Invacare 2009 Annual Report Download - page 56

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 10.74% in 2009 compared to 8.90% to 9.90% in 2008 and 9.25% to
10.25% in 2007. If the discount rate used were 100 basis points higher for the 2009 impairment analysis, the
company could potentially have an impairment for the Asia/Pacific reporting unit. Accordingly, the performance
of the Asia/Pacific region in particular will be closely monitored going forward to determine if the goodwill for
the region needs to be re-evaluated for potential impairment.
Based upon the assumptions indicated above, there was no indication of impairment in 2009 related to
goodwill impairment. However, charges totaling $1,696,000 were recognized related to intangibles in Europe and
NA/HME and a future potential impairment is possible for any of the company’s reporting units should actual
results differ materially from forecasted results used in the valuation analysis. Furthermore, the company’s
annual valuation of goodwill can differ materially if the market inputs used to determine the discount rate change
significantly. For instance, higher interest rates or greater stock price volatility would increase the discount rate
and thus, increase the chance of impairment.
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
layers of external insurance coverage insuring up to $75,000,000 in annual aggregate losses arising from
individual claims anywhere in the world that exceed the captive insurance company policy limits or the limits of
the company’s per country foreign liability limits, as applicable. There can be no assurance that Invacare’s
current insurance levels will continue to be adequate or available at affordable rates.
Product liability reserves are recorded for individual claims based upon historical experience, industry
expertise and indications from the third-party actuary. Additional reserves, in excess of the specific individual
case reserves, are provided for incurred but not reported claims based upon third-party actuarial valuations at the
time such valuations are conducted. Historical claims experience and other assumptions are taken into
consideration by the third-party actuary to estimate the ultimate reserves. For example, the actuarial analysis
assumes that historical loss experience is an indicator of future experience, that the distribution of exposures by
geographic area and nature of operations for ongoing operations is expected to be very similar to historical
operations with no dramatic changes and that the government indices used to trend losses and exposures are
appropriate.
Estimates made are adjusted on a regular basis and can be impacted by actual loss awards and settlements
on claims. While actuarial analysis is used to help determine adequate reserves, the company is responsible for
the determination and recording of adequate reserves in accordance with accepted loss reserving standards and
practices.
Warranty
Generally, the company’s products are covered from the date of sale to the customer by warranties against
defects in material and workmanship for various periods depending on the product. Certain components carry a
lifetime warranty. A provision for estimated warranty cost is recorded at the time of sale based upon actual
experience. The company continuously assesses the adequacy of its product warranty accrual and makes
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