Invacare 2015 Annual Report Download - page 52

I-46
Europe
European net sales increased 4.7% in 2014 compared to the prior year to $610,555,000 from $583,143,000 as foreign currency
translation increased net sales by 1.1 percentage points. Constant currency net sales increased 3.6% principally due to increases
in lifestyle and mobility and seating products, which were partially offset by declines in respiratory products.
North America/Home Medical Equipment (North America/HME)
North America/HME net sales decreased 13.8% in 2014 versus the prior year to $507,867,000 from $589,240,000 with
foreign currency translation decreasing net sales by 0.5 of a percentage point. The constant currency net sales decrease of 13.3%
was driven by declines in all product categories. The net sales decline in respiratory products was primarily attributable to a
significant shipment of Invacare® HomeFill® oxygen systems to a large national account in 2013 that did not repeat in 2014. The
net sales decline in lifestyle products was primarily impacted by a shift toward lower cost products for certain lifestyle products
that are subject to the Centers for Medicare and Medicaid Services' National Competitive Bidding program and pre- and post-
payment audits. The net sales decline in mobility and seating products was primarily driven by reduced net sales of scooter products,
which the company decided to exit domestically. In addition, the mobility and seating product category continued to be impacted
by the FDA consent decree, which limits production of custom power wheelchairs and seating systems at the Taylor Street
manufacturing facility to products having properly completed verification of medical necessity (VMN) documentation. The VMN
is a signed document from a clinician, and in some instances a physician, that certifies that the product is deemed medically
necessary for a particular patient's condition, which cannot be adequately addressed by another manufacturer's product or which
is a replacement of the patient's existing product.
Institutional Products Group (IPG)
IPG net sales decreased 8.5% in 2014 over the prior year to $102,796,000 from $112,290,000 with foreign currency translation
decreasing sales by 0.3 of a percentage point. The constant currency net sales decrease of 8.2% was driven primarily by declines
in all product categories except therapeutic support surfaces and patient transport products.
Asia/Pacific
Asia/Pacific net sales decreased 1.8% in 2014 from the prior year to $48,945,000 from $49,832,000. Foreign currency
translation decreased net sales by 1.4 percentage points. Constant currency net sales decreased 0.4% largely due to declines at the
company's subsidiary that produces microprocessor controllers primarily related to its decision to exit the contract manufacturing
business for customers outside of the healthcare industry. This was partially offset by growth in the company's Australian distribution
business. Changes in exchange rates, particularly with the euro and U.S. dollar had a significant impact on sales in this segment.
Gross Profit. Consolidated gross profit as a percentage of net sales was 27.3% in 2014 as compared to 27.5% in 2013. The
margin decline was principally related to reduced volumes, sales mix favoring lower margin product lines and lower margin
customers and an incremental warranty expense related to three recalls. Gross profit as a percentage of net sales for the Europe,
IPG and Asia/Pacific segments was favorable as compared to the prior year with the North America/HME segment unfavorable
compared to the prior year. The 2014 gross margin reflected an incremental warranty expense for three previously disclosed recalls
of $11,493,000 or 0.9 of a percentage point. The incremental warranty expense was recorded in the North America/HME, Europe
and Asia/Pacific reporting segments. The company's warranty reserve is subject to adjustment as new developments change the
company's estimates. The 2013 gross margin reflected an incremental warranty expense for a power wheelchair joystick recall of
$7,264,000 or 0.5 of a percentage point. The incremental warranty expense was recorded in the North America/HME and Asia/
Pacific reporting segments. In addition, the 2013 gross margin benefited by $1,389,000 or 0.1 of a percentage point, related to an
amended value added tax (VAT) filing recognized in the European segment.
Gross profit in Europe as a percentage of net sales increased 1.0 percentage point in 2014 from the prior year. The increase
in margin was principally due to favorable customer and product mix and lower product costs partially offset by increased warranty
and freight expense. The 2014 gross margin reflected an incremental warranty expense of $3,395,000 pre-tax or 0.6 of a percentage
point for a previously disclosed recall. Gross margin in 2013 benefited by $1,389,000 or 0.2 of a percentage point, related to an
amended VAT filing recognized in the fourth quarter of 2013.
North America/HME gross profit as a percentage of net sales decreased 2.5 percentage points in 2014 from the prior year.
The decline in margins was principally due to an unfavorable sales mix favoring lower margin products, increased warranty expense
and asset write-offs attributable to canceled product launches. The 2014 gross margin reflected an incremental recall expense of
$6,833,000 or 1.3 of a percentage point for three recalls compared to $2,625,000 or 0.4 of a percentage point for the joystick recall
initiated in 2013.