INVACARE CORP Item 1A Risk Factors |
- ----------------------- The companyapstas business, operations and financial condition are subject to various risks and uncertainties |
You should carefully consider the risks and uncertainties described below, together with all of the other information in this annual report on Form 10-K and in the companyapstas other filings with the SEC, before making any investment decision with respect to the companyapstas securities |
The risks and uncertainties described below may not be the only ones the company faces |
Additional risks and uncertainties not presently known by the company or that the company currently deems immaterial may also affect the companyapstas business |
If any of these known or unknown risks or uncertainties actually occur or develop, the companyapstas business, financial condition, results of operations and future growth prospects could change |
The consolidation of health care customers and the companyapstas competitors could result in a loss of customers or in competitive pricing pressures |
Numerous initiatives and reforms initiated by legislators, regulators and third-party payors to reduce HME costs have resulted in a consolidation trend in the home medical equipment industry as well as among the companyapstas customers, including home health care providers |
Some of the companyapstas competitors have been able to reduce production costs and have lowered the purchase prices of their products in an effort to attract customers |
This in turn has resulted in greater pricing pressures, including pressure to offer customers more competitive pricing terms, and the exclusion of certain suppliers from important market segments as group purchasing organizations, independent delivery networks and large single accounts continue to consolidate purchasing decisions for some of the companyapstas customers |
Further consolidation could result in a loss of customers, including increased collectibility risks, or in increased competitive pricing pressures |
If the companyapstas cost reduction efforts are ineffective, the revenues and profitability of the company could be negatively impacted |
The company may not be successful in achieving expected operating efficiencies and operating cost reductions, and may experience business disruptions, associated with its previously announced restructuring and cost reduction activities, including the restructuring activities announced in July 2005 and, in particular, the companyapstas facility consolidations initiated in connection with these activities |
These efforts may not produce the full efficiency and cost reduction benefits that the company expects |
Further, such benefits may be realized later than expected, and the costs of implementing these measures may be greater than anticipated |
If these measures are not successful, the company may undertake additional cost reduction efforts, which could result in future charges |
Moreover, the companyapstas ability to achieve its other strategic goals and business plans may be adversely affected and the company could experience business disruptions with customers and elsewhere if its cost reduction and restructuring efforts prove ineffective |
Decreased availability or increased costs of raw materials could increase the companyapstas costs of producing its products |
The company purchases raw materials, fabricated components and services from a variety of suppliers |
Raw materials such as plastics, steel, and aluminum are considered key raw materials |
Where appropriate, the company employs contracts with its suppliers, both domestically and from the Far East |
In those situations in which contracts are not advantageous, the company believes that its relationships with its suppliers are satisfactory and that alternative sources of supply are readily available |
From time to time, however, the prices and availability of these raw materials fluctuate due to global market demands, which could impair the companyapstas ability to procure necessary materials, or increase the cost of such materials |
Inflationary and other increases in costs of these raw materials have occurred in the past and may recur from time to time |
In addition, freight costs associated with shipping and receiving product and sales are impacted by fluctuations in the cost of oil and gas |
A reduction in the supply or increase in the cost of those raw materials could impact the companyapstas ability to manufacture its products and could increase the cost of production |
Changes in government and other third-party payor reimbursement levels could negatively impact the companyapstas revenues and profitability |
The companyapstas products are sold through a network of specialized home health care providers, extended care facilities, hospital and HMO-based stores, and other providers |
Many of those providers (the companyapstas customers) are reimbursed for the healthcare services provided to their patients by third-party payors, such as government programs, including Medicare and Medicaid, private insurance plans and managed care programs |
Many of these programs set maximum reimbursement levels for certain of the products sold by the company in the United States |
If third-party payors deny coverage, make the reimbursement process or documentation requirements more uncertain or reduce their current levels of reimbursement, or if the companyapstas costs of production increase faster than increases in reimbursement levels, the company may be unable to sell its products through its distribution channels on a profitable basis |
In particular, reduced government reimbursement levels and changes in reimbursement policies could add pressure to the companyapstas revenues and profitability |
Uncertainty related to Medicareapstas reimbursement policies for power wheelchairs in particular, and equipment in general, is expected to continue into 2006 |
