Note 5: Goodwill and Long-Lived Asset Impairment

Purchased Intangible Assets

Our purchased intangible assets associated with completed acquisitions for the years ended December 31, 2011 and 2010 are as follows (in thousands, except for weighted average useful life):


	December 31, 2011									December 31, 2010
	Weighted average useful life		Gross carrying amount		Accumulated amortization			Net carrying amount		Gross carrying amount		Accumulated amortization			Net carrying amount
Goodwill			$	164,323	$	—		$	164,323	$	139,517	$	—		$	139,517

Existing technology		4.5	$	117,317	$	(108,235	)	$	9,082	$	113,076	$	(105,365	)	$	7,711
Patents, trademarks, and trade names		14.3		52,638		(23,334	)		29,304		51,555		(20,432	)		31,123
Customer relationships and other		5.9		78,709		(61,809	)		16,900		66,769		(56,463	)		10,306
IPR&D		—		706		—			706		—		—			—

Amortizable intangible assets		7.0	$	249,370	$	(193,378	)	$	55,992	$	231,400	$	(182,260	)	$	49,140

Acquired existing technology, patents, trademarks, trade names, and other intangible assets are amortized over their estimated useful lives of 2 to 18 years using the straight-line method, which approximates the pattern in which the economic benefits of the intangible assets are realized. Aggregate amortization expense was $11.2, $12.4, and $18.5 million for the years ended December 31, 2011, 2010, and 2009, respectively. As of December 31, 2011 future estimated amortization expense for each of the next five years and thereafter related to amortizable intangible assets is as follows (in thousands):


For the years ended December 31,	Future amortization expense
2012	$	10,968
2013		9,587
2014		7,927
2015		6,869
2016		4,592
Thereafter		16,049

	$	55,992

Goodwill Rollforward

The goodwill rollforward for the years ended December 31, 2011 and 2010 as required by ASC 805 (in thousands):


	Fiery			Inkjet			APPS			Total
Ending Balance, December 31, 2009	$	53,250		$	36,508		$	33,082		$	122,840

Additions	$	—		$	—		$	16,173			16,173
Radius opening balance sheet adjustment		—			—			943			943
Reclassification of Proofing Business from APPS to Fiery		6,228			—			(6,228	)		—
Foreign currency adjustments		528			—			(967	)		(439	)

Ending Balance, December 31, 2010	$	60,006		$	36,508		$	43,003		$	139,517

Additions	$	4,611		$	—		$	20,620		$	25,231
Prism opening balance sheet adjustment		—			—		$	(254	)		(254	)
Foreign currency adjustments		(205	)		—			(220	)		(425	)

Ending Balance, December 31, 2011	$	64,412		$	36,508		$	63,149		$	164,069

Accumulated Impairment, December 31, 2011	$	—		$	(103,991	)	$	—			(103,991	)

Goodwill additions in 2011 result from the Alphagraph, Prism, Entrac, and Streamline acquisitions, as well as Pace contingent consideration. Goodwill additions in 2010 result from the Radius acquisition and Pace contingent consideration. The Pace acquisition closed prior to the effective date of ASC 805. Consequently, Pace contingent consideration is accounted for as an adjustment to the purchase price.

Goodwill previously reported in the APPS operating segment for the year ended December 31, 2009 has been revised to conform to the December 31, 2010 presentation, reflecting the reclassification of proofing software from the APPS to the Fiery operating segment. Total goodwill for the years ended December 31, 2011 and 2010 has not changed.

The initial preliminary allocation of the Prism purchase price was adjusted during the fourth quarter of 2011 to reflect a $0.3 million decrease to goodwill, offset by a corresponding decrease in deferred tax liabilities. This adjustment was recorded as an adjustment to the opening balance sheet.

The initial preliminary allocation of the Radius purchase price was adjusted during the fourth quarter of 2010 to reflect a $0.9 and $0.6 million increase to goodwill and deferred tax assets, respectively, offset by a corresponding decrease in customer relationships. This adjustment was recorded as an adjustment to the opening balance sheet resulting in a credit to intangible amortization expense of $0.2 million in 2010.

Based on the outcome of conditions existing during the fourth quarter of 2008, we determined that a triggering event requiring an interim impairment analysis had occurred relating to the Inkjet reporting unit. The resulting impairment analysis resulted in a non-cash goodwill impairment charge of $104 million. The goodwill valuation analysis was performed based on our respective reporting units—Fiery, Inkjet, and APPS—which are consistent with our operating segments identified in Note 15—Segment Information, Geographic Data, and Major Customers of the Notes to Consolidated Financial Statements.

