NOTE H — GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill Impairment Testing

Under the provisions of ASC 350-10, Intangibles-Goodwill and Other, goodwill is not amortized. Rather, an entity’s goodwill is subject to periodic impairment testing. ASC 350 requires that an entity assign its goodwill to reporting units and test each reporting unit’s goodwill for impairment at least on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Accordingly, we perform our goodwill test annually as of October 1 and between annual tests whenever we identify certain triggering events or circumstances that would more likely than not reduce the fair value of any of our reporting units below its respective carrying value. Additionally, we consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable.

Prior to our adoption of ASU 2017-04, our goodwill impairment testing for 2015 and 2016 was based on a two-step approach, with the second step of the goodwill impairment test requiring an assignment of the reporting unit’s fair value to the reporting unit’s assets and liabilities, including any unrecognized intangible assets, using the acquisition method accounting guidance in ASC 805, to determine the implied fair value of the reporting unit’s goodwill. The difference between the reporting unit’s fair value and the fair values assigned to the reporting unit’s individual assets and liabilities, is the implied fair value of the reporting unit’s goodwill. The implied fair value of the reporting unit’s goodwill is then compared with the carrying amount of the reporting unit’s goodwill to determine the goodwill impairment loss to be recognized, if any. An impairment charge is recognized for the excess of the carrying value of goodwill over its implied fair value.

The goodwill impairment test compares a reporting unit’s fair value to its carrying amount to identify any potential impairment. We apply judgment in determining the fair value of our reporting units for purposes of performing the goodwill impairment test. We rely on widely accepted valuation techniques, including discounted cash flow and market multiple analysis approaches, which capture both the future income potential of the reporting unit and the market behaviors and actions of market participants in the industry that includes the reporting unit. These types of analyses require us to make assumptions and estimates regarding future cash flows, industry-specific economic factors and the profitability of future business strategies. The discounted cash flow approach uses a projection of estimated operating results and cash flows that are discounted using a weighted average cost of capital. Under the discounted cash flow approach, the projection uses management’s best estimates of the amount and timing of expected future cash flows impacted by economic and market conditions over the projected period for each reporting unit. Significant estimates and assumptions include terminal value growth rates, changes in working capital requirements and weighted average cost of capital. The market multiple analysis estimates fair value by applying revenue and earnings multiples to the reporting unit’s operating results. The multiples are derived from comparable publicly traded companies with similar operating and investment characteristics to the reporting units.

We evaluate the reasonableness of the estimated fair value of our reporting units by reconciling the aggregate fair value of all three of our reporting units to our total market capitalization as of our impairment testing date, taking into account an appropriate control premium. The determination of a control premium requires the use of judgment and is based upon control premiums observed in comparable market transactions.

We first assess qualitative factors for a reporting unit to determine if the quantitative goodwill impairment test is necessary. If we choose to bypass this qualitative assessment or alternatively determine that a quantitative goodwill impairment test is required, our annual goodwill impairment test is performed by comparing the estimated fair value of a reporting unit with its carrying amount (including attributed goodwill).

The changes in the carrying value of goodwill for the years ended December 31, 2017 and 2016 are as follows:

	Patient Care					Products & Services
(in thousands)	Gross		Accumulated Impairment			Gross		Accumulated Impairment			Total
Balance at December 31, 2015	$	625,011	$	(428,668	)	$	139,299	$	—		$	335,642
Goodwill impairment	—		—			—		(85,964		)	(85,964		)

Balance at December 31, 2016	625,011		(428,668		)	139,299		(85,964		)	249,678
Goodwill impairment	—		—			—		(53,335		)	(53,335		)

Balance at December 31, 2017	$	625,011	$	(428,668	)	$	139,299	$	(139,299	)	$	196,343

2017 Goodwill

At October 1, 2017, we tested each of our three reporting units as part of our annual goodwill impairment test. Due to the nature and magnitude of events adversely impacting the reimbursement environment within the skilled nursing facility industry (our primary customer source for our Therapeutic solutions business) and the O&P industry (our primary source for our Distribution services business), combined with customer losses and related margin pressures, which increased in the fourth quarter of 2017, our evaluation of our Therapeutic and Distribution reporting units’ long-term outlook resulted in our conclusion that the carrying amounts of these two reporting units exceeded their respective estimated fair values. Consistent with the provisions of ASU 2017-04, which we adopted in 2017, we recorded non-cash goodwill impairment charges of $32.8 million for our Therapeutic reporting unit and $20.5 million for our Distribution reporting unit which is included in “Impairment of intangible assets” in the consolidated statements of operations and comprehensive loss. The fair value of our Patient Care reporting unit exceeded its carrying amount. These goodwill impairment charges had no impact on our cash flow or compliance with debt covenants for 2017.