The Centers for Medicare and Medicaid Services are scheduled to issue a new rule on face-to-face exams and documentation requirements for power wheelchairs and other mobility devices by April 1, 2006, as well as new reimbursement codes, possibly later in the year |
Additionally, the US Congress recently passed the Deficit Reduction Act, which includes payment cuts to home I-14 oxygen that will take effect in January 2009 and reductions for certain durable home medical equipment spending that will take effect in 2007 |
Finally, while it is unclear whether Congress will enact the proposed provisions into law, the Medicare cuts included in President Bushapstas fiscal year 2007 budget proposal include approximately dlra7dtta4 billion in cuts to home oxygen therapy and power wheelchair reimbursements |
Similar trends and concerns are occurring in the states &apos Medicaid programs |
If unfavorable reimbursement policies or budgetary cuts are adopted, they could adversely affect the demand for the companyapstas products by customers who depend on reimbursement by the government-funded programs |
The percentage of the companyapstas sales dependent on Medicare or other insurance programs may increase as the portion of the United States population over age 65 continues to grow, making the company more vulnerable to reimbursement level reductions by these organizations |
Reduced government reimbursement levels also could result in reduced private payor reimbursement levels because certain third-party payors may index their reimbursement schedules to Medicare fee schedules |
Reductions in reimbursement levels also may affect the profitability of the companyapstas customers and ultimately force some customers without strong financial resources to go out of business |
Outside the United States, reimbursement systems vary significantly by country |
Many foreign markets have government-managed health care systems that govern reimbursement for new home health care products |
The ability of hospitals and other providers supported by such systems to purchase the companyapstas products is dependent, in part, upon public budgetary constraints |
Canada and some European countries, for example, have tightened reimbursement rates |
If adequate levels of reimbursement from third-party payors outside of the United States are not obtained, international sales of the companyapstas products may decline, which could adversely affect the companyapstas net sales and could have a material adverse effect on the companyapstas business, financial condition and results of operations |
Difficulties in implementing a new Enterprise Resource Planning system have disrupted the companyapstas business |
Due to complexities and business process changes associated with this implementation, the company encountered a number of issues related to the start-up of the system, including difficulties in processing orders, customer disruptions and the loss of some business |
While the company believes that the difficulties associated with implementing and stabilizing its ERP system were temporary and have been addressed, there can be no assurance that the company will not experience additional ongoing disruptions or inefficiencies in its business operations as a result of this new system implementation |
In addition, the final phase addressing the companyapstas manufacturing system is planned to be implemented during 2006 |
The companyapstas success depends on its ability to design, manufacture, distribute, and achieve market acceptance of new products with higher functionality and lower costs |
The company sells its products to customers primarily in markets that are characterized by technological change, product innovation and evolving industry standards and in which product price is increasingly the primary consideration in customers &apos purchasing decisions |
The company is continually engaged in product development and improvement programs |
The company must continue to design and improve innovative products, effectively distribute and achieve market acceptance of those products, and reduce the costs of producing its products, in order to compete successfully with the companyapstas competitors |
If competitors &apos product development capabilities become more effective than those of the company, if competitors &apos new or improved products are accepted by the market before the companyapstas products, or if competitors are able to produce products at a lower cost and thus offer products for sale at a lower price, the companyapstas business, financial condition, and results of operation could be adversely affected |
The company may be unable to successfully identify, acquire, and integrate strategic acquisition candidates |
The companyapstas plans include identifying, acquiring, and integrating other strategic businesses |
There are various reasons for the company to acquire businesses or product lines, including providing new products or new manufacturing and service capabilities, to add new customers, to increase penetration with existing customers, and to expand into new geographic markets |
The companyapstas ability to successfully grow through acquisitions depends upon its ability to identify, negotiate, complete and integrate suitable acquisitions and to obtain any necessary financing |
The costs of acquiring other businesses could increase if competition for acquisition candidates increases |
Additionally, the success of the companyapstas acquisition strategy is subject to other risks and costs, including the following: o the companyapstas ability to realize operating efficiencies, synergies, or other benefits expected from an acquisition, and possible delays in realizing the benefits of the acquired company or products; o diversion of managementapstas time and attention from other business concerns; o difficulties in retaining key employees of the acquired businesses who are necessary to manage these businesses; o difficulties in maintaining uniform standards, controls, procedures and policies throughout acquired companies; o adverse effects on existing business relationships with suppliers or customers; o the risks associated with the assumption of contingent or undisclosed liabilities of acquisition targets; and o ability to generate future cash flows or the availability of financing |
