Memorex 2013 Annual Report Download - page 31

value of this reporting unit have not been adversely impacted. Based on our updated business plan and strategy for Mobile
Security, our projected cash flows and associated estimated fair value of this reporting unit are heavily dependent on
achieving significant revenue growth of our data solution products developed for our IronKey Workspaces for Microsoft®
Windows To Go®which is a new market in which we do not presently generate significant revenue and for which limited
external market data exists. Our projections for this market include significant revenue growth expectations and gross margins
generally consistent with our existing Mobile Security business. While the current projections in our Mobile Security reporting
unit support no impairment of this reporting unit in 2013, it is reasonably possible that an impairment could be incurred in the
future given several factors, including its value being heavily dependent on significant growth in a new market in which we are
not generating significant revenue and the generally small sensitivities to various assumptions that could cause an impairment
to potentially be necessary. We will continue to closely monitor our results and expected cash flows in the future to assess
whether a goodwill impairment in our Mobile Security reporting unit may be necessary.
Storage Solutions Reporting Unit — For the 2013 impairment test for the Storage Solutions reporting unit, the estimated
fair value of the reporting unit exceeded the carrying value in Step 1 of the impairment test by 25.7 percent. We used
forecasted cash flows over a ten year period, a terminal growth rate of 3.0 percent and a discount rate of 13.5 percent. The
discount rate reflects the relative risk of achieving cash flows as well as any other specific risks or factors related to the
Storage Solutions reporting unit. We calculated the impact of a potential change in our assumptions to determine the impact
on the results or the impairment test. Holding all other assumptions constant, an unfavorable change in various components
of our projected cash flows, including revenue growth, of less than 5.0 percent would potentially result in an indication of
impairment. Additionally, a decrease in the residual growth rate and an increase in the discount rate of less than 5.0 basis
points would potentially result in an indication of impairment.
During 2013 our Storage Solutions reporting unit achieved slower growth than was anticipated at the time of its
acquisition, due to what we believe to be temporary factors, including the impact of the government shut-down. Despite these
lower than anticipated results, our longer-term projections and estimated fair value of this reporting unit have not been
adversely impacted as compared to our expectations at the time of acquisition. Given the relatively short time since the date
we acquired Nexsan (December 31, 2012), we have not yet had an opportunity to sufficiently execute our planned strategy to
achieve the results and associated cash flows that we had anticipated. We are investing in this business aggressively and
have seen that market participants show this type of business can be valued at extremely high multiples. However, while our
current projections support no impairment of this reporting unit for 2013, given that our 2013 results fell below expectations
and the generally small sensitivities to various assumptions that could cause an impairment to potentially be necessary, it is
reasonably possible that an impairment could be incurred in the future. We will continue to closely monitor our results and
expected cash flows in the future to assess whether a goodwill impairment in our Storage Solutions reporting unit may be
necessary.
2012 Goodwill Analysis
We acquired the assets of MXI Security from Memory Experts International Inc., and the secure data storage hardware
business of IronKey during 2011 which resulted in goodwill of $21.9 million and $9.4 million, respectively. These businesses
made up our Mobile Security reporting unit as of December 31, 2012 with a carrying value of $31.3 million of goodwill prior to
our 2012 impairment testing described below.
During the second and third quarters of 2012, we adjusted our internal financial forecast for our Mobile Security
reporting unit (referred to as our Americas-Mobile Security reporting unit in 2012) due to changes in timing of expected cash
flows and lower expected short-term revenues and gross margins. As we considered these factors to be an event that
warranted an interim test as to whether the goodwill was impaired, we performed an impairment test as of each of these
periods. These impairment tests resulted in no impairment of goodwill as the estimated fair value of the reporting units
exceeded the carrying value in Step 1 of the impairment tests by 43.3 percent and 17.7 percent, during the second and third
quarter of 2012, respectively. During the fourth quarter of 2012, our internal financial forecast for our Mobile Security reporting
unit was again adjusted with further declines in our revenue and gross margin projections resulting from lower expectations in
the high-security market segment. In accordance with our policy, we performed our annual assessment of goodwill in the
Mobile Security reporting unit during the fourth quarter of 2012 and, as a result of this assessment, it was determined that the
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