Goodwill and other Identifiable Intangible Assets

12 Months Ended

Sep. 30, 2023

Goodwill and Intangible Assets Disclosure [Abstract]

3. GOODWILL AND OTHER IDENTIFIABLE INTANGIBLE ASSETS, NET

Identifiable Intangible Assets, Net

Amortizable identifiable intangible assets, net as of September 30, 2023 and 2022 were comprised of the following (in thousands):


	September 30, 2023						September 30, 2022
	Gross carrying amount		Accum. amort.		Net		Gross carrying amount		Accum. amort.		Net
Purchased and core technology	$	85,032	$	(59,833)	$	25,199	$	85,016	$	(55,854)	$	29,162
License agreements	112		(112)		—		112		(112)		—
Patents and trademarks	39,957		(19,888)		20,069		39,711		(17,666)		22,045
Customer relationships	309,196		(77,380)		231,816		309,212		(58,355)		250,857
Non-compete agreements	600		(600)		—		600		(600)		—
Order backlog	1,000		(1,000)		—		1,000		(1,000)		—
Total	$	435,897	$	(158,813)	$	277,084	$	435,651	$	(133,587)	$	302,064

Amortization expense is included in our consolidated statements of operations in cost of sales and general and administrative expense. Amortization expense in cost of sales includes amortization for purchased and core technology and certain patents and trademarks.

Amortization expense for fiscal years 2023, 2022 and 2021 was as follows (in thousands):


Fiscal year	Total
2023	$	25,226
2022	$	27,195
2021	$	16,534

Estimated amortization expense for the next five fiscal years is as follows (in thousands):


Fiscal year	Total
2024 (twelve months)	$	25,232
2025	$	21,776
2026	$	21,544
2027	$	20,593
2028	$	20,411

The changes in the carrying amount of goodwill by reportable segments are (in thousands):


	IoT Products & Services		IoT Solutions		Total
Balance on September 30, 2021	$	175,180	$	50,342	$	225,522
Acquisitions	—		118,635		118,635
Adjustments	186		(631)		(445)
Foreign currency translation adjustment	(2,435)		(800)		(3,235)
Balance on September 30, 2022	$	172,931	$	167,546	$	340,477


Foreign currency translation adjustment	1,026		90		1,116
Balance on September 30, 2023	$	173,957	$	167,636	$	341,593

No goodwill impairment has been recorded in any period presented.

3. GOODWILL AND OTHER IDENTIFIABLE INTANGIBLE ASSETS, NET (CONTINUED)

Goodwill represents the excess of cost over the fair value of net identifiable assets acquired. Goodwill is quantitatively tested for impairment on an annual basis as of June 30, or more frequently if events or circumstances occur which could indicate impairment. We continue to have two reportable segments, our IoT Products & Services segment and our IoT Solutions segment (see Note 4). Effective with the reorganization announcement on October 7, 2020 (see Note 10), our IoT Products & Services business is structured to include four reporting units under the IoT Products & Services segment, each with a reporting manager: Cellular Routers, Console Servers, OEM Solutions and Infrastructure Management. Due to the reorganization, we performed our fiscal third quarter 2021 annual impairment test for those four reporting units along with our IoT Solutions segment. Following our acquisition of Ventus, IoT Solutions is comprised of two reporting units. All six reporting units were included in our fiscal third quarter 2022 annual impairment test.

For our quantitative goodwill impairment tests, we determine the estimated fair value of each reporting unit and compare it to the carrying value of the reporting unit, including goodwill. If the carrying amount of a reporting unit is higher than its estimated fair value, then an impairment loss must be recognized for the excess. Fair values for the six reporting units were each estimated on a standalone basis using a weighted combination of the income approach and market approach.

The income approach indicates the fair value of a business based on the value of the cash flows the business or asset can be expected to generate in the future. A commonly used variation of the income approach used to value a business is the discounted cash flow (“DCF”) method. The DCF method is a valuation technique in which the value of a business is estimated on the earnings capacity, or available cash flow, of that business. Earnings capacity represents the earnings available for distribution to stockholders after consideration of the reinvestment required for future growth. Significant judgment is required to estimate the amount and timing of future cash flows for each reporting unit and the relative risk of achieving those cash flows. Key assumptions used in the analysis were related to the determination of discount rates and forecasts of future gross margins and earnings before income taxes, depreciation and amortization margins. The market approach indicates the fair value of a business or asset based on a comparison of the business or asset to comparable publicly traded companies or assets and transactions in its industry as well as our prior acquisitions. This approach can be estimated through the guideline company method. This method indicates fair value of a business by comparing it to publicly traded companies in similar lines of business. After identifying and selecting the guideline companies, we make judgments about the comparability of the companies based on size, growth rates, profitability, risk, and return on investment in order to estimate market multiples. These multiples are then applied to the reporting units to estimate a fair value.

Assumptions and estimates to determine fair values under the income and market approaches are complex and often subjective. They can be affected by a variety of factors. These include external factors such as industry and economic trends. They also include internal factors such as changes in our business strategy and our internal forecasts. Changes in circumstances or a potential event could negatively affect the estimated fair values. We will continue to monitor potential impacts to our assumptions, as any changes could potentially affect our cash flows and market capitalization. If our future operating results do not meet current forecasts or if we experience a sustained decline in our market capitalization that is determined to be indicative of a reduction in fair value of one or more of our reporting units, we may be required to record future impairment charges for goodwill.

Digi conducted an analysis as of September 30, 2023 and concluded changes in market conditions from the time of the Fiscal 2023 test, conducted as of June 30,2023, were not indicative of a reduction in fair value of any of our reporting units.

Results of our Fiscal 2023 Annual Impairment Test

As of June 30, 2023, we had a total of $32.7 million of goodwill for the Cellular Routers reporting unit, $57.1 million of goodwill for the Console Servers reporting unit, $64.6 million of goodwill for the OEM Solutions reporting unit, $20.4 million of goodwill for the Infrastructure Management reporting unit, $48.9 million of goodwill for the SmartSense by Digi reporting unit and $118.6 million of goodwill for the Ventus reporting unit. At June 30, 2023, the fair value of goodwill exceeded the carrying value for all six reporting units and no impairment was recorded.

Goodwill and Intangible Assets Disclosure [Text Block]

GOODWILL AND OTHER IDENTIFIABLE INTANGIBLE ASSETS, NET