INVACARE CORP - 10-Q Quarterly Report

Back to GetFilings.com

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

For the quarterly period ended March 31, 2005
-------------------------------------------------

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 0-12938
---------------------------------------------------------

Invacare Corporation
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)

Ohio 95-2680965
- --------------------------------------------------------------------------------
(State or other jurisdiction of (IRS Employer Identification No)
incorporation or organization)

One Invacare Way, P.O. Box 4028, Elyria, Ohio 44036
- --------------------------------------------------------------------------------
(Address of principal executive offices)

(440) 329-6000

(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(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 (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 if the registrant is an accelerated filer (as defined in
Rule 12b-2 of the Act). Yes X No____

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:

As of May 4, 2005, the Company had 30,493,890 Common Shares and 1,111,965 Class
B Common Shares outstanding.

INVACARE CORPORATION

INDEX

Part I. FINANCIAL INFORMATION: Page No.
- ------------------------------ --------

Item 1. Financial Statements (Unaudited)

Condensed Consolidated Balance Sheet -

March 31, 2005 and December 31, 2004........................3

Condensed Consolidated Statement of Earnings -

Three Months Ended March 31, 2005 and 2004..................4

Condensed Consolidated Statement of Cash Flows -

Three Months Ended March 31, 2005 and 2004..................5

Notes to Condensed Consolidated Financial

Statements - March 31, 2005.................................6

Item 2. Management's Discussion and Analysis of

Financial Condition and Results of Operations...............12

Item 3. Quantitative and Qualitative Disclosures About Market Risk...........21

Item 4. Controls and Procedures..............................................21

Part II. OTHER INFORMATION:
- ---------------------------

Item 6. Exhibits.............................................................22

SIGNATURES....................................................................22

2

Part I. FINANCIAL INFORMATION
Item 1... Financial Statements

5

INVACARE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated
Financial Statements
(Unaudited)
March 31, 2005

Nature of Operations - Invacare Corporation and its subsidiaries ("Invacare" or
the "Company") is the leading home medical equipment manufacturer in the world
based on its distribution channels, the breadth of its product line and net
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, low air loss therapy products,
respiratory products and distributed products. The Company is directly affected
by government regulation and reimbursement policies in virtually every country
in which it operates. Changes in regulations and heath care policy take place
frequently and can impact the size, growth potential and profitability of
products sold in each market.

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 is the primary beneficiary and include all
adjustments, which were of a normal recurring nature, necessary to present
fairly the financial position of the Company as of March 31, 2005, the results
of its operations for the three months ended March 31, 2005 and 2004,
respectively, and changes in its cash flows for the three months ended March 31,
2005 and 2004, respectively. Certain foreign subsidiaries, represented by the
European segment, are consolidated using a February 28 quarter end. The results
of operations for the three months ended March 31, 2005, 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 March 31, 2005.

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 reports its results of operations through three
primary business segments based on geographical area: North America, Europe and
Asia/Pacific. The three reportable segments represent operating groups that sell
products in different geographic regions.

The North America segment sells each of five primary product lines, which
includes: standard, rehab, distributed, respiratory, and continuing care
products. Europe and Asia/Pacific sell the same product lines with the exception
of distributed products. 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 net sales and transfers are

6

based on the costs to manufacture plus a reasonable profit element. Therefore,
intercompany profit or loss on intersegment net sales and transfers are not
considered in evaluating segment performance. Intersegment net sales for
reportable segments was $22,758,000 for the three months ended March 31, 2005
and $19,343,000 for the same period in the preceding year.

