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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended June 30, 2002
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Commission File Number 0-12938
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Invacare Corporation
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(Exact name of registrant as specified in its charter)
Ohio 95-2680965
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(State or other jurisdiction of (IRS Employer Identification No)
incorporation or organization)
One Invacare Way, P.O. Box 4028, Elyria, Ohio 44036
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(Address of principal executive offices)
(440) 329-6000
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year, if change since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 12 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date:
As of August 12, 2002, the company had 29,831,189 Common Shares and 1,112,023
Class B Common Shares outstanding.
INVACARE CORPORATION
INDEX
Part I. FINANCIAL INFORMATION: Page No.
- ------------------------------ --------
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheet -
June 30, 2002 and December 31, 2001..........................3
Condensed Consolidated Statement of Earnings -
Three and Six Months Ended June 30, 2002 and 2001............4
Condensed Consolidated Statement of Cash Flows -
Six Months Ended June 30, 2002 and 2001......................5
Notes to Condensed Consolidated Financial
Statements - June 30, 2002...................................6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations...............10
Item 3. Quantitative and Qualitative Disclosure of Market Risk...............15
Part II. OTHER INFORMATION:
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Item 4. Result of Votes of Security Holders..................................15
Item 6. Exhibits and Reports on Form 8-K.....................................15
SIGNATURES....................................................................16
Part I. FINANCIAL INFORMATION
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Item 1... Financial Statements (Unaudited)
INVACARE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheet - (unaudited)
June 30, December 31,
2002 2001
---- ----
ASSETS (In thousands)
- ------
CURRENT ASSETS
..........Cash and cash equivalents $ 9,573 $ 16,683
..........Marketable securities 1,507 1,188
..........Trade receivables, net 216,560 219,844
..........Installment receivables, net 27,362 35,423
..........Inventories, net 103,744 111,868
..........Deferred income taxes 23,990 24,125
..........Other current assets 14,833 19,270
-------- --------
.......... TOTAL CURRENT ASSETS 397,569 428,401
OTHER ASSETS 47,812 44,492
OTHER INTANGIBLES 5,361 5,906
PROPERTY AND EQUIPMENT, NET 131,013 132,202
GOODWILL, NET 311,122 303,536
-------- --------
.......... TOTAL ASSETS $892,877 $914,537
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES
..........Accounts payable $68,940 $74,133
..........Accrued expenses 80,117 76,000
..........Accrued income taxes 15,059 16,207
..........Current maturities of long-term obligations 6,516 9,083
-------- --------
.......... TOTAL CURRENT LIABILITIES 170,632 175,423
LONG-TERM DEBT 281,347 342,724
OTHER LONG-TERM OBLIGATIONS 13,227 14,840
SHAREHOLDERS' EQUITY
..........Preferred shares 0 0
..........Common shares 7,546 7,466
..........Class B common shares 278 278
..........Additional paid-in-capital 95,866 87,980
..........Retained earnings 371,211 344,032
..........Accumulated other comprehensive earnings (34,724) (48,129)
..........Treasury shares (11,172) (9,306)
..........Unearned compensation on stock awards (1,334) (771)
-------- --------
.......... TOTAL SHAREHOLDERS' EQUITY 427,671 381,550
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $892,877 $914,537
======== ========
See notes to condensed consolidated financial statements.
INVACARE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statement of Earnings - (unaudited)
Three Months Ended Six Months Ended
(In thousands except per share data) June 30, June 30,
2002 2001 2002 2001
------- ------- ------- -------
Net sales $271,846 $265,704 $526,927 $519,853
Cost of products sold 191,228 184,849 371,675 362,108
------- ------- ------- -------
Gross profit 80,618 80,855 155,252 157,745
Selling, general and administrative expense 53,309 48,726 106,374 99,586
Amortization of goodwill and intangibles 322 2,318 674 5,274
Interest income 1,143 2,171 2,072 4,676
Interest expense 4,138 5,859 8,606 12,647
------- ------- ------- -------
Earnings before income taxes 23,992 26,123 41,670 44,914
Income taxes 7,890 10,057 13,700 17,292
------- ------- ------- -------
NET EARNINGS $ 16,102 $ 16,066 $ 27,970 $ 27,622
======== ======== ======== ========
DIVIDENDS DECLARED PER
COMMON SHARE .0125 .0125 .0250 .0250
======== ======== ======== ========
Net earnings per share - basic $ 0.52 $ 0.52 $ 0.91 $ 0.90
======== ======== ======== ========
Weighted average shares outstanding - basic 30,890 30,606 30,814 30,539
======== ======== ======== ========
Net earnings per share - assuming dilution $ 0.51 $ 0.51 $ 0.88 $ 0.87
======== ======== ======== ========
Weighted average shares outstanding -
assuming dilution 31,807 31,719 31,677 31,647
======== ======== ======== ========
See notes to condensed consolidated financial statements.
