10. Intangible assets and goodwill

Intangible assets

Intangible assets include the value assigned to intellectual property and other technology, patents, customer contracts and relationships, trade names, and in-process research and development. The estimated useful lives for our finite-lived intangible assets are between 1 to 14 years. Indefinite-lived intangibles consist of trade names acquired in business combinations. The carrying values of our indefinite-lived intangible assets relating to trade names were $7.6 million at both July 31, 2017 and 2016.

Finite-lived intangible assets at July 31, 2017 and 2016 consisted of the following:

		As of July 31, 2017						As of July 31, 2016
(in millions)	Weighted Average Amortization Period	Cost		Accumulated Amortization/ Write-Offs		Net		Cost		Accumulated Amortization		Net
Developed technologies	10 years	$	17.7	$	14.4	$	3.3	$	29.9	$	15.1	$	14.8
Customer relationships	13 years		43.7		28.7		15.0		47.1		25.2		21.9
Trade names	3 years		0.9		0.9		-		1.9		1.0		0.9
Total finite-lived intangible assets		$	62.3	$	44.0	$	18.3	$	78.9	$	41.3	$	37.6

Amortization expense related to finite-lived intangible assets was $7.4 million, $8.4 million, and $8.9 million for fiscal years 2017, 2016 and 2015, respectively. Amortization expense related to customer relationships and trade names is recognized in operating expenses and amortization expense related to developed technologies is recognized in cost of sales in our Consolidated Statement of Operations.

We evaluate the potential impairment of finite-lived intangible assets whenever events or changes in circumstances indicate that the carrying value of assets may not be recoverable. During the third quarter of fiscal year 2017, our management noted impairment indicators related to the Oncura intangible assets which had a carrying value of $3.2 million. Oncura is part of our Ultrasound operating segment. Management performed an impairment test based on the projected future cash flows. Further disruption in the sales channel of our veterinary business of fiscal year 2017 resulted in lower revenues than anticipated and a reduced revenue forecast of our Oncura reporting unit, as compared with our prior estimates resulting in the recording of an impairment charge of $3.2 million, including a write-off of customer relationships of $2.4 million and a write-off of trade names of $0.8 million in the third quarter of fiscal 2017. We recorded these amounts in the asset impairment charges caption in our accompanying Consolidated Statements of Operations. For more information on the acquisition of Oncura, please refer to Note 3. Business combination.

During the third quarter of fiscal year 2017, our management noted impairment indicators related to the PocketSonics intangible assets which had a carrying value of $8.1 million. PocketSonics is part of our Ultrasound operating segment. Management performed an impairment test based on the projected future cash flows and, based on a decision during the third quarter of fiscal year 2017 to forgo further investment in the business, the Company recorded an impairment charge of $8.1 million, related to the acquired technology in connection with the acquisition of PocketSonics. We recorded these amounts in the asset impairment charges caption in our accompanying Consolidated Statements of Operations. For more information on the acquisition of PocketSonics, please refer to Note 3. Business combination in our Annual Report on Form 10-K for fiscal year 2016, as filed with the SEC on September 27, 2016.

During the second quarter of fiscal year 2017, management noted impairment indicators related to the Pathfinder intangible assets which had a carrying value of $0.6 million. Pathfinder is part of our Security and Detection operating segment. Management performed an impairment test based on the projected future cash flows and changes in strategy to discontinue investments in commercializing these technologies and recorded an impairment charge of $0.6 million, including a write-off of developed technology of $0.5 million and a write-off of trade names of $0.1 million in the second quarter of fiscal 2017. We recorded these amounts in the asset impairment charges caption in our accompanying Consolidated Statements of Operations. For more information on the acquisition of Pathfinder, please refer to Note 3. Business combination in our Annual Report on Form 10-K for fiscal year 2016, as filed with the SEC on September 27, 2016.

The estimated future amortization expenses related to intangible assets for succeeding fiscal years is expected to be as follows:

	Estimated
	Future
	Amortization
(in millions)	Expense
2018	$	5.0
2019		3.8
2020		3.4
2021		3.0
2022		2.2
Thereafter		0.9
	$	18.3

Goodwill

The carrying value of our goodwill at July 31, 2017 and 2016 was $2.3 million and $73.9 million, respectively. We review periodically or more frequently if indicators are present or changes in circumstances suggest that it is more likely than not that impairment may exist and we perform a formal goodwill impairment test in the second quarter of each fiscal year.

