used) by Operating Activities
 
$
(13,492
)
 
$
1,616
   
$
8,908
   
$
-
   
$
(2,968
)
Investing Activities
                                       
Purchases of property and equipment
   
(3,193
)
   
(522
)
   
(7,921
)
   
-
     
(11,636
)
Proceeds from sale of property and equipment
   
-
     
-
     
36
     
-
     
36
 
Increase in other long-term assets
   
4,550
     
-
     
-
     
-
     
4,550
 
Business acquisitions, net of cash acquired
   
-
     
(2,152
)
   
-
     
-
     
(2,152
)
Other
   
(1,444
)
   
1,521
     
1,432
     
-
     
1,509
 
Net Cash Used for Investing Activities
   
(87
)
   
(1,153
)
   
(6,453
)
   
-
     
(7,693
)
Financing Activities
                                       
    Proceeds from revolving lines of credit and long-term borrowings
   
168,979
     
-
     
8,638
     
-
     
177,617
 
Payments on revolving lines of credit and long-term borrowings
   
(177,778
)
   
-
     
(12,758
)
   
-
     
(190,536
)
Proceeds from exercise of stock options
   
821
     
-
     
-
     
-
     
821
 
Payment of dividends
   
(799
)
   
-
     
-
     
-
     
(799
)
Net Cash Used by Financing Activities
   
(8,777
)
   
-
     
(4,120
)
   
-
     
(12,897
)
Effect of exchange rate changes on cash
   
-
     
-
     
1,319
     
-
     
1,319
 
Increase (decrease) in cash and cash equivalents
   
(22,356
)
   
463
     
(346
)
   
-
     
(22,239
)
Cash and cash equivalents at beginning of period
   
27,133
     
1,773
     
33,294
     
-
     
62,200
 
Cash and cash equivalents at end of period
 
$
4,777
   
$
2,236
   
$
32,948
   
$
-
   
$
39,961
 
                                         
Six month period ended June 30, 2007
                                       
Net Cash Provided (Used) by Operating Activities
 
$
(95,244
)
 
$
912
   
$
92,074
   
$
-
   
$
(2,258
)
Investing Activities
                                       
Purchases of property and equipment
   
(1,763
)
   
(698
)
   
(5,309
)
   
-
     
(7,770
)
Proceeds from sale of property and equipment
   
-
     
-
     
462
     
-
     
462
 
Increase in other long-term assets
   
(187
)
   
-
     
-
     
-
     
(187
)
Other
   
(1,629
)
   
-
     
39
     
-
     
(1,590
)
Net Cash Used for Investing Activities
   
(3,579
)
   
(698
)
   
(4,808
)
   
-
     
(9,085
)
Financing Activities
                                       
    Proceeds from revolving lines of credit, securitization facility and long-term borrowings
   
548,373
     
-
     
2,567
     
-
     
550,940
 
Payments on revolving lines of credit, securitization facility and long-term borrowings
   
(449,878
)
   
-
     
(116,337
)
   
-
     
(566,215
)
Payment of dividends
   
(798
)
   
-
     
-
     
-
     
(798
)
Payment of financing costs
   
(20,384
)
   
-
     
-
     
-
     
(20,384
)
Net Cash Provided (Used) by Financing Activities
   
77,313
     
-
     
(113,770
)
   
-
     
(36,457
)
Effect of exchange rate changes on cash
   
-
     
-
     
1,143
     
-
     
1,143
 
Increase (decrease) in cash and cash equivalents
   
(21,510
)
   
214
     
(25,361
)
   
-
     
(46,657
)
Cash and cash equivalents at beginning of period
   
35,918
     
2,202
     
44,083
     
-
     
82,203
 
Cash and cash equivalents at end of period
 
$
14,408
   
$
2,416
   
$
18,722
   
$
-
   
$
35,546
 
                                         


 
19 



 Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis should be read in conjunction with the company’s Condensed Consolidated Financial Statements and related notes thereto included elsewhere in this Quarterly Report on Form 10-Q and in the company’s Current Report on Form 8-K as furnished to the Securities and Exchange Commission on July 24, 2008.

OUTLOOK

The Company continues to execute on its plan for the year, despite global commodity cost increases and increasing reimbursement pressures in Europe.  To compensate for rising commodity costs, each of the Company’s segments has already completed or is implementing planned selective price increases and freight policy changes for the third quarter.

For fiscal year 2008, the company expects organic growth in net sales of between 5% and 6%, excluding the impact from acquisitions and foreign currency translation adjustments.  Operating cash flows are estimated to be $65 million to $70 million with net purchases of property, plant and equipment of up to approximately $25 million.  The full year earnings are expected to be consistent with the guidance furnished in the company’s press release on July 24, 2008.

