Edgar Filing: INVACARE CORP

q3 2013 IVC 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


[X]	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2013


[ ]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 001-15103

INVACARE CORPORATION

(Exact name of registrant as specified in its charter)




Ohio	95-2680965
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)

One Invacare Way, P.O. Box 4028, Elyria, Ohio	44036
(Address of principal executive offices)	(Zip Code)

(440) 329-6000

(Registrant's telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 (the “Exchange Act”) during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “small reporting company” in Rule 12b-2 of the Exchange Act. (Check One): Large accelerated filer ¨ Accelerated filer x Non-accelerated filer ¨ (Do not check if a smaller reporting company) Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

As of November 4, 2013, the registrant had 30,921,729 Common Shares and 1,084,747 Class B Common Shares outstanding.

Table of Contents

INVACARE CORPORATION

INDEX




Item		Page
PART I: FINANCIAL INFORMATION
1	Financial Statements (Unaudited)
	Condensed Consolidated Statement of Comprehensive Income (Loss) - Three and Nine Months Ended September 30, 2013 and September 30, 2012	FS-1
	Condensed Consolidated Balance Sheets - September 30, 2013 and December 31, 2012	FS-2
	Condensed Consolidated Statement of Cash Flows - Nine Months Ended September 30, 2013 and September 30, 2012	FS-3
	Notes to Condensed Consolidated Financial Statements - September 30, 2013	FS-4
2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	I-1
3	Quantitative and Qualitative Disclosures About Market Risk	I-11
4	Controls and Procedures	I-13

PART II: OTHER INFORMATION
1	Legal Proceedings	I-14
1A.	Risk Factors	I-15
2	Unregistered Sales of Equity Securities and Use of Proceeds	I-15
6	Exhibits	I-16
Signatures		I-16

Table of Contents

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements.

INVACARE CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statement of Comprehensive Income (Loss) (unaudited)



(In thousands, except per share data)	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
Net sales	$	341,176		$	361,518		$	1,017,373		$	1,077,767
Cost of products sold	244,352			252,106			733,408			746,369
Gross Profit	96,824			109,412			283,965			331,398
Selling, general and administrative expenses	98,719			103,281			306,042			306,755
Charges related to restructuring activities	1,884			1,175			6,998			3,742
Loss on debt extinguishment including debt finance charges and associated fees	—			—			—			312
Asset write-downs related to intangible assets	167			—			167			—
Interest expense	745			2,114			2,677			6,339
Interest income	(58		)	(166		)	(239		)	(610		)
Earnings (loss) from Continuing Operations Before Income Taxes	(4,633		)	3,008			(31,680		)	14,860
Income tax provision	750			2,445			3,900			14,486
Net Earnings (loss) from Continuing Operations	(5,383		)	563			$	(35,580	)	$	374
Net Earnings from Discontinued Operations (net of tax of $227; $2,629; $237; and $5,264)	307			2,301			3,321			8,746
Gain on Sale of Discontinued Operations (net of tax of $1,583 and $11,083)	21,178			—			71,080			—
Total Net Earnings from Discontinued Operations	21,485			2,301			74,401			8,746
Net Earnings	$	16,102		$	2,864		38,821			9,120
Dividends Declared per Common Share	$	0.0125		$	0.0125		$	0.0375		$	0.0375
Net Earnings (Loss) per Share—Basic
Net Earnings (loss) from Continuing Operations	$	(0.17	)	$	0.02		$	(1.12	)	$	0.01
Net Earnings from Discontinued Operations	$	0.67		$	0.07		$	2.33		$	0.27
Net Earnings per Share—Basic	$	0.50		$	0.09		$	1.21		$	0.28
Weighted Average Shares Outstanding—Basic	31,902			31,877			31,902			31,838
Net Earnings (Loss) per Share—Assuming Dilution
Net Earnings (loss) from Continuing Operations	$	(0.17	)	$	0.02		$	(1.12	)	$	0.01
Net Earnings from Discontinued Operations	$	0.67		$	0.07		$	2.32		$	0.27
Net Earnings per Share—Assuming Dilution	$	0.50		$	0.09		$	1.20		$	0.28
Weighted Average Shares Outstanding—Assuming Dilution	32,066			31,901			32,009			31,847

Net Earnings	$	16,102		$	2,864		$	38,821		$	9,120
Other comprehensive income (loss):
Foreign currency translation adjustments	9,790			15,764			554			(24,288		)
Defined Benefit Plans:
Amortization of prior service costs and unrecognized gains	359			38			895			136
Amounts arising during the year, primarily due to the addition of new participants	(154		)	—			(320		)	(168		)
Deferred tax adjustment resulting from defined benefit plan activity	(71		)	(13		)	(199		)	13
Valuation reserve associated with defined benefit plan activity	69			13			193			(17		)
Current period unrealized gain on cash flow hedges	(104		)	(1,322		)	779			(276		)
Deferred tax loss related to unrealized gain on cash flow hedges	(15		)	38			(57		)	(73		)
Other Comprehensive Income (Loss)	9,874			14,518			1,845			(24,673		)

Comprehensive Income (Loss)	$	25,976		$	17,382		$	40,666		$	(15,553	)

See notes to condensed consolidated financial statements.

FS-1

Table of Contents

INVACARE CORPORATION AND SUBSIDIARIES

Condensed Consolidated Balance Sheets (unaudited)



	September 30, 2013			December 31, 2012
	(In thousands)
Assets
Current Assets
Cash and cash equivalents	$	32,625		$	38,791
Trade receivables, net	191,464			198,791
Installment receivables, net	1,560			2,188
Inventories, net	167,368			183,246
Other current assets	33,830			41,776
Assets held for sale - current	—			103,157
Total Current Assets	426,847			567,949
Other Assets	40,327			42,262
Other Intangibles	65,105			71,652
Property and Equipment, net	108,391			118,231
Goodwill	450,727			462,200
Total Assets	$	1,091,397		$	1,262,294
Liabilities and Shareholders’ Equity
Current Liabilities
Accounts payable	$	117,684		$	133,048
Accrued expenses	130,479			135,189
Accrued income taxes	7,201			2,713
Short-term debt and current maturities of long-term obligations	1,294			5,427
Liabilities held for sale - current	—			23,358
Total Current Liabilities	256,658			299,735
Long-Term Debt	54,775			229,375
Other Long-Term Obligations	114,773			112,195
Shareholders’ Equity
Preferred Shares (Authorized 300 shares; none outstanding)	—			—
Common Shares (Authorized 100,000 shares; 34,053 and 33,952 issued in 2013 and 2012, respectively)—no par	8,531			8,503
Class B Common Shares (Authorized 12,000 shares; 1,085 and 1,086 issued and outstanding in 2013 and 2012, respectively)—no par	272			272
Additional paid-in-capital	232,881			228,187
Retained earnings	402,181			364,546
Accumulated other comprehensive earnings	114,588			112,743
Treasury shares (3,135 and 3,135 shares in 2013 and 2012, respectively)	(93,262		)	(93,262		)
Total Shareholders’ Equity	665,191			620,989
Total Liabilities and Shareholders’ Equity	$	1,091,397		$	1,262,294

See notes to condensed consolidated financial statements.

FS-2

Table of Contents

INVACARE CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statement of Cash Flows (unaudited)



	Nine Months Ended September 30,
	2013			2012
Operating Activities	(In thousands)
Net earnings	$	38,821		$	9,120
Adjustments to reconcile net earnings to net cash provided by operating activities:
Gain on sale of businesses (pre-tax)	(82,163		)	—
Depreciation and amortization	28,236			29,065
Provision for losses on trade and installment receivables	3,160			4,252
Provision for deferred income taxes	2,698			628
Provision for other deferred liabilities	140			821
Provision for stock-based compensation	4,721			5,198
Loss on disposals of property and equipment	565			108
Loss on debt extinguishment including debt finance charges and associated fees	—			312
Asset write-downs to intangible assets	167			—
Amortization of convertible debt discount	468			430
Changes in operating assets and liabilities:
Trade receivables	3,049			(8,149		)
Installment sales contracts, net	(633		)	4,353
Inventories	10,599			(30,936		)
Other current assets	7,539			(90		)
Accounts payable	(16,848		)	(329		)
Accrued expenses	(390		)	251
Other long-term liabilities	(1,374		)	11,788
Net Cash Provided (Used) by Operating Activities	(1,245		)	26,822
Investing Activities
Purchases of property and equipment	(11,086		)	(14,775		)
Proceeds from sale of property and equipment	856			97
Proceeds from sale of business	187,552			—
Change in other long-term assets	949			409
Other	(147		)	(219		)
Net Cash Provided (Used) by Investing Activities	178,124			(14,488		)
Financing Activities
Proceeds from revolving lines of credit and long-term borrowings	250,124			255,703
Payments on revolving lines of credit and long-term borrowings	(432,185		)	(266,721		)
Payment of financing costs	—			(1		)
Payment of dividends	(1,187		)	(1,183		)
Net Cash Used by Financing Activities	(183,248		)	(12,202		)
Effect of exchange rate changes on cash	203			226
Decrease in cash and cash equivalents	(6,166		)	358
Cash and cash equivalents at beginning of year	38,791			34,924
Cash and cash equivalents at end of period	$	32,625		$	35,282

See notes to condensed consolidated financial statements.

FS-3

Table of Contents

INVACARE CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (unaudited) - September 30, 2013

Accounting Policies

Nature of Operations: Invacare Corporation is a leading manufacturer and distributor of medical equipment used in the home based upon the company’s distribution channels, breadth of product line and net sales. The company designs, manufactures and distributes an extensive line of health care products for the non-acute care environment, including the home health care, retail and extended care markets.

Principles of Consolidation: The consolidated financial statements include the accounts of the company and its wholly owned subsidiaries and include all adjustments, which were of a normal recurring nature, necessary to present fairly the financial position of the company as of September 30, 2013, the results of its operations for the three and nine months ended September 30, 2013 and changes in its cash flow for the nine months ended September 30, 2013 and 2012, respectively. Certain foreign subsidiaries, represented by the European segment, are consolidated using an August 31 quarter end in order to meet filing deadlines. No material subsequent events have occurred related to the European segment, which would require disclosure or adjustment to the company's financial statements. All significant intercompany transactions are eliminated. The results of operations for the three and nine months ended September 30, 2013 are not necessarily indicative of the results to be expected for the full year.

Use of Estimates: The consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States, which require management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results may differ from these estimates.

Stock-Based Compensation Plans: The company accounts for share-based compensation under the provisions of Compensation-Stock Compensation, ASC 718. The company has not made any modifications to the terms of any previously granted options and no significant changes have been made regarding the valuation methodologies used to determine the fair value of options granted. The company continues to use a Black-Scholes valuation model.

Stock options awarded have been granted at exercise prices equal to the market value of the underlying stock on the date of grant. Restricted stock awards granted without cost to the recipients are expensed on a straight-line basis over the vesting periods. The amounts of stock-based compensation expense recognized were as follows (in thousands):



	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
Stock-based compensation expense recognized as part of selling, general and administrative expense	$	2,147	$	2,208	$	4,721	$	5,198

The amounts above reflect compensation expense related to restricted stock awards and nonqualified stock options awarded under the 2003 Performance Plan and the 2013 Equity Compensation Plan. Stock-based compensation is not allocated to the business segments, but is reported as part of All Other as shown in the company's Business Segment Note to the Consolidated Financial Statements.

Recent Accounting Pronouncements: In February, 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (ASU 2013-02 or the ASU). ASU 2013-02 requires companies to report, in one place, changes in and reclassifications out of accumulated other comprehensive income (OCI). The ASU does not change what is required to be reported in OCI. The company adopted ASU 2013-02 in the first quarter of 2013 with no impact on the company's Condensed Consolidated Statement of Comprehensive Income (Loss), Balance Sheets or Statement of Cash Flows. See Accumulated Other Comprehensive Income (Loss) in the Notes to these Consolidated Financial Statements.

In February 2013, the FASB issued ASU No. 2013-04, Liabilities (Topic 405), Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation is Fixed at the Reporting Date. This update requires an entity to measure obligations resulting from joint and several liability arrangements for which the total amount of the obligation is fixed at the reporting date, as the sum of a) the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and b) any additional amount the reporting entity expects to pay on behalf of its co-obligors. The update also requires an entity to disclose the nature and amount of the obligation as well as other information about those obligations. The requirements of ASU No. 2013-04 are effective on a retrospective basis for interim and annual periods beginning after December 15, 2013. The company is in the process of determining the effects, if any, that the adoption of ASU No. 2013-04 will have on the company’s financial position, results of operations or cash flows.

FS-4

Table of Contents

INVACARE CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (unaudited) - September 30, 2013

In December, 2011, the FASB issued ASU 2011-11, Disclosures about Offsetting Assets and Liabilities, and in January, 2013, issued ASU 2013-01, Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities (ASU 2013-01). ASU 2013-01 is intended to help investors and other financial statement users to better assess the effect or potential effect of offsetting arrangements on an entity's financial position and requires companies to disclose both gross and net information about both instruments and transactions eligible for offset in the financial position; and to disclose instruments and transactions subject to an agreement similar to a master netting agreement. The company adopted ASU 2013-01 in the first quarter of 2013 with no impact on the company's Condensed Consolidated Statement of Comprehensive Income (Loss), Balance Sheets or Statement of Cash Flows. See Derivatives in the Notes to these Consolidated Financial Statements. See Accumulated Other Comprehensive Income (Loss) in the Notes to these Consolidated Financial Statements.

Discontinued Operations

On December 21, 2012, as part of the company's globalization strategy, and to allow it to focus on its core equipment product lines, the company entered into an agreement to sell Invacare Supply Group (ISG) and accordingly the company determined on that date that the "held for sale" criteria of ASC 360-10-45-9 were met. Accordingly, the assets and liabilities of ISG (long-lived asset disposal group) are shown at their carrying amounts, which are lower than the fair values less cost to sale as of December 31, 2012.

On January 18, 2013, the company completed the sale of the ISG medical supplies business for a purchase price of $150,800,000 in cash, which remains subject to final post-closing adjustments. ISG had been operated on a stand-alone basis and reported as a reportable segment of the company. The company recorded a gain of $59,402,000 pre-tax in the first quarter of 2013 which represents the excess of the net sales price over the book value of the assets and liabilities of ISG. The sale of this business is dilutive to the company's results. The company utilized the proceeds from the sale to reduce debt outstanding under its revolving credit facility in the first quarter of 2013. The company recorded expenses related to the sale of $5,350,000, of which $3,392,000 were paid as of September 30, 2013. The gain recorded by the company reflects the company's estimated final purchase adjustments.

The assets and liabilities of ISG that were sold are shown as held for sale in the company's Consolidated Balance Sheets and are comprised of the following (in thousands):



	December 31, 2012

Trade receivables, net	$	44,196
Inventories, net	25,165
Other current assets	9,355
Property and Equipment, net	1,368
Goodwill	23,073
Assets held for sale - current	$	103,157

Accounts payable	$	17,692
Accrued expenses	4,602
Accrued income taxes	1,064
Liabilities held for sale - current	$	23,358

The net sales of the discontinued operation were $0 and $18,498,000 for the three and nine months ended September 30, 2013 and $85,763,000 and $246,433,000 for the three and nine months ended September 30, 2012, respectively. Earnings before income taxes for the discontinued operation were $0 and $402,000 for the three and nine months ended September 30, 2013 and $3,894,000 and $10,703,000 for the three and nine months ended September 30, 2012, respectively.

The company will continue to sell products to the acquirer of ISG and provide certain transitional services to the acquirer over a period of less than one year from the date of sale. The net cash flows expected to be paid and received related to such product sales and transitional services are not expected to be significant.

FS-5

Table of Contents

INVACARE CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (unaudited) - September 30, 2013

On August 6, 2013, the company sold Champion Manufacturing, Inc. (Champion), its domestic medical recliner business for dialysis clinics, to Champion Equity Holdings, LLC for $45,000,000 in cash, which is subject to final post-closing adjustments. Champion had been operated on a stand-alone basis and reported as part of the IPG segment of the company. The company recorded a gain of $22,761,000 pre-tax in the third quarter of 2013, which represents the excess of the net sales price over the book value of the assets and liabilities of Champion. The sale of this business is dilutive to the company's results. The company utilized the proceeds from the sale to reduce debt outstanding under its revolving credit facility in the third quarter of 2013. The company recorded expenses related to the sale of $2,130,000, of which $1,367,000 were paid as of September 30, 2013. The gain recorded by the company reflects the company's estimated final purchase adjustments.

The assets and liabilities of Champion were the following as of the date of the sale, August 6, 2013, and as of December 31, 2012 (in thousands):



	August 6, 2013		December 31, 2012

Trade receivables, net	$	3,030	$	2,375
Inventories, net	1,689		1,617
Other current assets	92		21
Property and Equipment, net	309		237
Goodwill	16,277		16,277
Assets sold	$	21,397	$	20,527

Accounts payable	$	936	$	475
Accrued expenses	352		318
Accrued income taxes	—		200
Liabilities sold	$	1,288	$	993

The net sales of the discontinued operation were $2,643,000 and $15,857,000 for the three and nine months ended September 30, 2013 and $5,700,000 and $17,271,000 for the three and nine months ended September 30, 2012, respectively. Earnings before income taxes for the discontinued operation were $484,000 and $3,156,000 for the three and nine months ended September 30, 2013 and $1,037,000 and $3,307,000 for the three and nine months ended September 30, 2012, respectively. Results for Champion include an interest expense allocation from continuing operations to discontinued operations of $78,000 and $449,000 for the three and nine months ended September 30, 2013 and $198,000 and $594,000 for the three and nine months ended September 30, 2012, respectively, as proceeds from the sale were required to be utilized to pay down debt. The interest allocation was based on the net proceeds assumed to pay down debt applying the company's average interest rates for the periods presented.

In addition, in accordance with ASC 350, when a portion of a reporting entity that constitutes a business is disposed of, goodwill associated with that business should be included in the carrying amount of the net assets of the business sold in determining the gain or loss on the disposal. As such, the company allocated additional goodwill of $16,205,000 to Champion from the continuing operations of the IPG segment based on the relative fair value of Champion as compared to the remaining IPG reporting unit.

The company will continue to purchase an immaterial amount of products from the acquirer of Champion until the company transitions manufacturing of the product, which is expected to occur before the end of the year.

The company recorded an incremental intra-period tax allocation expense to discontinued operations in the quarter representing the cumulative intra-period allocation expense to discontinued operations based on the company's current estimate of the projected domestic taxable loss related to continuing operations for 2013. The amount recorded through September 30, 2013 is less than the federal statutory rate as the expected taxable loss in continuing operations is less than the taxable gain from discontinued operations.

The company has classified ISG and Champion as discontinued operations for all periods presented.

FS-6

Table of Contents

INVACARE CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (unaudited) - September 30, 2013

Receivables

Accounts receivable are reduced by an allowance for amounts that may become uncollectible in the future. Substantially all of the company’s receivables are due from health care, medical equipment providers and long term care facilities located throughout the United States, Australia, Canada, New Zealand and Europe. A significant portion of products sold to providers, both foreign and domestic, is ultimately funded through government reimbursement programs such as Medicare and Medicaid in the U.S. As a consequence, changes in these programs can have an adverse impact on dealer liquidity and profitability. The estimated allowance for uncollectible amounts ($20,836,000 at September 30, 2013 and $22,213,000 at December 31, 2012) is based primarily on management’s evaluation of the financial condition of specific customers. In addition, as a result of the company's third party financing arrangement with De Lage Landen, Inc. ("DLL"), a third party financing company which the company has worked with since 2000, management monitors the collection status of these contracts in accordance with the company’s limited recourse obligations and provides amounts necessary for estimated losses in the allowance for doubtful accounts and establishing reserves for specific customers as needed. The company charges off uncollectible trade accounts receivable after such receivables are moved to collection status and legal remedies are exhausted. See Concentration of Credit Risk in the Notes to the Consolidated Financial Statements for a description of the financing arrangement. Long-term installment receivables are included in “Other Assets” on the consolidated balance sheet.

