Impairment of Goodwill and Intangibles

9 Months Ended

Sep. 30, 2015

Goodwill and Intangible Assets Disclosure [Abstract]

Impairment of Goodwill and Intangibles

3. Impairment of Goodwill and Intangibles

During the second quarter of 2015 and prior to the annual impairment test of goodwill in October, the Company concluded that impairment indicators existed at the Southwest Wire Rope (Southwest) reporting unit, due to a decline in the overall financial performance and overall market demand. Impairment indicators also existed for certain of the Company’s tradenames related to the Southwest and Southern Wire reporting units.

The Company performed step one of the impairment test and concluded that the fair value of the Southwest reporting unit was less than its carrying value. Therefore, the Company performed step two of the impairment analysis for Southwest. The step one test also concluded that certain of the tradenames were impaired and the Company recorded a non-cash charge of $0.4 million against the tradenames during the period ended June 30, 2015.

Step two of the impairment analysis measures the impairment charge by allocating the reporting unit’s fair value to all of the assets and liabilities of the reporting unit in a hypothetical analysis that calculates implied fair value of goodwill in the same manner as if the reporting unit was being acquired in a business combination and recording the deferred tax impact. Any excess of the carrying value of the reporting unit’s goodwill over the implied fair value of the reporting unit’s goodwill is recorded as an impairment loss.

The fair value of the Southwest reporting unit and tradenames were estimated using a discounted cash flow model. The material assumptions used for the income approach included a weighted average cost of capital of 13% and a long-term growth rate of 5-7%. The carrying value of the Southwest reporting unit’s goodwill was $2.6 million and its implied fair value resulting from step two of the impairment test was zero. As a result, the Company recorded a non-cash goodwill impairment charge of $2.6 million during the quarter ended June 30, 2015. This goodwill impairment is not tax deductible; therefore, it has a significant impact on the effective tax rate.

The fair value for goodwill and tradenames (indefinite-lived intangible assets) were both determined using a Level 3 measurement approach.