RESULTS OF OPERATIONS

NET SALES

Net sales for the three months ended June 30, 2008 were $447,152,000, compared to $393,267,000 for the same period a year ago, representing a 13.7% increase.  Organic sales growth was 7.8% as foreign currency translation increased net sales by five percentage points while acquisitions increased net sales by less than one percentage point for the three month period.  The positive sales growth was primarily driven by performance in NA/HME and Europe.  For the six months ended June 30, 2008, net sales increased 12.4% to $863,430,000, compared to $768,172,000 for the same period a year ago.  Organic sales growth was 6.8% as foreign currency translation increased net sales by five percentage points while acquisitions increased net sales by less than one percentage point for  the six month period.  The positive sales growth was achieved in each of the company’s operating segments.

North American/Home Medical Equipment (NA/HME)

NA/HME net sales increased 12.3% for the quarter to $187,163,000 as compared to $166,601,000 for the same period a year ago.   The increase for the quarter was driven primarily by sales increases in all principal product lines.  For the first half of 2008, net sales increased 10.5% to $362,944,000 as compared to $328,364,000 for the same period a year ago.  Foreign currency and acquisitions both increased net sales by one percentage point in the second quarter and first half of 2008.  

Rehab product line net sales increased by 7% compared to the second quarter last year, despite volume declines in the consumer power product line caused by the Company’s previous decision to terminate sales to a large national account.   Excluding consumer power products, Rehab product line net sales increased 13.3% compared to the second quarter last year, driven by volume increases in custom power and custom manual wheelchairs as well as seating and positioning products.    Standard product line net sales for the second quarter increased 15.1% compared to the second quarter of last year, driven by increased volumes in manual wheelchairs, patient aids and beds partially offset by discounts associated with higher sales of manual wheelchairs to national providers.  Respiratory product line net sales increased 9.2%, driven by volume increases in oxygen concentrators and strong purchases by national and independent providers.

Invacare Supply Group (ISG)

ISG net sales for the quarter increased 2.9% to $64,523,000 compared to $62,696,000 last year driven by an increase in home delivery program sales, increased sales volumes with larger providers and growth in the infusion business.  For the first half of 2008, net sales increased 4.3% to $129,779,000 as compared to $124,372,000 for the same period a year ago.

 
20 


Institutional Products Group (IPG)

IPG net sales increased by 7.8% to $23,177,000 compared to $21,496,000 last year.  Foreign currency translation increased net sales by two percentage points.  The net sales increase was driven by new products introduced late last year including beds, therapeutic support surfaces and clinical recliners along with strong sales in durable medical equipment (DME) and bathing products.  For the first half of 2008, net sales increased 7.7% to $48,474,000 as compared to $44,989,000 for the same period a year ago.  Foreign currency translation increased net sales by three percentage points.

Europe

European net sales increased 22.5% for the quarter to $145,977,000 as compared to $119,213,000 for the same period a year ago.  European net sales for the first six months of 2008 increased 20.2% to $271,980,000 as compared to $226,243,000 for the same period a year ago.  Foreign currency translation increased net sales by fifteen percentage points for the quarter and thirteen percentage points in the first half of 2008.  Net sales performance continues to be strong in most regions with the exception of Germany where reimbursement and pricing pressures are increasing.

Asia/Pacific

Asia/Pacific net sales increased 13.1% for the quarter to $26,312,000 as compared to $23,261,000 for the same period a year ago.  Foreign currency increased net sales by nine percentage points.  For the first half of the year, net sales increased 13.7% to $50,253,000 as compared to $44,204,000 for the same period a year ago.  Foreign currency translation increased net sales by twelve percentage points.  The net sales improvement was the result of volume increases in the Company’s distribution businesses in the region and at the Company’s subsidiary which manufactures microprocessor controllers.

GROSS PROFIT

Gross profit as a percentage of net sales for the three and six-month periods ended June 30, 2008 was 27.8% and 27.5%, respectively, compared to 28.0% and 27.2%, respectively, in the same periods last year.   Gross margin as a percentage of net sales for the second quarter was lower by .2 percentage points compared to last year’s second quarter primarily due to increased freight costs and commodity costs as well as unfavorable product mix in Europe and discounts associated with higher sales to national providers in NA/HME.

For the first half of the year, NA/HME margins as a percentage of net sales increased to 30.1% compared with 29.4% in the same period last year, primarily due to increased volumes and cost reduction initiatives partially offset by commodity cost increases and discounts associated with higher sales to national providers in standard and respiratory products.  ISG gross margins decreased by ..9 percentage point due to higher freight costs and discounts associated with higher sales to larger providers.  IPG gross margin declined by .5 percentage points primarily due to lower margins achieved on new beds introduced in the fourth quarter of last year.  In Europe, gross margin as a percentage of net sales declined by 1.8 percentage points primarily due to higher freight costs, unfavorable product mix toward lower margin products, and unfavorable foreign currency impact from the weakness or the British Pound as compared to the Euro.  Gross margin as a percentage of net sales in Asia/Pacific increased year to date by 8.1 percentage points, largely due to cost reduction activities and increased volumes.

