Invacare 2011 Annual Report Download - page 88

INVACARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Goodwill
The carrying amount of goodwill by operating segment is as follows (in thousands):
North
America/
HME
Invacare
Supply
Group
Institutional
Products
Group Europe
Asia/
Pacific Consolidated
Balance at January 1, 2010 ............ $ 9,551 $23,073 $20,267 $467,385 $ 35,817 $556,093
Foreign currency translation
adjustments ...................... — — 1,238 (60,870) 4,330 (55,302)
Purchase accounting adjustments ....... 6,292 — — — — 6,292
Balance at December 31, 2010 ......... $15,843 $23,073 $21,505 $406,515 $ 40,147 $507,083
Reclassification ..................... (7,853) 7,853
Foreign currency translation
adjustments ...................... — — (537) 14,668 (418) 13,713
Acquisitions ........................ — — 23,528 — — 23,528
Impairment charge .................. (7,990) — — — (39,729) (47,719)
Balance at December 31, 2011 ......... $ — $23,073 $52,349 $421,183 $ — $496,605
As a result of the Dynamic Medical Systems acquisition in 2011, additional goodwill of $23,528,000 was
recorded for the Institutional Product Group segment, which is deductible for tax purposes. As a result of the Boston
Rentals acquisition in 2010, additional goodwill of $6,292,000 was recorded, which is deductible for tax purposes.
In the third quarter of 2011 and as a result of an acquisition that expanded the company’s North American rental
operations, management re-evaluated its rental operations and determined that sales are more closely aligned with
institutional customers and as a result, these operations are now included and evaluated as part of IPG. The
reclassification noted in the table above reflects the impact of the change by management.
In accordance with Intangibles—Goodwill and Other, ASC 350, goodwill is reviewed for impairment. 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 or whenever events or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. To estimate the fair values of the reporting units, the company utilizes a discounted cash flow
method (DCF) model 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 initial 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.
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