Invacare 2014 Annual Report Download - page 112

INVACARE CORPORATION AND SUBSIDIAIRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
FS-42
The carrying amounts and fair values of the Company’s financial instruments at December 31, 2014 and 2013 are as follows
(in thousands):
2014 2013
Carrying
Value Fair Value Carrying Value Fair Value
Cash and cash equivalents. . . . . . . . . . . . . . . . . . 38,931 $ 38,931 29,785 $ 29,785
Other investments . . . . . . . . . . . . . . . . . . . . . . . . 249 249 998 998
Installment receivables, net of reserves. . . . . . . . 1,911 1,911 2,819 2,819
Long-term debt (including current maturities of
long-term debt) . . . . . . . . . . . . . . . . . . . . . . . . . . (20,344)(20,261)(45,286)(46,124)
Forward contracts in other current assets . . . . . . 520 520 789 789
Forward contracts in accrued expenses. . . . . . . . (2,526)(2,526)(1,200)(1,200)
Interest rate swap agreements in accrued
expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — (12)(12)
The Company, in estimating its fair value disclosures for financial instruments, used the following methods and assumptions:
Cash, cash equivalents: The carrying amount reported in the balance sheet for cash, cash equivalents equals its fair value.
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 2014, 2013 or 2012.
Installment receivables: The carrying amount reported in the balance sheet for installment receivables approximates its fair
value. The interest rates associated with these receivables have not varied significantly since inception. Management believes that
after consideration of the credit risk, the net book value of the installment receivables approximates market value.
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.
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 9.89% in 2014 for the Company's impairment analysis compared to 10.00% in 2013 and 9.88% in
2012.
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.