Invacare Corporation (NYSE: IVC) today announced its financial results for the quarter and year ended December 31, 2010 and provided guidance for 2011.
CEO SUMMARY
Commenting on Invacare's 2010 results, Gerald B. Blouch, President & Chief Executive Officer, stated, "Throughout 2010, Invacare made progress on its strategic goal to transform from a holding company of regionally focused business units into an agile global enterprise. This ongoing initiative will better position Invacare for growth and will make the Company more efficient in dealing with economic volatility and margin pressures. While the Company focused on this strategic goal, it also delivered strong results for 2010. The Company increased adjusted earnings per share by 16% to $1.84, which is the third year in a row of double digit percentage growth. The Company exceeded the high end of its guidance on free cash flow by $14.9 million, generating $104.9 million. Also in 2010, Invacare's focus on sales growth moved the Company back into positive organic net sales growth at 1% for the year."
Focusing on guidance, Blouch continued, "For 2011, Invacare is forecasting organic net sales growth of 2% to 4% and operating margin expansion resulting from the Company's globalization strategy. Adjusted earnings per share is expected to be $2.05 to $2.15, which anticipates continued volatility related to foreign exchange as well as the potential for continued increases in freight and commodity costs, which we are actively managing. The Company also will realize a higher effective tax rate in 2011 on adjusted pre-tax earnings, because it expects to see continued improvements in its businesses in the United States. In addition, the Company plans to generate between $85 and $95 million in free cash flow in 2011 that it expects to use to pay down debt, buy back common stock or pursue acquisitions as appropriate."
HIGHLIGHTS FOR THE FOURTH QUARTER AND YEAR
- As a result of charges related to the Company's decision to extinguish higher interest rate debt, earnings per share on a GAAP basis decreased 60% for the quarter to $0.22 versus $0.55 last year and decreased 40% for the year to $0.78 versus $1.29 last year. The 2010 results were negatively impacted by $0.43 per share ($14.2 million net after-tax expense) for the quarter and $1.11 per share ($36.3 million net after-tax expense) for the year related to the early debt extinguishment charges.
- Adjusted earnings per share increased 3% for the quarter to $0.65 versus $0.63 last year and increased 16% for the year to $1.84 versus $1.58 last year
- Free cash flow for the quarter was $41.7 million as compared to $61.8 million last year and for the year was $104.9 million as compared to $141.6 million last year
- Organic net sales increased 1.6% for the quarter and 1.0% for the year
- Adjusted EBITDA of $42.3 million for the quarter and $146.1 million for the year
- Reduction in debt outstanding of $50.4 million for the year, leading to an improved ratio of debt to adjusted EBITDA of 1.9, as compared to 2.2 for the fourth quarter of last year
CONSOLIDATED RESULTS
Earnings per share on a GAAP basis for the fourth quarter were $0.22 ($7.2 million net earnings) as compared to earnings per share for the same period last year of $0.55 ($17.6 million net earnings). Current quarter GAAP earnings per share were negatively impacted by $0.43 per share ($14.2 million net after-tax expense) for early debt extinguishment charges. Net earnings for the quarter on a GAAP basis for 2009 were unfavorably impacted by asset write-downs related to investments and intangible assets of $0.22 per share ($6.9 million after-tax expense) and write-down of deferred financing fees as a result of early extinguishment of debt of $0.09 per share ($2.9 million after-tax expense). Adjusted earnings per share were $0.65 for the fourth quarter of 2010 as compared to $0.63 for the fourth quarter of 2009. Adjusted net earnings for the quarter were $21.3 million versus $20.3 million for the fourth quarter last year. Adjusted net earnings for the quarter were positively impacted by net sales growth and reduced interest expense partially offset by a slightly reduced gross margin, higher selling, general and administrative (SG&A) expenses and a significant increase in effective tax rate on adjusted pre-tax earnings. The Company's reduced interest expense in the quarter reflects the pay down of higher interest rate debt throughout the year.
Net sales for the quarter increased 0.7% to $451.5 million versus $448.6 million last year. Foreign currency translation decreased net sales by 1.5 percentage points and an acquisition increased net sales by 0.6 of a percentage point. Organic net sales for the quarter increased 1.6% over the same period last year driven by organic net sales increases for Invacare Supply Group (ISG), Europe and Institutional Products Group (IPG), partially offset by organic net sales declines in Asia/Pacific and North America/Home Medical Equipment (HME).
Gross margin as a percentage of net sales for the fourth quarter was lower by 0.5 of a percentage point compared to last year's fourth quarter. The margin decline was related to commodity cost increases, increased freight costs and unfavorable foreign currency transactions partially offset by reduced warranty expense. Gross margins for North America/HME and ISG segments were favorable compared to last year's fourth quarter with Europe, IPG and Asia Pacific segments unfavorable.
