6. Intangible Assets and Goodwill

The following tables present the changes in intangible assets and goodwill for the years ended December 31, 2012 and 2011 (dollars in thousands):


	Indefinite-Lived			Definite-Lived			Total
Intangible Assets:
Balance as of January 1, 2011	$	160,418		$	552		$	160,970
Acquisitions		1,466,530			428,408			1,894,938
Dispositions		(1,533	)		(83	)		(1,616	)
Amortization		—			(38,368	)		(38,368	)

Balance as of December 31, 2011	$	1,625,415		$	390,509		$	2,015,924

Balance as of January 1, 2012		1,625,415			390,509			2,015,924
Purchase price allocation adjustments		—			(1,027	)		(1,027	)
Acquisitions		22,253			376			22,629
Impairments		(14,706	)		(12,435	)		(27,141	)
Dispositions		(30,589	)		(6,880	)		(37,469	)
Amortization		—			(112,240	)		(112,240	)

Balance as of December 31, 2012	$	1,602,373		$	258,303		$	1,860,676


	2012			2011
Balance as of January 1:
Goodwill	$	1,564,253		$	285,820
Accumulated impairment losses		(229,741	)		(229,741	)

Subtotal		1,334,512			56,079
Acquisitions		3,018			1,278,433
Purchase price allocation adjustments		(10,308	)		—
Dispositions		(31,628	)		—
Impairment losses		(100,000	)		—
Balance as of December 31:
Goodwill		1,525,335			1,564,253
Accumulated impairment losses		(329,741	)		(229,741	)

Total	$	1,195,594		$	1,334,512

The Company has significant intangible assets recorded and these intangible assets are comprised primarily of broadcast licenses and goodwill acquired through the acquisition of radio stations. The Company reviews the carrying value of its indefinite lived intangible assets and goodwill at least annually for impairment. If the carrying value exceeds the estimate of fair value, the Company calculates an impairment as the excess of the carrying value of goodwill over its estimated fair value and charges the impairment to results of operations. During the quarter ended December 31, 2012, the Company recorded goodwill and broadcast license impairments of $100.0 million and $14.7 million, respectively. During the quarter ended June 30, 2012 the Company recognized an impairment of $12.4 million of definite-lived intangible asset related to the cancellation of an underlying contract.

Total amortization expense related to the Company’s intangible assets was $112.2 million, $37.9 million and $0.0 million for the years ended December 31, 2012, 2011, and 2010, respectively. As of December 31, 2012, estimated future amortization expenses related to intangible assets subject to amortization were as follows (dollars in thousands):


2013	$	85,753
2014		65,179
2015		52,471
2016		39,120
2017		15,780

Total other intangibles, net	$	258,303

Goodwill

2012 Impairment Testing

The Company performs its annual impairment testing of goodwill during the fourth quarter and on an interim basis if events or circumstances indicate that goodwill may be impaired. The calculation of the fair value of each reporting unit is prepared using an income approach and discounted cash flow methodology. As part of its overall planning associated with the testing of goodwill, the Company determined that its geographic markets are the appropriate reporting unit.

During the fourth quarter of 2012, the Company performed its annual impairment test. The assumptions used in estimating the fair values of reporting units are based on currently available data at the time the test is conducted and management’s best estimates and accordingly, a change in market conditions or other factors could have a material effect on the estimated values.

Step 1 Goodwill Test

The Company performed its annual impairment testing of goodwill using a discounted cash flow analysis, an income approach. The discounted cash flow approach requires the projection of future cash flows and the calculation of these cash flows into their present value equivalent via a discount rate. The Company used an approximate five-year projection period to derive operating cash flow projections from a market participant view. The Company made certain assumptions regarding future revenue growth based on industry market data and historical and expected performance. The Company then projected future operating expenses in order to derive expected operating profits, which the Company combined with expected working capital additions and capital expenditures to determine expected operating cash flows.

The Company performed the Step 1 test and compared the fair value of each market to the carrying value of its net assets as of December 31, 2012. This test was used to determine if any of the Company’s markets had an indicator of impairment (i.e. the market net asset carrying value was greater than the calculated fair value of the market).

The discount rate employed in the fair value calculations in the Step 1 test in the Company’s markets was 9.5%. The Company believes this discount rate was appropriate and reasonable for estimating the fair value of the markets.

For periods after 2012, the Company projected annual revenue growth based on industry data and historical and expected performance. The Company projected expense growth based primarily on the stations’ historical financial performance and expected growth. The Company’s projections were based on then-current market and economic conditions and the Company’s historical knowledge of the markets.

To validate the Company’s conclusions and determine the reasonableness of the Company’s assumptions, the Company conducted an overall check of the Company’s fair value calculations by comparing the implied fair value of the Company’s markets, in the aggregate, to the Company’s market capitalization as of December 31, 2012. As compared with the market capitalization value of $3.4 billion as of December 31, 2012, the aggregate fair value of all markets of approximately $4.0 billion was approximately $616.4 million, or 18.4%, higher than the market capitalization.

Key data points included in the market capitalization calculation were as follows:

•

shares outstanding, including certain warrants, of 215.3 million as of December 31, 2012;

•

closing price of the Company’s Class A common stock on December 31, 2012 of $2.67 per share; and

•

total debt, including preferred equity, of $2.8 billion, on December 31, 2012.