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

Three Months Ended
March 31,
2005 2004
------- -------
Revenues from external customers
North America $250,940 $237,283
Europe 102,091 69,338
Asia/Pacific 17,913 14,722
------- -------
Consolidated $370,944 $321,343
======= =======

Earnings (loss) before income taxes
North America $19,405 $21,871
Europe 3,882 1,140
Asia/Pacific (1,704) 437
All Other * (1,693) (2,407)
------- -------
Consolidated $19,890 $21,041
======= =======

* Consists of the domestic export unit, unallocated corporate selling,
general and administrative costs, the Invacare captive insurance unit, and
intercompany 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
March 31,
2005 2004
------- -------
(In thousands, except per
share data)
Basic
Average common shares outstanding 31,359 31,094

Net earnings $13,545 $14,201

Net earnings per common share $ 0.43 $ 0.46

Diluted
Average common shares outstanding 31,359 31,094
Stock options and awards 1,175 1,178
------- -------
Average common shares assuming dilution 32,534 32,272

Net earnings $13,545 $14,201

Net earnings per common share $ 0.42 $ 0.44

7

At March 31, 2005 and 2004, 37,645 and 4,747 shares, respectively were excluded
from the average common shares assuming dilution, as they were anti-dilutive. In
2005, the majority of the anti-dilutive shares were granted at an exercise price
of $47.01, which was higher than the average fair market value price of $46.11
for 2005. In 2004, the majority of the anti-dilutive shares were granted at an
exercise price of $44.42, which was higher than the average fair market value
price of $43.49 for 2004.

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 for periods ranging from 6 to 39 months. 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 limited recourse obligation
($54,079,000 at March 31, 2005) to DLL for events of default under the contracts
(total balance outstanding of $110,740,000 at March 31, 2005). Financial
Accounting Standards Board (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 for this guarantee obligation. 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 FASB Statement 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 dealers and long term care facilities located throughout the United
States, Australia, Canada, New Zealand, Asia 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, 2004 to March 31, 2005 was the result of an acquisition
representing an increase in goodwill of $7,265,000 in Asia/Pacific with the
balance attributable to currency translation.

Motion Concepts, Inc. ("Motion") was acquired in 2003. Pursuant to the Motion
purchase agreement, the Company agreed to pay contingent consideration based
upon earnings before interest and taxes over the three years subsequent to the
acquisition up to a maximum of approximately $16,000,000. Based upon 2004
results, no such consideration was paid. When the contingency related to the
acquisition is settled, any such consideration paid will increase the purchase
price and reported goodwill.

All of the Company's other intangible assets have definite lives and are
amortized over their useful lives, except for $27,621,000 related to trademarks,
which have indefinite lives. An increase in patents of $6,664,000 was recorded
in the first quarter of 2005 as part of the North American segment, which was a
result of the consolidation of the Company's variable interest in NeuroControl.

8

As of March 31, 2005 and December 31, 2004, other intangibles consisted of the
following (in thousands):

March 31, 2005 December 31, 2004
-------------- -----------------

Historical Accumulated Historical Accumulated
Cost Amortization Cost Amortization
---------- ------------ ---------- ------------
Customer lists $57,607 $3,995 $57,788 $2,737
Trademarks 27,621 - 27,732 -
License agreements 7,399 5,397 6,518 5,051
Developed technology 5,825 173 5,842 80
Patents 10,790 1,560 4,137 1,443
Other 7,389 2,199 7,348 1,842
------- ------- ------- -------
$116,631 $13,324 $109,365 $11,153
======= ======= ======= =======

Amortization expense related to other intangibles was $2,171,000 in the first
quarter of 2005 and is estimated to be $6,945,000 in 2006, $6,699,000 in 2007,
$6,092,000 in 2008, $5,911,000 in 2009 and $5,760,000 in 2010.

Investment in Affiliated Company - In January 2003, the FASB issued
Interpretation No. 46, Consolidation of Variable Interest Entities ("FIN 46"),
which was revised in December 2003 and, which among other things, deferred the
implementation date of FIN 46 until periods after March 15, 2004. This
interpretation 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.

The Company has an investment in NeuroControl, a development stage company,
which is currently pursuing FDA approval to market a product focused on the
treatment of post-stroke shoulder pain in the United States. The amount of net
advances and investment recorded on the Company's books was approximately
$3,000,000 at December 31, 2004. Certain of the Company's officers and directors
have minority equity ownership positions in NeuroControl. Subsequent to December
31, 2004, the Company's board of directors approved an additional investment by
the Company in NeuroControl. Accordingly, the Company has consolidated this
investment prospectively beginning with the quarter ended March 31, 2005, as the
Company is now deemed the primary beneficiary of this VIE based on the
provisions of FIN 46. The other beneficial interest holders have no recourse
against the Company.

