Memorex 2011 Annual Report Download - page 62

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
businesses are considered a separate reporting unit (Mobile Security) for the purposes of goodwill impairment testing. In
accordance with our policy, goodwill was tested for impairment during the fourth quarter of 2011.
In evaluating whether goodwill was impaired, we compared the fair value of the Mobile Security reporting unit to it’s
carrying value (Step 1 of the impairment test). In calculating fair value, we used the income approach, a valuation technique
under which we estimate future cash flows using the reporting unit’s financial forecasts. Future estimated cash flows are
discounted to their present value to calculate fair value. In determining the fair value of the Mobile Security reporting unit
under the income approach, our expected cash flows are affected by various assumptions. Fair value on a discounted cash
flow basis uses forecasts over a 10 year period with an estimation of residual growth rates thereafter. We use our business
plans and projections as the basis for expected future cash flows. A discount rate of 16.5 percent was used to reflect the
relevant risks of the higher growth assumed for this reporting unit. An increase in the discount rate of one percent would have
decreased the reporting unit’s fair value by approximately $5.0 million while a decrease in the discount rate by one percent
would have increased the reporting unit’s fair value by $6.0 million. The revenue growths in 2012 through 2014 are significant
assumptions within the projections. If revenue were decreased 10 percent for each year in the plan without a change in
projected SG&A costs or other cash flows, the indicated fair value of the reporting unit would be reduced by approximately
$11.0 million. Based on the goodwill test performed, we determined that the fair value of the reporting unit exceeded its
carrying amount. The indicated excess in fair value over carrying value of the Mobile Security reporting unit in step one of the
impairment test at November 30, 2011 and goodwill is as follows:
Goodwill
Reporting
Unit
Carrying
Amount
Excess of Fair
Value Over
Carrying
Amount
Percentage of
Fair Value
Over Carrying
Amount
(In millions)
Mobile Security ............................... $31.3 $52.0 $13.0 25%
While this analysis indicates that this goodwill is not impaired, to the extent that actual results or other assumptions
about future economic conditions or potential for our growth and profitability in this business changes, it is possible that our
conclusion regarding the remaining goodwill could change, which could have a material effect on our financial position and
results of operations.
During 2011 we acquired certain assets of Encryptx which resulted in goodwill of $1.6 million. The goodwill was allocated to
our existing Americas-Commercial reporting unit. Goodwill is considered impaired when its carrying amount exceeds its implied
fair value. As of March 31, 2011, the carrying amount of all of our reporting units significantly exceeded their fair value and we
performed an impairment test. Based on the goodwill test performed as of March 31, 2011, we determined that the carrying
amount of the goodwill in the Americas-Commercial reporting unit, including the assets of Encryptx, exceeded the implied fair
value and, therefore, the goodwill was fully impaired. As a result, a $1.6 million goodwill impairment charge was recorded during
the three months ended March 31, 2011 in the Consolidated Statements of Operations.
During 2009 our reporting units for goodwill were our operating segments (Americas, Europe, Asia Pacific, and
Electronic Products) with the exception of the Americas segment which was further divided between the Americas-Consumer
and Americas-Commercial reporting units as determined by sales channel. During the second quarter of 2010 we realigned
our corporate segments and reporting structure and combined our Electronic Products segment with our Americas segment,
and we separated our Asia Pacific segment into North Asia and South Asia regions. As a result of the segment change, the
goodwill of $23.5 million which was previously allocated to the Electronics Products segment was merged into the Americas-
Consumer reporting unit. The Americas-Consumer reporting unit had a fair value that was significantly less than its carrying
amount prior to the combination, which is a triggering event for an interim goodwill impairment test. A two-step impairment test
was performed to identify a potential impairment and measure an impairment loss to be recognized. Based on this step of the
impairment test, we determined that the full amount of remaining goodwill, $23.5 million, was impaired.
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