CORRESP: A correspondence can be sent as a document with another submission type or can be sent as a separate submission.
Published on April 24, 2009
April 24, 2009
VIA EDGAR
U.S. Securities and Exchange Commission
Division of Corporation Finance
100 F Street, N.E.
Washington, D.C. 20549
Attention: Mr. Kyle Moffatt
Division of Corporation Finance
100 F Street, N.E.
Washington, D.C. 20549
Attention: Mr. Kyle Moffatt
| Re: | Clear Channel Outdoor Holdings, Inc. (the Company) Form 10-K for the fiscal year ended December 31, 2008, filed March 2, 2009 File No. 001-32663 |
Dear Mr. Moffat:
This letter is in response to the Staffs comments to the Company by its letter dated April 3,
2009 relating to the above-referenced Form 10-K. Our responses are referenced to the applicable
Staff comment and the paragraph numbering used for each response set forth below corresponds to the
paragraph numbering used in the Staffs comment letter.
Item 1. Business
Sources of Revenues, page 5
| 1. | We note that for all of your billboards in the United States, you use independent third party-auditing companies to verify the number of impressions delivered by a display. Please tell us how you utilize this information. |
The Traffic Audit Bureau (TAB) is a tri-party consortium funded by advertisers, advertising
agencies and the outdoor industry. The TAB compiles the daily effective circulation (DEC), which
is based on traffic count, of a particular display. This information is posted on-line and is
available to TAB members. The information supplied by TAB is one of the factors for determining
the pricing of a particular display and is used as a sales resource. Generally, the more
impressions a display delivers, the higher the rate. In addition, the TAB also audits sales
proposals to determine if the DECs contained in the proposal are accurate. These selected audits
ensure that the outdoor advertising data is presented to potential advertising customers
consistently across the various competitors.
Item 7. Managements Discussion and Analysis of Financial Condition and Results of
Operations
Americas Results of operations, page 43
International Results of operations, page 44
International Results of operations, page 44
| 2. | Please revise to discuss how you expect customer cancellations and non-renewals during the fourth quarter to impact each of your segments prospectively in 2009. |
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The Company is unable to estimate the impact customer cancellations and non-renewals will have on
its segments prospectively in 2009 because the factors that affect cancellations and non-renewals
continue to be in a state of flux which makes future visibility uncertain. However, the Company
states on page 36 under Description of Business, Our outdoor advertising business has been, and
may continue to be, adversely impacted by the difficult economic conditions currently present in
the United States and other countries in which we operate. The continuing weakening economy has,
among other things, adversely affected our clients need for advertising and marketing services,
resulted in increased cancellations and non-renewals by our clients, thereby reducing our occupancy
levels and could require us to lower our rates in order to remain competitive, thereby reducing our
yield, or affect our clients solvency. Any one or more of these effects could materially affect
our business, financial condition and results of operations.
| 3. | Tell us the source and nature of the significant increase in bad debt in the Americas business, particularly after your merger. Per schedule set forth on page 107, you reported a significant increase in the allowance for doubtful accounts during the period from July 31 through December 31, 2008. |
Approximately $17 million of the reserve for bad debt after the merger was attributable to the
Companys Americas segment. Approximately $4 million was attributable to deterioration in agings
based on our standard policies and the remainder due to payment concerns on specific national
agency accounts primarily in the automotive and retail advertising categories.
| 4. | We note your disclosure that direct operating expenses increased as a result of new site lease contracts for both the Americas and the International segments. In light of the fixed and long-term nature of these expenses, it is unclear to us how direct operating expenses decreased sequentially during the third and fourth quarters of 2008 as set forth in Note O. Please advise. |
Direct operating expenses increased approximately $5 million in the Companys Americas segment
during the period noted. However, the increase was offset by a direct operating expense decline in
the Companys International segment. This decline was attributable to movements in foreign
exchange. On a constant dollar basis (as defined on page 37), direct operating expenses in the
Companys International segment would have increased approximately $2.5 million during the period
noted.
Cash Flows, page 46
| 5. | We note that in lieu of a discussion and analysis of cash flows, you merely recited net changes in the major captions in the Statements of Cash Flows. Please provide an enhanced analysis and explanations of the sources and uses of cash and material changes in particular items underlying the major captions as reported therein for all periods presented. |
The Company will add the following disclosure to the Form 10-K:
Investing Activities
2008
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We spent $175.8 million in our Americas segment for the purchase of property, plant and
equipment mostly related to the construction of new billboards. We spent $182.5 million in our
International segment for the purchase of property, plant and equipment mostly related to new
billboard and street furniture contracts and renewals of existing contracts.
Our Americas segment paid $55.1 million for the acquisition of advertising structures and the
final earnout payments for Interspace Airport Advertising, which we acquired in July 2006. Our
International segment paid $41.4 million primarily related to the acquisition of additional equity
interests in outdoor companies and the acquisition of advertising structures.
We also received proceeds of $41.5 million from asset sales, $34.2 million of which was from
the disposal of land and buildings in our International segment.
