Goodwill

12 Months Ended

Sep. 30, 2012

Goodwill and Intangible Assets Disclosure Abstract

Goodwill Disclosure [Text Block]

Note 7 – Goodwill

The changes to goodwill during the year ended September 30, 2012 are summarized as follows:

	Contract
	Research		Optics		Instruments			Total
Goodwill at September 30, 2011	$	4,938,625	$	1,283,775	$	6,299,571		$	12,521,971
Goodwill impairment on Dynasil Products		-		-		(2,284,499	)		(2,284,499	)
Currency translation on Hilger Crystals		-		16,688		-			16,688
Goodwill at September 30, 2012	$	4,938,625	$	1,300,463	$	4,015,072		$	10,254,160

The Company performs an annual assessment of goodwill impairment at the end of the fourth quarter of the fiscal year. The first step (defined as “Step 1”) of the goodwill impairment test, used to identify potential impairment, compares the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired, thus the second step of the impairment test is unnecessary. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test must be performed to measure the amount of impairment loss, if any.

In the Step 1 testing for goodwill impairment, the Company estimates the fair value of each reporting unit, which have been determined to be RMD, Dynasil Products and Hilger Crystals. The estimated fair value of each reporting unit is compared with the carrying value of the net assets assigned to each reporting unit. The sum of the fair values of the reporting units is reconciled to the Company’s market capitalization (based on the Company’s stock price) plus an estimated control premium. The discounted cash flow method is used to measure the fair value of the Company’s equity under the income approach for each reporting unit. Determining the fair value using a discounted cash flow method requires significant estimates and assumptions, including market conditions, discount rates, and long-term projections of cash flows. The Company’s estimates are based upon historical experience, current market trends, projected future volumes and other information. The Company believes that the estimates and assumptions underlying the valuation methodology are reasonable; however, different estimates and assumptions could result in a different estimate of fair value. In estimating future cash flows, the Company relies on internally generated projections for a defined time period for revenue and operating profits, including capital expenditures, changes in net working capital, and adjustments for non-cash items to arrive at the free cash flow available to invested capital. A terminal value utilizing a constant growth rate of cash flows is used to calculate a terminal value after the explicit projection period. The future projected cash flows for the discrete projection period and the terminal value are discounted at a risk adjusted discount rate to determine the fair value of the reporting unit.

In fiscal year 2012, the Step 1 test resulted in the determination that the carrying value of equity exceeded the fair value of equity for the Dynasil Products reporting unit, thus requiring the Company to measure the amount of any goodwill impairment by performing the second step of the impairment test. The reasons for this outcome were the continued deterioration of the equity and credit markets and the economy and lower operating projections and their related impact on (i) projected near term cash flows and (ii) an increase in the Company’s risk adjusted discount rate.

The second step (defined as “Step 2”) of the goodwill impairment test, used to measure the amount of impairment loss, compares the implied fair value of reporting unit goodwill with the carrying amount of that goodwill. If the carrying amount of the Company’s goodwill exceeds the implied fair value of that goodwill, an impairment loss shall be recognized in an amount equal to that excess. The loss recognized cannot exceed the carrying amount of goodwill. After a goodwill impairment loss is recognized, the adjusted carrying amount of goodwill becomes its new accounting basis. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination is determined. The excess of the fair value of the reporting unit over the amounts assigned to its assets and liabilities is the implied amount of goodwill. The Company estimates the fair value of several tangible and intangible assets during the process that are valued during this process. Intangible assets included customer relationships and trade names. For intangible assets, the Company selected an income approach to value the customer relationships, and trade names. The customer relationships are valued using the multi-period excess earnings method under the income approach, which estimates the fair value of the asset by discounting the future projected earnings of the asset to present value as of the valuation date. The trade names were valued using a relief from royalty method. 

The Step 2 test performed as of September 30, 2012 resulted in the impairment of goodwill of $2,284,499.  As a result the Company recognized a non-cash pre-tax charge of $2,284,499 for the quarter ended September 30, 2012, to write-off a portion of the carrying value of the Dynasil Products goodwill. The Company also performed a sensitivity analysis on certain key assumptions in the Step 2 test. Changes in the underlying assumptions were not deemed to have a material impact on the conclusion.

As of September 30, 2012, the Company determined that the indicated fair value of the RMD reporting unit exceeds its carrying value by more than 19% which the Company believes substantially exceeds the carrying value.  The indicated fair value of the Hilger Crystals reporting unit exceeded its carrying value by 17%.

The Step 1 test for the RMD reporting unit and the resulting calculation of the indicated fair value was performed as described above based on certain specific assumptions.  The Company relied on a weighted average cost of capital of approximately 13% for this reporting unit which takes into consideration certain industry and specific premiums.  The Company utilized a long term growth rate of approximately 3.0% for this reporting unit which considers industry research and management’s representations as to the prospects for long term growth in this industry.  The long term growth assumed in the model represents consistent growth.  The Company assumed a tax rate of 38.5% in the model which is based on our historical effective tax rate with some consideration given to rates observed within the industry as well.

The Step 1 test for the Hilger Crystal reporting unit and the resulting calculation of the indicated fair value was performed as described above based on certain specific assumptions.  The Company relied on a weighted average cost of capital of 17.28% for this reporting unit which takes into consideration certain industry and specific premiums.  The Company utilized a long term growth rate of approximately 3.0% for this reporting unit which considers industry research and management’s representations as to the prospects for long term growth in this industry.  The long term growth assumed in the model represents consistent growth.  The Company assumed a tax rate of 24.0% in the model which is based on our historical effective tax rate with some consideration given to rates observed within the industry as well.