Goodwill and Identifiable Intangible Assets

9 Months Ended

Sep. 29, 2017

Goodwill and Identifiable Intangible Assets [Abstract]

Goodwill and Identifiable Intangible Assets

8. Goodwill and Identifiable Intangible Assets

Goodwill. In accordance with the accounting standards for business combinations, the Company records the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition (commonly referred to as the purchase price allocation). The table below presents the changes in goodwill allocated to the Company’s reporting units in each reportable segment.

	Electronic Systems			Aerospace Systems			Communication Systems			Sensor Systems			Consolidated Total
	(in millions)
Goodwill⁽¹⁾	$	2,687		$	1,698		$	1,058		$	1,559		$	7,002
Accumulated impairment losses		(43	)		(338	)		(35	)		(26	)		(442	)
Balance at December 31, 2016		2,644			1,360			1,023			1,533			6,560
Business acquisitions⁽²⁾		129			—			—			70			199
Business divestitures⁽³⁾		(12	)		—			—			—			(12	)
Foreign currency translation adjustments⁽⁴⁾		58			17			—			17			92
Impairment charge		—			(187	)		—			—			(187	)
Balance at September 29, 2017		2,819			1,190			1,023			1,620			6,652
Goodwill		2,862			1,715			1,058			1,646			7,282
Accumulated impairment losses		(43	)		(525	)		(35	)		(26	)		(629	)
	$	2,819		$	1,190		$	1,023		$	1,620		$	6,652

⁽¹⁾

The business realignment during the quarterly period ended March 31, 2017 in the Electronic Systems segment resulted in a reallocation of goodwill due to changes in reporting units. Goodwill was reallocated to the affected reporting units based upon their relative fair value. The changes to reporting units did not result in a goodwill impairment of any reporting unit.

⁽²⁾

The increase for the Electronic Systems segment was due to the acquisitions of the ETD and Doss Aviation businesses and the purchase price allocation adjustments for the MacH and Aerosim business acquisitions. The increase for the Sensor Systems segment was primarily due to the Adaptive Methods, Open Water Power and OceanServer business acquisitions.

⁽³⁾

The decrease for the Electronic Systems segment was due to the divestitures of Coleman and Aviation Jet Services during the quarterly period ended March 31, 2017.

⁽⁴⁾

The increase in the Electronic Systems segment was due to the weakening of the U.S. dollar against the British pound and the Canadian dollar during the year-to-date period ended September 29, 2017. The increase in the Aerospace Systems segment was due to the weakening of the U.S. dollar against the Canadian dollar during the year-to-date period ended September 29, 2017. The increase in the Sensor Systems segment was due to the weakening of the U.S. dollar against the Euro, the British pound and the Australian dollar during the year-to-date period ended September 29, 2017.

During the quarterly period ended September 29, 2017, the Company was notified that it did not win the recompetition of the Fort Rucker Maintenance Support contract with the U.S. Army Aviation and Missile Life Cycle Management Command (AMCOM). The Company filed a protest with the United States Government Accountability Office (GAO) related to the contract. Notwithstanding the Company's protest, the Fort Rucker recompetition loss indicated that the carrying amount of the goodwill for the Vertex Aerospace reporting unit may not be recoverable due to the decline in the projected future cash flows. As such, the Company performed an impairment test for the reporting unit. The Company calculated the fair value of the reporting unit using a discounted cash flow valuation approach and compared that fair value to the carrying value, and determined that the fair value of the reporting unit was less than the carrying value. The Company recorded an impairment charge of $187 million ($133 million after income taxes), for the difference between the fair value and the carrying value of the reporting unit, which resulted in an impairment of the entire amount of goodwill for the Vertex Aerospace reporting unit.

Identifiable Intangible Assets. The most significant identifiable intangible asset that is separately recognized for the Company’s business acquisitions is customer contractual relationships. All of the Company’s customer relationships are established through written customer contracts (revenue arrangements). The fair value for customer contractual relationships is determined, as of the date of acquisition, based on estimates and judgments regarding expectations for the estimated future after-tax earnings and cash flows (including cash flows for working capital) arising from the follow-on sales on contract (revenue arrangement) renewals expected from the customer contractual relationships over their estimated lives, including the probability of expected future contract renewals and sales, less a contributory assets charge, all of which is discounted to present value. The Company’s indefinite-lived intangible assets include IPR&D.

The table below presents information for the Company’s identifiable intangible assets that are subject to amortization and indefinite-lived intangible assets.

September 29, 2017							December 31, 2016
	Weighted Average Amortization Period	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
	(in years)	(in millions)
Customer contractual relationships	15	$	418	$	287	$	131	$	409	$	269	$	140
Technology	10		207		113		94		191		102		89
Other	20		20		12		8		21		12		9
Total subject to amortization	10		645		412		233		621		383		238
IPR&D	indefinite		66		—		66		—		—		—
Total		$	711	$	412	$	299	$	621	$	383	$	238

The table below presents amortization expense recorded by the Company for its identifiable intangible assets.

	Third Quarter Ended				Year-to-Date Ended
	September 29, 2017		September 23, 2016		September 29, 2017		September 23, 2016
	(in millions)
Amortization expense	$	10	$	9	$	30	$	26

Based on gross carrying amounts at September 29, 2017, the Company’s estimate of amortization expense for identifiable intangible assets for the years ending December 31, 2017 through 2021 is presented in the table below.

	Year Ending December 31,
	2017		2018		2019		2020		2021
	(in millions)
Estimated amortization expense	$	39	$	38	$	34	$	30	$	27

- 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.

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