The company is not in a position to provide guidance for 2012 and does not expect to be able to do so until the terms of the FDA's proposed consent decree of injunction related to the company's corporate facility and its wheelchair manufacturing facility in Elyria, Ohio are finalized. The company continues to discuss these terms with the FDA and, in the meantime, it is working expeditiously to make systemic improvements to ensure full compliance with the FDA's Quality System Regulation (QSR). The company is making significant progress on its remediation efforts and in the fourth quarter of 2012, it expects to engage a third party to conduct an audit of its compliance. In addition to incurring incremental costs related to quality systems improvements ($4,104,000), the company has diverted internal resources to accelerate progress on quality systems improvements. These diversions have temporarily impacted other areas of the company's business, including delays in new product introductions and progress on its Globalization initiative. The Globalization initiative is the company's long-term strategy to harmonize global product lines and reduce complexity, the results of which the company expects can generate an aggregate of $100 million in annualized savings by 2015. These savings are expected to drive gross margin expansion, allow for increased investment in research and development and help offset pricing/reimbursement pressures over time. As the company makes progress on its remediation efforts, it intends to redirect internal resources to accelerate new product development and its Globalization initiative, which are critical priorities for the company. The company believes that all of the progress it is making on its quality systems improvements will make Invacare an even stronger company. 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.

Net Sales. Consolidated net sales for the quarter increased 1.2% to $433,564,000 versus $428,498,000 for the same period last year. Foreign currency translation decreased net sales 0.4 of a percentage point while an acquisition increased sales by 1.4 percentage points. The organic net sales increase of 0.2% was driven by growth in Europe and Invacare Supply Group (ISG) substantially offset by declines in North America/Home Medical Equipment (NA/HME), Asia Pacific and Institutional Products Group (IPG) segments.

North America/Home Medical Equipment (NA/HME) NA/HME net sales decreased 3.1% for the quarter to $176,118,000 as compared to $181,831,000 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 3.0% was driven by declines in mobility and seating and respiratory therapy products.

Invacare Supply Group (ISG)
ISG net sales for the quarter increased 6.0% to $78,465,000 compared to $74,046,000 for the same period last year. The net sales increase was primarily the result of net sales increases in incontinence, diabetic, urological and ostomy products.

Institutional Products Group (IPG)
IPG net sales for the first quarter increased 15.0% to $36,138,000 compared to $31,423,000 for the first quarter last year. Foreign currency translation decreased net sales by 0.2 of a percentage point and an acquisition increased net sales by 18.5 percentage points. The organic net sales decrease of 3.3% was largely driven by declines in institutional beds and case goods, partially offset by increases in therapeutic support systems and dialysis chairs. The first quarter of last year benefited from an incremental funding available to customers, which did not repeat in the current year.

Europe
For the first quarter, European net sales increased 3.2% to $125,303,000 versus $121,387,000 for the first quarter last year, with foreign currency translation decreasing net sales by 2.1 percentage points. Organic net sales increased 5.3% attributable to increases in oxygen therapy and lifestyle products.

Asia/Pacific
Asia/Pacific net sales decreased 11.5% for the quarter to $17,540,000 as compared to $19,811,000 for the same period a year ago. Foreign currency translation increased net sales by 5.1 percentage points. Organic net sales decreased 16.6%, driven by declines in the company's Australian and New Zealand distribution businesses, partially offset by net sales increases by the company's subsidiary which produces microprocessor controllers. Changes in exchange rates, particularly the exchange rate between the Euro and U.S. Dollar, have had, and may continue to have, a significant impact on sales in this segment.

Gross Profit. Consolidated gross profit as a percentage of net sales for the three month period ended March 31, 2012 was 27.6% compared to 28.7% in the same period last year. The margin decline was principally related to sales mix favoring lower margin product lines and lower margin customers, pricing pressure, primarily in the European segment, and increased warranty costs. The margin decline was partially offset by the favorable impact from an acquisition that was finalized in the third quarter of 2011. Gross profit as a percentage of net sales for all segments except IPG were unfavorable as compared to the prior year.

