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Goodwill and Acquired Intangible Assets

9 Months Ended

Oct. 01, 2017

Goodwill and Acquired Intangible Assets

L. GOODWILL AND ACQUIRED INTANGIBLE ASSETS

Goodwill

Teradyne performs its annual goodwill impairment test as required under the provisions of ASC 350-10, “Intangibles—Goodwill and Other” on December 31 of each fiscal year unless interim indicators of impairment exist. Goodwill is considered impaired when the net book value of a reporting unit exceeds its estimated fair value.

In the second quarter of 2016, the Wireless Test reporting unit (which is Teradyne’s Wireless Test operating and reportable segment) reduced headcount by 11% as a result of a sharp decline in projected demand attributable to an estimated smaller future wireless test market. The decrease in projected demand was due to lower forecasted buying from Teradyne’s largest Wireless Test segment customer (who had previously contributed between 51% and 73% of annual Wireless Test sales since the LitePoint acquisition in 2011) as a result of the customer’s numerous operational efficiencies; slower smartphone growth rates; and a slowdown of new wireless technology adoption. Teradyne considered the headcount reduction and sharp decline in projected demand to be a triggering event for an interim goodwill impairment test.

Teradyne used the income and market approaches to determine the fair value of the Wireless Test reporting unit for step 1 of the goodwill impairment test. With respect to the income approach, Teradyne used the discounted cash flow method, which included seven year future cash flow projections and an estimated terminal value. The cash flow projections were prepared using Teradyne’s forecast, which was based upon underlying estimates of the total market size, and Teradyne’s market share in the wireless test market developed using Teradyne and independent third party data. The estimated terminal value was calculated using the Gordon Growth model. The market approach used a revenue multiple to develop an estimate of fair value. The revenue multiple was estimated using enterprise value as a ratio of next twelve months revenue for comparable companies. Teradyne equally weighted the income and market approaches to determine the fair value of the Wireless Test reporting unit. The carrying amount of the Wireless Test reporting unit exceeded its fair value; therefore, the second step of the goodwill impairment test was performed to calculate implied goodwill and to measure the amount of the impairment loss.

Teradyne allocated the fair value of the Wireless Test reporting unit to all of its assets and liabilities (including unrecognized intangible assets). The net book value of raw materials inventory was estimated as an approximation of current replacement costs. The fair value of finished goods inventory was estimated at the present value of selling price less direct selling costs and profit on the selling effort. The selling price used in the inventory fair values was based upon the product gross margins included in Teradyne’s forecast. The fair value of the deferred revenue liability was estimated by assessing the costs required to service the obligation plus a reasonable profit margin. The fair value for personal property assets, which consisted of furniture and fixtures, machinery and equipment, computer equipment, software and leasehold improvements, was estimated using the replacement cost approach, which approximated carrying value. The fair value of intangible assets was estimated using the income approach and, in particular, developed technology and trademarks/trade names were valued using the relief-from-royalty method and customer relationships and customer backlog were valued using the discounted cash flow method. Royalty rates were estimated using rates applicable to wireless testing equipment and other similar technologies. Based upon this allocation, Teradyne determined that goodwill was valued at $8.0 million and recorded an impairment loss of $254.9 million in the second quarter of 2016.

The changes in the carrying amount of goodwill by reportable segments for the nine months ended October 1, 2017, were as follows:

		Industrial Automation				System Test				Wireless Test				Semiconductor Test				Total
		(in thousands)
Balance at December 31, 2016
Goodwill		$	204,851			$	158,699			$	361,819			$	260,540			$	985,909
Accumulated impairment losses			—				(148,183	)			(353,843	)			(260,540	)			(762,566	)
			204,851				10,516				7,976				—				223,343
Foreign currency translation adjustment			25,934				—				—				—				25,934
Balance at October 1, 2017
Goodwill			230,785				158,699				361,819				260,540				1,011,843
Accumulated impairment losses			—				(148,183	)			(353,843	)			(260,540	)			(762,566	)
		$	230,785			$	10,516			$	7,976			$	—			$	249,277

