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 that requires that we test for impairment at least annually or when events or circumstances indicates that they may be impaired. Approximately 71% of our total assets at December 31, 2017 consisted of indefinite-lived intangible assets including broadcast licenses, goodwill and mastheads. We do not amortize broadcast licenses, goodwill and mastheads but rather test for impairment annually or more frequently if events or circumstances indicate that the value 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.

Broadcast Licenses

 

We perform a qualitative assessment for each of our broadcast market clusters annually. 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.

 

 

Of the 25 markets for which an independent third party fair value appraisal was obtained in the prior year, eight markets were subject to testing in 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:

 

 

The second step 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 eight additional markets subject to further testing, which included each of the eight markets not tested in the prior year. We identified one additional market subject to further testing based on declining SOI margins.

 

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 nine market clusters:

 

 

Based on our qualitative assessment we engaged Noble Financial, an independent third-party appraisal and valuation firm, to assist us with determining the enterprise value as part of our quantitative review. The quantitative review performed was to estimate the fair value of broadcast licenses in 17 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 an FCC license is equivalent to a hypothetical start-up in which the only asset owned by the station as of the valuation date is the FCC license. This approach eliminates factors that are unique to the 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 FCC 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 FCC 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:

 

 

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:

 

 

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. The increase in the WACC for the 2017 testing period as compared to 2016 was largely attributable to increases in corporate borrowing interest rates during 2017 within the composite mix of industry participants considered in the analysis and the impact of the tax reform act of 2017.

 

Based on our review and analysis, we did not recognize impairment charges to our broadcast license as of the annual testing period ended December 31, 2017. The table below presents the results of our impairment testing under the income approach for the 2017 annual testing period.

 

 

Mastheads

 

We regularly perform quantitative reviews of mastheads due to the low margins by which the estimated fair value has exceeded our carrying value. Due to operating results that did not meet management’s expectations, we ceased publishing Preaching Magazine^™, YouthWorker Journal^™, FaithTalk Magazine^™ and Homecoming^™. The Magazine upon issuance of the May 2017 publication. Because of the likelihood that these print magazines would be sold or otherwise disposed of before the end of their previously estimated life, we performed impairment tests as of March 31, 2017. Due to reductions in forecasted operating cash flows and indications of interest from potential buyers, we then recorded an impairment charge of $19,000 associated with mastheads. For the annual testing period ended December 31, 2017, we engaged Noble Financial, an independent third-party appraisal firm, to assist us in estimating the fair value of our mastheads using a Relief from Royalty method, a form of the income approach.

 

The Relief from Royalty method estimates the fair value of mastheads through use of a discounted cash flow model that incorporates a hypothetical “royalty rate” that a third-party owner would be willing to pay in lieu of owning the asset. The royalty rate is based on observed royalty rates for comparable assets as of the measurement date. We adjust the selected royalty rate to account for a percentage of the royalty fee that could be attributed to the use of other intangibles, such as goodwill, time in existence, trade secrets and industry expertise. The adjusted royalty rate represents the royalty fee remaining that could be attributed to the use of the masthead only.

 

Pre-tax royalty income is based on a 10-year revenue forecast and assumed to carry on into perpetuity. Revenue beyond the projection period (terminal year) is based on estimated long-term industry growth rates. The analysis also incorporated the present value of the tax amortization benefit associated with the mastheads. The key estimates and assumptions are as follows:

 

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. The increase in the WACC for the 2017 testing period as compared to 2016 was largely attributable to increases in corporate borrowing interest rates during 2016 within the composite mix of industry participants considered in the analysis and the impact of the tax reform act of 2017.

 

Based on our review and analysis, we did not recognize impairment charges to mastheads as of the annual testing period ended December 31, 2017.

 

Goodwill – Broadcast Radio Stations

 

Nineteen of our broadcast markets had goodwill associated with them as of December 31, 2017. Based on our qualitative review, we tested three of these market clusters for impairment of goodwill. We engaged Noble Financial, an independent third-party appraisal firm, to assist us in estimating the enterprise of value our market clusters for the purpose of testing goodwill for impairment.

 

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

 

 

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. The increase in the WACC for the 2017 testing period as compared to 2016 was largely attributable to increases in corporate borrowing interest rates during 2017 within the composite mix of industry participants considered in the analysis and the impact of the tax reform act of 2017.

 

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, 2017.

 

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:

 

 

Goodwill – Broadcast Networks

 

TCM, one of our five networks has goodwill associated with it as of our annual testing period ended December 31, 2017. Based on the first step of our qualitative review, in which we calculate excess fair value, or the amount by which our prior year estimated fair value exceeds the current year carrying value, with no significant changes in the prior year assumptions and key estimates, the value of broadcast network goodwill is not likely to be impaired

 

Based on this review and analysis, we determined that the fair value of the reporting unit was more than the carrying value. No impairment charges were recorded and Step 2 was not necessary based on the results. We did not perform a sensitivity analysis for the current year certain key assumptions, as such changes in assumptions would have no impact on the carrying value of goodwill associated with our broadcast networks.

 

Goodwill – Digital Media

 

Four of our digital media businesses had goodwill associated with them as of our annual testing period ended December 31, 2017. We tested two of these entities for impairment based on our qualitative review indicating an excess carrying value of less than 25%. The key estimates and assumptions used in the valuation of our digital media entities for each testing period are as follows:

 

 

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. The increase in the WACC for the 2017 testing period as compared to 2016 was largely attributable to increases in the risk free rate and corporate borrowing interest rates during 2017 as compared to the prior year and the impact of the tax reform act of 2017.

 

We engaged Noble Financial, an independent third-party appraisal firm, to assist us in estimating the enterprise of value this entity for the purpose of testing goodwill for impairment. Based on this review and analysis, we determined that the fair value of the reporting unit was more than the carrying value. No impairment charges were recorded and Step 2 was not necessary based on the results. We did not perform a sensitivity analysis for the current year certain key assumptions, as such changes in assumptions would have no impact on 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, 2017
		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			2
Carrying value including goodwill (in thousands)		$	448		$	-		$	3,585		$	28,343

 

Goodwill – Publishing

 

Two of our publishing entities had goodwill associated with them as of the annual testing period ended December 31, 2017. Based on actual operating results that did not meet our annual projections, we engaged Noble Financial, an independent third-party appraisal firm to assist us with estimating the enterprise value of one of these entities for the purpose of testing 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:

 

 

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. The increase in the WACC for the 2017 testing period as compared to 2016 was largely attributable to increases in corporate borrowing interest rates during 2017 within the composite mix of industry participants considered in the analysis and the impact of the tax reform act of 2017.

 

Based on our review and analysis of the enterprise estimated fair value, 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, 2017 and that Step 2 was not necessary.

 

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.

 

 

We believe that we have made reasonable estimates and assumptions to calculate the estimated fair value of our indefinite-lived intangible assets, however, these estimates and assumptions are highly judgmental in nature. Actual results can be materially different from estimates and assumptions. 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.