2007
We spent $142.8 million in our Americas segment for the purchase of property, plant and
equipment mostly related to construction of new billboards. We spent $132.9 million in our
International segment for the purchase of property, plant and equipment mostly related to new
billboard and street furniture contracts and renewals of existing contracts.
During 2007, our Americas segment paid $39.5 million in cash primarily to acquire display
faces. In addition, our International segment paid $29.6 million, which includes the acquisition
of an outdoor advertising business in Romania, additional equity interests in outdoor companies and
the acquisition of advertising structures.
2006
We spent $90.5 million in our Americas segment for the purchase of property, plant and
equipment mostly related to construction of new billboards. We spent $143.4 million in our
International segment for the purchase of property, plant and equipment mostly related to new
billboard and street furniture contracts and renewals of existing contracts.
We completed the acquisition of Interspace on July 1, 2006 and paid cash consideration of
$76.5 million. In addition our Americas segment acquired display faces for $55.4 million in cash.
Our International segment acquired display faces and additional equity interests in outdoor
companies for $105.7 million, including the acquisition of an outdoor advertising business in the
United Kingdom.
Financing Activities
2008
Net cash used in financing activities of $232.8 million for 2008 reflected a net reduction in
debt and credit facilities of $67.6 million and net transfers of cash to Clear Channel
Communications of $169.2 million. The net transfers of cash to Clear Channel Communications
represent the activity in the Due from/to Clear Channel Communications account. This
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activity primarily relates to working capital and settlement of interest on the cash
management notes and the $2.5 billion note payable to Clear Channel Communications.
2007
Net cash used in financing activities of $305.8 million for 2007 is primarily related to the
net transfer of cash to Clear Channel Communications of $302.9 million. The net transfers of cash
to Clear Channel Communications represent the activity in the Due from/to Clear Channel
Communications account. This activity primarily relates to working capital and settlement of
interest on the cash management notes and the $2.5 billion note payable to Clear Channel
Communications.
2006
Net cash used in financing activities of $53.2 million for 2006 principally reflects a net
reduction in debt of $59.7 million. The net transfers of cash to Clear Channel Communications
represent the activity in the Due from/to Clear Channel Communications account. This activity
primarily relates to working capital and settlement of interest on the cash management notes and
the $2.5 billion note payable to Clear Channel Communications.
Debt with Clear Channel Communications, pages 49-50
| 6. | We note that you maintain collection bank accounts which are swept daily into accounts of Clear Channel Communications. Per your disclosure, unlike the management of cash from your U.S. based operations, the amount of cash, if any, which is transferred from your foreign operations to Clear Channel Communications is determined on a basis mutually agreeable to you and Clear Channel Communications based on the reasonable foreseeable cash needs of your foreign operations. Addressing existing and known or reasonably likely future cash requirements of your foreign operations, please disclose the nature of such needs which are evaluated regularly for cash management purposes. |
The Company will add the following disclosure to its Form 10-K:
The Companys foreign operations forecast their cash needs to satisfy general working capital
requirements and capital expenditures. The Companys foreign operations also evaluate anticipated
cash flows from various investing activities. Therefore, to the extent that anticipated cash on
hand from the Companys foreign operations is not enough to satisfy its cash needs, the foreign
operations will either borrow from local credit facilities that may be available to those
operations or the Company will transfer required funds to its foreign operations. However, the
Companys $150.0 million sub-limit facility is not currently available as Clear Channel
Communications drew the remaining availability on February 6, 2009. To the extent that cash on
hand from the Companys foreign operations exceeds its cash needs, the foreign operations may repay
local credit facilities (which could include the $150.0 million sub-limit) or the Company may
repatriate that cash for use domestically.
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Critical Accounting Estimates, page 55
Indefinite-lived Assets, page 56
| 7. | We note that indefinite-lived intangibles which consist of billboard permits accounted for 19% of total assets as of December 31, 2008. In light of the significance of the remaining indefinite-lived intangibles balance, we expect robust and comprehensive disclosure in your critical accounting policies regarding your impairment testing policy. This disclosure should provide investors with sufficient information about managements insights and assumptions with regard to the recoverability of your billboard permits. Specifically, we believe you should provide the following information: |
| | Provide a more detailed description of the steps you perform to review your billboard permits for recoverability. |
The Company has responded to this Staff comment by providing a marked excerpt of the Form 10-K.
Please see Attachment A.
| | Describe the nature of the valuation techniques you employed in performing the impairment tests. Qualitatively and quantitatively describe in more detail the significant estimates and assumptions used in your valuation model to determine the fair value of each unit of accounting under your direct valuation method and how you derive industry normalized information. For example, you should disclose at a minimum your assumptions with respect to market revenue growth rates, market share, profit margin, duration and profile of the build-up period, how estimated start-up capital costs and losses incurred during the build-up period were determined, the risk adjusted discount rates and terminal values. Discuss your consideration of any market risk premiums. |
The Company has responded to this Staff comment by providing a marked excerpt of the Form 10-K.