INVACARE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statement of Cash Flows - (unaudited)
Six Months Ended
June 30,
2002 2001
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OPERATING ACTIVITIES (In thousands)
Net earnings $27,970 $27,622
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 12,495 16,784
Provision for losses on trade and installment receivables 3,259 2,562
Provision for deferred income taxes 653 (45)
Provision for other deferred liabilities 1,464 (24)
Changes in operating assets and liabilities:
Trade receivables 5,138 (9,998)
Inventories 10,991 (8,020)
Other current assets 4,585 (516)
Accounts payable (5,899) 6,206
Accrued expenses 1,753 (1,368)
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NET CASH PROVIDED BY OPERATING ACTIVITIES 62,409 33,203
INVESTING ACTIVITIES
Purchases of property and equipment (9,195) (9,741)
Proceeds from sale of property and equipment 97 560
Installment sales contracts, net 6,331 13,052
Marketable securities 33 128
Increase in other investments (113) (2,135)
Increase in other long term assets (3,648) (7,353)
Other 65 (1,259)
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NET CASH UTILIZED BY INVESTING ACTIVITIES (6,430) (6,748)
FINANCING ACTIVITIES
Proceeds from revolving lines of credit and long-term borrowings 109,780 69,879
Principal payments on revolving lines of credit, long-term debt
and capital lease obligations (179,040) (101,465)
Proceeds from exercise of stock options 4,278 3,572
Payment of dividends (788) (759)
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NET CASH UTILIZED BY FINANCING ACTIVITIES (65,770) (28,773)
Effect of exchange rate changes on cash 2,681 (1,541)
------- -------
Decrease in cash and cash equivalents (7,110) (3,859)
Cash and cash equivalents at beginning of period 16,683 12,357
------- -------
Cash and cash equivalents at end of period $ 9,573 $ 8,498
======= =======
See notes to condensed consolidated financial statements.
INVACARE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated
Financial Statements
(Unaudited)
June 30, 2002
Nature of Operations - Invacare Corporation and its subsidiaries (the "company")
is the leading home medical equipment manufacturer in the world based on the
breadth of its product line and sales. The company designs, manufactures and
distributes an extensive line of medical equipment for the home health care,
retail and extended care markets. The company's products include standard manual
wheelchairs, motorized and lightweight prescription wheelchairs, seating and
positioning systems, motorized scooters, patient aids, home care beds, home
respiratory products and disposable medical supplies.
Principles of Consolidation - The consolidated financial statements include the
accounts of the company and include all adjustments, which were of a normal
recurring nature, necessary to present fairly the financial position of the
company as of June 30, 2002 and the results of its operations for the three and
six months ended June 30, 2002 and 2001 and changes in its cash flows for the
six months ended June 30, 2002 and 2001. Certain foreign subsidiaries are
consolidated using a one-month lagging. The results of operations for the three
and six months ended June 30, 2002, are not necessarily indicative of the
results to be expected for the full year.
Reclassifications - Certain reclassifications have been made to the prior years'
consolidated financial statements to conform to the presentation used for the
periods ended June 30, 2002.
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 three primary business segments
based on geographical area: North America, Europe and Australasia. The three
reportable segments represent operating groups which offer products to different
geographic regions.
The North America segment consists of five operating groups which sell the
following products: wheelchairs, scooters, seating products, patient aid
products, home care beds, disposable medical supplies, extended care beds and
furniture products, respiratory and other products. The Europe segment consists
of one operating group that sells primarily wheelchairs, scooters, self care
products, beds, patient transport and oxygen therapy products. The Australasia
segment consists of two operating groups which sell primarily custom power
wheelchairs, electronic wheelchair and scooter controllers, manual wheelchairs,
beds, oxygen therapy products and patient aids. Each business segment sells to
the home health care, retail and extended care markets.
