Invacare Corporation Reports First Quarter Results

Cost Reduction Initiatives Remain on Track

ELYRIA, Ohio–(BUSINESS WIRE)–Invacare Corporation (NYSE:IVC) today announced its financial results for the quarter ended March 31, 2007.

CONSOLIDATED RESULTS

Loss per share on a GAAP basis for the first quarter was $.55 ($17.5 million net loss after-tax) as compared to earnings per share for the same period last year of $.16 ($5.2 million net income after-tax). Adjusted earnings per share(a) were $.05 for the first quarter of 2007 as compared to $.24 last year. Adjusted earnings per share(a) excludes the impact of restructuring charges and costs associated with the company’s debt refinancing which was completed during the first quarter. Adjusted net earnings(b) for the quarter, excluding restructuring charges and costs associated with the company’s debt refinancing, were $1.6 million versus $7.6 million last year. Net sales for the quarter increased 3.6% to $374.9 million versus $361.7 million last year. Acquisitions increased net sales by one percentage point and foreign currency translation increased net sales by two percentage points.

Adjusted earnings per share(a) for the quarter excludes the impact of:

• $3.3 million pre-tax charge compared to a $3.5 million pre-tax charge last year related to restructuring activities with severance costs being the largest component.
• $13.4 million pre-tax expense related to debt refinancing costs consisting primarily of make whole payments to debt holders, incremental interest and write-off of debt issuance costs related to the previous debt instruments as described below.

The Company continues to be impacted by reimbursement changes in the U.S. related to power mobility devices. These changes significantly impacted both revenues and profits for the company’s North America/HME (NA/HME) segment where first quarter revenues declined from the same period last year by 5.9% and profits declined $9.6 million to a loss of $.5 million, excluding restructuring charges.

Operations for the quarter benefited from the Company’s implementation of cost reduction initiatives announced earlier this year. The benefits achieved from the cost reduction initiatives during the first quarter were $7 million, slightly better than the Company’s expectations, principally due to product sourcing savings. However, as expected, this benefit was offset by continued competitive pricing pressures and product mix shift toward lower margin product in the U.S as a result of the Medicare related reimbursement changes.

Gross margin as a percentage of net sales for the first quarter was lower by 1.6 percentage points compared to last year’s first quarter primarily due to competitive pricing pressures in the U.S. and an unfavorable change in product mix away from high-end options in the U.S. Rehab business. Excluding restructuring charges, the margin percentage also declined 1.6 percentage points. As compared to the fourth quarter of last year, gross margins as a percentage of sales improved by .7 of a percentage point driven by the cost reduction initiatives. Excluding restructuring charges, the margin percentage improved by .2 of a percentage point.

Selling, general and administrative expense (SG&A) increased 5.0% to $87.8 million compared to $83.6 million in the first quarter last year. Foreign currency translation and acquisitions each increased SG&A expense by two percentage points. SG&A expense also increased when compared to the first quarter of last year as a result of higher distribution and commission costs associated with increased sales volumes, bank fees related to the Company’s debt refinancing, and stock option expense resulting from the change in accounting treatment for stock options which became effective in 2006. These increased expenses were partially offset by cost reduction activities. Results for the quarter were also negatively impacted by increased interest expense due to increases in interest rates and higher debt levels.

A. Malachi Mixon, III, chairman and chief executive officer, stated “The adjusted results for the quarter were slightly better than our internal expectations due to better than anticipated cost reductions of $7 million during the quarter. There is much to be accomplished to deliver our $38 million cost reduction budget for the year, but our first quarter performance provides us further confidence that we will achieve this reduction. First quarter free cash flow(c) of negative $17 million was due to lower profitability and a higher level of customer rebates and employee incentive payments we pay annually in the first quarter. In addition, in the first quarter there was a decline in payables and accruals versus the end of 2006 as a result of the Company’s debt refinancing process which included the acceleration of interest payments related to the previous debt structure. Inventories also increased $4 million primarily in Europe but initiatives we have in place are expected to result in approximately $20 million of declines in inventory levels later in the year.”

NORTH AMERICA/HME

For the quarter, NA/HME net sales declined 5.9% to $161.5 million compared to $171.7 million last year, driven primarily by Rehab and Respiratory product lines. Rehab product line net sales declined by 9.2% primarily due to Medicare reimbursement changes which drove competitive price reductions and a continued shift away from high-end options that normally drive higher average selling prices and margins. Standard product line net sales increased .2% from the first quarter of last year driven by increased volumes, particularly in manual wheelchairs and patient aids, partially offset by pricing reductions. Respiratory product line net sales declined 12.6% due to reduced unit volumes of oxygen concentrators resulting from the loss of one customer and continued asset management programs by providers along with pricing declines in concentrators. However, HomeFill^TM II oxygen system net sales increased for the quarter by 38% due to increased purchases from national and smaller providers. Our HomeFill technology was granted increased reimbursement by Medicare late in 2006 with the change effective January 1, 2007. This improved reimbursement has further enhanced the cost advantage this technology offers our customers. As previously announced, a large national respiratory provider launched a large-scale HomeFill implementation in the first quarter.

