Goodwill and Other Intangible Assets

Goodwill is recorded to the extent that the purchase price of an acquisition exceeds the fair value of the identifiable net assets acquired. Other intangibles with definite and indefinite useful lives are recorded at fair value at the date of the acquisition. Under the provisions of FASB ASC 350, Intangibles-Goodwill and Other (ASC 350), goodwill is tested for impairment at least annually, or more frequently if events or circumstances indicate that it is "more likely than not" that goodwill might be impaired. We assess the impairment of our goodwill and other intangible assets by determining the fair value of each of our reporting units and comparing the fair value to the carrying value for each reporting unit. Determining fair value requires the exercise of significant judgments, including judgments about appropriate discount rates, the amount and timing of expected future cash flows, and perpetual growth rates.

We monitor potential triggering events, including changes in the business climate in which we operate, attrition of key personnel, the current volatility in the capital markets, the company’s market capitalization compared to our book value, our recent operating performance, and financial projections. During the third quarter of 2015 as a result of a sustained decline in our market capitalization below our book value of equity and recent operating performance, the company determined that a triggering event had occurred. In accordance with ASC 350, we determined that an interim Step One impairment test of Customer Interaction and Trillium Software goodwill was warranted. The fair value of each reporting unit was estimated using both the income approach and market approach models. The fair value of our Customer Interaction reporting unit was estimated to be less than the carrying value, including goodwill. The fair value of our Trillium Software reporting unit was estimated to be more than the carrying value, including goodwill. The company determined that the goodwill balance with respect to the Customer Interaction was impaired and Step Two testing on that reporting unit balance was deemed necessary.

Step Two of the goodwill test consists of performing a hypothetical purchase price allocation, under which the estimated fair value of the reporting unit is allocated to its tangible and intangible assets based on their estimated fair values, with any residual amount being assigned to goodwill. During the Step Two analysis, book value was estimated to approximate fair value for all working capital items, as well as a number of insignificant assets and liabilities. Intangible assets related to trade names, customer relationships and non-compete agreements were identified and the fair value of these intangible assets was estimated.

The models used to value the Customer Interaction reporting unit in Step One and the identified intangible assets in Step Two relied on management’s assumptions. These assumptions, which are significant to the calculated fair values, are considered Level 3 inputs under the fair value hierarchy established by ASC 350, as they are unobservable. The assumptions in the Step One test include discount rate, revenue growth rates, tax rates, and operating margins. In addition to these assumptions, the Step Two assumptions include customer attrition rates and royalty rates.

The impairment analysis indicated an impairment of Customer Interaction goodwill that is recorded in the Consolidated Statements of Comprehensive Income (Loss) in the third quarter of 2015 of $209.9 million and a corresponding $36.8 million tax benefit resulting in a net income impact of $173.1 million.

The changes in the carrying amount of goodwill are as follows:



In thousands	Customer Interaction			Trillium		Total
Balance at December 31, 2013	$	377,854		$	20,310	$	398,164
Segment reallocation	$	(128,963	)	$	128,963	$	—
Balance at December 31, 2014	$	248,891		$	149,273	$	398,164
Purchase consideration	41,845			—		41,845
Disposition	(11,099		)	—		(11,099		)
Impairment	(209,938		)	—		(209,938		)
Balance at December 31, 2015	$	69,699		$	149,273	$	218,972

On April 14, 2015 the company sold its B2B research businesses, Aberdeen Group and Harte Hanks Market Intelligence (the "B2B research business”). The B2B research business asset group was a part of our Customer Interaction segment (see Note M, Business Segments). The allocated fair value to the B2B research business within the net book value of Customer Interaction goodwill was $11.1 million. In addition, $2.3 million of intangible assets with indefinite useful lives related to the Aberdeen Group trade name was written off in conjunction with the sale of the B2B research business. These amounts were written off and are reflected in the Loss on sale in the Other expenses section of the Condensed Consolidated Statements of Income (Loss). See Note N, Acquisition and Disposition, below for further discussion.

On March 16, 2015 the company acquired the stock of a privately-owned digital marketing agency. The company paid some consideration upon closing, with additional consideration payable upon the achievement of revenue performance goals over the three-year period following the closing. The company performed a valuation to determine the estimate of the total purchase consideration and to estimate values for the tangible and identifiable intangible assets. As a result of the calculation, we recorded $41.8 million in goodwill and $4.8 million of identified intangible assets with definite lives for for customer relationships, trade names and non-compete agreements.

During second quarter of 2014, we determined our reporting units as Customer Interaction and Trillium Software. In this analysis, our goodwill was allocated to each reporting unit based on the estimated fair value of the reporting unit. We performed an impairment test immediately before and after the change in reporting units, utilizing this same methodology as our November 30 annual impairment test and no indication of impairment was identified.

On September 30, 2013, as a result of a significant decrease in forecasted revenues and an overall strategic assessment of the related operations, management completed an evaluation of the Aberdeen Group trade name. A discounted cash flow model was used to calculate the fair value of the Aberdeen trade name. The significant assumptions used in this method included the (i) revenue growth rates for Aberdeen, (ii) discount rate, (iii) tax rate, and (iv) royalty rate. These assumptions are considered Level 3 inputs under the fair value hierarchy established by FASB ASC 820, Fair Value Measurements and Disclosures. Harte Hanks recorded a non-cash trade name intangible asset impairment charge of $2.8 million. The impairment charge is included in Impairment of other intangible assets in the Consolidated Statements of Comprehensive Income (Loss) in the third quarter of 2013.

We performed our annual goodwill impairment testing as of November 30, 2015. We performed a step zero analysis, and overall fair value was compared to overall market capitalization. Based on the results of our November 30, 2015 impairment tests, we did not record any additional impairment losses in 2015 related to goodwill and other intangible assets. We did not record an impairment loss related to goodwill in 2014.

The company continues to monitor potential triggering events, including changes in the business climate in which it operates, attrition of key personnel, the current volatility in the capital markets, the company’s market capitalization compared to its book value, the company’s recent operating performance, and the company’s financial projections. The occurrence of one or more triggering events could require additional impairment testing, which could result in additional impairment charges in the future.

Other intangibles with indefinite useful lives relate to trade names associated with the Aberdeen Group acquisition in September 2006. These intangibles were written-off in conjunction with the sale of the B2B Research Business. The changes in the carrying amount of other intangibles with indefinite lives are as follows:



In thousands
Balance at December 31, 2013	$	2,250
Acquisition	—
Impairment	—
Balance at December 31, 2014	$	2,250
Acquisition	—
Disposition	(2,250		)
Balance at December 31, 2015	$	—

Other intangibles with definite useful lives all relate to contact databases, client relationships, and non-compete agreements. Other intangible assets with definite useful lives are amortized on a straight-line basis over their respective estimated useful lives, typically a period of 2 to 10 years, and are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

The changes in the carrying amount of other intangibles with definite lives are as follows:



In thousands
Balance at December 31, 2013	$	53
Acquisition	—
Amortization	(26		)
Impairment	—
Balance at December 31, 2014	$	27
Disposition	(18		)
Acquisition	4,773
Amortization	(659		)
Impairment	—
Balance at December 31, 2015	$	4,123

Amortization expense related to other intangibles with definite useful lives was $0.7 million, $0.0 million, and $0.2 million for the years ended December 31, 2015, 2014, and 2013, respectively. Expected amortization expense for the next five years is as follows:



In thousands
2016	$	821
2017	707
2018	627
2019	613
2020	613
Thereafter	742
	$	4,123