Impairment Of Goodwill And Other Intangibles

12 Months Ended

Sep. 30, 2011

Impairment Of Goodwill And Other Intangibles

Impairment Of Goodwill And Other Intangibles

NOTE 4. IMPAIRMENT OF GOODWILL AND OTHER INTANGIBLES

We test goodwill and other intangible assets for impairment on an annual basis during our third fiscal quarter, or more often if events or circumstances indicate there may be impairment.  The assessment during the third quarter of 2011 and 2010 indicated that there was no impairment with respect to goodwill or other recorded intangible assets. During the second quarter of fiscal 2009, as a result of the decline in our market capitalization related to the overall macro-economic climate and its resulting unfavorable impact on hospital capital spending and our operating results, we determined we were required to perform an interim impairment test with respect to goodwill and certain other intangibles outside of our normal third fiscal quarter test period.

Based on the results of goodwill and other intangible asset impairment testing as of March 31, 2009, we recorded an estimated impairment charge of $470 million in the second fiscal quarter of 2009.  During the third quarter of 2009, we refined our impairment assessment for the second quarter and recorded an additional charge of $3.8 million.  A further adjustment of $1.0 million was required in the fourth quarter as a result of purchase accounting adjustments in connection with the Liko Acquisition. An additional adjustment is possible based on claims related to provisions contained in the purchase agreement associated with the Liko Acquisition, with any such adjustment expected to be favorable and not material.

As discussed in Note 12, we operate in three reportable business segments.  Goodwill and other intangible impairment testing are performed at the reporting unit level, which is one level below a reportable business segment.  We have determined that we have eight reporting units.  Goodwill is assigned to reporting units at the date the goodwill is initially recorded and has been reallocated as necessary based on the restructuring of reporting units over time.  Once goodwill has been assigned to reporting units, it no longer retains its association with a particular acquisition, and all of the activities within a reporting unit, whether acquired or organically grown, are available to support the value of the goodwill.

The goodwill impairment test involves a two-step process. The first step, used to identify potential impairment, is a comparison of each reporting unit's estimated fair value to its carrying value, including goodwill.  If the fair value of a reporting unit exceeds its carrying value, applicable goodwill is considered not to be impaired.  If the carrying value exceeds fair value, there is an indication of impairment and the second step is performed to measure the amount of the impairment.  The second step requires us to calculate an implied fair value of goodwill.  The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination, which is the excess of the fair value of the reporting unit, as determined in the first step, over the aggregate fair values of the individual assets, liabilities and identifiable intangibles as if the reporting unit was being acquired in a business combination.  If the goodwill assigned to a reporting unit exceeds the implied fair value of the goodwill, an impairment charge is recorded for the excess.

For our second quarter of 2009 analysis, we estimated the fair value of each reporting unit in step one based on discounted cash flows as well as a market approach that compared each reporting unit's earnings and revenue multiples to those of comparable public companies.  The reporting unit's discounted cash flows required significant management judgment with respect to forecasted sales, gross margin and selling, general and administrative expenses, capital expenditures and the selection and use of an appropriate discount rate.  Utilizing our weighted average cost of capital as the discount rate for the discounted cash flows and median revenue and earnings multiples of comparable public companies under the market approach resulted in an implied fair value substantially in excess of our market capitalization.  In order to reconcile the discounted cash flows and market approach fair values to the trading value of the our common stock, we applied higher discount rates than our weighted average cost of capital to the discounted cash flows and utilized earnings and revenue multiples below the median of comparable public companies, reflecting the equity risk premiums expected by a market participant.  The reconciled fair values under both the discounted cash flows and market approach were substantially the same and resulted in three of our then reporting units having a carrying value in excess of their fair value.

The second step required us to allocate the fair value of each reporting unit that failed the first step test to the fair value of each reporting unit's net assets. We calculated the fair values of each reporting unit's net assets, with assistance from a third party valuation firm in the determination of fair values for significant tangible and intangible assets. All Hill-Rom-specific data and analytics, including estimates and assumptions, used in the valuations prepared by the third party valuation firm were either prepared or validated by us. Management takes full responsibility for this data and the ultimate results of the valuation work including the final fair values assigned to each reporting unit.  Due to the fact that we were required to allocate a significant portion of fair value to unrecorded intangible assets such as the Hill-Rom trade name, technology and know-how and customer lists, but were not permitted to record these assets on our balance sheet, the resulting fair value allocated to implied goodwill was significantly lower than recorded goodwill resulting in the impairment charge.

In fiscal 2009, we incurred the impairment charge for goodwill and other intangibles in each of our three reportable segments in the following amounts:  North America Acute Care $289.5 million, North America Post-Acute Care $68.6 million and International $114.7 million, which represented a full impairment of goodwill at that time in the affected North America Acute Care and International reporting units.

The following is a summary of the activity in goodwill by segment.  During the first quarter of fiscal 2011, we changed our segment reporting to reflect changes in our organizational structure and management's view of the business.  As a part of these changes, we moved our surgical reporting unit from the International and Surgical segment (now referred to as the International segment) to the North America Acute Care segment.  The prior year segment information included below has been updated to reflect these changes.  See Note 12 for further details.

	North America Acute Care			North America Post-Acute Care			International			Total
Balances at September 30, 2009:
Goodwill	$	317.0		$	114.2		$	114.7		$	545.9
Accumulated impairment losses		(289.5	)		(68.6	)		(114.7	)		(472.8	)
Goodwill, net at September 30, 2009		27.5			45.6			-			73.1
Changes in Goodwill during the period:
Goodwill related to acquisitions		8.0			-			-			8.0
Balances at September 30, 2010:
Goodwill		325.0			114.2			114.7			553.9
Accumulated impairment losses		(289.5	)		(68.6	)		(114.7	)		(472.8	)
Goodwill, net at September 30, 2010		35.5			45.6			-			81.1
Changes in Goodwill during the period:
Goodwill related to acquisitions		-			-			6.1			6.1
Balances at September 30, 2011:
Goodwill		325.0			114.2			120.8			560.0
Accumulated impairment losses		(289.5	)		(68.6	)		(114.7	)		(472.8	)
Goodwill, net at September 30, 2011	$	35.5		$	45.6		$	6.1		$	87.2