Windstream 2011 Annual Report Download - page 159

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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F-51
The fair values of the assets acquired and liabilities assumed were determined using income, cost, and market approaches.
Identified intangible assets, consisting primarily of customer lists, were valued primarily on the basis of the present value of
future cash flows, which is an income approach. Significant assumptions utilized in the income approach were based on our
specific information and projections, which are not observable in the market and are thus considered Level 3 measurements as
defined by authoritative guidance. The cost approach, which estimates value by determining the current cost of replacing an
asset with another of equivalent economic utility, was used as appropriate for property, plant and equipment. The cost to replace
a given asset reflects the estimated reproduction or replacement cost for the asset, less an allowance for loss in value due to
depreciation. The fair value of the long-term debt and related interest rate swap agreements assumed were determined based on
quoted prices for the repayment of these instruments.
For PAETEC, the credit facility was valued based on the expected redemption cost, while the remaining bonds were valued
based on market value. Equity consideration was based on the closing price of our common stock on November 30, 2011.
Consideration related to assumed restricted stock units was calculated based on the closing price of our common stock on
November 30, 2011, net of the portion of the fair value attributable to future vesting requirements. Consideration related to
assumed stock options was calculated based on the fair value of the new Windstream stock options issued as of November 30,
2011, net of the portion of the fair value attributable to future vesting requirements. The fair value of these stock option awards
was calculated using the Hull-White II Lattice model based on assumptions determined as of November 30, 2011. The amount
allocated to unearned compensation cost for awards subject to future service requirements was calculated based on the fair
value of such awards at the acquisition date and will be recognized as compensation cost over the remaining future service
period.
The purchase price allocations for Q-Comm, Hosted Solutions, Iowa Telecom, NuVox, D&E and Lexcom have been
completed. Pro forma financial results related to the acquisitions of the Acquired Companies, D&E or Lexcom have not been
included because we do not consider these acquisitions to be significant individually or in the aggregate.
Disposition of Out of Territory Product Distribution – On August 21, 2009, we completed the sale of our out of territory
product distribution operations to Walker and Associates of North Carolina, Inc. (“Walker”) for approximately $5.3 million in
total consideration. The out of territory product distribution operations primarily consisted of product inventory with a carrying
value of $4.9 million and customer relationships outside of our telecommunications operating territories. These operations were
not central to our strategic goals in our core communications business. Product revenues from these operations totaled $38.5
2009,with related cost of products sold of $34.3 million for the same period in 2009. In conjunction with this transaction, we
recognized a gain of $0.4 million in other expense, net in our consolidated statements of income in 2009.
4. Goodwill and Other Intangible Assets:
Goodwill represents the excess of cost over the fair value of net identifiable tangible and intangible assets acquired through
various business combinations. The cost of acquired entities at the date of the acquisition is allocated to identifiable assets, and
the excess of the total purchase price over the amounts assigned to identifiable assets has been recorded as goodwill.
Changes in the carrying amount of goodwill were as follows:
(Millions)
Balance at December 31, 2009
Adjustment of D&E (a)
Adjustment of Lexcom (a)
Acquisition of NuVox (b)
Acquisition of Iowa Telecom (b)
Acquisition of Hosted Solutions
Acquisition of Q-Comm
Balance at December 31, 2010
Acquisition of Hosted Solutions (see Note 3)
Acquisition of Q-Comm (see Note 3)
Acquisition of PAETEC (see Note 3)
Balance at December 31, 2011
$ 2,326.5
2.2
2.3
270.5
552.4
171.8
345.5
3,671.2
3.9
12.5
614.1
$ 4,301.7
(a) Adjustments to the carrying value of D&E and Lexcom goodwill were attributable to adjustments in the fair values of
assets acquired and liabilities assumed in these acquisitions recognized during the first quarter of 2010.
(b) We have elected to revise historical results for certain previously unrecorded immaterial errors (See Note 2).