GOODWILL AND OTHER INTANGIBLE ASSETS

The costs of specifically identifiable intangible assets that do not have an indefinite life are amortized over their estimated useful lives. Goodwill and intangible assets with indefinite lives are not amortized.

As of March 31, 2016 and March 31, 2017, Orion had no goodwill on its Consolidated Balance Sheet. Prior to March 31, 2016, Orion had allocated goodwill to its reporting units which were also two of its reportable segments as follows: $2,371,000 to the U.S. Markets ("USM") and $2,038,000 to Orion Engineered Systems ("OES"). The Orion Distribution Services ("ODS") segment had no goodwill. Orion tests goodwill for impairment at least annually as of the first day of the fiscal fourth quarter, or when indications of potential impairment exist. Orion performed its last annual goodwill impairment test as of January 1, 2016. In accordance with ASC 350, Intangibles - Goodwill and Other, Step 1 of the impairment test compares the fair value of the reporting unit with its carrying value. Orion determined the fair value of each reporting unit using a discounted cash flow method and the guideline public entity method. After completing a Step 1 evaluation, the estimated fair value of both reporting units was determined to be lower than their carrying values. As such, each unit failed Step 1 of the goodwill impairment test and Step 2 of the goodwill impairment test was performed. In conjunction with the Step 2 test, Orion performed a hypothetical purchase price allocation for each of its reporting units to determine the implied fair value of goodwill and compared the implied fair value of goodwill to the carrying amount of goodwill. A third-party valuation firm was engaged to assist in the Step 2 valuation process. The fair value determination was categorized as Level 3 in the fair value hierarchy (see “Fair Value of Financial Instruments” for the definition of Level 3 inputs). As a result of Step 2 of the goodwill impairment tests as of January 1, 2016, Orion’s USM segment recorded a goodwill impairment charge of $2,371,000 and Orion’s OES segment recorded a goodwill impairment charge of $2,038,000. Therefore, as of March 31, 2017 and March 31, 2016, Orion had no goodwill on its Consolidated Balance Sheets.

The change in the carrying value of goodwill during fiscal 2016 was as follows (dollars in thousands):



Balance at March 31, 2015	$	4,409
Impairments	(4,409		)
Balance at March 31, 2016	$	—

Amortizable intangible assets are amortized over their estimated economic useful life to reflect the pattern of economic benefits consumed based upon the following lives and methods:



Patents	10-17 years	Straight-line
Licenses	7-13 years	Straight-line
Customer relationships	5-8 years	Accelerated based upon the pattern of economic benefits consumed
Developed technology	8 years	Accelerated based upon the pattern of economic benefits consumed
Non-competition agreements	5 years	Straight-line

Intangible assets that have a definite life are evaluated for potential impairment whenever events or circumstances indicate that the carrying value may not be recoverable based primarily upon whether expected future undiscounted cash flows are sufficient to support the asset recovery. If the actual useful life of the asset is shorter than the estimated life, the asset may be deemed to be impaired and accordingly a write-down of the value of the asset determined by a discounted cash flow analysis or shorter amortization period may be required.

Indefinite lived intangible assets are evaluated for impairment at least annually on the first day of Orion’s fiscal fourth quarter, or when indications of potential impairment exist. This annual impairment review may begin with a qualitative test to determine whether it is more likely than not that an indefinite lived intangible asset's carrying value is greater than its fair value. If the qualitative assessment reveals that asset impairment is more likely than not, a quantitative impairment test is performed comparing the fair value of the indefinite lived intangible asset to its carrying value. Alternatively, the qualitative test may be bypassed and the quantitative impairment test may be immediately performed. If the fair value of the indefinite lived intangible asset exceeds its carrying value, the indefinite lived intangible asset is not impaired and no further review is performed. If the carrying value of the indefinite lived intangible asset exceeds its fair value, an impairment loss would be recognized in an amount equal to such excess. Once an impairment loss is recognized, the adjusted carrying value becomes the new accounting basis of the indefinite lived intangible asset.

