Note 8. Goodwill

The following table presents the changes in goodwill allocated to the Company’s reportable segments (in millions):



	Network Enablement			Service Enablement			Optical Security and Performance Products		Total
Balance as of June 27, 2015 (1)	$	154.5		$	92.7		$	8.3	$	255.5
Goodwill allocation - WaveReady (3)	(6.0		)	—			—		$	(6.0	)
Currency translation and other adjustments	(4.7		)	(1.3		)	—		$	(6.0	)
Goodwill impairment charge	—			(91.4		)	—		(91.4		)
Balance as of July 2, 2016 (2)	$	143.8		$	—		$	8.3	$	152.1
Currency translation	(0.5		)	—			—		$	(0.5	)
Balance as of July 1, 2017 (4)	$	143.3		$	—		$	8.3	$	151.6


(1)	Gross goodwill balances for NE, SE and OSP were $456.4 million, $273.9 million and $92.8 million, respectively as of June 27, 2015. Accumulated impairment for NE, SE and OSP was $301.9 million, $181.2 million and $84.5 million, respectively as of June 27, 2015.


(2)	Gross goodwill balances for NE, SE and OSP were $445.7 million, $272.6 million and $92.8 million, respectively as of July 2, 2016. Accumulated impairment for NE, SE and OSP was $301.9 million, $272.6 million and $84.5 million, respectively as of July 2, 2016.


(3)	Amount represents a release of the relative fair value of goodwill in our NE reporting unit related to the WaveReady products line, which is now a part of Lumentum as of the Separation Date. Refer to “Note 3. Discontinued Operations” for more information about the Separation.


(4)	Gross goodwill balances for NE, SE and OSP were $445.2 million, $272.6 million and $92.8 million, respectively as of July 1, 2017. Accumulated impairment for NE, SE and OSP was $301.9 million, $272.6 million and $84.5 million, respectively as of July 1, 2017.

The following table presents gross goodwill and aggregate impairment balances for the fiscal years ended July 1, 2017, and July 2, 2016 (in millions):



	years ended
	July 1, 2017			July 2, 2016
Gross goodwill balance	$	810.6		$	811.1
Accumulated impairment losses	(659.0		)	(659.0		)
Net goodwill balance	$	151.6		$	152.1

Impairment of Goodwill

The Company reviews goodwill for impairment annually during the fourth quarter of the fiscal year or more frequently if events or circumstances indicate that an impairment loss may have occurred. The Company determined that, based on its organizational structure and the financial information that is provided to and reviewed by management during fiscal 2017 and 2016, its reporting units were NE, SE and OSP.

Fiscal 2017

During the fourth quarter of fiscal 2017, the Company early adopted the new authoritative guidance that eliminated the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge. Instead, any impairment charge would be based on the excess of a reporting unit's carrying amount over its fair value.

During the fourth quarter of fiscal 2017, the Company performed the quantitative goodwill impairment test in accordance with the authoritative guidance for impairment test of the NE reporting unit. The fair value of NE was determined based on a combination of the income approach, which estimates the fair value based on the future discounted cash flows, and the market approach, which estimates the fair value based on multiples of earnings or revenue, or a similar performance measure. Based on the first step of the analysis, the Company determined that the fair value of NE is above its carrying amount.

The Company reviewed goodwill of the OSP reporting unit under the qualitative assessment of the authoritative guidance for impairment testing. The Company concluded that it was more likely than not that the fair value of OSP exceeded its carrying amount. In assessing the qualitative factors, the Company considered the impact of key factors, including changes in industry and competitive environment, market capitalization, earnings multiples, budgeted-to-actual operating performance from prior year, and consolidated company stock price and performance. As such, it was not necessary to perform the first step of the goodwill impairment test at this time.

The Company recorded no impairment charge in accordance with its annual impairment test.

Fiscal 2016

Interim Review

During the first quarter of fiscal 2016, the Company released the relative fair value of goodwill in its NE reporting unit related to the WaveReady products line which became part of Lumentum as of the Separation Date. In connection with this change in the NE reporting unit, the Company performed a goodwill impairment test for its NE reporting unit under the qualitative assessment of the authoritative guidance for impairment testing. The Company concluded that it was more likely than not that the fair value of the NE reporting unit exceeded its carrying amount. There were no events or changes in circumstances which triggered an impairment review for the remaining reporting units.

