Invacare 2012 Annual Report Download - page 98

INVACARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
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 9.88% in 2012 for the
company’s initial 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 company reviewed for potential impairments of any other assets related to the segment,
specifically the company’s Taylor Street facility which is subject to the FDA consent decree 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 undiscounted
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
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