Note 7 – Goodwill

The changes to goodwill during the years ended September 30, 2014 and 2013 are summarized as follows:

	Contract
	Research		Optics		Instruments		Total
Goodwill at September 30, 2012	$	4,939,000	$	1,300,000	$	4,015,000	$	10,254,000
Goodwill impairment on Instruments		-		-		(4,015,000)		(4,015,000)
Currency translation on Hilger Crystals		-		2,000		-		2,000
Goodwill at September 30, 2013	$	4,939,000	$	1,302,000	$	-	$	6,241,000
Goodwill impairment on Instruments		-		-		-		-
Currency translation on Hilger Crystals				6,000				6,000
Goodwill at September 30, 2014	$	4,939,000	$	1,308,000	$	-	$	6,247,000

In the second quarter of 2013, as a result of a decision to dispose of a significant portion of the Products reporting unit, the Company performed an interim impairment test of long lived assets and goodwill associated with its Dynasil Products reporting unit. Under step two of the impairment testing, the income method was used to allocate the fair values of all of the assets and liabilities of this reporting unit, with the remaining residual fair value allocated to goodwill. The result of this impairment test was to write off Product’s remaining goodwill totaling approximately $4.0 million resulting in cumulative goodwill impairment charges of approximately $6.3 million.

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.

With respect to the Company's annual goodwill impairment testing performed during the fourth quarter of fiscal year 2014, step one of the testing determined the estimated fair value of RMD (included in the Contract Research segment) and Hilger (included in the Optics segment) reporting units exceeded their carrying value by more than 20%. Accordingly, the Company concluded that no impairment had occurred and no further testing was necessary.

The step one 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 2.5% for this reporting unit which considers industry research and management’s expectations as to the prospects for long term growth in this industry.

The step one test for the Hilger 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 16% for this reporting unit which takes into consideration certain industry and specific premiums. The Company utilized a long term growth rate of approximately 5.0% for this reporting unit which considers industry research and management’s expectations as to the prospects for long term growth in this industry.