Please see Attachment A.
| | Describe changes to the assumptions and methodologies, if any, since your annual impairment test. In addition, tell us how the assumptions in your most recent test were impacted by the current economic environment. For example, you should explain in detail how your discount rates reflect the market risk premiums that have been noted in the current equity and debt markets. |
The Company has responded to this Staff comment by providing a marked excerpt of the Form 10-K.
Please see Attachment A.
| | Further, disclose any changes to your units of accounting or allocations of building permits by unit of accounting and the reasons for such changes. |
There were no changes to the Companys units of accounting.
| | Provide a table showing: |
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| 1. | the carrying value and the fair value of each unit of accounting. Alternatively, if you do not disclose the fair value of each unit of accounting, you should disclose its fair value if it does not exceed its carrying value by a significant amount; and |
The Company has responded to this Staff comment by inserting The fair value of our permits equaled
their carrying value after recognition of the non-cash impairment charge. Please see Attachment
A.
| 2. | using hypothetical percentage reductions in fair value, disclose the impairment amount that would have occurred had the hypothetical reduction in fair value existed at the time of your impairment testing. |
The Company has responded to this Staff comment by providing a marked excerpt of the Form 10-K.
Please see Attachment A.
| | In addition, if the fair value of any of your units of accounting does not, or would not, exceed its carrying value by a significant amount, provide a sensitivity analysis of your most recent impairment test assumptions for this unit of accounting based upon reasonable likely changes similar to what was already provided for you billboard permits balance on page 57. |
The fair value of the Companys billboard permits equaled their carrying value after recognition of
the non-cash impairment charge. The unit of accounting for the Companys billboard permits is the
market level. The table on page 57 was produced based on the effect of 100 basis point declines in
the discrete and terminal period revenue growth rate, profit margin and discount rate assumptions
for each unit of accounting.
| 8. | Explain how you determined your units of accounting including your basis for concluding that separately recorded indefinite-lived intangibles should be combined into a single unit of accounting for purposes of testing impairment. In this regard, tell us more about your impairment testing at the market level and provide us with your analysis of EITF 02-7. |
The Company determined that its billboard permits should be combined into a single unit of
accounting at the market level after consideration of the guidance in EITF 02-7. Specifically, the
Company concluded that the intangible assets were purchased in order to construct or enhance a
single asset (that is, they will be used together). In this regard, the Company generally sells
rotary advertising campaigns to its customers. This involves moving the advertising message to
different bulletins within the market during the advertising campaign. Rotating delivers high
frequency at each bulletin location. Reach builds as the advertising message is moved to different
bulletin locations. Therefore, the billboard permits as a group represent the highest and best use
of the assets. Secondarily, the Company does not have a history of selling specific permits within
a market. Generally, the Company will swap markets with a third party rather than sell individual
permits. Finally, as part of the purchase price allocation, the permits were recorded as a single
group at the market level.
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Goodwill, page 57
| 9. | In light of the significance of the remaining goodwill balance, which accounted for 15% of your total assets as of December 31, 2008, we expect robust and comprehensive disclosure in your critical accounting policies regarding your impairment testing policy. This disclosure should provide investors with sufficient information about managements insights and assumptions with regard to the recoverability of the remaining goodwill balance. Specifically, we believe you should provide the following information: |
| | Provide a more detailed description of the steps you perform to review your goodwill for recoverability similar to that provided on page 77. |
The Company has responded to this Staff comment by providing a marked excerpt of the Form 10-K.
Please see Attachment A.
| | Disclose a breakdown of your goodwill balance as of December 31, 2008 by reporting unit (i.e. by country in your international segment). |
The Company has responded to this Staff comment by providing a marked excerpt of the Form 10-K.
Please see Attachment A.
| | Describe the nature of the valuation techniques you employed in performing the impairment tests. Qualitatively and quantitatively describe the significant estimates and assumptions used in your valuation model to determine the fair value of your reporting units in your impairment analysis. For example, since you utilize the discounted cash flow approach, you should disclose at a minimum: |
| 1. | The discount rates for each reporting unit and how those discount rates were determined, |
The Company has responded to this Staff comment by providing a marked excerpt of the Form 10-K.
Please see Attachment A.
| 2. | How cash flows were determined, including your assumed growth rates, period of assumed cash flows and determination of terminal value, and |
The Company has responded to this Staff comment by providing a marked excerpt of the Form 10-K.
Please see Attachment A.
| 3. | Your consideration of any market risk premiums. |
The Company has responded to this Staff comment by providing a marked excerpt of the Form 10-K.
Please see Attachment A.
| | Describe changes to the assumptions and methodologies, if any, since your annual impairment test. For example, you should explain in detail how your discount rates reflect the market risk premiums that have been noted in the current equity and debt markets. |
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The Company has responded to this Staff comment by providing a marked excerpt of the Form 10-K.
