Invacare 2006 Annual Report Download - page 39

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equipment, and bathing equipment products sold into the long-term care market. The increase is primarily
attributable to higher volumes in its core bed products as well as increases in bathing equipment.
Europe
European net sales declined .4% in 2006 compared to the prior year to $430,427,000 from $432,142,000 with
acquisitions increasing net sales one percentage point and foreign currency translation decreasing net sales by one
percentage point. Strong sales performance in most of the regions was offset by continued weakness in the German
market related to reimbursement policy.
Asia/Pacific
Asia/Pacific net sales declined 17.8% in 2006 from the prior year to $69,591,000 from $84,712,000.
Acquisitions increased net sales by five percentage points and foreign currency translation decreased net sales
by four percentage points. Performance in this region continues to be negatively impacted by U.S. reimbursement
uncertainty in the consumer power wheelchair market, resulting in decreased sales of microprocessor controllers by
Invacare’s New Zealand subsidiary and reduced volumes in the company’s Australian distribution business. In
addition, the Asia/Pacific segment transacts a substantial amount of its business with customers outside of their
region in various currencies other than their functional currencies. As a result, changes in exchange rates,
particularly with the Euro and U.S. Dollar, can have a significant impact on sales and cost of sales.
Gross Profit. Consolidated gross profit as a percentage of net sales was 27.8% in 2006 versus 29.2% in 2005.
The margin decline was primarily attributable to continued reimbursement issues and competitive pricing pressures
as well as inventory write-downs related to restructuring, increased freight costs and lower manufacturing volumes.
The decline was partially offset by cost reduction initiatives.
NA/HME gross profit as a percentage of net sales was 29.7% in 2006 versus 33.8% in 2005. The decline was
primarily attributable to pricing reductions experienced in Rehab, Standard and Respiratory product lines, inventory
write-downs related to restructuring, reduced volumes as a result of reimbursement changes in Rehab and
Respiratory product lines, and increased freight costs, all of which were partially offset by continued cost
reduction efforts.
ISG gross profit as a percentage of net sales declined .7 of a percentage point from the prior year. The decline
was primarily attributable to inventory write-downs related to restructuring and an unfavorable product mix toward
lower margin product — diabetic and incontinence products.
IPG gross profit as a percentage of net sales increased 1.9 percentage points in 2006 from the prior year. The
increase in margin is attributable to volume increases and continued cost reduction activities.
Gross profit in Europe as a percentage of net sales improved 2.2 percentage points in 2006 from the prior year.
The increase was primarily attributable to cost reduction activities.
Gross profit in Asia/Pacific as a percentage of net sales declined by .6 of a percentage point in 2006 from the
prior year. The decrease was largely due to inventory write-downs related to restructuring.
Selling, General and Administrative. Consolidated selling, general and administrative expenses as a
percentage of net sales were 24.9% in 2006 and 22.4% in 2005. The overall dollar increase was $31,807,000
or 9.3%, with acquisitions increasing selling, general and administrative costs by approximately $3,750,000 or one
percentage point and foreign currency translation decreasing expenses by $2,424,000 or one percentage point.
Excluding acquisitions and foreign currency translation impact, SG&A increased $30,481,000 or 8.9%. The
primary driver of the increase is attributable to an incremental reserve against accounts receivable of $26,775,000 in
the NA/HME segment as described below.
As the company previously disclosed, throughout 2006 Medicare proposed several significant changes to
durable medical equipment and oxygen reimbursement, which dramatically impacted the company’s results and the
profitability of our U.S. customers. The many changes to reimbursement, which were finalized in the fourth quarter
of 2006, added complexity and uncertainty to the claims process and have eroded our customers’ ability to provide
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