Note 5 – Goodwill, Spectrum Licenses and Intangible Assets
Goodwill and Spectrum Licenses
Changes in carrying values of goodwill and spectrum licenses were as follows:
|
| | | | | | | | | | | | | | | | | | | |
(in millions) | December 31,
2011 | | Net Changes | | December 31,
2012 | | Net Changes | | December 31,
2013 |
Goodwill, gross | $ | 18,465 |
| | $ | — |
| | $ | 18,465 |
| | $ | 1,683 |
| | $ | 20,148 |
|
Accumulated impairment | (10,331 | ) | | (8,134 | ) | | (18,465 | ) | | — |
| | (18,465 | ) |
Goodwill | $ | 8,134 |
| | $ | (8,134 | ) | | $ | — |
| | $ | 1,683 |
| | $ | 1,683 |
|
| | | | | | | | | |
Spectrum licenses, gross | $ | 23,251 |
| | $ | 1,701 |
| | $ | 24,952 |
| | $ | 2,895 |
| | $ | 27,847 |
|
Accumulated impairment | (10,437 | ) | | 35 |
| | (10,402 | ) | | 677 |
| | (9,725 | ) |
Spectrum licenses | $ | 12,814 |
| | $ | 1,736 |
| | $ | 14,550 |
| | $ | 3,572 |
| | $ | 18,122 |
|
Acquisition of Goodwill and Spectrum Licenses
Changes in 2013 include goodwill and spectrum licenses of $1.7 billion and $3.8 billion, respectively, acquired through the business combination with MetroPCS. See Note 2 – Business Combinations for further information. In addition, T-Mobile completed a transaction to purchase AWS spectrum from United States Cellular Corporation (“U.S. Cellular”) for $308 million. Additionally, the Company entered into an agreement with Verizon Communications Inc. (“Verizon”) to exchange certain AWS spectrum and Personal Communications Service spectrum (“PCS spectrum”) in November 2013. The transaction is subject to regulatory approval. A non-cash gain is expected to be recognized upon close of the transaction. Spectrum licenses to be transferred under various agreements are classified as held for sale and included in other current assets at their carrying value of $614 million as of December 31, 2013. Spectrum licenses classified as held for sale were not significant as of December 31, 2012.
During the year ended December 31, 2012, the carrying value of spectrum licenses increased primarily as a result of spectrum acquisition activities. T-Mobile acquired spectrum licenses valued at $1.2 billion from Deutsche Telekom, which Deutsche Telekom had received from AT&T as a component of the break-up consideration related to the terminated acquisition of T-Mobile USA by AT&T in 2011. In addition, T-Mobile completed a transaction to purchase from and exchange with Verizon certain AWS spectrum. As a result of the transaction, the Company received AWS spectrum and transferred certain of its AWS spectrum along with a cash payment to Verizon. A gain of $156 million was recognized as a result of this transaction and is recorded in other, net.
Goodwill Impairment and Indefinite-Lived Intangible Assets Assessment
The Company's annual impairment assessment of goodwill and indefinite-lived intangible assets (spectrum licenses) as of December 31, 2013 resulted in no impairment. The fair value of goodwill is determined using a market method, which is based on market capitalization. Market capitalization is calculated based on the price of our common stock and number of common stock outstanding. The Company estimated the fair value of indefinite-lived intangible assets (spectrum licenses) using the Greenfield approach, which is an income approach.
In October 2012, the business combination of T-Mobile USA and MetroPCS was announced. See Note 2 – Business Combinations for further information. The Company determined the announced transaction was a triggering event for a goodwill impairment assessment. The fair value of T-Mobile USA implied by using the market value of MetroPCS and the exchange terms contemplated in the BCA was less than the carrying amount, including goodwill, of the Company's single reporting unit. The Company used the fair value implied by the transaction to estimate the fair value of the reporting unit in step one of its goodwill impairment test as it incorporates observable inputs that are considered as Level 2 in the fair value hierarchy. As the carrying value exceeded the fair value of the reporting unit, the Company performed the second step in the goodwill impairment test.
