Invacare 2007 Annual Report Download - page 43

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costs. Margins also benefited by .2 of a percentage point from the impact of insurance and asset recoveries
related to an embezzlement at one of the company’s foreign locations which the company disclosed earlier in the
year. The situation was investigated by local authorities and the company’s internal audit department and a
forensic audit was performed. As a result of the investigation, it was determined that the company’s internal
controls were circumvented by collusion. The company was able to recover its loss through the receipt of
$5,000,0000 received under an employee dishonesty insurance policy as well as asset recoveries from the
individuals involved during the fourth quarter of 2007.
NA/HME gross profit as a percentage of net sales was 30.7% in 2007 versus 29.7% in 2006. The
improvement was primarily attributable to cost reduction initiatives and the favorable impact from insurance and
asset recoveries related to an embezzlement as noted above. These benefits were partially offset by increases in
freight costs and pricing reductions.
ISG gross profit as a percentage of net sales declined .5 of a percentage point from the prior year. The
decline was primarily attributable to continued unfavorable product mix toward lower margin product—diabetic
and incontinence products, and an unfavorable customer mix toward larger providers who historically have lower
margins.
IPG gross profit as a percentage of net sales decreased 2.2 percentage points in 2007 from the prior year.
The decrease in margin is attributable to volume decreases, unfavorable foreign currency exchange rate
movement of the Canadian dollar and incremental costs related to new product introductions.
Gross profit in Europe as a percentage of net sales declined 1.4 percentage points in 2007 from the prior
year. The decrease was primarily attributable shift away from higher margin product, increased freight and duty
costs, partially offset by the impact of cost reduction activities.
Gross profit in Asia/Pacific as a percentage of net sales improved by 5.6 percentage points in 2007 from the
prior year. The increase was largely due to cost reduction activities and favorable impact from acquisitions
finalized in the fourth quarter of 2006.
Selling, General and Administrative. Consolidated selling, general and administrative expenses as a
percentage of net sales were 22.9% in 2007 and 24.9% in 2006. The overall dollar decrease was $7,000,000 or
1.9%, with foreign currency translation increasing expenses by $10,249,000 or three percentage points and
acquisitions increasing expenses by approximately $4,845,000 or one percentage point. Excluding acquisitions
and foreign currency translation impact, selling, general and administrative (SG&A) expenses decreased
$22,094,000 or 5.9%. The decrease is primarily attributable to an incremental account receivable reserve of
$26,775,000 recognized in the NA/HME segment in 2006, with no such incremental reserve in 2007.
Selling, general and administrative expenses excluding acquisitions, foreign currency translation and the
incremental accounts receivable reserve in 2006 increased $4,681,000 in 2007 or 1.3% primarily as a result of
additional bonus expense, bad debt expense and legal and professional expenses related to the embezzlement
noted above. These increases were offset by a one-time gain of $3,981,000 resulting from debt cancellation
related to a development stage company which the company consolidated as a variable interest entity in
accordance with the provisions of FASB Interpretation No. 46, Consolidation of Variable Interest Entities (FIN
46).
Selling, general and administrative expenses for NA/HME decreased 12.9% or $27,230,000 in 2007
compared to 2006. Foreign currency translation increased expense by $942,000 while acquisitions increased
expense by approximately $313,000. The SG&A expense decrease is primarily attributable to an incremental
account receivable reserve of $26,775,000 recognized in 2006, with no such incremental reserve recorded in
2007. The remaining decrease in expense is $455,000 or 0.2%. The decline in expense is the result of cost
reduction activities offset by increases in bonus expense, bad debt expense and legal and professional expenses
related to the embezzlement noted above.
I-38