Invacare 2007 Annual Report Download - page 47

uncertainty to the claims process and have eroded our customers’ ability to provide quality solutions. As a result
of these changes in reimbursement, the company performed a review of its customers most vulnerable to changes
in the reimbursement for power mobility products and, as part of its 2006 fourth quarter financial results, the
company recorded an incremental reserve against accounts receivable of $26,775,000. In response to these
regulatory changes, the company has implemented tighter credit policies and continues to work with certain
customers in an effort to help them reduce costs and improve their financial viability.
Selling, general and administrative expenses excluding acquisitions, foreign currency translation and the
incremental reserve against accounts receivable increased $3,706,000 in 2006 or 1% primarily as a result of
increased information technology and distribution costs.
Selling, general and administrative expenses for NA/HME increased 17.7% or $31,699,000 in 2006
compared to 2005. Acquisitions increased selling, general and administrative expense by approximately
$1,656,000 and foreign currency translation increased expense by $1,082,000. Selling, general and administrative
expense also increased $26,775,000 attributable to the incremental reserve recorded for accounts receivable
discussed above. The remaining increase in expense is $2,186,000 or 1.2%.
Selling, general and administrative expenses for ISG increased by 8.1% or $1,711,000 in 2006 compared to
2005. The increase was attributable to an increase in distribution and sales and marketing expenses. Selling
general and administrative expenses for IPG increased by 3.4% or $463,000 compared to 2005. The increase was
attributable to increased product liability and advertising expenses.
European selling, general and administrative expenses decreased by 1.5% or $1,620,000 in 2006 compared
to 2005. Acquisitions increased selling, general and administrative expense by approximately $594,000 and
foreign currency translation decreased expense by $2,647,000. The remaining increase in expense of $433,000 or
.4% was primarily due to higher distribution costs.
Asia/Pacific selling, general and administrative expenses decreased 2.4% or $446,000 in 2006 compared to
2005. Acquisitions increased selling, general and administrative expense by approximately $1,500,000 and
foreign currency translation decreased expense by $859,000. The remaining decline in expense of $1,087,000 or
5.9% is attributable to reduced cost structure.
Asset write-downs related to goodwill and other intangibles. The company undertakes its annual
impairment test of goodwill and intangible assets in accordance with SFAS No. 142, Goodwill and Other
Intangible Assets, in connection with the preparation of its fourth quarter results each year. As a result of the
reduced profitability of its NA/HME operating segment, and uncertainty associated with future market
conditions, the company recorded an impairment charge related to goodwill and intangible assets of this segment
of $300,417,000 in 2006.
The impairment of goodwill in the NA/HME operating segment was primarily the result of reduced
government reimbursement levels and changes in reimbursement policies, which negatively affected revenues
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 have caused and
continue to 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™
oxygen system product line, in part, until they had a clearer view of future oxygen reimbursement levels.
I-42