Goodwill and Other Long-Lived Assets

9 Months Ended

Sep. 30, 2012

Goodwill and Other Long-Lived Assets

Goodwill and Other Long-Lived Assets

5. Goodwill and Other Long-Lived Assets

We have three reporting units as shown in the table below and two reportable segments (television and online) as shown in Note 11.  For segment reporting purposes, the SourceEcreative reporting unit is included in the television segment.  Changes in the carrying value of our goodwill by reporting unit for the nine months ended September 30, 2012 are as follows (in thousands):

	Television			Online			SourceEcreative		Total
Balance at December 31, 2011:
Goodwill	$	363,068		$	346,454		$	1,998	$	711,520
Accumulated impairment losses	(131,291		)	—			—		(131,291		)
	231,777			346,454			1,998		580,229
Acquisition of Peer 39	—			7,225			—		7,225
Acquisition of North Country	948			—			—		948
Impairment loss	—			(208,166		)	—		(208,166		)
Foreign currency translation	714			—			—		714
Balance at September 30, 2012:
Goodwill	364,730			353,679			1,998		720,407
Accumulated impairment losses	(131,291		)	(208,166		)	—		(339,457		)
	$	233,439		$	145,513		$	1,998	$	380,950

Goodwill Impairment Loss

We test goodwill for possible impairment each year on December 31st and whenever events or changes in circumstances indicate the carrying value of our goodwill may not be recoverable.  The goodwill impairment test involves a two-step process. In the first step, we compare the fair value of each reporting unit to its carrying value.  If the fair value of the reporting unit exceeds its carrying value, goodwill is not impaired and no further testing is required.  If the fair value of the reporting unit is less than the carrying value, we must perform the second step of the impairment test to measure the amount of the impairment loss.  In the second step, the reporting unit’s fair value is allocated to the assets and liabilities of the reporting unit, including any unrecognized intangible assets, in a hypothetical analysis that calculates the implied fair value of goodwill in the same manner as if the reporting unit was being acquired in a business combination.  If the implied fair value of the reporting unit’s goodwill is less than the carrying value, the difference is recorded as an impairment loss.

We made two significant acquisitions in the third quarter of 2011 (MediaMind and EyeWonder) that created a significant amount of goodwill for our online reporting unit (see Note 4).  In testing our goodwill for possible impairment at December 31, 2011, we determined that the fair values (using a variety of methods, including discounted cash flows) of our online reporting unit and our television reporting unit were 6% and 33%, respectively, in excess of their carrying values.  Also, at December 31, 2011, our market capitalization was below our total stockholders’ equity, and we noted if that circumstance continued for an extended period of time, it would likely result in us recording a goodwill impairment charge in the future.  At each of March 31, 2012 and June 30, 2012, we continued to monitor our online reporting unit’s goodwill and determined a goodwill impairment test was not required.

During the third quarter of 2012, we determined that indicators of potential impairment existed for our online reporting unit requiring us to perform an interim goodwill impairment test.  These indicators included (i) revenues and operating results sufficiently below our earlier forecasts which prompted us to revise our future forecasts, (ii) our market capitalization continuing to be valued well below the book value of our total stockholders’ equity, and (iii) weaker market conditions and trends than expected.

As a result, during the third quarter we conducted a goodwill impairment test of our online reporting unit.  We estimated the fair value of the online reporting unit using a weighting of fair values derived from an income approach and a market approach (both Level 3 fair value measurements).  Under the income approach, we calculated the fair value of the online reporting unit based on the present value of its estimated future cash flows.  Cash flow projections are based on our estimates of revenue growth rates and operating margins, taking into consideration industry and market conditions.  The discount rate used was based on the weighted average cost of capital adjusted for the risks associated with the online business and the projected cash flows.  The market approach estimates fair value based on market multiples of revenue and earnings of comparable publicly traded companies that have similar operating and investment characteristics as our online reporting unit.

Upon estimating the fair value of the online reporting unit’s goodwill, we determined it was less than its carrying value.  As a result, we performed the second step of the impairment analysis and allocated the fair value of the online reporting unit to the estimated fair values of each of the assets and liabilities of the online reporting unit (including identifiable intangible assets) with the excess fair value being the implied goodwill.  Estimating the fair value of certain assets and liabilities requires significant judgment about future cash flows.  The implied fair value of the online reporting unit’s goodwill was $208.2 million less than its carrying value, which we recorded as a goodwill impairment loss during the third quarter of 2012.

In the first quarter of 2002, upon adoption of ASC Topic 350 Intangibles — Goodwill and other, originally issued as Financial Accounting Standards No. 142, we recorded a goodwill impairment of $131.3 million as the cumulative effect of a change in accounting principle.  The impairment charge was recorded in what was known at the time as the services reporting unit, which was later reorganized and renamed as the television reporting unit.  The television unit has not recorded any additional goodwill impairments since 2002, and we believe the fair value of the television unit exceeds its carrying value by approximately 25% as of September 30, 2012.

To the extent that actual operating results or future expected operating results fall sufficiently below our current forecast, or other indicators of potential impairment exist, we may be required to record another goodwill impairment charge in the future.  Future net cash flows are impacted by a variety of factors including revenues, our ability to achieve forecasted synergies from our acquisitions, operating margins, income tax rates, and discount rates.  In accordance with our policy, we will test goodwill for impairment again at December 31, 2012.

Long-Lived Assets

We also performed impairment testing of the online reporting unit’s long-lived assets (e.g., customer relationships, trade names, etc.) and determined they were not impaired at September 30, 2012.