Salem Media Group, Inc. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Goodwill

Goodwill

12 Months Ended

Dec. 31, 2022

Goodwill and Intangible Assets Disclosure [Abstract]

Goodwill

NOTE 9. 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—Recent Transactions and impairments as described below.


	Year Ended December 31,
	2021			2022
	(Dollars in thousands)
Balance, beginning of period before cumulative loss on impairment,	$	28,520		$	28,749
Accumulated loss on impairment		(4,763	)		(4,763	)

Balance, beginning of period after cumulative loss on impairment		23,757			23,986

Acquisitions of radio stations		4			—
Acquisitions of digital media entities		225			226
Loss on impairment		—			(127	)

Ending period balance	$	23,986		$	24,085

Balance, end of period before cumulative loss on impairment		28,749			28,976
Accumulated loss on impairment		(4,763	)		(4,891	)

Ending period balance	$	23,986		$	24,085

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.

During our annual testing in the fourth quarter of 2021, we determined that no impairment charges were necessary to the carrying value of goodwill. We continued to monitor the critical accounting estimates used in our valuations and determined that interim impairment testing was appropriate for the second and third quarters of 2022. Our annual testing in the fourth quarter of 2022 reflected updates to our interim assumptions based on current economic and market conditions.

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 reasonable indicator of fair value as described in Note 8, Broadcast Licenses.

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. Four of our 30 market clusters have goodwill associated with them as of our annual testing period ended December 31, 2022.

Based on our qualitative review, we tested three market clusters for goodwill impairment during our annual testing period and one entity during our June 30, 2022 interim review. 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” uses the value of the underlying assets.

The key estimates and assumptions used for our enterprise valuations were as

follows:


Broadcast Markets Enterprise Valuations	December 31, 2021	June 30, 2022	December 31, 2022
Risk-adjusted discount rate	8.5%	9.5%	9.5%
Operating profit margin ranges	(1.4%) - 15.0%	(7.8%) - 15.0%	17.2% - 37.3%
Long-term revenue growth rates	0.4%	0.4%	0.6% - 0.7%

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 no impairment charges were necessary to the carrying value of our broadcast market goodwill as of the annual testing period ended December 31, 2022. We recorded an impairment charge of $0.1 million to goodwill in one of our broadcast markets at June 30, 2022. The impairment charge was driven by an increase in the WACC partially offset by improvements in revenue growth rates over those used in the prior

year-end

valuation forecasts. There were no impairments during the annual testing period ended December 31, 2021.

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, 2022 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		—		—		—		3
Carrying value including goodwill ( in thousands )		—		—		—	$	43,222

Goodwill – Digital Media

The unit of accounting we use to test goodwill in our digital media segment is the entity level, which includes SWN, Townhall.com

, and Eagle Financial Publications. 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 entity level is the level reviewed by management and the lowest level for which discrete financial information is available.

We tested one entity at December 31, 2022 based on the length of time elapsed from the last valuation. We also tested one entity during interim testing at June 30, 2022 and September 30, 2022. We engaged Bond & Pecaro, an independent appraisal and valuation firm, to assist us in estimating the enterprise value of the entity. 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 were as follows:


Digital Media Enterprise Valuations	December 31, 2021	June 30, 2022	September 30, 2022	December 31, 2022
Risk adjusted discount rate	9.5%	10.5%	10.5%	10.5%
Operating profit margin ranges	25.3% - 28.5%	28.5% - 32.9%	29.0% - 33.55%	0.9% - 5.3%
Long-term revenue growth rates	0.5%	0.5%	0.5%	0.6%

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 no impairment charges were necessary to the carrying value of goodwill associated with our digital media entities as of the annual testing period ended December 31, 202

. There were no impairments during the interim testing periods.

The table below presents the percentage within a range by which the estimated fair value exceeded the carrying value of the digital media entities, including goodwill.


	Digital Media Entities as of December 31, 2022 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		—		—		—
Carrying value including goodwill ( in thousands )		3,282		—		—		—

Goodwill—Publishing

The unit of accounting we use to test goodwill in our publishing segment is the entity level for Regnery

Publishing and Salem Author Services. 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 flow reported at the entity level. Salem Author Services operates a self-publishing business from a stand-alone facility in Orlando, Florida under one general manager who is responsible for the operating results and cash flow. The entity level is the level reviewed by management and the lowest level for which discrete financial information is available.

Each of these publishing entities have goodwill associated with them as of our annual testing period ended December 31, 2022. We tested one entity based on the length of time elapsed from the last valuation and the other entity based on the amount by which the latest estimated fair value exceeded the carrying value. We also tested one entity during interim testing at June 30, 2022 and September 30, 2022. 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 were as follows:


Publishing Enterprise Valuations	December 31, 2021	June 30, 2022	September 30, 2022	December 31, 2022
Risk adjusted discount rate	9.5%	10.5%	10.5%	10.5%
Operating margin ranges	2.4% - 5.2%	0.5% - 3.0%	0.5% - 2.7%	(9.0)% -4.9%
Long-term revenue growth rates	0.5%	0.5%	0.5%	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.

Based on our review and analysis, we determined that no impairment charges were necessary to the carrying value of goodwill associated with our publishing entities as of the annual testing period ended December 31, 2022. There were no impairments during the interim testing periods.

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


	Publishing Entities as of December 31, 2022
	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 )		1,748		—		—		278