Earthlink 2009 Annual Report Download - page 92

Download and view the complete annual report

Please find page 92 of the 2009 Earthlink annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 175

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116
  • 117
  • 118
  • 119
  • 120
  • 121
  • 122
  • 123
  • 124
  • 125
  • 126
  • 127
  • 128
  • 129
  • 130
  • 131
  • 132
  • 133
  • 134
  • 135
  • 136
  • 137
  • 138
  • 139
  • 140
  • 141
  • 142
  • 143
  • 144
  • 145
  • 146
  • 147
  • 148
  • 149
  • 150
  • 151
  • 152
  • 153
  • 154
  • 155
  • 156
  • 157
  • 158
  • 159
  • 160
  • 161
  • 162
  • 163
  • 164
  • 165
  • 166
  • 167
  • 168
  • 169
  • 170
  • 171
  • 172
  • 173
  • 174
  • 175

Table of Contents
EARTHLINK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
downturn. Economic conditions affecting retail businesses worsened substantially during the "holiday season" in the fourth quarter of 2008. As a
result, the Company updated its long-
range financial outlook in the fourth quarter of 2008, which reflected decreased expectations of future
growth rates and cash flows for New Edge. The Company used this updated financial outlook in conjunction with its annual impairment test.
After completing its annual impairment test during the fourth quarter of 2009, the Company concluded that goodwill and certain intangible
assets recorded as a result of the New Edge acquisition were further impaired and recorded non-
cash impairment charges related to the New
Edge reporting unit of $23.9 million for goodwill and $0.2 million for the indefinite-
lived trade name. As a result, there is no remaining carrying
value related to New Edge goodwill. The primary factor contributing to the impairment charge was continued sales pressure in the small and
medium-sized business market due to the economy, which adversely impacted the Company's long-
range financial outlook. The Company used
this updated financial outlook in conjunction with its annual impairment test.
Goodwill. Impairment testing of goodwill is required at the reporting unit level and involves a two-
step process. Although the Company
operates two reportable segments, Consumer Services and Business Services, the Company has identified three reporting units for evaluating
goodwill, which are Consumer Services, New Edge and Web Hosting. The Consumer Services reportable segment is one reporting unit, while
the Business Services reportable segment consists of two reporting units, New Edge and Web Hosting. Each of these reporting units constitutes a
business for which discrete financial information is available and segment management regularly reviews the operating results.
The first step of the annual impairment test involves comparing the estimated fair value of the Company's reporting units with the reporting
unit's carrying amount, including goodwill. The Company estimated the fair values of its reporting units primarily using the income approach
valuation methodology that includes the discounted cash flow method, taking into consideration the market approach and certain market
multiples as a validation of the values derived using the discounted cash flow methodology. The discounted cash flows for each reporting unit
were based on discrete financial forecasts developed by management for planning purposes. Cash flows beyond the discrete forecasts were
estimated using a terminal value calculation, which incorporated historical and forecasted financial trends for each identified reporting unit.
Upon completion of the first step during the years ended December 31, 2008 and 2009, the Company determined that the carrying value of
its New Edge reporting unit exceeded its estimated fair value. Because indicators of impairment existed for this reporting unit, the Company
performed the second step of the test. The implied fair value of goodwill was determined in the same manner as utilized to estimate the amount
of goodwill recognized in a business combination. To determine the implied value of goodwill, fair values were allocated to the assets and
liabilities of the New Edge reporting unit. The implied fair value of goodwill was measured as the excess of the fair value of the New Edge
reporting unit over the amounts assigned to its assets and liabilities. The impairment losses of $64.0 million and $23.9 million during the years
ended December 31, 2008 and 2009, respectively, were measured as the amount the carrying value of goodwill exceeded the implied fair value
of the goodwill.
Indefinite-lived intangible assets. The impairment test for the Company's indefinite-
lived intangible assets, which consist of trade names,
involves a comparison of the estimated fair value of the intangible asset with its carrying value. The Company determined the fair values of its
trade names using the royalty savings method, in which the fair value of the asset was calculated based on the present value of the royalty stream
that we are saving by owning the asset. Given the economic environment and other factors noted above, the Company decreased its estimates for
revenues associated with its New Edge trade name. As a
88