Annual Review

During the fourth quarter the Company performed the goodwill impairment test for all its reporting units under the two-step quantitative goodwill impairment test in accordance with the authoritative guidance. Other than noted above, there were no other triggering events during the interim periods of fiscal 2016. Thus, the Company reviewed goodwill for impairment during the fourth quarter, in line with the completion of its annual operating plan for fiscal 2017.

Under the first step of the authoritative guidance for impairment testing, the fair value of the NE and OSP reporting units was determined based on a combination of the income approach, which estimates the fair value based on the future discounted cash flows, and the market approach, which estimates the fair value based on multiples of earnings or revenue, or a similar performance measure. The market approach estimates the fair value of the business based on a comparison of the reporting unit to comparable publicly traded companies in similar lines of business. Due to lack of comparability with its peer companies, the fair value of the SE reporting unit was determined only utilizing the income approach. The Company assumed a cash flow period of 10 years, long-term annual growth rates of 3.0% to 7.0%, discount rates of 14.0% to 17.0% and terminal value growth rates of 3.0% to 5.0%. The Company believes that the assumptions and rates used in the impairment test are reasonable, but they are judgmental, and variations in any of the assumptions or rates could result in materially different calculations of impairment amounts. The determination of the estimated fair value of goodwill required the use of significant unobservable inputs which are considered Level 3 fair value measurements. The sum of the fair values of the reporting units was reconciled to the Company’s current market capitalization plus an estimated control premium. Based on the first step of the authoritative guidance for impairment testing, the Company concluded that the fair value of all reporting units, except SE, were in excess of their carrying value. The fair value of the SE reporting unit was lower than the carrying value based on the completion of its annual operating plan for fiscal 2017 in the fourth quarter which revealed a longer investment cycle being needed for certain growth products within SE, coupled with a decline in the reporting unit’s revenue and operating profitability in fiscal 2016 as compared to fiscal 2015 when goodwill was last tested for impairment.

The second step of the goodwill impairment test involved performing a hypothetical purchase price allocation to determine the implied fair value of the SE reporting unit’s goodwill. This process is complex and required judgment in the development of assumptions that affected the determination of the fair value of the SE reporting unit’s individual assets and liabilities, including previously unrecognized intangible assets. Based on the step two analysis, the Company determined that all of the SE goodwill balance of $91.4 million was impaired and therefore recorded an impairment charge in the fourth quarter of fiscal 2016 in the accompanying Consolidated Statements of Operations. Prior to completing the goodwill impairment test, the Company tested the recoverability of the SE long-lived assets (other than goodwill) and concluded that such assets were not impaired.

Fiscal 2015

Interim Review

As the Company reorganized its NSE segment into two reportable segments, NE and SE, during the first quarter of fiscal 2015, goodwill allocated to the new NE and SE reporting units was reviewed under the two-step quantitative goodwill impairment test in accordance with the authoritative guidance.

The fair value of the new reporting units was determined based on a combination of the income approach, which estimates the fair value based on the future discounted cash flows, and the market approach, which estimates the fair value based on multiples of earnings or revenue, or a similar performance measure. Based on the first step of the analysis, the Company determined that the fair value of each reporting unit is significantly above its carrying amount. As such, the Company was not required to perform step two of the analysis. The Company recorded no impairment charge as a result of the interim period impairment test performed during the three months ended September 27, 2014. There were no events or changes in circumstances which triggered an impairment review for the remaining reporting units.

Annual Review

During the fourth quarter, the Company reviewed the goodwill of all its reporting units under the qualitative assessment of the authoritative guidance for impairment testing. The Company concluded that it was more likely than not that the fair value of the reporting units with goodwill exceeded its carrying amount. In assessing the qualitative factors, the Company considered the impact of key factors, including changes in industry and competitive environment, budgeted-to-actual operating performance from prior year, and consolidated company stock price and performance. As such, it was not necessary to perform the two-step goodwill impairment test at that time and the Company recorded no impairment charge as a result of its annual impairment test.