Invacare 2007 Annual Report Download - page 48

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™ oxygen system.
Medicare will also institute a new competitive bidding program for various items in ten of the largest
metropolitan areas to be effective in 2008. 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 a decrease 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 was higher than the expected benefit at the U.S. federal statutory rate primarily due to losses
with no corresponding tax benefits due to 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. In 2005,
the company had pretax earnings and benefited from foreign earnings taxed at less than the U.S. statutory rate.
Research and Development. 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 1.5% in 2006 and 2005.
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
2007, 2006 and 2005, 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 in the Notes to Consolidated Financial Statements) included in this report and working
capital management.
Total debt outstanding was $537,852,000 million at the end of 2007 down from $573,126,000 at the end of
2006, resulting in a debt-to-total-capitalization of 49.3% for 2007 versus 54.1% at the end of 2006. The
debt-to-capitalization ratio improvement was driven by the company’s debt reduction during 2007.
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