Invacare 2013 Annual Report Download - page 53

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I-47
losses in countries which had tax valuation allowances for the year, except in the U.S. where a benefit of $7,126,000 was recognized
as an intra-period allocation with discontinued operations, more than offsetting the benefit of foreign income taxed at rates below
the U.S. statutory rate. The Company also recorded a foreign discrete tax adjustment of $9,336,000 including interest related to
prior year periods under audit, which is being contested by the Company. In 2013, the Company's losses without benefit and
valuation allowances existed in the United States, Australia and New Zealand, and for 2012 also existed for Denmark. The Danish
valuation allowance of $390,000 was reversed in 2013 due to a pattern of profitability. See “Income Taxes” in the Notes to the
Consolidated Financial Statements included elsewhere in this report for more detail.
Research and Development. The Company continues to invest in research and development activities to maintain its
competitive advantage. The Company dedicates funds to applied research activities to ensure that new and enhanced design
concepts are available to its businesses. Research and development expenditures, which are included in costs of products sold,
increased to $24,544,000 in 2013 from $24,459,000 in 2012. The expenditures, as a percentage of net sales, were 1.8% and 1.7%
in 2013 and 2012, respectively.
2012 Versus 2011
Net Sales. Consolidated net sales for 2012 decreased 3.4% for the year, to $1,432,693,000 from $1,482,429,000 in 2011.
Foreign currency translation decreased net sales 2.5 percentage points while an acquisition increased net sales by 1.1 percentage
points. Organic net sales declined 2.0% which was driven by decreases in the North America/HME and Asia Pacific segments
partially offset by increases in the Europe and IPG segments.
North America/Home Medical Equipment (North America/HME)
North America/HME net sales decreased 7.2% in 2012 versus the prior year to $692,657,000 from $746,782,000 in the prior
year, with foreign currency translation decreasing net sales by 0.1 of a percentage point. The organic net sales decrease of 7.1%
was driven by reductions in all three sales categories: mobility and seating, respiratory therapy and lifestyle products. The net
sales in this segment were impacted by uncertainty related to the FDA consent decree and the lack of new products as a result of
refocusing engineering resources on remediation related to the consent decree. In addition, in the second half of 2012 there were
also external pressures on the Company's customers relating to the second round of National Competitive Bidding, as well as
prepayment reviews and post-payment audits from Medicare and Medicaid.
Institutional Products Group (IPG)
IPG net sales increased 20.6% in 2012 to $126,508,000 from $104,911,000 in the prior year. An acquisition increased net
sales by 15.5 percentage points. The organic net sales increase of 5.1% was largely driven by net sales increases in interior design
projects for long-term care facilities partially offset by declines in institutional beds.
Europe
European net sales increased 0.4% in 2012 to $546,543,000 from $544,537,000 in the prior year with foreign currency
translation decreasing net sales by 6.6 percentage points. Organic net sales increased 7.0%, which was primarily attributable to
increases in respiratory therapy products partially offset by declines in lifestyle and mobility and seating products.
Asia/Pacific
Asia/Pacific net sales decreased 22.3% in 2012 to $66,985,000 from $86,199,000 in the prior year. Foreign currency
translation increased net sales by 0.7 of a percentage point. The organic net sales decline of 23.0% was driven primarily by volume
declines in the Company's Australian and New Zealand distribution businesses as well as in the Company's subsidiary, which
produces microprocessor controllers.
Gross Profit. Consolidated gross profit as a percentage of net sales was 30.5% in 2012 as compared to 32.0% in 2011. The
margin decline was principally related to sales mix favoring lower margin product lines and lower margin customers, reduced
volumes and increased research and development expenses partially offset by the benefit of the Company's 2011 acquisition of a
rental business. Gross profit as a percentage of net sales for the IPG segment was favorable as compared to the prior year with
North America/HME, European and Asia/Pacific segments unfavorable to the prior year.