Invacare 2008 Annual Report Download - page 49

of $26,775,000 recognized in 2006, with no such incremental reserve recorded in 2007. The remaining decrease
in expense was $455,000 or 0.2%. The decline in expense was 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.
SG&A expenses for ISG increased by 12.5% or $2,858,000 in 2007 compared to 2006. The increase was
attributable to higher distribution costs associated with increased sales volumes.
SG&A expenses for IPG increased by 5.9% or $836,000 in 2007 compared to 2006. Foreign currency
translation increased SG&A expenses by approximately one percentage point or $132,000. The remaining
increase in expenses of $704,000 was due to investments in sales and marketing programs to drive growth and
unfavorable currency transaction effects due to the strengthening of the Canadian dollar.
European SG&A expenses increased by 9.6% or $10,329,000 in 2007 compared to 2006. Foreign currency
translation increased SG&A expenses by approximately $6,975,000. The remaining increase in expenses of
$3,354,000 or 3.1% was primarily due to higher distribution costs and investment in marketing programs to drive
sales growth.
Asia/Pacific SG&A expenses increased 34.8% or $6,207,000 in 2007 compared to 2006. Acquisitions
increased SG&A expenses by approximately $4,532,000 and foreign currency translation increased expenses by
$2,200,000. Excluding acquisitions and foreign currency translation impact, SG&A expenses decreased $525,000
or 2.9% as a result of cost reduction activities.
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. No impairments were
recognized in 2007. However, 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 of
$294,656,000 related to goodwill and $160,000 related to intangible assets of this segment in 2006. In addition,
an impairment charge of $5,601,000 was recorded related to the intangible related to NeuroControl, a
consolidated variable interest entity, which is included in Other in the segment disclosure.
Debt Finance Charges, Interest and Fees Associated with Debt Refinancing. In February 2007, the
company completed its refinancing efforts which resulted in a Credit Agreement which provides for a $400
million senior secured credit facility consisting of a six-year $250 million term loan facility and a five-year $150
million revolving credit facility with interest at LIBOR plus 2.25%, the issuance and sale of $135 million
aggregate principal amount of 4.125% convertible senior subordinated debentures due 2027 and the issuance and
sale of $175 million aggregate principal amount of 9.75% Senior Notes due 2015. The company incurred
$13,408,000 in 2007 and $3,745,000 in 2006 for debt finance charges, interest and fees associated with the debt
refinancing.
Interest. Interest expense increased to $44,309,000 in 2007 from $34,084,000 in 2006, representing a 30%
increase. This increase was attributable to increased borrowing rates as a result of the company’s refinancing.
Interest income in 2007 was $2,340,000, which was lower than the prior year amount of $2,775,000, primarily
due to favorable finance terms provided to customers.
Income Taxes. The company had an effective tax rate of 91.8% in 2007 and 2.7% in 2006. The company’s
effective tax rate was higher than the U.S. federal statutory rate, primarily due to domestic and certain foreign
losses with no corresponding tax benefits due to a valuation allowance recorded against domestic and certain
foreign deferred tax assets, partially offset by earnings abroad being taxed at rates lower than the U.S. federal
statutory rate (including in 2007 a benefit of $7,820,000 related to a tax rate change in Germany and
corresponding reduction of the company’s net German deferred tax liability). The increase in the effective rate in
2007 compared to 2006 was primarily due to the losses without tax benefit.
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