Goodwill, Purchased Technology and Other Intangible Assets
Goodwill and Purchased Intangible Assets
Applied’s methodology for allocating the purchase price relating to purchase acquisitions is determined through established and generally accepted valuation techniques. Goodwill is measured as the excess of the cost of the acquisition over the sum of the amounts assigned to tangible and identifiable intangible assets acquired less liabilities assumed. Applied assigns assets acquired (including goodwill) and liabilities assumed to one or more reporting units as of the date of acquisition. Typically, acquisitions relate to a single reporting unit and thus do not require the allocation of goodwill to multiple reporting units. If the products obtained in an acquisition are assigned to multiple reporting units, the goodwill is distributed to the respective reporting units as part of the purchase price allocation process.
Goodwill and purchased intangible assets with indefinite useful lives are not amortized, but are reviewed for impairment annually during the fourth quarter of each fiscal year and whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. The process of evaluating the potential impairment of goodwill and intangible assets requires significant judgment, especially in emerging markets. Applied regularly monitors current business conditions and other factors including, but not limited to, adverse industry or economic trends, restructuring actions and lower projections of profitability that may impact future operating results.
To test goodwill for impairment, Applied first performs a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If it is concluded that this is the case, Applied then performs the two-step goodwill impairment test. Otherwise, the two-step goodwill impairment test is not required. Under the two-step goodwill impairment test, Applied would, in the first step, compare the estimated fair value of each reporting unit to its carrying value. Applied determines the fair value of each of its reporting units based on a weighting of income and market approaches. If the carrying value of the net assets assigned to the reporting unit exceeds its fair value, then Applied would then perform the second step of the impairment test in order to determine the implied fair value of the reporting unit’s goodwill. If Applied determines that the carrying value of a reporting unit’s goodwill exceeds its implied fair value, Applied would record an impairment charge equal to the difference. Applied’s reporting units are consistent with the reportable segments identified in Note 16, Industry Segment Operations, which are based on the manner in which Applied operates its business and the nature of those operations.
During fiscal 2012, the solar industry faced increasing challenges, including manufacturing overcapacity and weak operating performance and outlook, which led to a deterioration in market conditions. As a result, Applied performed a two-step goodwill impairment test and recorded a $421 million goodwill impairment charge in its Energy and Environmental Solutions segment.
During the second quarter of fiscal 2013, the solar industry experienced further deterioration of market conditions associated with continued manufacturing overcapacity and weaker operating performance and outlook, resulting in increased uncertainties regarding the timing and nature of a recovery in solar capital equipment expenditures. Taking these factors into account, Applied reassessed its financial outlook for the Energy and Environmental Solutions reporting unit and consequently reevaluated the recoverability of this reporting unit's goodwill. Applied performed the two-step impairment test and concluded that the Energy and Environmental Solutions reporting unit's carrying value exceeded its fair value. Based on Applied's analyses, the implied fair value of goodwill was substantially lower than the carrying value of goodwill for the reporting unit. As a result, in the second quarter of fiscal 2013, Applied recorded a goodwill impairment charge of $224 million, representing all of the remaining goodwill for this reporting unit. As of October 27, 2013, accumulated goodwill impairment charges amounted to $645 million which were recorded in the Energy and Environmental Solutions segment.
Applied also performed an impairment test for long-lived assets associated with the Energy and Environmental Solutions reporting unit and determined that the majority of intangible assets were impaired mostly due to the lower long-term revenue and profitability outlook associated with products related to these intangible assets. Accordingly, during the second quarter of fiscal 2013, Applied recorded an impairment charge of $54 million related to these intangible assets, which was the amount by which the carrying value of these intangible assets exceeded their estimated fair value, based on discounted projected cash flows.
Applied utilized an equal weighting of both the discounted cash flow method of the income approach and the guideline company method of the market approach to estimate the fair value of the Energy and Environmental Solutions reporting unit. The estimates used in the impairment testing were consistent with the discrete forecasts that Applied uses to manage its business, and considered the significant developments that occurred during the quarter. Under the discounted cash flow method, cash flows beyond the discrete forecasts were estimated using a terminal growth rate, which considered the long-term earnings growth rate specific to the Energy and Environmental Solutions reporting unit. The estimated future cash flows were discounted to present value using a discount rate that was the value-weighted average of the reporting unit's estimated cost of equity and debt derived using both known and estimated market metrics, and was adjusted to reflect risk factors that considered both the timing and risks associated with the estimated cash flows. The tax rate used in the discounted cash flow method reflected the international structure currently in place, which is consistent with the market participant perspective. Under the guideline company method, market multiples were applied to forecasted revenues and earnings before interest, taxes, depreciation and amortization. The market multiples used were consistent with comparable publicly-traded companies.