Selling, general and administrative expense increased 0.1% to $103.4 million in the quarter compared to $103.2 million in the fourth quarter last year. Foreign currency translation decreased SG&A expense by 0.8 of a percentage point while an acquisition increased SG&A expense by 1.9 percentage points. Excluding foreign currency translation and acquisitions, SG&A expense was down compared to the fourth quarter of last year by 1.0%. Decreased depreciation and amortization expense, favorable foreign currency transactions, and a reduction in bad debt were partially offset by increased associate costs and legal expenses related to enforcement of intellectual property rights.
The effective tax rate on a GAAP basis for the fourth quarter includes the benefit of reversing net tax accruals as a result of tax audit settlements and adjustments to tax valuation allowances, which yielded a combined one-time net benefit of $4.4 million for the quarter ended December 31, 2010.
Earnings per share on a GAAP basis for the year ended December 31, 2010 were $0.78 ($25.3 million net earnings) as compared to earnings per share for the same period last year of $1.29 ($41.2 million net earnings). GAAP earnings per share for 2010 were negatively impacted by $1.11 per share ($36.3 million net after-tax expense) from early debt extinguishment charges. Net earnings on a GAAP basis for 2009 were unfavorably impacted by asset write-downs related to investments and intangible assets of $0.25 per share ($7.9 million after-tax expense) and write-down of deferred financing fees as a result of early extinguishment of debt of $0.09 per share ($2.9 million after-tax expense). Adjusted earnings per share were $1.84 for the year ended December 31, 2010 as compared to $1.58 for the same period last year. Adjusted net earnings for the year ended December 31, 2010 were $59.9 million versus $50.7 million last year. Adjusted net earnings for 2010 were positively impacted by net sales growth, cost reduction activities and reduced net interest expense, which were partially offset by increased SG&A expenses and an increased effective tax rate on adjusted pre-tax earnings.
Net sales for the year ended December 31, 2010 increased 1.7% to $1.72 billion versus $1.69 billion last year. Foreign currency translation increased net sales by 0.3 of a percentage point and an acquisition increased net sales by 0.4 of a percentage point. Organic net sales for the year ended December 31, 2010 increased 1.0% over the same period last year.
NORTH AMERICA/HOME MEDICAL EQUIPMENT (HME)
For the quarter ended December 31, 2010, North America/HME net sales increased 1.6% to $191.6 million compared to $188.6 million in the same period last year, driven by increases in Standard and Rehab product lines partially offset by declines in Respiratory product lines. Organic net sales for North America/HME decreased 0.2%, as foreign currency translation increased net sales 0.3 of a percentage point and an acquisition increased net sales by 1.5 percentage points. Standard product line net sales for the fourth quarter increased 7.7% compared to the fourth quarter of last year, driven by increased volumes in standard wheelchairs, beds and therapeutic support surfaces. Rehab product line net sales increased by 3.7% compared to the fourth quarter last year, driven primarily by volume increases in custom power products. Respiratory product line net sales decreased 22.1%, primarily driven by lower sales of both concentrators and HomeFill® oxygen delivery systems to national providers. Respiratory sales were unusually slow in the fourth quarter, as providers leveraged their existing oxygen inventory in light of uncertainty related to the implementation of National Competitive Bidding.
For the fourth quarter, North America/HME earnings before income taxes were $17.5 million as compared to earnings before income taxes of $14.1 million last year. The $3.4 million increase in earnings before income taxes was principally the result of cost reduction activities and reduced interest expense partially offset by increased SG&A spending, primarily in associate costs.
For the year ended December 31, 2010, North America/HME net sales decreased 0.1% to $747.6 million compared to $748.4 million last year. Organic net sales decreased by 1.7 percentage points, as foreign currency translation increased net sales by 0.7 of a percentage point and an acquisition increased net sales by 0.9 of a percentage point. Earnings before income taxes were $54.6 million as compared to earnings before income taxes of $39.4 million last year, excluding 2009 restructuring charges of $0.3 million pre-tax. The $15.2 million increase in earnings before income taxes was primarily the result of cost reduction activities and reduced interest expense partially offset by increased SG&A spending, primarily in associate costs.
INVACARE SUPPLY GROUP (ISG)
ISG net sales for the fourth quarter increased 5.5% to $79.8 million compared to $75.6 million for the same period last year. The net sales increase was primarily in incontinence, ostomy, enteral and urological products. Earnings before income taxes for the fourth quarter increased to $3.1 million as compared to $1.9 million last year primarily as a result of volume increases and cost reduction initiatives including freight cost reduction programs partially offset by increased SG&A, primarily in bad debt expense.
