Goodwill, Intangible Assets and Impairment

Goodwill

The Company has goodwill of $315 million at December 31, 2013. The Company performed its annual impairment test of goodwill as of October 1, 2013 on the SuperMedia reporting unit. Based on that analysis, it was determined that the carrying value of the SuperMedia reporting unit including goodwill exceeded the fair value of the SuperMedia reporting unit, requiring the Company to perform step two of the goodwill impairment test to determine the amount of impairment loss, if any. This test resulted in a goodwill impairment of $74 million ($73 million after-tax), which was recognized in the Company’s consolidated statement of comprehensive income (loss) for the year ended December 31, 2013.

In performing step one of the impairment test, the Company estimated the fair value of the SuperMedia reporting unit using a combination of the income and market approaches with greater emphasis placed on the income approach, for purposes of estimating the total enterprise value of the SuperMedia reporting unit.

The income approach was based on a discounted cash flow analysis and calculated the fair value of the reporting unit by estimating the after-tax cash flows attributable to the reporting unit and then discounting the after-tax cash flows to a present value, using the weighted average cost of capital (“WACC”). The WACC utilized in the Company’s analysis using the income approach was 19%. The WACC is an estimate of the overall after-tax rate of return required for equity and debt holders of a business enterprise. The reporting unit’s cost of equity and debt was developed based on data and factors relevant to the economy, the industry and the reporting unit. The cost of equity was estimated using the capital asset pricing model (“CAPM”). The CAPM uses a risk-free rate of return and an appropriate market risk premium for equity investments and the specific risks of the investment. The analysis also included comparisons to a group of guideline companies engaged in the same or similar businesses. The cost of debt was estimated using the current after-tax average borrowing cost that a market participant would expect to pay to obtain its debt financing assuming the target capital structure.

To determine the fair value of the SuperMedia reporting unit based on the market approach, the Company utilized the guideline publicly traded company method. Under the guideline publicly traded company method, market multiples ratios were applied to the reporting unit’s earnings with consideration given to the Company’s size, product offerings, growth and other relevant factors compared to those guideline companies. The guideline companies selected were engaged in the same or similar line of business as the Company. Market multiples were then selected based on consideration of risk, growth and profitability differences between the Company and the guideline companies. The selected market multiples were then multiplied by the Company’s 2014 forecasted earnings to arrive at an estimate of fair value for the Company.

In performing step two of the goodwill impairment test, the Company compared the implied fair value of the SuperMedia reporting unit’s goodwill to its carrying value of goodwill. This test resulted in a goodwill impairment of $74 million ($73 million after-tax), which was recognized as impairment charge in the Company’s consolidated statement of comprehensive income (loss) for the year ended December 31, 2013. This charge had no impact on our cash flows or on our compliance with debt covenants.

The fair value estimates used in the goodwill impairment analysis required significant judgment. The Company’s fair value estimates for purposes of determining the goodwill impairment charge are considered Level 3 fair value measurements. We based our fair value estimates on assumptions of future revenues and operating margins and assumptions about the overall economic climate and the competitive environment of our business. Our estimates assume revenue will decline into the foreseeable future. There can be no assurances that our estimates and assumptions will prove to be accurate predictions of the future. If our assumptions regarding business plans, competitive environments or anticipated operating results are not correct, we may be required to record additional goodwill impairment charges in the future.

The following table sets forth the balance of the Company’s goodwill and accumulated impairment losses as of December 31, 2013 and 2012.



	Goodwill Gross		Accumulated Impairment Losses			Goodwill Net
	(in millions)
Beginning balance at January 1, 2012	$	—	$	—		$	—
Additions	—		—			—
Impairments	—		—			—
Ending balance at December 31, 2012	—		—			—
Additions	389		—			389
Impairments	—		(74		)	(74		)
Ending balance at December 31, 2013	$	389	$	(74	)	$	315

Goodwill of $389 million was established as a result of the merger with SuperMedia on April 30, 2013, and represented the expected synergies and residual benefits that Dex Media believes will result from the combined operations. The Company determined that the $389 million of acquired goodwill is not deductible for tax purposes. For additional information related to goodwill and the merger with SuperMedia, see Note 2.