In the fourth quarter of fiscal 2013, Applied performed a qualitative assessment to test goodwill for all reporting units for impairment and determined that it was more likely than not that each of the Silicon Systems Group, Applied Global Services, and Display reporting units' fair values exceeded their respective carrying values and that it was not necessary to perform the two-step goodwill impairment test for these reporting units.
The evaluation of goodwill and intangible assets for impairment requires the exercise of significant judgment. In the event of future changes in business conditions, Applied will be required to reassess and update its forecasts and estimates used in future impairment analyses. If the results of these analyses are lower than current estimates, a material impairment charge may result at that time.
Details of goodwill and other indefinite-lived intangible assets were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| October 27, 2013 | | October 28, 2012 |
| Goodwill | | Other Intangible Assets | | Total | | Goodwill | | Other Intangible Assets | | Total |
| | | | | | | | | | | |
| (In millions) |
Silicon Systems Group | $ | 2,151 |
| | $ | 142 |
| | $ | 2,293 |
| | $ | 2,151 |
| | $ | 142 |
| | $ | 2,293 |
|
Applied Global Services | 1,027 |
| | — |
| | 1,027 |
| | 1,027 |
| | — |
| | 1,027 |
|
Display | 116 |
| | — |
| | 116 |
| | 116 |
| | — |
| | 116 |
|
Energy and Environmental Solutions | — |
| | — |
| | — |
| | 224 |
| | — |
| | 224 |
|
Carrying amount | $ | 3,294 |
| | $ | 142 |
| | $ | 3,436 |
| | $ | 3,518 |
| | $ | 142 |
| | $ | 3,660 |
|
During fiscal 2013, goodwill and other indefinite-lived intangible assets decreased by $224 million due to the impairment of goodwill recorded in the second quarter of fiscal 2013.
Other intangible assets that are not subject to amortization consist primarily of in-process technology, which will be subject to amortization upon commercialization. The fair value assigned to in-process technology was determined using the income approach taking into account estimates and judgments regarding risks inherent in the development process, including the likelihood of achieving technological success and market acceptance. If an in-process technology project is abandoned, the acquired technology attributable to the project will be written-off.
A summary of Applied's purchased technology and intangible assets is set forth below:
|
| | | | | | | |
| October 27,
2013 | | October 28,
2012 |
| | | |
| (In millions) |
Purchased technology, net | $ | 748 |
| | $ | 945 |
|
Intangible assets - finite-lived, net | 213 |
| | 268 |
|
Intangible assets - indefinite-lived | 142 |
| | 142 |
|
Total | $ | 1,103 |
| | $ | 1,355 |
|
Finite-Lived Purchased Intangible Assets
Applied amortizes purchased intangible assets with finite lives using the straight-line method over the estimated economic lives of the assets, ranging from 1 to 15 years.
Applied evaluates long-lived assets for impairment whenever events or changes in circumstances indicate the carrying value of an asset group may not be recoverable. Applied assesses the fair value of the assets based on the amount of the undiscounted future cash flow that the assets are expected to generate and recognizes an impairment loss when estimated undiscounted future cash flow expected to result from the use of the asset, plus net proceeds expected from disposition of the asset, if any, are less than the carrying value of the asset. When Applied identifies an impairment, Applied reduces the carrying value of the group of assets to comparable market values, when available and appropriate, or to its estimated fair value based on a discounted cash flow approach.
Intangible assets, such as purchased technology, are generally recorded in connection with a business acquisition. The value assigned to intangible assets is usually based on estimates and judgments regarding expectations for the success and life cycle of products and technology acquired. Applied evaluates the useful lives of its intangible assets each reporting period to determine whether events and circumstances require revising the remaining period of amortization. In addition, Applied reviews intangible assets for impairment when events or changes in circumstances indicate their carrying value may not be recoverable. Management considers such indicators as significant differences in actual product acceptance from the estimates, changes in the competitive and economic environment, technological advances, and changes in cost structure. In the fourth quarter of fiscal 2013, Applied performed an impairment analysis on the carrying value of its intangible assets and determined that there was no impairment.