For the year ended December 31, 2010, ISG net sales increased 6.1% to $297.5 million compared to $280.3 million for the same period last year. Earnings before income taxes for the year ended December 31, 2010 increased to $7.5 million as compared to $5.4 million last year, excluding 2009 restructuring charges of $0.1 million pre-tax, primarily as a result of volume increases, cost reduction initiatives including freight and distribution, partially offset by unfavorable product mix to lower margin diabetic and ostomy products and increased SG&A, primarily in bad debt expense.
INSTITUTIONAL PRODUCTS GROUP (IPG)
IPG net sales for the fourth quarter increased by 7.1% to $23.5 million compared to $22.0 million last year. Foreign currency translation increased net sales by 0.3 of a percentage point. Organic net sales increased 6.8% driven by increased net sales to large nursing home chains primarily for institutional beds and dialysis chairs. Earnings before income taxes decreased to $2.3 million as compared to $2.4 million last year, excluding 2009 restructuring charge adjustments of $0.1 million pre-tax, as a result of increased freight costs, higher SG&A expense, primarily in associate costs and unfavorable foreign exchange impact related to the strengthening of the Canadian dollar, partially offset by improved volumes.
For the year ended December 31, 2010, IPG net sales decreased 1.3% to $88.3 million compared to $89.4 million for the same period last year. Organic net sales decreased 2.0% as foreign currency translation increased net sales by 0.7 of a percentage point. Earnings before income taxes were $9.3 million for the year ended December 31, 2010 as compared to $9.3 million last year, excluding 2009 restructuring charges of $0.1 million pre-tax. Earnings before income taxes were unchanged principally as a result of increased SG&A expense offset by lower interest expense.
EUROPE
For the fourth quarter, European net sales decreased 4.4% to $136.6 million versus $142.9 million last year. Foreign currency translation decreased net sales by 6.2 percentage points. Organic net sales for the quarter increased 1.8 percentage points attributable to net sales growth primarily in Sweden, France and the U.K. and increases in Standard and Respiratory product lines. For the fourth quarter, earnings before income taxes were $12.8 million as compared to $12.1 million last year, excluding 2009 restructuring charges of $0.8 million pre-tax. Excluding the impact of an intangible write-down in 2009, earnings before income taxes decreased slightly largely attributable to increased freight costs and unfavorable foreign currency transactions partially offset by volume increases and cost reduction activities including reduced SG&A expenses.
For the year ended December 31, 2010, European net sales increased 0.6% to $506.1 million compared to $503.1 million for the same period last year. Organic net sales increased 2.5% as foreign currency translation decreased net sales by 1.9 percentage points. Earnings before income taxes for the year ended December 31, 2010 increased to $39.3 million as compared to $37.9 million last year, excluding 2009 restructuring charges of $3.3 million pre-tax. The increase in earnings before income taxes was a result of volume increases and cost reduction activities, partially offset by increased freight costs and unfavorable foreign currency transactions.
ASIA/PACIFIC
For the fourth quarter, Asia/Pacific net sales increased 2.3% to $20.0 million versus $19.6 million last year. Organic net sales for the quarter decreased 3.2% as foreign currency translation increased net sales by 5.5 percentage points. The organic net sales decline was driven by the Company's Australian distribution business which continued to have lower sales due in large part to weak demand from long-term care facilities which continued to delay capital purchases and at the Company's subsidiary which produces microprocessor controllers. For the fourth quarter, earnings before income taxes were $0.5 million as compared to $1.6 million last year, excluding 2009 restructuring charges of $0.1 million pre-tax. The decrease in earnings is primarily attributable to volume declines, increased research and development expenses, increased SG&A expense related to associate costs and unfavorable foreign currency transactions.
For the year ended December 31, 2010, Asia/Pacific net sales increased 14.9% to $82.6 million compared to $71.9 million for the same period last year. For the year, organic net sales increased 2.0% as foreign currency translation increased net sales by 12.9 percentage points. Earnings before income taxes for the year ended December 31, 2010 increased to $6.8 million as compared to $2.8 million last year, excluding 2009 restructuring charges of $1.2 million pre-tax, primarily as a result of volume increases and favorable foreign currency transactions partially offset by increased SG&A expense primarily related to associate costs.
FINANCIAL CONDITION
Total debt outstanding (including the debt discount as described below) was $271.2 million at December 31, 2010 as compared to $321.6 million at December 31, 2009. The Company's balance sheet reflects the adoption of Convertible Debt, ASC 470-20. As a result of adopting Convertible Debt, ASC 470-20, the Company recorded a debt discount, which reduced debt and increased equity by $25.1 million as of December 31, 2010 and by $48.3 million as of December 31, 2009. The debt discount decreased $1.9 million during the quarter, primarily as a result of the extinguishment of convertible debt.