During the second quarter of 2011, the Company concluded there were indicators of impairment and as a result, we performed an impairment test of our goodwill. Based upon the testing results of our goodwill, we determined that the remaining goodwill assigned to each of our reporting units was fully impaired and thus recognized an aggregate goodwill impairment charge of $801 million during the year ended December 31, 2011. Please refer to the Dex One Annual Report on Form 10-K for the year ended December 31, 2011 for additional information including the methodology, estimates and assumptions used in our impairment testing.

Intangibles

The Company has definite-lived intangible assets of $1,381 million as of December 31, 2013. Intangible assets are recorded separately from goodwill if they meet certain criteria. The Company reviews its definite-lived intangible assets whenever events or circumstances indicate that their carrying value may not be recoverable. The Company evaluated its definite-lived intangible assets based on current economic and business indicators and determined there were indicators of impairment as of October 1, 2013.

For the impairment test, the Company’s definite-lived intangible assets were evaluated for each reporting unit, which is the lowest level of identifiable cash flows. The impairment test was performed by comparing the carrying value of each reporting unit, including goodwill with the undiscounted expected future cash flows associated with each respective reporting unit. The undiscounted expected future cash flows were computed utilizing the income approach. For three of our reporting units (RHD, DME and DMW), the carrying value of the reporting unit exceeded the undiscounted expected future cash flows of the respective reporting unit, indicating impairment.

To compute the amount of the impairment, the Company compared the carrying value of each of the reporting units to the fair value of each impacted reporting unit. The Company estimated the fair value of the impacted reporting units using a combination of the income and market approaches with greater emphasis placed on the income approach, for purposes of estimating the total enterprise value of the reporting unit. As a result, the Company recorded an impairment of $384 million for the year ended December 31, 2013 and is shown as impairment charge on the Company's consolidated statement of comprehensive income (loss). The impairment loss reduced the carrying value of the definite-lived assets of each of the impacted reporting units on a pro rata basis using the relative carrying amounts of those assets. None of the carrying amounts were reduced below their respective fair value.

The following table sets forth the Company's impairment charge by type of intangible asset.



	(in millions)
Directory services agreements	$	253
Client relationships	38
Trademarks and domain names	86
Patented technologies	7
Total impairment charge	$	384

The following table sets forth the details of the Company's intangible assets at December 31, 2013 and 2012.



	At December 31, 2013						At December 31, 2012
	Gross		Accumulated Amortization		Net		Gross		Accumulated Amortization		Net
	(in millions)
Directory services agreements	$	666	$	97	$	569	$	1,330	$	363	$	967
Client relationships	924		348		576		735		217		518
Trademarks and domain names	222		29		193		380		84		296
Patented technologies	42		4		38		75		30		45
Advertising commitment	11		6		5		11		4		7
Total intangible assets	$	1,865	$	484	$	1,381	$	2,531	$	698	$	1,833

Included in the above amounts at December 31, 2013 are the intangible assets acquired as a result of the merger with SuperMedia on April 30, 2013. For additional information related to the acquisition of SuperMedia's intangible assets, see Note 2.

The Company also evaluated the estimated remaining useful lives of its intangible assets as of April 30, 2013 and October 1, 2013 and concluded that the estimated remaining useful lives needed to be shortened to properly reflect the remaining period that each intangible asset is expected to contribute to future cash flows. To determine the amount to amortize in each year of their estimated remaining useful lives, the Company used the income forecast method, which is an accelerated amortization method that assumes the remaining value of these intangible assets is greater in the earlier years and then steadily declines over time based on expected future cash flows. The changes to the estimated remaining useful lives are reflected in the following table.



	Estimated Remaining Useful Lives
	Previous	Revised April 30, 2013	Revised October 1, 2013

Directory services agreements	9 years	5 years	5 years
Client relationships	8 years	4 years	3 years
Trademarks and domain names	8 years	6 years	5 years
Patented technologies	5 years	5 years	4 years
Advertising commitment	5 years	3 years	3 years

Amortization expense for intangible assets for the years ended December 31, 2013, 2012 and 2011 was $703 million, $350 million and $187 million respectively. The year ended December 31, 2013 intangible asset amortization expense was impacted by the inclusion of SuperMedia's May 1, 2013 through December 31, 2013 amortization expense of $209 million. Additionally, amortization expense related to Dex One existing intangibles assets increased $144 million for the year ended December 31, 2013, primarily due to the change in estimated remaining useful lives.

The annual amortization expense for intangible assets is estimated to be $587 million in 2014, $373 million in 2015, $237 million in 2016, $103 million in 2017, and $81 million in 2018.