Please see Attachment A.
| | Further, disclose any changes to your reporting units or allocations of goodwill by reporting unit and the reasons for such changes. |
There were no changes to the Companys reporting units.
| | Provide a table showing: |
| 1. | the carrying value and the fair value of each reporting unit. Alternatively, if you do not disclose the fair value of reporting unit, you should disclose its fair value it does not exceed its carrying value by a significant amount; and |
The Company has responded to this Staff comment by inserting The fair value of our reporting units
approximated their carrying value after recognition of the non-cash impairment charge. Please see
Attachment A.
| 2. | using hypothetical percentage reductions in fair value, disclose the percentage by which the fair value of a reporting unit would exceed its carrying value. |
As disclosed, the carrying value of all material reporting units approximated their fair value after
recognition of the non-cash impairment charge. Therefore, the Company will add a table similar to
the table added for its billboard permits, aggregated at the reportable segment level. Please see
Attachment A.
| | In addition, if the fair value of any of your reporting units does not, or would not, exceed its carrying value by a significant amount, provide a sensitivity analysis of your most recent impairment test assumptions for this reporting unit based upon reasonable likely changes similar to what was already provided at the reportable segment level on page 57. |
The table on page 57 was produced based on the effect of 100 basis
point declines in the discrete and terminal period revenue growth rate, profit margin and discount
rate assumptions for each reporting unit, as noted in our original filing.
Note A Summary of Significant Accounting Policies
Intangible Assets, pages 71-72
| 10. | Tell us your basis for determining that the reporting unit for Americas is the reportable segment, in this regard, we note that you have a Regional President for each of the Western U.S., Eastern U.S. and Latin America as indicated on your web site at http://www.clearchanneloutdoor.com/corporate/officers.htm. |
The Company reviewed the guidance in EITF D-101 and determined that each of its U.S. markets,
Canada, Mexico, Peru and Brazil constitute components. Each of these components constitutes a
business, discrete financial information is available for each component and each
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component is regularly reviewed by segment management. The segment manager of the Americas is its President/
Chief Executive Officer Clear Channel Americas and Asia Divisions. The discrete financial
information regularly reviewed by the segment manager provides information by U.S. market, Canada,
Mexico, Peru and Brazil.
The Company determined that each of its U.S. markets are components and should be aggregated and
deemed a single reporting unit for purposes of impairment testing because they have similar
economic characteristics.
The Company reviewed the following guidance in EITF D-101 to make its determination that its
components have similar economic characteristics, noting that EITF D-101 states the assessment
should be more qualitative than quantitative:
The manner in which an entity operates its business and the nature of those operations
The Company operates its Americas segment as part of a national platform. The national platform
was created primarily through the acquisitions of Eller Media Company in 1997, the acquisition of
Universal Outdoor in 1998 and the acquisition of the Ackerley group in 2002. The Companys
strategy is to use the national platform to increase cash flow by providing advertisers a one-stop
solution for multiple market advertisements and to lower expenses through the consolidation of
numerous processes. Subsequent acquisitions have consisted primarily of one-off billboard
acquisitions to fill out the Companys presence in each of its markets. These acquisitions gave
the Company a presence in 49 of the largest 50 markets in the United States, including all of the
20 largest markets.
To operate the national platform, the Company has established centralized systems. For example,
the Company has a centralized sales force to sell national advertising across its platform, its
accounts receivable are centralized, it has a centralized real estate group, a centralized capital
investment group, a centralized lease accounting and billing system, a centralized creative group
and a master customer database.
The Company has an Executive Vice President of Sales and Marketing that is responsible for managing
sales across the Companys national platform. This involves making sure that the national platform
is utilized in the most effective manner. The Company has also invested in technology that allows all account executives access
to information regarding all of the advertising display options available across the national
platform. Further, the technology allows the account executives to sell advertising across the
national platform.
The Company also has a national sales force that works directly with national sales agencies. The
Company believes that its scale is a competitive advantage and allows it to drive shared
revenues. The Company defines shared revenues as advertiser buys across multiple markets. For
instance, the Company has an account executive that sells advertisements for a large agency in
Atlanta. The advertisements run in Atlanta are considered local revenue, but as part of the
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advertising campaign, the agency will also buy advertisements in New York, Dallas and San
Francisco. The advertisements run in the markets outside of Atlanta are considered shared
revenues. Typically, agency buys are for multiple markets in the same advertising campaign and
thus generate shared revenues. Approximately 40% of the Companys revenues are shared and the
Company will continue to focus on growing its shared revenues.
The account executive in Atlanta is able to generate a seamless proposal to sell the Atlanta, New
York, Dallas and San Francisco markets through access to Fast Pitch, which is an internal web based
proposal generation system. This program delivers real time availability for every market allowing
local account executives the ability to create multi or single market programs without having to
contact individual markets for current rates and availability. Fast Pitch also contains maps,
product sheets, market information, shipping information and product specifications. Inventory
availability is updated daily directly from each divisions scheduling system. Fast Pitch allows
the advertising agency to deal with a single point of contact in Atlanta and be able to buy
advertisement in multiple markets.
As posting instructions and final rates are determined, this information is shared with the markets
so they can ensure the advertising is displayed and invoiced. Though each market invoices
separately, the collections work is done at a consolidated level with an individual collector
assigned to the agency.