The company evaluates performance and allocates resources based on profit or
loss from operations before income taxes for each reportable segment. The
accounting policies of each segment are the same as those 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 are not
considered in evaluating segment performance. Intersegment sales for reportable
segments was $15,494,000 and $29,652,000 for the three and six months ended June
30, 2002, respectively, and $16,803,000 and $34,150,000 for the same periods a
year ago. The information by segment is as follows (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
-------- -------- -------- --------
Net sales from external customers
North America $202,121 $196,382 $393,890 $384,345
Europe 59,061 57,664 113,396 114,175
Australasia 10,664 11,658 19,641 21,333
-------- -------- -------- --------
Consolidated $271,846 $265,704 $526,927 $519,853
======== ======== ======== ========
Earnings (loss) before income taxes
North America $34,028 $32,541 $65,852 $63,685
Europe 4,760 1,448 5,666 1,799
Australasia 1,136 1,455 1,574 2,039
All Other * (15,932) (9,321) (31,422) (22,609)
-------- -------- -------- --------
Consolidated $23,992 $26,123 $41,670 $44,914
======== ======== ======== ========
* Consists of the domestic export unit, corporate selling, general and
administrative costs, the Invacare captive insurance unit, and inter-company
profits which do not meet the quantitative criteria for determining reportable
segments.
Net Earnings Per Common Share - The following table sets forth the computation
of basic and diluted net earnings per common share for the periods indicated.
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
-------- -------- -------- --------
(In thousands, except per share data)
Basic
Average common shares outstanding 30,890 30,606 30,814 30,539
Net earnings $16,102 $16,066 $27,970 $27,622
Net earnings per common share $ .52 $ .52 $ .91 $ .90
Diluted
Average common shares outstanding 30,890 30,606 30,814 30,539
Stock awards 8 0 6 0
Stock options 909 1,113 857 1,108
-------- -------- -------- --------
Average common shares assuming 31,807 31,719 31,677 31,647
dilution
Net earnings $16,102 $16,066 $27,970 $27,622
Net earnings per common share $ .51 $ .51 $ .88 $ .87
Adoption of SFAS No. 142 -Effective January 1, 2002, Invacare adopted SFAS No.
142, Goodwill and Other Intangible Assets. Under the new rules, goodwill and
intangible assets deemed to have indefinite lives are no longer amortized but
are subject to annual impairment tests in accordance with the Statement. The
company has completed the required initial analysis of goodwill impairment,
which indicated no impairment of goodwill as of January 1, 2002.
In accordance with SFAS No. 142, the effect of no longer amortizing goodwill is
reflected prospectively. The following comparative disclosure shows the impact
of adoption had the change been applied retroactively.
Three Months Ended Six Months Ended
June 30, June 30,
(In thousands, except per share data) 2002 2001 2002 2001
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Reported net income $ 16,102 $ 16,066 $ 27,970 $ 27,622
Goodwill amortization - 1,959 - 4,517
------ ------ ------ ------
Adjusted net income $ 16,102 $ 18,025 $ 27,970 $ 32,139
====== ====== ====== ======
Basic earning per share:
Reported net income $0.52 $0.52 $0.91 $0.90
Goodwill amortization - 0.06 - 0.15
----- ----- ----- -----
Adjusted net income $0.52 $0.58 $0.91 $1.05
===== ===== ===== =====
Diluted earning per share:
Reported net income $0.51 $0.51 $0.88 $0.87
Goodwill amortization - 0.06 - 0.14
----- ----- ----- -----
Adjusted net income $0.51 $0.57 $0.88 $1.01
===== ===== ===== =====
All of the company's other intangible assets have definite lives and will
continue to be amortized over their useful lives. As of June 30, 2002 and
December 31, 2001, other intangibles consisted of the following:
June 30, 2002 December 31, 2001
----------------------- -----------------------
(In thousands) Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
-------- ------------ -------- ------------
License agreements $ 5,956 $ 3,562 $ 5,882 $ 3,185
Patents 2,430 774 2,450 679
Customer list 1,000 375 1,000 250
Non-compete agreements 708 348 689 315
Trademarks and other 883 557 827 513
------ ------ ------ ------
Other intangibles $10,977 $ 5,616 $10,848 $ 4,942
Amortization expense related to other intangibles is expected to be $1,260,000
for 2002, $1,070,000 in 2003, $1,053,000 in 2004, $801,000 in 2005 and $317,000
in 2006. The change in goodwill reflected on the balance sheet for the quarter
was entirely due to currency translation.