The company’s U.S. customers electing to finance their purchases can do so using DLL. In addition, the company often provides financing directly for its Canadian customers for which DLL is not an option. The installment receivables recorded on the books of the company represent a single portfolio segment of finance receivables to the independent provider channel. The portfolio segment is comprised of two classes of receivables distinguished by geography and credit quality. The U.S. installment receivables are the first class and represent installment receivables re-purchased from DLL because the customers were in default. Default with DLL is defined as a customer being delinquent by 3 payments. The Canadian installment receivables represent the second class of installment receivables which were originally financed by the company because third party financing was not available to the HME providers. The Canadian installment receivables are typically financed for 12 months and historically have had a very low risk of default.

The estimated allowance for uncollectible amounts and evaluation for impairment for both classes of installment receivables is based on the company’s quarterly review of the financial condition of each individual customer with the allowance for doubtful accounts adjusted accordingly. Installments are individually and not collectively reviewed for impairment. The company assesses the bad debt reserve levels based upon the status of the customer’s adherence to a legally negotiated payment schedule and the company’s ability to enforce judgments, liens, etc. The company is closely monitoring the roll-out of the second round of NCB, which became effective in 91 additional metropolitan statistical areas on July 1, 2013. At this early stage of the program, it is difficult to characterize the impact from NCB on its domestic home medical equipment business, as there continues to be uncertainty as the industry realigns and adjusts itself to the small number of bid contracts awarded.

For purposes of granting or extending credit, the company utilizes a scoring model to generate a composite score that considers each customer’s consumer credit score and/or D&B credit rating, payment history, security collateral and time in business. Additional analysis is performed for customers desiring credit greater than $250,000 which generally includes a detailed review of the customer’s financials as well as consideration of other factors such as exposure to changing reimbursement laws.

Interest income is recognized on installment receivables based on the terms of the installment agreements. Installment accounts are monitored and if a customer defaults on payments and is moved to collection, interest income is no longer recognized. Subsequent payments received once an account is put on non-accrual status are generally first applied to the principal balance and then to the interest. Accruing of interest on collection accounts would only be restarted if the account became current again. All installment accounts are accounted for using the same methodology regardless of the duration of the installment agreements. When an account is placed in collection status, the company goes through a legal process of adjudication which typically approximates 18 months. Any write-offs are made after the legal process has been completed. The company has not made any changes to either its accounting policies or methodology to estimation allowances for doubtful accounts in the last twelve months.

FS-7

Table of Contents

INVACARE CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (unaudited) - September 30, 2013

Installment receivables consist of the following (in thousands):



	September 30, 2013									December 31, 2012
	Current			Long- Term			Total			Current			Long- Term			Total
Installment receivables	$	3,554		$	2,394		$	5,948		$	4,982		$	1,506		$	6,488
Less: Unearned interest	(70		)	—			(70		)	(71		)	—			(71		)
	3,484			2,394			5,878			4,911			1,506			6,417
Allowance for doubtful accounts	(1,924		)	(1,718		)	(3,642		)	(2,723		)	(1,100		)	(3,823		)
	$	1,560		$	676		$	2,236		$	2,188		$	406		$	2,594

Installment receivables purchased from DLL during the nine months ended September 30, 2013 increased the gross installment receivables balance by $2,415,000. No sales of installment receivables were made by the company during the quarter.

The movement in the installment receivables allowance for doubtful accounts was as follows (in thousands):



	Nine Months Ended June 30, 2013			Year Ended December 31, 2012
Balance as of beginning of period	$	3,823		$	4,273
Current period provision	943			458
Direct write-offs charged against the allowance	(1,124		)	(908		)
Balance as of end of period	$	3,642		$	3,823

Installment receivables by class as of September 30, 2013 consist of the following (in thousands):



	Total Installment Receivables		Unpaid Principal Balance		Related Allowance for Doubtful Accounts		Interest Income Recognized
U.S.
Impaired Installment receivables with a related allowance recorded	$	4,510	$	4,510	$	3,477	$	—
Canada
Non-Impaired Installment receivables with no related allowance recorded	1,273		1,203		—		76
Impaired Installment receivables with a related allowance recorded	165		165		165		—
Total Canadian Installment Receivables	$	1,438	$	1,368	$	165	$	76
Total
Non-Impaired Installment receivables with no related allowance recorded	1,273		1,203		—		76
Impaired Installment receivables with a related allowance recorded	4,675		4,675		3,642		—
Total Installment Receivables	$	5,948	$	5,878	$	3,642	$	76

FS-8

Table of Contents

INVACARE CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (unaudited) - September 30, 2013

Installment receivables by class as of December 31, 2012 consist of the following (in thousands):



	Total Installment Receivables		Unpaid Principal Balance		Related Allowance for Doubtful Accounts		Interest Income Recognized
U.S.
Impaired Installment receivables with a related allowance recorded	$	4,508	$	4,508	$	3,365	$	—
Canada
Non-Impaired Installment receivables with no related allowance recorded	1,522		1,451		—		120
Impaired Installment receivables with a related allowance recorded	458		458		458		—
Total Canadian Installment Receivables	$	1,980	$	1,909	$	458	$	120
Total
Non-Impaired Installment receivables with no related allowance recorded	1,522		1,451		—		120
Impaired Installment receivables with a related allowance recorded	4,966		4,966		3,823		—
Total Installment Receivables	$	6,488	$	6,417	$	3,823	$	120

Installment receivables with a related allowance recorded as noted in the table above represent those installment receivables on a non-accrual basis in accordance with ASU 2010-20. As of September 30, 2013, the company had no U.S. installment receivables past due of 90 days or more for which the company is still accruing interest. Individually, all U.S. installment receivables are assigned a specific allowance for doubtful accounts based on management’s review when the company does not expect to receive both the contractual principal and interest payments as specified in the loan agreement. However, while the full balance may be deemed to be impaired, the company has historically collected a large percentage of the principal of its U.S. installment receivables.

The company had an immaterial amount of Canadian installment receivables which were past due of 90 days or more as of September 30, 2013 and December 31, 2012 for which the company is still accruing interest. The aging of the company’s installment receivables was as follows (in thousands):



	September 30, 2013						December 31, 2012
	Total		U.S.		Canada		Total		U.S.		Canada
Current	$	1,218	$	—	$	1,218	$	1,467	$	—	$	1,467
0-30 Days Past Due	9		—		9		43		—		43
31-60 Days Past Due	6		—		6		2		—		2
61-90 Days Past Due	—		—		—		—		—		—
90+ Days Past Due	4,715		4,510		205		4,976		4,508		468
	$	5,948	$	4,510	$	1,438	$	6,488	$	4,508	$	1,980

FS-9

Table of Contents

INVACARE CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (unaudited) - September 30, 2013

Inventories

Inventories consist of the following (in thousands):



	September 30, 2013		December 31, 2012
Finished goods	$	90,422	$	94,675
Raw materials	61,642		71,596
Work in process	15,304		16,975
	$	167,368	$	183,246

Other Current Assets

Other current assets consist of the following (in thousands):



	September 30, 2013		December 31, 2012
Value added tax receivables	$	15,004	$	18,002
Recoverable income taxes	3,457		6,192
Derivatives (foreign currency forward contracts)	1,311		1,062
Prepaid insurance	300		2,241
Prepaids and other current assets	13,758		14,279
	$	33,830	$	41,776

Other Long-Term Assets

Other long-term assets consist of the following (in thousands):



	September 30, 2013		December 31, 2012
Cash surrender value of life insurance policies	$	35,772	$	36,375
Deferred Financing Fees	1,356		2,728
Investments	1,190		1,171
Long-term installment receivables	676		406
Other	1,333		1,582
	$	40,327	$	42,262

Property and Equipment

Property and equipment consist of the following (in thousands):



	September 30, 2013			December 31, 2012
Machinery and equipment	$	356,935		$	356,512
Land, buildings and improvements	90,234			95,047
Furniture and fixtures	12,998			13,397
Leasehold improvements	14,886			14,975
	475,053			479,931
Less allowance for depreciation	(366,662		)	(361,700		)
	$	108,391		$	118,231

FS-10

Table of Contents

INVACARE CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (unaudited) - September 30, 2013

Goodwill

The goodwill decrease reflected on the balance sheet from December 31, 2012 to September 30, 2013 was due to the sale of Champion which decreased goodwill by $16,277,000, partially offset by an increase in goodwill due to foreign currency translation.

Other Intangibles

All of the company’s other intangible assets have been assigned definite lives and continue to be amortized over their useful lives, except for $31,299,000 related to trademarks, which have indefinite lives. The changes in intangible balances reflected on the balance sheet from December 31, 2012 to September 30, 2013 were the result of foreign currency translation, amortization and an intangible impairment write-down charge of $167,000 for a customer list in the NA/HME segment. The after-tax and pre-tax impairment amounts were the same for the impairment. The company's intangibles consist of the following (in thousands):



	September 30, 2013				December 31, 2012
	Historical Cost		Accumulated Amortization		Historical Cost		Accumulated Amortization
Customer Lists	$	91,344	$	61,888	$	93,572	$	58,447
Trademarks	31,299		—		31,280		—
License Agreements	1,428		1,428		3,212		3,212
Developed Technology	9,712		6,098		9,650		5,588
Patents	6,115		5,472		6,060		5,234
Other	7,481		7,388		7,571		7,212
	$	147,379	$	82,274	$	151,345	$	79,693

Amortization expense related to other intangibles was $6,937,000 in the first nine months of 2013 and is estimated to be $9,182,000 in 2013, $8,670,000 in 2014, $7,174,000 in 2015, $5,796,000 in 2016, $2,290,000 in 2017 and $2,290,000 in 2018. Amortized intangibles are being amortized on a straight-line basis for periods from 3 to 17 years with the majority of the intangibles being amortized over a life of between 10 and 13 years.

Current Liabilities

Accrued expenses consist of accruals for the following (in thousands):



	September 30, 2013		December 31, 2012
Salaries and wages	$	37,480	$	41,813
Taxes other than income taxes, primarily Value Added Taxes	23,225		24,600
Warranty cost	25,020		21,451
Freight	7,806		7,853
Professional	7,355		7,595
Product liability, current portion	3,572		3,323
Rebates	2,136		3,635
Insurance	2,726		2,674
Interest	921		1,268
Derivative liabilities	771		1,373
Severance	3,481		5,211
Other items, principally trade accruals	15,986		14,393
	$	130,479	$	135,189

FS-11

Table of Contents

INVACARE CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (unaudited) - September 30, 2013

Accrued rebates relate to several volume incentive programs the company offers its customers. The company accounts for these rebates as a reduction of revenue when the products are sold in accordance with the guidance in ASC 605-50, Customer Payments and Incentives.

Generally, the company's products are covered from the date of sale to the customer by warranties against defects in material and workmanship for various periods depending on the product. Certain components carry a lifetime warranty. A provision for estimated warranty cost is recorded at the time of sale based upon actual experience. The company continuously assesses the adequacy of its product warranty accrual and makes adjustments as needed. Historical analysis is primarily used to determine the company's warranty reserves. Claims history is reviewed and provisions are adjusted as needed. However, the company does consider other events, such as a product recall, which could warrant additional warranty reserve provision. The increase in the liability for pre-existing warranties in 2013 is primarily the result of product recalls. The warranty accrual as of September 30, 2013 includes anticipated warranty expense related to the power wheelchair joystick recall of $3,800,000, provided for during the second quarter of 2013, which primarily impacted the Asia/Pacific segment. No change was made in the warranty accrual related to the power wheelchair joystick recall during the quarter ended September 30, 2013.

The following is a reconciliation of the changes in accrued warranty costs for the reporting period (in thousands):




Balance as of January 1, 2013	$	21,451
Warranties provided during the period	7,843
Settlements made during the period	(8,741		)
Changes in liability for pre-existing warranties during the period, including expirations	4,467
Balance as of September 30, 2013	$	25,020

Long-Term Debt

Debt consists of the following (in thousands):



	September 30, 2013			December 31, 2012
Senior secured revolving credit facility, due in October 2015	$	38,968		$	217,494
Convertible senior subordinated debentures at 4.125%, due in February 2027	10,476			10,009
Other notes and lease obligations	6,625			7,299
	56,069			234,802
Less current maturities of long-term debt	(1,294		)	(5,427		)
	$	54,775		$	229,375

The reduction in debt during the year was principally the result of utilizing the proceeds from the sale of the discontinued operations of ISG and Champion to reduce borrowing under the company's revolving credit agreement. On May 30, 2013, the company entered into a Fourth Amendment ("the Amendment") to its Credit Agreement (the “Credit Agreement”). Pursuant to the Amendment, the Credit Agreement was amended to: (i) decrease the aggregate principal amount of the revolving credit facility to $250,000,000 from $400,000,000, and limit the company's borrowings under the revolving credit facility to an amount not to exceed $200,000,000 aggregate principal amount through December 31, 2013; (ii) increase the maximum leverage ratio (consolidated funded indebtedness to consolidated EBITDA, each as defined in the Credit Agreement, as amended) to 4.00 to 1.00 from 3.50 to 1.00 until January 1, 2014, when the maximum leverage ratio will revert back to 3.50 to 1.00; (iii) decrease the minimum interest coverage ratio (consolidated EBITDA to consolidated interest charges, each as defined in the Credit Agreement, as amended) to 3.00 to 1.00 from 3.50 to 1.00 until January 1, 2014, when the minimum interest coverage ratio will revert back to 3.50 to 1.00; (iv) in calculating consolidated EBITDA for purposes of determining the ratios, provide for the add back to consolidated EBITDA of up to an additional $15,000,000 for future one-time cash restructuring charges and (v) provide for an increase of (A) 25 basis points in the margin applicable to determining the interest rate on borrowings under the revolving credit facility and letter of credit fees and (B) 10 basis points in the commitment fee, all during periods when the leverage ratio exceeds 3.50 to 1.00. Compliance with the ratios is tested at the end of the quarter in accordance with the credit agreement. As a result of the amendment, the company incurred $436,000 in fees in the second quarter of 2013 which were capitalized and are being amortized through October, 2015. In addition, as a result of reducing the capacity of the facility from $400,000,000 to $250,000,000,

FS-12

Table of Contents

INVACARE CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (unaudited) - September 30, 2013

the company wrote-off $1,216,000 in fees previously capitalized in the second quarter of 2013, which is reflected in the expense of the North America / HME segment.

In 2007, the company issued $135,000,000 principal amount of Convertible Senior Subordinated Debentures due 2027. The debentures are unsecured senior subordinated obligations of the company guaranteed by substantially all of the company’s domestic subsidiaries, pay interest at 4.125% per annum on each February 1 and August 1, and are convertible upon satisfaction of certain conditions into cash, common shares of the company, or a combination of cash and common shares of the company, subject to certain conditions. The debentures allow the company to satisfy the conversion using any combination of cash or stock, and at the company’s discretion. The company intends to satisfy the accreted value of the debentures using cash. Assuming adequate cash on hand at the time of conversion, the company also intends to satisfy the conversion spread using cash, as opposed to stock.

The company may from time to time seek to retire or purchase its 4.125% Convertible Senior Subordinated Debentures due 2027, in open market purchases, privately negotiated transactions or otherwise. Such purchases or exchanges, if any, will depend on prevailing market conditions, the company's liquidity requirements, contractual restrictions and other factors. The amounts involved in any such transactions, individually or in the aggregate, may be material.

The liability components of the company’s convertible debt consist of the following (in thousands):



	September 30, 2013			December 31, 2012
Principal amount of liability component	$	13,350		$	13,350
Unamortized discount	(2,874		)	(3,341		)
Net carrying amount of liability component	$	10,476		$	10,009

The company is a party to an interest rate swap agreement to effectively convert a portion of floating rate revolving credit facility debt to fixed rate debt to avoid the risk of changes in market interest rates. Specifically, an interest rate swap agreement for a notional amount of $12,000,000 through April 2014 was entered into that fixes the LIBOR component of the interest rate on that portion of the revolving credit facility debt at a rate of 0.54% for an effective aggregate rate 3.04%. As of September 30, 2013, the weighted average floating interest rate on revolving credit borrowings was 2.45% compared to 2.21% as of December 31, 2012.

Shareholders’ Equity Transactions

On May 16, 2013 shareholders approved the Invacare Corporation 2013 Equity Compensation Plan (the “2013 Plan”), which was adopted on March 27, 2013 by the company's Board of Directors (the “Board”). The Board adopted the 2013 Plan because the ten-year term of the company's prior equity plan, the Invacare Corporation Amended and Restated 2003 Performance Plan (the “2003 Plan”), expired on May 21, 2013. No new awards will be granted under the 2003 Plan following its expiration, but awards granted prior to its expiration will remain in effect under their original terms.

The 2013 Plan uses a fungible share-counting method, under which each common share underlying an award of stock options or SARs will count against the number of total shares available under the 2013 Plan as one share; and each common share underlying any award other than a stock option or a stock appreciation rights (“SAR”) will count against the number of total shares available under the 2013 Plan as two shares. Any common shares that are added back to the 2013 Plan as the result of the cancellation or forfeiture of an award granted under the 2013 Plan will be added back in the same manner such shares were originally counted against the total number of shares available under the 2013 Plan. Each common share that is added back to the 2013 Plan due to a cancellation or forfeiture of an award granted under the 2003 Plan will be added back as one common share.

The Compensation and Management Development Committee of the Board (the “Committee”), in its discretion, may grant an award under the 2013 Plan to any director or employee of the company or an affiliate. The 2013 Plan initially allows the Committee to grant up to 4,460,337 Common Shares in connection with the following types of awards with respect to shares of the company's common shares: incentive stock options, nonqualified stock options, SARs, restricted stock, restricted stock units, unrestricted stock, and performance shares. The Committee also may grant performance units that are payable in cash. The Committee has the authority to determine which participants will receive awards, the amount of the awards and the other terms and conditions of the awards.

FS-13

Table of Contents

INVACARE CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (unaudited) - September 30, 2013

During the nine months ended September 30, 2013, the Committee granted 756,700 non-qualified stock options, each having a term of ten years and generally granted at the fair market value of the company’s Common Shares on the date of grant. In addition, restricted stock awards for 114,700 shares were granted without cost to the recipients which vest ratably over the four years after the award date. Compensation expense of $1,568,000 was recognized during the nine months ended September 30, 2013 related to restricted stock awards and there were outstanding restricted stock awards totaling 362,323 shares that were not vested.

As of September 30, 2013, there was $13,264,000 of total unrecognized compensation cost from stock-based compensation arrangements granted under the plan, which is related to non-vested options and shares, and includes $4,169,000 related to restricted stock awards. The company expects the compensation expense to be recognized over a weighted-average period of approximately two years.

The following table summarizes information about stock option activity for the nine months ended September 30, 2013:



	September 30, 2013			Weighted Average Exercise Price
Options outstanding at January 1, 2013	4,664,634			$	26.21
Granted	756,700			14.47
Exercised	—			—
Canceled	(792,584		)	28.74
Options outstanding at September 30, 2013	4,628,750			$	23.86
Options exercise price range at September 30, 2013	$ 12.42 to
	$	47.80
Options exercisable at September 30, 2013	3,070,364
Options available for grant at September 30, 2013*	4,460,337

________________________


*	Options available for grant as of September 30, 2013 reduced by net restricted stock award activity of 793,351.

