

5.	Goodwill

The following table presents the changes in the carrying amount of our goodwill for 2015 and 2014 (in thousands):



	Animal Hospital			Laboratory			All Other			Total
Balance as of December 31, 2013
Goodwill	$	1,206,213		$	97,556		$	138,276		$	1,442,045
Accumulated impairment losses	—			—			(120,811		)	(120,811		)
Subtotal	1,206,213			97,556			17,465			1,321,234
Goodwill acquired	110,207			27			4,701			114,935
Goodwill impairment	—			—			(9,246		)	(9,246		)
Foreign translation adjustment	(9,722		)	(48		)	—			(9,770		)
Other ⁽¹⁾	(1,140		)	—			(152		)	(1,292		)
Balance as of December 31, 2014
Goodwill	1,305,558			97,535			142,825			1,545,918
Accumulated impairment losses	—			—			(130,057		)	(130,057		)
Subtotal	1,305,558			97,535			12,768			1,415,861
Goodwill acquired	120,374			3,824			1,507			125,705
Goodwill impairment	—			—			—			—
Foreign translation adjustment	(22,441		)	(86		)	—			(22,527		)
Other ⁽¹⁾	(1,385		)	(4		)	—			(1,389		)
Balance as of December 31, 2015
Goodwill	1,402,106			101,269			144,332			1,647,707
Accumulated impairment losses	—			—			(130,057		)	(130,057		)
Subtotal	$	1,402,106		$	101,269		$	14,275		$	1,517,650

____________________________


⁽¹⁾	In 2015 and 2014, "Other" primarily includes write-offs related to the sale of animal hospitals partially offset by measurement period adjustments. Additionally, 2014 includes an immaterial write-off related to the sale of a Camp Bow Wow camp.



5.	Goodwill, continued

Goodwill Impairment Charges

2014 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. We have the option to 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 net book value. If we elect to not use this option, or we determine, using the qualitative method, that it is more likely than not that the fair value of a reporting unit is less than its net book value, we then perform the more detailed two-step impairment test.

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.

We calculate the implied fair value of the Vetstreet 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.

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

We based our fair value estimates on assumptions that we believe to be reasonable but that are inherently uncertain, including estimates of future revenues and operating margins and assumptions about the overall economic climate and the competitive environment for our business.

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 positive impact of new product offerings combined with the negative 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 interim impairment review, we 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 third quarter ended September 30, 2014. This charge had no impact on our cash flows or our compliance with debt covenants.



5.	Goodwill, continued

As of October 31, 2014, we evaluated our goodwill for impairment using the qualitative method. Based on this analysis, we determined that it was more likely than not that the fair values of each of our reporting units were greater than their net carrying values at that date. As such, we concluded that goodwill was not impaired for any of our reporting units. As of December 31, 2014, no events or changes in circumstances occurred that would have triggered the need for an additional impairment review of goodwill.