2016 Goodwill

As of October 1, 2016, we tested each of our three reporting units as part of our annual goodwill impairment test. We concluded that the carrying amounts of the Therapeutic and Distribution reporting units within our Products & Services segment exceeded their respective estimated fair values. The second step of the test was then performed to measure the impairment loss, resulting in non-cash goodwill impairment charges of $64.9 million for our Therapeutic reporting unit and $21.1 million for our Distribution reporting unit which is included in “Impairment of intangible assets” in the consolidated statements of operations and comprehensive loss. The fair value of our Patient Care reporting unit exceeded its carrying amount.

These goodwill impairment charges had no impact on our cash flow or compliance with debt covenants for 2016.

2015 Goodwill

In the fourth quarter of 2015, it became likely that our 2014 financial statements would not be filed by March 19, 2016, our extended due date granted to us by the NYSE. Upon informing the NYSE of a further delay, we were delisted in February 2016. In addition to the decrease in market value due to the delisting, we also anticipated a significant increase in the time and cost for us to recover from these adverse events, and considered this to be a triggering event. We tested each of our three reporting units as of December 31, 2015. We concluded that the carrying amount of the Patient Care reporting unit exceeded its estimated fair value. The second step of the test was then performed to measure the impairment loss, resulting in a non-cash goodwill impairment charge for our Patient Care reporting unit of $382.9 million as of December 31, 2015, which is included in “Impairment of intangible assets” in the consolidated statements of operations and comprehensive loss. The fair value of our Distribution and Therapeutic reporting units exceeded their respective carrying amounts.

This goodwill impairment charge had no impact on our cash flow or compliance with debt covenants for 2015.

During the third quarter of 2015, we noted a significant decline in our stock price and market capitalization coupled with changes in our earnings expectations that were identified during our 2016 budget process which we considered to be a triggering event. We tested each of our three reporting units as of September 30, 2015. The fair value of each of our three reporting units exceeded their respective carrying amounts.

Intangible Asset Impairment Testing

Under the provisions of ASC 360-10, Property, plant, and equipment, an intangible asset that has a finite life should be amortized over its estimated useful life and should be tested for recoverability by comparing the net carrying value of the asset or asset group to the undiscounted net cash flows to be generated from the use and eventual disposition of that asset or asset group when events or changes in circumstances indicate that its carrying amount may not be recoverable. We perform our annual test for recoverability on October 1 of each fiscal year. If the carrying amount of a definite-lived asset or asset group is not recoverable, the fair value of the asset or asset group is measured and if the carrying amount exceeds the fair value, an impairment loss is recognized.

Under the provisions of ASC 350, Intangibles-goodwill and other, an indefinite-lived intangible asset is not amortized but should be tested for impairment annually and between annual tests if events or changes in circumstances indicate that it is more likely than not that the asset is impaired. The indefinite-lived intangible asset impairment standard allows an entity first to assess qualitative factors to determine if a quantitative impairment test is necessary. Further testing is only required if the entity determines, based on the qualitative assessment, that it is more likely than not that an indefinite-lived intangible asset’s fair value is less than its carrying amount. We perform our annual test for recoverability on October 1 of each fiscal year.

The fair value of acquired customer list intangibles is estimated using an excess earnings model. Key assumptions utilized in the valuation model include pro-forma projected cash flows adjusted for market-participant assumptions, forecasted customer retention curve, and discount rate. Customer intangibles are amortized, using the straight-line method over an estimated useful life of four to ten years. The fair value of non-compete agreements are estimated using a discounted cash flow model. The related intangible assets are amortized, using the straight-line method, over their term which ranges from two to five years. Other definite-lived intangible assets are recorded at cost and are amortized, using the straight-line method, over their estimated useful lives of up to seventeen years. The fair value associated with trade names is estimated using the relief-from-royalty method with the primary assumptions being the royalty rate and expected revenues associated with the trade names. These assets, some of which have indefinite lives, are primarily included in the Products & Services segment. Indefinite lived trade name intangible assets are assessed for impairment in the fourth quarter of each year, or more frequently if events or changes in circumstances indicate that the asset might be impaired. Trade name intangible assets with definite lives are amortized over their estimated useful lives of one to ten years.