The following table summarizes information about stock options outstanding at September 30, 2013:



	Options Outstanding				Options Exercisable
Exercise Prices	Number Outstanding At 9/30/13	Weighted Average Remaining Contractual Life (Years)	Weighted Average Exercise Price		Number Exercisable At 9/30/13	Weighted Average Exercise Price
$ 12.42 – $15.00	1,354,435	9.2	$	13.95	166,045	$	13.38
$ 15.01 – $25.00	1,613,291	5.6	22.51		1,364,559	22.21
$ 25.01 – $35.00	950,109	5.7	25.81		828,846	25.85
$ 35.01 – $47.80	710,915	1.4	43.21		710,914	43.21
Total	4,628,750	6.0	$	23.86	3,070,364	$	27.57

When stock options are awarded, they generally become exercisable over a four-year vesting period whereby options vest in equal installments each year. Options granted with graded vesting are accounted for as single options. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with assumptions for expected dividend yield, expected stock price volatility, risk-free interest rate and expected life. The assumed expected life is based on the company's historical analysis of option history. The expected stock price volatility is also based on actual historical volatility, and expected dividend yield is based on historical dividends as the company has no current intention of changing its dividend policy.

The 2013 Plan provides that shares granted come from the company's authorized but unissued Common Shares or treasury shares. In addition, the company's stock-based compensation plans allow employee participants to exchange shares for minimum withholding taxes, which results in the company acquiring treasury shares.

FS-14

Table of Contents

INVACARE CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (unaudited) - September 30, 2013

Accumulated Other Comprehensive Income (Loss) by Component

Changes in accumulated other comprehensive income (Loss) ("OCI") during the quarter ended September 30, 2013 were as follows (in thousands):



	Foreign Currency	Long-Term Notes		Defined Benefit Plans		Derivatives		Total
June 30, 2013	117,817	(6,743	)	(6,419	)	59		104,714
OCI before reclassifications	17,852	(8,062	)	265		(197	)	9,858
Amount reclassified from accumulated OCI	—	—		(62	)	78		16
Net current-period OCI	17,852	(8,062	)	203		(119	)	9,874
September 30, 2013	135,669	(14,805	)	(6,216	)	(60	)	114,588

Changes in OCI during the nine months ended September 30, 2013 were as follows (in thousands):



	Foreign Currency	Long-Term Notes		Defined Benefit Plans		Derivatives		Total
December 31, 2012	117,465	2,845		(6,785	)	(782	)	112,743
OCI before reclassifications	18,204	(17,650	)	750		650		1,954
Amount reclassified from accumulated OCI	—	—		(181	)	72		(109	)
Net current-period OCI	18,204	(17,650	)	569		722		1,845
September 30, 2013	135,669	(14,805	)	(6,216	)	(60	)	114,588

Reclassifications out of accumulated OCI for the three and nine months ended September 30, 2013 were as follows (in thousands):



	Amount reclassified from OCI				Affected line item in the Statement of Comprehensive Income (Loss)
	Three Months Ended September 30, 2013		Nine Months Ended September 30, 2013
Defined Benefit Plans
Service and interest costs	(64	)	(187	)	Selling, General and Administrative
Tax	2		6		Income Taxes
Total after tax	(62	)	(181	)

Derivatives
Foreign currency forward contracts hedging sales	(54	)	(496	)	Net Sales
Foreign currency forward contracts hedging purchases	128		453		Cost of Products Sold
Interest rate swaps	13		139		Interest Expense
Total before tax	87		96
Tax	(9	)	(24	)	Income Taxes
Total after tax	78		72

FS-15

Table of Contents

INVACARE CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (unaudited) - September 30, 2013

Charges Related to Restructuring Activities

Historically, the company's restructuring charges were necessitated primarily by continued declines in Medicare and Medicaid reimbursement by the U.S. government, as well as similar healthcare reimbursement pressures abroad, which negatively affect the company's customers (e.g. home health care providers) and continued pricing pressures faced by the company as a result of outsourcing by competitors to lower cost locations. In addition, restructuring actions principally in the North America/HME segment have been precipitated by the negative impact on the business related to the FDA consent decree which has resulted in a sales decline in custom power wheelchairs, which is one of the company's higher margin product lines. While the company's restructuring efforts have been executed on a timely basis resulting in operating cost savings, the savings have been more than offset by continued margin decline, principally as a result of volume declines, unfavorable product mix, and higher regulatory and compliance costs related to quality system improvements. The company expects any near-term cost savings from restructuring will be offset by higher regulatory and compliance costs related to quality system improvements at least until the company has completed its quality systems remediation efforts.

The company's restructuring commenced in the second quarter of 2011 with the company's decision to close the Hong, Denmark assembly facility as part of the company's ongoing globalization initiative to reduce complexity in the company's supply chain which is intended to reduce expenses to help offset pricing pressures. In the third quarter of 2011, the company continued to execute on the closure of the Hong, Denmark assembly facility and initiated the closure of a smaller facility in the U.S. Charges for the quarter ended December 31, 2011 were primarily incurred at the company's corporate headquarters for severance, with additional costs incurred as a result of the closure of the Hong, Denmark facility. The facility closures were completed in 2012 in addition to the elimination of various positions principally in the North America/Home Medical Equipment (HME) and Asia/Pacific segments.

Charges for the year ended December 31, 2011 totaled $10,534,000 including charges for severance ($8,352,000), contract exit costs primarily related to the closure of the Hong, Denmark assembly facility ($1,788,000) and inventory write-offs ($277,000) recorded in cost of products sold and other miscellaneous costs ($117,000). The majority of the 2011 North America/HME charges were incurred for severance, primarily at the corporate headquarters as the result of the elimination of various positions principally in sales and administration in Elyria, Ohio. These eliminations were permanent reductions in workforce which primarily resulted in reduced selling, general and administrative expenses. In Europe, the charges were the result of the closure of the company's Hong, Denmark facility. The assembly activities were transferred to other company facilities or outsourced to third parties. This closure enabled the company to reduce fixed operating costs related to the facility and reduce headcount with the transfer of a portion of the production to other company facilities. The 2011 charges have now been paid out and were funded with operating cash flows.

Charges for the year ended December 31, 2012 totaled $11,395,000 including charges for severance ($6,775,000), lease termination costs ($1,725,000), building and asset write-downs, primarily related to the closure of the Hong, Denmark assembly facility, other miscellaneous charges, primarily building and asset write-downs, in Europe and Asia/Pacific ($2,404,000) and inventory write-offs ($491,000) in Asia/Pacific recorded in cost of products sold. Severance charges were primarily incurred in the North America/HME segment ($4,242,000), Asia/Pacific segment ($1,681,000) and Europe segment ($817,000). The charges were incurred as a result of the elimination of various positions as part of the company's globalization initiatives. In addition, a portion of the North America/HME segment severance was related to positions eliminated, principally in sales and marketing as well as manufacturing, at the company's Taylor Street facility as a result of the FDA consent decree. The savings from these charges are reflected primarily in reduced selling, general and administrative expenses and manufacturing expenses for the company. In Europe, positions were eliminated as a result of finalizing the exit from the manufacturing facility in Denmark and an elimination of a senior management position in Switzerland. In Asia/Pacific, the company's management approved in the fourth quarter of 2012 a plan to restructure the company's operations in this segment. In Australia, the company consolidated offices / warehouses, decreased staffing and exited various activities while returning to a focus on distribution. At the company's subsidiary, which produces microprocessor controllers, the company decided to cease the contract manufacturing business for companies outside of the healthcare industry. Payments for the year ended December 31, 2012 were $9,381,000 and were funded with operating cash flows. The majority of the 2012 charges are expected to be paid out during 2013.

Restructuring continued during 2013 resulting in restructuring charges of $6,998,000 in the first nine months of 2013 principally for severance in NA/HME and Asia/Pacific and to a lesser extent Europe and IPG as a result of the permanent elimination of certain positions. Payments for the nine months ended September 30, 2013 were $9,830,000 and were funded with the company's credit facility. The majority of the outstanding charge accruals at September 30, 2013 are expected to be paid out within the next twelve months.

FS-16

Table of Contents

INVACARE CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (unaudited) - September 30, 2013

There have been no material changes in accrued balances related to the charges, either as a result of revisions in the plan or changes in estimates. In addition, the savings anticipated as a result of the company's restructuring plans have been or are expected to be achieved, primarily resulting in reduced salary and benefit costs principally impacting selling, general and administrative expenses, and to a lesser extent, costs of products sold. However, these savings have been more than offset by continued margin decline, principally as a result of volume declines, unfavorable product mix, and higher regulatory and compliance costs related to quality system improvements. To date, the company's liquidity has not been materially impacted by the company's restructuring charges.

A progression by reporting segment of the accruals recorded as a result of the restructuring is as follows (in thousands):



	Severance			Product Line Discontinuance			Contract Terminations			Other			Total
December 31, 2010 Balance
Total	$	—		$	—		$	—		$	—		$	—
Charges
NA/HME	4,755			—			—			4			4,759
IPG	123			—			—			—			123
Europe	3,288			277			1,788			113			5,466
Asia/Pacific	186			—			—			—			186
Total	8,352			277			1,788			117			10,534
Payments
NA/HME	(1,663		)	—			—			(4		)	(1,667		)
IPG	(52		)	—			—			—			(52		)
Europe	(1,546		)	(277		)	(1,714		)	(113		)	(3,650		)
Asia/Pacific	(186		)	—			—			—			(186		)
Total	(3,447		)	(277		)	(1,714		)	(117		)	(5,555		)
December 31, 2011 Balance
NA/HME	3,092			—			—			—			3,092
IPG	71			—			—			—			71
Europe	1,742			—			74			—			1,816
Asia/Pacific	—			—			—			—			—
Total	4,905			—			74			—			4,979
Charges
NA/HME	4,242			—			5			—			4,247
IPG	35			—			—			—			35
Europe	817			—			53			1,223			2,093
Asia/Pacific	1,681			491			1,667			1,181			5,020
Total	6,775			491			1,725			2,404			11,395
Payments
NA/HME	(3,587		)	—			(5		)	—			(3,592		)
IPG	(106		)	—			—			—			(106		)
Europe	(1,964		)	—			(127		)	(1,223		)	(3,314		)
Asia/Pacific	(812		)	(340		)	(42		)	(1,175		)	(2,369		)
Total	$	(6,469	)	$	(340	)	$	(174	)	$	(2,398	)	$	(9,381	)

FS-17

Table of Contents

INVACARE CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (unaudited) - September 30, 2013



	Severance			Product Line Discontinuance			Contract Terminations			Other			Total
December 31, 2012 Balance
NA/HME	$	3,747		$	—		$	—		$	—		$	3,747
IPG	—			—			—			—			—
Europe	595			—			—			—			595
Asia/Pacific	869			151			1,625			6			2,651
Total	5,211			151			1,625			6			6,993
Charges
NA/HME	1,679			—			—			—			1,679
IPG	189			—			—			—			189
Europe	115			—			—			—			115
Asia/Pacific	453			—			86			—			539
Total	2,436			—			86			—			2,522
Payments
NA/HME	(2,005		)	—			—			—			(2,005		)
IPG	(17		)	—			—			—			(17		)
Europe	(461		)	—			—			—			(461		)
Asia/Pacific	(618		)	(151		)	(766		)	(4		)	(1,539		)
Total	(3,101		)	(151		)	(766		)	(4		)	(4,022		)
March 31, 2013 Balance
NA/HME	3,421			—			—			—			3,421
IPG	172			—			—			—			172
Europe	249			—			—			—			249
Asia/Pacific	704			—			945			2			1,651
	4,546			—			945			2			5,493
Charges
NA/HME	1,948			—			—			—			1,948
IPG	13			—			—			—			13
Europe	65			—			—			—			65
Asia/Pacific	480			—			86			—			566
Total	2,506			—			86			—			2,592
Payments
NA/HME	(1,795		)	—			—			—			(1,795		)
IPG	(26		)	—			—			—			(26		)
Europe	(182		)	—			—			—			(182		)
Asia/Pacific	(129		)	—			(49		)	(2		)	(180		)
Total	(2,132		)	—			(49		)	(2		)	(2,183		)
June 30, 2013 Balance
NA/HME	3,574			—			—			—			3,574
IPG	159			—			—			—			159
Europe	132			—			—			—			132
Asia/Pacific	1,055			—			982			—			2,037
	$	4,920		$	—		$	982		$	—		$	5,902

FS-18

Table of Contents

INVACARE CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (unaudited) - September 30, 2013



	Severance			Product Line Discontinuance		Contract Terminations			Other			Total
Charges
NA/HME	$	644		$	—	$	213		$	353		$	1,210
IPG	36			—		—			—			36
Europe	739			—		—			(198		)	541
Asia/Pacific	15			—		79			3			97
Total	1,434			—		292			158			1,884
Payments
NA/HME	(1,624		)	—		(85		)	(305		)	(2,014		)
IPG	(52		)	—		—			—			(52		)
Europe	(157		)	—		—			198			41
Asia/Pacific	(1,040		)	—		(557		)	(3		)	(1,600		)
Total	(2,873		)	—		(642		)	(110		)	(3,625		)
September 30, 2013 Balance
NA/HME	2,594			—		128			48			2,770
IPG	143			—		—			—			143
Europe	714			—		—			—			714
Asia/Pacific	30			—		504			—			534
	$	3,481		$	—	$	632		$	48		$	4,161

Income Taxes

The company had an effective tax rate of 16.2% and 12.3% on losses before tax from continuing operations for the three and nine month periods ended September 30, 2013, respectively, compared to an expected benefit at the U.S. statutory rate of 35%. The company's effective tax rate for the three and nine months ended September 30, 2013 was greater than the U.S. federal statutory rate, principally due to losses overseas without tax benefit due to valuation allowances, foreign dividends which reduced the domestic intra-period allocation benefit in continuing operations, and the recording of a discreet adjustment of $3,143,000 related to a federal domestic valuation allowance adjustment. The rate was benefited by taxes outside the United States, excluding countries with valuation allowances that are in losses in 2013, recorded at a lower effective rate than the U.S. statutory rate.

The company had an effective tax rate of 81.3% and 97.5% on earnings before tax from continuing operations for the three and nine month period ended September 30, 2012, respectively, compared to an expected rate at the U.S. statutory rate of 35%. The company's effective tax rate for the three and nine months ended September 30, 2012 was greater than the U.S. federal statutory rate, principally due to a discrete foreign tax adjustment of $9,173,000 ($0.29 per share), recorded in the first nine months 2012, of which $3,178,000 was interest, related to prior year periods under audit, which is being contested by the company. This adjustment was partially offset by foreign earnings taxed at an effective rate lower than the U.S. statutory rate principally due to foreign taxes recognized at rates below the U.S. statutory rate.

FS-19

Table of Contents

INVACARE CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (unaudited) - September 30, 2013

Net Earnings (Loss) Per Common Share

The following table sets forth the computation of basic and diluted net earnings (loss) per common share for the periods indicated.



(In thousands except per share data)	For the Three Months Ended September 30,					For the Nine Months Ended September 30,
	2013			2012		2013			2012
Basic
Average common shares outstanding	31,902			31,877		31,902			31,838

Net earnings (loss) from continuing operations	$	(5,383	)	$	563	$	(35,580	)	$	374
Net earnings from discontinued operations	$	21,485		$	2,301	$	74,401		$	8,746
Net earnings	$	16,102		$	2,864	$	38,821		$	9,120

Net earnings (loss) per common share from continuing operations	$	(0.17	)	$	0.02	$	(1.12	)	$	0.01
Net earnings per common share from discontinued operations	$	0.67		$	0.07	$	2.33		$	0.27
Net earnings per common share	$	0.50		$	0.09	$	1.21		$	0.28

Diluted
Average common shares outstanding	31,902			31,877		31,902			31,838
Shares related to convertible debt	—			—		—			—
Stock options and awards	164			24		107			9
Average common shares assuming dilution	32,066			31,901		32,009			31,847

Net earnings (loss) from continuing operations	$	(5,383	)	$	563	$	(35,580	)	$	374
Net earnings from discontinued operations	$	21,485		$	2,301	$	74,401		$	8,746
Net earnings	$	16,102		$	2,864	$	38,821		$	9,120

Net earnings (loss) per common share from continuing operations *	$	(0.17	)	$	0.02	$	(1.12	)	$	0.01
Net earnings per common share from discontinued operations	$	0.67		$	0.07	$	2.32		$	0.27
Net earnings per common share *	$	0.50		$	0.09	$	1.20		$	0.28

* Net loss per common share assuming dilution calculated utilizing weighted average shares outstanding-basic for the period in which there was a net loss.

At September 30, 2013, 4,375,829 and 4,406,045 shares associated with stock options were excluded from the average common shares assuming dilution for the three and nine months ended September 30, 2013 as they were anti-dilutive. At September 30, 2013, the majority of the anti-dilutive shares were granted at an exercise price of $41.87, which was higher than the average fair market value prices of $15.88 and $15.04 for the three and nine months ended September 30, 2013. At September 30, 2012, 4,639,809 and 4,679,093 shares associated with stock options were excluded from the average common shares assuming dilution for the three and nine months ended September 30, 2012 as they were anti-dilutive. At September 30, 2012, the majority of the anti-dilutive shares were granted at an exercise price of $41.87, which was higher than the average fair market value prices of $14.74 and $15.55 for the three and nine months ended September 30, 2012. For both the three and nine months ended September 30, 2013 and September 30, 2012, there were no shares necessary to settle a conversion spread on the convertible notes to be included in the common shares assuming dilution as the average market price of the company stock for these periods did not exceed the conversion price.

FS-20

Table of Contents

INVACARE CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (unaudited) - September 30, 2013

Concentration of Credit Risk

The company manufactures and distributes durable medical equipment to the home health care, retail and extended care markets. The company performs credit evaluations of its customers’ financial condition. The company utilizes De Lage Landen, Inc. (“DLL”), a third party financing company, to provide the majority of future lease financing to the company’s North America customers. The DLL agreement provides for direct leasing between DLL and the Invacare customer. The company retains a recourse obligation which was $7,074,000 at September 30, 2013 to DLL for events of default under the leasing contracts, which total $50,570,000 at September 30, 2013. The company monitors the collections status of these contracts and has provided amounts for estimated losses in its allowances for doubtful accounts in accordance with Receivables, ASC 310-10-05-4. Credit losses are provided for in the financial statements.

Substantially all of the company’s receivables are due from health care, medical equipment providers and long term care facilities located throughout the United States, Australia, Canada, New Zealand and Europe. A significant portion of products sold to dealers, both foreign and domestic, is ultimately funded through government reimbursement programs such as Medicare and Medicaid. The company has also seen a significant shift in reimbursement to customers from managed care entities. As a consequence, changes in these programs can have an adverse impact on dealer liquidity and profitability. In addition, reimbursement guidelines in the home health care industry have a substantial impact on the nature and type of equipment an end user can obtain as well as the timing of reimbursement and, thus, affect the product mix, pricing and payment patterns of the company’s customers.

In addition, the company is closely monitoring the roll-out of the second round of NCB, which became effective in 91 additional metropolitan statistical areas on July 1, 2013. At this early stage of the program, it is difficult to characterize the impact from NCB on the company's domestic home medical equipment business, as there continues to be uncertainty as the industry realigns and adjusts itself to the small number of bid contracts awarded.

Derivatives

ASC 815 requires companies to recognize all derivative instruments in the consolidated balance sheet as either assets or liabilities at fair value. The accounting for changes in fair value of a derivative is dependent upon whether or not the derivative has been designated and qualifies for hedge accounting treatment and the type of hedging relationship. For derivatives designated and qualifying as hedging instruments, the company must designate the hedging instrument, based upon the exposure being hedged, as a fair value hedge, cash flow hedge, or a hedge of a net investment in a foreign operation.

Cash Flow Hedging Strategy

The company uses derivative instruments in an attempt to manage its exposure to foreign currency exchange risk and interest rate risk. Foreign currency forward exchange contracts are used to manage the price risk associated with forecasted sales denominated in foreign currencies and the price risk associated with forecasted purchases of inventory over the next twelve months. Interest rate swaps are, at times, utilized to manage interest rate risk associated with the company’s fixed and floating-rate borrowings.