In the second step, the Company concluded that the implied goodwill was zero, and recognized a noncash impairment charge of $8.1 billion for the year ended December 31, 2012. The Company also recorded a related deferred tax benefit of $74 million for the year ended December 31, 2012 to reflect the impact on the respective deferred tax liability due to the reduced book to tax basis difference of goodwill. The Company attributes this impairment to the business impacts from the highly competitive environment and the ongoing challenges in attracting and retaining branded postpaid customers.
The Company's annual impairment assessment of indefinite-lived intangible assets (spectrum licenses) as of December 31, 2012 resulted in no impairment. The Company estimated the fair value of indefinite-lived intangible assets (spectrum licenses) using the Greenfield approach, which is an income approach.
In its annual goodwill impairment test as of December 31, 2011, the carrying value of the reporting unit was determined to exceed its fair value due to the Company experiencing legal and regulatory challenges against a planned sale of the reporting unit, subscriber declines and lower service revenues. The Company estimated the fair value of the reporting unit using an income approach, specifically based on the present value of estimated future cash flows. Future cash flows were based on the Company's estimates of revenues, earnings before interest, tax, depreciation and amortization as a percentage of service revenues ("EBITDA margin") and a long-term growth rate taking into consideration expected industry and market conditions. The cash flows were discounted using a weighted average cost of capital reflecting the risks associated with the business and the projected cash flows. As the estimated fair value of the reporting unit was lower than its carrying value, the Company performed the second step of the impairment test to determine the amount of the goodwill impairment.
In its annual impairment test of spectrum licenses as of December 31, 2011, the Company estimated the fair value using the Greenfield approach, which is an income approach. Future cash flows were based on the Company's estimates and assumptions of revenues, EBITDA margin, network build-out period, and a long-term growth rate for a market participant taking into consideration expected industry and market conditions. The cash flows were discounted using a weighted average cost of capital reflecting the risks associated with the business and the projected cash flows. Due to adverse changes in the competitive landscape and regulatory environment in 2011, management changed its assumptions on which market participants would be able to transact for the asset leading to declines in the estimated cash flows used to value the spectrum licenses. As the estimated fair value of the spectrum licenses was lower than its carrying value, the Company recognized the impairment charge.
In connection with its annual assessment for impairment of goodwill and indefinite-lived intangible assets spectrum licenses as of December 31, 2011, the Company recorded a noncash impairment charge of $3.9 billion against the carrying value of goodwill and $2.5 billion against the carrying value of its spectrum licenses for the year ended December 31, 2011. The Company also recorded a related deferred tax benefit of $1.0 billion for the year ended December 31, 2011 to reflect the impact on the respective deferred tax liability due to the reduced book to tax basis difference of goodwill and spectrum licenses.
Other Intangible Assets
The components of intangible assets were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Useful Lives | | December 31, 2013 | | December 31, 2012 |
(in millions) | | Gross
Amount | | Accumulated Amortization | | Net
Amount | | Gross
Amount | | Accumulated Amortization | | Net
Amount |
Customer lists | Up to 6 years | | $ | 1,313 |
| | $ | (419 | ) | | $ | 894 |
| | $ | 209 |
| | $ | (207 | ) | | $ | 2 |
|
Trademarks and patents | Up to 12 years | | 292 |
| | (38 | ) | | 254 |
| | 55 |
| | (8 | ) | | 47 |
|
Other | Up to 28 years | | 75 |
| | (19 | ) | | 56 |
| | 58 |
| | (28 | ) | | 30 |
|
Other intangible assets | | | $ | 1,680 |
| | $ | (476 | ) | | $ | 1,204 |
| | $ | 322 |
| | $ | (243 | ) | | $ | 79 |
|
Customer lists, trademarks and other intangible assets include $1.1 billion, $233 million and $39 million respectively, with useful lives of 6 years, 8 years, and up to 28 years, respectively, related to the business combination with MetroPCS. See Note 2 – Business Combinations for further information.
Amortization expense for intangible assets subject to amortization was $255 million, $27 million and $51 million for the years ended December 31, 2013, 2012 and 2011, respectively. Estimated aggregate future amortization expense for intangible assets subject to amortization as of December 31, 2013 are $333 million for the year ending 2014, $279 million in 2015, $223 million in 2016, $163 million in 2017, $104 million in 2018 and $102 million thereafter.
