Invacare 2007 Annual Report Download - page 81

INVACARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Goodwill—Continued
As a result of the RoadRunner Mobility, Inc. acquisition in 2007, additional goodwill of $2,822,000 was
recorded, which is deductible for tax purposes. In the fourth quarter of 2006, the company expanded its number
of reporting segments from three to five due to organizational changes within the former North American
geographic operating segment in line with how the chief operating decision maker assesses performance and
makes resource allocation decisions. Accordingly, under the provisions of SFAS No. 142, the company
reallocated the goodwill related to the former North American reporting unit to the three new reporting units
which comprise the North America geographic region.
In accordance with SFAS No. 142, goodwill is subject to annual impairment testing. For purposes of Step I
of the impairment test, the fair value of each reporting unit is estimated by forecasting cash flows and
discounting those cash flows using appropriate discount rates. The fair values are then compared to the carrying
value of the net assets of each reporting unit. Step II of the impairment test requires a more detailed assessment
of the fair values associated with the net assets of a reporting unit that fails the Step I test, including a review for
impairment in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets
(“SFAS 144”).
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 and days’ sales outstanding 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 company’s 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.
No impairment was evident based on the company’s 2007 fourth quarter review. An impairment charge
related to goodwill in the North America/HME segment of $294,656,000 was recorded in the fourth quarter of
2006 as a result of reduced profitability in the NA/HME operating segment and uncertainty associated with
future market conditions. As part of the impairment analysis in 2006, the company compared the forecasted
un-discounted cash flows for each facility in the North America/HME segment to the carrying value of the net
assets associated with a given facility, which calculated no impairment of any other long-lived assets pursuant to
SFAS No. 144.
The 2006 impairment of goodwill in the NA/HME operating segment was primarily the result of reduced
government reimbursement levels and changes in reimbursement policies, which negatively affected revenues
and profitability in the NA/HME operating segment. The changes announced by the Centers for Medicare and
Medicaid Services, or “CMS,” affected eligibility, documentation, codes, and payment rules relating to power
wheelchairs impacted the predictability of reimbursement of expenses for and access to power wheelchairs and
created uncertainty in the market place, thus decreasing purchases. Effective November 15, 2006, the CMS
reduced the maximum reimbursement amount for power wheelchairs under Medicare by up to 28%. The reduced
reimbursement levels may cause consumers to choose less expensive versions of the company’s power
wheelchairs.
NA/HME sales of respiratory products were also negatively affected by the changes in 2006. Small and
independent provider sales declined as these dealers slowed their purchases of the company’s HomeFill™
oxygen system product line, in part, until they had a clearer view of future oxygen reimbursement levels.
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