Avid 2011 Annual Report Download - page 32

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value including existing goodwill. Upon an indication of impairment from the first step, a second step is performed to determine
if goodwill impairment exists.
To estimate the fair value of our single reporting unit for step one, we utilize a combination of market and income approaches.
Since we have one reporting unit, we believe that the direct market capitalization approach, which considers our market
capitalization including an implied control premium, is the most relevant measure and is weighted most heavily. We also use
other market approaches including the guideline public company market approach, under which we identify similar public
companies and derive estimated market multiples of revenue and earnings before interest, taxes, depreciation, and amortization,
or EBITDA, and apply those multiples to our historical and forecasted results to estimate the fair value of our single reporting
unit, and the guideline transaction market approach, under which we identify recent sale transactions involving similar companies
and derive estimated transaction multiples of revenue and EBITDA and apply those multiples to our historical and forecasted
results to estimate the fair value of our single reporting unit. The income approaches, specifically discounted cash flow
methodologies, include assumptions for, among others, forecasted revenues, gross profit margins, operating profit margins,
working capital cash flows, capital expenditures, growth rates, income tax rates, expected tax benefits, terminal values and long
term discount rates, all of which require significant judgments by management.
Goodwill is also tested for impairment when events and circumstances occur that indicate that the recorded goodwill may be
impaired. At September 30, 2011, as a result of a decline in our stock price since our fourth quarter 2010 goodwill impairment
testing, lower than expected year-to-date 2011 revenues and operating results, and a reduction in forecasted 2011 results, we
performed an interim step one goodwill impairment test. The interim step one test at September 30, 2011 indicated that the
estimated fair value of our single reporting unit (approximately $530 million) exceeded the carrying value of $414.9 million by
approximately 28%. Therefore, no goodwill impairment existed at September 30, 2011, and we were not required to perform step
two. In connection with our interim goodwill step one impairment test at September 30, 2011, we weighted the direct market
capitalization approach at 67%, the income approaches at 11%, the guideline public company market approaches at 11%, and the
guideline transaction market approaches at 11%. The estimated fair value under the direct market capitalization approach was
calculated by applying control premiums of approximately 45% to our market capitalization. Our market capitalization was
calculated using the average stock price of our common stock for the 20 trading days prior to September 30, 2011 ($8.73 per
share). If we had used the closing stock price of our common stock on September 30, 2011 ($7.74 per share) in the direct market
capitalization approach described above and applied similar weightings, the estimated fair value of our single reporting would
have exceeded its carrying value by approximately 20%.
Our annual goodwill impairment testing in the fourth quarter of 2011 determined that no goodwill impairment existed at
December 31, 2011. At that date, we performed a step one test using the same approach weightings as were used for the
September 30, 2011 interim impairment test. The step one test at December 31, 2011 indicated that the estimated fair value of our
single reporting unit (approximately $506 million) exceeded the carrying value of $417.0 million by approximately 21%.
Therefore, no goodwill impairment existed at December 31, 2011, and we were not required to perform step two. The estimated
fair value under the direct market capitalization approach was calculated by applying control premiums of approximately 45% to
our market capitalization. Our market capitalization was calculated using the average stock price of our common stock for the 20
trading days prior to December 31, 2011 ($8.04 per share). If we had used the closing stock price of our common stock on
December 31, 2011 ($8.53 per share) in the direct market capitalization approach described above and applied similar weightings,
the estimated fair value of our single reporting would have exceeded its carrying value by approximately 26%.
At December 31, 2011, our market capitalization based on the closing stock price of $8.53 per share at that date was
approximately $329.3 million, compared to the carrying value of the our single reporting unit of $417.0 million. This implied a
control premium of approximately 27%. Subsequent to December 31, 2011, the volatility of the price of our stock has continued.
On February 24, 2012, the closing price of our common stock was $11.71 per share.
Identifiable intangible assets are also tested for impairment in accordance with ASC Section 360-10-35, Property, Plant and
Equipment - Overall - Subsequent Measurement, if events or circumstances exist that indicate the carrying value of an asset may
not be recoverable. The fair value of each asset is compared to its carrying value, and if the asset's carrying value is not
recoverable and exceeds its fair value, we record an impairment loss equal to the difference between the carrying value of the
asset and its fair value. The carrying value of an asset is not recoverable if it exceeds the sum of the undiscounted cash flows
expected to result from the use and eventual disposition of the asset. Changes in business conditions or our assumptions could
require that we record impairment charges related to our identifiable intangible assets.
Assumptions, judgments and estimates of future values are complex and often subjective. They can be affected by a variety of
factors, including external factors such as industry and economic trends, and internal factors such as changes in our business