The company recognizes its derivative instruments as assets or liabilities in the consolidated balance sheet measured at fair value. A majority of the company’s derivative instruments are designated and qualify as cash flow hedges. Accordingly, the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. The remaining gain or loss on the derivative instrument in excess of the cumulative change in the fair value of the hedged item, if any, is recognized in current earnings during the period of change.

During the first nine months of 2013 and 2012, the company was a party to interest rate swap agreements that qualified as cash flow hedges and effectively converted floating-rate debt to fixed-rate debt, so the company could avoid the risk of changes in market interest rates. The gains or losses on interest rate swaps are reflected in interest expense on the consolidated statement of comprehensive income (loss).

To protect against increases/decreases in forecasted foreign currency cash flows resulting from inventory purchases/sales over the next year, the company utilizes foreign currency forward contracts to hedge portions of its forecasted purchases/sales denominated in foreign currencies. The gains and losses are included in cost of products sold and selling, general and administrative expenses on the consolidated statement of comprehensive income (loss). If it is later determined that a hedged forecasted transaction

FS-21

Table of Contents

INVACARE CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (unaudited) - September 30, 2013

is unlikely to occur, any prospective gains or losses on the forward contracts would be recognized in earnings. The company does not expect any material amount of hedge ineffectiveness related to forward contract cash flow hedges during the next twelve months.

The company has historically not recognized any material amount of ineffectiveness related to forward contract cash flow hedges because the company generally limits its hedges to between 60% and 90% of total forecasted transactions for a given entity’s exposure to currency rate changes and the transactions hedged are recurring in nature. Furthermore, the majority of the hedged transactions are related to intercompany sales and purchases for which settlement occurs on a specific day each month. Forward contracts with a total notional amount in USD of $51,251,000 and $131,923,000 matured during the three and nine months ended September 30, 2013 compared to forward contracts with a total notional amount in USD of $50,244,000 and $134,402,000 that matured during the three and nine months ended September 30, 2012.

Outstanding foreign currency forward exchange contracts qualifying and designated for hedge accounting treatment were as follows (in thousands USD):



	September 30, 2013					December 31, 2012
	Notional Amount		Unrealized Net Gain (Loss)			Notional Amount		Unrealized Net Gain (Loss)
USD / AUD	$	579	$	46		$	—	$	—
USD / CAD	10,330		(85		)	17,620		(6		)
USD / CNY	3,320		55			—		—
USD / CHF	232		7			—		—
USD / EUR	14,433		(368		)	59,510		(797		)
USD / GBP	692		22			2,519		(3		)
USD / NZD	465		4			—		—
USD / SEK	3,499		115			—		—
USD / MXP	2,846		11			6,954		141
EUR / CAD	450		12			—		—
EUR / CHF	1,555		17			—		—
EUR / GBP	5,389		(40		)	2,077		46
EUR / SEK	415		25			—		—
EUR / NZD	1,748		23			5,749		105
GBP / CHF	304		(8		)	—		—
GBP / SEK	1,099		52			4,154		25
DKK / SEK	1,051		(9		)	6,397		(47		)
NOK / SEK	926		66			3,428		(4		)
	$	49,333	$	(55	)	$	108,408	$	(540	)

Derivatives Not Qualifying or Designated for Hedge Accounting Treatment

The company also utilizes foreign currency forward exchange contracts that are not designated as hedges in accordance with ASC 815. These contracts are entered into to eliminate the risk associated with the settlement of short-term intercompany trading receivables and payables between Invacare Corporation and its foreign subsidiaries. The contracts are entered into at the same time as the intercompany receivables or payables are created so that upon settlement, the gain/loss on the settlement is offset by the gain/loss on the foreign currency forward exchange contract. No material net gain or loss was realized by the company in 2013 or 2012 related to these contracts and the associated short-term intercompany trading receivables and payables.

FS-22

Table of Contents

INVACARE CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (unaudited) - September 30, 2013

Foreign currency forward exchange contracts not qualifying or designated for hedge accounting treatment entered into in 2013 and 2012, respectively, and outstanding were as follows (in thousands USD):



	September 30, 2013					September 30, 2012
	Notional Amount		Gain (Loss)			Notional Amount			Gain (Loss)
CAD / USD	$	4,840	$	4		$	14,801		$	434
EUR / USD	12,273		166			9,906			134
CHF / USD	—		—			785			13
DKK / USD	13,517		62			—			—
GBP / USD	6,361		67			—			—
NOK / USD	4,486		12			—			—
NZD / USD	2,161		(8		)	3,146			40
SEK / USD	6,502		32			—			—
EUR / AUD	—		—			1,908			5
EUR / CAD	—		—			239			(15		)
EUR / DKK	—		—			(11,203		)	(27		)
AUD / CAD	878		(4		)	3,056			(38		)
AUD / EUR	1,788		248			—			—
AUD / GBP	298		38			—			—
AUD / NZD	—		—			1,048			15
EUR / NZD	—		—			90			(10		)
EUR / NOK	—		—			6			—
	$	53,104	$	617		$	23,782		$	551

The fair values of the company’s derivative instruments were as follows (in thousands):



	September 30, 2013				December 31, 2012
	Assets		Liabilities		Assets		Liabilities
Derivatives designated as hedging instruments under ASC 815
Foreign currency forward exchange contracts	$	626	$	681	$	375	$	915
Interest rate swap contracts	—		22		—		316
Derivatives not designated as hedging instruments under ASC 815
Foreign currency forward exchange contracts	685		68		687		142
Total derivatives	$	1,311	$	771	$	1,062	$	1,373

The fair values of the company’s foreign currency forward exchange contract assets and liabilities are included in Other Current Assets and Accrued Expenses, respectively in the Consolidated Balance Sheets.

FS-23

Table of Contents

INVACARE CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (unaudited) - September 30, 2013

The effect of derivative instruments on the Statement of Comprehensive Income (Loss) and Other Comprehensive Income (OCI) was as follows (in thousands):



Derivatives in ASC 815 cash flow hedge relationships	Amount of Gain (Loss) Recognized in OCI on Derivatives (Effective Portion)			Amount of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)			Amount of Gain (Loss) Recognized in Income on Derivatives (Ineffective Portion and Amount Excluded from Effectiveness Testing)
Three months ended September 30, 2013
Foreign currency forward exchange contracts	$	(207	)	$	83		$	2
Interest rate swap contracts	33			(13		)	—
	$	(174	)	$	70		$	2
Nine months ended September 30, 2013
Foreign currency forward exchange contracts	$	505		$	(20	)	$	37
Interest rate swap contracts	433			(139		)	—
	$	938		$	(159	)	$	37
Three months ended September 30, 2012
Foreign currency forward exchange contracts	$	(2,522	)	$	1,241		$	(38	)
Interest rate swap contracts	(3		)	—			—
	$	(2,525	)	$	1,241		$	(38	)
Nine months ended September 30, 2012
Foreign currency forward exchange contracts	$	(2,956	)	$	2,706		$	(9	)
Interest rate swap contracts	(99		)	—			—
	$	(3,055	)	$	2,706		$	(9	)

Derivatives not designated as hedging instruments under ASC 815							Amount of Gain (Loss) Recognized in Income on Derivatives
Three months ended September 30, 2013
Foreign currency forward exchange contracts							$	361
Nine months ended September 30, 2013
Foreign currency forward exchange contracts							$	617
Three months ended September 30, 2012
Foreign currency forward exchange contracts							$	569
Nine months ended September 30, 2012
Foreign currency forward exchange contracts							$	551

The pre-tax gains or losses recognized as the result of the settlement of cash flow hedge foreign currency forward exchange contracts are recognized in net sales for hedges of inventory sales or cost of product sold for hedges of inventory purchases. For the three and nine months ended September 30, 2013, net sales were increased by $54,000 and $496,000 and cost of product sold was increased by $128,000 and increased by $453,000 for net realized loss of $74,000 and $43,000. For the three and nine months ended September 30, 2012, net sales were decreased by $146,000 and increased by $49,000, respectively, and cost of product sold was decreased by $1,487,000 and $2,804,000, respectively, for net realized gains of $1,341,000 and $2,853,000, respectively.

The company recognized expense of $23,000 and $328,000 for the three and nine months ended September 30, 2013, respectively, compared to expense of $147,000 and $419,000 for the three and nine months ended September 30, 2012, respectively, related to interest rate swap agreements, which is reflected in interest expense on the consolidated statement of comprehensive income (loss).

FS-24

Table of Contents

INVACARE CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (unaudited) - September 30, 2013

Gains of $361,000 and $617,000 versus gains of $569,000 and $551,000 were recognized in selling, general and administrative (SG&A) expenses for the three and nine months ended September 30, 2013 and September 30, 2012, respectively, on ineffective forward contracts and forward contracts not designated as hedging instruments that are entered into to offset gains/losses also recorded in SG&A expenses on intercompany trade payables. Any gains/losses on the non designated hedging instruments were substantially offset by gains/losses also recorded in SG&A expenses on intercompany trade payables.

The company has entered into foreign currency forward exchange contracts and interest rate swap contracts (the “agreements”) with various bank counterparties, each of which are subject to provisions which are similar to a master netting agreement. The agreements provide for a net settlement payment in a single currency upon a default by the company. Furthermore, the agreements provide the counterparty with a right of set off in the event of a default that would enable the counterparty to offset any net payment due by the counterparty to the company under the applicable agreement by any amount due by the company to the counterparty under any other agreement. For example, the terms of the agreement would permit a counterparty to a derivative contract that is also a lender under the company's Credit Agreement to reduce any derivative settlement amounts owed to the company under the derivative contract by any amounts owed to the counterparty by the company under the Credit Agreement. In addition, the agreements contain cross-default provisions that could trigger a default by the company under the agreement in the event of a default by the company under another agreement with the same counterparty. The company does not present any derivatives on a net basis in its financial statements and all derivative balances presented are subject to provisions that are similar to master netting agreements.

Fair Values

Pursuant to ASC 820, the inputs used to derive the fair value of assets and liabilities are analyzed and assigned a level I, II or III priority, with level I being the highest and level III being the lowest in the hierarchy. Level I inputs are quoted prices in active markets for identical assets or liabilities. Level II inputs are quoted prices for similar assets or liabilities in active markets: quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs are observable in active markets. Level III inputs are based on valuations derived from valuation techniques in which one or more significant inputs are unobservable.

The following table provides a summary of the company’s assets and liabilities that are measured on a recurring basis (in thousands).



				Basis for Fair Value Measurements at Reporting Date
				Quoted Prices in Active Markets for Identical Assets / (Liabilities)	Significant Other Observable Inputs			Significant Other Unobservable Inputs
	Total			Level I	Level II			Level III
September 30, 2013
Forward Exchange Contracts—net	$	562		—	$	562		—
Interest Rate Swap Agreements—net	(22		)	—	(22		)	—
December 31, 2012:
Forward Exchange Contracts—net	$	5		—	$	5		—
Interest Rate Swap Agreements—net	(316		)	—	(316		)	—

Forward Contracts: The company operates internationally and as a result is exposed to foreign currency fluctuations. Specifically, the exposure includes intercompany and third party sales or payments as well as intercompany loans. In an attempt to reduce this exposure, foreign currency forward exchange contracts are utilized and accounted for as hedging instruments. The contracts are used to hedge the following currencies: AUD, CAD, CHF, CNY, DKK, EUR, GBP, MXP, NOK, NZD, SEK and USD. The company does not use derivative financial instruments for speculative purposes. Fair values for the company’s foreign currency forward exchange contracts are based on quoted market prices for contracts with similar maturities.

FS-25

Table of Contents

INVACARE CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (unaudited) - September 30, 2013

The carrying values and fair values of the company’s financial instruments are as follows (in thousands):



	September 30, 2013						December 31, 2012
	Carrying Value			Fair Value			Carrying Value			Fair Value
Cash and cash equivalents	$	32,625		$	32,625		$	38,791		$	38,791
Other investments	1,190			1,190			1,171			1,171
Installment receivables, net of reserves	2,236			2,236			2,594			2,594
Long-term debt (including current maturities of long-term debt)	(56,069		)	(56,115		)	(234,802		)	(234,072		)
Forward contracts in Other Current Assets	1,311			1,311			1,062			1,062
Forward contracts in Accrued Expenses	(749		)	(749		)	(1,057		)	(1,057		)
Interest rate swap agreements in Accrued Expenses	(22		)	(22		)	(316		)	(316		)

The company, in estimating its fair value disclosures for financial instruments, used the following methods and assumptions:

Cash, cash equivalents: The carrying value reported in the balance sheet for cash, cash equivalents equals its fair value.

Other investments: The company has made other investments in limited partnerships and non-marketable equity securities, which are accounted for using the cost method, adjusted for any estimated declines in value. These investments were acquired in private placements and there are no quoted market prices or stated rates of return and the company does not have the ability to easily sell these investments.

Installment receivables: The carrying value reported in the balance sheet for installment receivables approximates its fair value. The interest rates associated with these receivables have not varied significantly since inception. Management believes that after consideration of the credit risk, the net book value of the installment receivables approximates market value.

Long-term debt: Fair values for the company’s convertible debt and revolving credit facility are based upon the company’s estimate of the market for similar borrowing arrangements.

Forward contracts and interest rate swaps: Fair values for the company’s foreign currency forward exchange contracts are based on quoted market prices, while the fair values of the interest rate swaps are based on model-derived calculations using inputs that are observable in active markets.

Business Segments

The company operates in four primary business segments: North America/Home Medical Equipment (North America/HME), Institutional Products Group (IPG), Europe and Asia/Pacific. The North America/HME segment sells each of three primary product lines, which includes: lifestyle, mobility and seating and respiratory therapy products. IPG sells or rents long-term care medical equipment, health care furnishings and accessory products. Europe and Asia/Pacific sell product lines similar to North America/HME and IPG. Each business segment sells to the home health care, retail and extended care markets.

The company evaluates performance and allocates resources based on profit or loss from operations before income taxes for each reportable segment. The accounting policies of each segment are the same as those described in the summary of significant accounting policies for the company’s consolidated financial statements. Intersegment sales and transfers are based on the costs to manufacture plus a reasonable profit element. Therefore, intercompany profit or loss on intersegment sales and transfers is not considered in evaluating segment performance except for Asia/Pacific due to its significant intercompany sales volume relative to the segment.

FS-26

Table of Contents

INVACARE CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (unaudited) - September 30, 2013

The information by segment is as follows (in thousands):



	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2013			2012			2013			2012
Revenues from external customers
North America/HME	$	151,052		$	170,701		$	462,261		$	527,103
Institutional Products Group	28,083			33,557			87,135			95,726
Europe	150,265			141,705			429,650			401,721
Asia/Pacific	11,776			15,555			38,327			53,217
Consolidated	$	341,176		$	361,518		$	1,017,373		$	1,077,767
Intersegment revenues
North America/HME	$	20,501		$	24,813		$	59,735		$	81,985
Institutional Products Group	1,254			1,941			4,243			5,471
Europe	1,890			3,239			6,156			8,448
Asia/Pacific	6,411			7,737			19,417			27,177
Consolidated	$	30,056		$	37,730		$	89,551		$	123,081
Restructuring charges before income taxes
North America/HME	$	1,210		$	352		$	4,837		$	2,214
Institutional Products Group	36			—			237			35
Europe	542			481			722			772
Asia/Pacific	96			342			1,202			721
Consolidated	$	1,884		$	1,175		$	6,998		$	3,742
Earnings (loss) before income taxes
North America/HME	$	(10,191	)	$	(28	)	$	(33,593	)	$	8,086
Institutional Products Group	1,009			579			1,955			4,820
Europe	13,136			10,218			27,344			23,504
Asia/Pacific	(2,233		)	(2,301		)	(9,871		)	(4,139		)
All Other (1)	(6,354		)	(5,460		)	(17,515		)	(17,411		)
Consolidated	$	(4,633	)	$	3,008		$	(31,680	)	$	14,860

________________________


(1)	Consists of un-allocated corporate SG&A costs and intercompany profits, which do not meet the quantitative criteria for determining reportable segments. In addition, the “All Other” earnings (loss) before income taxes includes loss on debt extinguishment including debt finance charges, interest and fees.

Contingencies

General

In the ordinary course of its business, the company is a defendant in a number of lawsuits, primarily product liability actions in which various plaintiffs seek damages for injuries allegedly caused by defective products. All of the product liability lawsuits in the United States have been referred to the company's captive insurance company and/or excess insurance carriers while all non-U.S. lawsuits have been referred to the company's commercial insurance carriers. All such lawsuits are generally contested vigorously. The coverage territory of the company's insurance is worldwide with the exception of those countries with respect to which, at the time the product is sold for use or at the time a claim is made, the U.S. government has suspended or prohibited diplomatic or trade relations. The amount recorded for identified contingent liabilities is based on estimates. Amounts recorded are reviewed periodically and adjusted to reflect additional technical and legal information that becomes available. Actual costs to be incurred in future periods may vary from the estimates, given the inherent uncertainties in evaluating certain exposures.

FS-27

Table of Contents

INVACARE CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (unaudited) - September 30, 2013

As a medical device manufacturer, the company is subject to extensive government regulation, including numerous laws directed at preventing fraud and abuse and laws regulating reimbursement under various government programs. The marketing, invoicing, documenting and other practices of health care suppliers and manufacturers are all subject to government scrutiny. The company's facilities are subject to periodic inspection by the FDA. Violations of law or regulations can result in administrative, civil and criminal penalties and sanctions, including disqualification from Medicare and other reimbursement programs, which could have a material adverse effect on the company's business.

FDA Matters

The FDA regulates virtually all aspects of the development, testing, manufacturing, labeling, promotion, distribution and marketing of a medical device. The company's failure to comply with the regulatory requirements of the FDA and other applicable U.S. medical device regulatory requirements can subject the company to administrative or judicially imposed sanctions. These sanctions include warning letters, civil penalties, criminal penalties, injunctions, consent decrees, product seizure or detention, product recalls and total or partial suspension of production.

As previously disclosed, the company entered into a consent decree of injunction with the FDA related to the company's Corporate facility and its Taylor Street wheelchair manufacturing facility in Elyria, Ohio in December 2012. The consent decree was approved and made effective by the U.S. District Court for the Northern District of Ohio on December 21, 2012. The consent decree limits the company's manufacture and distribution of power and manual wheelchairs, wheelchair components and wheelchair sub-assemblies at or from its Taylor Street manufacturing facility. The decree also temporarily limited design activities related to wheelchairs and power beds that take place at the impacted Elyria, Ohio facilities. The company is entitled to continue to produce from the Taylor Street manufacturing facility certain medically necessary products, as well as ongoing replacement, service and repair of products already in use, under terms delineated in the consent decree. Under the terms of the consent decree, in order to resume full operations at the impacted facilities, the company must successfully complete a third-party expert certification audit at the impacted Elyria facilities, which is comprised of three distinct reports that must be submitted to, and accepted by, the FDA. After the expert's final certification report is submitted to the FDA, along with the company’s own report as to its compliance as well as responses to any observations in the certification report, the FDA will perform an inspection of the company's Corporate and Taylor Street facilities to determine whether they are in compliance with the FDA's Quality System Regulation. The FDA has the authority to reinspect at any time. Once satisfied with the company's compliance, the FDA will provide written notification that the company is permitted to resume full operations at the impacted facilities.

At the time of filing this Quarterly Report on Form 10-Q, the company has completed the first two of its third-party expert certification audits, and the FDA has found the results of both to be acceptable. In these reports, the third-party expert certified that the company's equipment and process validation procedures and its design control systems were compliant with the FDA's Quality System Regulation. As a result of the FDA's approval of the first certification audit report on May 13, 2013, the Taylor Street facility was able to resume supplying parts and components for the further manufacturing of medical devices at other company facilities. The company's receipt of the FDA's approval on the second certification audit report on July 15, 2013 resulted in the company being able to resume design activities related to power wheelchairs and power beds. The third, most comprehensive third-party certification audit is a comprehensive review of the company's compliance with the FDA's Quality System Regulation at the impacted Elyria facilities.

