Invacare Improves Financials, Will Pull Back on Business ‘Impacted by Medicare’

ELYRIA, Ohio–Despite the nature of the current market, both net
earnings and sales were up for HME manufacturing giant Invacare,
according to the company’s posting of fourth-quarter figures on
Wednesday.

In financial results for the quarter and year ended Dec. 31,
2007, Invacare reported Q4 earnings were $19.9 million versus $10.4
million in 2006, and sales increased 10.8 percent to $426.8 million
versus $385.1 million. For the year, earnings were $42.9 million
compared to $37.8 million in 2006, and sales increased 7 percent to
$1.6 billion from $1.5 billion.

“I am extremely proud that our management team met and exceeded
challenging commitments for adjusted earnings per share, free cash
flow and cost reduction,” said Invacare Chairman and CEO Mal Mixon.
“We are also encouraged by the improving organic net sales growth
trends. As well, during 2007, two national accounts have made
significant purchases of our HomeFill oxygen technology. European
business continues to perform well with improved sales and earnings
over last year.

“We also generated strong free cash flow, totaling $44 million
for the quarter and $73 million for the year, driven by stronger
than expected cash collections on receivables and by inventory
reductions,” Mixon continued. “This enabled the company to reduce
debt in the quarter by approximately $38 million. Cost reduction
and reducing our debt levels were our top priorities for 2007 and
we were successful in achieving both.”

The company’s cost-reduction initiatives, principally related to
product sourcing savings, headcount reductions and manufacturing
consolidation, totaled $40 million for 2007, slightly better than
expected. A company statement, however, said “a significant portion
of this benefit was offset by continued pricing pressures and
product mix shift toward lower-margin product in the U.S. as a
result of Medicare-related reimbursement changes.”

The company said it intends to continue and expand cost-savings
initiatives in 2008 for additional savings. Even so, Invacare
anticipates the benefit will be “tempered by continuing
reimbursement uncertainties, primarily the implementation of
competitive bidding in the U.S., and continued global pricing
pressures in the industry.”

“Don’t expect more acquisitions in ’08,” Mixon told reporters in
a Q&A session following the company’s presentation. “We’re
looking to pay down debt and get earnings up.”

In additional comments on the domestic market, Mixon said it’s
hard to anticipate the effects of competitive bidding “realizing
that we have never been through something like this before, and
there are a lot of unanswered questions.”

As far as pricing resulting from the program, he said, “It’s
strictly conjecture at this point. We don’t even know how many
bidders there are at this point.”

While Invacare’s business in the first 10 MSAs–which Mixon put
between $25 million and $30 million–will be impacted in the last
half of the year if CMS hangs to its current July implementation
date, he has other concerns about the program. “We think
competitive bidding will be traumatic enough this year, not only in
terms of the pricing, but we’re very concerned that it’s going to
put hundreds of small players out of business and will be very
disruptive to patients. I don’t think the government understands
what they have done yet,” he said.

The company is “lobbying in Washington heavily to amend or end
this program, which I think is very ill-conceived … and we intend
to pursue vigorously and aggressively legislation to affect it,”
Mixon said, referring to the Tanner-Hobson (House) and Hatch-Conrad
(Senate) bills currently in Congress.

Another rough spot could be the oxygen rental cap that will kick
in Jan. 1, 2009, when Mixon said “the first of patients who
received 36 months of reimbursements will suddenly learn they don’t
have the government paying for their reimbursement anymore at
sufficient levels, and I think Congress is going to get thousands
of phone calls from these beneficiaries who suddenly aren’t being
recognized.

“By leading a call for reform, we intend to ask the government
to stay any further cuts in oxygen,” Mixon continued, pointing to
the possibility that oxygen reimbursement cuts and elimination of
the first-month purchase option for power wheelchairs could be
included in a Medicare bill later this year.

He noted, however, that new oxygen technologies should remain at
current reimbursement levels. “While we don’t want any cuts in
oxygen and we are the industry’s largest creditor and don’t want to
see any of our customers have their P&Ls hurt,” he said, “we
are very encouraged that CMS and the House and Senate and the
president all in one way or another have recognized this new
technology.”

Observing that the industry is better organized than ever, Mixon
said, “Together we continue to fight these battles. We had a lot of
ups and downs during the year of ’07 but we were successful and
perhaps lucky that there were no reimbursement cuts … and we’re
hoping to get back-to-back years here of getting through this and
working with the government to lead in the reimbursement
reform.”

But like many of the industry’s providers, Mixon said Invacare
is preparing to reduce its dependence on Medicare-related
business:

“The component of our business that is impacted by Medicare–and
by ‘impacted by Medicare’ I mean Medicaid and insurance companies
that follow suit–today represents probably 40 percent of our
business. We are working hard to reduce our dependence on U.S.
Medicare-Medicaid, and we’ve set an internal goal of trying to
reduce that to 25 percent over the next three years … We want to
fix it if we can, but we’d like to be less dependent on
[government].”