Accounting for Stock-Based Compensation - The Company utilizes the
disclosure-only provisions of Statement of Financial Accounting Standards (SFAS)
No. 123, Accounting for Stock-Based Compensation. Accordingly, the Company has
not recognized compensation cost for non-qualified stock options. The Company
does record, however, compensation cost on restricted common shares based on the
vesting periods. Had compensation cost for the Company's stock option plans been
determined based on the fair value at the grant date for awards in 2005 and 2004
consistent with the provisions of SFAS No. 123, the Company's net earnings and
earnings per share would have been reduced to the pro forma amounts indicated
below (in thousands, except per share data):

9

Three Months Ended
March 31,
2005 2004
----- -----
Net earnings - as reported * $13,545 $14,201
Less: compensation expense determined based on the
fair-value method for all awards granted at
market value, net of related tax effects 1,076 953
----- -----
Net earnings - pro forma $12,469 $13,248
====== ======

Earnings per share as reported - basic $0.43 $0.46
Earnings per share as reported - assuming dilution $0.42 $0.44

Pro forma earnings per share - basic $0.40 $0.43
Pro forma earnings per share - assuming dilution $0.38 $0.41

* Includes stock compensation expense, net of tax, on
restricted awards granted without cost to recipients of: $138 $114

Warranty Costs - Generally, the Company's products are covered by warranties
against defects in material and workmanship for periods 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 were
necessary in the first quarter of 2005.

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

Balance as of January 1, 2005 $ 13,998
Warranties provided during the period 2,985
Settlements made during the period (2,672)
Changes in liability for pre-existing warranties during
the period, including expirations 214
------
Balance as of March 31, 2005 $ 14,525
======

Comprehensive Earnings - Total comprehensive earnings were as follows (in
thousands):

Three Months Ended
March 31,
2005 2004
------ ------
Net earnings $13,545 $14,201
Foreign currency translation gain (loss) (3,325) 10,324
Unrealized gain on available for sale securities 52 10
Current period unrealized gain (loss) on cash flow hedges 573 (1,055)
------ ------
Total comprehensive earnings $10,845 $23,480
====== ======

10

Inventories - Inventories consist of the following components (in thousands):

March 31, December 31,
2005 2004
------ ------
Raw materials $ 62,069 $ 60,548
Work in process 16,003 16,156
Finished goods 105,513 99,179
------- -------
$183,585 $175,883
======= =======

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):

March 31, December 31,
2005 2004
------ ------

Machinery and equipment $249,212 $243,335
Land, buildings and improvements 94,659 95,041
Furniture and fixtures 28,297 27,494
Leasehold improvements 15,359 14,275
------- -------
387,527 380,145
Less allowance for depreciation (195,555) (188,982)
------- -------
$191,972 $191,163
======= =======

Acquisitions - On September 9, 2004 the Company acquired 100% of the shares of
WP Domus GmbH (Domus), a European-based holding company that manufactures
several complementary product lines to Invacare's product lines, including power
add-on products, bath lifts and walking aids, from WP Domus LLC. Domus has three
divisions: Alber, Aquatec and Dolomite. The acquisition allows the Company to
expand its product line and reach new markets. The preliminary purchase price
was $227,382,000 including acquisition costs of $3,670,000, which was paid in
cash, and is subject to final determination of the estimated costs of possible
office closures, sales agency transfers and other consolidation efforts expected
to be finalized by the end of the third quarter of 2005. Invacare's reported
results reflect the operating results of Domus since the date of the
acquisition.

