NOTE 8. GOODWILL

We account for goodwill in accordance with FASB ASC Topic 350 Intangibles—Goodwill and Other. We do not amortize goodwill, but rather test for impairment annually or more frequently if events or circumstances indicate that an asset may be impaired. 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 following table presents the changes in goodwill including business acquisitions as described 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,		$	27,642			$	28,453
Accumulated loss on impairment			(2,029	)			(2,029	)
Balance, beginning of period after cumulative loss on impairment			25,613				26,424
Acquisitions of radio stations			14				7
Acquisitions of digital media entities			810				986
Disposition of radio stations			—				(628	)
Sale of income generating broadcast business			(13	)			—
Balance, end of period before cumulative loss on impairment			28,453				28,818
Accumulated loss on impairment			(2,029	)			(2,029	)
Ending period balance		$	26,424			$	26,789

Goodwill Impairment Testing

When performing our annual impairment testing for goodwill, the fair value of each applicable accounting unit is estimated using a discounted cash flow analysis, which is a form of the income approach. The discounted cash flow analysis utilizes a five to ten year projection period to derive operating cash flow projections from a market participant view. We make certain assumptions regarding future revenue growth based on industry market data, historical performance and our expectations of future performance. We also make assumptions regarding working capital requirements and ongoing capital expenditures for fixed assets. Future net free cash flows are calculated on a debt free basis and discounted to present value using a risk adjusted discount rate. The terminal year value is calculated using the Gordon constant growth method and long-term growth rate assumptions based on long-term industry growth and GDP inflation rates. The resulting fair value estimates, net of any interest bearing debt, are then compared to the carrying value of each reporting unit’s net assets.

The first step of our impairment testing is to perform a qualitative assessment to determine if events and circumstances have occurred that indicate it is more likely than not that the fair value of the assets, including goodwill, are less than their carrying values. We review the significant inputs used in our prior year fair value estimates to determine if any changes to those inputs should be made. We estimate the fair value using a market approach and compare the estimated fair value of each entity to its carrying value, including goodwill. Under the market approach, we apply a multiple of four to each entities operating income to estimate the fair value. We believe that a multiple of four is a conservative indicator of fair value as described above.

If the results of our qualitative assessment indicate that the fair value of a reporting unit may be less than its carrying value, we perform a second quantitative review of the reporting unit. We engage an independent third-party appraisal and valuation firm to assist us with determining the enterprise value as part of this quantitative review.

Goodwill—Broadcast Markets

The unit of accounting we use to test goodwill associated with our radio stations 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. Seventeen of our 33 market clusters have goodwill associated with them as of our annual testing period ended December 31, 2018.

The key estimates and assumptions used for our enterprise valuations are as follows:

 

Broadcast Markets Enterprise Valuations		December 31, 2017		December 31, 2018
Risk-adjusted discount rate		9.0%		9.0%
Operating profit margin ranges		(7.8%) - 36.2%		(4.1%) - 45.1%
Long-term revenue growth rates		1.9%		0.5% - 1.1%

The risk-adjusted discount rate reflects the WACC developed based on data from same or similar industry participants and publicly available market data as of the measurement date.

Based on our qualitative review, we tested seven of these market clusters for impairment of goodwill. We engaged Bond & Pecaro, an independent appraisal and valuation firm, to assist us in estimating the enterprise of value our market clusters to test goodwill for impairment. The enterprise valuation assumes that the subject assets are installed as part of an operating business rather than as a hypothetical start-up. The analysis includes both an income and cost approach to valuation. The income approach uses a discounted cash flow projection while the cost approach, or “stick” value of the underlying assets is used.

Based on our review and analysis, we determined that no impairment charges were necessary to the carrying value of our broadcast market goodwill as of the annual testing period ended December 31, 2018.

The tables below present the percentage within a range by which the estimated fair value exceeded the carrying value of each of our market clusters, including goodwill:

 

		Broadcast Market Clusters as of December 31, 2018 Percentage Range By Which Estimated Fair Value Exceeds Carrying Value Including Goodwill
		< 10%				>11% to 20%				>21% to 50%				> than 51%
Number of accounting units			2				3				6				6
Carrying value including goodwill (in thousands)		$	49,525			$	41,244			$	100,121			$	78,471

Goodwill—Broadcast Networks

The unit of accounting we use to test goodwill in our radio networks is the entity level, which includes SRN^TM, Todays Christian Music (“TCM”) and Singing News^® Radio. The entity level is the level reviewed by management and the lowest level for which discrete financial information is available. One of our networks, TCM, has goodwill associated with it as of our annual testing period ended December 31, 2018. The enterprise valuation assumes that the subject assets are installed as part of an operating business rather than as a hypothetical start-up.

