NOTE 7. BROADCAST LICENSES

We account for broadcast licenses in accordance with FASB ASC Topic 350 Intangibles—Goodwill and Other. We do not amortize broadcast licenses, but rather test for impairment annually or more frequently if events or circumstances indicate that the value may be impaired. In the case of our broadcast radio stations, we would not be able to operate the properties without the related broadcast license for each property. Broadcast licenses are renewed with the Federal Communications Commission (“FCC”) every eight years for a nominal fee that is expensed as incurred. We continually monitor our stations’ compliance with the various regulatory requirements that are necessary for the FCC renewal and all of our broadcast licenses have been renewed at the end of their respective periods. We expect all of our broadcast licenses to be renewed in the future and therefore, we consider our broadcast licenses to be indefinite-lived intangible assets. We are not aware of any legal, competitive, economic or other factors that materially limit the useful life of our broadcast licenses. The weighted-average period before the next renewal of our broadcasting licenses is 2.6 years.

The following table presents the changes in broadcasting licenses that include acquisitions and divestitures of radio stations and FM translators as discussed in Note 3—Acquisitions and Recent Transactions.

 

		Year Ended December 31,
		2017				2018
		(Dollars in thousands)
Balance, beginning of period before cumulative loss on impairment		$	494,058			$	486,455
Accumulated loss on impairment			(105,541	)			(105,541	)
Balance, beginning of period after cumulative loss on impairment			388,517				380,914
Acquisitions of radio stations			191				6,270
Acquisitions of FM translators and construction permits			198				19
Capital projects to improve broadcast signal and strength			5				—
Abandoned capital projects			—				(40	)
Disposition of radio stations			(7,997	)			(8,013	)
Impairments based on the estimated fair value of broadcast licenses			—				(2,834	)
Balance, end of period before cumulative loss on impairment		$	486,455			$	484,691
Accumulated loss on impairment			(105,541	)			(108,375	)
Balance, end of period after cumulative loss on impairment		$	380,914			$	376,316

Broadcast Licenses Impairment Test

We perform our annual impairment testing during the fourth quarter of each year, which coincides with our budget and planning process for the upcoming year.

The unit of accounting we use to test broadcast licenses is the cluster level, which we define as a group of radio stations operating in the same geographic market, sharing the same building and equipment and managed by a single general manager. The cluster level is the lowest level for which discrete financial information and cash flows are available and the level reviewed by management to analyze operating results.

The first step of our impairment testing is to perform a qualitative assessment as to whether it is more likely than not that a broadcast license is impaired. This qualitative assessment requires significant judgment when considering the events and circumstances that may affect the estimated fair value of our broadcast licenses. We review the significant assumptions and key estimates applicable to our prior year estimated fair value calculations to assess if events and circumstances have occurred that could affect these assumptions and key estimates. We also review internal benchmarks and the economic performance for each market cluster to assess if it is more likely than not that impairment exists.

As part of our qualitative assessment, we calculate the excess fair value, or the amount by which our prior year estimated fair value exceeds the current year carrying value. Based on our analysis and review, including the financial performance of each market, we believe that a 25% excess fair value margin is a conservative and reasonable benchmark for our qualitative analysis. Markets with an excess fair value of 25% or more, which have had no significant changes in the prior year assumptions and key estimates, are not likely to be impaired.

Of the 17 markets for which an independent third party fair value appraisal was obtained in the prior year, one market was sold, leaving 16 markets applicable to the current year. The table below presents the percentage within a range by which our prior year start-up income estimated fair value exceeds the current year carrying value of our broadcasting licenses:

 

		Geographic Market Clusters as of December 31, 2018 Percentage Range By Which 2017 Estimated Fair Value Exceeds 2018 Carrying Value
		£25%				>26%-50%				>51% to 75%				> +than 76%
Number of accounting units			9				1				4				2
Broadcast license carrying value (in thousands)		$	200,098			$	14,743			$	52,051			$	9,558

The second part of our qualitative assessment consists of a review of the financial operating results for each market cluster. Radio stations are often sold on the basis of a multiple of projected cash flow, or Station Operating Income (“SOI”) defined as net broadcast revenue less broadcast operating expenses. See Item 6—Selected Financial Data within this annual report for information on SOI, a non-GAAP measure. Numerous trade organizations and analysts review these radio station sales to track SOI multiples applicable to each transaction. Based on published reports and analysis of market transactions, we believe industry benchmarks to be in the six to seven times cash flow range. We elected an SOI benchmark of four as a conservative indicator of fair value. Based on this qualitative review, we identified 16 markets subject to further testing that were not tested in the prior year and one market for which a valuation was obtained as part of the broadcast goodwill testing.