NA/HME gross profit as a percentage of net sales decreased by 2.3 percentage points compared to the same period last year. The decline in margins was principally due to unfavorable product mix away from higher margin products, unfavorable sales mix favoring lower margin customers, volume declines and warranty expense.

ISG gross profit as a percentage of net sales decreased by 0.7 percentage points compared to the same period last year. The decline in margins was principally due to unfavorable sales mix favoring lower margin customers and higher freight costs.

IPG gross profit as a percentage of net sales increased 6.6 percentage points compared to the same period last year. The increase in margin is primarily attributable to favorable impact an acquisition finalized in the third quarter of 2011 and lower freight costs partially offset by volume declines.

Gross profit in Europe as a percentage of net sales decreased 1.2 percentage points compared to the same period last year. The decline was primarily a result of unfavorable sales mix favoring lower margin product lines and lower margin customers, pricing pressures, primarily in lifestyle and power mobility products, and increased warranty costs.

Gross profit in Asia/Pacific as a percentage of net sales decreased by 3.7 percentage points compared to the same period last year. The decline was primarily as a result of volume declines in the Australian distribution business which historically achieved higher than the average margins.

Selling, General and Administrative. Consolidated selling, general and administrative (SG&A) expenses as a percentage of net sales for the three month period ended March 31, 2012 was 24.8% compared to 24.7% for the same period a year ago. The overall dollar increase was $1,722,000 or 1.6%, with foreign currency translation increasing expenses by $20,000 or less than one percentage point and acquisitions increasing expenses by $3,647,000 or 3.4 percentage points. Excluding acquisitions and the impact of foreign currency translation, SG&A expenses decreased $1,945,000 or 1.8%. This decrease is primarily attributable to reduced associate and bad debt costs, including certain retirement plan costs, partially offset by increased regulatory and compliance costs related to quality systems improvements ($4,104,000). The increased regulatory and compliance costs were incurred in the NA/HME segment.

SG&A expenses for NA/HME decreased 3.3% or $1,730,000 in the first quarter of 2012 as compared to the first quarter of 2011 with foreign currency translation decreasing SG&A expense by $88,000. Excluding the foreign currency translation, SG&A expense decreased $1,642,000 or 3.1% primarily due to reduced bad debt and associate costs, including certain retirement plan costs, partially offset by increased regulatory and compliance costs related to quality systems improvements.

SG&A expenses for ISG decreased by 1.5% or $106,000 in the first quarter of 2012 as compared to the first quarter of 2011 principally due to reduced associate costs partially offset by increased bad debt expense.

SG&A expenses for IPG increased by 54.6% or $4,086,000 in the first quarter of 2012 as compared to the first quarter of 2011. An acquisition increased SG&A expenses by 48.7 percentage points or $3,647,000, while foreign currency translation decreased expense by $10,000 or 0.1 of a percentage point. Excluding the impact of acquisitions and foreign currency translation, SG&A expenses increased by $449,000 or 6.0% due to increased associate costs, including commission expense, partially offset by favorable currency transaction impact associated with the Canadian Dollar versus the U.S. Dollar.

European SG&A expenses decreased by 3.1% or $978,000 in the first quarter of 2012 as compared to the first quarter of 2011. Foreign currency translation decreased SG&A expenses by approximately $318,000. Excluding the foreign currency translation impact, SG&A expenses decreased by $660,000 primarily attributable to associate costs and depreciation and amortization.

Asia/Pacific SG&A expenses increased 5.9% or $450,000 in the first quarter of 2012 as compared to the first quarter of 2011. Foreign currency translation increased expenses by $436,000. Excluding the foreign currency translation impact, SG&A expenses increased $14,000 or 0.2%.