The company is targeting to have the third, final and most comprehensive third-party certification report completed and filed with the FDA by mid-November 2013. There remains some scheduling issues and final work to complete in order to reach the targeted timing. Under the terms of the consent decree, the company must submit its own report to the FDA on the actions taken to correct any violations that may have been brought to the company’s attention by the expert and the actions the company has taken to ensure that the affected facilities are operated, and will continue to be operated, in conformity with the FDA’s Quality System Regulation. Within thirty (30) days after FDA’s receipt of the expert’s report and the company’s report, the FDA will commence its own inspection. It is not possible for the company to estimate the timing or potential response of the FDA's inspection and subsequent written notifications. Following successful completion of the FDA inspection and the company's receipt of written notification from the FDA that the Corporate and Taylor Street facilities appear to be in compliance, the company may resume full operations at those facilities.

As described above, because the limitations on production will only be temporary in nature, and partial production will be allowed, the company does not anticipate any major repair, replacement or scrapping of its fixed assets at the Taylor Street manufacturing facility. Based on the company's expectations at the time of filing of this Quarterly Report on Form 10-Q with respect to the time frame for completion of the third-party expert certification audits and FDA inspection and with respect to future

FS-28

Table of Contents

INVACARE CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (unaudited) - September 30, 2013

cash flows from production at the Taylor Street manufacturing facility, the company concluded that there is no impairment in the value of the fixed assets related to the Taylor Street manufacturing facility at September 30, 2013.

The majority of the production from the Taylor Street facility is "made to order" custom wheelchairs for customers and, as a result, there was not a significant amount of finished goods inventory on hand at September 30, 2013. At the time of filing this Quarterly Report on Form 10-Q, the company believes that it would be able to obtain substantially all of the documentation required under the consent decree in order to complete the manufacture and shipment from the Taylor Street facility of the orders in the company's order fulfillment system and thus, the company concluded that there was not an impairment of the work in process and finished goods at the Taylor Street facility at September 30, 2013. Further, based on its analysis of the raw material inventory at the Taylor Street facility and the company's expectations at the time of filing of this Quarterly Report on Form 10-Q with respect to the time frame for completion of the third-party expert certification audits and FDA inspection, the company concluded that the value of the inventory was not excessive or impaired at September 30, 2013. However, if the company's expectations regarding the impacts of the limitations in the consent decree or the time frame for completion of the third-party expert certification audits and FDA inspection were to change, the company may, in future periods, conclude that an impairment exists with respect to its fixed assets or inventory at the Taylor Street facility.

The North America/HME segment is the segment primarily impacted by the limitations in the FDA consent decree. However, the Asia/Pacific segment also is negatively affected as a result of the consent decree due to the lower sales volume of microprocessor controllers. During 2012, before the effective date of the consent decree, the company started to experience decreases in net sales in this segment. Those decreases were primarily related to delays in new product introductions, uncertainty on the part of the company's customers as they coped with prepayment reviews and post-payment audits by the Centers for Medicare and Medicaid Services ("CMS") and contemplated their participation in the next round of National Competitive Bidding ("NCB"), and, the company believes, uncertainty regarding the resolution of the consent decree which limited the company's ability to renegotiate and bid on certain customer contracts and otherwise led to a decline in customer orders. The negative effect of the consent decree on customer orders and net sales has been considerable, and the company expects to experience continued low levels in net sales as a result of the limitations imposed by the consent decree. The company expects to continue to experience lower levels of net sales in the segment at least until it has successfully completed the previously-described third-party expert certification audit and FDA inspection and has received written notification from the FDA that the company may resume full operations at the Corporate and Taylor Street facilities. Even after the company is permitted to resume full operations at the affected facilities, it is uncertain as to whether, or how quickly, the company will be able to rebuild net sales to more typical historical levels, irrespective of market conditions. Accordingly, the limitations in the consent decree had, and likely will continue to have, a material adverse effect on the company's business, financial condition and results of operations.

In the second quarter of 2013, the company recorded a warranty reserve of $3,800,000 related to a power wheelchair joystick recall. The estimate was calculated based on discussions with the FDA and the company's resultant expectation that an end user notification was not adequate and that a recall would be initiated involving the replacement of the potentially affected joysticks, which are sold globally. The power wheelchair joystick performance issue relates to an anomaly discovered in a fraction of a percentage of the components in the field. The company's warranty reserve for this power wheelchair component recall is based upon estimates derived from the company's actual experience with prior recalls. No changes were made in the warranty reserve recorded related to this issue in the third quarter of 2013. However, the reserve is subject to adjustment as new developments or experiences change the company's estimate of the total cost of this matter.

For additional information regarding the consent decree, please see the following sections of the company's Annual Report on Form 10-K for the year ending December 31, 2012: Item 1. Business - Government Regulation and Item 1A. Risk Factors and the following sections of this Quarterly Report on Form 10-Q: Item 1. Legal Proceedings; and Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Outlook and - Liquidity and Capital Resources.

In addition, in December 2010, the company received a warning letter from the FDA related to quality system processes and procedures at the company's Sanford, Florida facility. The company has taken actions which it believes address all of the FDA's concerns in the warning letter. However, the results of regulatory claims, proceedings, investigations, or litigation are difficult to predict. An unfavorable resolution or outcome of the FDA warning letter could materially and adversely affect the company's business, financial condition, and results of operations.

Any of the above contingencies could have an adverse impact on the company's financial condition or results of operations.

FS-29

Table of Contents

INVACARE CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (unaudited) - September 30, 2013

Supplemental Guarantor Information

Effective February 12, 2007, substantially all of the domestic subsidiaries (the “Guarantor Subsidiaries”) of the company became guarantors of the indebtedness of Invacare Corporation under its 4.125% Convertible Senior Subordinated Debentures due 2027 (the “Debentures”) with an original aggregate principal amount of $135,000,000. The majority of the company’s subsidiaries are not guaranteeing the indebtedness of the Debentures (the “Non-Guarantor Subsidiaries”). Each of the Guarantor Subsidiaries has fully and unconditionally guaranteed, on a joint and several basis, to pay principal, premium, and interest related to the Debentures and each of the Guarantor Subsidiaries are directly or indirectly 100%-owned subsidiaries of the company. Specifically, the Debentures are guaranteed on an unsecured senior subordinated basis by all of our existing domestic subsidiaries (other than our captive insurance subsidiary and any receivables subsidiaries) and certain future direct and indirect 100% owned domestic subsidiaries. All of the guarantors are released and relieved of any liability under such guarantees upon the satisfaction and discharge of the indenture governing the debentures and the payment in full of the debentures. Additionally, in the event any subsidiary guarantor no longer guarantees any of our existing or future senior debt incurred in a public or private U.S. capital markets transaction, such guarantor shall be released and relieved of any liability which it has under the indenture governing the debentures.

Presented below are the consolidating condensed financial statements of Invacare Corporation (Parent), its combined Guarantor Subsidiaries and combined Non-Guarantor Subsidiaries with their investments in subsidiaries accounted for using the equity method. The company does not believe that separate financial statements of the Guarantor Subsidiaries are material to investors and accordingly, separate financial statements and other disclosures related to the Guarantor Subsidiaries are not presented.

CONSOLIDATING CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)



	The Company (Parent)			Combined Guarantor Subsidiaries		Combined Non-Guarantor Subsidiaries		Eliminations			Total
Three month period ended September 30, 2013	(in thousands)
Net sales	$	60,641		$	119,548	$	184,299	$	(23,312	)	$	341,176
Cost of products sold	52,454			86,978		128,232		(23,312		)	244,352
Gross Profit	8,187			32,570		56,067		—			96,824
Selling, general and administrative expenses	29,046			25,363		44,310		—			98,719
Charge related to restructuring activities	1,597			36		251		—			1,884
Asset write-downs to intangibles and investments	—			167		—		—			167
Income (loss) from equity investee	32,513			8,935		22		(41,470		)	—
Interest expense (income)—net	(603		)	1,213		77		—			687
Earnings (Loss) from Continuing Operations before Income Taxes	10,660			14,726		11,451		(41,470		)	(4,633		)
Income taxes (benefit)	(5,442		)	—		6,192		—			750
Net Earnings (Loss) from Continuing Operations	16,102			14,726		5,259		(41,470		)	(5,383		)
Net Earnings from Discontinued Operations	—			21,485		—		—			21,485
Net Earnings (loss)	$	16,102		$	36,211	$	5,259	$	(41,470	)	$	16,102

Other Comprehensive Income (Loss), Net of Tax	9,874			220		10,135		(10,355		)	9,874

Comprehensive Income (Loss)	$	25,976		$	36,431	$	15,394	$	(51,825	)	$	25,976

FS-30

Table of Contents

INVACARE CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (unaudited) - September 30, 2013

CONSOLIDATING CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)



	The Company (Parent)			Combined Guarantor Subsidiaries			Combined Non-Guarantor Subsidiaries		Eliminations			Total
Three month period ended September 30, 2012	(in thousands)
Net sales	$	90,406		$	116,339		$	183,801	$	(29,028	)	$	361,518
Cost of products sold	70,600			83,685			126,852		(29,031		)	252,106
Gross Profit	19,806			32,654			56,949		3			109,412
Selling, general and administrative expenses	33,712			20,356			45,492		3,721			103,281
Charge related to restructuring activities	334			18			823		—			1,175
Loss on debt extinguishment including debt finance charges and associated fees	—			—			—		—			—
Income (loss) from equity investee	17,302			(4,264		)	228		(13,266		)	—
Interest expense (income)—net	(1,024		)	2,201			771		—			1,948
Earnings (Loss) from Continuing Operations before Income Taxes	4,086			5,815			10,091		(16,984		)	3,008
Income taxes (benefit)	1,222			(3,028		)	4,251		—			2,445
Net Earnings (Loss) from Continuing Operations	2,864			8,843			5,840		(16,984		)	563
Net Earnings from Discontinued Operations	—			2,301			—		—			2,301
Net Earnings (loss)	$	2,864		$	11,144		$	5,840	$	(16,984	)	$	2,864

Other Comprehensive Income (Loss), Net of Tax	14,518			3,164			11,412		(14,576		)	14,518

Comprehensive Income (Loss)	$	17,382		$	14,308		$	17,252	$	(31,560	)	$	17,382

FS-31

Table of Contents

INVACARE CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (unaudited) - September 30, 2013

CONSOLIDATING CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)



	The Company (Parent)			Combined Guarantor Subsidiaries			Combined Non-Guarantor Subsidiaries			Eliminations			Total
Nine month period ended September 30, 2013
Net sales	$	186,453		$	364,005		$	535,805		$	(68,890	)	$	1,017,373
Cost of products sold	159,884			264,501			378,287			(69,264		)	733,408
Gross Profit	26,569			99,504			157,518			374			283,965
Selling, general and administrative expenses	99,338			72,370			131,640			2,694			306,042
Charge related to restructuring activities	5,078			49			1,871			—			6,998
Asset write-downs to intangibles and investments	—			167			—			—			167
Income (loss) from equity investee	105,501			21,472			(93		)	(126,880		)	—
Interest expense (income)—net	(1,418		)	3,141			715			—			2,438
Earnings (Loss) from Continuing Operations before Income Taxes	29,072			45,249			23,199			(129,200		)	(31,680		)
Income taxes (benefit)	(9,749		)	—			13,649			—			3,900
Net Earnings (Loss) from Continuing Operations	38,821			45,249			9,550			(129,200		)	(35,580		)
Net Earnings from Discontinued Operations	—			74,401			—			—			74,401
Net Earnings (loss)	$	38,821		$	119,650		$	9,550		$	(129,200	)	$	38,821

Other Comprehensive Income (Loss), Net of Tax	1,845			(415		)	2,228			(1,813		)	1,845

Comprehensive Income (Loss)	$	40,666		$	119,235		$	11,778		$	(131,013	)	$	40,666

FS-32

Table of Contents

INVACARE CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (unaudited) - September 30, 2013

CONSOLIDATING CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)



	The Company (Parent)			Combined Guarantor Subsidiaries			Combined Non-Guarantor Subsidiaries			Eliminations			Total
Nine month period ended September 30, 2012	(in thousands)
Net sales	$	275,742		$	355,378		$	540,535		$	(93,888	)	$	1,077,767
Cost of products sold	211,115			256,854			371,855			(93,455		)	746,369
Gross Profit	64,627			98,524			168,680			(433		)	331,398
Selling, general and administrative expenses	99,736			64,452			138,207			4,360			306,755
Charge related to restructuring activities	2,085			39			1,618			—			3,742
Loss on debt extinguishment including debt finance charges and associated fees	312			—			—			—			312
Income (loss) from equity investee	45,175			1,954			391			(47,520		)	—
Interest expense (income)—net	(3,041		)	6,396			2,374			—			5,729
Earnings (Loss) from Continuing Operations before Income Taxes	10,710			29,591			26,872			(52,313		)	14,860
Income taxes (benefit)	1,590			(5,164		)	18,060			—			14,486
Net Earnings (Loss) from Continuing Operations	9,120			34,755			8,812			(52,313		)	374
Net Earnings from Discontinued Operations	—			8,746			—			—			8,746
Net Earnings (loss)	$	9,120		$	43,501		$	8,812		$	(52,313	)	$	9,120

Other Comprehensive Income (Loss), Net of Tax	(24,673		)	3,179			(27,878		)	24,699			(24,673		)

Comprehensive Income (Loss)	$	(15,553	)	$	46,680		$	(19,066	)	$	(27,614	)	$	(15,553	)

FS-33

Table of Contents

INVACARE CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (unaudited) - September 30, 2013

CONSOLIDATING CONDENSED BALANCE SHEETS



	The Company (Parent)		Combined Guarantor Subsidiaries		Combined Non-Guarantor Subsidiaries		Eliminations			Total
September 30, 2013	(in thousands)
Assets
Current Assets
Cash and cash equivalents	$	3,148	$	—	$	29,477	$	—		$	32,625
Trade receivables, net	69,633		29,453		92,378		—			191,464
Installment receivables, net	—		569		991		—			1,560
Inventories, net	37,797		27,784		104,970		(3,183		)	167,368
Intercompany advances, net	5,055		664		43,145		(48,864		)	—
Other current assets	6,371		570		34,129		(7,240		)	33,830
Total Current Assets	122,004		59,040		305,090		(59,287		)	426,847
Investment in subsidiaries	1,433,252		440,197		—		(1,873,449		)	—
Intercompany advances, net	937,116		1,592,785		178,180		(2,708,081		)	—
Other Assets	38,961		463		903		—			40,327
Other Intangibles	553		19,139		45,413		—			65,105
Property and Equipment, net	36,783		18,621		52,987		—			108,391
Goodwill	—		16,660		434,067		—			450,727
Total Assets	$	2,568,669	$	2,146,905	$	1,016,640	$	(4,640,817	)	$	1,091,397
Liabilities and Shareholders’ Equity
Current Liabilities
Accounts payable	$	50,462	$	8,237	$	58,985	$	—		$	117,684
Accrued expenses	30,864		17,737		89,118		(7,240		)	130,479
Accrued income taxes	5,540		—		1,661		—			7,201
Intercompany advances, net	41,889		1,481		5,494		(48,864		)	—
Short-term debt and current maturities of long-term obligations	556		7		731		—			1,294
Total Current Liabilities	129,311		27,462		155,989		(56,104		)	256,658
Long-Term Debt	22,476		82		32,217		—			54,775
Other Long-Term Obligations	54,176		—		60,597		—			114,773
Intercompany advances, net	1,707,515		936,722		63,844		(2,708,081		)	—
Total Shareholders’ Equity	655,191		1,182,639		703,993		(1,876,632		)	665,191
Total Liabilities and Shareholders’ Equity	$	2,568,669	$	2,146,905	$	1,016,640	$	(4,640,817	)	$	1,091,397

FS-34

Table of Contents

INVACARE CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (unaudited) - September 30, 2013

CONSOLIDATING CONDENSED BALANCE SHEETS



	The Company (Parent)		Combined Guarantor Subsidiaries		Combined Non-Guarantor Subsidiaries		Eliminations			Total
December 31, 2012	(in thousands)
Assets
Current Assets
Cash and cash equivalents	$	5,774	$	1,018	$	31,999	$	—		$	38,791
Trade receivables, net	71,622		37,223		89,946		—			198,791
Installment receivables, net	—		829		1,359		—			2,188
Inventories, net	40,278		31,455		114,169		(2,656		)	183,246
Intercompany advances, net	4,077		763		64,570		(69,410		)	—
Other current assets	12,727		473		34,606		(6,030		)	41,776
Assets held for sale - current	—		103,157		—		—			103,157
Total Current Assets	134,478		174,918		336,649		(78,096		)	567,949
Investment in subsidiaries	1,536,898		523,176		6,888		(2,066,962		)	—
Intercompany advances, net	863,973		1,468,405		173,903		(2,506,281		)	—
Other Assets	41,006		314		942		—			42,262
Other Intangibles	663		22,211		48,778		—			71,652
Property and Equipment, net	39,911		19,957		58,363		—			118,231
Goodwill	—		32,937		429,263		—			462,200
Total Assets	$	2,616,929	$	2,241,918	$	1,054,786	$	(4,651,339	)	$	1,262,294
Liabilities and Shareholders’ Equity
Current Liabilities
Accounts payable	$	63,812	$	9,465	$	59,771	$	—		$	133,048
Accrued expenses	36,716		18,155		86,348		(6,030		)	135,189
Accrued income taxes	1,545		—		1,168		—			2,713
Intercompany advances, net	61,368		2,369		5,673		(69,410		)	—
Short-term debt and current maturities of long-term obligations	4,552		7		868		—			5,427
Liabilities held for sale - current	—		23,358		—		—			23,358
Total Current Liabilities	167,993		53,354		153,828		(75,440		)	299,735
Long-Term Debt	223,014		143		6,218		—			229,375
Other Long-Term Obligations	52,957		—		59,238		—			112,195
Intercompany advances, net	1,551,976		863,585		90,720		(2,506,281		)	—
Total Shareholders’ Equity	620,989		1,324,836		744,782		(2,069,618		)	620,989
Total Liabilities and Shareholders’ Equity	$	2,616,929	$	2,241,918	$	1,054,786	$	(4,651,339	)	$	1,262,294

FS-35

Table of Contents

INVACARE CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (unaudited) - September 30, 2013

CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS



	The Company (Parent)			Combined Guarantor Subsidiaries			Combined Non-Guarantor Subsidiaries			Eliminations			Total
Nine month period ended September 30, 2013	(in thousands)
Net Cash Provided (Used) by Operating Activities	$	35,179		$	(81,077	)	$	(20,736	)	$	65,389		$	(1,245	)
Investing Activities
Purchases of property and equipment	(3,234		)	(3,611		)	(4,241		)	—			(11,086		)
Proceeds from sale of property and equipment	—			11			845			—			856
Proceeds from sale of business	—			187,552			—			—			187,552
Other long-term assets	783			—			166			—			949
Other	171,353			(103,417		)	—			(68,083		)	(147		)
Net Cash Provided (Used) for Investing Activities	168,902			80,535			(3,230		)	(68,083		)	178,124
Financing Activities
Proceeds from revolving lines of credit and long-term borrowings	226,189			—			23,935			—			250,124
Payments on revolving lines of credit and long-term borrowings	(431,709		)	(476		)	—			—			(432,185		)
Payment of dividends	(1,187		)	—			(2,694		)	2,694			(1,187		)
Net Cash Provided (Used) by Financing Activities	(206,707		)	(476		)	21,241			2,694			(183,248		)
Effect of exchange rate changes on cash	—			—			203			—			203
Decrease in cash and cash equivalents	(2,626		)	(1,018		)	(2,522		)	—			(6,166		)
Cash and cash equivalents at beginning of year	5,774			1,018			31,999			—			38,791
Cash and cash equivalents at end of period	$	3,148		$	—		$	29,477		$	—		$	32,625

FS-36

Table of Contents

INVACARE CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (unaudited) - September 30, 2013

CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS



	The Company (Parent)			Combined Guarantor Subsidiaries			Combined Non-Guarantor Subsidiaries			Eliminations			Total
Nine month period ended September 30, 2012	(in thousands)
Net Cash Provided (Used) by Operating Activities	$	18,260		$	5,405		$	7,527		$	(4,370	)	$	26,822
Investing Activities
Purchases of property and equipment	(1,353		)	(7,854		)	(5,568		)	—			(14,775		)
Proceeds from sale of property and equipment	18			14			65			—			97
Other long-term assets	(214		)	—			623			—			409
Other	(158		)	(117		)	56			—			(219		)
Net Cash Used for Investing Activities	(1,707		)	(7,957		)	(4,824		)	—			(14,488		)
Financing Activities
Proceeds from revolving lines of credit and long-term borrowings	252,590			3,113			—			—			255,703
Payments on revolving lines of credit and long-term borrowings	(266,182		)	—			(539		)	—			(266,721		)
Payment of financing costs	(1		)	—			—			—			(1		)
Payment of dividends	(1,183		)	—			(4,370		)	4,370			(1,183		)
Net Cash Provided (Used) by Financing Activities	(14,776		)	3,113			(4,909		)	4,370			(12,202		)
Effect of exchange rate changes on cash	—			—			226			—			226
Increase (Decrease) in cash and cash equivalents	1,777			561			(1,980		)	—			358
Cash and cash equivalents at beginning of year	3,642			2,104			29,178			—			34,924
Cash and cash equivalents at end of period	$	5,419		$	2,665		$	27,198		$	—		$	35,282

FS-37

Table of Contents

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Continuing Operations.