The table below shows the percentage within a range by which our estimated fair value exceeded the carrying value of our broadcasting licenses for these 16 remaining market clusters:

 

		Geographic Market Clusters as of December 31, 2018 Tested due to SOI Multiple and length of time from prior valuation—Percentage Range by Which Prior Valuation Exceeded 2017 Carrying Value
		£25%				>26%-50%				>51% to 75%				> +than 76%
Number of accounting units			—				2				—				14
Broadcast license carrying value (in thousands)		$	—			$	7,692			$	—			$	95,039

 

Based on our assessment we engaged Bond & Pecaro, an independent third-party appraisal and valuation firm, to assist us with determining the enterprise value of 26 of our market clusters. The estimated fair value of each market cluster was determined using the Greenfield Method, a form of the income approach. The premise of the Greenfield Method is that the value of a broadcast license is equivalent to a hypothetical start-up in which the only asset owned by the station as of the valuation date is the broadcast license. This approach eliminates factors that are unique to our operation of the station, including its format and historical financial performance. The method then assumes the entity has to purchase, build, or rent all of the other assets needed to operate a comparable station to the one in which the broadcast license is being utilized as of the valuation date. Cash flows are estimated and netted against all start-up costs, expenses and investments necessary to achieve a normalized and mature state of operations, thus reflecting only the cash flows directly attributable to the broadcast license. A multi-year discounted cash flow approach is then used to determine the net present value of these cash flows to derive an indication of fair value. For cash flows beyond the projection period, a terminal value is calculated using the Gordon constant growth model and long-term industry growth rate assumptions based on long-term industry growth and Gross Domestic Product (“GDP”) inflation rates.

The primary assumptions used in the Greenfield Method are:

 

(1)

gross operating revenue in the station’s designated market area,

 

(2)

normalized market share,

 

(3)

normalized profit margin,

 

(4)

duration of the “ramp-up” period to reach normalized operations, (which was assumed to be three years),

 

(5)

estimated start-up costs (based on market size),

 

(6)

ongoing replacement costs of fixed assets and working capital,

 

(7)

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

 

(8)

amortization of the intangible asset, or the broadcast license.

The assumptions used reflect those of a hypothetical market participant and not necessarily the actual or projected results of Salem. The key estimates and assumptions used in the start-up income valuation for our broadcast licenses were as follows:

 

Broadcast Licenses		December 31, 2017		December 31, 2018
Risk-adjusted discount rate		9.0%		9.0%
Operating profit margin ranges		(13.9%) - 30.8%		4.4% - 34.5%
Long-term revenue growth rates		1.9%		0.5% - 1.2%

The risk-adjusted discount rate reflects the Weighted Average Cost of Capital (“WACC”) developed based on data from same or similar industry participants and publicly available market data as of the measurement date.

Based on our review and analysis, we determined that the carrying value of broadcast licenses in three of our market clusters were impaired as of the annual testing period ending December 31, 2018. We recorded an impairment charge of $2.8 million to the value of broadcast licenses in Cleveland, Louisville and Portland. The impairment charge was driven by a decrease in the projected long-term revenue growth rates for the broadcast industry. We believe that these decreases are indicative of trends in the industry as a whole and not unique to our company or operations.

 

The table below presents the results of our impairment testing under the income approach for the 2018 annual testing period.

 

Market Cluster		Excess Fair Value 2018 Estimate
Atlanta, GA			21.2	%
Cleveland, OH			(3.8	%)
Columbus, OH			25.4	%
Dallas, TX			45.9	%
Denver, CO			951.3	%
Detroit, MI			47.6	%
Greenville, SC			46.5	%
Honolulu, HI			131.1	%
Houston, TX			1070.4	%
Little Rock			21.0	%
Los Angeles, CA			102.6	%
Louisville, KY			(11.2	%)
Nashville, TN			675.1	%
New York, NY			35.4	%
Philadelphia, PA			9.7	%
Phoenix, AZ			51.0	%
Pittsburgh, PA			292.7	%
Portland, OR			(3.9	%)
Sacramento, CA			3.1	%
San Antonio, TX			63.1	%
San Diego, CA			47.2	%
San Francisco, CA			2.6	%
Seattle, WA			597.4	%
St Louis			329.5	%
Tampa, FL			12.5	%
Washington, D.C.			164.9	%