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Goodwill and Intangible Assets | 12 Months Ended
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Dec. 31, 2017
Goodwill and Intangible Assets | J. GOODWILL AND 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 to be impaired when the net book value of a reporting unit exceeds its estimated fair value. Teradyne has the option to perform a qualitative assessment (“Step zero”) to determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount. If Teradyne determines this is the case, Teradyne is required to perform the two-step goodwill impairment test to identify potential goodwill impairment and measure the amount of goodwill impairment loss to be recognized. If Teradyne determines that it is more-likely-than-not that the fair value of the reporting unit is greater than its carrying amounts, the two-step goodwill impairment test is not required. When performing the two-step process, the first step involves a comparison of the estimated fair value of a reporting unit to its carrying amount, including goodwill. In performing the first step, Teradyne determines the fair value of a reporting unit using the results derived from an income approach and a market approach. The income approach is estimated through the discounted cash flow (“DCF”) analysis. Determining fair value requires the exercise of significant judgment, including judgments about appropriate discount rates, perpetual growth rates, and the amount and timing of expected future cash flows. Discount rates are based on a weighted average cost of capital (“WACC”), which represents the average rate a business must pay its providers of debt and equity, plus a risk premium. The WACC used to test goodwill is derived from a group of comparable companies. The cash flows employed in the DCF analysis are derived from internal forecasts and external market forecasts. The market approach estimates the fair value of the reporting unit by utilizing the market comparable method which is based on revenue and earnings multiples from comparable companies. If the estimated fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not impaired and the second step of the impairment test is not necessary. If the carrying amount of a reporting unit exceeds its estimated fair value, then the second step of the goodwill impairment test must be performed. The second step of the goodwill impairment test compares the implied fair value of the reporting unit’s goodwill with its carrying amount of goodwill to measure the amount of impairment loss, if any. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination, whereby the estimated fair value of the reporting unit is allocated to all of the assets and liabilities of that unit (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the purchase price paid. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. 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 has contributed between 51% and 73% of annual Wireless Test sales since the LitePoint acquisition in 2011 through 2015) 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 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 the Wireless Test reporting unit goodwill is valued at $8.0 million and recorded an impairment loss of $254.9 million in the second quarter of 2016. In the fourth quarter of 2017, Teradyne performed the annual goodwill impairment test. Teradyne completed step one of the two-step impairment test for the Industrial Automation reporting unit. Teradyne completed step zero for the Wireless Test and Defense/Aerospace reporting units. There was no impairment as a result of the annual test performed in the fourth quarter of 2017. In the fourth quarter of 2016, Teradyne performed the annual goodwill impairment test. Teradyne completed step one of the two-step impairment test for the Industrial Automation, Wireless Test and Defense/Aerospace reporting units. There was no impairment as a result of the annual test performed in the fourth quarter of 2016. In 2015, Teradyne performed step one of the two-step impairment test for the Wireless Test and Defense/Aerospace reporting units and the step zero assessment for the Industrial Automation reporting unit. In 2015, there was no impairment. The changes in the carrying amount of goodwill by reportable segments for the years ended December 31, 2017 and 2016 are as follows:
|  | Industrial Automation |  |  | System Test |  |  | Wireless Test |  |  | Semiconductor Test |  |  | Total |
|  | (in thousands) |
Balance at December 31, 2015: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Goodwill |  | $ | 214,975 |  |  | $ | 158,699 |  |  | $ | 361,819 |  |  | $ | 260,540 |  |  | $ | 996,033 |
Accumulated impairment losses |  |  | — |  |  |  | (148,183 | ) |  |  | (98,897 | ) |  |  | (260,540 | ) |  |  | (507,620 | )
|  |  | 214,975 |  |  |  | 10,516 |  |  |  | 262,922 |  |  |  | — |  |  |  | 488,413 |
Foreign currency translation adjustment |  |  | (10,124 | ) |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (10,124 | )
Goodwill impairment losses |  |  | — |  |  |  | — |  |  |  | (254,946 | ) |  |  | — |  |  |  | (254,946 | )
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 |  |  | 28,668 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 28,668 |
Balance at December 31, 2017: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Goodwill |  |  | 233,519 |  |  |  | 158,699 |  |  |  | 361,819 |  |  |  | 260,540 |  |  |  | 1,014,577 |
Accumulated impairment losses |  |  | — |  |  |  | (148,183 | ) |  |  | (353,843 | ) |  |  | (260,540 | ) |  |  | (762,566 | )
|  | $ | 233,519 |  |  | $ | 10,516 |  |  | $ | 7,976 |  |  | $ | — |  |  | $ | 252,011 |
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, resulting in a remaining intangible assets balance of $3.6 million at December 31, 2017, for the Wireless Test segment. There were no events or circumstances indicating that the carrying value of intangible and long-lived assets may not be recoverable in 2017 and 2015. Amortizable intangible assets consist of the following and are included in intangible assets, net on the balance sheets:
|  | December 31, 2017 |
|  | Gross Carrying Amount |  |  | Accumulated Amortization |  |  | Foreign Currency Translation Adjustment |  |  | Net Carrying Amount |
|  | (in thousands) |
Developed technology |  | $ | 270,877 |  |  | $ | (226,190 | ) |  | $ | 1,618 |  |  | $ | 46,305 |
Customer relationships |  |  | 92,741 |  |  |  | (83,585 | ) |  |  | 171 |  |  |  | 9,327 |
Tradenames and trademarks |  |  | 50,100 |  |  |  | (27,120 | ) |  |  | 416 |  |  |  | 23,396 |
Non-compete agreement |  |  | 320 |  |  |  | (260 | ) |  |  | — |  |  |  | 60 |
Total intangible assets |  | $ | 414,038 |  |  | $ | (337,155 | ) |  | $ | 2,205 |  |  | $ | 79,088 |
|  | December 31, 2016 |
|  | Gross Carrying Amount |  |  | Accumulated Amortization |  |  | 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 intangible assets |  | $ | 414,038 |  |  | $ | (306,698 | ) |  | $ | (6,939 | ) |  | $ | 100,401 |
Aggregate intangible assets amortization expense for the years ended December 31, 2017, 2016, and 2015 was $30.5 million, $52.6 million, and $69.0 million, respectively. Estimated intangible assets amortization expense for each of the five succeeding fiscal years is as follows:
Year |  | Amortization Expense |
|  | (in thousands) |
2018 |  | $ | 29,496 |
2019 |  |  | 25,533 |
2020 |  |  | 11,249 |
2021 |  |  | 3,732 |
2022 |  |  | 2,927 |
Thereafter |  |  | 6,151 |

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- 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 + Details
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