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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
was significantly in excess of our assumptions. Revenue in the third quarter of 2013 declined 67% versus the third quarter of 2012,
compared to a revenue decline of 28% in the first half of 2013 versus the first half of 2012. As a result, in the third quarter of 2013, it
became apparent that we would not achieve our 2013 and long-term forecasted revenue and earnings, and we completed an interim
impairment assessment of the fair value of goodwill related to our operations in China.
China’s revenue performance in the third quarter of 2013 was approximately 67% less (when excluding the impact of foreign currency) than
the revenue in our Q4 2012 projections. The revenue decline in China during the third quarter of 2013 resulted in the recognition of an
operating loss while we had expected operating profit in our Q4 2012 projections. In the third quarter of 2013, we significantly lowered our
long-term revenue and earnings projections for China that was included in our DCF model utilized in our interim impairment assessment.
Based upon this interim analysis, we determined that the goodwill related to our operations in China was impaired. Specifically, the results
of our interim impairment analysis indicated the estimated fair value of our China reporting unit was less than its respective carrying amount.
As a result of our impairment testing, we recorded a non-cash before tax impairment charge of $38.4 ($38.4 after tax) to reduce the
carrying amount of goodwill. There is no goodwill remaining for our China reporting unit as a result of this impairment. The decline in the
fair value of the China reporting unit was primarily driven by the significant reduction in the forecasted long-term growth rates and cash
flows used to estimate fair value. Fiscal year 2013 revenue for China was expected to be approximately 38% less than the revenue in our Q4
2012 projections and 47% less than fiscal year 2012 results.
We also performed an interim impairment analysis for our China finite-lived intangible assets, which indicated the carrying value of these
intangible assets exceeded the estimated future undiscounted cash flows of the business. This resulted in a non-cash before tax impairment
charge of $3.7 ($2.8 after tax) to reduce the carrying amount of these assets. There are no intangible assets remaining for China as a result
of this impairment charge.
China had historically generated positive cash flows, but was not expected to generate positive cash flows in 2013 or for a number of years
thereafter as there was a need for further investment than was previously anticipated. As a result, the expected cash flows of the business as
of the date of our impairment analysis were not at a level sufficient to support the carrying value of the business. As compared to prior
years’ projections for China, the future expectations declined significantly in the 2012 and 2013 impairment analyses. This reduction in
future expectations led to impairments of $44.0 and $42.1 being recorded in the third quarters of 2012 and 2013, respectively.
Key Assumptions – China
Key assumptions used in measuring the fair value of China during these impairment assessments included projections of revenue and the
resulting cash flows, as well as the discount rate (based on the estimated weighted-average cost of capital). To estimate the fair value of
China, we forecasted revenue and the resulting cash flows over ten years using a DCF model which included a terminal value at the end of
the projection period. We believed that a ten-year period was a reasonable amount of time in order to return China’s cash flows to
normalized, sustainable levels.
Goodwill
Latin
America
Europe,
Middle East
& Africa
Asia
Pacific Total
Gross balance at December 31, 2013 $112.6 $167.3 $ 85.0 $364.9
Accumulated impairments – – (82.4) (82.4)
Net balance at December 31, 2013 $112.6 $167.3 $ 2.6 $282.5
Changes during the period ended December 31, 2014:
Foreign exchange $ (21.9) $ (11.3) $ – $ (33.2)
Gross balance at December 31, 2014 $ 90.7 $156.0 $ 85.0 $331.7
Accumulated impairments – – (82.4) (82.4)
Net balance at December 31, 2014 $ 90.7 $156.0 $ 2.6 $249.3