Invacare 2006 Annual Report Download - page 1

Fellow Shareholders:
Invacare has encountered a steady stream of disruptive change in its industry over the past few years. As the
home medical equipment (HME) industry continues to evolve due to ongoing cuts in Medicare and Medicaid HME
reimbursement in the U.S., Invacare has found strength in the diversity of its business and the long-term
demographic, social and economic trends that will continue to drive its growth. Combined with the Company’s
diversity in products, programs, and global presence, Invacare remains the best positioned manufacturer/distributor
in its industry.
Most of the Company’s challenges stem from the North America/Home Medical Equipment (NA/HME)
division, which is greatly impacted by Medicare and Medicaid reimbursement uncertainty. Segments of the
business not impacted by reimbursement are doing well. The Company’s international businesses, particularly in
Europe, continued to strengthen and build a foundation for growth.
In 2006, Invacare continued to focus on its global initiative to reduce costs. Since the cost reduction initiatives
were first announced in 2005, approximately 600 positions have been eliminated, several facilities were exited, and
manufacturing and sourcing capabilities were increased in Asia. These initiatives will make us a lean and efficient
Company, which should put us in a favorable position when the dust settles around reimbursement.
2006 Financial Results
Results for 2006 reflect the ongoing uncertainty and caution with which HME customers are approaching the
market. For the year, Invacare reported a net sales decrease of 2.1% to $1.50 billion. Dealer uncertainty attributable
to reimbursement changes, lower prices due to competitive pressure from Asian sourcing, and the elimination of
certain product lines contributed to the revenue decline.
Adjusted earnings per share (See Table) for the year were $1.18 versus $1.66 last year, which excludes the
impact of a pre-tax $21.3 million restructuring charge in 2006 and a pre-tax $7.5 million restructuring charge in
2005. The 2006 adjusted results also exclude fourth quarter 2006 finance charges, interest and fees related to debt
refinancing, incremental reserve against accounts receivable due to Medicare reimbursement reductions and an
impairment charge related to goodwill and intangible assets. Loss per share on a U.S. generally accepted accounting
principles (GAAP) basis was $10.00 ($317.8 million net loss after-tax) as compared to earnings per share last year
of $1.51 ($48.9 million net income after-tax).
Performance by Region
In 2006, NA/HME net sales decreased 4.3% to $676.3 million from $706.6 million last year with revenue
declines in Rehab, Standard and Respiratory product lines. The reduction in sales was largely due to the pricing and
competitive industry conditions driven by reimbursement declines and the growing impact of low-cost Asian
products.
Areas in North America outside of the HME Group showed solid performance in 2006. Invacare Supply Group
(ISG) net sales increased 3.3% to $228.2 million from $220.9 million last year. The Institutional Products Group
(IPG) net sales increased 9.4% to $93.5 million from $85.4 million last year due to increased volumes in its core bed
products and in other product offerings such as bathing products.
For the year, European net sales were down .4% to $430.4 million versus $432.1 million last year. Pricing
reductions contributed to the sales declines. In addition, foreign currency translation reduced sales by one
percentage point, which was offset by acquisitions that increased sales by one percentage point.
Asia/Pacific net sales for 2006 decreased 17.8% to $69.6 million versus $84.7 million last year. Foreign
currency accounted for four percentage points of the net sales decline, while acquisitions increased net sales by five
percentage points. Performance in this region continues to be negatively impacted by U.S. reimbursement
uncertainty in the consumer power wheelchair market, resulting in decreased sales of microprocessor controllers
by Invacare’s New Zealand subsidiary.