For the quarter, NA/HME loss before income taxes was $.5 million, excluding restructuring charges of $2.4 million pre-tax, as compared to earnings before income taxes of $9.1 million last year, excluding restructuring charges of $2.8 million pre-tax. The decline in profit before tax was largely due to the pricing and competitive industry conditions in Rehab, Standard and Respiratory product lines and higher freight costs.

INVACARE SUPPLY GROUP (ISG)

ISG net sales for the quarter increased 12.0% to $61.7 million compared to $55.1 million last year driven by volume increases primarily in diabetic and incontinence products lines. Earnings before income taxes for the quarter decreased to $1.1 million as compared to $1.3 million last year. This reduction is attributable to reduced margins due to sales increases in lower margin products (diabetic and incontinence), higher SG&A expenses to drive growth, and a reduction in supplier discounts as a result of extended supplier payments in the first quarter prior to completion of the company’s debt refinancing.

INSTITUTIONAL PRODUCTS GROUP (IPG)

IPG net sales for the quarter increased by 2.3% to $23.7 million compared to $23.2 million last year due to increased volumes in its core bed products, along with increases in other offerings such as seating products. Earnings before income taxes decreased to $.6 million from $1.6 million last year as a result of increased new product development investments, and lower manufacturing absorption. The Company has announced the closure of its case-good manufacturing facility in St. Louis with consolidation of these activities into the Company’s other existing manufacturing locations.

EUROPE

For the quarter, European net sales increased 12.0% to $107.0 million versus $95.5 million last year. Foreign currency translation contributed eight percentage points of the increase. For the quarter, earnings before income taxes were $4.7 million, excluding restructuring charges of $.8 million pretax, as compared to $4.0 million last year, excluding restructuring charges of $.3 million pre-tax. There was strong sales performance in most regions and increased profits were driven by volume increases, cost reduction initiatives and a weakening U.S. dollar.

ASIA/PACIFIC

For the quarter, Asia/Pacific net sales increased 29.4% to $20.9 million versus $16.2 million last year. Foreign currency increased net sales by five percentage points and acquisitions increased net sales by twenty-five percentage points. For the quarter, loss before income taxes was $1.1 million, excluding restructuring charges of less than $.1 million pre-tax, as compared to a pre-tax loss of $1.1 million last year, excluding restructuring charges of $.3 million pre-tax. 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. The Company continued to benefit from cost reductions initiatives in the region.

FINANCIAL CONDITION

Total debt outstanding was $601.9 million at the end of the first quarter, resulting in a debt-to-total-capitalization ratio of 56.1% versus 54.1% at the end of last year. The increase in the debt-to-capitalization ratio was impacted primarily by the increase in debt levels as a result of negative cash flow generation in the first quarter.

Free cash flow(c) for the Company during the first quarter was negative $17.3 million principally as a result of lower earnings along with declines in payables and accrued expenses. The payables and accrued expense balances at year-end 2006 were higher than normal because the Company’s refinancing efforts were in process. First quarter free cash flow(c) is normally lower for the Company than the other quarters as a result of a higher level of customer rebates paid in the first quarter, employee incentive payments in certain locations, and other payments which are historically made during the first quarter. In addition, accelerated interest payments were made as a result of the debt refinancing, which negatively impacted free cash flow(c). Free cash flow(c) is defined as net cash provided by operating activities, excluding cash related restructuring activities, less purchases of property and equipment, net of proceeds from sales of property and equipment.

The Company’s cash and cash equivalents at the end of the first quarter were approximately $57.2 million, down $25.2 million from the end of 2006. The cash was utilized to pay costs associated with the Company’s debt refinancing as described below and to reduce payables and accrued expenses. Days sales outstanding at the end of the first quarter was 67 days versus 69 days in the same period last year, and 66 days at the end of 2006. Inventory turns were 4.4 versus 4.7 for the same period last year, and flat as compared to year-end 2006.

