Identifiable Intangible Assets and Goodwill

The Company is required to test goodwill and other indefinite-lived intangible assets for impairment on an annual basis and between annual tests if current events or circumstances require an interim impairment assessment. The Company allocates goodwill to its various reporting units upon the acquisition of the assets or stock of another third party business operation. The Company compares the fair value of each reporting unit to the carrying amount of their allocated net assets to determine if there is a potential impairment of goodwill. If the fair value of a reporting unit is less than its carrying value, an impairment loss is recorded to the extent that the fair value of the goodwill within the reporting unit is less than the carrying value of its goodwill. To determine the fair value of the Company's reporting units, the Company uses a present value (discounted cash flow) technique corroborated by market multiples when available, a reconciliation to market capitalization or other valuation methodologies and reasonableness tests, as appropriate. Determining the fair value of a reporting unit is judgmental in nature and requires the use of significant estimates and assumptions, including revenue growth rates, operating margins, discount rates and future market conditions, among others. The future occurrence of a potential indicator of impairment, such as, but not limited to, a significant adverse change in legal factors or business climate, reductions of projected patient census, an adverse action or assessment by a regulator, as well as other unforeseen factors, would require an interim assessment for some or all of the reporting units.

If the carrying amount of an indefinite-lived intangible asset exceeds its fair value, an impairment loss is recognized. Fair values of other indefinite-lived intangible assets are determined based on discounted cash flows or appraised values, as appropriate.

The Company's operations include two reporting units: Home Health and Hospice. To determine fair value of each of these reporting units, the Company considered the income approach, which determines fair value based on estimated future cash flows of each reporting unit, discounted by an estimated weighted-average cost of capital (“discount rate”), which reflects the overall level of inherent risk of a reporting unit and the rate of return an outside investor would expect to earn. The Company determined that discounted cash flow is the best indicator to determine fair value.

The Company performed its annual impairment test as of December 31, 2012. For purposes of the annual impairment test, the Company applied certain assumptions that included, but were not limited to, patient census projections, gross margin assumptions consistent with the Company's historical trends combined with the expectations of operating efficiencies and economies of scale. The Company used discount rates of 10.6 percent and 9.5 percent to calculate the fair value of its Home Health and Hospice reporting units, respectively. Discount rates of 12.1 percent and 11.7 percent, respectively, were used in the annual impairment test performed as of December 31, 2011.

Based on the results of the annual impairment test as of December 31, 2012, the Company's Home Health reporting unit had an estimated fair value that was approximately 52 percent greater that its carrying value. The total net book value and estimated fair value of the Home Health reporting unit at December 31, 2012 were $129 million and $196 million, respectively. The Company's Hospice reporting unit had an estimated fair value that was approximately 18 percent greater than its carrying value. The total net book value and estimated fair value of the Hospice reporting unit at December 31, 2012 were $746 million and $883 million, respectively. The total allocated goodwill assigned to the Company's Home Health and Hospice reporting units were $9.0 million and $647.3 million, respectively, at December 31, 2012.

During 2012, the Company initiated an effort to re-brand all of its branch operations under the single Gentiva name. In connection with this re-branding effort, the Company recorded a $19.1 million non-cash write-off of remaining trade name balances for the year 2012, which is reflected in goodwill, intangibles and other long-lived asset impairment in the Company's consolidated statements of comprehensive income.

During 2011, the Company determined a triggering event had occurred and performed an interim impairment test of its identifiable intangible assets and goodwill in response to changes in its business climate, uncertainties around Medicare reimbursement as the federal government worked to reduce the federal deficit as well as a significant decline in the price of the Company's common stock during the third quarter. The impairment assessment was completed as of August 31, 2011. The interim test concluded that the fair value of certain identifiable intangible assets, as well as goodwill, was less than their carrying value as of that date. The Company utilized a discounted cash flow approach to determine the fair values. The Company then determined the implied fair value of goodwill by determining the fair value of all assets and liabilities. As a result of this process, the Company recorded a non-cash charge of approximately $602.1 million to reduce the carrying value of certain identifiable intangible assets, as well as goodwill, to their estimated fair values. The impairment loss is included within goodwill, intangibles and other long-lived assets impairment in the Company's consolidated statements of comprehensive income for the year 2011.

The gross carrying amount and accumulated amortization of each category of identifiable intangible assets as of December 31, 2012 and December 31, 2011 were as follows (in thousands):



	December 31, 2012									December 31, 2011									Useful Life
	Home Health			Hospice			Total			Home Health			Hospice			Total
Amortized intangible assets:
Covenants not to compete	$	1,667		$	15,685		$	17,352		$	1,473		$	15,675		$	17,148		2-5 Yrs
Less: accumulated amortization	(1,449		)	(14,113		)	(15,562		)	(1,411		)	(9,144		)	(10,555		)
Net covenants not to compete	218			1,572			1,790			62			6,531			6,593

Customer relationships	27,196			910			28,106			27,196			910			28,106			5-10 Yrs
Less: accumulated amortization	(17,651		)	(390		)	(18,041		)	(15,304		)	(299		)	(15,603		)
accumulated impairment losses	(27		)	—			(27		)	(27		)	—			(27		)
Net customer relationships	9,518			520			10,038			11,865			611			12,476

