Invacare 2011 Annual Report Download - page 107

INVACARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Concentration of Credit Risk—Continued
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 14.4% of 2011 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 2011 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 2011, 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 operations. The company was not a party to any interest rate swap agreements during
2010.
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 operations. 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.
FS-35