DEBT RECAPITALIZATION

As previously disclosed, the Company completed its debt refinancing transactions in February 2007. The company entered into a Credit Agreement which provides for a $400 million senior secured credit facility consisting of a $250 million term loan facility and a $150 million revolving credit facility with interest at LIBOR plus 2.25. The Company’s obligations under the Credit Agreement are secured by substantially all of the Company’s assets, subject to certain exceptions, and are guaranteed by our material domestic subsidiaries, with certain obligations also guaranteed by our material foreign subsidiaries. The Credit Agreement contains a number of customary restrictive covenants, affirmative covenants and events of default, and financial covenants that require the Company to maintain a maximum leverage ratio, a minimum interest coverage ratio, and a minimum fixed charge coverage ratio. These covenants are driven primarily by Adjusted EBITDA(d), which is defined and shown on the reconciliation table included with this release.

The Company also consummated the issuance and sale of $135 million aggregate principal amount of convertible subordinated debentures. The net proceeds to the Company from the offering, after deducting the initial gross spread payable by the Company, were approximately $132.3 million. The debentures are unsecured senior subordinated obligations of the Company guaranteed by substantially all domestic subsidiaries and pay interest at 4.125% per annum on each February 1 and August 1. The debentures are convertible into common shares of the Company under certain conditions.

The Company also consummated the issuance and sale of $175 million aggregate principal amount of 9¾% Senior Notes due 2015 (the “senior notes”). The Company’s net proceeds from this offering, after deducting the initial note purchasers’ discount and the estimated offering expenses payable by the Company, were approximately $167 million. The senior notes are unsecured senior obligations of the Company, guaranteed by substantially all domestic subsidiaries.

The Company used the net proceeds from the offerings of the senior notes and the debentures, together with initial borrowings under the Credit Agreement to repay outstanding indebtedness and related expenses and repayment costs aggregating $568 million. In addition, as a result of the refinancing, during the first quarter the Company incurred $33.1 million in costs comprised of: debt issuance costs related to the new debt structure of $19.7 million which the Company has capitalized over the respective lives of the debt instruments; one-time make whole payments to the previous holders of senior notes and incremental interest totaling $10.9 million; and write-off of costs previously capitalized related to the old debt structure of $2.5 million.

The Company estimates that the current weighted average interest rate of the new facilities and securities combined is approximately 7.3% versus the year-end 2006 weighted average interest rate of approximately 5.9%.

OUTLOOK

The Company continues to execute the numerous cost reduction initiatives previously communicated and as described further below. The Company believes that the implementation of these initiatives will improve the Company’s operating margin and result in approximately $38 million of realized savings in 2007, including the $7 million already realized in the first quarter. The Company anticipates restructuring charges of approximately $20 million in 2007 relating to these actions. Annualized savings from these initiatives implemented by the end of 2007 should approximate $56 million thereafter. The core initiatives are as follows:

• Product line simplification. The Company plans to simplify its product lines and pricing processes to reduce costs and improve service levels.
• Improvement of gross margins and reduction of fixed costs through further product and sub-assembly outsourcing. The Company expects to accelerate its outsourcing of commodity products and sub-assemblies. Asian sourcing is planned to double over the next three years.
• Rationalization of facilities. Today, Invacare’s primary manufacturing facilities consist of fourteen integrated fabrication plants and two assembly plants worldwide. Invacare will continue in its strategy to move from integrated fabrication plants to assembly plants worldwide. We are finalizing plans to close and/or consolidate several locations worldwide beginning this year through 2009.
• Standardization of product platforms. To further simplify and reduce production costs, as well as to leverage development and tooling investment, the Company has begun the process of standardizing some of its product platforms globally.

For fiscal year 2007, the Company is reconfirming the following guidance:

• Organic growth in net sales of 0% to 2%, excluding the impact from acquisitions and foreign currency translation adjustments.

• Adjusted EBITDA(d) increase of 4% to 6% over 2006 levels.
• Adjusted earnings per share(a) of $.95 to $1.15.
• Free cash flow(c) between $40 million and $50 million.

Commenting on the Company’s anticipated results, Mixon said, “Cost reduction remains our top priority. The competitive pricing conditions driven by reimbursement changes in the U.S. remain and we expect approximately $30 million in net sales reductions in 2007 from the lower pricing. Our $38 million of cost reductions, which are heavily weighted to the second half of the year, will offset these impacts and result in improved profitability in the second half of the year. We expect adjusted second quarter earnings to be sequentially improved from adjusted first quarter earnings but still lower than adjusted second quarter earnings last year.

Increased HomeFill revenues in the quarter are evidence that this technology is gaining further traction as a result of the increased reimbursement by Medicare effective January 1, 2007. This improved reimbursement has further enhanced the cost advantage this technology offers our customers.

As previously communicated, Medicare officially announced earlier this month the 10 Metropolitan Statistical Area test sites for U.S. competitive bidding. Implementation has already begun with the scheduled effective date for competitive bid pricing in April 2008. Invacare has once again demonstrated its industry leadership by sponsorship of the Tanner Hobson bill to ensure smaller providers continued participation in the supply chain of home medical products.”

