Invacare 2011 Annual Report Download - page 113

INVACARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Fair Values of Financial Instruments—Continued
segment to the carrying value of the net assets, which calculated no impairment of any other long-lived assets. As
part of the Step II test, the company calculated the fair value of all recorded and unrecorded assets and liabilities to
determine the goodwill impairment amount. As a result of reduced profitability in the Asia/Pacific segment in the
fourth quarter of 2011, uncertainty associated with future market conditions, and based on the Step II calculated
results, the company recorded an impairment charge related to goodwill in the Asia Pacific segment of $39,729,000
in the fourth quarter of 2011, which represented the entire goodwill amount for the segment.
In December, 2011, the FDA requested that the company agree to a consent decree of injunction at the
company’s corporate facility and its wheelchair manufacturing facility in Elyria, Ohio, the proposed terms of
which would require the suspension of certain operations at those facilities until they are certified by the
company and determined by the FDA to be in compliance with FDA quality system regulations. As a result of
this potential uncertain event, the company’s market capitalization declined considerably on the day of the
disclosure. In accordance with ASC 350, a significant decline in the company’s stock price and market
capitalization, should be considered as indicators of possible impairment that would require an interim
assessment of goodwill for impairment. The company believes the consent decree would primarily impact the
company’s NA/HME segment if the operations at the subject facilities were suspended.
The company is in the process of negotiating with the FDA the terms of the consent decree. As of
December, 2011, the company updated the assumptions and variables in its DCF model as of December, 2011 in
regards to the NA/HME segment and factored in a 230 basis point risk premium to the discount rate used to
reflect the increased uncertainty with the company’s forecasted cash flows for the reporting unit. The risk
premium adjustment was calculated by the company by considering the decline in the company’s stock price as
well as the company’s EBITDA multiple. The premium adjustment was made as the company was not able to
produce a range of cash flows given the lack of clarity on the final terms of the consent decree. The results of the
calculation as of December 31, 2011 confirmed that the carrying value of the NA/HME reporting unit exceeded
its fair value. Pursuant to ASC 360, the company compared the forecasted un-discounted cash flows of the
NA/HME segment to the carrying value of the net assets, which indicated no impairment of any other long-lived
assets. The company then conducted a preliminary Step II test in which the fair values of all recorded and
unrecorded assets and liabilities were calculated to determine the estimated impairment charge of $7,990,000,
which represented the entire goodwill amount for the segment. The company expects to finalize the Step II
analysis and record any adjustment in the first quarter of 2012.
While there was no indication of impairment in 2011 related to goodwill for the Europe, ISG or IPG
segments, a future potential impairment is possible for any of the company’s segments 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. In consideration of this potential, the company reviewed the results
if the discount rate used were 100 basis points higher for the 2011 impairment analysis and determined that there
still would not be any indicator of potential impairment for the Europe, ISG or IPG segments.
The company’s intangible assets consist of intangible assets with defined lives as well as intangible assets
with indefinite lives. Defined-lived intangible assets consist principally of customer lists, developed technology,
license agreements, patents and other miscellaneous intangibles such as non-compete agreements. The
company’s indefinite lived intangible assets consist entirely of trademarks.
The company evaluates the carrying value of definite-lived assets whenever events or circumstances
indicate possible impairment. Definite-lived assets are determined to be impaired if the future un-discounted cash
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