Goodwill and Intangible Assets

Goodwill

The Company’s goodwill balance was $321.7 million, $321.7 million, and $310.2 million as of January 27, 2018, July 29, 2017, and July 30, 2016, respectively. Changes in the carrying amount of goodwill were as follows (dollars in thousands):



	Goodwill			Accumulated Impairment Losses			Total
Balance as of July 25, 2015	$	467,420		$	(195,767	)	$	271,653
Purchase price allocation adjustments	101			—			101
Goodwill from fiscal 2016 acquisitions	38,403			—			38,403
Balance as of July 30, 2016	505,924			(195,767		)	310,157
Goodwill from fiscal 2017 acquisition	10,087			—			10,087
Purchase price allocation adjustments from fiscal 2016 acquisitions	1,504			—			1,504
Balance as of July 29, 2017	517,515			(195,767		)	321,748
Purchase price allocation adjustments from fiscal 2017 acquisition	(5		)	—			(5		)
Balance as of January 27, 2018	$	517,510		$	(195,767	)	$	321,743

Goodwill largely consists of expected synergies resulting from acquisitions, including the expansion of the Company’s geographic presence and strengthening of its customer base. With respect to the fiscal 2017 acquisition of Texstar, the associated goodwill is not deductible for tax purposes.

The Company’s goodwill resides in multiple reporting units. Goodwill and other indefinite-lived intangible assets are assessed annually for impairment, or more frequently if events occur that would indicate a potential reduction in the fair value of a reporting unit below its carrying value. The profitability of individual reporting units may suffer periodically due to downturns in customer demand and the level of overall economic activity including, in particular, construction and housing activity. The Company’s customers may reduce capital expenditures and defer or cancel pending projects during times of slowing economic conditions. Additionally, adverse conditions in the economy and future volatility in the equity and credit markets could impact the valuation of the Company’s reporting units. The cyclical nature of the Company’s business, the high level of competition existing within its industry, and the concentration of its revenues from a limited number of customers may also cause results to vary. These factors may affect individual reporting units disproportionately, relative to the Company as a whole. As a result, the performance of one or more of the reporting units could decline, resulting in an impairment of goodwill or intangible assets.

The Company evaluates current operating results, including any losses, in the assessment of goodwill and other intangible assets. The estimates and assumptions used in assessing the fair value of the reporting units and the valuation of the underlying assets and liabilities are inherently subject to significant uncertainties. Changes in judgments and estimates could result in significantly different estimates of the fair value of the reporting units and could result in impairments of goodwill or intangible assets of the reporting units. In addition, adverse changes to the key valuation assumptions contributing to the fair value of the Company’s reporting units could result in an impairment of goodwill or intangible assets.

The Company has historically completed its annual goodwill impairment assessment as of the first day of the fourth fiscal quarter of each year. As a result of the change in the Company’s fiscal year end, the annual goodwill impairment assessment date was changed to the first day of the fiscal quarter ending on the last Saturday in January, as this will be the first day of the Company’s fourth fiscal quarter. For the six month transition period ended January 27, 2018, the assessment was performed as of October 29, 2017, which is approximately six months earlier than in previous years. The change in the annual goodwill impairment assessment date is deemed a change in accounting principle, which the Company believes to be preferable as the change was made to better align the annual goodwill impairment test with the change in the Company’s annual planning and budgeting process related to the new fiscal year end. This change in accounting principle did not delay, accelerate or avoid a goodwill impairment charge and had no effect on the consolidated financial statements, including any cumulative effect on retained earnings.

The Company performed its annual impairment assessment for the 2018 transition period and each of fiscal 2017, 2016, and 2015 and concluded that no impairment of goodwill or the indefinite-lived intangible asset was indicated at any reporting unit for any of the periods. In the 2018 transition period and each of fiscal 2017, 2016, and 2015, qualitative assessments were performed on reporting units that comprise a substantial portion of the Company’s consolidated goodwill balance. A qualitative assessment includes evaluating all identified events and circumstances that could affect the significant inputs used to determine the fair value of a reporting unit or indefinite-lived intangible asset for the purpose of determining whether it is more likely than not that these assets are impaired. The Company considers various factors while performing qualitative assessments, including macroeconomic conditions, industry and market conditions, financial performance of the reporting units, changes in market capitalization, and any other specific reporting unit considerations. These qualitative assessments indicated that it was more likely than not that the fair value exceeded carrying value for those reporting units. For the remaining reporting units, the Company performed the first step of the quantitative analysis described in ASC Topic 350 in the 2018 transition period and each of fiscal 2017, 2016, and 2015. When performing the quantitative analysis, the Company determines the fair value of its reporting units using a weighing of fair values derived in equal proportions from the income approach and market approach valuation methodologies. Under the income approach, the key valuation assumptions used in determining the fair value estimates of the Company’s reporting units for each annual test were: (a) a discount rate based on the Company’s best estimate of the weighted average cost of capital adjusted for certain risks for the reporting units; (b) terminal value based on the Company’s best estimate of terminal growth rates; and (c) seven expected years of cash flow before the terminal value.