Orion performed a qualitative assessment in conjunction with its annual impairment test of its indefinite lived intangible assets as of January 1, 2017. This qualitative assessment considered Orion’s operating results for the first nine months of fiscal 2017 in comparison to prior years as well as its anticipated fourth quarter results and fiscal 2018 plan. As a result of the conditions that existed as of the assessment date, an asset impairment was not deemed to be more likely than not and a quantitative analysis was not required.

During the fourth quarter of fiscal 2017, Orion achieved lower than anticipated operating results, made a strategic shift in its manufacturing strategy and approach to the fluorescent and LED exterior lighting market, and revised its fiscal 2018 forecast. As a result, a triggering event occurred requiring the Company to reassess its indefinite lived intangible assets for impairment. As such Orion performed a quantitative impairment review of its indefinite lived intangible assets related to the Harris trade name applying the royalty replacement method to determine the asset’s fair value as of March 31, 2017. Under the royalty replacement method, the fair value of the Harris tradename was determined based on a market participant’s view of the royalty that would be paid to license the right to use the tradename. This quantitative analysis incorporated several assumptions including forecasted future revenues and cash flows, estimated royalty rate, based on similar licensing transactions and market royalty rates, and discount rate, which incorporates assumptions such as weighted-average cost of capital and risk premium. As a result of this impairment test, the carrying value of the Harris trade name exceeded its estimated fair value and an impairment of $250,000 was recorded to Impairment of assets during the fourth quarter to reduce the asset’s carrying value to its calculated fair value. This fair value determination was categorized as Level 3 in the fair value hierarchy (see “Fair Value of Financial Instruments” for the definition of Level 3 inputs).

The components of, and changes in, the carrying amount of other intangible assets were as follows (dollars in thousands):



	March 31, 2017							March 31, 2016
	Gross Carrying Amount		Accumulated Amortization			Net		Gross Carrying Amount		Accumulated Amortization			Net
Patents	$	2,658	$	(1,211	)	$	1,447	$	2,377	$	(1,053	)	$	1,324
Licenses	58		(58		)	—		58		(58		)	—
Trade name and trademarks	1,715		—			1,715		1,956		—			1,956
Customer relationships	3,600		(3,054		)	546		3,600		(2,512		)	1,088
Developed technology	900		(426		)	474		900		(265		)	635
Non-competition agreements	100		(75		)	25		100		(55		)	45
Total	$	9,031	$	(4,824	)	$	4,207	$	8,991	$	(3,943	)	$	5,048

As of March 31, 2017, the weighted average useful life of intangible assets was 6.0 years. The estimated amortization expense for each of the next five years is shown below (dollars in thousands):



Fiscal 2018	$	621
Fiscal 2019	445
Fiscal 2020	359
Fiscal 2021	285
Fiscal 2022	167
Thereafter	615
	$	2,492

Amortization expense is set forth in the following table (dollars in thousands):



	Fiscal Year Ended March 31,
	2017		2016		2015
Amortization included in cost of sales:
Patents	$	158	$	139	$	132
Total	$	158	$	139	$	132

Amortization included in operating expenses:
Customer relationships	$	542	$	891	$	1,085
Developed technology	161		156		90
Non-competition agreements	20		20		20
Patents	—		9		—
Total	723		1,076		1,195
Total amortization	$	881	$	1,215	$	1,327

Orion’s management periodically reviews the carrying value of patent applications and related costs. When a patent application is probable of being unsuccessful or a patent is no longer in use, Orion writes off the remaining carrying value as a charge to general and administrative expense within its Consolidated Statement of Operations. Such write-offs recorded in fiscal 2017, 2016 and 2015 were $0, $78,000 and $120,000, respectively.

Included in other income in fiscal 2017 are product royalties received from licensing agreements for our patents.