The total amount of goodwill that is deductible for tax purposes was $10.5 million for fiscal years 2017 and 2016, respectively.

Changes in the carrying amount of goodwill by reportable segment and reporting unit for the twelve months ended July 31, 2017 are as follows:

	Medical Imaging		Ultrasound						Security and Detection
(in millions)	(Medical Imaging Reporting Unit)		(Ultrasound Reporting Unit)			(Oncura Reporting Unit)			(Security and Detection Reporting Unit)		Total Goodwill
Balance as of July 31, 2016	$	1.8	$	55.2		$	16.4		$	0.5	$	73.9
Impairment losses		-		(55.2	)		(16.4	)		-		(71.6	)
Balance as of July 31, 2017	$	1.8	$	-		$	-		$	0.5	$	2.3

The following is a rollforward of accumulated goodwill impairment losses by reportable segment and reporting unit:

	Medical Imaging		Ultrasound						Security and Detection
(in millions)	(Medical Imaging Reporting Unit)		(Ultrasound Reporting Unit)			(Oncura Reporting Unit)			(Security and Detection Reporting Unit)		Total
Accumulated impairment losses as of July 31, 2016	$	-	$	-		$	-		$	-	$	-
Goodwill impairment losses		-		(55.2	)		(16.4	)		-		(71.6	)
Accumulated impairment losses as of July 31, 2017	$	-	$	(55.2	)	$	(16.4	)	$	-	$	(71.6	)

We have four reporting units with goodwill—Medical Imaging, Ultrasound, Oncura, and Security and Detection and three reportable segments—Medical Imaging, Ultrasound, and Security and Detection. We performed the annual impairment test for our goodwill and other intangible assets with indefinite lives as of December 31, 2016. We first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value and as a basis for determining whether it is necessary to perform the quantitative impairment test. Alternatively, we may elect to bypass the qualitative assessment and proceed to the two-step quantitative impairment test. If we choose to perform a qualitative assessment and determine it is more likely than not that the carrying value of the net assets is more than the fair value of the related operations, the two-step impairment process is then performed; otherwise, no further testing is required. As discussed in Note 1(w), Recent accounting pronouncements, during the second quarter of fiscal year 2017, subsequent to the annual impairment test of goodwill and other intangible assets with indefinite lives as of December 31, 2016, we elected early adoption of ASU 2017-04 as of January 01, 2017, “Intangibles─Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” As a result, we removed Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. Accordingly, starting the third quarter of fiscal 2017, goodwill impairment amount was recorded by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill.

Our quantitative impairment assessment considered both the market approach and income approach to calculate the fair value of the reporting unit, with different weights assigned to each. Under the market approach, the fair value of the reporting unit is based on trading multiples of a peer group of companies, which was determined based on an analysis of the selected guideline public companies’ business enterprise value (“BEV”) plus a control premium, which was determined based on an analysis of control premiums for recent relevant acquisitions. Under the income approach, the fair value of the reporting unit is based on the present value of estimated future cash flows, which are determined, based upon the Company’s most recent strategic operating plan and considering market participant assumptions. The income approach is dependent on a number of significant management assumptions including estimates of future revenues, costs and expenses, and a number of significant valuation inputs including discount rates, working capital rates and tax rates. During the second quarter of fiscal year 2017, for our Medical Imaging, Ultrasound, Oncura, and Security and Detection reporting units, we used the two-step quantitative impairment test. For the Security and Detection reporting unit, we performed the market approach and determined that the fair value of our Security and Detection reporting unit was in excess of its carrying value, and concluded that there was no impairment during the annual impairment test of goodwill and other intangible assets with indefinite lives as of December 31, 2016. For our Medical Imaging and Ultrasound reporting units, we used both the market approach and income approach and determined that there was no impairment of goodwill during the annual impairment test of goodwill and other intangible assets with indefinite lives as of December 31, 2016. For our Medical Imaging reporting unit, we determined that the estimated fair value of the Medical Imaging reporting unit substantially exceeds its carrying value. For our Ultrasound reporting unit, we determined that our Ultrasound reporting unit was at risk of failing the first step of the goodwill impairment test in future reporting periods due to forecast revisions and changes in strategy in our ultrasound business. Our Ultrasound reporting unit had excess fair value over carrying value of approximately 25% as of our annual test date and held $55.2 million of allocated goodwill as of December 31, 2016.

