NOTE 2. IMPAIRMENT OF GOODWILL AND OTHER INDEFINITE-LIVED INTANGIBLE ASSETS

We account for goodwill and other indefinite-lived intangible assets in accordance with FASB ASC Topic 350 “Intangibles—Goodwill and Other.” We do not amortize goodwill or other indefinite-lived intangible assets, but rather test for impairment annually or more frequently if events or circumstances indicate that an asset may be impaired.

Approximately 70% of our total assets as of December 31, 2013, consist of indefinite-lived intangible assets, such as broadcast licenses, goodwill and mastheads, the value of which depends significantly upon the operating results of our businesses. In the case of our radio stations, we would not be able to operate the properties without the related FCC broadcast license for each property. Broadcast licenses are renewed with the FCC every eight years for a nominal cost that is expensed as incurred. We continually monitor our stations’ compliance with the various regulatory requirements. Historically, all of our broadcast licenses are renewed at the end of their respective periods, and we expect that all broadcast licenses will continue to be renewed in the future. Accordingly, we consider our broadcast licenses to be indefinite-lived intangible assets in accordance with FASB ASC Topic 350, “Intangibles – Goodwill and Other.” Broadcast licenses account for approximately 94% of our indefinite-lived intangible assets. Goodwill and magazine mastheads account for the remaining 6%. We do not amortize goodwill or other indefinite-lived intangible assets, but rather test for impairment at least annually or more frequently if events or circumstances indicate that an asset may be impaired.

We complete our annual impairment tests in the fourth quarter of each year. We believe that our estimate of the value of our broadcast licenses, mastheads, and goodwill is a critical accounting estimate as the value is significant in relation to our total assets, and our estimates incorporate variables and assumptions that are based on experiences and judgment about future operating performance of our markets and business segments. The fair value measurements for our indefinite-lived intangible assets use significant unobservable inputs that reflect our own assumptions about the estimates that market participants would use in measuring fair value including assumptions about risk. The unobservable inputs are defined in FASB ASC Topic 820 “Fair Value Measurements and Disclosures” as Level 3 inputs discussed in detail in Note 7 to our Consolidated Financial Statements.

 

In July 2012, the FASB issued Accounting Standards Update (“ASU”) 2012-02, “Intangibles – Goodwill and Other (Topic 350).” Under ASU 2012-02, we have the option to assess whether it is more likely than not that an indefinite-lived intangible asset is impaired. If it is more likely than not that impairment exists, we are required to perform a quantitative analysis to estimate the fair value of the assets. The qualitative assessment requires significant judgment in considering events and circumstances that may affect the estimated fair value of our indefinite-lived intangible assets and to weigh these events and circumstances by what we believe to be the strongest to weakest indicator of potential impairment. ASU 2012-02 is effective for annual and interim impairment tests for fiscal years beginning after September 15, 2012, with early adoption permitted. We adopted the provisions of ASU 2012-02 as of our 2012 annual testing period.

ASU 2012-02 provides examples of events and circumstances that could affect the estimated fair value of indefinite-lived intangible assets; however, the examples are not all-inclusive and are not by themselves indicators of impairment. We considered these events and circumstances, as well as other external and internal considerations. Our analysis, in order of what we consider to be the strongest to weakest indicators of impairment include: (1) the difference between any recent fair value calculations and the carrying value; (2) financial performance, such as station operating income, including performance as compared to projected results used in prior estimates of fair value; (3) macroeconomic economic conditions, including limitations on accessing capital that could affect the discount rates used in prior estimates of fair value; (4) industry and market considerations such as a declines in market-dependent multiples or metrics, a change in demand, competition, or other economic factors; (5) operating cost factors, such as increases in labor, that could have a negative effect on future expected earnings and cash flows; (6) legal, regulatory, contractual, political, business, or other factors; (7) other relevant entity-specific events such as changes in management or customers; and (8) any changes to the carrying amount of the indefinite-lived intangible asset.