SELLING, GENERAL AND ADMINISTRATIVE

Selling, general and administrative (“SG&A”) expense as a percentage of net sales for the three and six months ended June 30, 2008 was 23.4% in each period, compared to 23.9% and 23.6%, respectively, for the same periods a year ago.  The dollar increases were $10,669,000 and $20,598,000, or 11.4% and 11.3%, respectively, for the quarter and first half of the year, as compared to the same period a year ago.  Acquisitions increased these expenses by $780,000 in the quarter and $1,351,000 in the first half of the year, while foreign currency translation increased these expenses by $5,737,000 in the quarter and $10,414,000 in the first half of the year compared to the same periods a year ago.  Excluding the impact of foreign currency translation and acquisitions, selling, general and administrative expense increased 4.4% for the quarter and 4.9% for the first half of 2008 as compared to the same periods a year ago.  The increase in SG&A expense is primarily attributable to increased bonus and bad debt expense.

North American/HME SG&A cost increased $751,000, or 2.0%, for the quarter and $2,459,000, or 3.3%, in the first half of 2008 compared to the same periods a year ago.  For the quarter, foreign currency translation increased SG&A by $326,000 or .7% while acquisitions increased SG&A by $780,000 or 1.6%.  For the first half of 2008, foreign currency translation increased SG&A by $947,000 or 1.0% while acquisitions increased SG&A by $1,351,000 or 1.5%.  Excluding the impact of foreign currency translation and acquisitions, SG&A declined by .9% for the quarter and increased by .2% year to date.

 
21 


Invacare Supply Group SG&A expense decreased $112,000, or 1.7%, for the quarter and increased by $445,000, or 3.5%, in the first half of 2008 compared to the same periods a year ago with the year to date increase primarily due to higher distribution costs associated with increased sales volumes.

Institutional Products Group SG&A expense increased $101,000, or 2.5%, for the quarter and $34,000, or .4%, in the first half of 2008 compared to the same periods a year ago.  Foreign currency translation increased SG&A by $99,000 or 2.5% for the quarter and $136,000 for the first half of the year.

European SG&A cost increased $5,207,000, or 17.6%, for the quarter and $9,948,000, or 17.3%, for the first half of 2008 compared to the same periods a year ago.  For the quarter, foreign currency translation increased SG&A by $4,623,000, or 15.6%.  For the first half of 2008, foreign currency translation increased SG&A by $7,722,000, or 13.5%, respectively.  Excluding the impact of foreign currency translation, the increases in expense is primarily due to higher sales and marketing costs for people and programs to drive future sales growth.

Asia/Pacific SG&A cost increased $1,692,000, or 29.6%, for the quarter and $3,293,000, or 28.9%, in the first half of the year compared to the same periods a year ago.  For the quarter, foreign currency translation increased SG&A expense by $689,000, or 12.1%.  For the first half of 2008, foreign currency translation increased SG&A by $1,609,000, or 14.1%.  Excluding the impact of foreign currency translation, SG&A expense increased 17.6% and 14.8% for the quarter and first half of 2008, respectively as compared to last year due to higher sales and marketing costs for people and programs to drive future sales growth.

CHARGE RELATED TO RESTRUCTURING ACTIVITIES

Previously, the company announced multi-year cost reductions and profit improvement actions, which included: reducing global headcount, outsourcing improvements utilizing the company’s China manufacturing capability and third parties, shifting substantial resources from product development to manufacturing cost reduction activities and product rationalization, reducing freight exposure through freight auctions and changing the freight policy, general expense reductions and exiting manufacturing and distribution facilities.
 
The restructuring was necessitated by the continued decline in reimbursement, continued pricing pressures faced by the company as a result of outsourcing by competitors to lower cost locations and commodity cost increases for steel, aluminum and fuel.

Restructuring charges of $1,441,000 were incurred in the first half of 2008, of which $71,000 are recorded in cost of products sold as it relates to inventory markdowns and the remaining charge amount is included on the Charge Related to Restructuring Activities in the Condensed Consolidated Statement of Operations as part of operations.

The restructuring charges included $255,000 in NA/HME, $115,000 in IPG, $783,000 in Europe and $288,000 in Asia/Pacific.  Of the total charges incurred to date, $868,000 remained unpaid as of June 30, 2008 with $720,000 unpaid related to NA/HME; $104,000 unpaid related to Europe; and $44,000 unpaid related to Asia/Pacific.  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, and the company expects to utilize the accruals recorded through June 30, 2008 during 2008.  With additional actions to be undertaken during the remainder of 2008, the company anticipates recognizing pre-tax restructuring charges of approximately $5,000,000 for the year.

CHARGES, INTEREST AND FEES ASSOCIATED WITH DEBT REFINANCING

As a result of the company’s refinancing completed in the first quarter of 2007, the company incurred in the quarter ended March 31, 2007 one-time make whole payments to the holders of previously outstanding senior notes and incremental interest totaling $10,900,000 and wrote-off previously capitalized costs of $2,500,000 related to the old debt structure.