Debt Finance Charges and Fees. During the three months ended March 31, 2012, the company did not repay any of its par value 4.125% Convertible Senior Subordinated Debentures due 2027 compared to the three months ended March 31, 2011 in which the company repaid $13,514,000. The company retired the debt at a premium above par in 2011. In accordance with Convertible Debt, ASC 470-20, the company utilized the inducement method of accounting to calculate the loss associated with the early retirement of the convertible debt. For the three months ended March 31, 2012 and 2011, the company recorded expense of $0 and $4,881,000, respectively, related to the loss on the debt extinguishment including the write-off of $0 and $336,000, respectively, of pre-tax deferred financing fees, which were previously capitalized. All of these charges are included in the All Other segment.

Charge Related to Restructuring Activities. During the quarter ended March 31, 2012, the company incurred restructuring charges as part of the company's ongoing globalization initiative to reduce complexity within its global footprint. The restructuring was undertaken in response to the continued decline in reimbursement by the U.S. government as well as similar reimbursement pressures abroad and continued pricing pressures faced by the company as a result of outsourcing by competitors to lower cost locations. As a result, the company recorded restructuring charges of $548,000 in the first quarter of 2012. There have been no material changes in accrued balances related to the charge, either as a result of revisions in the plan or changes in estimates. The majority of the outstanding charge accruals at March 31, 2012 are expected to be paid out within the next twelve months.

Interest. Interest expense decreased to $1,476,000 for the first quarter compared to $2,611,000 for the same period a year ago, representing a 43.5% decrease. This decrease was attributable to lower borrowing rates in 2012 as compared to 2011. Interest income in 2012 was $337,000, substantially comparable to $267,000 in 2011.

Income Taxes. The company had an effective tax rate of 20.7% on earnings before tax for the three month period ended March 31, 2012 compared to an expected rate at the US statutory rate of 35%. The company's effective tax rate for the three months ended March 31, 2012 was lower than the U.S. federal statutory rate, principally due to foreign earnings taxed at an effective rate lower than the US statutory rate. The company also benefited year to date from countries with valuation allowances included in the combined effective rate due to expected current year profits. The company had an effective tax rate of 25.5% on earnings before tax for the three month period ended March 31, 2011, respectively, compared to an expected rate at the U.S. statutory rate of 35%. The company's effective tax rate for the three months ended March 31, 2011 was lower than the U.S. federal statutory rate as a result of foreign earnings taxed at an effective rate lower than the US statutory rate and a net profit for the quarter related to countries with tax valuation allowances. The company had a domestic profit in the first quarter of 2012, but continued to be in a three-year cumulative loss position in the U.S. principally as a result of recording pre-tax expenses in prior periods related to the extinguishment of convertible debt at a premium and the write-off of goodwill. As a result of the loss position, the majority of the U.S. deferred tax assets continue to be subject to a valuation allowance.

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, increased by $2,022,000 to $271,559,000 at March 31, 2012 from $269,537,000 as of December 31, 2011. The company's balance sheet reflects the impact of ASC 470-20, which reduced debt and increased equity by $3,912,000 and $4,053,000 as of March 31, 2012 and December 31, 2011, respectively. The debt discount decreased during the quarter was a result of amortization of the convertible debt discount. The company's cash and cash equivalents were $32,668,000 at March 31, 2012, down from $34,924,000 at the end of 2011. At March 31, 2012, the company had outstanding $249,438,000 on its revolving line of credit compared to $247,063,000 as of December 31, 2011.

The company's borrowing capacity and cash on hand were utilized for normal operations as there were no acquisitions, repurchases of convertible debt or buybacks of shares during the quarter. Debt repurchases, acquisitions, the timing of vendor payments and other activity can have a significant impact on the company's 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. During the quarter, the outstanding borrowings on the company's revolving credit facility varied from a low of $247,000,000 to a high of $284,000,000. While the company has cash balances in various jurisdictions around the world, there are no material restrictions regarding the use of such cash for dividends, loans or other purposes.

