Washington Post 2011 Annual Report Download - page 71

In the third quarter of 2011, as a result of continued challenges
facing the lead generation industry, 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.
The Company used a discounted cash flow model to determine the
estimated fair value of the reporting unit. 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 2010 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 2011 through 2015 were used. 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 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 20.5% 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 impairment
charge of $11.9 million related to the reporting unit. Following the
impairment, the reporting unit had no goodwill remaining.
The Company had 16 reporting units as of December 31, 2011.
The reporting units with significant goodwill balances as of
December 31, 2011, were as follows, representing 97% of the
total goodwill of the Company:
(in millions) Goodwill
Education
Higher education ............................ $ 409.1
Test preparation ............................. 152.2
Kaplan international .......................... 515.9
Cable television ............................... 85.5
Television broadcasting ......................... 203.2
Total ....................................... $1,365.9
As of November 30, 2011, in connection with the Company’s
annual impairment testing, the Company assessed the qualitative
factors to determine reporting units in which it was necessary to
perform the two-step goodwill impairment process. The Company
decided to perform the two-step goodwill impairment process at all
reporting units with the exception of the television broadcasting
reporting unit. The decision was based on a combination of events
and circumstances present at the reporting units, including negative
financial performance, sustained declines in share price of industry
peers, market changes for products and services, regulatory
challenges, and the possibility of disposal of some reporting units;
and some instances where the Company decided to bypass the
qualitative assessment.
The estimated fair value of the television broadcasting reporting unit
exceeded its carrying value by a margin in excess of 100% as of
November 30, 2010. The Company’s qualitative assessment
indicated that it is not more likely than not that the estimated fair
value of the reporting unit is less than its carrying amount
considering all factors, including the reporting unit’s financial
performance and conditions in the television broadcasting industry.
In connection with the Company’s reporting units where the two-step
goodwill impairment process was performed, 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, 2011, was consistent with the
one used during the 2010 annual goodwill impairment test. The
Company made changes to certain of its assumptions utilized in the
discounted cash flow models for 2011 compared with the prior
year due largely to the somewhat improved economic environment,
newly enacted 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 2012 through 2016 were used. The expected cash
flows took into account historical growth rates, the effect of the
improved economic outlook at some of the Company’s
businesses, industry challenges, and an estimate for the possible
impact of newly enacted 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 2016 were projected to grow at a long-term
growth rate, which the Company estimated between 1% and 3%
for each reporting unit.
• The Company used a discount rate of 8.0% to 22.5% 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, 2011.
The estimated fair value of the KTP reporting unit exceeded its
carrying value by a margin of 15% following a substantial decrease
in its estimated fair value compared with the prior year. There exists
a reasonable possibility that a decrease in the assumed 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 an impairment charge.
The estimated fair value of the Company’s other reporting units with
significant goodwill balances exceeded their respective carrying
values by a margin in excess of 25%. While less likely, additional
2011 FORM 10-K 59