Invacare first quarter earnings per share increases 156% to $0.23

Invacare Corporation (NYSE: IVC) today announced its financial results for the quarter ended March 31, 2011.

CEO SUMMARY

Commenting on Invacare's first quarter 2011 results, Gerald B. Blouch, President & Chief Executive Officer, stated, "Invacare is off to a solid start in 2011. The Company achieved 6.1% organic net sales growth in the quarter with increases in all business segments. Adjusted earnings per share for the quarter of $0.32 increased 39% over the first quarter last year. In addition, the Company generated free cash flow of $5.6 million, which is a testament to effective management of working capital in a growth environment."

Focusing on the outlook for 2011, Blouch continued, "Invacare is confident that the momentum from this quarter will continue to deliver positive results for its shareholders in 2011. As a result of the performance in the first quarter, the Company is narrowing its 2011 guidance on organic net sales growth to 3% to 4% from previous guidance of 2% to 4%. Although rising commodity and freight costs and the potential for fluctuations in foreign exchange rates are being managed through ongoing cost reduction projects and selective price increases, the Company is maintaining previous 2011 guidance on adjusted earnings per share of $2.05 to $2.15 and free cash flow between $85 and $95 million."

HIGHLIGHTS FOR THE FIRST QUARTER

• Earnings per share on a GAAP basis increased 156% for the quarter to $0.23 versus $0.09 last year. The results were negatively impacted by $0.15 per share ($4.9 million net after-tax expense) and $0.11 per share ($3.8 million net after-tax expense) for the quarters ended March 31, 2011 and 2010, respectively, related to early convertible debt extinguishment charges.
• Adjusted earnings per share increased 39% for the quarter to $0.32 versus $0.23 last year
• Free cash flow for the quarter was $5.6 million as compared to $5.8 million last year (free cash flow in the first quarter of 2010 benefited from the collection of a $7.8 million tax receivable)
• Organic net sales increased 6.1% for the quarter with increases across all business segments versus first quarter last year
• Adjusted EBITDA of $28.8 million for the quarter as compared to $27.9 million last year
• Reduction in debt outstanding of $4.1 million for the quarter, leading to a ratio of debt to adjusted EBITDA of 1.9, comparable to the fourth quarter of last year

CONSOLIDATED RESULTS

Earnings per share on a GAAP basis for the quarter were $0.23 ($7.5 million net earnings) as compared to earnings per share for the same period last year of $0.09 ($3.1 million net earnings). Net earnings for the quarter were negatively impacted by $0.15 per share ($4.9 million net after-tax expense) for early debt extinguishment charges compared to $0.11 per share ($3.8 million net after-tax expense) last year. Adjusted earnings per share were $0.32 for the first quarter of 2011 as compared to $0.23 for the first quarter of 2010. Adjusted net earnings for the quarter were $10.5 million versus $7.6 million for the first quarter last year. Adjusted net earnings for the quarter were positively impacted by net sales growth and reduced interest expense partially offset by a reduced gross margin, higher selling, general and administrative (SG&A) expenses and a higher effective tax rate on adjusted pre-tax earnings.

Net sales for the quarter increased 6.5% to $428.5 million versus $402.2 million last year. Organic net sales for the quarter increased 6.1% over the same period last year driven by increases in all business segments. The first quarter impact of foreign currency translation and acquisitions for all segments and the consolidated Company as compared to last year is provided in a table accompanying this release.

Gross margin as a percentage of net sales for the first quarter was lower by 0.6 of a percentage point compared to last year's first quarter. The margin decline was related to mix toward lower margin products, mix toward lower margin customers, pricing pressures and increased freight costs partially offset by favorable cost reduction projects.

Selling, general and administrative expense increased 3.9% to $105.8 million in the first quarter compared to $101.8 million in the first quarter last year. Foreign currency translation increased SG&A expense by 0.6 of a percentage point while an acquisition increased SG&A expense by 2.0 percentage points. Excluding foreign currency translation and acquisitions, SG&A expense increased by 1.3% compared to the first quarter of last year driven by associate costs and bad debt expense.

NORTH AMERICA/HOME MEDICAL EQUIPMENT (HME)

For the quarter ended March 31, 2011, North America/HME net sales increased 6.1% to $185.6 million compared to $175.0 million in the same period last year, driven by increases in rehab, respiratory and standard product lines. Organic net sales for North America/HME increased 4.0%, primarily driven by increased net sales of oxygen concentrators, custom power and custom manual wheelchairs and beds.

For the first quarter, North America/HME earnings before income taxes were $13.3 million as compared to earnings before income taxes of $11.5 million last year. The $1.8 million increase in earnings before income taxes was principally the result of reduced interest expense, volume increases and cost reduction activities partially offset by mix toward lower margin products, mix toward lower margin customers, price declines in certain standard products, higher freight costs and increased SG&A spending, primarily in associate costs and bad debt expense.

INVACARE SUPPLY GROUP (ISG)

ISG net sales for the first quarter increased 6.2% to $74.0 million compared to $69.7 million for the same period last year. The net sales increase was across all major product lines. Earnings before income taxes for the first quarter increased to $1.2 million as compared to $0.9 million last year primarily as a result of volume increases and cost reduction initiatives partially offset by mix toward lower margin products, increased freight costs and SG&A expense, primarily in distribution and associate costs.

