Invacare 2006 Annual Report Download - page 41

and profitability in the NA/HME operating segment. During 2006, changes announced by the Centers for Medicare
and Medicaid Services, or “CMS,” affected eligibility, documentation, codes, and payment rules relating to power
wheelchairs. These changes impacted the predictability of reimbursement of expenses for and access to power
wheelchairs, created uncertainty in the market place, and thus had a negative impact on NA/HME’s revenues and
related earnings. Effective November 15, 2006, CMS reduced the maximum reimbursement amount for power
wheelchairs under Medicare by up to 28%. The reduced reimbursement levels may cause consumers to choose less
expensive versions of the company’s power wheelchairs.
NA/HME sales of respiratory products were also negatively affected by the changes in 2006. Small and
independent provider sales declined as these dealers slowed their purchases of the company’s HomeFill
TM
oxygen
system product line, in part, until they had a clearer view of future oxygen reimbursement levels. Furthermore, a
study issued by the Office of Inspector General or “OIG,” in September 2006 suggested that $3.2 billion in savings
could be achieved over five years by reducing the reimbursed rental period from three years (the reimbursement
period under current law) to 13 months. The uncertainty created by these announcements continues to negatively
impact the home oxygen equipment market, particularly for those providers considering changing to the
HomeFill
TM
oxygen system.
Medicare will also institute a new competitive bidding program for various items in ten as yet unidentified of
the largest metropolitan areas late in 2007. This program is designed to reduce Medicare payment levels for items
that the Medicare program spends the most money on under the home medical equipment benefit. This new
program will likely eliminate some providers from the competitive bidding markets, because only those providers
who are chosen to participate (based largely on price) will be able to provide beneficiaries with items included in the
bid. Medicare will be expanding the program to an additional 80 metropolitan areas in 2009.
The impact of the above reimbursement changes were taken into consideration in reviewing the profitability of
the company’s NA/HME operating segment and in evaluating impairment of goodwill and other intangibles.
Interest. Interest expense increased to $34,084,000 in 2006 from $27,246,000 in 2005, representing a 25%
increase. This increase was attributable to increased borrowing rates. Interest income in 2006 was $2,775,000,
which was higher than the prior year amount of $1,683,000 primarily due to an increase in interest received
associated with financing provided to customers.
Income Taxes. The company had an effective tax rate of 2.7% in 2006 and 31.5% in 2005. The company’s
effective tax rate is higher than the expected benefit at the U.S. federal statutory rate primarily due to losses with no
corresponding tax benefits and a valuation reserve recorded against domestic deferred tax assets reduced by tax
credits and earnings abroad being taxed at rates lower than the U.S. federal statutory rate. The decline in the
effective rate in 2006 compared to 2005 is primarily due to the losses without benefit and valuation reserve.
Research and Development. The company continues to invest in research and development activities to
maintain its competitive advantage. The company dedicates dollars 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, decreased to $22,146,000 in 2006 from $23,247,000 in 2005. The expenditures,
as a percentage of net sales, were 1.4% and 1.5% in 2006 and 2005, respectively.
2005 Versus 2004
Charge Related to Restructuring Activities. On July 28, 2005, the company announced cost reduction and
profit improvement actions, which included: reducing global headcount, outsourcing improvements utilizing the
company’s China manufacturing capability and third parties, shifting substantial resources from product devel-
opment to manufacturing cost reduction activities and product rationalization, reducing freight exposure through
freight auctions and changing the freight policy, general expense reductions, and exiting four facilities.
To date, the company has made substantial progress on its restructuring activities, including exiting four
facilities and eliminating approximately 300 positions through December 31, 2005, which resulted in restructuring
charges of $7,533,000, principally for severance, of which $4,181,000 has been paid as of December 31, 2005.
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