Invacare 2005 Annual Report Download - page 9

14฀15
Also฀contributing฀to฀the฀operating฀earnings฀decline฀
were฀higher฀selling,฀general฀and฀administrative฀
(SG&A)฀expense฀and฀higher฀interest฀expense,฀
partially฀offset฀by฀a฀reduced฀effective฀tax฀rate.฀
The฀higher฀interest฀expense฀related฀to฀acquisitions฀
and฀an฀increasing฀interest฀rate฀environment.฀Cost฀
reduction฀actions฀beginning฀in฀mid-2005฀began฀
to฀offset฀pricing฀pressures฀and฀led฀to฀sequential฀
declines฀in฀SG&A฀expense฀during฀the฀second฀฀
half฀of฀the฀year.
Strong฀Financial฀Condition฀฀
With฀its฀current฀capitalization฀structure,฀the฀
Company฀has฀the฀flexibility฀to฀continue฀to฀support฀
its฀core฀businesses฀and฀make฀acquisitions.฀In฀early฀
2005,฀the฀Company฀renegotiated฀its฀revolving฀
credit฀facility฀with฀improved฀pricing฀and฀availabil-
ity.฀In฀September฀2005,฀Invacare฀received฀$75.5฀
million฀under฀a฀364-day,฀$100฀million฀accounts฀
receivable฀securitization฀facility,฀which฀was฀฀
used฀to฀increase฀available฀debt฀capacity฀by฀฀
reducing฀balances฀outstanding฀on฀its฀revolving฀
credit฀facility.
Total฀debt฀outstanding฀at฀the฀end฀of฀the฀year฀was฀
$538฀million,฀resulting฀in฀a฀debt-to-total-capital-
ization฀of฀41.7%฀versus฀42.2%฀at฀the฀end฀of฀last฀
year.฀The฀Company฀generated฀$51฀million฀of฀free฀
cash฀flow฀for฀the฀year.฀Invacare฀used฀$58฀million฀
in฀cash฀to฀acquire฀three฀small฀companies฀during฀
the฀year.฀Free฀cash฀flow฀is฀defined฀as฀net฀cash฀
provided฀by฀operating฀activities฀less฀purchases฀
of฀property฀and฀equipment฀net฀of฀proceeds฀from฀
sales฀of฀property฀and฀equipment.฀(See฀Invacare’s฀
Form฀10-K.)฀
Reimbursement฀Issues฀฀
Uncertainty฀continues฀related฀to฀Medicare’s฀฀
reimbursement฀policies฀for฀HME.฀The฀Centers฀฀
for฀Medicare฀and฀Medicaid฀Services฀are฀currently฀
scheduled฀to฀issue฀a฀new฀rule฀on฀face-to-face฀
exams฀and฀documentation฀requirements฀for฀฀
power฀wheelchairs฀and฀other฀mobility฀devices฀
by฀April฀1,฀2006,฀along฀with฀new฀reimbursement฀
codes,฀possibly฀later฀in฀the฀year.฀
Additionally,฀Congress฀recently฀passed฀the฀Deficit฀
Reduction฀Act,฀which฀includes฀payment฀cuts฀to฀
home฀oxygen฀that฀will฀take฀effect฀in฀January฀2009,฀
as฀well฀as฀reductions฀for฀certain฀durable฀HME฀
spending฀that฀will฀take฀effect฀in฀2007.฀President฀
Bush’s฀just-released฀fiscal฀year฀2007฀budget฀
proposal฀includes฀further,฀potentially฀significant,฀
payment฀reductions฀for฀home฀oxygen฀therapy.฀
Home฀oxygen฀therapy฀is฀the฀most฀cost-effective฀
and฀clinically฀efficacious฀treatment฀available฀to฀
those฀with฀chronic฀obstructive฀pulmonary฀disease฀
(COPD)฀and฀low฀blood฀oxygen.฀This฀proposal฀
to฀cut฀Medicare฀payments฀for฀home฀oxygen฀
would฀dramatically฀erode฀the฀quality฀of฀care฀for฀
beneficiaries฀and฀lead฀to฀increased฀hospitaliza-
tion.฀In฀2002฀(the฀most฀recent฀year฀for฀which฀data฀
is฀available),฀673,000฀people฀were฀hospitalized฀
for฀COPD฀at฀an฀average฀cost฀to฀Medicare฀for฀their฀
stay฀of฀over฀$18,000.฀Home฀oxygen,฀in฀contrast,฀
can฀be฀provided฀to฀a฀patient฀for฀one฀year฀at฀less฀
than฀the฀average฀cost฀of฀one฀day฀in฀the฀hospital.฀
Invacare฀and฀members฀of฀the฀Ohio฀congressional฀
delegation฀have฀been฀extremely฀active฀in฀lobby-
ing฀against฀these฀cuts฀and฀in฀favor฀of฀the฀฀
HME฀industry.