INTEREST

Interest expense decreased $2,091,000 and $2,417,000 for the first quarter and first half of 2008, respectively, compared to the same periods last year due to lower debt levels.  Interest income for the second quarter and first half of 2008 increased $369,000 and $593,000, respectively, compared to the same periods last year, primarily due to interest on higher average foreign cash balances.

 
22 


INCOME TAXES

The company had an effective tax rate of 37.5% and 40.4% on earnings before tax compared to an expected rate at the US statutory rate of 35% for the three and six month periods ended June 30, 2008.  For the three and six month periods ended June 30, 2007, the company had  an effective rate of 98.3% and (46.3%) compared to an expected rate at the US statutory rate of 35%.  The company’s effective tax rate for each of the three and six month periods ended June 30, 2008 and 2007 was higher than the U.S. federal statutory rate or benefit as a result of the company not being able to record tax benefits related to losses in countries which had tax valuation allowances, while normal tax expense was recognized in countries without tax allowances.

LIQUIDITY AND CAPITAL RESOURCES

The company’s reported level of debt decreased by $11,659,000 from December 31, 2007 to $526,193,000 at June 30, 2008, as a result of positive cash flow in the second quarter and increased earnings.  As compared to March 31, 2008, reported debt decreased by $12,528,000.  The debt-to-total-capitalization ratio was 46.6% at June 30, 2008 as compared to 48.2% at March 31, 2008.

The company’s cash and cash equivalents were $39,961,000 at June 30, 2008, down from $62,200,000 at the end of the year.  The cash was primarily utilized to pay annual bonus payments and required interest payments on debt outstanding, plus additional payments to reduce the company’s debt outstanding.

The company’s borrowing arrangements contain covenants with respect to maximum amount of debt, minimum loan commitments, interest coverage, net worth, dividend payments, working capital, and funded debt to capitalization, as defined in the company’s bank agreements and agreements with its note holders.  As of June 30, 2008, the company was in compliance with all covenant requirements.  Under the most restrictive covenant of the company’s borrowing arrangements as of June 30, 2008, the company had the capacity to borrow up to an additional $117,300,000.

CAPITAL EXPENDITURES

The company had no individually material capital expenditure commitments outstanding as of June 30, 2008. The company estimates that capital investments for 2008 will approximate up to $25,000,000 as compared to $20,068,000 in 2007.  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 to fund required capital expenditures for the foreseeable future.

CASH FLOWS

Cash flows used by operating activities were $2,968,000 for the first half of 2008 compared to $2,258,000 used in the first half of 2007.  Operating cash flows for the first half of 2008 were flat compared to the same period a year ago as the significant improvement in net earnings in the first half of 2008 was offset by increased working capital needs due to higher sales.  While net cash provided by operating activities was comparable in each period, receivables and inventories were both a drain on cash flow during the first half of 2008 by approximately $30.8 million and $14.0 million, respectively.  The receivables increase is primarily due to higher sales levels while inventories increased throughout the company, particularly in the Asia Pacific segment to support future sales initiatives and as a result of its outsourcing efforts.

Cash used for investing activities was $7,693,000 for the first half of 2008 compared to $9,085,000 used in the first half of 2007.  The decrease in cash used for investing activities is primarily the result of cash receipts on company-owned life insurance policies in the current year offset by an increase in the purchases of property, plant and equipment in the first half of 2008 compared to the first half of 2007.

Cash used by financing activities was $12,897,000 for the first half of 2008 compared to cash required of $36,457,000 in the first half of 2007.  The first quarter of 2007 financing cash flow included $20,384,000 of financing cost payments as a result of the company refinancing which was completed in the first quarter of 2007.

 
23 


During the first half of 2008, the company used free cash flow of $12,512,000 as compared to $865,000 used by the company in the first half of 2007.  The decrease was primarily attributable to the same items as noted above which impacted operating cash flows.  Free cash flow is a non-GAAP financial measure that is comprised of net cash provided by operating activities, excluding net cash impact related to restructuring activities, less net purchases of property and equipment, net of proceeds from sales of property and equipment.  Management believes that this financial measure provides meaningful information for evaluating the overall financial performance of the company and its ability to repay debt or make future investments (including, for example, acquisitions).  However, it should be noted that the company’s definition of free cash flow may not be comparable to similar measures disclosed by other companies because not all companies calculate free cash flow in the same manner.

The non-GAAP financial measure is reconciled to the GAAP measure as follows (in thousands):
 
   
Six Months Ended June 30, 
 
   
2008
   
2007
 
Net cash used by operating activities
 
$
(2,968
)
 
$
(2,258
)
Net cash impact related to restructuring activities
   
2,056
     
8,701
 
Less:  Purchases of property and equipment - net
   
(11,600
)
   
(7,308
)
Free Cash Flow
 
$
(12,512
 
$
(865

DIVIDEND POLICY

On May 22, 2008, the company’s Board of Directors declared a quarterly cash dividend of $0.0125 per Common Share to shareholders of record as of July 3, 2008, which was paid on July 11, 2008.  At the current rate, the cash dividend will amount to $0.05 per Common Share on an annual basis.