In addition, an acquisition could materially impair the companyapstas operating results by causing the company to incur debt or requiring the amortization of acquisition expenses and acquired assets |
I-15 The company is subject to certain risks inherent in managing and operating businesses in many different foreign jurisdictions |
The company has significant international operations, including operations in Australia, New Zealand, Asia, and Europe |
Certain risks are inherent in operating and selling products internationally, including: o difficulties in enforcing agreements and collecting receivables through certain foreign legal systems; o foreign customers who may have longer payment cycles than customers in the United States; o tax rates in certain foreign countries that may exceed those in the United States and foreign earnings that may be subject to withholding requirements; o the imposition of tariffs, exchange controls or other trade restrictions including transfer pricing restrictions when products produced in one country are sold to an affiliated entity in another country; o general economic and political conditions in countries where the company operates or where end users of the companyapstas products reside; o difficulties associated with managing a large organization spread throughout various countries; o difficulties in enforcing intellectual property rights and weaker intellectual property rights protection in some countries; and o required compliance with a variety of foreign laws and regulations |
The companyapstas revenues are subject to exchange rate fluctuations that could adversely affect the companyapstas results of operations or financial position |
Currency exchange rates are subject to fluctuation due to, among other things, changes in local, regional, or global economic conditions, the imposition of currency exchange restrictions, and unexpected changes in regulatory or taxation environments |
The functional currency of the companyapstas subsidiaries outside the United States is the predominant currency used by the subsidiaries to transact business |
Through its international operations, the company is exposed to foreign currency fluctuations, and changes in exchange rates can have a significant impact on net sales and elements of cost |
The company uses forward contracts to help reduce its exposure to exchange rate variation risk |
Despite the companyapstas efforts to mitigate these risks, however, the companyapstas revenues may be adversely affected by exchange rate fluctuations |
The company also is exposed to market risk through various financial instruments, including fixed rate and floating rate debt instruments |
The company uses interest swap agreements to mitigate its exposure to interest rate fluctuations, but those efforts may not adequately protect the company from significant interest rate risks |
The company may be adversely affected by legal actions or regulatory proceedings |
The company may be subject to claims, litigation or other liabilities as a result of injuries caused by allegedly defective products, acquisitions it has completed or in the intellectual property area |
For example, the company may be exposed to future litigation by third parties based on intellectual property infringement claims similar to the ongoing and previously disclosed Respironics litigation |
Any such claims or litigation against the company, regardless of the merits, could result in substantial costs and could harm the companyapstas business |
Intellectual property litigation or claims also could require the company: o to cease manufacturing and selling any of its products that incorporate the challenged intellectual property; o to obtain a license from the holder of the infringed intellectual property right alleged to have been infringed, which license may not be available on commercially reasonable terms, if at all; or o to redesign or rename its products, which may not be possible and could be costly and time consuming |
The results of legal proceedings are difficult to predict and the company cannot provide you with any assurance that an action or proceeding will not be commenced against it, or that the company will prevail in any such action or proceeding |
An unfavorable resolution of any legal action or proceeding could materially and adversely affect the companyapstas business, results of operations, liquidity or financial condition |
The companyapstas business and financial condition could be adversely affected by the difficulties in acquiring and maintaining a proprietary intellectual property ownership position |
The companyapstas ability to compete effectively with other companies depends in part on the companyapstas ability to maintain and enforce its patents and other proprietary rights, which are essential to the companyapstas business |
The company relies on a combination of patents, trade secrets, know-how and confidentiality agreements to protect the proprietary aspects of its technology |
These measures afford only limited protection, and competitors may gain access to the companyapstas intellectual property and proprietary information |
The law of patents and trade secrets is constantly evolving and often involves complex legal and factual questions |
Litigation has been and may continue to be necessary to enforce the companyapstas intellectual property rights, to protect the companyapstas trade secrets, and to determine the validity and scope of the companyapstas proprietary rights |
Such litigation can be costly and can divert managementapstas attention from the growth of the business |
The company cannot assure you that its patents and other proprietary rights will not be successfully challenged or that others will not independently develop substantially equivalent information and technology or otherwise gain access to the companyapstas proprietary technology |