iHeartMedia 2009 Annual Report Download - page 39

For the normalized operating margin in the third year, management assumed a hypothetical business would operate at the
lower of the operating margin for the specific market or the industry average margin of 46% and 45% based on an analysis of
comparable companies in the December 31, 2008 and June 30, 2009 impairment models, respectively. For the first and second year of
operations, the operating margin was assumed to be 50% of the “normalized” operating margin for both the December 31, 2008 and
June 30, 2009 impairment models. The first and second-year expenses include the non-recurring start-up costs necessary to build the
operation (i.e. development of customers, workforce, etc.).
In addition to cash flows during the projection period, a “normalized” residual cash flow was calculated based upon
industry-average growth of 3% beyond the discrete build-up projection period in both the December 31, 2008 and June 30, 2009
impairment models. The residual cash flow was then capitalized to arrive at the terminal value.
The present value of the cash flows is calculated using an estimated required rate of return based upon industry-average
market conditions. In determining the estimated required rate of return, management calculated a discount rate using both current and
historical trends in the industry.
We calculated the discount rate as of the valuation date and also one-year, two-year, and three-year historical quarterly
averages. The discount rate was calculated by weighting the required returns on interest-bearing debt and common equity capital in
proportion to their estimated percentages in an expected capital structure. The capital structure was estimated based on the quarterly
average of data for publicly traded companies in the outdoor advertising industry.
The calculation of the discount rate required the rate of return on debt, which was based on a review of the credit ratings
for comparable companies (i.e. market participants). We used the yield on a Standard & Poor’s “B” rated corporate bond for the pre-
tax rate of return on debt and tax-effected such yield based on applicable tax rates.
The rate of return on equity capital was estimated using a modified CAPM. Inputs to this model included the yield on long-
term U.S. Treasury Bonds, forecast betas for comparable companies, calculation of a market risk premium based on research and
empirical evidence and calculation of a size premium derived from historical differences in returns between small companies and
large companies using data published by Ibbotson Associates.
Our concluded discount rate used in the discounted cash flow models to determine the fair value of the permits was 9.5% at
December 31, 2008 and 10% at June 30, 2009. Applying the discount rate, the present value of cash flows during the discrete
projection period and terminal value were added to estimate the fair value of the hypothetical start-up operation. The initial capital
investment was subtracted to arrive at the value of the permits. The initial capital investment represents the expenditures required to
erect the necessary advertising structures.
The discount rate used in the December 31, 2008 impairment model increased approximately 100 basis points over the
discount rate used to value the permits in the preliminary purchase price allocation as of July 30, 2008. Industry revenue forecasts
declined 10% through 2013 compared to the forecasts used in the preliminary purchase price allocation as of July 30, 2008. These
market driven changes were primarily responsible for the decline in fair value of the billboard permits below their carrying value. As
a result, we recognized a non-cash impairment charge which totaled $722.6 million. The fair value of our permits was $1.5 billion at
December 31, 2008.
The discount rate used in the June 30, 2009 impairment model increased approximately 50 basis points over the discount
rate used to value the permits at December 31, 2008. Industry revenue forecasts declined 8% through 2013 compared to the forecasts
used in the 2008 impairment test. These market driven changes were primarily responsible for the decline in fair value of the billboard
permits below their carrying value. As a result, we recognized a non-cash impairment charge in all but five of our markets in the
United States and Canada, which totaled $345.4 million. The fair value of our permits was $1.1 billion at June 30, 2009.
The following table shows the increase to the billboard permit impairment that would have occurred using hypothetical
percentage reductions in fair value, had the hypothetical reductions in fair value existed at the time of our impairment testing:
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(In thousands)
June 30, 2009 December 31, 2008
Percent change in fair value Change to impairmen
t
Change to impairmen
t
5% $ 55,776 $ 80,798
10%
$ 111,782 $ 156,785
15% $ 167,852 $ 232,820