Invacare 2013 Annual Report Download - page 114

INVACARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
FS-40
Long-term debt: Fair value for the Company’s convertible debt is based on quoted market-based estimates as of the end of
the year, while the revolving credit facility fair values are based upon the Company’s estimate of the market for similar borrowing
arrangements. These fair values are deemed to be categorized as Level 2 in the fair value hierarchy.
Other investments: The Company has made other investments in limited partnerships and non-marketable equity securities,
which are accounted for using the cost method, adjusted for any estimated declines in value. These investments were acquired in
private placements and there are no quoted market prices or stated rates of return. The Company does not have the ability to easily
sell these investments. The Company completes an evaluation of the residual value related to these investments in the fourth
quarter of each year. No impairment was recognized in 2013 or 2012 while an immaterial loss was recognized in the fourth quarter
of 2011 and included in the All Other segment.
Other Intangibles and Goodwill: Under Intangibles—Goodwill and Other, ASC 350, goodwill and intangible assets deemed
to have indefinite lives are subject to annual impairment tests. 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 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 view
and yielded a discount rate of 10.00% in 2013 for the Company's initial impairment analysis compared to 9.88% in 2012 and
9.27% in 2011.
The Company also utilizes an Enterprise Value (EV) 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.
While there was no indication of impairment in 2013 related to goodwill for any segment with goodwill, a future potential
impairment is possible for 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 2013 impairment analysis and determined that there still would not
be any indicator of potential impairment for the segments with goodwill which are Europe and IPG.
In 2011, 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 then 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 North America/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 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