Mixon concluded, “We are confident our restructuring plans are achievable and will put us back in front of the curve by year end, with net year-over-year improved operating income.”

(a) Adjusted earnings per share (EPS) is a non-GAAP financial measure which is defined as net earnings excluding the impact of restructuring charges and debt finance charges, interest and fees associated with the Company’s debt refinancing divided by weighted average shares outstanding – assuming dilution. This financial measure is reconciled to the related GAAP financial measure in the “Reconciliation” table included after the Condensed Consolidated Statement of Operations included in this press release.

(b) Adjusted net earnings is a non-GAAP financial measure which is defined as net earnings excluding the impact of restructuring charges and debt finance charges, interest and fees associated with the Company’s debt refinancing. This financial measure is reconciled to the related GAAP financial measure in the “Reconciliation” table included after the Condensed Consolidated Statement of Earnings included in this press release.

(c) Free cash flow is a non-GAAP financial measure, which is defined as net cash provided by operating activities, excluding cash related restructuring activities less purchases of property and equipment, net of proceeds from sales of property and equipment. This financial measure is reconciled to the related GAAP financial measure in the “Reconciliation” table included after the Condensed Consolidated Balance Sheets included in this press release.

(d) Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) is a non-GAAP financial measure which is defined as net earnings excluding the following: interest expense, income taxes, depreciation and amortization, as further adjusted to exclude restructuring charges, debt finance charges, interest and fees associated with the Company’s debt refinancing, bank fees and stock option expense. It should be noted that the Company’s definition of Adjusted EBITDA may not be comparable to similar measures disclosed by other companies because not all companies and analysts calculate Adjusted EBITDA in the same manner. This financial measure is reconciled to the related GAAP financial measure in the “Reconciliation” table included after the Condensed Consolidated Statement of Operations included in this press release.

Invacare Corporation (NYSE:IVC), headquartered in Elyria, Ohio, is the global leader in the manufacture and distribution of innovative home and long-term care medical products that promote recovery and active lifestyles. The Company has 5,700 associates and markets its products in 80 countries around the world. For more information about the Company and its products, visit Invacare’s website at www.invacare.com.

This press release contains forward-looking statements within the meaning of the “Safe Harbor” provisions of the Private Securities Litigation Reform Act of 1995. Terms such as “will,” “should,” “plan,” “intend,” “expect,” “continue,” “forecast”, “believe,” “anticipate” and “seek,” as well as similar comments, are forward-looking in nature. Actual results and events may differ significantly from those expressed or anticipated as a result of risks and uncertainties which include, but are not limited to, the following: possible adverse effects of being substantially leveraged, which could impact our ability to raise capital, limit our ability to react to changes in the economy or our industry or expose us to interest rate or event of default risks; changes in government and other third-party payor reimbursement levels and practices; consolidation of health care customers and our competitors; ineffective cost reduction and restructuring efforts; inability to design, manufacture, distribute and achieve market acceptance of new products with higher functionality and lower costs; extensive government regulation of our products; lower cost imports; increased freight costs; failure to comply with regulatory requirements or receive regulatory clearance or approval for our products or operations in the United States or abroad; potential product recalls; uncollectible accounts receivable; difficulties in implementing a new Enterprise Resource Planning system; legal actions or regulatory proceedings and governmental investigations; product liability claims; inadequate patents or other intellectual property protection; incorrect assumptions concerning demographic trends that impact the market for our products; provisions in our bank credit agreements or other debt instruments that may prevent or delay a change in control; the loss of the services of our key management and personnel; decreased availability or increased costs of raw materials which could increase our costs of producing our products; inability to acquire strategic acquisition candidates because of limited financing alternatives; risks inherent in managing and operating businesses in many different foreign jurisdictions; exchange rate fluctuations, as well as the risks described from time to time in Invacare’s reports as filed with the Securities and Exchange Commission. Except to the extent required by law, we do not undertake and specifically decline any obligation to review or update any forward-looking statements or to publicly announce the results of any revisions to any of such statements to reflect future events or developments or otherwise.

Business Segments – The Company operates in five primary business segments based on geographical area: North America / Home Medical Equipment (“HME”), Invacare Supply Group, Institutional Products Group, Europe and Asia/Pacific. The five reportable segments represent operating groups, which offer products to different geographic regions. Intersegment revenue for reportable segments was $19,874,000 and $24,880,000 for the Three Months Ended March 31, 2007 and 2006, respectively.

Contact:

Invacare Corporation
Gregory C. Thompson, 440-329-6111