Supplemental pro forma information is presented below as though the business
combination had been completed as of the beginning of the period ended March 31,
2004. The pro forma information does not necessarily reflect the results of
operations that would have occurred if Domus had been a wholly owned entity of
Invacare as of the beginning of the three months ended March 31, 2004 (in
thousands).

Three Months Ended
March 31, 2004
--------------
Net sales $348,891
Net earnings 17,281
Earnings per share - assuming dilution $.54

11

Income Taxes - The Company had an effective tax rate of 31.9% for the
three-month period ended March 31, 2005 compared with 32.5% for the same period
a year ago. The effective tax rate declined due to a change in estimate in the
mix of earnings and permanent deductions. The Company's effective tax rate is
lower than the federal statutory rate primarily due to tax credits and earnings
abroad being taxed at rates lower than the federal statutory rate.

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations

The following discussion and analysis should be read in conjunction with our
Condensed Consolidated Financial Statements and related notes thereto included
elsewhere in this Quarterly Report on Form 10-Q and in our Current Report on
Form 8-K as furnished to the Securities and Exchange Commission on April 28,
2005.

OUTLOOK

Reimbursement uncertainties continue to affect the core North American rehab and
standard businesses. Although the Centers for Medicare and Medicaid Services
(CMS) has released new draft guidelines on power wheelchair eligibility, the
guidelines have not been finalized or implemented yet. Even once the guidelines
are finalized, there may be up to six months for implementation, and there will
still be uncertainty regarding CMS' plan to have 49 new codes and related fees
on power wheelchairs for 2006. The uncertainty negatively affected the Company's
first quarter results for consumer power wheelchair sales, and will likely
impact results all year. In terms of Medicaid, numerous states, including
California, Ohio and New York, are challenging reimbursement on durable medical
equipment submissions, leading to slower payments and approvals for lower-priced
product, in addition to no reimbursement at all in some cases.

For the full year, the Company believes that it will have a net sales increase
of between 17% and 19% and earnings per share of between $2.60 and $2.80. This
is consistent with current analysts' estimates but is at the lower end of
Invacare's previous guidance. This guidance anticipates foreign currency and
acquisitions to account for 11% of the net sales increase. Excluding the impact
of foreign currency and acquisitions, the net sales increase is expected to be
between 6% and 8%. The Company anticipates operating cash flows of between $107
million and $117 million and net purchases of property and equipment of
approximately $37 million.

For the second quarter, the Company expects a net sales increase of between 18%
and 20% and earnings per share of between $0.53 and $0.58. This guidance
anticipates foreign currency and acquisitions to account for 13% of the net
sales increase. Excluding the impact of foreign currency and acquisitions, the
net sales increase would be between 5% and 7%.

12

RESULTS OF OPERATIONS

NET SALES

Net sales for the three months ended March 31, 2005 were $370,944,000, compared
to $321,343,000 for the same period a year ago, representing a 15% increase.
Foreign currency translation and acquisitions accounted for 2% and 10% of the
net sales increase for the quarter, respectively. Excluding the impact of
currency and acquisitions, net sales growth was driven primarily by volume
increases in each of the Company's geographic business segments.

North American Operations

North American net sales increased 6% for the quarter to $250,940,000 as
compared $237,283,000 for the same period a year ago. These 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), Continuing Care (beds and
furniture), Respiratory (oxygen concentrators, aerosol therapy, sleep, homefill
and associated respiratory) and Distributed (ostomy, incontinence, diabetic,
wound care and other medical supplies) products. For the quarter, acquisitions
accounted for 2% of the net sales increase, while foreign currency translation
contributed to a 1% increase in net sales.

The increase for the quarter was principally due to net sales increases in
Respiratory products (16%), Distributed products (7%) and Continuing Care
products (22%), which were partially offset by declines in Standard products
(1%) and Rehab products (4%). Acquisitions accounted for 15% of the Continuing
Care product net sales increase and positively impacted Rehab product net sales
by 3%.

