NOTE 3

GOODWILL AND OTHER INTANGIBLE ASSETS

 

The following summarizes changes in the carrying amount of goodwill by reporting segments:

Our M&EC subsidiary was awarded the CH Plateau Remediation Company (“CHPRC”) subcontract by CH2M Hill Plateau Remediation Company (“CH2M Hill”), effective June 19, 2008, in connection with CH2M Hill’s prime contract with the U.S. Department of Energy (“DOE”), relating to waste management and facility operations at the DOE’s Hanford, Washington site. The CHPRC subcontract provided for a base contract period from October 1, 2008 through September 30, 2013, with an option of renewal for an additional five years.  During the second quarter of 2013, our M&EC subsidiary was notified by CH2M Hill that the subcontract, which expired on September 30, 2013, would not be renewed.  As permitted by ASC Topic 350 “Intangibles – Goodwill and Other,” when an impairment indicator arises toward the end of an interim reporting period, the Company may recognize its best estimate of that impairment loss; accordingly, based on the Company’s analysis prepared as of June 30, 2013, we recorded a goodwill impairment charge of $1,149,000 during the three months ended June 30, 2013.  Upon finalization, the Company determined there was no change in the estimated impairment charge recorded in the second quarter. This amount represented the total goodwill for our CHPRC reporting unit – our operations under the CHPRC subcontract.

The Company performed its annual goodwill testing as of October 1, for its remaining three reporting units:  (1) SYA reporting unit (Services Segment); (2) SEC reporting unit (Services Segment); and (3) Treatment reporting unit (Treatment Segment).  The Company identified indicators of potential impairment (market capitalization in relation to net book value, negative industry and economic trends, and lower than anticipated results of operations), which resulted in performance of step 1 of the impairment test. In determining the estimated fair values of the reporting units, the Company generally employed a discounted cash flows analysis (“DCF”) and, in certain cases, used a combination of a DCF analysis and a market-based approach. As noted in the summary of the Company’s significant accounting policies, determining estimated fair values requires the application of significant judgment. As a result of the financial downturn suffered by the Company in 2013, and uncertainties with regards to federal government spending, determining the fair value of the Company’s reporting units was even more judgmental than it has been in the past. These factors reduced the Company’s visibility into long-term trends and dampened the Company’s expectations of future business performance. Consequently, estimates of future cash flows used in the fourth quarter 2013 DCF analyses were moderated, in some cases significantly, relative to the estimates used in the fourth quarter of 2012.  The discount rates utilized in these DCF analyses reflect market-based estimates of the risks associated with the projected cash flows of individual reporting units. The discount rates utilized in the DCF analyses were increased to reflect increased risk due to current economic volatility to a range of 21% to 35% in 2013 from 15% in 2012. In addition, the terminal growth rates used in the DCF analyses were decreased to 3% in 2013 from 4% in 2012. The results of the DCF analyses were corroborated with other value indicators where available, such as comparable company earnings multiples and research analyst estimates. The results of this Step 1 process indicated that there was a potential impairment of goodwill in the Treatment and SEC reporting units, as the book values of the reporting units exceeded their respective estimated fair values. As a result, the Company performed step 2 of the impairment analysis for the two reporting units discussed above. In step 2, the implied fair value is compared to the carrying amount of the goodwill.  If the implied fair value of goodwill is less than the carrying value of goodwill, we would recognize an impairment loss equal to the difference. The implied fair value is calculated by assigning the fair value of the reporting unit (as determined in step 1) to all of its assets and liabilities (including unrecognized intangible assets) and any excess in fair value that is not assigned to the asset and liabilities is the implied fair value of goodwill.  Based on the result of our step 2 analysis, we determined that the goodwill for each of our Treatment and SEC reporting units was fully impaired, and therefore, we recorded a goodwill impairment loss of $13,691,000 and $13,016,000, for our Treatment and SEC reporting unit, respectively.

 

The following table summarizes changes in the carrying amount of permits.  No permit exists at our Services Segment.

⁽¹⁾ Amortization for the one definite-lived permit capitalized in 2009 in connection with the authorization issued by the U.S. EPA to our DSSI facility to commercially store and dispose of radioactive PCBs. This permit is being amortized over a ten year period in accordance with its estimated useful life.

The following table summarizes information relating to the Company’s other intangible assets:

 

The intangible assets are amortized on a straight-line basis over their useful lives with the exception of customer relationships which are being amortized using an accelerated method.

The following table summarizes the expected amortization over the next five years for our definite-lived intangible assets (including the one definite-lived permit) discussed above:

Amortization expense relating to intangible assets for the Company was approximately $745,000 and $675,000, for the years ended December 31, 2013 and 2012, respectively.