Invacare 2011 Annual Report Download - page 59

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
Intangibles-Goodwill and Other, ASC 350, goodwill and intangible assets deemed to have indefinite lives are
subject to annual impairment tests. The company’s measurement date for its annual goodwill impairment test is
October 1. 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.
To review goodwill for impairment in accordance with ASC 350, the company first estimates the fair value
of each reporting unit and compares the calculated fair value to the carrying value of the each reporting unit. A
reporting unit is defined as an operating segment or one level below. The company has determined that its
reporting units are the same as its operating segments. The company completes its annual impairment tests in the
fourth quarter of each year. To estimate the fair values of the reporting units, the company utilizes a discounted
cash flow method (DCF) 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 and a
small cap stock adjustment. The discount rates used have a significant impact upon the discounted cash flow
methodology utilized in the company’s annual impairment testing as higher discount rates decrease the fair value
estimates. The assumptions used are based on a market participant’s point of view and yielded a discount rate of
9.27% in 2011 for the company’s annual impairment analysis compared to 9.59% in 2010 and 10.74% in 2009.
The company also utilizes an EV (Enterprise Value) to EBITDA (Earnings Before Interest, Taxes,
Depreciation and Amortization) Method to compute the fair value of its reporting units which considers potential
acquirers and their EV to EBITDA multiples adjusted by an estimated premium. While more weight is given to
the discounted cash flow method, the EV to EBITDA method does provide corroborative evidence of the
reasonableness of the discounted cash flow method results.
The results of the company’s Step I annual impairment test indicated a potential impairment in the Asia/
Pacific segment. As a result, the company completed a Step II impairment test for this segment. Pursuant to
Property, Plant and Equipment, ASC 360, the company compared the forecasted un-discounted cash flows of the
Asia/Pacific segment to the carrying value of the net assets, which indicated 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 reporting unit.
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 then determined by the FDA to be in compliance with FDA quality system regulations. The
significant decline in the company’s stock price and market capitalization, as occurred following the
announcement of the consent decree, were considered by the company as indicators of possible impairment that
required an interim assessment of goodwill for impairment. The company believes the suspension of operations
at its wheelchair manufacturing facility as required under the consent decree would primarily impact the
company’s NA/HME segment.
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