OUTLOOK

With respect to the status of the consent decree with the United States Food and Drug Administration (FDA), the company has made significant progress on the final, most comprehensive third-party certification audit at the Corporate and Taylor Street facilities in Elyria, Ohio. The company is targeting to have the certification report stating that the company is in compliance with 21 CFR Part 820 of the Quality System Regulation (QSR) completed by the third-party expert and filed with the FDA by mid-November 2013. There remains some scheduling issues and final work to complete in order to reach the targeted timing. In addition, since receiving the FDA's acceptance of the second certification report in July, the company has restarted new product development on critical projects, such as complex power wheelchairs.

The company is actively managing expenses as it works through the consent decree process. Restructuring efforts to make the company more cost competitive continue in line with the company's globalization strategy to reduce complexity within the business and focus on its core medical equipment product lines. Accordingly, the company is considering the possible divestiture or closure of subsidiaries that are outside the company's core equipment business. Cost reduction initiatives continue, including general expense reduction, project delays and infrastructure consolidation. In addition, the company is closely monitoring the roll-out of the second round of National Competitive Bidding ("NCB"), which became effective in 91 additional metropolitan statistical areas in the U.S. on July 1, 2013. The company estimates that, for the first nine months of 2013, approximately $220,000,000 in net sales of its U.S. HME equipment business, the major division within the NA/HME segment, are in products sold to home care providers that are included in the competitive bidding product categories. When the company's products are ordered by HME customers, the company does not know if the products are then billed by the customer for Medicare, Medicaid, private pay reimbursement or sold as cash sales. However, industry studies have shown historically that approximately 40% of HME providers revenues on average are paid by Medicare. Additionally, it is estimated that round one and round two of NCB, which include a total of 100 metropolitan statistical areas, account for approximately 75% of its spending on durable medical equipment. Taking the $220,000,000 of U.S. HME net sales for the first nine months of 2013 of NCB bid categorized product and applying the previously mentioned 40% and then the 75% estimates, the products exposed to NCB could be approximately $66,000,000. This estimate does not include other potential pricing pressures that could also impact HME providers from other payors. At this early stage of the NCB program, it is difficult to estimate the realized impact from NCB on the company's domestic home medical equipment business, since there continues to be uncertainty as the industry realigns and adjusts itself to the small number of bid contracts awarded.

STATUS OF THE CONSENT DECREE

The FDA consent decree at the Corporate and Taylor Street facilities in Elyria, Ohio, requires that a third-party expert perform three separate certification audits. In order to resume full operations, the third-party certification audit reports must be submitted to the FDA for review and acceptance. After the final certification report is provided to the FDA, along with the company's own report as to its compliance with the FDA's QSR as well as the actions taken to correct any violation that may have been brought to the company's attention in the third-party certification report, the company expects the FDA to conduct its own audit of the impacted facilities. The company has already received the FDA's acceptance of two of the three certification reports, and it is targeting to have the final third-party certification report completed and filed with the FDA by mid-November 2013. There remains some scheduling issues and final work to complete in order to reach the targeted timing. According to the consent decree, the FDA is expected to commence its own inspection of the impacted facilities within thirty days of receipt of the third-party expert's final certification report and the company's accompanying report. If, following its inspection, the FDA finds the company to be in compliance, it will issue a written notification permitting the company to resume full operations at the Corporate and Taylor Street facilities. It is not possible for the company to estimate the timing of or potential response from the FDA's inspection. The company will provide investors with an update when the final, third-party expert certification report is filed with the FDA. See the “Contingencies” note to the financial statements contained in Item 1 of this Form 10-Q and “Forward-Looking Statements” contained below in this Item.

I-1

Table of Contents

RESULTS OF CONTINUING OPERATIONS

Except for free cash flow, the financial information for all periods excludes the results of discontinued operations. Discontinued operations include Invacare Supply Group (ISG), the company's former domestic medical supplies business that was divested on January 18, 2013 and Champion Manufacturing, Inc. (Champion), the company's former domestic medical recliner business for dialysis clinics that was divested on August 6, 2013. Champion was a part of the Institutional Products Group segment. For more information, see the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.

Champion was sold to Champion Equity Holdings, LLC for $45,000,000 in cash, subject to certain post-closing adjustments. This divestiture was consistent with the company's focus on its globalization strategy to harmonize core global product lines and reduce complexity within its business. The company realized net proceeds from the sale of the Champion business of $42,872,000, net of tax and expenses, which were used to reduce debt outstanding under its revolving credit facility.

Net Sales. Consolidated net sales for the quarter ended September 30, 2013 decreased 5.6% to $341,176,000 versus $361,518,000 for the same period last year. Foreign currency translation increased net sales by 1.4 percentage points. Organic net sales for the quarter decreased by 7.0% over the same period a year ago as increases in Europe were more than offset by declines in all other segments. The largest decline in net sales was in the North America/Home Medical Equipment (HME) segment, primarily in mobility and seating products, principally due to the reduced order volume at the company's Taylor Street manufacturing facility resulting from the FDA consent decree. The company estimates that sales of products manufactured at the Taylor Street facility, which includes some products sold outside of the North America/HME segment, were approximately $12.0 million in the third quarter compared to approximately $37.6 million in the third quarter of last year.

Net sales for the nine months ended September 30, 2013 decreased 5.6% to $1,017,373,000 versus $1,077,767,000 for the same period last year. Foreign currency translation increased net sales by 0.6 of a percentage point. Organic net sales for the first nine months of 2013 decreased 6.2% over the same period last year as increases in Europe were more than offset by declines in all other segments. The largest decline in net sales was in the North America/HME segment, primarily in mobility and seating products, principally due to the reduced order volume at the company's Taylor Street manufacturing facility resulting from the FDA consent decree. The company estimates that sales of products manufactured from the Taylor Street facility, which includes some products sold outside of the North America/HME segment, were approximately $43.7 million in the first nine months of the year compared to approximately $114.2 million in the first nine months of last year.

North America/Home Medical Equipment (HME)

North America/HME net sales decreased 11.5% for the quarter to $151,052,000 as compared to $170,701,000 for the same period a year ago with foreign currency translation decreasing net sales by 0.3 of a percentage point. The organic net sales decrease of 11.2% was primarily driven by declines in mobility and seating and lifestyle products. The decline in organic net sales was partially offset by increased net sales in respiratory products, partially driven by a large order of Invacare® HomeFill® oxygen systems by a large national account. The sales decline in mobility and seating products was primarily driven by the impact of the consent decree with the FDA, which limits production of custom power wheelchairs and seating systems at the Taylor Street manufacturing facility. While products ordered from the Taylor Street facility continued to be fulfilled with properly completed verification of medical necessity (VMN) documentation, the number of new orders that were fulfilled in the third quarter of 2013 represented 11.2% of the company's unit volume of domestic power wheelchair shipments from the facility in the same period last year. For the nine months ended September 30, 2013, net sales decreased by 12.3% to $462,261,000 as compared to $527,103,000 for the same period a year ago with foreign currency translation decreasing net sales by 0.1 of a percentage point. The organic net sales decrease of 12.2% was primarily driven by declines in mobility and seating and lifestyle products, partially offset by increased net sales in respiratory products. The sales decline in mobility and seating products was primarily driven by the impact of the consent decree with the FDA, which limits production of custom power wheelchairs and seating systems at the Taylor Street manufacturing facility. The company has provided extended payment terms to certain customers where the volume of business justifies the extended terms.

Institutional Products Group (IPG)

IPG net sales for the quarter decreased 16.3% to $28,083,000 compared to $33,557,000 for the same period last year as foreign currency decreased net sales by 0.2 of a percentage point. Organic net sales decreased by 16.1% due to declines in all product categories. In the third quarter of 2012, organic net sales grew 22.2% compared to third quarter 2011, primarily due to increases in interior design projects for long-term care facilities that did not reoccur in 2013. For the nine months ended September 30, 2013, IPG net sales decreased by 9.0% to $87,135,000 compared to $95,726,000 during the same period last year

I-2

Table of Contents

as foreign currency decreased net sales by 0.1 of a percentage point. Organic net sales decreased 8.9% primarily driven by declines in all product lines as prior year net sales were particularly strong due to increases in interior design projects.

Europe

For the quarter, European net sales increased 6.0% to $150,265,000 versus $141,705,000 for the third quarter last year with foreign currency translation increasing net sales by 4.5 percentage points. The organic net sales increase of 1.5% was primarily related to increases in net sales of lifestyle and mobility and seating products, which were partially offset by declines in respiratory products. For the nine months ended September 30, 2013, European net sales increased 7.0% to $429,650,000 versus $401,721,000 for the first nine months of last year as foreign currency translation increased net sales by 2.0 percentage points. Organic net sales increased by 5.0% due to increases in net sales of lifestyle and mobility and seating products, which were partially offset by slight declines in respiratory products.

Asia/Pacific

Asia/Pacific net sales decreased 24.3% for the quarter to $11,776,000 as compared to $15,555,000 for the same period a year ago. Organic net sales decreased 20.1% as foreign currency translation decreased net sales by 4.2 percentage points. For the nine months ended September 30, 2013, Asia/Pacific net sales decreased 28.0% to $38,327,000 versus $53,217,000 for the same period last year as foreign currency translation decreased net sales by one percentage point. Organic net sales decreased by 27.0%. Net sales declined for the three and nine months ended September 30, 2013 as the company's Australian distribution business experienced declines in mobility and seating and lifestyle products and the company's subsidiary which produces microprocessor controllers recognized reduced sales of controllers. Contract manufacturing business with companies outside of the healthcare industry decreased as a result of the company's decision to exit that business.

Gross Profit. Consolidated gross profit as a percentage of net sales for the three and nine months ended September 30, 2013 was 28.4% and 27.9%, respectively, compared to 30.3% and 30.7%, respectively, in the same periods last year. The margin was negatively impacted principally by the North America/HME sales decline in custom power wheelchairs, which is one of the company's higher margin product lines. In addition, the negative impact of reduced order volume through the Taylor Street manufacturing facility caused an unfavorable absorption of fixed costs for this facility. Gross margin also was negatively impacted by sales mix favoring lower margin products and lower margin customers. Gross margin was positively impacted by reduced warranty expense.

For the first nine months of the year, North America/HME gross profit as a percentage of net sales decreased by 5.7 percentage points compared to the same period last year. The decline in margins was primarily as a result of volume declines, unfavorable sales mix favoring lower margin customers and lower margin products and unfavorable absorption of fixed costs at the Taylor Street manufacturing facility related to the impact of the consent decree. While warranty expense for the first nine months of 2013 is favorable to the same period in 2012, North America/HME incurred a charge of approximately $400,000 in the second quarter of 2013 related to anticipated warranty expense related to a power wheelchair joystick recall, which was partially offset by the reversal of accrued warranty expense related to the closure of other field actions.

For the first nine months of the year, IPG gross profit as a percentage of net sales increased 1.5 of a percentage point compared to the same period last year. The increase in margin is primarily attributable to favorable product mix.

For the first nine months of the year, gross profit in Europe as a percentage of net sales increased 0.7 of a percentage point compared to the same period last year. Gross profit was favorably impacted by volume increases, which were partially offset by an unfavorable sales mix favoring lower margin product lines and lower margin customers.

For the first nine months of the year, gross profit in Asia/Pacific as a percentage of net sales decreased by 16.0 percentage points compared to the same period last year. The decline was due to volume declines and an increase in warranty expense of approximately $3,400,000 recorded in the second quarter of 2013 as the result of a power wheelchair joystick recall. Excluding the warranty expense increase, gross profit decreased by 7.2 percentage points compared to the same period last year primarily as a result of volume declines and unfavorable product mix at the company's subsidiary which produces microprocessor controllers.

Selling, General and Administrative. Consolidated selling, general and administrative (SG&A) expenses as a percentage of net sales for the three and nine months ended September 30, 2013 was 28.9% and 30.1%, respectively, compared to 28.6% and 28.5%, respectively, for the same period a year ago. However, SG&A expenses decreased to $4,562,000 or 4.4% for the quarter and $713,000 or 0.2% for the first nine months of the year compared to the same periods a year ago. Foreign currency translation increased expenses by $873,000 in the quarter and by $1,050,000 for the first nine months of the year. Excluding the impact of foreign currency translation, SG&A expenses decreased 5.3% for the quarter and by 0.6% for the first nine months of the year

I-3

Table of Contents

compared to the same period a year ago. The dollar decrease, excluding foreign currency translation, was $5,435,000 for the quarter and $1,763,000 for the first nine months of the year compared to the same period a year ago. The SG&A expense decrease for the quarter and first nine months of the year primarily related to a decrease in regulatory and compliance costs. Amortization expense for the first nine months of 2013 includes an increase of $1,216,000 as a result of the write-off of bank fees, previously capitalized, related to the amendment for the company's credit facility finalized during the second quarter of 2013 which reduced the capacity on the facility from $400,000,000 to $250,000,000 effective May 30, 2013. Excluding the impact of foreign currency translation and the write-off of bank fees, SG&A expense decreased by $2,979,000 or 1.0% for the first nine months of the year.

SG&A expenses for North America/HME decreased 6.0% or $3,146,000 for the quarter and decreased 0.4% or $581,000 for the three and nine months ended September 30, 2013 as compared to the same periods a year ago. Foreign currency translation decreased SG&A expenses by $198,000 or 0.4 of a percentage point for the quarter and decreased SG&A expenses by $312,000 or 0.2 of a percentage point for the first nine months of the year. Excluding the foreign currency translation, SG&A expenses decreased $2,948,000 or 5.6 percentage points for the quarter and decreased $269,000 or 0.2 of a percentage point for the first nine months of the year. The expense decrease for both the quarter and year to date was principally due to decreased regulatory and compliance costs partially offset by higher associate costs for the first nine months of 2013.

SG&A expenses for IPG decreased by 9.8% or $1,181,000 for the quarter and increased by 1.4% or $474,000 for the first nine months of 2013 compared to the same periods a year ago. Foreign currency translation did not have a material impact for the quarter or year to date. The SG&A expense decrease for the quarter was primarily attributable to the absence of the acquisition earn-out expense that was recorded in the third quarter of last year due to the profitability achievement of a rentals acquisition. The increase in SG&A expense in the first nine months of 2013 was primarily attributable to increased associate costs.

European SG&A expenses increased by 7.5% or $2,275,000 for the quarter and increased by 7.3% or $6,711,000 compared to the same periods a year ago. Foreign currency translation increased SG&A expenses by approximately $1,419,000 or 4.7 percentage points for the quarter and increased SG&A expenses by approximately $1,660,000 or 1.8 percentage points for the first nine months of 2013. Excluding the foreign currency translation impact, SG&A expenses increased by $856,000 or 2.8% for the quarter and increased by $5,051,000 or 5.5% in the first nine months of 2013 primarily due to increased associate costs and foreign currency transactions.

Asia/Pacific SG&A expenses decreased 31.3% or $2,510,000 and for the quarter and decreased 30.0% or $7,317,000 for the first nine months of 2013 as compared to the same periods a year ago. Foreign currency translation decreased SG&A expenses by approximately $330,000 or 4.1 percentage points for the quarter and decreased SG&A expenses by approximately $273,000 or 1.1 percentage points for the first nine months of 2013. Excluding the foreign currency translation impact, SG&A expenses decreased by $2,180,000 or 27.2% for the quarter and decreased by $7,044,000 or 28.9% in the first nine months of 2013 principally as a result of reduced personnel costs resulting from restructuring activities in 2012.

Charge Related to Restructuring Activities. Restructuring continued during the quarter resulting in restructuring charges of $1,884,000 and $6,998,000 for the three and nine months ended September 30, 2013, respectively, principally for severance in NA/HME and to a lesser extent Europe and Asia/Pacific as a result of the permanent elimination of certain positions. The majority of the outstanding restructuring accruals at September 30, 2013 are expected to be paid out within the next twelve months.

Asset Write-downs Related to Intangible Assets. In the third quarter of 2013, the company decided to cease business operations at its subsidiary that offered repair services to U.S. homecare and long-term care medical equipment providers. As a result, the company recognized an intangible impairment write-down charge of $167,000 related to a customer list intangible asset in the HA/HME Segment.

Interest. Interest expense decreased to $745,000 and $2,677,000 for the third quarter and for the first nine months of 2013 compared to $2,114,000 and $6,339,000 for the same periods a year ago, representing a 64.8% and 57.8% decrease, respectively. This decline is primarily attributable to reduced debt levels and lower borrowing costs in 2013 as compared to 2012. Interest income decreased due to a reduction in the volume of financing provided to customers to $58,000 and $239,000 for the third quarter and for the first nine months of 2013, respectively, compared to $166,000 and $610,000 for the comparable periods in 2012.

Income Taxes. The company had an effective tax rate of 16.2% and 12.3% on losses before tax from continuing operations for the three and nine month periods ended September 30, 2013, respectively, compared to an expected benefit at the U.S. statutory rate of 35%. The company's effective tax rate for the three and nine months ended September 30, 2013 was greater than the U.S. federal statutory rate, principally due to losses overseas without tax benefit due to valuation allowance, foreign dividends which reduced the domestic intra-period allocation benefit in continuing operations, and the recording of a discrete adjustment of $3,143,000 related to a federal domestic valuation allowance adjustment. The rate was benefited by taxes outside the United States,

I-4

Table of Contents

excluding countries with valuation allowances that are in losses in 2013, recorded at a lower effective rate than the U.S. statutory rate. The company had an effective tax rate of 81.3% and 97.5% on earnings before tax from continuing operations for the three and nine month period ended September 30, 2012, respectively, compared to an expected rate at the U.S. statutory rate of 35%. The company's effective tax rate for the three and nine months ended September 30, 2012 was greater than the U.S. federal statutory rate, principally due to a foreign discrete tax adjustment of $9,173,000 ($0.29 per share), recorded in the first nine months of 2012, of which $3,178,000 was interest, related to prior year periods under audit, which is being contested by the company. This adjustment was partially offset by foreign earnings taxed at an effective rate lower than the U.S. statutory rate principally due to foreign taxes recognized at rates below the U.S. statutory rate.

