Invacare 2011 Annual Report Download - page 60

The company is in the process of negotiating with the FDA on the terms of the consent decree. As of
December 31, 2011, the company updated the assumptions and variables in its DCF model 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 reporting unit. 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 each or 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
flows expected to be generated by the asset are less than the carrying value. Actual impairment amounts for
definite-lived assets are then calculated using a discounted cash flow calculation. The company reviews
indefinite-lived assets for impairment annually in the fourth quarter of each year and whenever events or
circumstances indicate possible impairment. Any impairment amounts for indefinite-lived assets are calculated as
the difference between the future discounted cash flows expected to be generated by the asset less than the
carrying value for the asset.
During the fourth quarter of 2011, the company recognized an intangible impairment charge of $1,761,000.
In the IPG segment, the company recognized a $625,000 impairment related to a customer list which had a
remaining life of five years. In the NA/HME segment, a $508,000 impairment, representing the entire carrying
value, was recognized related to a customer list which had a remaining life of seven years. In the Europe
segment, a $427,000 indefinite-lived trademark impairment was recognized as the calculated fair value was less
than its carrying value. In the Asia/Pacific segment, a $201,000 impairment, representing the entire carrying
value, was recognized related to intellectual property which had a remaining life of approximately 10 years. The
fair value of the customer lists were calculated using an excess earnings method, using a discounted cash flow
model. Estimated cash flow returns to the customer relationship were reduced by the cash flows required to
satisfy the return requirements of each of the assets employed with the residual cash flow then discounted to
value the customer relationship. The fair value of the trademark was calculated using a relief from royalty
payment methodology which requires applying an estimated market royalty rate to forecasted net sales and
discounting the resulting cash flows to determine fair value. The intellectual properly intangible asset was
impaired as the intellectual property was determined to be no longer viable and is no longer being used.
I-54