CRITICAL ACCOUNTING POLICIES

The Consolidated Financial Statements included in this Quarterly Report on Form 10-Q include accounts of the company, all majority-owned subsidiaries and a variable interest entity for which the company was the primary beneficiary in 2007. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying Consolidated Financial Statements and related footnotes. In preparing the financial statements, management has made its best estimates and judgments of certain amounts included in the financial statements, giving due consideration to materiality. However, application of these accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates.

The following critical accounting policies, among others, affect the more significant judgments and estimates used in preparation of the company’s consolidated financial statements.

Revenue Recognition
Invacare’s revenues are recognized when products are shipped to unaffiliated customers. The SEC’s Staff Accounting Bulletin (SAB) No. 101, “Revenue Recognition,” as updated by SAB No. 104, provides guidance on the application of generally accepted accounting principles (GAAP) to selected revenue recognition issues. The company has concluded that its revenue recognition policy is appropriate and in accordance with GAAP and SAB No. 101.  Shipping and handling costs are included in cost of goods sold.

Sales are made only to customers with whom the company believes collection is reasonably assured based upon a credit analysis, which may include obtaining a credit application, a signed security agreement, personal guarantee and/or a cross corporate guarantee depending on the credit history of the customer. Credit lines are established for new customers after an evaluation of their credit report and/or other relevant financial information. Existing credit lines are regularly reviewed and adjusted with consideration given to any outstanding past due amounts.

The company offers discounts and rebates, which are accounted for as reductions to revenue in the period in which the sale is recognized. Discounts offered include: cash discounts for prompt payment, base and trade discounts based on contract level for specific classes of customers. Volume discounts and rebates are given based on large purchases and the achievement of certain sales volumes. Product returns are accounted for as a reduction to reported sales with estimates recorded for anticipated returns at the time of sale. The company does not sell any goods on consignment.

 
24 


Distributed products sold by the company are accounted for in accordance with Emerging Issues Task Force, or “EITF” No. 99-19 Reporting Revenue Gross as a Principal versus Net as an Agent.  The company records distributed product sales gross as a principal since the company takes title to the products and has the risks of loss for collections, delivery and returns.

Product sales that give rise to installment receivables are recorded at the time of sale when the risks and rewards of ownership are transferred. In December 2000, the company entered into an agreement with DLL, a third party financing company, to provide the majority of future lease financing to Invacare customers. As such, interest income is recognized based on the terms of the installment agreements. Installment accounts are monitored and if a customer defaults on payments, interest income is no longer recognized. All installment accounts are accounted for using the same methodology, regardless of duration of the installment agreements.

Allowance for Uncollectible Accounts Receivable
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 dealers 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. As a consequence, changes in these programs can have an adverse impact on dealer liquidity and profitability. The estimated allowance for uncollectible amounts is based primarily on management’s evaluation of the financial condition of the customer. In addition, as a result of the third party financing arrangement, 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.

The company continues to closely monitor the credit-worthiness of its customers and adhere to tight credit policies.  Due to delays in the implementation of various government reimbursement policies, including national competitive bidding, there still remains significant uncertainty as to the impact that those changes will have on the company’s customers.

Inventories and Related Allowance for Obsolete and Excess Inventory
Inventories are stated at the lower of cost or market with cost determined by the first-in, first-out method.  Inventories have been reduced by an allowance for excess and obsolete inventories. The estimated allowance is based on management’s review of inventories on hand compared to estimated future usage and sales.  A provision for excess and obsolete inventory is recorded as needed based upon the discontinuation of products, redesigning of existing products, new product introductions, market changes and safety issues.  Both raw materials and finished goods are reserved for on the balance sheet.
 
In general, Invacare reviews inventory turns as an indicator of obsolescence or slow moving product as well as the impact of new product introductions. Depending on the situation, the company may partially or fully reserve for the individual item. The company continues to increase its overseas sourcing efforts, increase its emphasis on the development and introduction of new products, and decrease the cycle time to bring new product offerings to market. These initiatives are sources of inventory obsolescence for both raw material and finished goods.

Goodwill, Intangible and Other Long-Lived Assets
Property, equipment, intangibles and certain other long-lived assets are amortized over their useful lives. Useful lives are based on management’s estimates of the period that the assets will generate revenue. Under SFAS No. 142, Goodwill and Other Intangible Assets, goodwill and intangible assets deemed to have indefinite lives are subject to annual impairment tests. Furthermore, goodwill and other long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The company completes its annual impairment tests in the fourth quarter of each year.  The discount rates used have a significant impact upon the discounted cash flow methodology utilized in our annual impairment testing as higher discount rates decrease the fair value estimates used in our testing.