Accounting Policy for Derivative Instruments - Financial Accounting Standards
Board Statement No. 133, Accounting for Derivative Instruments and Hedging
Activities, requires companies to recognize all of its derivative instruments as
either assets or liabilities in the consolidated balance sheet at fair value.
The company adopted the statement on January 1, 2001 and, accordingly,
recognized a pretax cumulative effect adjustment to other comprehensive income
of $802,000.
A majority of the company's derivative instruments are designated and qualify as
cash flow hedges. Accordingly, the effective portion of the gain or loss on the
derivative instrument is reported as a component of other comprehensive income
and reclassified into earnings in the same period or periods during which the
hedged transaction affects earnings. The remaining gain or loss on the
derivative instrument in excess of the cumulative change in the present value of
future cash flows of the hedged item, if any, is recognized in current earnings
during the period of change. The remaining derivatives are designated as fair
value hedges and are perfectly effective; thus, the entire gain or loss
associated with the derivative instrument directly affects the value of the debt
by increasing or decreasing its carrying value.
The company has entered into interest rate swap agreements that qualify as cash
flow hedges and effectively convert $45 million of its floating-rate debt to a
fixed-rate basis, thus reducing the impact of interest-rate changes on future
interest expense. The company also has entered into interest rate swap
agreements that qualify as fair value hedges and effectively convert $80 million
of fixed-rate debt to floating-rate debt, so the company can avoid paying higher
than market interest rates. For the quarter, the company recognized an
immaterial net gain related to its swap agreements, which is reflected in
interest expense on the statement of earnings.
To protect against decreases/increases in forecasted foreign currency cash flows
resulting from inventory purchases/sales over the next year, the company
utilizes cash flow hedges to hedge portions of its forecasted purchases/sales
denominated in foreign currencies. The company recognized an immaterial loss for
the quarter and recognized an immaterial gain for the first half of the year on
its foreign currency forward contracts.
The company recognized no gain or loss related to hedge ineffectiveness or
discontinued cash flow hedges. If it is later determined that a hedged
forecasted transaction is unlikely to occur, any gains or losses on the forward
contracts would be reclassified from other comprehensive income into earnings.
The company does not expect this to occur during the next twelve months.
Comprehensive Earnings - Total comprehensive earnings were as follows (in
thousands):
Three Months Six Months
Ended Ended
June 30, June 30,
2002 2001 2002 2001
-------- -------- -------- --------
Net earnings $16,102 $16,066 $27,970 $27,622
Foreign currency translation gain (loss) 16,397 (14,912) 13,302 (7,918)
Unrealized loss on available for sale securities (17) (366) (20) (91)
Cumulative effect upon adoption of FAS 133 0 0 0 521
Current period unrealized gain (loss) on cash flow hedges (681) 345 123 (1,693)
-------- -------- -------- --------
Total comprehensive earnings $ 31,801 $ 1,133 $41,375 $18,441
======== ======== ======== ========
Statement of Cash Flows - The company made payments (in thousands) of:
Six Months Ended
June 30,
2002 2001
------ ------
Interest $9,355 $14,864
Income taxes 13,390 14,311
Inventories - Inventories consist of the following components (in thousands):
June 30, December 31,
2002 2001
--------- ---------
Raw materials $ 33,155 $ 35,333
Work in process 12,085 11,326
Finished goods 58,504 65,209
--------- ---------
$103,744 $111,868
========= ========
The final inventory determination under the LIFO method is made at the end of
each fiscal year based on the inventory levels and cost at that point,
therefore, interim LIFO determinations are based on management's estimates of
expected year-end inventory levels and costs.
