Identifiable Intangible Assets and Goodwill

9 Months Ended

Sep. 30, 2013

Goodwill and Intangible Assets Disclosure [Abstract]

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 and other indefinite-lived intangible assets. 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. The Company is monitoring its Hospice operations for potential impairment due to actual patient census that is not in line with previous projections. In June 2013, CMS released its preliminary rule regarding rebasing of Medicare reimbursement rates, proposing annual reductions of 3.50 percent for each of the next four years beginning January 2014. CMS is expected to release the final rule during the fourth quarter of 2013. The Company is working towards obtaining some relief in the final rule as well as re-defining its operating model to achieve cost efficiencies and grow its business to help offset the impact of the rate reductions. Depending on future patient census and the success of the rate initiatives, the Company may need to perform an impairment assessment of its identifiable intangible assets and goodwill which could result in additional impairment charges.

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. At March 31, 2013, the Company determined that a triggering event had occurred due to lower than expected average daily census and higher than expected discharge rates during the quarter and performed an interim impairment test of its Hospice reporting unit. For purposes of the interim impairment test, the Company applied certain assumptions that included, but were not limited to, patient census projections, gross margin assumptions, operating efficiencies and economies of scale. To determine fair value, the Company considered the income approach, which determines fair value based on estimated future cash flows of the 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 used a discount rate of 9.5 percent to calculate the fair value of its Hospice reporting unit. Based on the results of the interim impairment test, the Company's Hospice reporting unit had an estimated fair value of approximately $555 million. As such, the Company recorded a non-cash impairment charge relating to goodwill of approximately $220.8 million, which is reflected in goodwill, intangibles and other long-lived asset impairment in the Company's consolidated comprehensive statement of income for the nine months ended September 30, 2013.

During the third quarter of 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 third quarter and first nine months of 2012, which is reflected in goodwill, intangibles and other long-lived asset impairment in the Company's consolidated statements of comprehensive income.

The gross carrying amount and accumulated amortization of each category of identifiable intangible assets as of September 30, 2013 and December 31, 2012 were as follows (in thousands):



	September 30, 2013									December 31, 2012									Useful Life
	Home Health			Hospice			Total			Home Health			Hospice			Total
Amortized intangible assets:
Covenants not to compete	$	1,667		$	15,685		$	17,352		$	1,667		$	15,685		$	17,352		2-5 Years
Less: accumulated amortization	(1,496		)	(15,678		)	(17,174		)	(1,449		)	(14,113		)	(15,562		)
Net covenants not to compete	171			7			178			218			1,572			1,790

Customer relationships	27,196			910			28,106			27,196			910			28,106			5-10 Years
Less: accumulated amortization	(19,411		)	(458		)	(19,869		)	(17,651		)	(390		)	(18,041		)
accumulated impairment losses	(27		)	—			(27		)	(27		)	—			(27		)
Net customer relationships	7,758			452			8,210			9,518			520			10,038
Amortized intangible assets	7,929			459			8,388			9,736			2,092			11,828
Indefinite-lived intangible assets:
Medicare licenses and certificates of need	227,799			102,239			330,038			225,227			101,749			326,976
Less: accumulated impairment losses	(144,672		)	(519		)	(145,191		)	(144,672		)	(519		)	(145,191		)
Net Medicare licenses and certificates of need	83,127			101,720			184,847			80,555			101,230			181,785
Total identifiable intangible assets	$	91,056		$	102,179		$	193,235		$	90,291		$	103,322		$	193,613

During the first nine months of 2012, the Company recorded a charge of approximately $0.5 million to reflect the transfer of the Medicare licenses associated with the sale of the four hospice branches in Louisiana, which is recorded in gain on sale of businesses in the Company’s consolidated statements of comprehensive income for the nine months ended September 30, 2012.

The Company recorded amortization expense of approximately $0.9 million and $3.4 million for the third quarter and first nine months of 2013, respectively, and $2.6 million and $8.7 million for the third quarter and first nine months of 2012, respectively. The estimated amortization expense for the remainder of 2013 is $0.6 million and for each of the next five succeeding years approximates $2.4 million for 2014, $2.3 million for 2015, $1.4 million for 2016, $1.2 million for 2017, and $0.4 million for 2018.

The gross carrying amount of goodwill as of September 30, 2013 and December 31, 2012 and activity during the first nine months of 2013 were as follows (in thousands):



	Goodwill, Gross						Accumulated Impairment Losses
	Home Health		Hospice		Total		Home Health			Hospice			Total
Balance at December 31, 2011:	$	267,058	$	831,648	$	1,098,706	$	(263,370	)	$	(193,667	)	$	(457,037	)
Goodwill acquired during 2012	5,331		9,364		14,695		—			—			—
Balance at December 31, 2012:	272,389		841,012		1,113,401		(263,370		)	(193,667		)	(457,037		)
Goodwill acquired during 2013	2,690		182		2,872		—			—			—
Impairment losses during 2013	—		—		—		—			(220,800		)	(220,800		)
Balance at September 30, 2013:	$	275,079	$	841,194	$	1,116,273	$	(263,370	)	$	(414,467	)	$	(677,837	)

The Company expects that substantially all of the goodwill acquired, as presented in the table above, will be deductible for tax purposes.

- Definition

The entire disclosure for the aggregate amount of goodwill and a description of intangible assets, which may include (a) for amortizable intangible assets (also referred to as finite-lived intangible assets), the carrying amount, the amount of any significant residual value, and the weighted-average amortization period, (b) for intangible assets not subject to amortization (also referred to as indefinite-lived intangible assets), the carrying amount, and (c) the amount of research and development assets acquired and written off in the period, including the line item in the income statement in which the amounts written off are aggregated, if not readily apparent from the income statement. Also discloses (a) for amortizable intangibles assets in total and by major class, the gross carrying amount and accumulated amortization, the total amortization expense for the period, and the estimated aggregate amortization expense for each of the five succeeding fiscal years, (b) for intangible assets not subject to amortization the carrying amount in total and by major class, and (c) for goodwill, in total and for each reportable segment, the changes in the carrying amount of goodwill during the period (including the aggregate amount of goodwill acquired, the aggregate amount of impairment losses recognized, and the amount of goodwill included in the gain (loss) on disposal of a reporting unit). If any part of goodwill has not been allocated to a reportable segment, discloses the unallocated amount and the reasons for not allocating. For each impairment loss recognized related to an intangible asset (excluding goodwill), discloses: (a) a description of the impaired intangible asset and the facts and circumstances leading to the impairment, (b) the amount of the impairment loss and the method for determining fair value, (c) the caption in the income statement or the statement of activities in which the impairment loss is aggregated, and (d) the segment in which the impaired intangible asset is reported. For each goodwill impairment loss recognized, discloses: (a) a description of the facts and circumstances leading to the impairment, (b) the amount of the impairment loss and the method of determining the fair value of the associated reporting unit, and (c) if a recognized impairment loss is an estimate not finalized and the reasons why the estimate is not final. May also disclose the nature and amount of any significant adjustments made to a previous estimate of an impairment loss.

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