Memorex 2013 Annual Report Download - page 45

between the reporting unit’s fair value and the fair values assigned to the reporting unit’s individual assets and liabilities is the
implied fair value of the reporting unit’s goodwill.
Our reporting units for goodwill are the Mobile Security reporting unit and the Storage Solutions reporting unit which are
each one level below our TSS reporting segment and for which goodwill of $8.0 million and $64.1 million, respectively, was
recorded as of December 31, 2013. We do not have any goodwill within any reporting units associated with our CSA
operating segment. See Note 6 — Intangible Assets and Goodwill for information on our 2013 and 2012 goodwill.
In determining the estimated fair value of the reporting units, we used the income approach, a valuation technique under
which we estimate future cash flows using the reporting unit’s financial forecasts and the market approach, a valuation
technique that provides an estimate of the value of the reporting unit based on a comparison to other similar businesses. Our
expected cash flows are affected by various significant assumptions, including projected revenue, gross margin and expense
expectations, terminal growth rate and a discount rate. Our analyses utilize discounted forecasted cash flows over a multi-
year period depending on the reporting unit with an estimation of residual growth rates thereafter. We use our business plans
and projections as the basis for these cash flow assumptions. Our 2013 impairment test resulted in no goodwill impairment for
either of our Mobile Security or our Storage Solutions reporting units. Following is a discussion of the results of the 2013
impairment test for each of these reporting units.
Mobile Security Reporting Unit — For the 2013 impairment test for the Mobile Security reporting unit, the estimated fair
value of the reporting unit exceeded the carrying value in Step 1 of the impairment test by 34.2 percent. We used forecasted
cash flows over a ten year period, a terminal growth rate of 3.0 percent and a discount rate of 15.5 percent. The discount rate
reflects the relative risk of achieving cash flows as well as any other specific risks or factors related to the Mobile Security
reporting unit. We calculated the impact of a potential change in our assumptions to determine the impact on the results of 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 the fourth quarter of 2013 our internal business plan and estimated cash flows associated with our Mobile
Security business was updated. Although there were some downward adjustments to the near-term projections as compared
to our previous forecast utilized during our fourth quarter 2012 impairment test, our longer-term projections and estimated fair
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.
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