Acquired Intangible Assets

Teradyne reviews long-lived assets for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable or that the useful lives of these assets are no longer appropriate. As a result of the Wireless Test segment goodwill impairment review in the second quarter of 2016, Teradyne performed an impairment test of the Wireless Test segment’s intangible and long-lived assets. The impairment test is based on a comparison of the estimated undiscounted cash flows to the carrying value of the asset group. If undiscounted cash flows for the asset group are less than the carrying amount, the asset group is written down to its estimated fair value based on a discounted cash flow analysis. The cash flow estimates used to determine the impairment contain management’s best estimates using appropriate assumptions and projections at that time. The fair value of intangible assets was estimated using the income approach and, in particular, developed technology and trademarks/trade names were valued using the relief-from-royalty method and customer relationships were valued using the discounted cash flow method. Royalty rates were estimated using rates applicable to wireless testing equipment and other similar technologies. As a result of the analysis, Teradyne recorded an $83.3 million impairment charge in the second quarter of 2016 in acquired intangible assets impairment on the statements of operations.

Amortizable acquired intangible assets consist of the following and are included in acquired intangible assets, net on the balance sheet:

		October 1, 2017
		Gross Carrying Amount				Accumulated Amortization				Cumulative Foreign Currency Translation Adjustment				Net Carrying Amount
		(in thousands)
Developed technology		$	270,877			$	(221,051	)		$	1,057			$	50,883
Customer relationships			92,741				(82,286	)			111				10,566
Tradenames and trademarks			50,100				(26,171	)			271				24,200
Non-compete agreement			320				(240	)			—				80
Total		$	414,038			$	(329,748	)		$	1,439			$	85,729

		December 31, 2016
		Gross Carrying Amount				Accumulated Amortization				Cumulative Foreign Currency Translation Adjustment				Net Carrying Amount
		(in thousands)
Developed technology		$	270,877			$	(206,376	)		$	(5,093	)		$	59,408
Customer relationships			92,741				(76,707	)			(538	)			15,496
Tradenames and trademarks			50,100				(23,435	)			(1,308	)			25,357
Non-compete agreement			320				(180	)			—				140
Total		$	414,038			$	(306,698	)		$	(6,939	)		$	100,401

Aggregate acquired intangible assets amortization expense was $7.0 million and $23.1 million, respectively, for the three and nine months ended October 1, 2017 and $8.5 million and $44.7 million, respectively, for the three and nine months ended October 2, 2016.

Estimated acquired intangible assets amortization expense for each of the five succeeding fiscal years is as follows:

Year		Amortization Expense
		(in thousands)
2017(remainder)			7,348
2018			29,268
2019			25,295
2020			11,134
2021			3,703
Thereafter			8,981

X

- Definition

The entire disclosure for the aggregate amount of goodwill and a description of intangible assets, which may include (a) for amortizable intangible assets (also referred to as finite-lived intangible assets), the carrying amount, the amount of any significant residual value, and the weighted-average amortization period, (b) for intangible assets not subject to amortization (also referred to as indefinite-lived intangible assets), the carrying amount, and (c) the amount of research and development assets acquired and written off in the period, including the line item in the income statement in which the amounts written off are aggregated, if not readily apparent from the income statement. Also discloses (a) for amortizable intangibles assets in total and by major class, the gross carrying amount and accumulated amortization, the total amortization expense for the period, and the estimated aggregate amortization expense for each of the five succeeding fiscal years, (b) for intangible assets not subject to amortization the carrying amount in total and by major class, and (c) for goodwill, in total and for each reportable segment, the changes in the carrying amount of goodwill during the period (including the aggregate amount of goodwill acquired, the aggregate amount of impairment losses recognized, and the amount of goodwill included in the gain (loss) on disposal of a reporting unit). If any part of goodwill has not been allocated to a reportable segment, discloses the unallocated amount and the reasons for not allocating. For each impairment loss recognized related to an intangible asset (excluding goodwill), discloses: (a) a description of the impaired intangible asset and the facts and circumstances leading to the impairment, (b) the amount of the impairment loss and the method for determining fair value, (c) the caption in the income statement or the statement of activities in which the impairment loss is aggregated, and (d) the segment in which the impaired intangible asset is reported. For each goodwill impairment loss recognized, discloses: (a) a description of the facts and circumstances leading to the impairment, (b) the amount of the impairment loss and the method of determining the fair value of the associated reporting unit, and (c) if a recognized impairment loss is an estimate not finalized and the reasons why the estimate is not final. May also disclose the nature and amount of any significant adjustments made to a previous estimate of an impairment loss.

+ References

Reference 1: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 350
-URI http://asc.fasb.org/topic&trid=2144416

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