Respiratory growth in the quarter was largely due to continued strong
performance in the HomeFill(TM) oxygen system product line and strong sales of
oxygen concentrators. Distributed products continued to grow, consistent with
recent performance, while Continuing Care products growth was lead by the
increased sales of Carroll Healthcare products. The net sales decline
experienced in Rehab products for the quarter is attributable to continued
Medicare eligibility pressures and Medicaid related reimbursement pressures.
Also as a result of these pressures, consumer power wheelchairs net sales were
down 16% for the quarter versus last year's first quarter. Standard products
sales benefited from increasing unit volumes, which were more than offset by
lower pricing. With market-driven pricing, the Company is making progress from
2004 when the sales decline in the fourth quarter in standard products was 8%.

European Operations

European net sales increased 47% for the quarter to $102,091,000 as compared to
$69,338,000 for the same period a year ago. Acquisitions and foreign currency
translation accounted for 40% and 6% of the net sales increase, respectively.
The 1% sales increase for the quarter, excluding foreign currency and
acquisitions, was due to solid performance in most regions excluding Germany.
The decline in Germany was due to significant reimbursement challenges for the
Invacare wheelchair product lines.

13

Asia/Pacific Operations

The Company's Asia/Pacific operations consist of Invacare Australia, which
imports and distributes the entire range of Invacare products and manufactures
and distributes Rollerchair custom power wheelchairs and Pro Med lifts; Dynamic
Controls, a New Zealand manufacturer of electronic operating components used in
power wheelchairs and scooters; Invacare New Zealand, a manufacturer of
wheelchairs and beds and a distributor of a wide range of home medical
equipment; and Invacare Asia Sales, which imports and distributes home medical
equipment to the Asia markets.

Asia/Pacific net sales increased 22% to $17,913,000 for the quarter compared to
$14,722,000 in the same period a year ago. For the quarter, acquisitions
accounted for 13% of the net sales increase, while foreign currency translation
contributed to a 6% increase in net sales. The 3% sales increase for the
quarter, excluding foreign currency and acquisitions, was limited by lower sales
of microprocessor controllers related to weakness in the power wheelchair
market.

GROSS PROFIT

Consolidated gross profit as a percentage of net sales for the three-month
period ended March 31, 2005 was 29.6% compared to 29.1% in the same period last
year. The improvement was due to in part the fact that cost reduction projects
were ahead of schedule in most manufacturing and sourcing locations and also was
the result of the positive impact of Domus, which has a higher gross margin than
that achieved historically by the Company. North American gross profit improved
by 0.4% for the first three months of the year to 29.9% compared with 29.5% in
the same period last year, principally as a result of continued cost reductions
and acquisitions which were offset by reduced pricing in standard products.
Gross profit in Europe increased year to date by 1.2% compared to the same
period last year primarily due to the higher gross margins achieved by Domus.
Gross profit in Asia/Pacific declined year to date by 0.7% largely due to
unfavorable sales mix towards lower margin products in the Company's Dynamic
Controls subsidiary and reduced volumes.

SELLING, GENERAL AND ADMINISTRATIVE

Selling, general and administrative ("S,G&A") expense as a percentage of net
sales for the three months ended March 31, 2005 was 22.6% compared to 22.2% in
the same period last year. The dollar increase was $12,724,000 or 17.9% for the
quarter, with acquisitions and foreign currency translation increasing S,G&A
expenses in the quarter by $10,837,000 or 15.2% and $1,722,000 or 2.4%,
respectively. Excluding foreign currency translation and acquisitions, S,G&A
spending increased by .2% for the quarter as declines in administrative costs
were mostly offset by increases in legal and selling costs.

North American S,G&A expenses increased $1,072,000 or 2.1% for the quarter
compared to the same period last year. Acquisitions contributed to a 2.6%
increase in expenses, which was offset by lower administrative costs.

European S,G&A expenses increased $9,233,000 or 47.2% for the quarter compared
to the same period last year. Acquisitions and foreign currency translation
increased S,G&A expenses in the quarter by $9,090,000 or 46.5% and $1,242,000 or
6.3%, respectively, compared to the same period last year. Accordingly, European
S,G&A, excluding foreign currency translation and acquisitions, decreased by
5.6% compared to the first three months of 2004.

