Goodwill

During the first quarter of 2016, the Company observed a sustained decrease in the stock price and lower than expected earnings during the three months ended March 31, 2016, thereby providing a potential indicator of goodwill impairment. As a result, the Company initiated an impairment test in the three months ended March 31, 2016.

We compared the carrying values of our International and North America reporting units to their estimated fair values at March 31, 2016. We estimated the fair value of each reporting unit based on a weighting of both the income approach and the market approach. The discounted cash flows for each reporting unit serve as the primary basis for the income approach, and were based on discrete financial forecasts developed by management. Cash flows beyond the discrete forecast period of five years were estimated using the perpetuity growth method calculation. The annual average revenue growth rates forecasted for our reporting units for the first five years of our projections were approximately 3%. We have projected a minor amount of operating profit margin improvement based on expected margin benefits from certain internal initiatives. The terminal value was calculated assuming projected growth rates of 3% after five years, which reflects our estimate of minimum long-term growth in IT spending. The income approach valuations also included each reporting unit’s estimated weighted average cost of capital, which were 17% and 14% for International and North America, respectively. The market approach applied pricing multiples derived from publicly-traded companies that are comparable to the respective reporting units to determine their values. For our International and North America reporting units, we used enterprise value/EBITDA multiples of approximately 5 and 6, respectively, under the market approach using the guideline public company method and approximately 7 and 7, respectively, under the market approach using the guideline transaction method in order to value each of our reporting units. In addition, the fair value under the market approach using the guideline public company method included a control premium of 30%. The control premium was determined based on a review of comparative market transactions. Publicly-available information regarding our market capitalization was also considered in assessing the reasonableness of the cumulative fair values of our reporting units.

Upon completing step one of the impairment test for each reporting unit, the Company determined that the carrying fair value of the North America reporting unit was greater than the carrying value by approximately 30%. It was determined that the carrying fair value of International reporting unit was less than the carrying value by approximately 30%, thus indicating potential impairment and requiring step two analysis.

The Company performed the second step of the goodwill test to determine the implied fair value of goodwill for the International reporting unit. The estimated implied fair value of goodwill was determined in a consistent manner utilized to estimate the amount of goodwill recognized in a business combination. As a result, we calculated the estimated fair value of certain non-recorded assets, including customer relationships, trade name and workforce. The implied fair value of goodwill was measured as the excess of the estimated fair value of the reporting unit over the amounts assigned to its assets and liabilities. The impairment loss for the reporting unit was measured by the amount that the carrying value of goodwill exceeded the implied fair value of the goodwill. Based on this preliminary assessment using reasonable estimates for the theoretical purchase price allocation, we recognized a preliminary impairment charge of $85.9 million in the three months ended March 31, 2016, which represented 69% of the goodwill of the International reporting unit prior to the impairment charge. The preliminary impairment charge will be subject to adjustments when the step two test is finalized in the quarter ending June 30, 2016. The preliminary impairment charge in our International reporting unit is primarily a result of the decreased operating performance of the reporting unit, including a lag in new sales and our inability to achieve operational efficiencies.

We have updated our cash flow forecasts and our other assumptions used to calculate the estimated fair value of our reporting units to account for our beliefs and expectations of the current business environment. While we believe our estimates are appropriate based on our view of current business trends, no assurance can be provided that impairment charges will not be required in the future.

The changes in the carrying amount of goodwill during the three months ended March 31, 2016, were as follows:



	International			North America		Total
	(In thousands)
Balance at January 1, 2016	$	123,055		$	133,681	$	256,736
Goodwill Impairment	(85,923		)	—		(85,923		)
Effect of foreign exchange rate changes	2,302			—		2,302
Balance at March 31, 2016	$	39,434		$	133,681	$	173,115