Invacare 2013 Annual Report Download - page 55

I-49
$39,729,000 ($39,729,000 after tax) in the Asia/Pacific segment as a result of reduced forecasted profitability and $7,990,000
($7,336,000 after tax) in the North America/HME segment as a result of the impact from the FDA consent decree.
Debt Finance Charges and Fees. In 2012, the Company extinguished $500,000 in principal amount of its outstanding
4.125% convertible senior subordinated debentures due in February 2027. This early debt extinguishment resulted in debt fees
and premium expenses of $312,000 comprised of $301,000 of premiums paid and losses recorded as a result of early debt
extinguishment and $11,000 of expense related to deferred financing fee write-offs, which were previously capitalized.
In 2011, the Company extinguished $63,351,000 in principal amount of its outstanding 4.125% convertible senior
subordinated debentures due in February 2027. This early debt extinguishment resulted in debt fees and premium expenses of
$24,200,000 comprised of $22,646,000 of premiums paid and losses recorded as a result of early debt extinguishment and
$1,554,000 of expenses related to deferred financing fee write-offs, which were previously capitalized.
All of the debt finance charges and fees in 2012 and 2011 are included in the All Other segment.
Charge Related to Restructuring Activities. Charges for the year ended December 31, 2012 totaled $11,395,000 including
charges for severance ($6,775,000), lease termination costs ($1,725,000), building and asset write-downs, primarily related to the
closure of the Hong, Denmark assembly facility, and other miscellaneous charges in Europe and Asia/Pacific ($2,404,000) and
inventory write-offs ($491,000) in Asia/Pacific recorded in cost of products sold. Severance charges were primarily incurred in
the North America/HME segment ($4,242,000), Asia/Pacific segment ($1,681,000) and Europe segment ($817,000). The charges
were incurred as a result of the elimination of various positions as part of the Company's globalization initiatives. In addition, a
portion of the North America/HME segment severance was related to positions eliminated, principally in sales and marketing as
well as manufacturing, at the Company's Taylor Street facility as a result of the FDA consent decree. The savings from these
charges will be reflected primarily in reduced selling, general and administrative expenses and manufacturing expenses for the
Company. In Europe, positions were eliminated as a result of finalizing the exit from the manufacturing facility in Denmark and
an elimination of a senior management position in Switzerland. In Asia/Pacific, at the end of October 2012, the Company's
management approved a plan to restructure the Company's operations in this segment. In Australia, the Company consolidated
offices / warehouses, decrease staffing and exited various activities while returning to a focus on distribution. At the Company's
subsidiary, which produces microprocessor controllers, the Company decided to cease the contract manufacturing business for
companies outside of the healthcare industry. Payments for the year ended December 31, 2012 were $9,381,000 and were funded
with operating cash flows. The majority of the 2012 charges have now been paid out.
Charges for the year ended December 31, 2011 totaled $10,534,000 including charges for severance ($8,352,000), contract
exit costs primarily related to the closure of the Hong, Denmark assembly facility ($1,788,000) and inventory write-offs ($277,000)
recorded in cost of products sold and miscellaneous costs ($117,000). The majority of the 2011 North America/HME charges
were incurred for severance, primarily at the corporate headquarters as the result of the elimination of various positions principally
in sales and administration in Elyria, Ohio. These eliminations were permanent reductions in workforce which primarily resulted
in reduced selling, general and administrative expenses. In Europe, the charges were the result of the closure of the Company's
Hong, Denmark facility. The assembly activities were transferred to other Company facilities or outsourced to third parties. This
closure enabled the Company to reduce fixed operating costs related to the facility and reduce headcount with the transfer of a
portion of the production to other Company facilities. The 2011 charges have now been paid out and were funded with operating
cash flows.
Interest. Interest expense decreased to $8,240,000 in 2012 from $10,106,000 in 2011, representing an 18.5% decrease. This
decrease was attributable primarily to debt reduction during the year, and to a lesser extent, lower borrowing rates in 2012 as
compared to 2011. Interest income in 2012 was $686,000 as compared to $1,213,000 in 2011, primarily due to a reduction in
volume of financing provided to customers.
Income Taxes. The Company had an effective tax rate of 294.3% in 2012 and 74.4% in 2011 on earnings (loss) from
continuing operations. The Company's effective tax rate in 2012 was higher than the expected U.S. federal statutory rate due to
the negative impact of the Company not being able to record tax benefits related to losses in countries which had tax valuation
allowances for the year, except in the US where a benefit of $7,126,000 was recognized as an intra-period allocation with
discontinued operations, more than offsetting the benefit of foreign income taxed at rates below the U.S. statutory rate. The
Company also recorded a foreign discrete tax adjustment of $9,336,000 including interest related to prior year periods under audit,
which is being contested by the Company. The Company's effective tax rate in 2011 was higher than the expected U.S. federal
statutory rate due to goodwill and intangible write-offs without tax benefit and the negative impact of the Company not being able
to record tax benefits related to losses in countries which had tax valuation allowances for the year, which more than offset the
benefit of foreign income taxed at rates below the U.S. statutory rate. In addition, during 2011, the Company recognized a
$4,947,000 tax benefit as a result of a tax settlement in Germany as the German government agreed to follow a European Court