Invacare 2007 Annual Report Download - page 53

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In 2007, the company continued to closely monitor the credit-worthiness of its customers and adhere to
tighter credit policies. Due to delays in the implementation of various government reimbursement policies
initiated in 2007, there still remains significant uncertainly as to the impact that those changes will have on the
company’s customers.
Inventories and Related Allowance for Obsolete and Excess Inventory
Inventories are stated at the lower of cost or market with cost determined by the first-in, first-out method.
Inventories have been reduced by an allowance for excess and obsolete inventories. The estimated allowance is
based on management’s review of inventories on hand compared to estimated future usage and sales. A provision
for excess and obsolete inventory is recorded as needed based upon the discontinuation of products, redesigning
of existing products, new product introductions, market changes and safety issues. Both raw materials and
finished goods are reserved for on the balance sheet.
In general, the company reviews inventory turns as an indicator of obsolescence or slow moving product as
well as the impact of new product introductions. Depending on the situation, the individual item may be partially
or fully reserved for. No inventory that was reserved for has been sold at prices above their new cost basis. The
company continues to increase its overseas sourcing efforts, increase its emphasis on the development and
introduction of new product, and decrease the cycle time to bring new product offerings to market. These
initiatives are sources of inventory obsolescence for both raw material and finished goods.
Goodwill, Intangible and Other Long-Lived Assets
Property, equipment, intangibles and certain other long-lived assets are amortized over their useful lives.
Useful lives are based on management’s estimates of the period that the assets will generate revenue. Under
SFAS No. 142, Goodwill and Other Intangible Assets, goodwill and intangible assets deemed to have indefinite
lives are subject to annual impairment tests. Furthermore, goodwill and other long-lived assets are reviewed for
impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. The company completes its annual impairment tests in the fourth quarter of each year. As a result
of reduced profitability in the NA/HME operating segment and uncertainty associated with future market
conditions, the company recorded impairment charges in 2006 related to goodwill and an intangible in this
segment of $294,656,000 and $160,000, respectively, while an impairment charge of $5,601,000 was recorded
related to the intangible recorded associated with NeuroControl, which is part of Other in the segment disclosure.
No impairment was recognized in 2007. The discount rates used have a significant impact upon the discounted
cash flow methodology utilized in our annual impairment testing as higher discount rates decrease the fair value
estimates used in our testing.
The company utilizes a discounted cash flow method model to analyze reporting units for impairment in
which the company forecasts income statement and balance sheet amounts based on assumptions regarding
future sales growth, profitability, inventory turns, days’ sales outstanding, etc. to forecast future cash flows. The
cash flows are discounted using a weighted average cost of capital discount rate where the cost of debt is based
on quoted rates for 20-year debt of companies of similar credit risk and the cost of equity is based upon the
20-year treasury rate for the risk free rate, a market risk premium, the industry average beta, a small cap stock
adjustment and company specific risk premiums. The assumptions used are based on a market participant’s point
of view and yielded a discount rate of 9.25% in 2007 compared to 8.85% in 2006. While no impairment was
indicated in 2007 for any reporting units, a future potential impairment is possible for any or the company’s
reporting units should actual results differ materially from forecasted results.
Product Liability
The company’s captive insurance company, Invatection Insurance Co., currently has a policy year that runs
from September 1 to August 31 and insures annual policy losses of $10,000,000 per occurrence and $13,000,000
in the aggregate of the company’s North American product liability exposure. The company also has additional
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