Invacare 2013 Annual Report Download - page 109

INVACARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
FS-35
allowances for doubtful accounts in accordance with Receivables, ASC 310-10-05-4. Credit losses are provided for in the financial
statements.
Substantially all of the Company’s receivables are due from health care, medical equipment providers and long term care
facilities located throughout the United States, Australia, Canada, New Zealand and Europe. A significant portion of products sold
to dealers, both foreign and domestic, is ultimately funded through government reimbursement programs such as Medicare and
Medicaid. The Company has also seen a significant shift in reimbursement to customers from managed care entities. As a
consequence, changes in these programs can have an adverse impact on dealer liquidity and profitability. In addition, reimbursement
guidelines in the home health care industry have a substantial impact on the nature and type of equipment an end user can obtain
as well as the timing of reimbursement and, thus, affect the product mix, pricing and payment patterns of the Company’s customers.
In addition, the Company is closely monitoring the roll-out of the second round of NCB, which became effective in 91
additional metropolitan statistical areas on July 1, 2013. At this early stage of the program, it is difficult to characterize the impact
from NCB on the Company's domestic home medical equipment business, as there continues to be uncertainty as the industry
realigns and adjusts itself to the small number of bid contracts awarded.
The Company’s top 10 customers accounted for approximately 18.1% of 2013 net sales. The loss of business of one or more
of these customers may have a significant impact on the Company, although no single customer accounted for more than 3.5% of
the Company’s 2013 net sales. Providers who are part of a buying group generally make individual purchasing decisions and are
invoiced directly by the Company.
Derivatives
ASC 815 requires companies to recognize all derivative instruments in the consolidated balance sheet as either assets or
liabilities at fair value. The accounting for changes in fair value of a derivative is dependent upon whether or not the derivative
has been designated and qualifies for hedge accounting treatment and the type of hedging relationship. For derivatives designated
and qualifying as hedging instruments, the Company must designate the hedging instrument, based upon the exposure being
hedged, as a fair value hedge, cash flow hedge, or a hedge of a net investment in a foreign operation.
Cash Flow Hedging Strategy
The Company uses derivative instruments in an attempt to manage its exposure to foreign currency exchange risk and interest
rate risk. Foreign forward exchange contracts are used to manage the price risk associated with forecasted sales denominated in
foreign currencies and the price risk associated with forecasted purchases of inventory over the next twelve months. Interest rate
swaps are, at times, utilized to manage interest rate risk associated with the Company’s fixed and floating-rate borrowings.
The Company recognizes its derivative instruments as assets or liabilities in the consolidated balance sheet measured at fair
value. A majority of the Company’s derivative instruments are designated and qualify as cash flow hedges. Accordingly, the
effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income and
reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. The remaining gain
or loss on the derivative instrument in excess of the cumulative change in the fair value of the hedged item, if any, is recognized
in current earnings during the period of change.
During 2013, the Company was a party to interest rate swap agreements that qualified as cash flow hedges and effectively
converted floating-rate debt to fixed-rate debt, so the Company could avoid the risk of changes in market interest rates. The gains
or losses on interest rate swaps are reflected in interest expense on the consolidated statement of comprehensive income (loss).
To protect against increases/decreases in forecasted foreign currency cash flows resulting from inventory purchases/sales
over the next year, the Company utilizes foreign currency forward contracts to hedge portions of its forecasted purchases/sales
denominated in foreign currencies. The gains and losses are included in cost of products sold and selling, general and administrative
expenses on the consolidated statement of comprehensive income (loss). If it is later determined that a hedged forecasted transaction
is unlikely to occur, any prospective gains or losses on the forward contracts would be recognized in earnings. The Company does
not expect any material amount of hedge ineffectiveness related to forward contract cash flow hedges during the next twelve
months.