The key estimates and assumptions used for our enterprise valuations are as follows:

 

Broadcast Network Valuations		December 31, 2017		December 31, 2018
Risk adjusted discount rate		—		10.0%
Operating profit margin ranges		—		14.8% - 15.7%
Long-term revenue growth rates		—		0.5%

 

The risk-adjusted discount rate reflects the WACC developed based on data from same or similar industry participants and publicly available market data as of the measurement date.

Because TCM was not tested in the prior year, our qualitative analysis was limited and we could not make a determination that the goodwill was likely not to be impaired. We proceeded with step 2 to perform a quantitative review of the fair value. We engaged Bond & Pecaro, an independent appraisal and valuation firm, to assist us in estimating the enterprise of value of TCM to test goodwill for impairment.

Based on our review and analysis, we determined that no impairment charges were necessary to the carrying value of goodwill associated with our TCM Network as of the annual testing period ended December 31, 2018. The estimated fair value exceeded the carrying value by 94.6%.

Goodwill—Digital Media

The unit of accounting we use to test goodwill in our digital media segment is the entity level, which includes Salem Web Network (“SWN”), SWN Spanish, Townhall.com^®, Eagle Financial Publications and Newport National Health. The financial statements for SWN include the operating results and cash flows for our Christian content websites and our church product websites. The financial statements for Townhall.com^® reflect the operating results for each of our conservative opinion websites. Eagle Financial Publications include our investing websites and related digital publications. The financial statements for Newport National Health include our e-commerce website. The entity level is the level reviewed by management and the lowest level for which discrete financial information is available.

Four of our digital media businesses had goodwill associated with them as of our annual testing period ended December 31, 2018. We tested one of these entities for impairment because it was note tested in the prior year. We engaged Bond & Pecaro, an independent appraisal and valuation firm, to assist us in estimating the enterprise of value of this entity to test goodwill for impairment. The enterprise valuation assumes that the subject assets are installed as part of an operating business rather than as a hypothetical start-up.

The key estimates and assumptions used for our enterprise valuations are as follows:

 

Digital Media Enterprise Valuations		December 31, 2017		December 31, 2018
Risk adjusted discount rate		10.0%		10.0%
Operating profit margin ranges		8.0% - 36.0%		8.5% - 17.2%
Long-term revenue growth rates		1.9% - 2.0%		1.0%

The risk-adjusted discount rate reflects the 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 that no impairment charges were necessary to the carrying value of goodwill associated with our digital media entities.

The table below presents the percentage within a range by which the estimated fair value exceeded the carrying value of our accounting units, including goodwill.

 

		Digital Media Entities as of December 31, 2018 Percentage Range By Which Estimated  Fair Value Exceeds Carrying Value Including Goodwill
		< 10%				>10% to 20%				>21% to 50%				> than 51%
Number of accounting units			1				2				—				1
Carrying value including goodwill (in thousands)		$	361			$	9,836			$	—			$	27,821

 

Goodwill—Publishing

The unit of accounting we use to test goodwill in our publishing segment is the entity level, which includes Regnery^® Publishing, Salem Author Services and Singing News^®. Regnery^® Publishing is a book publisher based in Washington DC that operates from a stand-alone facility under one general manager, with operating results and cash flows of reported at the entity level. Salem Author Services operates from a stand-alone facility in Orlando, Florida under one general manager who is responsible for the operating results and cash flows. Singing News^® produces and distributes a print magazine. The entity level is the level reviewed by management and the lowest level for which discrete financial information is available.

Two of our publishing entities have goodwill associated with them as of our annual testing period ended December 31, 2018. The enterprise valuation assumes that the subject assets are installed as part of an operating business rather than as a hypothetical start-up. We engaged Bond & Pecaro, an independent appraisal and valuation firm, to assist us in estimating the enterprise of value this publishing entity to test goodwill for impairment. The enterprise valuation assumes that the subject assets are installed as part of an operating business rather than as a hypothetical start-up.

The key estimates and assumptions used for our enterprise valuations are as follows:

 

Publishing Enterprise Valuations		December 31, 2017		December 31, 2018
Risk adjusted discount rate		10.0%		10.0%
Operating margin ranges		5.0% - 5.5%		4.0% - 5.0%
Long-term revenue growth rates		1.9%		1.0%

The risk-adjusted discount rate reflects the 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 that no impairment charges were necessary to the carrying value of goodwill associated with our publishing entities.

The table below presents the percentage within a range by which the estimated fair value exceeded the carrying value of our accounting units, including goodwill.

 

		Publishing Entities as of December 31, 2018 Percentage Range By Which Estimated Fair  Value Exceeds Carrying Value Including Goodwill
		< 10%				>11% to 20%				>21% to 50%				> than 51%
Number of accounting units			—				1				—				1
Carrying value including goodwill (in thousands)		$	—			$	3,976			$	—			$	847