During the second quarter of fiscal year 2017, for our Oncura reporting unit, recent changes in our strategy caused us to decrease future forecasted revenues from our prior estimates. As a result, we determined that the associated goodwill was impaired and we recorded an estimated charge of $9.8 million in the second quarter of fiscal 2017 during the annual impairment test of goodwill and other intangible assets with indefinite lives as of December 31, 2016. We recorded this amount in the asset impairment charges caption in our accompanying Consolidated Statements of Operations. The amount of this charge was finalized in the third quarter of fiscal year 2017 with no change, as we have completed the second step of the goodwill impairment test, in accordance with ASC Topic 350, Intangibles-Goodwill and Other.

During the third quarter of fiscal year 2017, during the strategic review of our Oncura reporting unit, we noted a decreased forecasted revenue as compared with prior estimates, which was caused by the further disruption in our sales channel in our veterinary business, we determined that the remaining goodwill was impaired and recorded a charge of $6.6 million in the third quarter of fiscal year 2017. We recorded this amount in the asset impairment charges caption in our accompanying consolidated statements of operations. The aggregate amount of goodwill associated with our Oncura reporting unit was zero as of July 31, 2017. Also as a result of our decreased revenue forecast for Oncura, we recorded an adjustment to the associated contingent consideration liability, which resulted in a gain of $10.2 million for fiscal 2017, recorded within General and administrative expenses. The fair value of the contingent consideration obligation associated with the Oncura acquisition was zero as of July 31, 2017.

During the third quarter of fiscal year 2017, the Company noted impairment indicators related to our Ultrasound reporting unit. Additional delays related to the introduction and commercialization of our general imaging platform sold through our technology partner in general imaging caused the Company to reassess our revenue expectations for the product. This significant change, as well as a further reduction in revenue estimates for our fiscal 2017 impacted our overall revenue growth expectations in Ultrasound in future periods. Management performed an interim impairment test based on both the market approach and income approach and recorded an estimated impairment charge of $55.2 million. As a result, the aggregate amount of goodwill associated with our Ultrasound reporting unit was taken down to zero as of April 30, 2017. The amount of this charge was finalized in the fourth quarter of fiscal 2017 with no change. In addition to the required goodwill impairment analysis, we also assessed the recoverability of the remaining book value of the finite-lived intangible assets allocated to our Ultrasound reporting unit after they failed the undiscounted cash flow test. The finite-lived intangible assets were tested for recoverability using the Relief from Royalty Method and Excess Earnings Method. The fair values of the intangible assets exceeded the carrying values and no impairment was incurred. The remaining book value of the intangible assets allocated to our Ultrasound reporting unit was $8.6 million as of July 31, 2017.

We compared the fair value of a tradename that has an indefinite life using the relief from royalty approach to its carrying value as of December 31, 2016. The relief from royalty approach utilized an after-tax royalty rate and a discount rate. The after-tax royalty rate was determined based on royalty research and margin analysis, while the discount rate was determined after consideration of market rates of return on debt and equity capital, the weighted average return on invested capital, and the risk associated with achieving forecasted sales for the tradename. We determined that the fair value of the tradename was in excess of its carrying value.

The current economic environment and the uncertainties regarding its impact on our business and our estimates for forecasted revenue and spending levels and made for purposes of our goodwill and trade name impairment testing may not be accurate predictions of the future. If our assumptions regarding forecasted revenue or margin growth rates of each reporting unit and trade name are not achieved, we may be required to record an impairment charge for the goodwill and trade name in future periods, whether in connection with our next annual impairment testing in the second quarter of the fiscal year ending July 31, 2018, or prior to that if any such change constitutes a triggering event outside of the quarter from when the annual goodwill and trade name impairment test is performed. We have made changes in our strategy to our Ultrasound business which have in part driven the impairment charges. Changes in our forecasts, or decreases in the value of our common stock could cause book values of certain operations to exceed their fair values which may result in goodwill impairment charges in future periods. It is not possible at this time to determine if any such future impairment charge would result or, if it does, whether such charge would be material.