Tradenames	18,215			16,730			34,945			18,215			16,730			34,945			5-10 Yrs
Less: accumulated amortization	(11,794		)	(3,608		)	(15,402		)	(10,522		)	(2,346		)	(12,868		)
accumulated impairment losses	(6,421		)	(13,122		)	(19,543		)	(411		)	—			(411		)
Net tradenames	—			—			—			7,282			14,384			21,666
Amortized intangible assets	9,736			2,092			11,828			19,209			21,526			40,735
Indefinite-lived intangible assets:
Medicare licenses and certificates of need	225,227			101,749			326,976			220,285			98,526			318,811
Less: accumulated impairment losses	(144,672		)	(519		)	(145,191		)	(144,672		)	—			(144,672		)
Net Medicare licenses and certificates of need	80,555			101,230			181,785			75,613			98,526			174,139
Total identifiable intangible assets	$	90,291		$	103,322		$	193,613		$	94,822		$	120,052		$	214,874

During 2012, the Company recorded a charge of approximately $1.4 million to reflect the transfer of the Medicare licenses associated with the sale of the four hospice branches in Louisiana and the Phoenix area hospice operations, which is recorded in gain on sale of assets and businesses, net in the Company’s consolidated statements of comprehensive income for the year ended December 31, 2012.

During 2011, the Company undertook a comprehensive review of its branch structure, support infrastructure and other significant expenditures in order to reduce its ongoing operating costs given the challenging rate environment that the Company was facing. As a result of this effort, the Company closed or divested 46 home health branches and 13 hospice branches in late 2011 and early 2012. In connection with these activities, during 2011, the Company recorded charges of $1.1 million related to disposition of intangible assets for certain of the closed or divested branches. Approximately $0.7 million of these charges are recorded in gain on sale of assets and businesses, net and the remaining $0.4 million are recorded as selling, general and administrative expenses in the Company's consolidated statement of comprehensive income for the year ended December 31, 2011.

For 2012, 2011 and 2010, the Company recorded amortization expense of approximately $10.0 million, $13.0 million, and $8.1 million, respectively. The estimated amortization expense for each of the next five succeeding years approximates $4.1 million for 2013, $2.4 million for 2014, $2.3 million for 2015, $1.4 million for 2016, and $1.2 million for 2017.

The gross carrying amount of goodwill as of December 31, 2012 and December 31, 2011 and activity during the years 2012 and 2011 were as follows (in thousands):



	Home Health			Hospice			Total
Balance at December 31, 2010	$	264,679		$	820,387		$	1,085,066
Goodwill adjustment	2,379			11,261			13,641
Accumulated impairment losses	(263,370		)	(193,667		)	(457,037		)
Balance at December 31, 2011	3,688			637,981			641,669
Goodwill acquired during 2012	5,331			9,364			14,695
Balance at December 31, 2012	$	9,019		$	647,345		$	656,364

During 2011, the Company reclassified deferred tax assets associated with the classification of deductible intangible assets and goodwill related to a 2006 acquisition. The impact of this reclassification was an increase in goodwill in the Home Health and Hospice segments of $2.4 million and $11.2 million, respectively, and a decrease in non-current deferred tax assets of $13.6 million.

Medicare Licenses and Certificates of Need

Medicare licenses and certificates of need (“CON”) represent the largest component of identifiable intangible assets. A Medicare license, which represents a provider number issued by the federal or state government, is a necessary requirement for any health care provider to be eligible to receive reimbursement for patient services under the government programs. A CON is a formal acknowledgment by a state government that a particular health care service, program or capital expenditure meets the identified needs of the state in providing health care to its population. For home health or hospice providers in certain regulated states, a CON functions as a permit or authorization to provide services in certain designated areas (i.e., counties or service areas) indefinitely. The CON process varies from state to state and is designed to prevent unnecessary duplication of services by regulating the number of providers that can engage in particular types of services within the service area. Currently, 17 states and the District of Columbia require CONs in order to operate a Medicare-certified home health agency, and 13 states and the District of Columbia require CONs in order to operate a Medicare-certified hospice agency. Without CON authority in these jurisdictions, a party is precluded from providing these services. The issuance of new CONs by most of these states has been very limited.

The amounts set forth in the table above for “Indefinite-lived intangible assets—Medicare licenses and certificates of need” reflect the value of Medicare licenses acquired in the Odyssey acquisition and CONs acquired during 2006 and thereafter. The carrying values of Medicare licenses were determined using a replacement cost and an opportunity cost approach, recognizing the time and expense to obtain a license if such license had not previously existed in the geographic areas covered by Odyssey branches. The carrying values of CONs were determined using an income approach, recognizing that CONs represent a right to conduct business in otherwise restricted areas as discussed above and should be recognized as an intangible asset apart from goodwill in accordance with authoritative guidance.

The Company has also classified the Medicare licenses and CONs as indefinite-lived, and therefore determined that the value of these Medicare licenses and CONs should not be amortized, in accordance with authoritative guidance that states “if no legal, regulatory, contractual, competitive, economic, or other factors limit the useful life of an intangible asset to the reporting entity, the useful life of the asset shall be considered to be indefinite.” The holder of a Medicare license may continue to provide services indefinitely as long as the healthcare provider continues to meet eligibility requirements. The holder of a CON may provide services in CON-approved counties indefinitely as long as services continue to be provided in a manner consistent with and as authorized by the respective CON. Furthermore, CONs are not subject to obsolescence because of competition since the issuance of new CONs is subject to regulatory approval that is granted in part only if there is a “need” for services of the same type in the relevant market. That attribute is a major factor in the significant market value inherent in a CON.