LIQUIDITY AND CAPITAL RESOURCES

The company continues to maintain an adequate liquidity position through its unused bank lines of credit (see Long-Term Debt in the Notes to Condensed Consolidated Financial Statements included in this report) and working capital management.

The company's total debt outstanding, inclusive of the debt discount included in equity in accordance with FSB APB 14-1, decreased by $179,200,000 to $58,943,000 at September 30, 2013 from $238,143,000 as of December 31, 2012. The company's balance sheet reflects the impact of ASC 470-20, which reduced debt and increased equity by $2,874,000 and $3,341,000 as of September 30, 2013 and December 31, 2012, respectively. The debt decrease during the first nine months was principally a result of using the proceeds from the sale of ISG in the first quarter and Champion in the third quarter to reduce debt outstanding under the company's revolving credit facility. The company's cash and cash equivalents were $32,625,000 at September 30, 2013, down from $38,791,000 as of December 31, 2012. At September 30, 2013, the company had outstanding borrowings of $38,968,000 on its revolving credit facility versus $217,494,000 as of December 31, 2012.

The company's borrowing capacity and cash on hand were utilized for normal operations during the period ended September 30, 2013. Debt repurchases, acquisitions, divestitures, the timing of vendor payments, the granting of extended payment terms to significant national accounts and other activity can have a significant impact on the company's cash flow and borrowings outstanding such that the debt reported at the end of a given period may be materially different than debt levels during a given period. For the nine months ended September 30, 2013, the outstanding borrowings on the company's revolving credit facility varied from a low of $39,000,000 to a high of $267,900,000. While the company has cash balances in various jurisdictions around the world, there are no material restrictions under the credit facility regarding the use of such cash for dividends within the company, loans or other purposes.

On May 30, 2013, the company entered into a Fourth Amendment ("the Amendment") to its Credit Agreement. Pursuant to the Amendment, the Credit Agreement was amended to: (i) decrease the aggregate principal amount of the revolving credit facility to $250,000,000 from $400,000,000, and limit the company's borrowings under the revolving credit facility to an amount not to exceed $200,000,000 aggregate principal amount through December 31, 2013; (ii) increase the maximum leverage ratio (consolidated funded indebtedness to consolidated EBITDA, each as defined in the Credit Agreement, as amended) to 4.00 to 1.00 from 3.50 to 1.00 until January 1, 2014, when the maximum leverage ratio will revert back to 3.50 to 1.00; (iii) decrease the minimum interest coverage ratio (consolidated EBITDA to consolidated interest charges, each as defined in the Credit Agreement, as amended) to 3.00 to 1.00 from 3.50 to 1.00 until January 1, 2014, when the minimum interest coverage ratio will revert back to 3.50 to 1.00; (iv) in calculating consolidated EBITDA for purposes of determining the ratios, provide for the add back to consolidated EBITDA of up to an additional $15,000,000 for future one-time cash restructuring charges and (v) provide for an increase of (A) 25 basis points in the margin applicable to determining the interest rate on borrowings under the revolving credit facility and letter of credit fees and (B) 10 basis points in the commitment fee, all during periods when the leverage ratio exceeds 3.50 to 1.00. Compliance with the ratios is tested at the end of the quarter in accordance with the credit agreement. As a result of the amendment, the company incurred $436,000 in fees in the second quarter of 2013 which were capitalized and are being amortized through October, 2015. In addition, as a result of reducing the capacity of the facility from $400,000,000 to $250,000,000, the company wrote-off $1,216,000 in fees previously capitalized in the second quarter of 2013, which is reflected in the expense of the North America / HME segment.

The company's senior secured revolving credit agreement, as amended, (the “Credit Agreement”) provides for a $250,000,000 senior secured revolving credit facility maturing in October 2015. Pursuant to the terms of the Credit Agreement, the company may from time to time borrow, repay and re-borrow up to an aggregate outstanding amount at any one time of $200,000,000 through December 31, 2013 and $250,000,000 thereafter, subject to customary conditions. The Credit Agreement also provides for the issuance of swing line loans. Borrowings under the Credit Agreement bear interest, at the company's election, at (i) the London Inter-Bank Offer Rate (“LIBOR”) plus a margin; or (ii) a Base Rate Option plus a margin. The applicable margin is currently 2.5% per annum for LIBOR loans and 1.50% for the Base Rate Option loans based on the company's leverage ratio. In addition to interest, the company is required to pay commitment fees on the unused portion of the Credit Agreement. The commitment fee rate is currently 0.40% per annum. Like the interest rate spreads, the commitment fee is subject to adjustment

I-5

Table of Contents

based on the company's leverage ratio. The amendment to the Credit Agreement provided for an increase of (A) 25 basis points in the margin applicable to determining the interest rate on borrowings under the revolving credit facility and letter of credit fees and (B) 10 basis points in the commitment fee, all during periods when the company's leverage ratio exceeds 3.50 to 1.00. The obligations of the borrowers under the Credit Agreement are secured by substantially all of the company's U.S. assets and are guaranteed by substantially all of the company's material domestic and foreign subsidiaries.

The Credit Agreement contains certain covenants that are customary for similar credit arrangements, including covenants relating to, among other things, financial reporting and notification, compliance with laws, preservation of existence, maintenance of books and records, use of proceeds, maintenance of properties and insurance, and limitations on liens, dispositions, issuance of debt, investments, payment of dividends, repurchases of capital stock, acquisitions, transactions with affiliates, and capital expenditures. There also are financial covenants that currently require the company to maintain a maximum leverage ratio (consolidated funded indebtedness to consolidated EBITDA, each as defined in the Credit Agreement) of no greater than 4.0 to 1 until January 1, 2014, when the maximum leverage ratio will revert back to 3.5 to 1, and a minimum interest coverage ratio (consolidated EBITDA to consolidated interest charges, each as defined in the Credit Agreement) of no less than 3.0 to 1 until January 1, 2014, when the minimum interest coverage ratio will revert back to 3.5 to 1. In calculating the ratios under the original Credit Agreement, the company could exclude up to $15,000,000 of cash restructuring charges from the calculation of EBITDA over the life of the agreement, and the company reached that maximum amount in the fourth quarter of 2012. However, the amended Credit Agreement provides for the exclusion of up to an additional $15,000,000 of future one-time cash restructuring charges from the calculation of EBITDA over the remaining life of the agreement. As of September 30, 2013, the company's leverage ratio was 2.04 and the company's interest coverage ratio was 9.13 compared to a leverage ratio of 2.66 and an interest coverage ratio of 19.00 as of December 31, 2012. As of September 30, 2013, the company was in compliance with all covenant requirements and under the most restrictive covenant of the company's borrowing arrangements, the company had the capacity to borrow up to an additional $61,442,000. Compliance with the ratios is tested at the end of the quarter in accordance with the credit agreement.

The company's Credit Agreement, as well as cash flows from operations, has been a principal source of financing for much of its liquidity needs. If the company were unsuccessful in meeting its leverage or interest coverage ratios, or other, financial or operating covenants in its credit facility, it would result in a default, which could trigger acceleration of, or the right to accelerate, the related debt. Because of cross-default provisions in the agreements and instruments governing certain of the company's indebtedness, a default under the credit facility could result in a default under, and the acceleration of, certain other company indebtedness. In addition, the company's lenders would be entitled to proceed against the collateral securing the indebtedness.

During the first quarter of 2013, the company completed the sale of its ISG business for net proceeds of $144,680,000 in cash and on August 6, 2013, the company sold Champion, its domestic medical recliner business for dialysis clinics for net proceeds of $42,872,000 in cash. The net proceeds from these divestitures were used to repay amounts outstanding under the credit facility and other current payables and thereby improve the company's leverage ratio.

Based on the company's current expectations, the company believes that its cash balances and available borrowing capacity under its senior credit facility should be sufficient to meet working capital needs, capital requirements, and commitments for at least the next twelve months. However, the company's ability to satisfy its liquidity needs will depend on many factors, including the operating performance of the business, the company's ability to successfully complete in a timely manner the third-party expert certification audit and FDA inspection contemplated under the consent decree and receipt of the written notification from the FDA permitting the company to resume full operations, as well as the company's continued compliance with the covenants under its credit facility. Notwithstanding the company's expectations, if the company's operating results decline substantially more than it currently anticipates, or if the company is unable to successfully complete the consent decree-related third-party expert certification audit and FDA inspection within the currently estimated time frame (including as a result of any need to complete significant additional remediation arising from the third-party expert certification audits of the FDA inspection), the company may be unable to comply with the financial covenants, and its lenders could demand repayment of the amounts outstanding under the company's credit facility.

As a result, continued compliance with, in particular, the leverage covenant under the company's credit facility remains a high priority, which means the company has remained focused on generating sufficient cash and managing its expenditures. The company also may examine alternatives such as raising additional capital through permitted asset sales. In addition, if necessary or advisable, the company may seek to amend or renegotiate its credit facility in order to remain in compliance. The company can make no assurances that under such circumstances its financing arrangements could be renegotiated, or that alternative financing would be available on terms acceptable to the company, if at all.

I-6

Table of Contents

on prevailing market conditions, the company's liquidity requirements, contractual restrictions and other factors. The amounts involved in any such transactions, individually or in the aggregate, may be material. At September 30, 2013, the company had $13,350,000 aggregate principal amount outstanding of its Convertible Senior Subordinated Debentures.

While there is general concern about the potential for rising interest rates, the company believes that its exposure to interest rate fluctuations is manageable given that portions of the company's debt are at fixed rates into 2014, the company has the ability to utilize swaps to exchange variable rate debt for fixed rate debt, if needed, and the company expects that it will be able to absorb any modest rate increases in the months ahead without any material impact on its liquidity or capital resources. The company is a party to an interest rate swap agreement to effectively convert a portion of floating rate revolving credit facility debt to fixed rate debt to avoid the risk of changes in market interest rates. As of September 30, 2013, interest associated with $12,000,000 of the outstanding revolver balance of $38,968,000 was fixed via an interest rate swap agreement. Specifically, an interest rate swap agreement for a notional amount of $12,000,000 through April 2014 was entered into that fixes the LIBOR component of the interest rate on that portion of the revolving credit facility debt at a rate of 0.54% for an effective aggregate rate of 3.04%. As of September 30, 2013, the weighted average floating interest rate on revolving credit borrowings was 2.45% compared to 2.21% as of December 31, 2012.

CAPITAL EXPENDITURES

There are no individually material capital expenditure commitments outstanding as of September 30, 2013. The company estimates that capital investments for 2013 could approximate between $15,000,000 and $18,000,000, compared to actual capital expenditures of $20,091,000 in 2012. The company believes that its balances of cash and cash equivalents, together with funds generated from operations and existing borrowing facilities, will be sufficient to meet its operating cash requirements and fund required capital expenditures for the foreseeable future.

CASH FLOWS

Cash flows used by operating activities were $1,245,000 in for the first nine months of 2013, compared to cash flows provided by operating activities of $26,822,000 in the first nine months of 2012. The decline in operating cash flows in 2013 was primarily attributable to reduced net earnings, excluding the gains on discontinued operations, and a reduction in accounts payable partially offset by decreased inventories and accounts receivable.

Cash flows provided by investing activities were $178,124,000 for the first nine months of 2013, compared to cash used of $14,488,000 in the first nine months of 2012. The significant change in investing cash flow was primarily attributable to the receipt of $187,552,000 in net proceeds resulting from the sale of ISG and Champion.

Cash flows used by financing activities were $183,248,000 in the first nine months of 2013 compared to cash flow used of $12,202,000 in the first nine months of 2012. Cash flows used in the first nine months of 2013 reflect the net pay down in debt as the majority of the proceeds from the sale of ISG and all the proceeds from the sale of Champion were used to pay down debt in 2013.

During the first nine months of 2013, the company used free cash flow of $3,670,000 compared to generated free cash flow of $17,894,000 in the first nine months of 2012. The decrease in free cash flow is due primarily to reduced net earnings. Free cash flow is a non-GAAP financial measure that is comprised of net cash provided by operating activities, excluding net cash flow impact related to restructuring activities, less net purchases of property and equipment, net of proceeds from sales of property and equipment. Management believes that this financial measure provides meaningful information for evaluating the overall financial performance of the company and its ability to repay debt or make future investments (including acquisitions, etc.).

The non-GAAP financial measure is reconciled to the GAAP measure as follows (in thousands):



	Nine Months Ended September 30,
	2013			2012
Net cash provided by operating activities	$	(1,245	)	$	26,822
Plus: Net cash impact related to restructuring activities	7,805			5,750
Less: Purchases of property and equipment—net	(10,230		)	(14,678		)
Free Cash Flow	$	(3,670	)	$	17,894

I-7

Table of Contents

DIVIDEND POLICY

On August 16, 2013, the company's Board of Directors declared a quarterly cash dividend of $0.0125 per Common Share to shareholders of record as of October 3, 2013, which was paid on October 11, 2013. At the current rate, the cash dividend will amount to $0.05 per Common Share on an annual basis.

CRITICAL ACCOUNTING ESTIMATES

The Consolidated Financial Statements included in the report include accounts of the company and all majority-owned subsidiaries. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying Consolidated Financial Statements and related footnotes. In preparing the financial statements, management has made its best estimates and judgments of certain amounts included in the financial statements, giving due consideration to materiality. However, application of these accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates.

The following critical accounting policies, among others, affect the more significant judgments and estimates used in preparation of the company’s consolidated financial statements.

Revenue Recognition

The company’s revenues are recognized when products are shipped or services provided to unaffiliated customers. Revenue Recognition, ASC 605, provides guidance on the application of generally accepted accounting principles to selected revenue recognition issues. The company has concluded that its revenue recognition policy is appropriate and in accordance with GAAP and ASC 605. Shipping and handling costs are included in cost of goods sold.

Sales are made only to customers with whom the company believes collection is reasonably assured based upon a credit analysis, which may include obtaining a credit application, a signed security agreement, personal guarantee and/or a cross corporate guarantee depending on the credit history of the customer. Credit lines are established for new customers after an evaluation of their credit report and/or other relevant financial information. Existing credit lines are regularly reviewed and adjusted with consideration given to any outstanding past due amounts.

The company offers discounts and rebates, which are accounted for as reductions to revenue in the period in which the sale is recognized. Discounts offered include: cash discounts for prompt payment, base and trade discounts based on contract level for specific classes of customers. Volume discounts and rebates are given based on large purchases and the achievement of certain sales volumes. Product returns are accounted for as a reduction to reported sales with estimates recorded for anticipated returns at the time of sale. The company does not ship any goods on consignment.

Distributed products sold by the company are accounted for in accordance with the revenue recognition guidance in ASC 605-45-05. The company records distributed product sales gross as a principal since the company takes title to the products and has the risks of loss for collections, delivery and returns.

Product sales that give rise to installment receivables are recorded at the time of sale when the risks and rewards of ownership are transferred. Interest income is recognized on installment agreements in accordance with the terms of the agreements. Installment accounts are monitored and if a customer defaults on payments, interest income is no longer recognized. All installment accounts are accounted for using the same methodology, regardless of duration of the installment agreements.

Allowance for Uncollectible Accounts Receivable

The estimated allowance for uncollectible amounts is based primarily on management's evaluation of the financial condition of the customer. In addition, as a result of the third party financing arrangement, management monitors the collection status of these contracts in accordance with the company's limited recourse obligations and provides amounts necessary for estimated losses in the allowance for doubtful accounts and establishing reserves for specific customers as needed.

The company continues to closely monitor the credit-worthiness of its customers and adhere to tight credit policies. In 2013, the Centers for Medicare and Medicaid Services announced new Medicare prices which became effective in July 2013 for the second round of the National Competitive Bidding program, which was expanded to include 91 metropolitan statistical areas. The company believes the changes announced could have a significant impact on the collectability of accounts receivable for those

I-8

Table of Contents

customers which are in the MSA locations impacted and which have a portion of their revenues tied to Medicare reimbursement. As a result, this is an additional risk factor which the company considers when assessing the collectability of accounts receivable.

The company has an agreement with DLL, a third party financing company, to provide the majority of future lease financing to the company's North America customers. The DLL agreement provides for direct leasing between DLL and the Invacare customer. The company retains a recourse obligation for events of default under the contracts. The company monitors the collections status of these contracts and has provided amounts for estimated losses in its allowances for doubtful accounts.

Inventories and Related Allowance for Obsolete and Excess Inventory

Inventories are stated at the lower of cost or market with cost determined by the first-in, first-out method. Inventories have been reduced by an allowance for excess and obsolete inventories. The estimated allowance is based on management’s review of inventories on hand compared to estimated future usage and sales. A provision for excess and obsolete inventory is recorded as needed based upon the discontinuation of products, redesigning of existing products, new product introductions, market changes and safety issues. Both raw materials and finished goods are reserved for on the balance sheet.

In general, the company reviews inventory turns as an indicator of obsolescence or slow moving product as well as the impact of new product introductions. Depending on the situation, the company may partially or fully reserve for the individual item. The company continues to increase its overseas sourcing efforts, increase its emphasis on the development and introduction of new products, and decrease the cycle time to bring new product offerings to market. These initiatives are sources of inventory obsolescence for both raw material and finished goods.

Goodwill, Intangible and Other Long-Lived Assets

Property, equipment, intangibles and certain other long-lived assets are amortized over their useful lives. Useful lives are based on management's estimates of the period that the assets will generate revenue. Under Intangibles-Goodwill and Other, ASC 350, goodwill and intangible assets deemed to have indefinite lives are subject to annual impairment tests. The company's measurement date for its annual goodwill impairment test is October 1. Furthermore, goodwill and other long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The majority of the company's goodwill and intangible assets relate to the company's Europe and IPG segments which have continued to be profitable.

To review goodwill for impairment in accordance with ASC 350, the company first estimates the fair value of each reporting unit and compares the calculated fair value to the carrying value of the each reporting unit. A reporting unit is defined as an operating segment or one level below. The company has determined that its reporting units are the same as its operating segments. The company completes its annual impairment tests in the fourth quarter of each year. To estimate the fair values of the reporting units, the company utilizes a discounted cash flow method (DCF) in which the company forecasts income statement and balance sheet amounts based on assumptions regarding future sales growth, profitability, inventory turns, days' sales outstanding, etc. to forecast future cash flows. The cash flows are discounted using a weighted average cost of capital discount rate where the cost of debt is based on quoted rates for 20-year debt of companies of similar credit risk and the cost of equity is based upon the 20-year treasury rate for the risk free rate, a market risk premium, the industry average beta and a small cap stock adjustment. The discount rates used have a significant impact upon the discounted cash flow methodology utilized in the company's annual impairment testing as higher discount rates decrease the fair value estimates. The assumptions used are based on a market participant's point of view and yielded a discount rate of 9.88% in 2012 for the company's annual impairment analysis compared to 9.27% in 2011.

The company also utilizes an EV (Enterprise Value) to EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) Method to compute the fair value of its reporting units which considers potential acquirers and their EV to EBITDA multiples adjusted by an estimated premium. While more weight is given to the discounted cash flow method, the EV to EBITDA method does provide corroborative evidence of the reasonableness of the discounted cash flow method results.

A future potential impairment is possible, for each or any of the company's segments, should actual results differ materially from forecasted results used in the valuation analysis. Furthermore, the company's annual valuation of goodwill can differ materially if the market inputs used to determine the discount rate change significantly. For instance, higher interest rates or greater stock price volatility would increase the discount rate and thus increase the chance of impairment. In consideration of this potential, the company reviewed the results if the discount rate used were 100 basis points higher for the 2012 impairment analysis and determined that there still would not be any indicator of potential impairment for the Europe or IPG segments.

