Earthlink 2013 Annual Report Download - page 48

Table of Contents
amortization expense in 2013 primarily due to definite-lived intangible assets becoming fully amortized during the year.
Impairment of goodwill
Interim goodwill test. During the first quarter of 2013, we recognized a $256.7 million non-
cash impairment charge to goodwill related
to our Business Services reporting unit, of which $255.6 million is included in continuing operations and $1.1 million is reflected in discontinued
operations. We test our goodwill annually during the fourth quarter of each fiscal year or when events or changes in circumstances indicate that
goodwill might be impaired. Our stock price and market capitalization declined during the three months ended March 31, 2013 following the
announcement in mid-
February 2013 of our fourth quarter 2012 earnings and 2013 financial guidance. As a result of the sustained decrease in
stock price and market capitalization, we performed an interim goodwill test in conjunction with the preparation of our financial statements for
the three months ended March 31, 2013. The primary factor contributing to the impairment was a change in the discount rate and market
multiples as a result of the change in these market conditions, both key assumptions used in the determination of fair value.
Impairment testing of goodwill is required at the reporting unit level and involves a two-
step process. We identified two reporting units,
Business Services and Consumer Services, for evaluating goodwill. 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 impairment test involves
comparing the estimated fair values of our reporting units with the reporting units' carrying amounts, including goodwill. We estimated the fair
values of our reporting units based on weighting of the income and market approaches. These models use significant unobservable inputs, or
Level 3 inputs, as defined by the fair value hierarchy. Under the income approach, the fair value of the reporting unit was estimated based on the
present value of estimated cash flows using a discounted cash flow method. The significant assumptions used in the discounted cash flow
method included internal forecasts and projections developed by management for planning purposes, available industry/market data, strategic
plans, discount rates and the growth rate to calculate the terminal value. Under the market approach, the fair value was estimated using the
guideline company method. We selected guideline companies in the industry in which each reporting unit operates.
Upon completion of the first step, we determined that the carrying value of our Business Services reporting unit exceeded its estimated
fair value, so a second step was performed to compare the carrying amount of goodwill to the implied fair value of that goodwill. The implied
fair value of goodwill for the Business Services reporting unit was determined in the same manner as utilized to recognize goodwill in a business
combination. To determine the implied value of goodwill, fair values were allocated to the assets and liabilities of the Business Services
reporting unit as of March 31, 2013. The implied fair value of goodwill was measured as the excess of the fair value of the Business Services
reporting unit over the fair value of its assets and liabilities. The impairment loss of $256.7 million during the first quarter of 2013 was measured
as the amount the carrying value of goodwill exceeded the implied fair value of the goodwill.
Annual goodwill test.
We did not record any impairment of goodwill during the years ended 2011 or 2012. In addition, our annual test
of impairment for fiscal 2013 did not result in an impairment. However, approximately $50.3 million of goodwill attributable to our Business
Services reporting unit and $88.9 million of goodwill attributable to our Consumer Services reporting unit remains as of December 31, 2013.
Deterioration in market conditions or estimated future cash flows in our reporting units could result in future goodwill impairment. We continue
to monitor events and circumstances which may affect the fair value of this reporting unit.
Restructuring, acquisition and integration
-related costs
Restructuring, acquisition and integration-related costs consisted of the following during the years ended December 31, 2011, 2012 and
2013 :
43
Year Ended December 31,
2012 vs 2011 2013 vs 2012
2011 2012 2013 $ Change % Change $ Change % Change
(dollars in thousands)
Integration-related costs
$
4,044
$
10,452
$
21,622
$
6,408
158
%
$
11,170
107
%
Severance, retention and other employee costs
16,460
6,067
14,844
(10,393
)
(63
)%
8,777
145
%
Transaction-related costs
5,756
1,399
1,021
(4,357
)
(76
)%
(378
)
(27
)%
Facility-related costs
5,530
479
2,328
(5,051
)
(91
)%
1,849
386
%
Legacy plan restructuring costs
278
(153
)
215
(431
)
(155
)%
368
241
%
Restructuring, acquisition and integration-
related costs
$
32,068
$
18,244
$
40,030
$
(13,824
)
(43
)%
$
21,786
119
%