Invacare 2006 Annual Report Download - page 44

Interest. Interest expense increased to $27,246,000 in 2005 from $14,201,000 in 2004, representing a 92%
increase. This increase was attributable to increased borrowings under the company’s previously existing revolving
credit facility, resulting primarily from 2004 acquisitions, and to increased borrowing rates. The company’s
debt-to-equity ratio decreased to 0.6:1 as of December 31, 2005 from 0.7:1 as of the end of the prior year. Interest
income in 2005 was $1,683,000, which was lower than the prior year amount of $5,186,000 primarily due to
reduced interest rate financing given to customers through De Lage Landen Inc. (DLL). Since December 2000,
Invacare customers desiring financing have primarily utilized the third-party financing arrangement with DLL, a
subsidiary of Rabo Bank of the Netherlands, to provide financing.
Income Taxes. The company had an effective tax rate of 31.5% in 2005 and 31.9% in 2004. The effective tax
rate declined due to a change in the mix of earnings and permanent deductions. The company’s effective tax rate was
lower than the federal statutory rate primarily due to tax credits and earnings abroad being taxed at rates lower than
the federal statutory rate.
Research and Development. Research and development expenditures, which are included in costs of
products sold, increased to $23,247,000 in 2005 from $21,638,000 in 2004. The expenditures, as a percentage of net
sales, were 1.5% in 2005 and in the prior year.
INFLATION
Although the company cannot determine the precise effects of inflation, management believes that inflation
does continue to have an influence on the cost of materials, salaries and benefits, utilities and outside services. The
company attempts to minimize or offset the effects through increased sales volume, capital expenditure programs
designed to improve productivity, alternative sourcing of material and other cost control measures. In 2006, 2005
and 2004, the company was able to offset the majority of the impact of price increases from suppliers by
productivity improvements and other cost reduction activities.
LIQUIDITY AND CAPITAL RESOURCES
The company continues to maintain an adequate liquidity position through its unused bank lines of credit (see
Long-Term Debt and Subsequent Events in the Notes to Consolidated Financial Statements) included in this report
and working capital management. The company maintains various bank lines of credit to finance its worldwide
operations.
Total debt outstanding was $573.1 million at the end of the year, resulting in a debt-to-total-capitalization of
54.1% versus 41.7% at the end of last year. The increase in the debt-to-capitalization ratio was impacted primarily
by the reduction in equity related to the goodwill and intangible asset write-off recorded by the company during the
fourth quarter 2006 and the restriction on the company’s ability to pay down debt as noted below.
The company obtained waivers of the covenant violation disclosed in its Form 10-Q for the quarter ended
September 30, 2006 from each of its lenders. The waivers were effective through February 15, 2007. The waivers
limited the company’s debt, (excluding $75 million for asset-backed securitization borrowings) to a maximum
amount of $521 million and did not allow a pay down of debt below $501 million. At year-end 2006, the company’s
debt, as defined under the waivers, was at the minimum level. The company’s cash and cash equivalents at the end of
2006 were approximately $82.4 million as a result of restrictions on debt pay down included in the debt covenant
waivers.
On February 12, 2007, the company completed the refinancing of its existing indebtedness and put in place a
long-term capital structure. The new financing program provides the company with total capacity of approximately
$710 million, the net proceeds of which were utilized to refinance substantially all of the company’s existing
indebtedness and pay related fees and expenses (the “Refinancing”). As part of the financing, the company entered
into a $400 million senior secured credit facility consisting of a $250 million term loan facility and a $150 million
revolving credit facility. The company’s obligations under the new senior secured credit facility are secured by
substantially all of the company’s assets and are guaranteed by its material domestic subsidiaries, with certain
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