14

Asia/Pacific S,G&A expenses increased $2,419,000 or 137.6% for the quarter
compared to the same period last year, with foreign currency translation
accounting for $462,000 or 26.3% and acquisitions accounting for $204,000 or
11.6% of the increase. The increase was principally due to additional systems
costs related to an Enterprise Resource Planning (ERP) implementation and higher
sales and marketing costs associated with the development of a sales and support
infrastructure for the Asia market.

INTEREST

Interest expense increased $4,227,000 for the first three months of the year,
compared to the same period last year, primarily due to increased borrowings for
acquisitions. Interest income was lower by $665,000 compared to the same period
last year due to lower loan origination fees received from DLL.

INCOME TAXES

The Company had an effective tax rate of 31.9% for the three-month period ended
March 31, 2005 compared with 32.5% for the same period a year ago. The effective
tax rate declined due to a change in estimate in the mix of earnings and
permanent deductions. The Company's effective tax rate is lower than the federal
statutory rate primarily due to tax credits and earnings abroad being taxed at
rates lower than the federal statutory rate.

LIQUIDITY AND CAPITAL RESOURCES

The Company's reported level of debt increased $4,700,000 to $554,736,000 for
the three months ended March 31, 2005 as a result of an acquisition and cash
flow used by operating activities. 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 March 31, 2005,
the Company had approximately $94,919,000 available under its lines of credit,
excluding debt covenant restrictions.

Effective April 4, 2005, Invacare requested, and the other parties to its
revolving credit agreement consented to, an increase in the amount of the
multi-currency, long-term revolving credit facility available to Invacare by
$50,000,000 to an aggregate amount of $500,000,000. In March 2005, the Company
entered into three treasury lock agreements with notional amounts of $50,000,000
each locking in rates of 4.60%, 4.62% and 4.68% to effectively hedge the
forecasted receipt of proceeds resulting from the anticipated issuance of ten
year, fixed rate debt by January 2006.

The Company's borrowing arrangements contain covenants, which were unchanged by
the $50,000,000 increase in the revolver, with respect to interest coverage, net
worth, dividend payments, working capital, and funded debt to capitalization, as
defined in the Company's bank agreements and agreement with its note holders. As
of March 31, 2005, the Company was in compliance with all covenant requirements.
Under the most restrictive covenant of the Company's borrowing arrangements, the
Company has the capacity to borrow up to an additional $87,285,000 as of March
31, 2005.

CAPITAL EXPENDITURES

The Company had no individually material capital expenditure commitments
outstanding as of March 31, 2005. The Company estimates that capital investments
for 2005 could approximate up to $37,000,000 as compared to $41,400,000 in 2004.

15

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 $3,495,000 for the first three
months of 2005 compared to cash provided by operating activities of $30,284,000
in the first quarter of 2004. The decrease in operating cash flows for the first
three months of the year was largely due to higher inventory levels and reduced
payables, which were partially offset by a decrease in receivables in the first
quarter of 2005 compared to the same period a year ago. Inventory levels were
temporarily inflated as the Company consolidated previous Domus sales agencies,
ramped up production in its factories in China and worked through a major
information systems implementation in the Asia/Pacific region. In addition, with
increased shipments from the Far East, the Company had more product in transit
than in previous years. Production in the quarter was more evenly distributed
during the quarter than during previous periods, leading to a lower payables
level at quarter end.

Cash used for investing activities was $19,490,000 for the first three months of
2005 compared to $40,985,000 in the first quarter of 2004. The decrease in cash
used for investing is attributable to the lower level of acquisitions incurred
in the first quarter of 2005 compared to the first quarter of 2004.

Cash provided by financing activities was $7,514,000 for the first three months
of 2005 compared to cash used of $608,000 in the first three months of 2004.
Financing activities for the first three months of 2005 were impacted by an
increase in the Company's net long-term borrowings of $8,144,000 as a result of
an acquisition and decrease in operating cash flows compared to the same period
a year ago.