Growth฀Strategy฀฀
Invacare’s฀growth฀plan฀has฀three฀parts:฀to฀฀
leverage฀global฀manufacturing฀and฀distribution฀
capabilities฀to฀lower฀costs฀and฀combat฀reimburse-
ment฀pressures;฀to฀grow฀through฀acquisitions;฀and฀
to฀continue฀to฀pursue฀key฀market฀opportunities,฀
the฀most฀attractive฀of฀which฀are฀home฀oxygen,฀
sleep฀therapy฀and฀bariatrics.
Home฀Oxygen:฀Because฀Invacare’s฀HomeFill฀II฀
system฀virtually฀eliminates฀the฀costs฀of฀delivering฀
oxygen,฀it฀is฀the฀ideal฀solution฀to฀cuts฀in฀Medicare฀
reimbursement.฀The฀HomeFill฀II฀system฀is฀being฀
embraced฀by฀industry฀entrepreneurs฀who฀are฀
building฀their฀businesses฀around฀it฀and฀gaining฀
market฀share.฀Even฀with฀the฀growth฀to฀date,฀sub-
stantial฀upside฀exists.฀Only฀65,000฀of฀the฀800,000฀
ambulatory฀oxygen฀patients฀in฀the฀U.S.฀are฀on฀the฀
HomeFill฀II฀today,฀and฀overseas฀markets฀are฀virtu-
ally฀untapped.฀Invacare฀has฀programs฀underway฀
to฀expand฀its฀HomeFill฀II฀business฀in฀Europe฀and฀
to฀develop฀home฀oxygen฀products฀specifically฀for฀
China฀and฀Japan.
Sleep฀Therapy:฀Invacare฀currently฀holds฀only฀a฀
small฀position฀in฀the฀rapidly฀growing฀sleep฀apnea฀
market,฀but฀the฀Company฀has฀been฀investing฀
consistently฀in฀product฀development฀and฀clinical฀
research.฀Design฀improvements฀introduced฀in฀late฀
2005฀make฀the฀Polaris™฀EX™฀Continuous฀Positive฀
Air฀Pressure฀(CPAP)฀system฀easier฀for฀patients฀to฀
use,฀and฀several฀exciting฀new฀sleep฀products฀are฀
in฀development.฀In฀addition,฀a฀newly฀completed฀
clinical฀study฀shows฀a฀substantial฀improvement฀
in฀compliance฀when฀patients฀use฀Invacare’s฀CPAP฀
with฀SoftX™฀Technology.
Bariatrics:฀With฀the฀obesity฀epidemic฀showing฀
no฀sign฀of฀slowing,฀the฀bariatric฀market฀represents฀
another฀significant฀market฀opportunity.฀Invacare฀
has฀developed฀an฀entire฀line฀of฀bariatric฀home฀
medical฀products,฀with฀weight฀capacities฀up฀to฀
1,000฀pounds.฀The฀Company฀also฀hosts฀a฀bariatric฀
website฀that฀provides฀information฀and฀resources฀
for฀providers,฀medical฀professionals฀and฀consumers.