Details of finite-lived intangible assets were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| October 27, 2013 | | October 28, 2012 |
| Purchased Technology | | Other Intangible Assets | | Total | | Purchased Technology | | Other Intangible Assets | | Total |
| | | | | | | | | | | |
| (In millions) |
Gross carrying amount: | | | | | | | | | | | |
Silicon Systems Group | $ | 1,301 |
| | $ | 252 |
| | $ | 1,553 |
| | $ | 1,300 |
| | $ | 252 |
| | $ | 1,552 |
|
Applied Global Services | 28 |
| | 44 |
| | 72 |
| | 28 |
| | 44 |
| | 72 |
|
Display | 110 |
| | 33 |
| | 143 |
| | 110 |
| | 33 |
| | 143 |
|
Energy and Environmental Solutions | 5 |
| | 15 |
| | 20 |
| | 105 |
| | 232 |
| | 337 |
|
Gross carrying amount | $ | 1,444 |
| | $ | 344 |
| | $ | 1,788 |
| | $ | 1,543 |
| | $ | 561 |
| | $ | 2,104 |
|
Accumulated amortization: | | | | | | | | | | | |
Silicon Systems Group | $ | (562 | ) | | $ | (58 | ) | | $ | (620 | ) | | $ | (411 | ) | | $ | (36 | ) | | $ | (447 | ) |
Applied Global Services | (23 | ) | | (42 | ) | | (65 | ) | | (22 | ) | | (39 | ) | | (61 | ) |
Display | (110 | ) | | (29 | ) | | (139 | ) | | (106 | ) | | (27 | ) | | (133 | ) |
Energy and Environmental Solutions | (1 | ) | | (2 | ) | | (3 | ) | | (59 | ) | | (191 | ) | | (250 | ) |
Accumulated amortization | $ | (696 | ) | | $ | (131 | ) | | $ | (827 | ) | | $ | (598 | ) | | $ | (293 | ) | | $ | (891 | ) |
Carrying amount | $ | 748 |
| | $ | 213 |
| | $ | 961 |
| | $ | 945 |
| | $ | 268 |
| | $ | 1,213 |
|
During fiscal 2013, the impact of the impairment of certain intangible assets associated with the Energy and Environmental Solutions segment on the gross carrying amount and accumulated amortization of the finite-lived intangible assets was approximately $317 million and $262 million, respectively.
Details of amortization expense by segment for fiscal 2013, 2012 and 2011 were as follows:
|
| | | | | | | | | | | |
| 2013 | | 2012 | | 2011 |
| | | | | |
| (In millions) |
Silicon Systems Group | $ | 172 |
| | $ | 183 |
| | $ | 13 |
|
Applied Global Services | 5 |
| | 9 |
| | 7 |
|
Display | 6 |
| | 7 |
| | 8 |
|
Energy and Environmental Solutions | 16 |
| | 25 |
| | 24 |
|
Total | $ | 199 |
| | $ | 224 |
| | $ | 52 |
|
For fiscal 2013, 2012 and 2011, amortization expense was charged to the following categories:
|
| | | | | | | | | | | |
| 2013 | | 2012 | | 2011 |
| | | | | |
| (In millions) |
Cost of products sold | $ | 166 |
| | $ | 185 |
| | $ | 36 |
|
Research, development and engineering | 1 |
| | 1 |
| | — |
|
Marketing and selling | 26 |
| | 30 |
| | 16 |
|
General and administrative | 6 |
| | 8 |
| | — |
|
Total | $ | 199 |
| | $ | 224 |
| | $ | 52 |
|
As of October 27, 2013, future estimated amortization expense is expected to be as follows:
|
| | | |
| Amortization Expense |
| (In millions) |
2014 | 181 |
|
2015 | 175 |
|
2016 | 169 |
|
2017 | 165 |
|
2018 | 163 |
|
Thereafter | 108 |
|
Total | $ | 961 |
|