Broadcast Licenses

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. For our 2012 annual tests, we performed a qualitative assessment for all of our market clusters and a qualitative assessment for the twelve market clusters that were more likely than not to have an impairment. Our 2012 fair value estimates were prepared using the start-up income approach to estimate the fair value of the broadcast license. The start-up-income approach measures the expected future economic benefits that the broadcast licenses provide and discounts these future benefits using a discounted cash flow analysis. The discounted cash flow analysis assumes that the broadcast licenses hypothetical start-up stations and the values yielded by the discounted cash flow analysis represent the portion of the stations value attributable solely to the broadcast license. The discounted cash flow model incorporates variables such as projected revenues, operating profit margins, forecasted growth rates, estimated start-up costs, losses expected to be incurred in the early years, competition within the market, the effective tax rate, future terminal values and the risk-adjusted discount rate. The variables used reflect historical company growth trends, industry projections, and the anticipated performance of the business. The discounted cash flow projection period was determined to be ten years, which is typically the time radio station operators and investors expect to recover their investments as widely used by industry analysts in their forecasts. We did not record an impairment of our broadcast licenses during 2012.

For our 2013 annual tests, we also performed a qualitative assessment for all of our market clusters. We reviewed the significant assumptions applicable to our 2012 fair value estimates to assess if events and circumstances have occurred that could affect the significant inputs used in these fair value estimates. We reviewed each of the key estimates and assumptions and determined that there have been no significant changes that would need to be applied to a hypothetical start-up station in order to estimate the fair value. Projected revenues, operating profit margins, forecasted growth rates, estimated start-up costs, losses expected to be incurred in the early years, competition within the market, the effective tax rate, future terminal values and the risk-adjusted discount rate are consistent with those applied in the 2012 testing period. We also reviewed internal benchmarks and economic performance for each of our markets to conclude that we could reasonably rely upon the 2012 fair value estimates and assumptions as a starting point to our qualitative analysis.

 

We calculated the amount by which the 2012 estimated fair values exceeded our carrying amounts to calculate the excess of fair value. We concluded that markets with broadcast licenses with a 25% or more excess of the estimated fair value over the carrying value were not likely to be impaired. We believe based on our analysis and review, including the financial performance of each market, that a 25% excess fair value margin is conservative and reasonable in the qualitative analysis. We determined that nine of the twelve markets for which a 2012 fair value was obtained were subject to further testing. The table below presents the percentage within a range by which our prior year start-up income estimated fair value exceeded the carrying value of our broadcasting licenses:

 

		Geographic Market Clusters as of December 31, 2013
		Percentage Range By Which 2012 Estimated Fair Value Exceeds  Carrying Value
		£25%				>26-30%				>30% to 75%				> than 75%
Number of market clusters			9				1				2				—
Broadcast license carrying value (in thousands)		$	217,111			$	18,501			$	13,577			$	—

Our qualitative review also included a review of the financial results of each market cluster. Radio station are often sold on the basis of a multiple of projected cash flow, or station operating income less station operating expenses (“SOI”). Numerous trade organizations and analysts review these radio stations sales to track SOI multiples applicable to each transaction. Based on published reports and analysis of transactions, we believe industry benchmarks to be in the six to seven times cash flow range. Based our analysis, we determined that an SOI benchmark of four would be a conservative indicator of fair value. We determined that eight of the remaining markets were subject to further testing. The table below presents the percentage within a range by which our estimated fair value as a multiple of SOI exceeded the carrying value of our broadcasting licenses for these market clusters:

 

		Geographic Market Clusters as of December 31, 2013
		Percentage Range By Which SOI Estimated Fair Value Exceeds  Carrying Value
		£5%				>6-10%				>11% to 40%				>than 40%
Number of market clusters			8				1				4				8
Broadcast license carrying value (in thousands)		$	51,850			$	2,402			$	61,354			$	21,835

We engaged Bond & Pecaro, an independent third-party appraisal and valuation firm, to perform an appraisal of the indefinite-lived intangible asset(s). Bond & Pecaro utilized an income approach to value broadcast licenses. The income approach measures the expected economic benefits that the broadcast licenses provides and discounts these future benefits using a discounted cash flow analysis. The discounted cash flow analysis assumes that the broadcast licenses are held by hypothetical start-up stations and the values yielded by the discounted cash flow analysis represent the portion of the stations value attributable solely to the broadcast license. The discounted cash flow model incorporates variables such as projected revenues, operating profit margins, and a discount rate. The variables used reflect historical company growth trends, industry projections, and the anticipated performance of the business. The discounted cash flow projection period was determined to be ten years; which is typically the time radio station operators and investors expect to recover their investments as widely used by industry analysts in their forecasts.

