Washington Post 2010 Annual Report Download - page 74

In the third quarter of 2010, the Company performed an interim
review of the carrying value of goodwill and other intangible assets
at its online lead generation business for possible impairment, as a
result of challenges facing the lead generation business due to the
changing regulatory environment for for-profit higher education
institutions. The Company used a discounted cash flow model to
determine the estimated fair value of the reporting unit. A market
value approach was also utilized to supplement the discounted cash
flow model. The Company made estimates and assumptions
regarding future cash flows, discount rates, long-term growth rates
and market values to determine the reporting unit’s estimated fair
value. The methodology used to estimate the fair value of the
Company’s lead generation business reporting unit was consistent
with the one used during the Company’s 2009 annual goodwill
impairment test.
The key assumptions used by the Company were as follows:
• Expected cash flows underlying the reporting unit’s business plans
for the periods 2010 through 2015. The expected cash flows
took into account historical growth rates, forecasts and long-term
business plans, but also included an estimate for the possible
impact of newly enacted and proposed “for-profit” education
regulations on the Company’s lead generation business.
• Cash flows beyond 2015 were projected to grow at a long-term
growth rate, which the Company estimated by considering
historical market growth trends, anticipated reporting unit
performance and expected market conditions.
• The Company used a discount rate of 20% to risk adjust the cash
flow projections in determining the estimated fair value. This took
into account the Company’s assessment of the risks inherent in the
future cash flows of the reporting unit and the weighted average
cost of capital of market participants in businesses similar to the
reporting unit.
The online lead generation reporting unit failed step one of the
interim goodwill impairment review, and the Company performed a
step two analysis. The Company recorded a goodwill and other
long-lived assets impairment charge of $27.5 million related to the
reporting unit. Following the impairment, the remaining goodwill
balance at the reporting unit as of October 3, 2010 was not signifi-
cant. There exists a reasonable possibility that a decrease in the
projected cash flows or long-term growth rate, or an increase in the
discount rate assumption used in the discounted cash flow model of
this reporting unit, could result in additional impairment charges.
The Company had 18 reporting units as of January 2, 2011. The
reporting units with significant goodwill balances as of January 2,
2011, were as follows, representing 94% of the total goodwill of
the Company:
(in millions) Goodwill
Education
Higher education ............................ $ 335.2
Test preparation ............................. 222.4
Kaplan international .......................... 444.9
Cable television ............................... 85.5
Television broadcasting ......................... 203.2
Total ....................................... $1,291.2
As of November 30, 2010, in connection with the Company’s
annual impairment testing, the Company used a discounted cash
flow model, and where appropriate, a market value approach was
also utilized to supplement the discounted cash flow model to
determine the estimated fair value of its reporting units. The
Company made estimates and assumptions regarding future cash
flows, discount rates, long-term growth rates and market values
to determine each reporting unit’s estimated fair value. The
methodology used to estimate the fair value of the Company’s
reporting units on November 30, 2010, was consistent with the
one used during the 2009 annual goodwill impairment test. The
Company made changes to certain of its assumptions utilized in the
discounted cash flow models for 2010 compared with the prior
year due largely to the improved economic environment, newly
enacted and proposed for-profit education regulations, and their
impact on the Company’s businesses. The key assumptions used by
the Company were as follows:
• Expected cash flows underlying the Company’s business plans for
the periods 2011 through 2015. The expected cash flows took
into account historical growth rates, the effect of the improved
economic outlook at some of the Company’s businesses,
particularly at the Company’s advertising-related businesses, but
also included an estimate for the possible impact of newly
enacted and proposed “for-profit” education regulations.
Expected cash flows also reflected the anticipated savings from
restructuring plans at the newspaper publishing and certain
education divisions’ reporting units, and other initiatives.
• Cash flows beyond 2015 were projected to grow at a long-term
growth rate, which the Company estimated between 1% and 5%
for each reporting unit.
• The Company used a discount rate of 8.0% to 20.0% to risk adjust
the cash flow projections in determining the estimated fair value.
The fair value of each of the reporting units exceeded its respective
carrying value as of November 30, 2010.
In 2009, the Company recorded goodwill and other intangible
asset impairment charges at two of its reporting units totaling $25.4
million. The remaining goodwill balances at these two reporting
units as of January 2, 2011 totaled $22.8 million. Combined, the
goodwill balance of $34.7 million at the three reporting units that
have been subject to impairment charges in 2010 and 2009
represents less than 3% of the Company’s total goodwill balance of
$1,376.4 million as of January 2, 2011. There exists a reasonable
possibility that a decrease in the projected cash flows or long-term
growth rate, or an increase in the discount rate assumptions used in
the discounted cash flow model of these reporting units, could result
in additional impairment charges.
The estimated fair value of the Company’s reporting units with signifi-
cant goodwill balances exceeded their respective carrying values by
a margin in excess of 25%. While less likely, additional impairment
charges could occur at these reporting units as well, given the
inherent variability in projecting future operating performance.
Indefinite-lived intangible assets
The other intangible assets impairment test compares the fair value
of the asset with its carrying value. The Company records an
58 THE WASHINGTON POST COMPANY