Invacare 2007 Annual Report Download - page 46

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 was 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 transacted 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, 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, including 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 was 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 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.
During 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
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