Ingram Micro 2008 Annual Report Download - page 61

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reporting unit exceeds the estimated fair value. The Company utilized a combination of income and market
approaches to estimate the fair value of its reporting units in the first step.
The income approach utilizes estimates of discounted cash flows of the reporting units, which requires
assumptions of, among other things, the reporting units’ expected long-term revenue trends, as well as estimates of
profitability, changes in working capital and long-term discount rates, all of which require significant judgment.
The income approach also requires the use of appropriate discount rates that take into account the current risks in the
capital markets. The market approach evaluates comparative market multiples applied to its reporting units’
businesses to yield a second assumed value of each reporting unit.
The Company compared a weighted average of the output from the income and market approaches to the
carrying value of each reporting unit, which yielded an indication of impairment in each of the North America,
EMEA and Asia-Pacific reporting units. The Company also compared the aggregate of the estimated fair values of
each of its four regional reporting units to its overall market capitalization, taking into account an acceptable control
premium considered supportable based upon historical comparable transactions.
Step two of the impairment test requires the Company to compute a fair value of the assets and liabilities,
including identifiable intangible assets, within each of the three reporting units with indications of impairment, and
compare the implied fair value of goodwill to its carrying value. The results of step two indicated that the goodwill
of each of the North America, EMEA and Asia-Pacific reporting units was fully impaired. As a result, the Company
recorded a charge of $742,653 in the fourth quarter of 2008, which is made up of $243,190, $24,125 and $475,338 in
carrying value of goodwill, prior to the impairment, in North America, EMEA and Asia-Pacific, respectively (see
Note 4 to the Company’s consolidated financial statements). This non-cash charge significantly impacted the
Company’s equity and results of operations for 2008, but does not impact the Company’s ongoing business
operations, liquidity, cash flow or compliance with covenants for its credit facilities.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist
principally of receivables from customers and vendors, as well as derivative financial instruments. Credit risk with
respect to trade accounts receivable is limited due to the large number of customers and their dispersion across
geographic areas. No single customer accounts for 10% or more of the Company’s net sales. The Company
performs ongoing credit evaluations of its customers’ financial conditions, obtains credit insurance in certain
locations and requires collateral in certain circumstances. The Company maintains an allowance for estimated
credit losses.
Derivative Financial Instruments
The Company operates in various locations around the world. The Company reduces its exposure to
fluctuations in foreign exchange rates by creating offsetting positions through the use of derivative financial
instruments in situations where there are not offsetting balances that create a natural hedge. The market risk related
to the foreign exchange agreements is offset by changes in the valuation of the underlying items being hedged. The
Company currently does not use derivative financial instruments for trading or speculative purposes, nor is the
Company a party to leveraged derivatives.
Foreign exchange risk is managed primarily by using forward contracts to hedge foreign currency denom-
inated receivables and payables. Cross-currency interest rate swaps are used to hedge foreign currency denominated
principal and interest payments related to intercompany loans.
All derivatives are recorded in the Company’s consolidated balance sheet at fair value. The estimated fair value
of derivative financial instruments represents the amount required to enter into similar offsetting contracts with
similar remaining maturities based on quoted market prices. Changes in the fair value of derivatives not designated
as hedges are recorded in current earnings.
51
INGRAM MICRO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)