(6) Goodwill & Intangibles

Goodwill

The Company performs its annual goodwill impairment testing for each reporting unit as of fiscal October month end or earlier if there is a triggering event or circumstance that indicates an impairment loss may have occurred. As of the October 29, 2017 testing date, the Company had $547.5 million of goodwill on its balance sheet. In 2017, the Company had eight reporting units. One of these reporting units, Water Quality, had no goodwill. The Company performed a qualitative analysis for six of the remaining seven reporting units, which include Blücher, Dormont, US Drains, Europe, Residential and Commercial, and APMEA. As of January 1, 2017, the Company began reporting the results of Watts Industries Middle East FZE (“Watts Middle East”), an indirect, wholly owned subsidiary, as part of the Company’s former Asia-Pacific segment, which is now referred to as APMEA. Watts Middle East had previously been reported within the former EMEA segment, which is now referred to as Europe. This change in segment composition aligns with the structure of the Company’s internal organization and did not result in a material change to previously reported segment information. There was no change in the determination of our eight reporting units for the purpose of goodwill testing. The Company followed the guidance in ASC 352-20-35-39 through ASC 350-20-35-40 to reassign assets and liabilities to the reporting units affected, including the allocation of an immaterial amount of goodwill.

As a result of the PVI acquisition in November 2016, the Company combined two components, AERCO and PVI, into the Heating and Hot Water Solutions (“HHWS”) reporting unit. The Company evaluated the aggregation criteria under ASC 350 in combining these components. AERCO was a standalone reporting unit for the 2016 annual impairment assessment. In the fourth quarter of 2017, the Company performed a quantitative impairment analysis for the HHWS reporting unit in connection with the annual strategic plan and due to underperformance to budget, primarily caused by continuing softness in the condensing boiler market, weakness in the Company’s tankless water heater products and competitive pricing pressure. The Company estimated the fair value of the reporting unit using a weighted calculation of the income approach and the market approach. The income approach calculated the present value of expected future cash flows. The guideline public company method (market approach) calculated the estimated fair values based on valuation multiples derived from stock prices and enterprise values of publicly traded companies that are comparable to the reporting unit. The estimated fair value of the reporting unit exceeded the carrying value by approximately 6% in 2017 and therefore, no impairment was recorded.

In the fourth quarter of 2015, the Company performed a quantitative impairment analysis for the Europe reporting unit in connection with the annual strategic plan and due to the underperformance to budget, primarily caused by the continued challenging European macroeconomic environment. The Company estimated the fair value of the reporting unit using a weighted calculation of the income approach and the market approach. The income approach calculated the present value of expected future cash flows and included the impact of recent underperformance of the reporting unit due to the continued challenging macroeconomic environment in Europe and the Company’s lowered expectations for the reporting unit included in the strategic plan. The guideline public company method (market approach) calculated estimated fair values based on valuation multiples derived from stock prices and enterprise values of publicly traded companies that are comparable to the Company. In the second step of the impairment test, the carrying value of the goodwill exceeded the implied fair value of goodwill, resulting in a pre-tax impairment charge of $129.7 million. There was a tax benefit associated with the impairment of $3.4 million, resulting in a net impairment charge of $126.3 million.

The changes in the carrying amount of goodwill by geographic segment are as follows:


	December 31, 2017
	Gross Balance								Accumulated Impairment Losses						Net Goodwill
			Acquired		Foreign
	Balance		During		Currency		Balance		Balance		Impairment		Balance
	January 1,		the		Translation		December 31,		January 1,		Loss During		December 31,		December 31,
	2017		Period (1)		and Other		2017		2017		the Period		2017		2017
	(in millions)
Americas	$	434.7		2.0		0.7		437.4	$	(24.5)		—		(24.5)		412.9
Europe		234.9		—		14.4		249.3		(129.7)		—		(129.7)		119.6
APMEA		30.2		—		0.7		30.9		(12.9)		—		(12.9)		18.0
Total	$	699.8		2.0		15.8		717.6	$	(167.1)		—		(167.1)		550.5

(1)

Americas goodwill additions during 2017 includes purchase accounting adjustments related to the PVI acquisition discussed in Note 5 of the Notes to the Consolidated Financial Statements.


	December 31, 2016
	Gross Balance								Accumulated Impairment Losses						Net Goodwill
			Acquired		Foreign
	Balance		During		Currency		Balance		Balance		Impairment		Balance
	January 1,		the		Translation		December 31,		January 1,		Loss During		December 31,		December 31,
	2016		Period		and Other		2016		2016		the Period		2016		2016
	(in millions)
Americas	$	391.2		43.3		0.2		434.7	$	(24.5)		—		(24.5)		410.2
Europe		238.6		—		(3.7)		234.9		(129.7)		—		(129.7)		105.2
APMEA		26.3		3.7		0.2		30.2		(12.9)		—		(12.9)		17.3
Total	$	656.1		47.0		(3.3)		699.8	$	(167.1)		—		(167.1)		532.7

On November 2, 2016, the Company acquired 100% of the shares of PVI Riverside Holdings, Inc., the parent company of PVI. The aggregate purchase price recorded, including the final working capital adjustment, was approximately $79.1 million. The Company accounted for the transaction as a purchased business combination. The Company finalized the purchase price allocation that resulted in the recognition of $41.1 million in goodwill and $31.0 million in intangible during the second quarter of 2017.