The Company’s analysis determined that, based on its Step 1 goodwill test, the fair value of 4 of its markets containing goodwill balances were below their carrying value. For the remaining markets, since no impairment indicator existed in Step 1, the Company determined goodwill was appropriately stated as of December 31, 2012.

Step 2 Goodwill Test

As required by the Step 2 test, the Company prepared an allocation of the fair value of the markets identified in the Step 1 test as containing indications of impairment and if each market was acquired in a business combination. The presumed “purchase price” utilized in the calculation was the fair value of the market determined in the Step 1 test. The results of the Step 2 test and the calculated impairment charge for each of those markets follows (dollars in thousands):


	Reporting Unit Fair Value		Implied Goodwill Value		December 31, 2012
Market ID	Reporting Unit Fair Value		Implied Goodwill Value		Carrying Value		Impairment
Market 27	$	49,900	$	22,488	$	33,452	$	10,964
Market 60		66,900		34,576		54,650		20,074
Market 70		52,900		20,723		43,477		22,754
Market 80		126,000		54,210		100,418		46,208

							$	100,000

Indefinite Lived Intangibles (FCC Licenses)

The Company performs its annual impairment testing of indefinite-lived intangibles (the Company’s FCC licenses) during the fourth quarter of each year and on an interim basis if events or circumstances indicate that the asset may be impaired. The Company has combined all of the Company’s broadcast licenses within a single geographic market cluster into a single unit of accounting for impairment testing purposes. As part of the overall planning associated with the indefinite-lived intangibles test, the Company determined that the Company’s geographic markets are the appropriate unit of accounting for the broadcast license impairment testing.

For the annual impairment test of the Company’s FCC licenses, including both AM and FM licenses, the Company utilized the income approach, specifically the Greenfield Method, with the exception of two stations which the Company was not operating as of the valuation date. A minimum value of fifty thousand dollars was estimated for the FCC licenses of these two non-operating stations. In completing the appraisals, the Company conducted a thorough review of all aspects of the assets being valued.

The income approach measures value based on income generated by the subject property, which is then analyzed and projected over a specified time and capitalized at an appropriate market rate to arrive at the estimated value. The Greenfield Method isolates cash flows attributable to the subject asset using a hypothetical start-up approach.

The estimated fair values of the Company’s FCC licenses represent the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between the Company and willing market participants at the measurement date. The estimated fair value also assumes the highest and best use of the asset by market participants, considering the use of the asset that is physically possible, legally permissible and financially feasible.

A basic assumption in the Company’s valuation of these FCC licenses was that these radio stations were new radio stations, signing on-the-air as of the date of the valuation. The Company assumed the competitive situation that existed in those markets as of that date, except that these stations were just beginning operations. In doing so, the Company bifurcated the value of going concern and any other assets acquired, and strictly valued the FCC licenses.

In estimating the value of the licenses using a discounted cash flow analysis the Company began with market revenue projections. Next, the Company estimated the percentage of the market’s total revenue, or market share, that market participants could reasonably expect an average start-up station to attain, as the well as the duration (in years) required to reach the average market share. The estimated average market share was computed based on market share data, by type (i.e., AM and FM).

After market revenue and market shares have been estimated, operating expenses, including depreciation based on assumed investments in fixed assets and future capital expenditures, of a start-up station or operation are similarly estimated based on industry-average cost data. Appropriate estimated income taxes are then subtracted, estimated depreciation added back, estimated capital expenditures subtracted, and estimated working capital adjustments are made to calculate estimated free cash flow during the build-up period until a steady state or mature “normalized” operation is achieved.

The Company discounted the net free cash flows using an after-tax weighted average cost of capital of 9.5%, and then calculated the total discounted net free cash flows. For net free cash flows beyond the projection period, the Company estimated a perpetuity value, and then discounted the amounts to present values.

In order to estimate what listening audience share would be expected for each station by market, the Company analyzed the average local commercial share garnered by similar AM and FM stations competing in those radio markets. The Company made any appropriate adjustments to the listening share and revenue share based on the stations’ signal coverage within the market and the surrounding area population as compared to the other stations in the market. Based on the Company’s knowledge of the industry and familiarity with similar markets, the Company determined that approximately three years would be required for the stations to reach maturity. The Company also incorporated the following additional assumptions into the discounted cash flow valuation model:

•

the projected operating revenues and expenses through 2017;

•

the estimation of initial and on-going capital expenditures (based on market size);

•

depreciation on initial and on-going capital expenditures (the Company calculated depreciation using accelerated double declining balance guidelines over five years for the value of the tangible assets necessary for a radio station to go on-the-air);

•

the estimation of working capital requirements (based on working capital requirements for comparable companies);

•

the calculations of yearly net free cash flows to invested capital; and

•

amortization of the intangible asset — the FCC license (the Company calculated amortization on a straight line basis over 15 years).

As a result of the annual impairment test conducted in the fourth quarter of 2012, the Company recorded a non-cash impairment charge of approximately $14.7 million in 2012 to reduce the carrying value of FCC licenses their estimated fair values.