The company utilizes a discounted cash flow method model to analyze reporting units for impairment in which the company forecasts income statement and balance sheet amounts based on assumptions regarding future sales growth, profitability, inventory turns, days’ sales outstanding, etc. to forecast future cash flows.  The cash flows are discounted using a weighted average cost of capital discount rate where the cost of debt is based on quoted rates for 20-year debt of companies of similar credit risk and the cost of equity is based upon the 20-year treasury rate for the risk free rate, a market risk premium, the industry average beta, a small cap stock adjustment and company specific risk premiums.  While no impairment was indicated in 2007 for any reporting units, a future potential impairment is possible for any or the company’s reporting units should actual results differ materially from forecasted results.

 
25 


Product Liability
The company’s captive insurance company, Invatection Insurance Co., currently has a policy year that runs from September 1 to August 31 and insures annual policy losses of $10,000,000 per occurrence and $13,000,000 in the aggregate of the company’s North American product liability exposure. The company also has additional layers of external insurance coverage insuring up to $75,000,000 in annual aggregate losses arising from individual claims anywhere in the world that exceed the captive insurance company policy limits or the limits of the company’s per country foreign liability limits, as applicable. There can be no assurance that Invacare’s current insurance levels will continue to be adequate or available at affordable rates.

Product liability reserves are recorded for individual claims based upon historical experience, industry expertise and indications from the third-party actuary. Additional reserves, in excess of the specific individual case reserves, are provided for incurred but not reported claims based upon third-party actuarial valuations at the time such valuations are conducted. Historical claims experience and other assumptions are taken into consideration by the third-party actuary to estimate the ultimate reserves. For example, the actuarial analysis assumes that historical loss experience is an indicator of future experience, that the distribution of exposures by geographic area and nature of operations for ongoing operations is expected to be very similar to historical operations with no dramatic changes and that the government indices used to trend losses and exposures are appropriate. Estimates made are adjusted on a regular basis and can be impacted by actual loss award settlements on claims. While actuarial analysis is used to help determine adequate reserves, the company accepts responsibility for the determination and recording of adequate reserves in accordance with accepted loss reserving standards and practices.
 
Warranty
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. No material adjustments to warranty reserves were necessary in the current year. See Warranty Costs in the Notes to the Condensed Consolidated Financial Statements included in this report for a reconciliation of the changes in the warranty accrual.

Accounting for Stock-Based Compensation
Effective January 1, 2006, the company adopted Statement of Financial Accounting Standard No. 123 (Revised 2004), Share Based Payment (“SFAS 123R”) using the modified prospective application method. Under the modified prospective method, compensation cost was recognized for: (1) all stock-based payments granted subsequent to January 1, 2006 based upon the grant-date fair value calculated in accordance with SFAS 123R, and (2) all stock-based payments granted prior to, but not vested as of, January 1, 2006 based upon grant-date fair value previously calculated for previously presented pro forma footnote disclosures in accordance with the original provisions of SFAS No. 123, Accounting for Stock Based Compensation.

Upon adoption of SFAS 123R, the company did not make any other modifications to the terms of any previously granted options. However, the terms of new awards granted since the adoption of SFAS 123R have been modified, as compared to the terms of the awards granted prior to the adoption of SFAS 123R, so that the vesting periods are deemed to be substantive for those who may be retiree eligible. No changes were made regarding the valuation methodologies or assumptions used to determine the fair value of options granted and the company continues to use a Black-Scholes valuation model. As of June 30, 2008, there was $7,631,000 of total unrecognized compensation cost from stock-based compensation arrangements granted under the company’s plans, which is related to non-vested shares, and includes $2,934,000 related to restricted stock awards.  The company expects the compensation expense to be recognized over approximately four years.

The majority of the options awarded have been granted at exercise prices equal to the market value of the underlying stock on the date of grant.  Restricted stock awards granted without cost to the recipients are expensed on a straight-line basis over the vesting periods.

 
26 


Income Taxes
As part of the process of preparing its financial statements, the company is required to estimate income taxes in various jurisdictions. The process requires estimating the company’s current tax exposure, including assessing the risks associated with tax audits, as well as estimating temporary differences due to the different treatment of items for tax and accounting policies. The temporary differences are reported as deferred tax assets and or liabilities. The company also must estimate the likelihood that its deferred tax assets will be recovered from future taxable income and whether or not valuation allowances should be established. In the event that actual results differ from its estimates, the company’s provision for income taxes could be materially impacted.

The company does not believe that there is a substantial likelihood that materially different amounts would be reported related to its critical accounting policies.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In September, 2006, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 157 (FAS 157), Fair Value Measurements, which creates a framework for measuring fair value, clarifies the definition of fair value and expands the disclosures regarding fair value measurements.  FAS 157 does not require any new fair value measurements.  The company adopted the new standard as of January 1, 2008 and the adoption had no material impact on the company’s financial position, results of operations or cash flows.