The effect of foreign currency translation and acquisitions 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.

During the first quarter of 2005, the Company generated negative free cash flow
of $12,402,000 compared to positive free cash flow of $21,929,000 in the first
quarter of 2004. The decrease was primarily attributable to changes in inventory
and accounts payable as explained above. Free cash flow is a non-GAAP financial
measure that is comprised of net cash provided by operating activities less net
purchases 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 acquisitions, etc.). The non-GAAP financial measure is
reconciled to the GAAP measure as follows (in thousands):

Three Months Ended
March 31,
2005 2004
------ ------
Net cash provided (used) by operating activities $(3,495) $30,284
Less: Purchases of property and equipment - net (8,907) (8,355)
------ ------
Free Cash Flow $ (12,402) $ 21,929
====== ======

16

DIVIDEND POLICY

On February 4, 2005, the Company's Board of Directors declared a quarterly cash
dividend of $0.0125 per Common Share to shareholders of record as of April 1,
2005, which was paid on April 15, 2005. 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 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. 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.

Revenue Recognition
Invacare's revenues are recognized when products are shipped to unaffiliated
customers. The Securities and Exchange Commission'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 to
selected revenue recognition issues. The Company has concluded that its revenue
recognition policy is appropriate and in accordance with generally accepted
accounting principles and SAB No. 101.

Sales are only made 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.

Distributed products sold by the Company are accounted for in accordance with
EITF 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

17

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, Asia 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 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. 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 with DLL,
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.

Inventories and Related Allowance for Obsolete and Excess Inventory
Inventories are stated at the lower of cost or market with cost principally
determined for domestic manufacturing inventories by the last-in, first-out
(LIFO) method and for non-domestic inventories and domestic finished products
purchased for resale by the first-in, first-out (FIFO) 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, we review 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 individual item may be partially or fully reserved for. No
inventory that was reserved for has been sold at prices above their new cost
basis. The Company continued 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. As a result of
the adoption of Statement of Financial Accounting Standard (SFAS) No. 142,
Goodwill and Other Intangible Assets in 2002, goodwill and intangible assets
deemed to have indefinite lives are subject to annual impairment tests in
accordance with the Statement. 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 and the
results of these analyses have indicated no impairment of goodwill.

18

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 $11,000,000 in the aggregate of
the Company's North American product liability exposure. The Company also has
additional layers of external insurance coverage insuring $100,000,000 in annual
aggregate losses arising from individual claims anywhere in the world that
exceed the captive insurance company policy limits. 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, 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 by warranties against defects in
material and workmanship for periods 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 were
necessary in the current year. See Warranty Costs in the Notes to the
Consolidated Financial Statements for a reconciliation of the changes in the
warranty accrual.

Accounting for Stock-Based Compensation
The Company accounts for options under its stock-based compensation plans using
the intrinsic value method proscribed in Accounting Principles Board Opinion
(APBO) No. 25, Accounting for Stock Issued to Employees, and related
Interpretations. 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; thus, no compensation cost has been reflected in the Consolidated
Statement of Earnings for these options. In addition, restricted stock awards
have been granted without cost to the recipients and are being expensed on a
straight-line basis over the vesting periods.

In December 2002, the Financial Accounting Standards Board (FASB) issued SFAS
No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure. This
statement provides guidance for those companies wishing to voluntarily change to
the fair value based method of accounting for stock-based compensation. The
statement also amends the disclosure requirements of SFAS No. 123. While
Invacare continues to utilize the disclosure-only provisions of SFAS No. 123,

19

the Company has modified its disclosures to comply with the new statement. See
Accounting for Stock-Based Compensation in the Notes to the Consolidated
Financial Statements.

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 ADOPTED ACCOUNTING POLICIES

In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities ("FIN 46"), which was revised in December 2003 and,
which among other things, deferred the implementation date of FIN 46 until
periods after March 15, 2004. This interpretation 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.

