GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other identifiable indefinite lived intangibles are not amortized, but are subject to an annual impairment test, or more frequent testing if circumstances indicate that they may be impaired.
Goodwill
We have two geographical reportable segments, “United States” and “International”, both of which have goodwill. The changes in the carrying amount of goodwill since December 31, 2011, by reportable segment, were as follows:
|
| | | | | | | | | | | | |
In thousands |
| | United States | | International | | Total |
Balance as of December 31, 2011 | | $ | 1,506,416 |
| | $ | 407,287 |
| | $ | 1,913,703 |
|
Goodwill acquired during year | | 114,931 |
| | 62,145 |
| | 177,076 |
|
Goodwill allocation adjustments | | (5,061 | ) | | (24,859 | ) | | (29,920 | ) |
Sale of business | | — |
| | (1,178 | ) | | (1,178 | ) |
Changes due to currency fluctuation | | — |
| | 5,422 |
| | 5,422 |
|
Balance as of December 31, 2012 | | 1,616,286 |
| | 448,817 |
| | 2,065,103 |
|
Goodwill acquired during year | | 57,250 |
| | 116,534 |
| | 173,784 |
|
Goodwill allocation adjustments | | 4,541 |
| | 1,470 |
| | 6,011 |
|
Changes due to currency fluctuation | | — |
| | (13,316 | ) | | (13,316 | ) |
Balance as of December 31, 2013 | | $ | 1,678,077 |
| | $ | 553,505 |
| | $ | 2,231,582 |
|
Current year adjustments to goodwill for certain 2012 acquisitions are primarily due to the finalization of intangible asset valuations.
During the quarter ended June 30, 2013, we performed our annual goodwill impairment evaluation for our three reporting units, Domestic Regulated and Compliance Services, Domestic Regulated Recall and Returns Management Services, and International Regulated and Compliance Services. We calculate the fair value of our reporting units using an income method and validate those results using a market approach. Both the income and market approaches indicated no impairment to goodwill to any of our three reporting units.
Market Approach: Our market approach begins by calculating the market capitalization of the Company using the average stock price for the prior twelve months and the outstanding share count at June 30, 2013. We then look at the Company's Earnings Before Interest, Tax, Depreciation, and Amortization (“EBITDA”), adjusted for stock compensation expense and other items, such as change in fair value of contingent consideration, restructuring and plant closure costs, and litigation settlement for the prior twelve months. The calculated market capitalization is divided by the modified EBITDA to arrive at a valuation multiple. The fair value of each reporting unit is then calculated by taking the product of the valuation multiple and the trailing twelve month modified EBITDA of that reporting unit. The fair value was then compared to the reporting units' book value and determined to be in excess of the book value. We believe that starting with the fair value of the company as a whole is a reasonable measure as that fair value is then allocated to each reporting unit based on that reporting unit's individual earnings. A sustained drop in our stock price would have a negative impact to our fair value calculations. A temporary drop in earnings of a reporting unit would have a negative impact to our fair value calculations.
The results of our goodwill impairment test using the market approach indicated the fair value of our reporting units exceeded book value by a substantial amount; in excess of 100%.
Income Approach: The income approach uses expected future cash flows of each reporting unit and discounts those cash flows to present values. Expected future cash flows are calculated using management assumptions of internal growth, capital expenditures, and cost efficiencies. Future acquisitions are not included in the expected future cash flows. We use a discount rate based on our Company calculated weighted average cost of capital which is adjusted for each of our reporting units based on size risk premium and country risk premium. Significant assumptions used in the income approach include realization of future cash flows and the discount rate used to present value those cash flows.
The results of our goodwill impairment test using the income approach indicated the fair value of our reporting units exceeded book value by a substantial amount; in excess of 100%.
Other Intangible Assets
As of December 31, 2013 and 2012 the values of other intangible assets were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
In thousands |
| 2013 | | 2012 |
| Gross
Carrying
Amount | | Accumulated
Amortization | | Net
Value | | Gross
Carrying
Amount | | Accumulated
Amortization | | Net
Value |
Amortizable intangibles: | | | | | | | | | | | |
Covenants not-to-compete | $ | 9,405 |
| | $ | 5,366 |
| | $ | 4,039 |
| | $ | 10,993 |
| | $ | 5,843 |
| | $ | 5,150 |
|
Customer relationships | 670,889 |
| | 81,271 |
| | 589,618 |
| | 602,095 |
| | 57,236 |
| | 544,859 |
|
Tradenames | 5,283 |
| | 1,031 |
| | 4,252 |
| | 4,922 |
| | 712 |
| | 4,210 |
|
License agreements | 611 |
| | 416 |
| | 195 |
| | 720 |
| | 420 |
| | 300 |
|
Other | 91 |
| | 14 |
| | 77 |
| | 89 |
| | 4 |
| | 85 |
|
Indefinite lived intangibles: | | | | | | | | | | | |
Operating permits | 116,054 |
| | — |
| | 116,054 |
| | 112,867 |
| | — |
| | 112,867 |
|
Tradenames | 5,800 |
| | — |
| | 5,800 |
| | — |
| | — |
| | — |
|
Total | $ | 808,133 |
| | $ | 88,098 |
| | $ | 720,035 |
| | $ | 731,686 |
| | $ | 64,215 |
| | $ | 667,471 |
|
In 2013 and 2012, we wrote off $2.9 million and $1.7 million, respectively, for the permit intangibles of facilities due to rationalizing our domestic and international operations. These expenses are reflected as part of "Selling, general and administrative expenses". Under current acquisition accounting, a fair value must be assigned to all acquired assets based on a theoretical "market participant" regardless of the acquirers' intended use for those assets. This accounting treatment can lead to the recognition of losses when a company disposes of acquired assets. In 2013, we wrote off $0.4 million of customer relationships due to impairment.
We complete our annual impairment analysis of our indefinite lived intangibles during the quarter ended December 31 of each year. In 2013 and 2012, we performed our annual permit impairment evaluation and determined that, other than as noted above, there was no impairment.
Our finite-lived intangible assets are amortized over their useful lives. We have determined that our customer relationships have useful lives from 14 to 40 years based upon the type of customer, with a weighted average remaining useful life of 25.6 years. We have covenants not-to-compete intangibles with useful lives from 3 to 14 years, with a weighted average remaining useful life of 3.9 years. We have tradename intangibles with useful lives from 10 to 40 years, with a weighted average remaining useful life of 15.7 years. We have license agreements with useful life of 5 years, with a weighted average remaining useful life of 1.9 years. We have determined that our permits have indefinite lives due to our ability to renew these permits with minimal additional cost, and therefore these are not amortized.
During the years ended ended December 31, 2013, 2012 and 2011, the aggregate amortization expense was $27.1 million, $22.1 million and $16.3 million, respectively.
The estimated amortization expense for each of the next five years, assuming no additional amortizable intangible assets, is as follows for the years ended December 31:
|
| | | | |
In thousands |
2014 | | $ | 29,087 |
|
2015 | | 28,895 |
|
2016 | | 28,548 |
|
2017 | | 28,402 |
|
2018 | | 28,072 |
|
Future amortization expense may fluctuate depending on changes in foreign currency rates, future acquisitions, or changes to the estimated amortizable life of the intangibles. The estimates for amortization expense noted above are based upon foreign exchange rates as of December 31, 2013.