Whether goodwill is recoverable from the separate operations of each component business or from two
or more component businesses working in concert (which might be the case if the components are
economically interdependent)
The Company makes resource allocation decisions among its markets based on those markets
contributions to the national platform compared to the total resources required by the market.
Without the national platform, the cost structure for an individual market would be much different
because an individual market would not be able to share resources with other markets.
For example, the Company believes its scale has enabled cost-effective investment in new
display technologies, such as digital billboards, which it believes will continue to support future
growth. The Company has experienced significantly higher revenue per digital display than revenue
per vinyl display. Digital displays currently account for approximately 5% of the Companys
revenue. All of its digital displays are monitored in San Antonio to protect against hackers.
The Company is also in the process of building technology to link all digital displays together.
This will allow for a single advertisement to be run across the Companys network of displays in
all markets at the same time.
In addition, the Company does not have a history of disposing of individual markets. The Company
does make like-kind exchanges for markets across the nation. The Company believes that like-kind
exchanges demonstrate economic similarity because the exchanges are made to
reposition its national platform. The Companys scale allows it to make these like-kind exchanges,
which demonstrates that the national platform is the highest and best use of the assets to the
Company.
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The extent to which the component businesses share assets and other resources
The Company has research tools that enable its clients to better understand how displays can
successfully reach their target audiences and promote their advertising campaigns. For example,
Profiles is a mapping system used across the Companys markets, combining detailed mapping with
demographic and psychographic information and the Companys own retail and outdoor display
database. Profiles allows the Companys advertisers to make out-of-home decisions based on
demographic and lifestyle information and evaluate trade areas and run comparisons based on market
potential.
The Company also has proprietary creative software shared by its markets. MOVI© Presenter allows
clients to view prospective creative in a virtual outdoor setting. Creative is viewed at several
distances to test readability, contrast and impact. As discussed above, Fast Pitch is another
application exclusive to the Company. This program delivers real time availability for every
market allowing local account executives the ability to create multi or single market programs
without having to contact individual markets for current rates and availability. Fast Pitch also
contains maps, product sheets, market information, shipping information and product specifications.
Inventory availability is updated daily directly from each divisions scheduling system. Finally,
WebPOP is a proprietary program that allows the Companys customers the ability to monitor the
installation of their campaigns as well as view photographs and Proof of Performance reports
instantly.
The Company has a centralized creative group that provides advice on advertising campaigns for its
local, regional and national customers. Also, the Company is working with its clients and
advertising agencies to develop more sophisticated systems that will provide improved demographic
measurements of outdoor advertising to be used across its markets.
The Companys markets use The Traffic Audit Bureau (TAB), an independent third party-auditing
company to verify the number of impressions delivered by a display. The TAB is a tri-party
consortium funded by advertisers, advertising agencies and the outdoor industry. The TAB compiles
the daily effective circulation (DEC), which is based on traffic count, of a particular display.
This information is posted on-line and is available to TAB members. The information supplied by
TAB is one of the factors for determining the pricing of a particular display and is used as a
sales resource. Generally, the more impressions a display delivers, the higher the rate.
Currently, approximately 60% 65% of the Companys domestic revenues are placed by advertising
agencies which rely on the information provided by the TAB. The Company believes its national
resources give it the ability to maximize and sustain reach which it could not achieve at a
stand-alone basis.
The Company believes that each of its U.S. markets is a component and meets the requirements for
aggregation under FAS 142 and EITF D-101. The Company aggregates its U.S. markets into a single
reporting unit for purposes of the goodwill impairment test because of the similar economic
characteristics discussed above.
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| 11. | We note that based on an interim impairment test of your reporting units as of December 31, 2008, you recognized a non-cash impairment charge of $2.5 billion to reduce goodwill due to disclosed macroeconomic factors which had an adverse effect on the estimated cash flows and discount rates used in the discounted cash flow model. Please enhance your discussion by providing a more detailed analysis of how such macroeconomic factors impacted your estimated cash flows and the discount rates used in the discounted cash flow model. Such discussion could be provided in your MD&A. |
The Company has responded to this Staff comment by providing a marked excerpt of the Form 10-K.
Please see Attachment A.
Note B Intangible Assets and Goodwill
Definite-lived Intangibles, page 75
| 12. | Please disclose the information required by paragraph 52(a)(3) of SFAS 141 for your other definite-lived intangibles. Additionally, please disclose: |
| | The nature of the assets which comprise Other definite-lived intangibles | ||
| | The amount, if any, which was assigned to the Clear Channel trademark. In this regard, we note your disclosure on page 24 that Clear Channel Communications granted you the right to use the Clear Channel mark, logo, and name. |
The Other definite-lived intangibles in the post-merger period consist primarily of easements
providing access to the land under the Companys advertising structures. 99% of these easements
are permanent which the Company considers similar to owning the land and therefore are not
amortized. The Company did not consider the weighted average useful life to be meaningful as only
1% of the easements are amortized.
The Company did not assign value to the Clear Channel trademark.