The key estimates and assumptions used in the start-up income valuation for our broadcast licenses were as follows:

 

Broadcast Licenses		December 31, 2011		December 31, 2012		December 31, 2013
Discount rate		9.0%		9.0%		9.0%
Operating profit margin ranges		3.8%—36.3%		5.1%—35.5%		4.1%—37.5%
Long-term market revenue growth rate ranges		1.0%—4.0%		0.3%—15.0%		1.0%—2.5%

The table below presents the results of our quantitative analysis for 17 market clusters as of the 2013 annual testing period.

 

		Excess Fair Value
Market Cluster		2013 Estimate
Atlanta, GA			13.6	%
Boston, MA			6.9	%
Chicago, IL			6.4	%
Cleveland, OH			4.6	%
Colorado Springs, CO			82.5	%
Columbus, OH			6.0	%
Dallas, TX			10.9	%
Detroit, MI			2.9	%
Greenville, SC (NEW)			8.5	%
Honolulu, HI			6.3	%
Los Angeles, CA			107.4	%
Louisville, KY			8.0	%
Minneapolis, MN			85.8	%
Omaha, NE			1.1	%
Phoenix, AZ			17.4	%
Portland, OR			6.9	%
Sacramento, CA			1.6	%

 

Based on our review and analysis we determined that no impairment charges were necessary to the carrying value of our broadcast licenses as of the annual testing period ending December 31, 2013. Based on prior tests, we determined that no impairments of our broadcast licenses were necessary for years ending December 31, 2012 and 2011, respectively.

Mastheads

Mastheads consist of the graphic elements that identify our publications to readers and advertisers. These include customized typeset page headers, section headers, and column graphics as well as other name and identity stylized elements within the body of each publication. We test the value of mastheads as a single combined publishing entity as our print magazines operate from one shared facility under one general manager with operating results and cash flows reported on a combined basis for all publications. This is the lowest level for which discrete financial information and cash flows are available and the level reviewed by management to analyze operating results.

We have regularly performed quantitative reviews of mastheads based on the low margin by which our estimated fair values exceed our carrying value and actual operating results that do not meet or exceed our expectations. We engaged Bond & Pecaro, an independent third-party appraisal firm, to estimate the fair value of our mastheads using an income-based approach. The income-based approach utilized an estimated royalty stream that measures a cost savings to the business because it does not have to pay a royalty to use the owned trade name and content. The analysis assumes that the assets are employed by a typical market participant in their highest and best use. A discounted cash flow method is applied to calculate the estimated fair value of our mastheads, the key estimates and assumptions to which are as follows:

 

Mastheads		December 31, 2011		Interim June 30, 2012		December 31, 2012		Interim June 30, 2013		December 31, 2013
Discount rate		8.5%		8.5%		8.5%		9.0%		9.5%
Projected revenue growth ranges		1.5% -2.50%		1.5% -2.50%		1.5% -3.0%		1.0% -2.8%		1.2% - 2.5%
Royalty growth rate		3.0%		3.0%		3.0%		3.0%		2.0%

As of our June 2012 interim testing period, the estimated fair value of our mastheads exceeded our carrying value by 1.7%. As of our 2012 annual testing, we recorded an impairment charge associated with mastheads of $0.1 million driven by a reduction in projected net revenues. For the interim testing performed as of June 2013, projected revenue growth rates were lowered based on failure of the print magazine segment to achieve the amounts previously projected. Based on these lower actual and projected growth rates. we recorded an impairment of $0.3 million as of June 2013. During our 2013 annual testing, our royalty rate was lowered to 2.0% from the 3.0% industry standard based on gross margins associated with the segment. Additionally, the discount rate was raised from 9.0% to 9.5% based on risks associated with print magazines. We recorded an additional $0.3 million impairment charge associated with mastheads because of these changes. The primary driver of our impairments is the reduction of revenues, which are prevalent throughout the print magazines industry and is not unique to our operations.