The company's intangible assets consist of intangible assets with defined lives as well as intangible assets with indefinite lives. Defined-lived intangible assets consist principally of customer lists, developed technology, license agreements, patents and

I-9

Table of Contents

other miscellaneous intangibles such as non-compete agreements. The company's indefinite lived intangible assets consist entirely of trademarks.

The company evaluates the carrying value of definite-lived assets whenever events or circumstances indicate possible impairment. Definite-lived assets are determined to be impaired if the future un-discounted cash flows expected to be generated by the asset are less than the carrying value. Actual impairment amounts for definite-lived assets are then calculated using a discounted cash flow calculation. The company reviews indefinite-lived assets for impairment annually in the fourth quarter of each year and whenever events or circumstances indicate possible impairment. Any impairment amounts for indefinite-lived assets are calculated as the difference between the future discounted cash flows expected to be generated by the asset less than the carrying value for the asset.

During the third quarter of 2013, the company recognized an intangible write-off charge of $167,000 for a customer list in the NA/HME segment. The after-tax and pre-tax impairment amounts were the same for the impairment.

Product Liability

The company’s captive insurance company, Invatection Insurance Co., currently has a policy year that runs from September 1 to August 31 and insures annual policy losses of $10,000,000 per occurrence and $13,000,000 in the aggregate of the company’s North American product liability exposure. The company also has additional layers of external insurance coverage insuring up to $75,000,000 in aggregate losses per policy year arising from individual claims anywhere in the world that exceed the captive insurance company policy limits or the limits of the company’s per country foreign liability limits, as applicable. There can be no assurance that the company’s current insurance levels will continue to be adequate or available at affordable rates.

Product liability reserves are recorded for individual claims based upon historical experience, industry expertise and indications from the third-party actuary. Additional reserves, in excess of the specific individual case reserves, are provided for incurred but not reported claims based upon third-party actuarial valuations at the time such valuations are conducted. Historical claims experience and other assumptions are taken into consideration by the third-party actuary to estimate the ultimate reserves. For example, the actuarial analysis assumes that historical loss experience is an indicator of future experience, that the distribution of exposures by geographic area and nature of operations for ongoing operations is expected to be very similar to historical operations with no dramatic changes and that the government indices used to trend losses and exposures are appropriate.

Estimates made are adjusted on a regular basis and can be impacted by actual loss awards and settlements on claims. While actuarial analysis is used to help determine adequate reserves, the company is responsible for the determination and recording of adequate reserves in accordance with accepted loss reserving standards and practices.

Warranty

Generally, the company’s products are covered from the date of sale to the customer by warranties against defects in material and workmanship for various periods depending on the product. Certain components carry a lifetime warranty. A provision for estimated warranty cost is recorded at the time of sale based upon actual experience. The company continuously assesses the adequacy of its product warranty accrual and makes adjustments as needed. Historical analysis is primarily used to determine the company’s warranty reserves. Claims history is reviewed and provisions are adjusted as needed. However, the company does consider other events, such as a product recall, which could warrant additional warranty reserve provision. See Warranty Costs in the Notes to the Condensed Consolidated Financial Statements included in this report for a reconciliation of the changes in the warranty accrual.

Accounting for Stock-Based Compensation

The company accounts for share based compensation under the provisions of Compensation—Stock Compensation, ASC 718. The company has not made any modifications to the terms of any previously granted options and no changes have been made regarding the valuation methodologies or assumptions used to determine the fair value of options granted and the company continues to use a Black-Scholes valuation model. As of September 30, 2013, there was $13,264,000 of total unrecognized compensation cost from stock-based compensation arrangements granted under the 2003 Performance Plan and the 2013 Equity Compensation Plan, which is related to non-vested options and shares, and includes $4,169,000 related to restricted stock awards. The company expects the compensation expense to be recognized over a four-year period for a weighted-average period of approximately two years.

I-10

Table of Contents

The substantial majority of the options awarded have been granted at exercise prices equal to the market value of the underlying stock on the date of grant. Restricted stock awards granted without cost to the recipients are expensed on a straight-line basis over the vesting periods.

Income Taxes

As part of the process of preparing its financial statements, the company is required to estimate income taxes in various jurisdictions. The process requires estimating the company’s current tax exposure, including assessing the risks associated with tax audits, as well as estimating temporary differences due to the different treatment of items for tax and accounting policies. The temporary differences are reported as deferred tax assets and or liabilities. Substantially all of the company’s U.S., Australia, New Zealand and Denmark deferred tax assets are offset by a valuation allowance. The company also must estimate the likelihood that its deferred tax assets will be recovered from future taxable income and whether or not valuation allowances should be established. In the event that actual results differ from its estimates, the company’s provision for income taxes could be materially impacted. The company does not believe that there is a substantial likelihood that materially different amounts would be reported related to its critical accounting estimates.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

Recent Accounting Pronouncements: In February, 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (ASU 2013-02 or the ASU). ASU 2013-02 requires companies to report, in one place, changes in and reclassifications out of accumulated other comprehensive income (OCI). The ASU did not change what is required to be reported in OCI. The company adopted ASU 2013-02 in this Form 10-Q for the quarter ended March 31, 2013, with no impact on the company's Condensed Consolidated Statement of Comprehensive Income (Loss), Balance Sheets or Statement of Cash Flows. See Accumulated Other Comprehensive Income in the Notes to these Consolidated Financial Statements.

QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

The company is exposed to market risk through various financial instruments, including fixed rate and floating rate debt instruments. The company does at times use interest swap agreements to mitigate its exposure to interest rate fluctuations. Based on September 30, 2013 debt levels, a 1% change in interest rates would impact annual interest expense by approximately $270,000. Additionally, the company operates internationally and, as a result, is exposed to foreign currency fluctuations. Specifically, the exposure results from intercompany loans, intercompany sales or payments and third party sales or payments. In an attempt to reduce this exposure, foreign currency forward contracts are utilized to hedge intercompany purchases and sales as well as third party purchases and sales. The company does not believe that any potential loss related to these financial instruments would have a material adverse effect on the company’s financial condition or results of operations.

The company has entered into an interest rate swap agreement to effectively convert a portion of floating rate revolving credit facility debt to fixed rate debt to avoid the risk of changes in market interest rates. Specifically, an interest rate swap

I-11

Table of Contents

agreement, as of September 30, 2013, for a notional amount of $12,000,000 through April 2014 was entered into that fixes the LIBOR component of the interest rate on that portion of the revolving credit facility debt at a rate of 0.54% for an effective aggregate rate of 3.04%.

On October 28, 2010, the company entered into a Credit Agreement which, as amended, provides for a $250,000,000 senior secured revolving credit facility maturing in October 2015 at variable rates. As of September 30, 2013, the company had outstanding $13,350,000 in principal amount of 4.125% Convertible Senior Subordinated Debentures due in February 2027, of which $2,874,000 is included in equity. Accordingly, while the company is exposed to increases in interest rates, its exposure to the volatility of the current market environment is limited as the company does not currently need to re-finance any of its debt. However, the company’s Credit Agreement contains covenants with respect to, among other items, consolidated funded indebtedness to consolidated earnings before interest, taxes, depreciation and amortization (EBITDA) and interest coverage, as defined in the agreement. As of September 30, 2013, the company was in compliance with all covenant requirements, but should it fall out of compliance with these requirements, the company would have to attempt to obtain alternative financing and thus likely be required to pay much higher interest rates.

FORWARD-LOOKING STATEMENTS

This Form 10-Q 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,” “could,” “plan,” “intend,” “expect,” “continue,” “believe” and “anticipate,” as well as similar comments, denote forward-looking statements that are subject to inherent uncertainties that are difficult to predict. 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: compliance costs, limitations on the production and/or distribution of the company's products, inability to bid on or win certain contracts, or other adverse effects of the FDA consent decree of injunction; unexpected circumstances or developments that might delay or adversely impact the results of the final, most comprehensive third-party expert certification audit or FDA inspections of the company's quality systems at the Elyria, Ohio, facilities impacted by the FDA consent decree, including any possible requirement to perform additional remediation activities; the failure or refusal of customers or healthcare professionals to sign verification of medical necessity (VMN) documentation or other certification forms required by the exceptions to the FDA consent decree; possible adverse effects of being leveraged, including interest rate or event of default risks, including those relating the company's financial covenants under its credit facility (particularly as might result from the impacts associated with the FDA consent decree); the company's inability to satisfy its liquidity needs, or additional costs to do so; adverse changes in government and other third-party payor reimbursement levels and practices both in the U.S. and in other countries (such as, for example, more extensive pre-payment reviews and post-payment audits by payors, or the Medicare national competitive bidding program covering nine metropolitan statistical areas that started in 2011 and the additional 91 metropolitan statistical areas that started on July 1, 2013); impacts of the U.S. Affordable Care Act that was enacted in 2010 (such as, for example, the impact on the company of the excise tax which began on January 1, 2013 on certain medical devices and the company's ability to successfully offset such impact); legal actions, regulatory proceedings or the company's failure to comply with regulatory requirements or receive regulatory clearance or approval for the company's products or operations in the United States or abroad; product liability or warranty claims; product recalls, including more extensive recall experience than expected; exchange rate or tax rate fluctuations; inability to design, manufacture, distribute and achieve market acceptance of new products with greater functionality or lower costs or new product platforms that deliver the anticipated benefits of the company's globalization strategy; consolidation of health care providers; lower cost imports; uncollectible accounts receivable; difficulties in implementing/upgrading Enterprise Resource Planning systems; risks inherent in managing and operating businesses in many different foreign jurisdictions; ineffective cost reduction and restructuring efforts; decreased availability or increased costs of materials which could increase the company's costs of producing or acquiring the company's products, including possible increases in commodity costs or freight costs; heightened vulnerability to a hostile takeover attempt arising from depressed market prices for company shares; provisions of Ohio law or in the company's debt agreements, shareholder rights plan or charter documents that may prevent or delay a change in control, as well as the risks described from time to time in the company's reports as filed with the Securities and Exchange Commission. Except to the extent required by law, the company does 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.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

The information called for by this item is provided under the same caption under Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations.

I-12

Table of Contents

Item 4. Controls and Procedures.

(a) Evaluation of Disclosure Controls and Procedures

As of September 30, 2013, an evaluation was performed, under the supervision and with the participation of the company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Based on that evaluation, the company’s management, including the Chief Executive Officer and Chief Financial Officer, concluded that the company’s disclosure controls and procedures were effective as of September 30, 2013, in ensuring that information required to be disclosed by the company in the reports it files and submits under the Exchange Act is (1) recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms and (2) accumulated and communicated to the company’s management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate to allow for timely decisions regarding required disclosure.

(b) Changes in Internal Control Over Financial Reporting

There have been no changes in the company’s internal control over financial reporting that occurred during the company’s last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the company’s internal control over financial reporting.

I-13

Table of Contents

Part II. OTHER INFORMATION

Item 1. Legal Proceedings.

In the ordinary course of its business, the company is a defendant in a number of lawsuits, primarily product liability actions in which various plaintiffs seek damages for injuries allegedly caused by defective products. All of the product liability lawsuits in the United States have been referred to the company's captive insurance company and/or excess insurance carriers while all non-U.S. lawsuits have been referred to the company's commercial insurance carriers. All such lawsuits are generally contested vigorously. The coverage territory of the company's insurance is worldwide with the exception of those countries with respect to which, at the time the product is sold for use or at the time a claim is made, the U.S. government has suspended or prohibited diplomatic or trade relations. Management does not believe that the outcome of any of these actions will have a material adverse effect upon the company's business or financial condition.

In December 2012, the company reached agreement with the FDA on the terms of the consent decree of injunction with respect to the company's Corporate facility and its Taylor Street wheelchair manufacturing facility in Elyria, Ohio. A complaint and consent decree were filed in the U.S. District Court for the Northern District of Ohio, and on December 21, 2012, the Court approved the consent decree and it became effective. The consent decree limits the company's manufacture and distribution of power and manual wheelchairs, wheelchair components and wheelchair sub-assemblies at or from its Taylor Street manufacturing facility. The decree also temporarily limited design activities related to wheelchairs and power beds that take place at the impacted Elyria, Ohio facilities. The company is entitled to continue to produce from the Taylor Street manufacturing facility certain medically necessary products, as well as ongoing replacement, service and repair of products already in use, under terms delineated in the consent decree. Under the terms of the consent decree, in order to resume full operations at the impacted facilities, the company must successfully complete a third-party expert certification audit at the impacted Elyria facilities, which is comprised of three distinct reports that must be submitted to, and accepted by, the FDA. After the final certification report is submitted to the FDA, along with the company’s own report as to its compliance as well as responses to any observations in the certification report, the FDA will perform an inspection of the company's Corporate and Taylor Street facilities to determine whether they are in compliance with the Quality System Regulation. The FDA has the authority to reinspect at any time. Once satisfied with the company's compliance, the FDA will provide written notification that the company is permitted to resume full operations at the impacted facilities.

At the time of filing this Quarterly Report on Form 10-Q, the company has completed the first two of its third-party expert certification audits, and the FDA has found the results of both to be acceptable. In these reports, the third-party expert certified that the company's equipment and process validation procedures and its design control systems are compliant with the FDA's Quality System Regulation. As a result of the FDA's approval of the first certification audit on May 13, 2013, the Taylor Street facility was able to resume supplying parts and components for the further manufacturing of medical devices at other company facilities. The company's receipt of the FDA's approval on the second certification report on July 15, 2013, resulted in the company being able to resume design activities related to power wheelchairs and power beds. The third, most comprehensive third-party certification audit is a comprehensive review of the company's compliance with the FDA's Quality System Regulation at the impacted Elyria facilities.

The company is targeting to have the third, final and most comprehensive third-party certification report completed and filed with the FDA by mid-November 2013. There remains some scheduling issues and final work to complete in order to reach the targeted timing. Under the terms of the consent decree, the company must submit its own report to FDA on the actions taken to correct any violations that may have been brought to the company’s attention by the expert and the actions the company has taken to ensure that the affected facilities are operated and will continue to be operated in conformity with the FDA’s Quality System Regulation. Within thirty (30) days after FDA’s receipt of the expert’s report and the company’s report, the FDA will commence its own inspection. However, it is possible the FDA could ask questions or seek additional information concerning the third certification report. It is not possible for the company to estimate the timing or potential response of the FDA's inspection and subsequent written notifications. Following successful completion of the FDA inspection and the company's receipt of written notification from the FDA that the Corporate and Taylor Street facilities appear to be in compliance, the company may resume full operations at those facilities.

For additional information regarding the consent decree, please see the following sections of the company's Annual Report on Form 10-K for the period ending December 31, 2012: Item 1. Business - Government Regulation and Item 1A. Risk Factors; and Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Outlook and - Liquidity and Capital Resources in this Quarterly Report on Form 10-Q.

I-14

Table of Contents

As previously disclosed, in December 2010, the company received a warning letter from the FDA related to quality system processes and procedures at the company's Sanford, Florida facility. At the time of filing of this Quarterly Report on Form 10-Q, this matter remains pending. See Item 1A. Risk Factors in the company's Annual Report on Form 10-K for the period ending December 31, 2012.

On May 24, 2013, a lawsuit was filed against Invacare Corporation, Gerald B. Blouch, A. Malachi Mixon III and Robert K. Gudbranson in the U.S. District Court for the Northern District of Ohio alleging that the defendants violated federal securities laws by failing to properly disclose the issues that the company has faced with the FDA. The lawsuit seeks class certification and unspecified damages for purchasers of the company's common shares between July 22, 2010 and December 7, 2011. This lawsuit has been referred to the company's insurance carriers. The company intends to vigorously defend this lawsuit.

On August 26, 2013, a lawsuit was filed against Invacare Corporation, Gerald B. Blouch, A. Malachi Mixon III and Patricia Stumpp, as well as outside directors Dale C. LaPorte, Michael F. Delaney and Charles S. Robb, in the U.S. District Court for the Northern District of Ohio alleging that the defendants breached their fiduciary duties and violated the Employment Retirement Security Act (ERISA) in the administration and maintenance of the company stock fund in the company’s Retirement Savings Plan (401(k) Plan). The lawsuit seeks class certification and unspecified damages for participants in the company's stock fund of the 401(k) Plan between July 22, 2010 and the present. This lawsuit has been referred to the company's insurance carriers. The company intends to vigorously defend this lawsuit.

The company received a subpoena in 2006 from the U.S. Department of Justice (“DOJ”) seeking documents relating to three longstanding and well-known promotional and rebate programs maintained by the company. The company believes that the programs described in the subpoena are in compliance with all applicable laws and the company has cooperated fully with the government investigation. As of the filing of this Quarterly Report on Form 10-Q, the subpoena remains pending; although the last communication with the DOJ was in 2007.

Item 1A. Risk Factors.

In addition to the other information set forth in this report, you should carefully consider the risk factors disclosed in Item 1A of the company’s Annual Report on Form 10-K for the fiscal period ended December 31, 2012.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The following table presents information with respect to repurchases of common shares made by the company during the three months ended September 30, 2013.



Period			Total Number of Shares Purchased (1)	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares That May Yet Be Purchased Under the Plans or Programs (2)
7/1/2013	-	7/31/2013	—	$	—	—	2,453,978
8/1/2013	-	8/31/2013	—	—		—	2,453,978
9/1/2013	-	9/30/2013	—	—		—	2,453,978
Total			—	$	—	—	2,453,978

________________________


(1)	No shares were repurchased between July 1, 2013 and September 30, 2013 and surrendered to the company by employees for minimum tax withholding purposes in conjunction with the vesting of restricted shares awarded to the employees by the company.

(2)

In 2001, the Board of Directors authorized the company to purchase up to 2,000,000 Common Shares, excluding any shares acquired from employees or directors as a result of the exercise of options or vesting of restricted shares pursuant to the company’s performance plans. The Board of Directors reaffirmed its authorization of this repurchase program on November 5, 2010, and on August 17, 2011 authorized an additional 2,046,500 shares for repurchase under the plan. To date, the company has purchased 1,592,522 shares under this program, with authorization remaining to purchase 2,453,978 shares. The company purchased no shares pursuant to this Board authorized program during the quarter ended September 30, 2013.

I-15

Table of Contents

Item 6. Exhibits



Exhibit No.
10.1	Form of Executive Stock Option Award under Invacare Corporation 2013 Equity Compensation Plan.
10.2	Form of Stock Option Award under Invacare Corporation 2013 Equity Compensation Plan.
10.3	Form of Executive Stock Option Award for Swiss Employees under Invacare Corporation 2013 Equity Compensation Plan.
10.4	Form of Stock Option Award for Swiss Employees under Invacare Corporation 2013 Equity Compensation Plan.
10.5	Form of Director Restricted Stock Award under Invacare Corporation 2013 Equity Compensation Plan.
10.6	Form of Restricted Stock Award under Invacare Corporation 2013 Equity Compensation Plan.
31.1	Chief Executive Officer Rule 13a-14(a)/15d-14(a) Certification (filed herewith).
31.2	Chief Financial Officer Rule 13a-14(a)/15d-14(a) Certification (filed herewith).
32.1	Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).
32.2	Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).
101.INS*	XBRL instance document
101.SCH*	XBRL taxonomy extension schema
101.CAL*	XBRL taxonomy extension calculation linkbase
101.DEF*	XBRL taxonomy extension definition linkbase
101.LAB*	XBRL taxonomy extension label linkbase
101.PRE*	XBRL taxonomy extension presentation linkbase

* Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.




		INVACARE CORPORATION

Date:	November 6, 2013	By:	/s/ Robert K. Gudbranson
			Name: Robert K. Gudbranson
			Title: Chief Financial Officer
			(As Principal Financial and Accounting Officer and on behalf of the registrant)

I-16