Goodwill, page 77
| 13. | Tell us how you determined the push down adjustments allocated to each reporting units goodwill, and particularly, why 99.5% of the fair value adjustment was pushed down to the Americas segment/reporting unit. |
The push down adjustments were determined using a discounted cash flow model that allocated the
purchase price between the Companys segments/reporting units. Approximately 80% of the purchase
price pushed down to the Company was attributed to the Americas segment primarily due to its higher
profit margins. After pushing down the fair value of the underlying net assets to each
segment/reporting unit, the residual purchase price was allocated to goodwill. The push
down adjustments reflect the amounts necessary to bring the pre-merger balance of goodwill for each
segment/reporting unit to the residual purchase price allocated to goodwill.
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* * * *
In connection with responding to the Staffs comments, the Company acknowledges that:
| | the Company is responsible for the adequacy and accuracy of the disclosure in the filings; | ||
| | Staff comments or changes to disclosure in response to Staff comments do not foreclose the Commission from taking any action with respect to the filings; and | ||
| | the Company may not assert Staff comments as a defense in any proceeding initiated by the Commission or any person under the federal securities laws of the United States. |
If you have any questions regarding these responses, please contact Herb Hill at (210)
822-2828.
| Very truly yours, |
||||
| /s/ Herbert W. Hill, Jr. | ||||
| Herbert W. Hill, Jr. | ||||
| Senior Vice President and Chief Accounting Officer | ||||
| cc: | Randall T. Mays President and Chief Financial Officer |
Attachment A
Page 1 of 8
Page 1 of 8
Indefinite-lived Assets
We have approximately
64,000 billboard permits in our Americas segment. Our
billboard permits are effectively issued in perpetuity by state and local governments as they are
transferable or renewable at little or no cost. Permits typically include the location which
allows us the right to operate an advertising structure.
We recorded purchase accounting adjustments related to billboard permits of $2.0 billion as a
result of Clear Channel Communications merger and the related preliminary push-down accounting.
The fair value of the permits was determined using the direct valuation method as prescribed in SEC
Staff Announcement No. D-108, Use of the Residual Method to Value Acquired Assets Other Than
Goodwill. Under the direct valuation method, the fair value of the permits was calculated at the
market level as prescribed by EITF 02-07, Unit of Accounting for Testing Impairment of
Indefinite-Lived Intangible Assets. We utilize Mesirow Financial Consulting, LLC, a third party
valuation firm, to assist in the development of the assumptions and determination of the fair value
of our permits.
Under the direct valuation method, it is assumed that rather than acquiring indefinite-lived
intangible assets as part of a going concern business, the buyer hypothetically obtains develops
indefinite-lived intangible assets and builds a new operation with similar attributes from scratch.
Thus, the buyer incurs start-up costs during the build-up phase which are normally associated with
going concern value. Initial capital costs are deducted from the discounted cash flows model which
results in value that is directly attributable to the indefinite-lived intangible assets.
Our key assumptions using the direct valuation method are market revenue growth rates, market
share, profit margin, duration and profile of the build-up period, estimated start-up capital costs
and losses incurred during the build-up period, the risk-adjusted discount rate and terminal
values. This data is populated using industry normalized information representing an average
permit within a market.
Management uses its internal forecasts to estimate industry normalized information as it
believes these forecasts are similar to what a market participant would expect to generate. This
Attachment A
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is due to the pricing structure and demand for outdoor signage in a market being relatively
constant regardless of the owner of the operation. Management also relied on its internal
forecasts because there is limited to no available public data for each of its markets.
The build-up period represents the time it takes for the hypothetical start-up operation to
reach normalized operations in terms of achieving a mature market share and profit margin.
Management believes that a one-year build-up period is required for a start-up operation to erect
the necessary structures and obtain advertisers. It is estimated that a start-up operation would
be able to obtain 10% of the potential revenues in the first year of operations and 100% in the
second year. However, the cost structure is expected to reach the normalized level over three
years due to the time required to recognize the synergies and cost savings associated with the
ownership of the permits within the market.
For the normalized operating margin in the third year, management assumed a hypothetical
business would operate at the industry average margin of 46% based on an analysis of comparable
companies. For the first and second year of operations, the operating margin was assumed to be 50%
of the normalized operating margin. 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 beyond the discrete build-up projection period. 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 weighted average cost of capital (WACC) using both current
industry WACCs and historical trends in the industry.
We calculated the WACC as of the valuation date and also 1-year, 2-year, and 3-year quarterly
averages. The WACC is 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 estimate of the typical capital structure was based on observing typical
proportions of interest-bearing debt and common equity of publicly traded companies in the outdoor
advertising industry. Our calculation of the WACC considered both current industry WACCs and
historical trends in the industry. The calculation of WACC requires the pre-tax 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 an S&P BB rated corporate bond for the pre-tax rate of return
on debt. The rate of return on equity capital was estimated using the Modified Capital Asset
Pricing Model (MCAPM). Inputs to the MCAPM 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 WACC used in the discounted cash flow models to determine the fair value purchase
accounting adjustments was
Attachment A
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Page 3 of 8
8.5%. Applying the WACC, 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 fixed assets needed to erect
the necessary advertising structures.
