Goodwill and Other Long-Lived Assets

Goodwill

The following table presents the changes in the carrying amount of our goodwill for the nine months ended September 30, 2014 (in thousands):



	Animal Hospital			Laboratory			All Other			Total
Balance as of December 31, 2013
Goodwill	$	1,216,581		$	96,871		$	138,276		$	1,451,728
Accumulated impairment losses	—			—			(120,811		)	(120,811		)
Subtotal	1,216,581			96,871			17,465			1,330,917
Goodwill acquired	46,475			27			6,669			53,171
Goodwill impairment	—			—			(9,246		)	(9,246		)
Foreign translation adjustment	(5,176		)	(28		)	—			(5,204		)
Other ⁽¹⁾	(1,408		)	—			—			(1,408		)
Balance as of September 30, 2014
Goodwill	1,256,472			96,870			144,945			1,498,287
Accumulated impairment losses	—			—			(130,057		)	(130,057		)
Subtotal	$	1,256,472		$	96,870		$	14,888		$	1,368,230

____________________________


⁽¹⁾	"Other" primarily includes immaterial measurement period adjustments and an immaterial write-off related to the sale of an animal hospital.

Vetstreet Goodwill Impairment Charge

Impairment testing for goodwill is performed at least annually at the reporting unit level. A reporting unit is an operating segment or one level below an operating segment (also known as a component). We perform our annual impairment test as of October 31st. Goodwill is also tested for impairment 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 value.

With respect to our Vetstreet reporting unit, during 2013 we established a Fiscal 2014 Operating and Financial Performance - Turnaround Plan. The Plan anticipated the launch of numerous product enhancements designed to restore our competitive advantage in the marketplace. Although certain of these product enhancements were delivered in a timely fashion, others were not. In addition, increasing competition created the need for additional product enhancements to those already planned. Given the less than anticipated impact of new product offerings combined with the the impact of increased competition, we determined that a triggering event had occurred with respect to goodwill and long-lived assets of our Vetstreet reporting unit. Accordingly, we established revised multi-year projections and performed an interim test of Vetstreet’s recorded goodwill and long-lived assets for impairment in the third quarter of 2014, prior to our annual October 31, 2014 test. As a result of our review, we determined that goodwill related to our Vetstreet reporting unit was impaired.

The impairment test for goodwill uses a two-step approach. Step one compares the fair value of the reporting unit to its carrying value including goodwill. If the carrying value exceeds the fair value, there is a potential impairment and step two must be performed. Step two compares the carrying value of the reporting unit's goodwill to its implied fair value (i.e., the fair value of the reporting unit less the fair value of the unit's assets and liabilities, including identifiable intangible assets). If the carrying value of goodwill exceeds its implied fair value, the excess is recorded as an impairment.


3.	Goodwill and Other Long-Lived Assets, continued

We calculate the implied fair value of the reporting unit utilizing the income approach. The income approach is based on a discounted cash flow analysis and calculates the fair value of the reporting unit by estimating the after-tax cash flows attributable to the reporting unit and then discounting the after-tax cash flows to a present value, using a weighted average cost of capital ("WACC"). The WACC utilized in our analysis using the income approach was 14.0%. The WACC is an estimate of the overall after-tax rate of return required for equity and debt holders of a business enterprise. The reporting unit's cost of equity and debt was developed based on data and factors relevant to the economy, the industry and the reporting unit. The cost of equity was estimated using the capital asset pricing model ("CAPM"). The CAPM uses a risk-free rate of return and an appropriate market risk premium for equity investments and the specific risks of the investment. The analysis also included comparisons to a group of guideline companies engaged in the same or similar businesses. The cost of debt was estimated using the current after-tax average borrowing cost that a market participant would expect to pay to obtain its debt financing assuming a target capital structure.

Based on the above analysis, it was determined that the carrying value of the Vetstreet reporting unit including goodwill exceeded the fair value of the reporting unit, requiring us to perform step two of the goodwill impairment test to measure the amount of impairment loss, if any.

In performing step two of the goodwill impairment test, we compared the implied fair value of the reporting unit's goodwill to its carrying value. As the carrying value of Vetstreet's goodwill exceeded its implied fair value we recognized a non-cash, goodwill impairment charge of $9.2 million, representing the entire balance of Vetstreet's goodwill. The impairment charge was recognized during the quarter ended September 30, 2014.

The fair value estimates used in the goodwill impairment analysis required significant judgment. The Company's fair value estimates for purposes of determining the goodwill impairment charge are considered Level 3 fair value measurements.

Other Intangible Assets

Our acquisition related amortizable intangible assets at September 30, 2014 and December 31, 2013 are as follows (in thousands):



	As of September 30, 2014							As of December 31, 2013
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Non-contractual customer relationships	$	98,904	$	(50,033	)	$	48,871	$	109,842	$	(41,895	)	$	67,947
Covenants not-to-compete	9,170		(4,383		)	4,787		8,843		(4,661		)	4,182
Favorable lease assets	9,591		(4,844		)	4,747		7,458		(4,373		)	3,085
Trademarks	13,104		(4,608		)	8,496		13,115		(4,194		)	8,921
Contracts	460		(363		)	97		608		(305		)	303
Technology	2,913		(1,613		)	1,300		5,240		(3,015		)	2,225
Client lists	—		—			—		50		(42		)	8
Franchise rights	10,400		(87		)	10,313		—		—			—
Total	$	144,542	$	(65,931	)	$	78,611	$	145,156	$	(58,485	)	$	86,671


3.	Goodwill and Other Long-Lived Assets, continued

The recoverability of the carrying values of all fixed assets and intangible assets with finite lives are re-evaluated when events or changes in circumstances indicate an asset's value may be impaired. We perform a quarterly review of fixed assets and identified intangible assets to determine if facts and circumstances indicate that the useful life is shorter than we had originally estimated or that the carrying amount of assets may not be recoverable. If such facts and circumstances exist, we assess recoverability by comparing the projected undiscounted net cash flows associated with the related asset or group of assets over their remaining lives against their respective carrying amounts. Impairments, if any, are based on the excess of the carrying amount over the fair value of those assets. If the useful life is shorter than originally estimated, we accelerate the rate of amortization and amortize the remaining carrying value over the new shorter useful life.

We recorded a $13.1 million intangible asset impairment charge related to non-contractual customer relationships, technology, trademarks and contracts related to our above noted interim impairment test of Vetstreet. We also recorded a fixed asset impairment of $4.7 million. Our determination during interim testing that the fair value of the intangible assets was less than carrying value was based upon changes in our estimate of forecasted cash flows. The fair values of the impaired intangibles were calculated utilizing valuation methods consisting primarily of discounted cash flow techniques, and market comparables, where applicable. The impairment charges are included under the caption "Impairment of goodwill and other long-lived assets" in our consolidated income statement.

The following table summarizes our aggregate amortization expense related to acquisition related intangible assets (in thousands):



	Three Months Ended September 30,				Nine Months Ended September 30,
	2014		2013		2014		2013
Aggregate amortization expense	$	5,231	$	5,588	$	15,605	$	16,153

The estimated amortization expense related to acquisition related intangible assets for the remainder of 2014 and each of the succeeding years thereafter, as of September 30, 2014, is as follows (in thousands):



Definite-lived intangible assets:
Remainder of 2014	$	5,147
2015	19,232
2016	16,321
2017	10,114
2018	6,677
Thereafter	20,250
Total	$	77,741
Indefinite-lived intangible assets:
Trademarks	870
Total intangible assets	$	78,611