Impairment of Goodwill and Intangibles

12 Months Ended

Dec. 31, 2015

Goodwill and Intangible Assets Disclosure [Abstract]

Impairment of Goodwill and Intangibles

3. Impairment of Goodwill and Intangibles

The annual goodwill impairment test was performed in October 2015 related to the two reporting units that have goodwill and the step one results of the test indicated that there was no impairment of goodwill at that date. This test concluded that the excess of fair value over the carrying value was in the 4% to 5% range. Given these results, and since the Company cannot predict future performance or market conditions, if there are further reductions in our market capitalization and market multiples, or the projected performance is not achieved, these remaining two reporting units could be at risk of failing the second step in the near future.

 During the second quarter of 2015 and prior to the annual impairment test of goodwill in October, the Company concluded that impairment indicators existed at the Southwest reporting unit, due to a decline in the overall financial performance and overall market demand. Step two of the impairment test was performed on Southwest and concluded that the fair value of the Southwest reporting unit was less than its carrying value; therefore the Company performed step three of the impairment analysis.

Step three of the impairment analysis measures the impairment charge by allocating the reporting unit’s fair value to all of the assets and liabilities of the reporting unit in a hypothetical analysis that calculates implied fair value of goodwill in the same manner as if the reporting unit was being acquired in a business combination and recording the deferred tax impact. Any excess of the carrying value of the reporting unit’s goodwill over the implied fair value of the reporting unit’s goodwill is recorded as an impairment loss.

The fair values of the Southwest reporting unit and tradenames were estimated using a discounted cash flow model. The material assumptions used for the income approach included a weighted average cost of capital of 13% and a long-term growth rate of 5-7%. The carrying value of the Southwest reporting unit’s goodwill was $2.6 million and its implied fair value resulting from step three of the impairment test was zero. As a result, the Company recorded a non-cash goodwill impairment charge of $2.6 million during the second quarter of 2015.

Additionally, in 2015, the Company tested its indefinite-lived intangible assets for impairment due to triggering events as well as part of the annual test. As a result, an impairment charge of $0.8 million against the tradenames was recorded during the year. The total 2015 impairment charge of $3.4 million included a $2.7 million non-deductible portion.

During the third quarter of 2013 and prior to the annual impairment test of goodwill in October, the Company concluded that impairment indicators existed at the Southern reporting unit, due to a decline in the overall financial performance and overall market demand. The same steps one, two and three analyses as outlined above were performed.

The fair value of the Southern reporting unit was estimated using a discounted cash flow model combined with a market approach, with a weighting of 50% to the discounted cash flow analysis and 50% to the market approach. The material assumptions used for the income approach included a weighted average cost of capital of 13% and a long-term growth rate of 3-4%. The carrying value of the Southern reporting unit’s goodwill was $20.1 million and its implied fair value resulting from step three of the impairment test was less than the carrying value. As a result, the Company recorded a non-cash goodwill impairment charge of $7.6 million during the year ended December 31, 2013.

The Company is still anticipating significant growth in the businesses it acquired in 2010, but if this growth is not achieved, further goodwill impairments may result.