Property and Equipment - Property and equipment consist of the following (in
thousands):
June 30, December 31,
2002 2001
-------- --------
Land, buildings and improvements $ 55,696 $ 54,308
Machinery and equipment 192,502 186,622
Furniture and fixtures 15,299 14,516
Leasehold improvements 12,024 11,648
-------- --------
275,521 267,094
Less allowance for depreciation (144,508) (134,892)
-------- --------
$131,013 $132,202
======== ========
Income Taxes - The company had an effective tax rate of 32.9% for the three
months and six months ended June 30, 2002 and 38.5% for the same periods a year
ago. The reduction in rates is the result of tax restructuring completed in the
fourth quarter of 2001 and the benefit of the change in accounting for goodwill.
Subsequent Event - On August 1, 2002, American HomePatient Inc. (AHP) announced
that it had filed for reorganization under Chapter 11 of the United States
Bankruptcy Code in order to restructure its bank debt. As of June 30, 2002,
Invacare had receivables outstanding of approximately $4,900,000. The bankruptcy
court is expected to act on the AHP filing prior to the end of the year. Under
the AHP proposed plan, creditors and vendors would receive all that they are
owed.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
NET SALES
Net sales for the three months ended June 30, 2002 were $271,846,000, compared
to $265,704,000 for the same period a year ago, representing a 2% increase. The
increase was attributable to higher sales in both North America and Europe,
while net sales declined in Australasia. For the first half, net sales increased
1% to $526,927,000, compared to $519,853,000 for the same period a year ago. The
increase was driven by increases in North America partially offset by declines
in Europe and Australasia. Foreign currency translation had no material impact
on the consolidated sales increase for the quarter or first half.
North American Operations
North American sales, consisting of Rehab (power wheelchairs, custom manual
wheelchairs, seating and scooters), Standard (manual wheelchairs, personal care,
bed products, patient transport and low air loss therapy), Continuing Care (beds
and furniture), Respiratory (oxygen concentrators, aerosol therapy, sleep
therapy and associated products) and Medical Supplies (ostomy, incontinence,
wound care and other medical supplies), increased 3% for the quarter and 2% for
the first half of the year compared to the same periods a year ago. The gain for
the quarter was principally due to sales volume increases in disposable medical
supplies (15%) and Rehab products (8%), driven by strong demand for the low-end
consumer power offerings. However, Respiratory sales were down approximately 7%
in the quarter. The gain year to date was likewise attributable to sales
increases in Medical Supplies (18%) and Rehab products (6%) offset in part by a
Respiratory sales decline of 10%.
European Operations
European sales increased to $59,061,000 from $57,664,000 for the quarter and
decreased to $113,396,000 from $114,175,000 year to date. Adjusting for the
impact of exchange rate differences, European sales increased 2% for the quarter
and 1% for the first half, when compared to the same periods a year ago. Sales
were in line with the company's expectations for the quarter and first half and
new product launches should lead to improved sales growth in the second half of
the year.
Australasia Operations
The Australasia products group consists of Invacare Australia, which imports and
distributes the Invacare range of products and also manufactures and distributes
the Rollerchair range of custom power wheelchairs and Pro Med lifts; Dynamic
Controls, a New Zealand manufacturer of operating components used in power
wheelchairs and scooters; and Invacare New Zealand, a manufacturer of
wheelchairs and beds and a distributor of a wide range of home medical
equipment. Excluding the impact of foreign currency, Australasia sales decreased
17% in the second quarter and 12% for the first half, when compared to the same
periods a year ago. Sales continued to be negatively impacted by weak global
economic conditions, which tend to have a more significant impact on this
business than the other businesses of the company.
GROSS PROFIT
Gross profit as a percentage of net sales for the three and six-month periods
ended June 30, 2002 was 29.7% and 29.5%, respectively, compared to 30.4% and
30.3% in the same periods last year. The overall decrease in margins as a
percentage of sales is the result principally of a shift in demand toward lower
margin products and pricing pressure, primarily in the standard products line.
Productivity improvements in the company's manufacturing facilities helped to
mitigate the gross margin decline. North American margins declined for the first
half to 29.4% compared with 30.9% in the prior year principally as a result of a
shift in product mix to lower margin products and pricing pressure in the
standard products line coming from increased competition from low cost imports.
