Note 16. Goodwill and Other Long-Lived Assets

Goodwill

We assign goodwill to our reporting units based on the expected benefit from the growth and synergies arising from each acquisition. We have three reportable segments: Intermec-branded products, Intermec-branded services and Voice solutions. Intermec-branded services and Voice solutions each comprise two reporting units. Intermec-branded services are divided into: Core Service and Intermec Global Solutions (“IGS”). Voice solutions contains the Supply Chain (“VSC”) and Healthcare (“VHS”) reporting units.

The following table represents changes in goodwill (amounts in thousands):


Reportable Segment	Reporting Unit	Goodwill balance at 12/31/2011		Goodwill impairment			Goodwill balance at 7/1/2012
Intermec-branded services:	Intermec Global Solutions	$	3,348	$	—		$	3,348
Voice solutions:	Supply chain		130,682		(40,689	)		89,993
	Healthcare		9,480		(825	)		8,655

	Total:	$	143,510	$	(41,514	)	$	101,996

Goodwill impairment charges of $26.6 and $41.5 million were recognized during the three and six months ended July 1, 2012, respectively. There were no goodwill impairment charges for the similar periods in 2011.

Q1 2012 goodwill impairment analysis

During the first quarter of 2012, two events occurred that triggered an analysis of the carrying value of goodwill and resulted in the estimated write down of goodwill of $14.9 million. Specifically, operating income was less than our forecast, primarily due to an $19 million loss on operations in the first quarter principally in the Intermec-branded products and services segments. In addition, our financial results negatively impacted the price per share of Intermec stock, causing the market capitalization of the Company to be significantly below its net book value. These triggering events were indicators that it was more likely than not the fair value of the Company’s goodwill was less than its book value.

We prepared a Step 1 goodwill impairment analysis to determine the fair values of all three reporting units with goodwill (Intermec Global Solutions, Healthcare, and Supply Chain). To calculate the fair values we used the discounted cash flow method and market approach. We made significant assumptions and estimates about the extent and timing of future cash flows, growth rates, and discount rates that represent unobservable inputs into our valuation methodologies used to calculate fair value. The cash flows were estimated over a significant future period of time, which made those estimates and assumptions subject to a high degree of uncertainty. Where available and as appropriate, comparative market multiples and the quoted market price of our common stock were used to corroborate the results of the discounted cash flow method and market approach. Assumptions used in our analysis that have the most significant effect on the estimated fair values of our reporting units include:

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Our estimated weighted-average cost of capital (WACC); and

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Our estimated long-term growth

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Market mutiples

Once we had determined our assumptions, we calculated the fair value of each reporting unit and compared it to the carrying value of the reporting unit. After performing our Step 1 analysis for the reporting units, we determined that the carrying value of the Supply Chain reporting unit exceeded its fair value by $14.9 million and recognized an estimated impairment charge in the first quarter. Due to the timing and complexity of this analysis, Step 2 of the impairment test was substantially completed in the second quarter of 2012. After performing that test we determined we had an additional goodwill impairment of $25.8 million associated with our Supply Chain reporting unit. The additional impairment was the result of an increase in the fair value of developed and in process technology intangible assets within the Supply Chain reporting unit. The increase in the intangible assets reduced the implied fair value of the goodwill, and we recognized a $40.7 million cumulative impairment of the Supply Chain reporting unit goodwill for the six months ended July 1, 2012.

Determining the fair value of goodwill for the Supply Chain reporting unit for Step 2 was judgmental in nature and involved the use of significant estimates and assumptions to calculate a hypothetical fair value of the assets and liabilities within the reporting unit. Our analysis utilized the income approach to calculate the implied fair value of goodwill of the Supply Chain reporting unit. The key inputs we used in the income approach included our forecast of revenue and expenses, a migration curve of developed and in-process technology, tax rate, discount rates, customer retention rates, useful lives, and contributory charge rates. These key inputs, for the income approach, are classified as Level 3 within the fair value hierarchy; see Note 3 Fair Value Measurements.

Q2 2012 goodwill impairment analysis

During the three months ended July 1, 2012, we changed the composition of key senior management at the reporting units and also changed our Chief Executive Officer. Additionally, we evaluated certain market trends and specific changes in our marketplace including, macro and micro economic conditions, expected government spending and industry data. As a result of the changes and evaluations, a review was performed over all areas in which we engage in business. Upon conclusion of the review, key operational and investment decisions were made which resulted in changes in the amount and timing of receipts and expenditures. Specifically, forecasts of revenue, research and development costs, capital expenditures, and other inputs to operations were revised, and the result was reduced cash flow forecasts across the three reporting units with goodwill. Consequently, a triggering event occurred to evaluate impairment of goodwill, specific to facts and circumstances during the three months ended July 1, 2012.

After performing our Step 1 analysis, for the reporting units, we determined that the carrying value of the Healthcare reporting unit exceeded its fair value, so we then performed a Step 2 analysis. Based on our preliminary Step 2 analysis we determined we had an estimated goodwill impairment of $0.8 million associated with our Healthcare reporting unit. This impairment was primarily the result of a reduction in our long term business forecast specifically related to expected government spending in the skilled nursing area, the likely impact on capital investments in that market and the timing of the launch of new products for our Healthcare reporting unit. Due to the timing and complexity of this Step 2 analysis, we will finalize it in the third quarter of 2012 and the impairment amount may change at that time.

Determining the fair value of goodwill for the Healthcare reporting unit for Step 2 is judgmental in nature and involves the use of significant estimates and assumptions to perform a hypothetical fair value of the assets and liabilities within the reporting unit. Our analysis utilized the income approach to calculate the implied fair value of goodwill of the Healthcare reporting unit. The key inputs we used in the income approach included our forecast of revenue and expenses, a migration curve of developed and new technology, tax rate, discount rates, customer retention rates, useful lives, and contributory charge rates. These key inputs, for the income approach, are classified as Level 3 within the fair value hierarchy. See Note 3 Fair Value Measurements to our Condensed Consolidated Financial Statements for further detail.

Future goodwill impairments that may be material could be recognized should the recent economic uncertainty continue, our equity price declines on a sustained basis, global economies enter in another recession, or industry growth stagnates further. Our fair value estimates for event-driven impairment tests assume the achievement of future financial results contemplated in our forecasted cash flows and there can be no assurance that we will realize that value. The estimates and assumptions used are subject to significant uncertainties, many of which are beyond our control, and there is no assurance that anticipated financial results will be achieved.

Valuation of Long-Lived Assets

Long-lived assets, such as property, plant, and equipment, and intangible assets subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. Recoverability of asset groups to be held and used is measured by a comparison of the carrying amount of an asset group to estimated undiscounted future cash flows expected to be generated by the asset group. If the carrying amount of an asset group exceeds its estimated future cash flows, an impairment charge is recognized in our statement of operations and as a reduction to the asset group to the extent that the fair market value of the asset group is less than its carrying value. Due to the same circumstances that required the interim goodwill impairment test above, we evaluated our long lived assets for impairment for the quarters ended April 1, 2012 and July 1, 2012. We determined that the carrying amount of our long-lived assets did not exceed their estimated undiscounted future cash flows, and thus our long-lived assets are not impaired as of April 1, 2012 and July 1, 2012.