On February 26, 2016, the Company acquired an additional 50% of the outstanding shares of Watts Korea for an aggregate purchase price of approximately $4 million. Prior to February 26, 2016, the Company held a 40% interest in Watts Korea, which operated as a joint venture. On December 30, 2016, the Company acquired the remaining 10% of the outstanding shares of Watts Korea for $0.8 million. The Company completed a valuation of the assets and liabilities acquired that resulted in the recognition of $3.7 million in goodwill and $1.6 million in intangible assets.

Long-Lived Assets

Indefinite‑lived intangibles are tested for impairment at least annually or more frequently if events or circumstances, such as a change in business conditions, indicate that it is “more likely than not” that an intangible asset might be impaired. The Company performs its annual indefinite‑lived intangibles impairment assessment in the fourth quarter of each year. For the 2017, 2016 and 2015 impairment assessments, the Company performed quantitative assessments for all indefinite‑lived intangible assets. The methodology employed was the relief from royalty method, a subset of the income approach. Based on the results of the assessment, the Company did not recognize an impairment on any indefinite-lived intangibles in 2017. In 2016 and 2015, Company recognized non‑cash pre‑tax impairment charges of approximately $0.4 million and $0.6 million, respectively. The impairment charge of $0.4 million in 2016 related to a trade name in the Europe segment. The $0.6 million impairment charge in 2015 included tradenames in the Americas and Europe segment for $0.5 million and $0.1 million, respectively.

Intangible assets with estimable lives and other long‑lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. Recoverability of intangible assets with estimable lives and other long‑lived assets is measured by a comparison of the carrying amount of an asset or asset group to future net undiscounted pretax cash flows expected to be generated by the asset or asset group. If these comparisons indicate that an asset is not recoverable, the impairment loss recognized is the amount by which the carrying amount of the asset or asset group exceeds the related estimated fair value. Estimated fair value is based on either discounted future pretax operating cash flows or appraised values, depending on the nature of the asset. The Company determines the discount rate for this analysis based on the weighted average cost of capital using the market and guideline public companies for the related businesses and does not allocate interest charges to the asset or asset group being measured. Judgment is required to estimate future operating cash flows. In the fourth quarter of 2017, the Company recognized a $1.0 million impairment charge in the Americas segment for a technology asset as a change in market expectations indicated the carrying amount of this asset was no longer recoverable.

Intangible assets include the following:


	December 31,
	2017						2016
	Gross				Net		Gross				Net
	Carrying		Accumulated		Carrying		Carrying		Accumulated		Carrying
	Amount		Amortization		Amount		Amount		Amortization		Amount
	(in millions)
Patents	$	16.1	$	(15.4)	$	0.7	$	16.1	$	(14.9)	$	1.2
Customer relationships		233.2		(133.5)		99.7		231.5		(117.3)		114.2
Technology		53.9		(23.1)		30.8		53.1		(19.2)		33.9
Trade names		25.5		(9.7)		15.8		25.1		(8.1)		17.0
Other		6.9		(6.0)		0.9		6.8		(5.9)		0.9
Total amortizable intangibles		335.6		(187.7)		147.9		332.6		(165.4)		167.2
Indefinite-lived intangible assets		37.3		—		37.3		35.3		—		35.3
	$	372.9	$	(187.7)	$	185.2	$	367.9	$	(165.4)	$	202.5

The Company acquired $31.0 million in intangible assets as part of the PVI acquisition in 2016, consisting of customer relationships valued at $17.6 million, technology of $10.2 million, and the trade name of $3.2 million. The weighted-average amortization period in total and by asset category of customer relationships, technology, and the trade name is 16.1 years, 15 years, 10 years, and 20 years, respectively.

The Company acquired $1.6 million in intangible assets as part of the Watts Korea acquisition in 2016, consisting entirely of customer relationships. The weighted-average amortization period for the customer relationships acquired in 10 years.

Aggregate amortization expense for amortized intangible assets for 2017, 2016 and 2015 was $22.5 million, $20.8 million and $20.9 million, respectively. Additionally, future amortization expense on amortizable intangible assets is expected to be $19.5 million for 2018, $15.5 million for 2019, $15.0 million for 2020, $13.3 million for 2021, and $11.6 million for 2022. Amortization expense is provided on a straight‑line basis over the estimated useful lives of the intangible assets. The weighted‑average remaining life of total amortizable intangible assets is 12.5 years. Patents, customer relationships, technology, trade names and other amortizable intangibles have weighted‑average remaining lives of 3.3 years, 11.3 years, 8.1 years, 14.4 years and 19.7 years, respectively. Indefinite‑lived intangible assets primarily include trade names and trademarks.