Quarterly report pursuant to Section 13 or 15(d)

Broadcast Licenses

Broadcast Licenses
9 Months Ended
Sep. 30, 2020
Text Block [Abstract]  
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 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.
We performed an interim review of broadcast licenses during the three months ended March 31, 2020 due to the
pandemic and the resulting
orders that began to adversely impact revenues. 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 11 of our market clusters. During the three months ended September 30, 2020 we performed an additional interim review of broadcast license for impairment due to industry forecasts showing that revenue was improving at a lower rate than originally expected. While we believe that revenue will recover from the rapid revenue decline due to the
pandemic, the recovery will be longer than expected due to extended and reinstated
orders that unfavorably impact the economy. We retested 11 of our market clusters based on the lower margin between the recent fair value estimate and the carrying value. The results of our interim impairment reviews are shown below.
Impairment testing requires estimates of the fair value of our indefinite-lived intangible assets. We believe that these fair value estimates are critical accounting estimates as the value is significant in relation to our total assets and the estimates incorporate variables and assumptions based on our experiences and judgment about our future operating performance. Fair value measurements 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. If actual future results are less favorable than the assumptions and estimates used in our estimates, we are subject to future impairment charges, the amount of which may be material. The unobservable inputs are defined in FASB ASC Topic 820 “Fair Value Measurements and Disclosures” as Level 3 inputs discussed in detail in Note 14 – Fair Value Measurements.

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
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
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:
gross operating revenue in the station’s designated market area,
normalized market share,
normalized profit margin,
duration of the
period to reach normalized operations, (which was assumed to be three years),
costs (based on market size),
ongoing replacement costs of fixed assets and working capital,
the calculations of yearly net free cash flows to invested capital; and
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
income valuation for the broadcast licenses subject to testing were as follows:
Broadcast Licenses
December 31, 2019
March 31, 2020
September 30, 2020
Risk-adjusted discount rate
Operating profit margin ranges
4.0% - 33.8%
4.6% - 33.8%
4.3% - 33.3%
Long-term revenue growth rates
   0.7% - 1.1%   
0.8% - 1.1%
0.2% - 1.1%
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 7 of our market clusters were impaired as of the interim testing period ended March 31, 2020. We recorded an impairment charge of $17.0 million to the value of broadcast licenses in Chicago, Cleveland, Louisville, Philadelphia, Portland, Sacramento and Tampa as of the interim testing period ended March 31, 2020. The impairment charges were driven by decreases in projected revenues due to the current estimated impact of
and an increase in the WACC. We believe that these factors are indicative of trends in the industry as a whole and not unique to our company or operations. There were no impairment charges recorded during the three
 months ended
September 30, 2020.
The table below presents the results of our interim impairment testing under the
income approach at March 31, 2020 and September 30, 2020:
Market Cluster
Excess Fair Value
March 31, 2020
Excess Fair Value
September 30, 2020
Boston, MA
     4.8     5.6
Chicago, IL
     (9.0 %)      8.5
Cleveland, OH
     (18.4 %)      6.5
Dallas, TX
     8.5     11.8
Louisville, KY
     (21.8 %)      13.8
New York, NY
     7.3     15.9
Philadelphia, PA
     (13.1 %)      5.1
Portland, OR
     (14.8 %)      10.1
Sacramento, CA
     (9.6 %)      4.6
San Francisco, CA
     1.2     7.0
Tampa, FL
     (28.0 %)      20.5
We believe we have made reasonable estimates and assumptions to calculate the estimated fair value of our broadcast licenses, however, these estimates and assumptions are highly judgmental in nature. Actual results can be materially different from estimates and assumptions. Due to the continued impact of the
pandemic we will continue to evaluate broadcast licenses for impairment and further assess if an impairment triggering event has occurred. 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 broadcast licenses below the amounts reflected on our balance sheet, we may recognize future impairment charges, the amount of which may be material.
The following table presents the changes in broadcasting licenses that include acquisitions and divestitures of radio stations and FM translators.
Broadcast Licenses
   Twelve Months Ended
December 31, 2019
Nine Months Ended

September 30, 2020
(Dollars in thousands)
Balance before cumulative loss on impairment, beginning of period
   $ 484,691      $
Accumulated loss on impairment, beginning of period
Balance after cumulative loss on impairment, beginning of period
Acquisitions of radio stations
Acquisitions of FM translators and construction permits
Capital projects
Dispositions of radio stations
Impairments based on the estimated fair value of broadcast licenses
Balance, end of period after cumulative loss on impairment
   $ 337,858      $
Balance, end of period before cumulative loss on impairment
   $ 441,143      $
Accumulated loss on impairment, end of period
Balance, end of period after cumulative loss on impairment
   $ 337,858      $