Goodwill Assessment

We perform our annual goodwill impairment analysis in the fourth quarter of each year according to the provisions of ASC 350-20-35. A two-step impairment test of goodwill is required. In the first step, the fair value of each reporting unit is compared to its carrying value. If the fair value exceeds carrying value, goodwill is not impaired and further testing is not required. If the carrying value exceeds fair value, then the second step of the impairment test is required to determine the implied fair value of the reporting unit's goodwill. The implied fair value of goodwill is calculated by deducting the fair value of all tangible and intangible net assets of the reporting unit, excluding goodwill, from the fair value of the reporting unit as determined in the first step. If the carrying value of the reporting unit's goodwill exceeds its implied fair value, then an impairment loss must be recorded equal to the difference.

Our goodwill valuation analysis is based on our respective reporting units (Fiery, Inkjet, and APPS), which are consistent with our operating segments identified in Note 15—Segment Information, Geographic Data, and Major Customers of the Notes to Consolidated Financial Statements. We determined the fair value of our reporting units as of December 31, 2011 by equally weighting the market and income approaches. Under the market approach, we estimated fair value based on market multiples of revenue or earnings of comparable companies. Under the income approach, we estimated fair value based on a projected cash flow method using a discount rate determined by our management to be commensurate with the risk inherent in our current business model. Based on our valuation results, we have determined that the fair values of our reporting units exceed their carrying values. Fiery, Inkjet, and APPS fair values are $288, $212, and $127 million, respectively, which exceed carrying value by 163%, 60%, and 50%, respectively.

To identify suitable comparable companies under the market approach, consideration was given to the financial condition and operating performance of the reporting unit being evaluated relative to companies operating in the same or similar businesses, potentially subject to corresponding economic, environmental, and political factors and considered to be reasonable investment alternatives. Consideration was given to the investment characteristics of the subject company relative to those of similar publicly traded companies (i.e., guideline companies), which are actively traded. In applying the PCMMM, valuation multiples were derived from historical and projected operating data of guideline companies and applied to the appropriate operating data of our reporting units to arrive at an indication of fair value. Five, four, and seven suitable guideline companies were identified for the Fiery, Inkjet, and APPS reporting units, respectively.

While the fair value of the Fiery, Inkjet, and APPS reporting units exceeded their carrying value as of December 31, 2011 as indicated by the market-based valuation, management determined to further examine whether an impairment had occurred given the Inkjet impairment recognized in the fourth quarter of 2008 and the susceptibility of the APPS reporting unit to fair value fluctuations. We reviewed the factors that could trigger an impairment charge and completed an income-based impairment analysis for all three reporting units. As part of this process, we engaged a third party valuation firm to assist management in its analysis. All estimates, key assumptions, and forecasts were either provided by or reviewed by us. While we chose to utilize a third party valuation firm, the impairment analysis and related valuations represent the conclusions of management and not the conclusions or statements of any third party.

Solely for purposes of establishing inputs for the income approach to assess the fair value of the Fiery, Inkjet, and APPS reporting units, we made the following assumptions:

•

Fiery and Inkjet revenue approximated historical normalized growth rates in 2011. During 2011, APPS revenue growth of 41% exceeded historical normalized growth rates due to several acquisitions completed in 2011 and 2010.

•

Despite the ongoing economic uncertainty, our reporting units' revenue will grow at historical normalized rates between 2012 and 2016 for the following primary reasons:

•

The ongoing transition from analog to digital technology will enable our Fiery revenue to grow at historical normalized rates in spite of the economic climate. This transition is expected to continue through the forecast horizon. Fiery is also well-positioned to achieve historical normalized growth rates due to our software solutions, including our self-service and payment solution (Entrac).

•

As the leading world-wide manufacturer of digital UV ink, our Inkjet revenue is positioned to outpace the slow economy and achieve historical normalized growth rates due to the ongoing transition from solvent-based to UV curable-based printing and from UV curing to UV/LED curing. This transition is expected to continue through the forecast horizon.

•

Our acquisition strategy in the APPS reporting unit will enable us to achieve historical normalized revenue growth rates through the forecast horizon. Our intention is to continue to explore additional acquisition opportunities in the APPS operating segment to further consolidate the business process automation and cloud-based order entry and order management software industries in both the Americas and world-wide.

•

Long-term industry growth after 2016 with the exception of Fiery, which is conservatively assumed at long-term growth rates by 2013.