The generation of strong free cash flow during the year allowed the Company to reduce debt outstanding by $50.4 million. The Company used the new revolving credit facility it obtained in the fourth quarter to redeem the remaining $146 million of its outstanding 9 ¾% senior notes. The Company's cash and cash equivalents at December 31, 2010 were $48.5 million compared to $37.5 million at the end of last year. The Company's ratio of debt to adjusted EBITDA improved to 1.9 as of December 31, 2010, as compared to 2.2 as of December 31, 2009.
The Company reported $41.7 million of free cash flow in the fourth quarter of 2010 as compared to $61.8 million of free cash flow in the fourth quarter of 2009. The principal drivers of free cash flow in the fourth quarter were improved profitability and better working capital management. The Company used a portion of this free cash flow to buy back 205,000 shares of the Company's common stock during the fourth quarter. Free cash flow of $104.9 million in 2010 proved to be another strong performance for the Company even though it was less than 2009's free cash flow of $141.6 million.
Days sales outstanding were 50 days at the end of the fourth quarter of 2010 versus 52 days at the end of last year. Inventory turns at the end of the fourth quarter of 2010 were unchanged from the end of last year at 6.2.
OUTLOOK
Invacare returned to organic net sales growth in 2010 and plans to increase the growth rate in 2011. As the Company shifts to a global operating model, it intends to leverage its regional product strengths into its other geographic markets. For example, the Company will be introducing a new bath lift in the United States that was developed and has already enjoyed success in Europe. The Company also has identified a number of internal opportunities to reduce complexity and drive organic net sales. For instance, the Company is integrating its Motion Concepts seating and positioning subsidiary with its existing Invacare® branded seating products. The combined efforts of the Invacare and Motion Concepts teams will lead to improved product design through one product development center, an enhanced sales organization that is focused on one united goal, and greater ease in sales and technical support for customers. Similarly, the Company will deploy its research and development efforts more efficiently to accelerate new product introductions that are expected to show benefits during the year. For instance, the new Invacare® FDX® power wheelchair, launched in Europe and the United States in 2010, is the Company's first global power wheelchair platform and it has already started to gain traction with clinicians and providers.
The Company will benefit from interest savings in 2011, as a result of paying down higher interest rate debt, namely the $146 million of 9 ¾% senior notes retired in the fourth quarter of 2010. However, this benefit will be partially offset by a number of items. First, the new revolving credit facility bears a higher interest rate than the previous revolving credit facility. Second, the Company's indebtedness has increased as a result of the debt finance charges, premium and fees paid during 2010 to extinguish the previous debt structure. In addition, the new credit facility affords Invacare the opportunity to pursue acquisitions or buy back Company stock.
The Company's organic net sales growth and interest savings will likely be partially offset by the potential for continued increases in freight and commodity costs, particularly in aluminum and steel, which are already being incurred in 2011. Additionally, as Invacare plans for its business in the United States to continue to improve, the Company's overall effective tax rate on adjusted pre-tax earnings will increase, since the United States tax rate is the highest of the countries in which it does business. The Company anticipates continued volatility related to foreign exchange rates which could be a benefit or a detriment. It also will manage potential increases in LIBOR rates by potentially fixing some of its exposure.
In regards to reimbursement, the Company is mindful of three key issues. In the United States, the Centers for Medicaid and Medicare Services is moving forward with National Competitive Bidding in the first nine metropolitan areas. While the Company expects this to be neutral to earnings in 2011, it will remain judicious in its extension of credit to customers and it will monitor whether other payors begin to model their payments on this system. The Company also will closely watch State Medicaid budgets and how deficits may impact coverage and payments for home medical equipment and institutional care products. In the European segment, there is discussion by the French government of reduced wheelchair reimbursement in the second half of 2011. This issue was originally anticipated to occur in 2010, but it was delayed.
In December 2010, the Company received a warning letter from the Food and Drug Administration (FDA) related to documentation and procedures at the Company's Sanford, Florida, facility. The letter does not call into question the safety or efficacy of Invacare products, and production has not been impacted. In fact, of the complaints that are detailed in the letter to illustrate the FDA's points on documentation, investigations to date show that no injuries or deaths were caused by a product defect. That said, the Company does have areas to improve and it is taking these issues very seriously. The Company has added resources to ensure it is addressing all of the FDA's concerns in a timely manner. The costs related to making the process improvements are not expected to be material and have been included in the Company's 2011 operating plan and guidance.
With these factors in mind, the Company is providing the following guidance for 2011:
- Organic net sales growth of 2% to 4%;
- Adjusted earnings per share of $2.05 to $2.15;
- Free cash flow between $85 million and $95 million;
- Effective tax rate of approximately 30% on adjusted pre-tax annual earnings, up from 26.4% in 2010 due to expected performance improvement in the United States; and
- Adjusted EBITDA between $145 million and $155 million.
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