In December 2007, the FASB issued SFAS 141(R), Business Combinations (SFAS 141R), which changes the accounting for business acquisitions.  SFAS 141(R) requires the acquiring entity in a business combination to recognize all the assets acquired and liabilities assumed in the transaction and establishes principles and requirements as to how an acquirer should recognize and measure in its financial statements the assets acquired, liabilities assumed, any non-controlling interest and goodwill acquired.  SFAS 141(R) also requires expanded disclosure regarding the nature and financial effects of a business combination.  SFAS 141(R) is effective for the company beginning January 1, 2009 and the company is currently evaluating the future impacts and disclosures of this standard.

In March 2008, the FASB issued SFAS 161, Disclosures about Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133 (SFAS 161). SFAS 161 requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. SFAS 161 is effective for the company beginning January 1, 2009 and the company is currently evaluating the effect that adoption will have on its 2009 financial statements.

On May 9, 2008, the FASB issued FASB Staff Position APB 14-1 (FSP APB 14-1) to provide clarification of the accounting for convertible debt that can be settled in cash upon conversion.  The FASB believed this clarification was needed because the accounting being applied for convertible debt does not fully reflect the true economic impact on the issuer since the conversion option is not captured as a borrowing cost and its full dilutive effect is not included in earnings per share.  The FSP requires separate accounting for the liability and equity components of the convertible debt in a manner that would reflect Invacare’s nonconvertible debt borrowing rate.  The company will have to bifurcate a component of its convertible debt as a component of stockholders’ equity and accrete the resulting debt discount as interest expense.  The company is currently evaluating the impact of the adoption FSP APB 14-1 and expects it may have a material impact on the company’s interest expense and earnings per share.  The effective date is January 1, 2009 with retrospective application required for all periods presented and no grandfathering for existing instruments.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The company is exposed to market risk through various financial instruments, including fixed rate and floating rate debt instruments. The company uses interest swap agreements to mitigate its exposure to interest rate fluctuations. Based on June 30, 2008 debt levels, a 1% change in interest rates would impact interest expense by approximately $496,000. Additionally, the company operates internationally and, as a result, is exposed to foreign currency fluctuations. Specifically, the exposure results from intercompany loans and third party sales or payments. In an attempt to reduce this exposure, foreign currency forward contracts are utilized. The company does not believe that any potential loss related to these financial instruments would have a material adverse effect on the company’s financial condition or results of operations.

 
27 


FORWARD-LOOKING STATEMENTS

This Form 10-Q contains forward-looking statements within the meaning of the “Safe Harbor” provisions of the Private Securities Litigation Reform Act of 1995. Terms such as “will,” “should,” “plan,” “intend,” “expect,” “continue,” “forecast”, “believe,” “anticipate” and “seek,” as well as similar comments, are forward-looking in nature. Actual results and events may differ significantly from those expressed or anticipated as a result of risks and uncertainties which include, but are not limited to, the following: possible adverse effects of being substantially leveraged, which could impact our ability to raise capital, limit our ability to react to changes in the economy or our industry or expose us to interest rate or event of default risks; changes in government and other third-party payor reimbursement levels and practices, including the Medicare Improvements for Patients and Providers Act of 2008; consolidation of health care providers and our competitors; loss of key health care providers; ineffective cost reduction and restructuring efforts; inability to design, manufacture, distribute and achieve market acceptance of new products with higher functionality and lower costs; extensive government regulation of our products; lower cost imports; increased freight costs; failure to comply with regulatory requirements or receive regulatory clearance or approval for our products or operations in the United States or abroad; potential product recalls; uncollectible accounts receivable; difficulties in implementing a new Enterprise Resource Planning system; legal actions or regulatory proceedings and governmental investigations; product liability claims; inadequate patents or other intellectual property protection; incorrect assumptions concerning demographic trends that impact the market for our products; provisions of Ohio law or in our debt agreements, our shareholder rights plan or our charter documents that may prevent or delay a change in control; the loss of the services of our key management and personnel; decreased availability or increased costs of raw materials which could increase our costs of producing our products; inability to acquire strategic acquisition candidates because of limited financing alternatives; risks inherent in managing and operating businesses in many different foreign jurisdictions; exchange rate fluctuations, as well as the risks described from time to time in Invacare’s reports as filed with the Securities and Exchange Commission. Except to the extent required by law, we do not undertake and specifically decline any obligation to review or update any forward-looking statements or to publicly announce the results of any revisions to any of such statements to reflect future events or developments or otherwise.


 
28 

 
 Quantitative and Qualitative Disclosures About Market Risk.

The information called for by this item is provided under the same caption under Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
 Controls and Procedures.
 