The Company has an investment in NeuroControl, a development stage company,
which is currently pursuing FDA approval to market a product focused on the
treatment of post-stroke shoulder pain in the United States. The amount of net
advances and investment recorded on the Company's books was approximately
$3,000,000 at December 31, 2004. Certain of the Company's officers and directors
have minority equity ownership positions in NeuroControl. Subsequent to December
31, 2004, the Company's board of directors approved an additional investment by
the Company in NeuroControl. Accordingly, the Company has consolidated this
investment prospectively beginning with the quarter ended March 31, 2005, as the
Company is now deemed the primary beneficiary of this VIE based on the
provisions of FIN 46. The other beneficial interest holders have no recourse
against the Company.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In December 2004, FASB issued Statement of Financial Accounting Standards
("SFAS") No. 123 (Revised 2004), Share-Based Payment ("SFAS 123R"), which
requires companies to expense stock options and other share-based payments. SFAS
123R supersedes SFAS No. 123, which permitted either expensing stock options or
providing pro forma disclosure. In April 2005, the SEC announced that the
adoption of SFAS 123R would be delayed. The provisions of SFAS 123R, which will
become effective with respect to the Company on January 1, 2006, apply to all
awards granted, modified, cancelled or repurchased after January 1, 2006 as well
as the unvested portion of prior awards. The Company will adopt the standard as
of the effective date and estimates that the impact to the Company's reported
results will be similar to the pro forma results shown in the Company's note
regarding Accounting for Stock-Based Compensation in the Notes to its
Consolidated Financial Statements.

20

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 and treasury locks to mitigate its current and
future exposure to interest rate fluctuations. Based on the Company's March 31,
2005 debt levels, a 1.0% change in interest rates would impact interest expense
by approximately $5,338,000 over the next twelve months. Additionally, the
Company operates internationally and as a result is exposed to foreign currency
fluctuations. Specifically, the exposure includes inter Company loans and third
party sales or payments. In an attempt to reduce this exposure, the Company
utilizes foreign currency forward contracts. 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

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 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: pricing pressures, the success
of the Company's ongoing efforts to reduce costs, increasing raw material costs,
the consolidations of health care customers and competitors, government
reimbursement issues (including those that affect the sales of and margins on
products, along with the viability of customers) both at the federal and state
level, the ability to design, manufacture, distribute and achieve market
acceptance of new products with higher functionality and lower costs, the effect
of offering customers competitive financing terms, Invacare's ability to
successfully identify, acquire and integrate strategic acquisition candidates,
the difficulties in managing and operating businesses in many different foreign
jurisdictions (including the recent Domus acquisition), the timely completion of
facility consolidations, the vagaries of any litigation or regulatory
investigations that the Company may be or become involved in at any time
(including the previously-disclosed litigation with Respironics), the
difficulties in acquiring and maintaining a proprietary intellectual property
ownership position, the overall economic, market and industry growth conditions
(including the impact that acts of terrorism may have on such growth
conditions), foreign currency and interest rate risks, 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. We undertake no obligation to review or update these
forward-looking statements 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.

Item 4. Controls and Procedures.

As of March 31, 2005, an evaluation was performed, under the supervision and
with the participation of the Company's management, including the CEO and CFO,
of the effectiveness of the design and operation of the Company's disclosure
controls and procedures. Based on that evaluation, the Company's management,
including the CEO and CFO, concluded that the Company's disclosure controls and

21

procedures were effective as of March 31, 2005 in ensuring that information
required to be disclosed by the Company in the reports it files and submits
under the Exchange Act is recorded, processed, summarized and reported, within
the time periods specified in the Commission's rules and forms. 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.

Part II. OTHER INFORMATION

Item 6. Exhibits.

Exhibits:
Official Exhibit No.
--------------------
31.1 Certification of the Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 (filed
herewith).
31.2 Certification of the Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 (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

By: /s/ Gregory C. Thompson
-----------------------------------------
Gregory C. Thompson
Chief Financial Officer
(Principal Financial and Accounting Officer)

Date: May 9, 2005

22