Invacare 2011 Annual Report Download - page 62

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Income Taxes
As part of the process of preparing its financial statements, the company is required to estimate income
taxes in various jurisdictions. The process requires estimating the company’s current tax exposure, including
assessing the risks associated with tax audits, as well as estimating temporary differences due to the different
treatment of items for tax and accounting policies. The temporary differences are reported as deferred tax assets
and or liabilities. Substantially all of the company’s U.S. and New Zealand deferred tax assets are offset by a
valuation allowance. The company also must estimate the likelihood that its deferred tax assets will be recovered
from future taxable income and whether or not valuation allowances should be established. In the event that
actual results differ from its estimates, the company’s provision for income taxes could be materially
impacted. The company does not believe that there is a substantial likelihood that materially different amounts
would be reported related to its critical accounting policies.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update
No. 2011-05, Presentation of Comprehensive Income (ASU 2011-05 or the ASU). ASU 2011-05 requires
comprehensive income to be reported in either a single statement or in two consecutive statements reporting net
income and other comprehensive income (OCI). The ASU does not change what is required to be reported in
OCI or the requirement to disclose reclassifications of items from OCI to net income. The company is analyzing
the impact of ASU 2011-05, which is required to be adopted for the company’s first quarter 2012 Form
10-Q. The company does not believe ASU 2011-05 will have a material impact on the company’s financial
position, results of operations or cash flows.
Item 7A. Quantitative and Qualitative Disclosure about Market Risk.
The company is exposed to market risk through various financial instruments, including fixed rate and
floating rate debt instruments. The company does at times use interest swap agreements to mitigate its exposure
to interest rate fluctuations. Based on December 31, 2011 debt levels, a 1% change in interest rates would impact
annual interest expense by approximately $1,471,000. Additionally, the company operates internationally and, as
a result, is exposed to foreign currency fluctuations. Specifically, the exposure results from intercompany loans,
intercompany sales or payments and third party sales or payments. In an attempt to reduce this exposure, foreign
currency forward contracts are utilized to hedge intercompany purchases and sales as well as third party
purchases and sales. The company does not believe that any potential loss related to these financial instruments
would have a material adverse effect on the company’s financial condition or results of operations.
In 2011, the company entered into interest rate swap agreements to effectively convert a portion of floating
rate revolving credit facility debt to fixed rate debt to avoid the risk of changes in market interest
rates. Specifically, interest rate swap agreements for notional amounts of $18,000,000 and $22,000,000 through
September 2013, $20,000,000 and $25,000,000 through May 2013 and $15,000,000 through February 2013 were
entered into that fix the LIBOR component of the interest rate on that portion of the revolving credit facility debt
at rates of 0.625%, 0.46%, 1.08%, 0.73% and 1.05%, respectively, for effective aggregate rates of 2.375%,
2.21%, 2.83%, 2.48% and 2.80%, respectively.
On October 28, 2010, the company entered into the Credit Agreement which provides for a $400,000,000
senior secured revolving credit facility maturing in October 2015 at variable rates. As of December 31, 2011, the
company had outstanding $13,850,000 in principal amount of 4.125% Convertible Senior Subordinated
Debentures due in February 2027, of which $4,053,000 is included in equity. Accordingly, while the company is
exposed to increases in interest rates, its exposure to the volatility of the current market environment is limited as
the company does not currently need to re-finance any of its debt. However, the company’s Credit Agreement
contains covenants with respect to, among other items, consolidated funded indebtedness to consolidated
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