As of June 30, 2008, an evaluation was performed, under the supervision and with the participation of the company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Based on that evaluation, the company’s management, including the Chief Executive Officer and Chief Financial Officer, concluded that the company’s disclosure controls and procedures were effective as of June 30, 2008, in ensuring that information required to be disclosed by the company in the reports it files and submits under the Exchange Act is (1) recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms and (2) accumulated and communicated to the company’s management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate to allow for timely decisions regarding required disclosure.  There were no changes in the company’s internal control over financial reporting that occurred during the company’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the company’s internal control over financial reporting.
 
 OTHER INFORMATION

 Risk Factors.
 
In addition to the other information set forth in this report, you should carefully consider the risk factors disclosed in Item 1A of the company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007.

 Unregistered Sales of Equity Securities and Use of Proceeds.
 
(c)  
The following table presents information with respect to repurchases of common shares made by the company during the three months ended June 30, 2008. All of the repurchased shares were surrendered to the company by employees for tax withholding purposes in conjunction with the vesting of restricted shares held by the employees under the company’s 2003 Performance Plan.

Period
 
Total Number of
Shares Purchased
   
Average Price
Paid Per Share
   
Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs
   
Maximum Number
of Shares That May Yet
Be Purchased Under
the Plans or Programs
 
4/1/2008-4/30/08
   
-
   
$
-
     
-
     
1,362,900
 
5/1/2008-5/31/08
   
-
     
-
     
-
     
1,362,900
 
6/1/2008-6/30/08
   
5,941
     
18.72
     
-
     
1,362,900
 
Total
   
5,941
   
$
18.72
     
-
     
1,362,900
 

On August 17, 2001, the Board of Directors authorized the company to purchase up to 2,000,000 Common Shares.  To date, the company has purchased 637,100 shares with authorization remaining to purchase 1,362,900 more shares.  The company purchased no shares pursuant to this Board authorized program during the first six months of 2008.
             
Item 4.                       Submission of Matters to a Vote of Security Holders.

On May 22, 2008, the company held its 2008 Annual Meeting of Shareholders to act on proposals to: 1) elect four directors to the class whose three-year term will expire in 2011, 2) approve and adopt an amendment to the company’s Amended and Restated Articles of Incorporation to eliminate certain supermajority voting requirements, 3) ratify the appointment of Ernst & Young LLP as its independent auditors for the company’s 2008 fiscal year, and 4) consider and vote upon two shareholder proposals, one proposal requesting that the Board of Directors take the necessary steps to declassify the Board of Directors and establish annual elections of directors, whereby directors would be elected annually and not by classes, and another proposal requesting that the Board of Directors take such steps as may be necessary to provide that at each shareholder meeting where there is an uncontested election of directors, a director shall be elected by a majority of the votes cast with respect to that director.

 
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Michael F. Delaney, C. Martin Harris, M.D., Bernadine P. Healy, M.D. and A. Malachi Mixon, III were each elected for a three-year term of office expiring in 2011 with 30,527,885; 24,448,193; 27,774,849; and 29,441,412 affirmative votes and 9,652,455; 15,732,147; 12,405,491; and 10,738,928 votes withheld, respectively.

James C. Boland, Gerald B. Blouch, William M. Weber, John R. Kasich, Dan T. Moore, III, Joseph B. Richey, II, and General James L. Jones are directors with continuing terms.

The proposal to approve and adopt amendments to the Company’s Amended and Restated Articles of Incorporation to eliminate certain supermajority voting requirements received 40,007,562 affirmative votes, 80,022 negative votes and 92,755 abstained votes.

The proposal to ratify the appointment of Ernst & Young LLP as the company’s independent auditors for its 2008 fiscal year received 39,827,707 affirmative votes, 288,876 negative votes and 63,758 abstained votes.

The shareholder proposal requesting that the Board of Directors take the necessary steps to declassify the Board of Directors and establish annual elections of directors, whereby directors would be elected annually and not by classes received 22,615,239 affirmative votes, 15,385,076 negative votes and 126,273 abstained votes.

The shareholder proposal requesting that the Board of Directors take such steps as may be necessary to provide that at each shareholder meeting where there is an uncontested election of directors, a director shall be elected by a majority of the votes cast with respect to that director received 20,759,301 affirmative votes, 17,264,165 negative votes and 103,121 abstained votes.
                  
 Exhibits.
 
Exhibit No.
   
 
3.1
 
Amended and Restated Articles of Incorporation, as last amended June 12, 2008 (filed herewith).
 
31.1
 
Chief Executive Officer Rule 13a-14(a)/15d-14(a) Certification (filed herewith).
 
31.2
 
Chief Financial Officer Rule 13a-14(a)/15d-14(a) Certification (filed herewith).
 
32.1
 
Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).
 
32.2
 
Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).


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
 
       
Date:  August 8, 2008  
By:
/s/ Robert K. Gudbranson
 
   
Name:  Robert K. Gudbranson
 
   
Title:  Chief Financial Officer
 
   
 (As Principal Financial and Accounting Officer and on behalf of the registrant)
 

 
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