Goodwill and Other Intangible Assets, net

In the second quarter of fiscal 2013, the Company performed its annual goodwill impairment testing, proceeding directly to the first step of the quantitative impairment test by comparing the fair value of each reporting unit with its carrying value, including goodwill. As a result of this test, the Company determined that the fair value of each reporting unit for which goodwill was allocated was in excess of its respective carrying value and, therefore, no goodwill impairment was identified.

In the fourth quarter of fiscal 2013, management identified the combination of the continued challenging market conditions, the constrained supply of raw materials, the Company’s recent financial performance and the lack of recovery of the Company’s market capitalization as a triggering event requiring an interim impairment test of goodwill allocated to its reporting units. The first step of the impairment test showed that the fair value of the MRB reporting unit was less than its carrying amount, indicating a potential impairment. Based on the second step of the impairment test, the Company concluded that the implied fair value of goodwill for the MRB reporting unit was less than its carrying amount, resulting in a partial impairment charge of MRB’s goodwill totaling $321 million.

During the first quarter of fiscal 2014, the Company elected to change its annual goodwill impairment testing date from February 28 to July 1 of each year. The Company believes this new testing date is preferable because it allows the Company to better align the annual goodwill impairment testing procedures with the Company’s year-end financial reporting as well as its annual budgeting cycle and allows the Company visibility into fourth quarter operating results which are typically significant to its annual performance. This change in accounting principle did not delay, accelerate or cause the Company to avoid an impairment charge.

In the fourth quarter of fiscal 2014, the Company performed its annual goodwill impairment testing, proceeding directly to the first step of the quantitative impairment test by comparing the fair value of each reporting unit with its carrying value, including goodwill.

For the MRB reporting unit with goodwill of $147 million as of July 1, 2014, the calculated fair value exceeded the carrying value by approximately 13%. The projections used in the income approach for MRB took into consideration the challenging market conditions for recycled metals, including the continued constrained supply of scrap metal and level of competition in our domestic markets, the generally weak macroeconomic indicators in the markets in which our customers are based, and the cyclical nature of our industry. The projections assumed a recovery of operating margins over a multi-year period, eventually returning to levels of profitability in the range of average historical levels. The market-based WACC used in the income approach for MRB was 12.87%, which included an additional Company risk premium of 1% to reflect the uncertainty in connection with the extent and pace of improvements in market conditions and future Company performance. The terminal growth rate used in the discounted cash flow model was 2% based on long-term domestic economic growth expectations. Assuming all other components of the fair value estimate were held constant, an increase in the WACC in excess of 1%, or weaker than anticipated improvements in either operating margins or volumes, could result in a failure of the Step 1 quantitative impairment test for the MRB reporting unit.

For the APB reporting unit with goodwill of $180 million as of July 1, 2014, the calculated fair value exceeded the carrying value by approximately 17%. The projections used in the income approach for APB took into consideration the impact of weak market conditions for ferrous and nonferrous commodities, the cost of obtaining adequate supply flows of end-of-life vehicles and the trends of self-serve parts sales in certain regional markets. The projections assumed a recovery of operating margins from current levels over a multi-year period, but to less than the peak levels of operating margin experienced in fiscal years 2010 and 2011. The market-based WACC used in the income approach for APB was 11.19%. The terminal growth rate used in the discounted cash flow model was 1%. Assuming all other components of the fair value estimate were held constant, an increase in the WACC in excess of 1.25% or weaker than anticipated improvements in operating margins could result in a failure of the Step 1 quantitative impairment test for the APB reporting unit.

The Company also used a market approach based on earnings multiple data and the Company’s market capitalization to corroborate the reporting units’ valuations. The Company reconciled its market capitalization to the aggregated estimated fair value of its reporting units, including consideration of a control premium representing the estimated amount a market participant would pay to obtain a controlling interest. The implied control premium resulting from the difference between the Company's market capitalization (based on the average trading price of our Class A common stock for the two-week period ended July 1, 2014) and the higher aggregated estimated fair value of its reporting units was within the historical range of average and mean premiums observed on historical transactions within the steel-making, scrap processing and metals industries. The Company identified specific reconciling items, including market participant synergies, which supported the implied control premium as of July 1, 2014.

The determination of fair value of the reporting units used to perform the first step of the impairment test requires judgment and involves significant estimates and assumptions about the expected future cash flows and the impact of market conditions on those assumptions. Due to the inherent uncertainty associated with forming these estimates, actual results could differ from those estimates. Future events and changing market conditions may impact the Company’s assumptions as to future revenue growth rates, pace and extent of operating margin and volume recovery, market-based WACC and other factors that may result in changes in the estimates of the Company’s reporting units’ fair value. Although management believes the assumptions used in testing the Company’s reporting units’ goodwill for impairment are reasonable, it is possible that market and economic conditions could deteriorate further or not improve as expected. Additional declines or a lack of recovery of market conditions in the metals recycling industry from current levels, a trend of weaker than anticipated Company financial performance including the pace and extent of operating margin and volume recovery, a lack of recovery in the Company’s share price from current levels for a sustained period of time, or an increase in the market-based WACC, among other factors, could significantly impact the impairment analysis and may result in future goodwill impairment charges that, if incurred, could have a material adverse effect on the Company’s financial condition and results of operations.

The gross changes in the carrying amount of goodwill by reporting segment for the years ended August 31, 2014 and 2013 were as follows (in thousands):



	MRB			APB			Total
Balance as of August 31, 2012	$	471,954		$	163,537		$	635,491
Acquisitions	1,744			17,634			19,378
Purchase accounting adjustments	135			614			749
Foreign currency translation adjustment	(5,620		)	(1,734		)	(7,354		)
Goodwill impairment charges	(321,000		)	—			(321,000		)
Balance as of August 31, 2013	147,213			180,051			327,264
Acquisitions	—			586			586
Purchase accounting adjustments	—			(51		)	(51		)
Foreign currency translation adjustment	(1,105		)	(791		)	(1,896		)
Balance as of August 31, 2014	$	146,108		$	179,795		$	325,903

Accumulated goodwill impairment charges were $321 million as of August 31, 2014 and 2013.

The following table presents the Company’s intangible assets as of August 31 (in thousands):



	2014					2013
	Gross Carrying Amount		Accumulated Amortization			Gross Carrying Amount		Accumulated Amortization
Covenants not to compete	$	18,747	$	(11,768	)	$	20,183	$	(10,796	)
Supply contracts	2,264		(2,109		)	2,264		(1,725		)
Other intangible assets subject to amortization⁽¹⁾	3,263		(1,735		)	3,783		(1,618		)
Indefinite-lived intangibles⁽²⁾	1,173		—			1,173		—
Total	$	25,447	$	(15,612	)	$	27,403	$	(14,139	)

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(1)	Other intangible assets subject to amortization include trade names, marketing agreements, employment agreements, leasehold interests, permits and licenses and real property options.


(2)	Indefinite-lived intangibles include trade names, permits and licenses and real property options.

Total intangible asset amortization expense was $4 million for the year ended August 31, 2014 and $5 million for the years ended August 31, 2013 and 2012.

The estimated amortization expense, based on current intangible asset balances, during the next five fiscal years and thereafter is as follows (in thousands):



Years Ending August 31,	Estimated Amortization Expense
2015	$	2,666
2016	1,580
2017	778
2018	458
2019	307
Thereafter	2,872
Total	$	8,661