We test our billboard permits for impairment annually, or more frequently if events or changes
in circumstances indicate that the billboard permit might be impaired. The United States and
global economies are undergoing a period of economic uncertainty, which has caused, among other
things, a general tightening in the credit markets, limited access to the credit markets, lower
levels of liquidity and lower consumer and business spending. These disruptions in the credit and
financial markets and the continuing impact of adverse economic, financial and industry conditions
on the demand for advertising negatively impacted the key assumptions in the discounted cash flow
models used to value our permits.
Our
permits were aggregated into a single unit of accounting at the market level in accordance
with EITF 02-07. The fair value of each unit of accounting as
of December 31, 2008 was determined using the guidance
in . SEC
Staff Announcement No. D-108 and EITF 02-07 in the same manner described above. Our impairment
test consisted of a comparison of the fair value of the billboard permits at the market level with
their carrying amount. If the carrying amount of the billboard permit exceeds its fair value, an
impairment loss is recognized equal to that excess. After an impairment loss is recognized, the
adjusted carrying amount of the billboard permit is its new accounting basis.
While we believe we had made reasonable estimates and utilized reasonable assumptions to
calculate the fair value of our permits, it is possible a material change could occur. If our
future actual results are not consistent with our estimates, we could be exposed to future
Attachment A
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Page 4 of 8
impairment losses that could be material to our results of operations. The following table shows
the impact on the fair value of our billboard permits of a 100 basis point decline in our discrete
and terminal period revenue growth rate, profit margin and discount rate assumptions, respectively:
| (in thousands) | ||||||||||||
| Indefinite-lived intangible | Revenue growth rate | Profit margin | Discount rates | |||||||||
Billboard permits |
$ | (508,300 | ) | $ | (84,000 | ) | $ | 770,200 | ||||
The following table shows the change to the billboard permit impairment amount that would have
occurred using hypothetical percentage reductions in fair value, had the hypothetical reduction in
fair value existed at the time of our impairment testing:
| (in thousands) | ||||
| % change in fair value | Change to impairment | |||
5% |
$ | 75,627 | ||
10% |
$ | 151,767 | ||
15% |
$ | 227,907 | ||
Goodwill represents the excess of the purchase price over the fair value of identifiable net
assets acquired in business combinations. We recorded purchase accounting adjustments related to
goodwill of $2.6 billion as a result of Clear Channel Communications merger and the related
preliminary push-down accounting. Goodwill was allocated to each reporting unit based on a
discounted cash flow model used to determine its enterprise value. We utilize Mesirow Financial
Consulting, LLC, a third party valuation firm, to assist in the development of the assumptions and
determination of the fair value of our reporting units.
The discounted cash flow approach we use for valuing goodwill involves estimating future cash
flows expected to be generated from the related assets, discounted to their present value using a
risk-adjusted discount rate. Terminal values are also estimated and discounted to their present
value.
We forecasted revenue, expenses, and cash flows over a ten-year period for each of our
reporting units. We also calculated a normalized residual year which represents the perpetual
cash flows of each reporting unit. The residual year cash flow was capitalized to arrive at the
terminal value of the reporting unit. The forecasted cash flows were compared to the Companys
historical operating results and industry results and expectations to form a basis for
reasonableness.
Attachment A
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Page 5 of 8
We calculated the WACC as of Clear Channel Communications merger date and also 1-year,
2-year, and 3-year quarterly averages. WACC is an overall rate based upon the individual rates of
return for invested capital (equity and interest bearing debt). The WACC is 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 estimate of the typical capital
structure was based on observing typical proportions of interest-bearing debt and common equity of
publicly traded companies in outdoor advertising industry. Our calculation of the WACC considered
both current industry WACCs and historical trends in the industry. The calculation of WACC
requires the pre-tax 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 an S&P BB rated corporate
bond for the pre-tax rate of return on debt. The rate of return on equity capital was estimated
using the Modified Capital Asset Pricing Model (MCAPM). Inputs to the MCAPM 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 WACC used in the discounted cash flow models to
determine the fair value purchase accounting adjustments was 8.5%. Applying the WACC, the present
value of cash flows during the discrete projection period and terminal value were added to estimate
the fair value of the reporting units.
We also utilized the market approach to provide a test of reasonableness to the results of the
discounted cash flow model. The market approach indicates the fair value of the invested capital
of a business based on a companys market capitalization (if publicly-traded) and a
comparison of the business to comparable publicly traded companies and transactions in its
industry. This approach can be estimated through the quoted market price method, the market
comparable method, and the market transaction method.
One indication of the fair value of a business is the quoted market price in active markets
for the debt and equity of the business. The quoted market price of equity multiplied by the
number of shares outstanding yields the fair value of the equity of a business on a marketable,
minority basis. We then apply a premium for control and add the estimated fair value of
interest-bearing debt to indicate the fair value of the invested capital of the business on a
marketable, controlling basis.