The company's senior secured revolving credit agreement (the "Credit Agreement") provides for a $400 million 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 $400 million, 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 1.75% per annum for LIBOR loans and 0.75% 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 0.30% per annum. Like the interest rate spreads, the commitment fee is subject to adjustment based on the company's leverage ratio. 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 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 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 3.5 to 1. As of March 31, 2012, the company's leverage ratio was 1.89 and the company's interest coverage ratio was 25.67 compared to a leverage ratio of 1.81 and an interest coverage ratio of 23.80 as of December 31, 2011. As of March 31, 2012, 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 $150,562,000.

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. In the first three months of 2012, the company did not repurchase and extinguish any of its Convertible Senior Subordinated Debentures. At March 31, 2012, the company had $13,850,000 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 2013, the company has the ability to utilize swaps to exchange variable rate debt for fixed rate debt, if needed, and the company's free cash flow should allow it 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 interest rate swap agreements 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, interest rate swap agreements for notional amounts of $18 million and $22 million through September 2013, $20 million and $25 million through May 2013 and $15 million through February 2013 were entered into that fix the LIBOR component of the interest rate on that portion of the revolving credit facility debt at rates of 0.625%, 0.46%, 1.08%, 0.73% and 1.05%, respectively, for effective aggregate rates of 2.375%, 2.21%%, 2.83%, 2.48% and 2.80%, respectively. As of March 31, 2012, the weighted average floating interest rate on borrowings was 2.01% compared to 2.28% as of December 31, 2011.

In the current economic environment, the company is exposed to a number of risks. These risks include the possibility, among other things, that: one or more of the lenders participating in the company's revolving credit facility may be unable or unwilling to extend credit to the company; the third party company that provides lease financing to the company's customers may refuse or be unable to fulfill its financing obligations or extend credit to the company's customers; interest rates on the company's variable rate debt could increase significantly; one or more customers of the company may be unable to pay for purchases of the company's products on a timely basis; one or more key suppliers may be unable or unwilling to provide critical goods or services to the company; and one or more of the counterparties to the company's hedging arrangements may be unable to fulfill its obligations to the company. Although the company has taken actions in an effort to mitigate these risks, during periods of economic downturn, the company's exposure to these risks increases. Events of this nature may adversely affect the company's liquidity or sales and revenues, and therefore have an adverse effect on the company's business and results of operations.

There are no individually material capital expenditure commitments outstanding as of March 31, 2012. The company estimates that capital investments for 2012 could approximate between $25,000,000 and $30,000,000, compared to actual capital expenditures of $22,160,000 in 2011. 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 used by operating activities were $825,000 in for the first three months of 2012, compared to cash flows provided by operating activities of $8,943,000 in the first three months of 2011. The decline in operating cash flows in 2012 was primarily attributable to an increase in net working capital assets specifically inventory and trade receivables.

Cash flows used for investing activities were $4,627,000 for the first three months of 2012, compared to $3,706,000 in the first three months of 2011. The increase in cash used was primarily attributable to an increase in property and equipment purchases.

Cash flows provided by financing activities were $2,631,000 in the first three months of 2012 compared to cash flows required of $22,750,000 in the first three months of 2011. Prior year cash flows used by financing activities included repurchase of treasury stock of $14,644,000 and payments related to early retirement of debt of $4,507,000.

During the first three months of 2012, the company used free cash flow of $2,498,000 compared to generating free cash flow of $5,604,000 in the first three months of 2011. The decrease is due primarily to an increase in net working capital assets and increased purchases of property and equipment. Free cash flow is a non-GAAP financial measure that is comprised of net cash provided by operating activities, excluding net cash 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):

                                                             Three Months Ended
                                                                 March 31,
                                                              2012         2011
Net cash provided by operating activities                 $     (825 )   $ 8,943
Plus: Net cash impact related to restructuring activities      2,963           -
Less: Purchases of property and equipment-net                 (4,636 )    (3,339 )
Free Cash Flow                                            $   (2,498 )   $ 5,604

On February 9, 2012, the company's Board of Directors declared a quarterly cash dividend of $0.0125 per Common Share to shareholders of record as of April 5, 2012, which was paid on April 13, 2012. At the current rate, the cash dividend will amount to $0.05 per Common Share on an annual basis.

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

Invacare'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.

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