INSTITUTIONAL PRODUCTS GROUP (IPG)

IPG net sales for the first quarter increased by 24.1% to $27.6 million compared to $22.3 million last year. Organic net sales increased 23.2% primarily driven by unexpectedly strong net sales of institutional beds due in part to funding availability in the first quarter. Earnings before income taxes increased to $4.1 million as compared to $1.8 million last year as a result of volume increases and cost reduction initiatives partially offset by increased freight costs and unfavorable foreign exchange impact related to the strengthening of the Canadian dollar.

EUROPE

For the first quarter, European net sales increased 3.1% to $121.4 million versus $117.7 million last year. Organic net sales for the quarter increased 6.2%, which was attributable to increases in net sales in the standard and respiratory product lines. For the first quarter, earnings before income taxes were $5.0 million as compared to $4.5 million last year. The earnings before income taxes increase was largely attributable to volume increases, cost reduction activities and favorable foreign currency transactions partially offset by mix toward lower margin products.

ASIA/PACIFIC

For the first quarter, Asia/Pacific net sales increased 13.0% to $19.8 million versus $17.5 million last year. Organic net sales for the quarter increased 4.1% driven by the Company's Australian distribution business and by the Company's subsidiary which produces microprocessor controllers. For the first quarter, earnings before income taxes were $1.1 million as compared to $0.8 million last year. The increase in earnings before income taxes is primarily attributable to volume increases and cost reduction activities partially offset by increased SG&A expense related to associate costs and unfavorable foreign currency transactions.

FINANCIAL CONDITION

Total debt outstanding was $267.1 million as of March 31, 2011, as compared to $271.2 million as of December 31, 2010 (including the convertible debt discount, which reduced convertible debt and increased equity by $20.2 million as of March 31, 2011, and by $25.1 million as of December 31, 2010). The convertible debt discount decreased $4.9 million during the quarter, primarily as a result of the extinguishment of convertible debt.

The Company reported $5.6 million of free cash flow in the first quarter of 2011 as compared to $5.8 million of free cash flow in the first quarter of 2010. The principal drivers of free cash flow in the first quarter were improved profitability partially offset by increased inventory levels and a reduction in accrued expenses. Free cash flow in the first quarter of 2010 benefited from the collection of a tax receivable of $7.8 million.

The Company utilized cash on hand and free cash flow generated during the quarter to buy back 492,500 shares of the Company's common stock, fund the premium paid on the repurchase of $13.5 million par value of convertible debt and reduce total debt outstanding in the quarter by $4.1 million. The Company's ratio of debt to adjusted EBITDA was 1.9 as of March 31, 2011, comparable to December 31, 2010.

Days sales outstanding were 52 days at the end of the first quarter of 2011 versus 56 days at the end of the first quarter of 2010 and 50 days at the end of last year. Inventory turns at the end of the first quarter of 2011 were 5.8 compared to 5.8 at the end of the first quarter 2010 and 6.2 at the end of 2010.

OUTLOOK

During the first quarter, the global economy continued to experience freight and commodity cost increases. The Company's supplier contracts negated most of the impact from commodity increases in the first quarter, but it expects to experience more commodity pressures starting in the second quarter. The Company is actively managing this exposure with adjustments to pricing and freight. For instance, the North America/HME segment recently announced a price increase for certain products effective May 1, 2011. The Company's other segments are in the process of reviewing whether freight and product price increases may be appropriate for their businesses.

The Company continues to closely monitor the tragedy in Japan and its impact on the global supply chain. Invacare sources a few key electronic components from suppliers in Japan. As uncertainties continue to exist in the region that could possibly lead to disruption in Invacare's supply chain, the Company is developing supplier and component alternatives to be implemented if necessary.

On April 5, 2011, the Company entered into an amendment to its credit agreement that reduces the applicable interest rate related to both LIBOR and Base Rate Option borrowings by 75 basis points. In addition, the amendment increases the aggregate amount of the Company's equity that may be repurchased by the Company.

The Company is providing updates to the Food & Drug Administration (FDA) regarding the improvements that it is making in response to the regulatory compliance concerns raised by the FDA in 2010. The Company is in the process of adding resources to its regulatory affairs and corporate compliance departments and engaging outside experts to accelerate implementation of its corrective actions.

In regards to National Competitive Bidding (NCB) in the United States, the Company has been monitoring the progress of the first round that went into effect in nine metropolitan service areas (MSA) on January 1, 2011. As expected, the Company did not see a significant impact to its business in the first quarter related to this first round of bidding. Invacare will continue to work with the industry to implement meaningful changes to the program. In April, the Centers for Medicare and Medicaid Services (CMS) announced that it would delay by six months the implementation of NCB to July 2013 when the program is to be extended to an additional 91 MSAs. Although this does not indicate that any changes will be made to the program, it does give the industry more time to communicate with the government and work toward a better solution.

With these factors in mind, the Company updates and reconfirms its 2011 guidance as follows:

• Organic net sales growth between 3% and 4% (narrowed from original guidance between 2% and 4%);
• Adjusted earnings per share between $2.05 and $2.15;
• Free cash flow between $85 million and $95 million;
• Effective tax rate of approximately 30% on adjusted pre-tax annual earnings; and
• Adjusted EBITDA between $145 million and $155 million.