The market comparable method provides an indication of the fair value of the invested capital
of a business by comparing it to publicly-traded companies in similar lines of business. The
conditions and prospects of companies in similar lines of business depend on common factors such as
overall demand for their products and services. An analysis of the market multiples of companies
engaged in similar lines of business yields insight into investor perceptions and, therefore, the
value of the subject business. These multiples are then applied to the operating results of the
subject business to estimate the fair value of the invested capital on a marketable, minority
basis. We then apply a premium for control to indicate the fair value of the business on a
marketable, controlling basis.
Attachment A
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The market transaction method estimates the fair value of the invested capital of a business
based on exchange prices in actual transactions and on asking prices for controlling interests in
similar companies recently offered for sale. This process involves comparison and correlation of
the subject business with other similar companies that have recently been purchased.
Considerations such as location, time of sale, physical characteristics, and conditions of sale are
analyzed for comparable businesses.
The three variations of the market approach indicated that the fair value determined by our
discounted cash flow model was within a reasonable range of outcomes.
We review goodwill for potential impairment in the third quarter of each year using a
discounted cash flow model to determine the fair value of our reporting units. Our impairment test
is a two-step process. The first step, used to screen for potential impairment, compares the fair
value of the reporting unit with its carrying amount, including goodwill. The second step, used to
measure the amount of the impairment loss, compares the implied fair value of the reporting unit
goodwill with the carrying amount of that goodwill. Each of our U.S. markets is a component. We
aggregate our U.S. markets into a single reporting unit for purposes of the goodwill impairment
test using the guidance in EITF D-101, Clarification of Reporting Unit Guidance in Paragraph 30 of
FASB Statement No. 142. We also determined that Canada, Mexico, Peru, Brazil and each country in
our International segment constitutes a reporting unit.
We test goodwill at interim dates if events or changes in circumstances indicate that goodwill
might be impaired. The United States and global economies are undergoing a period of economic
uncertainty, which has caused, among other things, a general tightening in the credit
markets, limited access to the credit markets, lower levels of liquidity and lower consumer
and business spending. These disruptions in the credit and financial markets and the continuing
impact of adverse economic, financial and industry conditions on the demand for advertising
negatively impacted the key assumptions in the discounted cash flow models used to value our
reporting units as part of the purchase price allocation. As a result of these factors, we
performed an interim impairment test as of December 31, 2008 As a result, wewhich resulted in recognized a non-cash
impairment charge of $2.5 billion to reduce our goodwill. The carrying value of our reporting units approximated their fair value after recognition
of the non-cash impairment charge.
Attachment A
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Page 7 of 8
In addition, the disruptions in the credit and financial markets and the macroeconomic risks
in the global economy negatively impacted the WACC of each of our reporting units. In estimating
the concluded WACC for valuing our reporting units for purposes of impairment testing, we applied
an adjustment to the WACC calculated to value our permits as of the impairment test date. The
adjustment captured the unsystematic risk (i.e. company/asset specific risk). Due to the economic
uncertainty, market instability and nature of the cash flow projections, we determined that 300
basis point premium over the industry WACC was warranted as of the date of the impairment test.
The concluded WACC was 12.5%.
Attachment A
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Page 8 of 8
A breakdown of our goodwill balance as of December 31, 2008 by reporting unit is as follows:
| (In thousands) | ||||
| Reporting Unit | Goodwill balance | |||
Americas (1) |
$ | 892,598 | ||
France |
84,498 | |||
Switzerland |
56,885 | |||
Australia |
28,179 | |||
Belgium |
25,928 | |||
Sweden |
23,677 | |||
Norway |
18,808 | |||
Ireland |
14,285 | |||
All others (2) |
35,283 | |||
Total |
$ | 1,180,141 | ||
| (1) | Approximately 9% of this balance relates to goodwill in Canada, Mexico, Peru and Brazil. | |
| (2) | No amount within this category represents more than 1% of total goodwill. |
While we
believe we made reasonable estimates and utilized reasonable assumptions to
calculate the fair value of our reporting units, it is possible a material change could occur. If
future results are not consistent with our assumptions and estimates, we may be exposed to
impairment charges in the future. The following table shows the impact on the fair value of each
of our reportable segments of a 100 basis point decline in our discrete and terminal period revenue
growth rate, profit margin and discount rate assumptions, respectively:
| (in thousands) | ||||||||||||
| Reportable segment | Revenue growth rate | Profit margin | Discount rates | |||||||||
Americas Outdoor |
$ | (380,000 | ) | $ | (90,000 | ) | $ | 420,000 | ||||
International Outdoor |
$ | (190,000 | ) | $ | (160,000 | ) | $ | 90,000 | ||||
The following table shows the change to the impairment amount to goodwill that would have
occurred using hypothetical percentage reductions in fair value, had the hypothetical reduction in
fair value existed at the time of our impairment testing:
| (In thousands) | ||||||||||||
| Reportable segment | 5% | 10% | 15% | |||||||||
Americas Outdoor |
$ | 168,992 | $ | 341,303 | $ | 516,303 | ||||||
International Outdoor |
$ | 19,139 | $ | 40,866 | $ | 65,909 | ||||||