The balances related to intangible assets as of December 31, 2017 and 2016 are as follows:

	December 31, 2017
(in thousands)	Gross Carrying Amount		Accumulated Amortization			Accumulated Impairment			Net Carrying Amount
Customer Lists	$	36,439	$	(24,267	)	$	—		$	12,172
Trade Name	462		(302		)	—			160
Patents and Other Intangibles	15,358		(10,050		)	—			5,308

Definite-lived intangible assets	52,259		(34,619		)	—			17,640
Indefinite life - Trade Name	9,070		—			(4,770		)	4,300

Total other intangible assets	$	61,329	$	(34,619	)	$	(4,770	)	$	21,940

	December 31, 2016
(in thousands)	Gross Carrying Amount		Accumulated Amortization			Accumulated Impairment			Net Carrying Amount
Customer Lists	$	43,380	$	(23,051	)	$	—		$	20,329
Trade Name	462		(248		)	—			214
Patents and Other Intangibles	15,358		(8,660		)	—			6,698

Definite-lived intangible assets	59,200		(31,959		)	—			27,241
Indefinite life - Trade Name	9,070		—			(3,370		)	5,700

Total other intangible assets	$	68,270	$	(31,959	)	$	(3,370	)	$	32,941

2017 Intangible Assets

As of October 1, 2017, we tested our Therapeutic reporting unit’s indefinite lived tradename as part of our annual impairment test which compared the estimated fair value with the carrying amount of the tradename. The fair value of the intangible asset was estimated using an income approach, specifically the relief-from-royalty method. The cash flows used contain management’s best estimates using appropriate assumptions and projections as of the testing date. The royalty rate was estimated using rates applicable to similar business acquisition transactions. Due to the continued decline in our Therapeutic reporting unit as presented in our annual forecast, the fair value of the tradename was determined to be less than the carrying amount, resulting in a $1.4 million impairment charge recorded in the fourth quarter of 2017. This charge is included in “Impairment of intangible assets” in the consolidated statements of operations and comprehensive loss.

This intangible asset impairment charge had no impact on our cash flow or compliance with debt covenants for 2017.

2016 Intangible Assets

As of October 1, 2016, we tested our Therapeutic reporting unit’s indefinite lived tradename as part of our annual impairment test which compared the estimated fair value with the carrying amount of the tradename. The fair value of the intangible asset was estimated using an income approach, specifically the relief-from-royalty method. The cash flows used contain management’s best estimates using appropriate assumptions and projections as of the testing date. The royalty rate was estimated using rates applicable to similar business acquisition transactions. The fair value of the tradename was determined to be less than the carrying amount, resulting in a $0.2 million impairment charge recorded in the fourth quarter of 2016. This charge is included in “Impairment of intangible assets” in the consolidated statements of operations and comprehensive loss.

This intangible asset impairment charge had no impact on our cash flow or compliance with debt covenants for 2016.

2015 Intangible Assets

In connection with our goodwill impairment testing as of September 30, 2015 and December 31, 2015 due to the triggering events discussed above, we tested our Therapeutic reporting unit’s indefinite-lived tradename intangible asset for impairment as of those dates. The fair value of the tradename was determined to be less than the carrying amount at both dates, resulting in a $0.8 million impairment charge recorded in the third quarter of 2015 and a $2.1 million impairment charge in the fourth quarter of 2015. These charges are included in “Impairment of intangible assets” in the consolidated statements of operations and comprehensive loss.

These intangible asset impairment charges had no impact on our cash flow or compliance with debt covenants for 2015.

In conjunction with our Goodwill impairment testing at December 31, 2015, we reevaluated the estimated useful life of our customer list intangibles. In the fourth quarter of 2015, the estimated useful life of our customer list intangibles was reduced from 10 years to four years in our Patient Care segment and from 14 years to 10 years in our Products & Services segment. This change in the estimated useful lives increased amortization for the years ended December 31, 2017, 2016 and 2015 by approximately $3.0 million, $7.0 million and $6.0 million, respectively.

Total intangible amortization expense was approximately $9.5 million, $13.9 million, and $13.8 million for the years ended December 31, 2017, 2016 and 2015, respectively, and reflects the impact of our change in the estimated useful lives of our customer list intangible assets beginning in the fourth quarter of 2015.

Estimated aggregate amortization expense for definite lived intangible assets for each of the next five years ended December 31 and thereafter is as follows:

(in thousands)	December 31,
2018	$	6,690
2019	3,714
2020	3,457
2021	879
2022	817
Thereafter	2,083

Total	$	17,640

As described, we apply judgment in the selection of key assumptions used in the goodwill impairment test and as part of our evaluation of intangible assets tested annually and at interim testing dates as necessary. If these assumptions differ from actual, we could incur additional impairment charges and those charges could be material.