Invacare 2012 Annual Report Download - page 68

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
9.88% in 2012 for the company’s annual impairment analysis compared to 9.27% in 2011 and 9.59% in 2010.
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.
In 2012, the results of the company’s Step I annual impairment test indicated a potential impairment in the
North America/HME segment. The goodwill for this segment was deemed impaired and thus written off in 2011.
Accordingly, the company proceeded with a review for potential impairments of any other assets related to the
segment, specifically the company’s Taylor Street facility which is subject to the consent decree injunction that
limits the company’s manufacture and distribution of custom power and manual wheelchairs, wheelchair
components and wheelchair subassemblies at the Taylor Street facility. The company determined there was no
impairment of the property, plant and equipment of the Taylor Street facility based on a comparison of the
forecasted un-discounted cash flows to the carrying value of the net assets in accordance with ASC 360. In
addition, the company determined there was no impairment of inventory associated with the facility.
In 2011, 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
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 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 then determined by the FDA to be in compliance with FDA quality system regulations. In
accordance with ASC 350, a significant decline in the company’s stock price and market capitalization, as
occurred following the announcement of the consent decree, should be considered as indicators of possible
impairment that would require an interim assessment of goodwill for impairment.
As a result of the potential impact of the FDA consent decree, the company updated the assumptions and
variables in its DCF model as of December 31, 2011 in regards to the NA/HME segment, the segment primarily
affected by the consent decree, and factored in a 230 basis point risk premium to the discount rate used to reflect
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