Invacare 2009 Annual Report Download - page 101

INVACARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Concentration of Credit Risk—Continued
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.
The company’s top 10 customers accounted for approximately 13.3% of 2009 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 3.3% of the company’s 2009 net sales. Providers who are part of a buying group
generally make individual purchasing decisions and are invoiced directly by the company.
Derivatives
In March 2008, SFAS 161 (codified in Derivatives and Hedging, ASC 815) was issued which requires
qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair
value amounts of and gains and losses on derivative instruments, and disclosures about credit-risk-related
contingent features in derivative agreements. The company adopted ASC 815 effective January 1, 2009.
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 commodity price risk,
foreign currency exchange risk and interest rate risk. Foreign 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 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 2009, 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 and or losses on interest rate swaps are reflected in interest expense on the
consolidated statement of operations. As of December 31, 2009, none of the company’s debt had its interest
payments designated as the hedged forecasted transactions to interest rate swap agreements.
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