Gross profit for Europe improved year to date by more than 1% primarily due to
favorable sales mix towards higher margin products and cost reductions. Gross
margin in Australasia declined by approximately 5% due to reduced sales in the
company's Dynamic Controls subsidiary. Margins were also adversely impacted by
an increase in research and development spending required to support the
company's new product strategy and also by higher freight costs in North
America.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expense as a percentage of net sales for the
three and six months ended June 30, 2002 was 19.6% and 20.2%, respectively,
compared to 18.3% and 19.2% in the same periods a year ago. Foreign currency had
no material effect on the percent of sales for the quarter and first half.
North American selling, general and administrative costs as a percentage of net
sales increased approximately 2% for the quarter and first half compared to the
same periods a year ago. The overall dollar increase was $5,069,000 for the
quarter and $7,689,000 for the year compared to the same periods a year ago,
with foreign currency having an immaterial impact. The increase primarily
resulted from continued investment in sales and marketing and branding programs
being implemented to drive future growth. In addition, insurance costs
contributed to the increase. European selling, general and administrative costs
grew at a slower rate than sales for the quarter and year to date, when compared
to the same periods a year ago. Australasian selling, general and administrative
costs also grew at a slower rate than sales for the quarter and year to date
principally as a result of aggressive expense control.
INTEREST
Interest income in the three months ended June 30, 2002 decreased by
approximately $1,028,000 and by $2,604,000 for the first half, when compared to
the same periods a year ago. The decrease was a result of our third-party
financing arrangement with DLL, a subsidiary of Rabo Bank of the Netherlands, in
which the company realizes loan origination fees which are much lower than the
interest income recognized when the company did the financing itself.
For the quarter and first half, interest expense decreased by $1,721,000 and
$4,041,000, respectively, compared to the same periods a year ago, as a result
of reduced debt levels and lower effective rates.
INCOME TAXES
The company had an effective tax rate of 32.9% for the three and six-month
periods ended June 30, 2002 compared to an effective tax rate of 38.5% for the
same periods a year ago. The reduction in rates is the result of tax
restructuring completed in the fourth quarter of 2001 and the benefit of the
change in accounting for goodwill.
LIQUIDITY AND CAPITAL RESOURCES
The company's reported overall level of long-term debt decreased $61.4 million
to $281.3 million for the six months ended June 30, 2002. Adjusting for the
impact of foreign currency, debt decreased by $69.3 million. The company
continues to maintain an adequate liquidity position to fund its working capital
and capital requirements through its bank lines of credit and working capital
management. As of June 30, 2002, the company had approximately $255.0 million
available under its lines of credit. Under the most restrictive covenant of the
company's borrowing arrangements, the company has the capacity to borrow up to
an additional $175.4 million as of June 30, 2002.
The company's borrowing arrangements contain covenants with respect to interest
coverage, net worth, dividend payments, working capital, funded debt to
capitalization and interest coverage, as defined in the company's bank
agreements and agreement with its note holders. As of June 30, 2002, the company
was in compliance with all covenant requirements.
CAPITAL EXPENDITURES
There were no material capital expenditure commitments outstanding as of June
30, 2002. The company expects to invest in capital projects at a rate that
approximates depreciation and amortization. The company estimates that capital
investments for 2002 will approximate $20 million. The company believes that its
balances of cash and cash equivalents, together with funds generated from
operations and existing borrowing facilities will be sufficient to meet its
operating cash requirements and fund required capital expenditures for the
foreseeable future.
CASH FLOWS
Cash flows provided by operating activities were $62.4 million for the first
half of 2002 compared to $33.2 million in 2001. Operating cash flows increased
in 2002 primarily due to a decrease in inventory and receivables which were
partially offset by decreases in accounts payable. The inventory decrease
resulted from an improvement in inventory turns to 6.2 from 5.7 at year-end
while the accounts receivable decrease resulted from a decrease in days sales
outstanding to 65 days, down significantly from year-end.
Cash flows utilized by investing activities were $6.4 million for the first half
of 2002 compared to $6.7 million in 2001. In 2002, the company purchased $9.2
million of property and equipment ($9.7 million in 2001), invested $3.8 million
in other assets ($9.5 million in 2001) and received $6.3 million from payments
on installment receivables ($13.1 million in 2001). The decrease in payments
received on installment receivables is the result of the company's agreement
with DLL, a third-party financing company, which now provides lease financing to
Invacare's customers, which the company used to provide itself.
Cash flows utilized by financing activities were $65.8 million compared to cash
utilized of $28.8 million in 2001. Financing activities for the first six months
of 2002 were impacted by the company's continued ability to pay down long-term
borrowings.