Outlook฀for฀2006฀
The฀ongoing฀cost-cutting฀initiatives฀combined฀
with฀an฀outstanding฀product฀lineup฀are฀expected฀
to฀result฀in฀earnings฀per฀share฀of฀between฀$2.00฀
and฀$2.10฀in฀2006฀on฀a฀net฀sales฀increase฀of฀4%฀
to฀6%.฀Those฀sales฀are฀expected฀to฀generate฀free฀
cash฀flow฀of฀between฀$70฀million฀and฀$80฀million.฀
The฀earnings฀projection฀excludes฀the฀impact฀of฀
any฀new฀acquisitions฀but฀includes฀the฀impact฀from฀
the฀stock฀option฀accounting฀standard฀SFAS฀123R.฀
Net฀sales฀are฀expected฀to฀be฀minimally฀impacted฀
by฀foreign฀currency฀and฀the฀full-year฀inclusion฀of฀
2005฀acquisitions.฀
After฀several฀years฀of฀solid฀growth฀in฀sales฀and฀
earnings฀per฀share,฀it฀was฀a฀difficult,฀though฀
necessary,฀decision฀to฀restructure฀and฀reposi-
tion฀the฀business.฀We฀regret฀the฀impact฀of฀these฀
actions฀on฀the฀affected฀associates,฀their฀families฀
and฀the฀communities.฀We฀are฀confident฀that฀
these฀changes,฀combined฀with฀Invacare’s฀inherent฀
strengths,฀position฀the฀Company฀for฀renewed฀
growth฀that฀will฀provide฀opportunities฀for฀as-
sociates,฀benefits฀to฀customers฀and฀consumers,฀
and฀profitable฀returns฀to฀shareholders.฀We฀thank฀
Invacare’s฀customers,฀associates฀and฀sharehold-
ers฀for฀their฀support.
Sincerely,
A.฀Malachi฀Mixon,฀III฀
Chairman฀and฀Chief฀Executive฀Officer
Gerald฀B.฀Blouch฀
President฀and฀Chief฀Operating฀Officer
March฀13,฀2006
free
cash flow (in millions)
net
earnings (in millions)
net sales (in millions)
’01
$1,053.6
$1,089.2
$1,247.2
$1,403.3
$1,529.7
’02 ’03 ’04 ’05
’01
$60.4
$64.8
$71.4
$75.2
$48.9
’02 ’03 ’04 ’05
’01
$60.7
$115.9
$86.1
$56.9
$50.8
’02 ’03 ’04 ’05
free
cash flow (in millions)
net
earnings (in millions)
net sales (in millions)
’01
$1,053.6
$1,089.2
$1,247.2
$1,403.3
$1,529.7
’02 ’03 ’04 ’05
’01
$60.4
$64.8
$71.4
$75.2
$48.9
’02 ’03 ’04 ’05
’01
$60.7
$115.9
$86.1
$56.9
$50.8
’02 ’03 ’04 ’05
free
cash flow (in millions)
net
earnings (in millions)
net sales (in millions)
’01
$1,053.6
$1,089.2
$1,247.2
$1,403.3
$1,529.7
’02 ’03 ’04 ’05
’01
$60.4
$64.8
$71.4
$75.2
$48.9
’02 ’03 ’04 ’05
’01
$60.7
$115.9
$86.1
$56.9
$50.8
’02 ’03 ’04 ’05
Excludes฀nonrecurring฀and฀unusual฀amount฀of฀$25.2฀million฀after฀tax฀
in฀2001.
Free฀Cash฀Flow฀is฀defined฀as฀net฀cash฀provided฀by฀operating฀activities฀
less฀purchases฀of฀property฀and฀equipment฀net฀of฀proceeds฀from฀sales฀
of฀property฀and฀equipment.฀The฀2001฀free฀cash฀flow฀amount฀excludes฀
nonrecurring฀and฀unusual฀amount฀of฀$29.9฀million.