Goodwill—Broadcast

We adopted ASU 2011-08, “Testing Goodwill for Impairment” as of our 2012 annual testing period. As a result, beginning in 2012, the first step of our impairment tests for goodwill is a thorough assessment of qualitative factors to determine if events or circumstances indicate that it is not more likely than not that the fair value of these assets is less than their carrying amounts. If the qualitative test indicates it is not more likely than not that the fair value of these assets is less than their carrying amounts, a quantitative assessment is not required. The unit of accounting used 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. Eleven of our 32 market clusters and our networks have goodwill associated with them as of our annual testing period ending December 31, 2013 compared to nine of our 31 markets as of the annual testing period ending December 31, 2012.

 

The first step of our review included an assessment to determine if events and circumstances have occurred that could affect the significant inputs used in our fair value estimates. We estimated fair values using a market and income approach and compared the estimated fair value of each market cluster to its carrying value including goodwill. Under the market approach, we applied a multiple of four to each market clusters’ station operating income (“SOI”) to calculate the estimated fair value. As described above, we believe that an SOI benchmark of four would be a conservative indicator of fair value. Under the income approach, we utilized a discounted cash flow method to calculate the estimated fair value of the accounting unit. The discounted cash flow method incorporates the cumulative present value of the net after-tax cash flows projected for each market assuming that it is a hypothetical start-up station. The key estimates and assumptions used in the start-up income valuation of our broadcast market clusters for each testing period are as follows:

 

		December 31,
Goodwill –Broadcast Market Clusters		2011		2012		2013
Discount rate		9.0%		9.0%		9.0%
Operating profit margin ranges		3.8% - 38.0%		5.1% - 35.5%		4.1% - 37.5%
Long-term market revenue growth rate ranges		1.0% - 4.0%		0.3% - 15.0%		1.0% - 2.5%

If the carrying amount, including goodwill, exceeded the estimated fair value of the market cluster, an indication exists that the amount of goodwill attributed to that market cluster may be impaired. When we have indication of impairment, we perform a second step to determine the amount of any impairment. We engaged Bond & Pecaro, an independent third-party appraisal and valuation firm, to determine the enterprise value of four of our market clusters in a manner similar to a purchase price allocation. 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:

 

		December 31, 2011		December 31, 2012		December 31, 2013
Enterprise Valuations		Broadcast Market Clusters		Broadcast Market Clusters		Broadcast Market Clusters
Discount rate		9.0%		9.0%		9.0%
Operating profit margin ranges		6.8% - 45.4%		16.9% - 49.2%		11.9% - 44.7%
Long-term revenue market growth rate ranges		1.5% - 3.5%		1.0% - 3.5%		1.0% - 2.5%

Based on our review and analysis we determined that no impairment charges were necessary to the carrying value of our broadcast goodwill as of the annual testing period ending December 31, 2013. Based on prior tests, we determined that no impairments of our broadcast goodwill were necessary for years ending December 31, 2012 and 2011, respectively. The estimated fair value of our networks exceeded the carrying value by 63%, 113.0% and 101.6% for each of the annual testing periods ending December 31, 2013, 2012 and 2011, respectively. 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, 2013
		Percentage Range By Which Estimated Fair Value Exceeds Carrying  Value Including Goodwill
		£ 1%				>10% to 20%				>20% to 50%				> than 50%
Number of market clusters			4				1				3				3
Carrying value including goodwill (in thousands)		$	28,952			$	17,978			$	45,375			$	45,152
		Broadcast Market Clusters as of December 31, 2012
		Percentage Range By Which Estimated Fair Value Exceeds Carrying Value Including Goodwill
		£ 10%				>10% to 20%				>20% to 50%				> than 50%
Number of market clusters			2				1				1				5
Carrying value including goodwill (in thousands)		$	18,836			$	1,423			$	10,506			$	132,645
		Broadcast Market Clusters as of December 31, 2011
		Percentage Range By Which Estimated Fair Value Exceeds Carrying Value Including Goodwill
		£ 10%				>10% to 20%				>20% to 50%				> than 50%
Number of market clusters			1				2				3				2
Carrying value including goodwill (in thousands)		$	9,877			$	17,487			$	68,506			$	5,178