The effect of foreign currency translation may result in amounts being shown for
cash flows in the Condensed Consolidated Statement of Cash Flows that are
different from the changes reflected in the respective balance sheet captions.
DIVIDEND POLICY
On May 22, 2002, the company's Board of Directors declared a quarterly cash
dividend of $.0125 per Common Share to shareholders of record as of July 1,
2002, to be paid on July 15, 2002. At the current rate, the cash dividend will
amount to $.05 per Common Share on an annual basis.
CRITICAL ACCOUNTING POLICIES
The consolidated financial statements include accounts of the company and all
majority-owned subsidiaries. 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 these financial statements,
management has made its best estimates and judgments of certain amounts included
in the financial statements, giving due consideration to materiality. There has
been no change in the company's critical accounting policies as disclosed in
Form 10-K filed for the year ended December 31, 2001. In addition, no new
critical accounting policies have been adopted in the first six months of 2002.
The company does not believe that there is a significant likelihood that
materially different amounts would be reported related to its critical
accounting policies. 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.
QUANTITATIVE AND QUALITATIVE DISCLOSURE 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 rate swap agreements to mitigate its exposure to interest rate
fluctuations. Based on June 30, 2002 debt levels, a 1% change in interest rates
would impact interest expense by approximately $2,160,000 over the next twelve
months. Additionally, 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. 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.
FORWARD-LOOKING STATEMENTS
The statements contained in this form 10-K constitute forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995.
Terms such as "will," "should," "achieve," "estimate," "increase," "plan,"
"can," "expect," "pursue," "benefit," "continue," "exceed," "improve,"
"believe," "anticipate," "build," "strengthen," "new," "lower," "drive," "seek,"
"hope," and "create," as well as similar comments, are forward-looking in
nature. Actual results and events may differ significantly from those expressed
or anticipated as a result of risks and uncertainties which include, but are not
limited to, the following: pricing pressures, increasing raw material costs, the
consolidations of health care customers and competitors, government
reimbursement issues including those that affect the viability of customers, the
ability to design, manufacture and distribute new products with improved
functionality and lower costs, the effect of offering customers competitive
financing terms, Invacare's ability to effectively identify, acquire and
integrate strategic acquisition candidates, the difficulties and risks of
managing and operating businesses in many different foreign jurisdictions, the
timely and efficient completion of facility consolidations, the difficulties in
acquiring and maintaining a proprietary intellectual property ownership
position, the overall economic, market and industry growth conditions, foreign
currency and interest rate risk, Invacare's ability to improve financing terms
and reduce working capital, as well as the risks described from time to time in
Invacare's reports as filed with the Securities and Exchange Commission. The
company undertakes no obligation to update any of the forward-looking or other
information contained herein.
Item 3. Quantitative and Qualitative Disclosure of 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.
Part II. OTHER INFORMATION
Item 4. Result of Votes of Security Holders
On May 22, 2002, the company held its 2002 Annual Meeting of Shareholders to act
on proposals to elect a class of Directors.
A. Malachi Mixon, III, Michael F. Delaney and Dr. Bernadine P. Healy were
re-elected for a three-year term of office expiring in 2005, with 31,168,878;
34,381,709; and 34,361,159 affirmative votes, respectively, (90, 99 and 99
percent of the total voting power, respectively). The candidates had 3,427,156;
214,325; and 234,875 votes withheld, respectively, (10, 1 and 1 percent of the
total voting power, respectively).
James C. Boland, Whitney Evans, E.P. Nalley, William M. Weber, Gerald B. Blouch,
John R. Kasich, Dan T. Moore, III and Joseph B. Richey, II are directors with
continuing terms.
Item 6. Exhibits and Reports on Form 8-K
A Exhibits: None
B Reports on Form 8-K:
An 8-K was filed on April 11, 2002 under Item 5, Other Events.
The filing contained Invacare Corporation's news release dated
April 11, 2002 which disclosed the resignation of Thomas R.
Miklich as the company's Chief Financial Officer
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INVACARE CORPORATION
By: /s/ Gerald B. Blouch
-------------------------------------
Gerald B. Blouch
President and Chief Operating Officer
Acting Chief Financial Officer
Date: August 14, 2002