In fiscal 2017, the Company performed the first step of the quantitative analysis on its indefinite-lived intangible asset. In the 2018 transition period, fiscal 2016, and fiscal 2015, qualitative assessments were performed on the Company’s indefinite-lived intangible asset.

The table below outlines certain assumptions used in the Company’s quantitative impairment analyses for the 2018 transition period and fiscal 2017, 2016, and 2015:



	2018	2017	2016	2015
Terminal Growth Rate	2.5% - 3.0%	2.0% - 3.0%	2.0% - 3.0%	1.5% - 2.5%
Discount Rate	11.0%	11.0%	11.5%	11.5%

The discount rate reflects risks inherent within each reporting unit operating individually. These risks are greater than the risks inherent in the Company as a whole. Determination of discount rates included consideration of market inputs such as the risk-free rate, equity risk premium, industry premium, and cost of debt, among other assumptions. The discount rate for the 2018 transition period was consistent with the rate used for fiscal 2017. The slight decrease in discount rates for fiscal 2017 from fiscal 2016 is a result of reduced risk in industry conditions. The changes in these inputs for fiscal 2016 from fiscal 2015 had offsetting impacts and the discount rate remained at 11.5%. The Company believes the assumptions used in the impairment analysis each year are reflective of the risks inherent in the business models of its reporting units and within its industry. Under the market approach, the guideline company method develops valuation multiples by comparing the Company’s reporting units to similar publicly traded companies. Key valuation assumptions and valuation multiples used in determining the fair value estimates of the Company’s reporting units rely on: (a) the selection of similar companies; (b) obtaining estimates of forecast revenue and earnings before interest, taxes, depreciation, and amortization for the similar companies; and (c) selection of valuation multiples as they apply to the reporting unit characteristics.

The Company determined that the fair values of each of the reporting units and the indefinite-lived intangible asset were substantially in excess of their carrying values in the 2018 transition period assessment. Management determined that significant changes were not likely in the factors considered to estimate fair value, and analyzed the impact of such changes were they to occur. Specifically, if there was a 25% decrease in the fair value of any of the reporting units due to a decline in their discounted cash flows resulting from lower operating performance, the conclusion of the assessment would remain unchanged. Additionally, if the discount rate applied in the 2018 transition period impairment analysis had been 100 basis points higher than estimated for each of the reporting units, and all other assumptions were held constant, the conclusion of the assessment would remain unchanged and there would be no impairment of goodwill. As of January 27, 2018, the Company believes the goodwill and the indefinite-lived intangible asset are recoverable for all of the reporting units and that no impairment has occurred. However, significant adverse changes in the projected revenues and cash flows of a reporting unit could result in an impairment of goodwill or the indefinite-lived intangible asset. There can be no assurances that goodwill or the indefinite-lived intangible asset may not be impaired in future periods.

Intangible Assets

The Company’s intangible assets consisted of the following (dollars in thousands):



	Gross Carrying Amount		Accumulated Amortization		Intangible Assets, Net
January 27, 2018:
Customer relationships	$	299,717	$	135,544	$	164,173
Trade names	10,350		7,872		2,478
UtiliQuest trade name	4,700		—		4,700
Non-compete agreements	450		332		118
	$	315,217	$	143,748	$	171,469

July 29, 2017:
Customer relationships	$	299,717	$	124,084	$	175,633
Trade names	10,350		7,285		3,065
UtiliQuest trade name	4,700		—		4,700
Non-compete agreements	450		287		163
	$	315,217	$	131,656	$	183,561

July 30, 2016:
Customer relationships	$	289,955	$	101,012	$	188,943
Trade names	9,800		6,034		3,766
UtiliQuest trade name	4,700		—		4,700
Non-compete agreements	685		329		356
Contract backlog	4,780		4,666		114
	$	309,920	$	112,041	$	197,879

During fiscal 2017, certain intangible assets became fully amortized. As a result, the gross carrying amount and the associated accumulated amortization each decreased $5.2 million. This decrease had no effect on the net carrying value of intangible assets.

Amortization of the Company’s customer relationship intangibles is recognized on an accelerated basis as a function of the expected economic benefit. Amortization for the Company’s other finite-lived intangibles is recognized on a straight-line basis over the estimated useful life. Amortization expense for finite-lived intangible assets was $12.1 million, $24.8 million, $19.4 million, and $16.7 million for the 2018 transition period and fiscal 2017, 2016, and 2015, respectively. As of January 27, 2018, customer relationships, trade names, and non-compete agreements had weighted average remaining useful lives of 11.6 years, 8.4 years, and 2.2 years, respectively.

As of January 27, 2018, total amortization expense for existing finite-lived intangible assets for the next five fiscal years and thereafter is as follows (dollars in thousands):



	Amount
2019	$	21,656
2020	20,095
2021	19,208
2022	16,740
2023	14,294
Thereafter	74,776
Total	$	166,769

As of January 27, 2018, the Company believes that the carrying amounts of its intangible assets are recoverable. However, if adverse events were to occur or circumstances were to change indicating that the carrying amount of such assets may not be fully recoverable, the assets would be reviewed for impairment and the assets could be impaired.