Goodwill – Internet & Publishing

During 2012, we adopted ASU 2011-08, “Testing Goodwill for Impairment.” As a result, beginning in 2012, the first step of our impairment tests for goodwill is a thorough assessment of qualitative factors to determine if events or circumstances indicate that it is not more likely than not that the fair value of these assets is less than their carrying amounts. If the qualitative test indicates it is not more likely than not that the fair value of these assets is less than their carrying amounts, a quantitative assessment is not required. The units of accounting we use to test goodwill in our Internet business include Townhall.com and Salem Web Network. The operating results for Salem Web Network reflect the operating results and cash flows for all of our Internet sites exclusive of Townhall.com. We also separate our publishing business into two accounting units. The first publishing accounting unit is the magazine unit, which operates and produces all publications from a stand-alone facility, under one general manager, with operating results and cash flows of all publications reported on a combined basis. The second accounting unit is our book publishing division, Xulon Press, which also operates from a stand-alone facility, under one general manager who is responsible for the separately stated operating results and cash flows. Four of these accounting units have goodwill associated with them as our annual testing period.

We have regularly performed quantitative reviews of goodwill associated with our print magazine unit based on the low margin by which our estimated fair values exceed our carrying value including goodwill and actual operating results that do not meet or exceed our expectations. We engaged Bond & Pecaro, an independent third-party appraisal firm, to estimate the enterprise value of our business unit in a manner similar to a purchase price allocation. 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:

 

Enterprise Valuation		December 31, 2011		Interim June 30, 2012		December 31, 2012		Interim June 30, 2013		December 31, 2013
		(Internet)		(Publishing)		(Internet & Publishing)		(Publishing)		(Publishing)
Discount rate		13.5%		8.5%		8.5% - 13.5%		9.0%		9.5%
Operating profit margin ranges		18.4 - 22.0%		1.4% - 7.5%		0.5% - 22.0%		0.9% - 6.0%		(0.5%) - 6.0%
Long-term revenue market growth rate ranges		3.0%		1.5%		1.5% - 3.0%		1.5% - 2.8%		1.5% - 6.1%

Based on our review and analysis of the enterprise estimated fair value, we recorded a $0.4 million impairment charge associated with the print magazine goodwill as of the June 2013 interim testing period. This impairment was driven by lower projected profit margins based on the failure of the print magazine segment to achieve the amounts previously projected. Additionally, the discount rate was raised from 9.0% to 9.5% based on risks associated with print magazines. The reduction of revenue in the print magazine segment is prevalent throughout the print magazine industry and is not unique to our operations. No impairment charges were necessary as of the annual testing periods ending December 31, 2013, 2012 and 2011. 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.

 

		Internet and Publishing Accounting units as of December 31, 2013
		Percentage Range By Which Estimated Fair Value Exceeds Carrying  Value Including Goodwill
		£ 10%				>10% to 20%				>20% to 50%				> than 50%
Number of accounting units			2				—				2				—
Carrying value including goodwill (in thousands)		$	$28,707			$	—			$	5,107			$	—
		Internet and Publishing Accounting units as of December 31, 2012
		Percentage Range By Which Estimated Fair Value Exceeds Carrying Value Including Goodwill
		£ 10%				>10% to 20%				>20% to 50%				> than 50%
Number of accounting units			—				—				2				2
Carrying value including goodwill (in thousands)		$	—			$	—			$	28,722			$	2,103
		Internet and Publishing Accounting units as of December 31, 2011
		Percentage Range By Which Estimated Fair Value Exceeds Carrying  Value Including Goodwill
		£ 10%				>10% to 20%				>20% to 50%				> than 50%
Number of accounting units			1				1				1				1
Carrying value including goodwill (in thousands)		$	$1,123			$	3,764			$	22,757			$	(46	)

 

We believe we have made reasonable estimates and assumptions to calculate the estimated fair value of our indefinite-lived intangible assets, however, these estimates and assumptions could be materially different from actual results. If actual market conditions are less favorable than those projected by the industry or by us, or if events occur or circumstances change that would reduce the estimated fair value of our indefinite-lived intangible assets below the amounts reflected on our balance sheet, we may recognize future impairment charges, the amount of which may be material.