•

Gross profit percentages will approximate historical average levels in the Fiery and APPS reporting units. Inkjet gross profit will remain at the 40 percent level, which is the approximate level achieved in 2011 as we have resolved significant warranty issues and exposures.

Our discounted cash flow projections were based on five-year financial forecasts, which were based on annual financial forecasts developed internally by management for use in managing our business and through discussions with the valuation firm engaged by us. The significant assumptions utilized in these five-year financial forecasts included consolidated annual revenue growth rates ranging from 8% to 10%, which equates to a consolidated compound annual growth rate of 8%. These are our historical normalized growth rates. Future cash flows were discounted to present value using a mid-year convention and a consolidated discount rate of 19%. Terminal values were calculated using the Gordon growth methodology with a consolidated long-term growth rate of 3.5%. The sum of the fair values of the Fiery, Inkjet, and APPS reporting units was reconciled to our current market capitalization (based on our stock price) plus an estimated control premium.

Significant assumptions used in determining fair values of the reporting units under the market-based and income-based analyses include the determination of appropriate market comparables, estimated multiples of revenue and EBIT that a willing buyer is likely to pay, estimated control premium a willing buyer is likely to pay, gross profit, and operating expenses. Gross profit and operating expenses as a percentage of revenue over the five-year forecast horizon were compared to approximate percentages realized by the guideline companies. To assess the reasonableness of the estimated control premium of 33%, we examined the most similar transactions in relevant industries and determined the average premium indicated by the transactions deemed to be most similar to a hypothetical transaction involving our reporting units. We examined the weighted average and median control premiums offered in relevant industries, industry specific control premiums, and specific transaction control premiums to conclude that our estimated control premium is reasonable.

We assess the impairment of identifiable intangibles and long-lived assets whenever events or changes in circumstances indicate the carrying value may not be recoverable or the life of the asset may need to be revised. Factors considered important that could trigger an impairment review include:

•

significant negative industry or economic trends,

•

significant decline in our stock price for a sustained period,

•

our market capitalization relative to net book value,

•

significant changes in the manner of our use of the acquired assets,

•

significant changes in the strategy for our overall business, and

•

our assessment of growth and profitability in each reporting unit over the coming years.

Given the uncertainty of the economic environment and the potential impact on our business, there can be no assurance that our estimates and assumptions regarding the duration of the ongoing economic downturn, or the period or strength of recovery, made for purposes of our goodwill impairment testing at December 31, 2011 will prove to be accurate predictions of the future. If our assumptions regarding forecasted revenue or gross profit rates are not achieved, we may be required to record additional goodwill impairment charges in future periods relating to any of our reporting units, whether in connection with the next annual impairment testing in the fourth quarter of 2012 or prior to that, if any such change constitutes an interim triggering event. It is not possible to determine if any such future impairment charge would result or, if it does, whether such charge would be material.

Long-Lived Assets

We evaluate potential impairment with respect to long-lived assets whenever events or changes in circumstances indicate their carrying amount may not be recoverable. We recognized long-lived asset impairment charges of $0.7 and $3.2 million for the years ended December 31, 2010 and 2009, respectively, consisting primarily of project abandonment costs related to equipment charges in the Inkjet operating segment, assets impaired related to an Inkjet facility closure, and the impairment of our remaining equity method investees. No asset impairment charges were recognized during the year ended December 31, 2011.

Other investments, included within other assets, consist of equity and debt investments in privately-held companies that develop products, markets, and services that are strategic to us. In-substance common stock investments in which we exercise significant influence over operating and financial policies, but do not have a majority voting interest, are accounted for using the equity method of accounting. Investments not meeting these requirements are accounted for using the cost method of accounting.

The process of assessing whether a particular equity or debt investment's fair value is less than its carrying cost requires a significant amount of judgment due to the lack of a mature and stable public market for these securities. In making this judgment, we carefully consider the investee's most recent financial results, cash position, recent cash flow data, projected cash flows (both short and long-term), financing needs, recent financing rounds, most recent valuation data, the current investing environment, management or ownership changes, and competition. This analysis is based primarily on information that we request and receive from these privately-held companies and is performed on a quarterly basis. Although we evaluate all of our privately-held equity and debt investments for impairment based on this criteria, each investment's fair value is only estimated when events or changes in circumstances have occurred that may have a significant effect on its fair value (because the fair value of each investment is not readily determinable). Where these factors indicate that the equity investment's fair value is less than its carrying cost, and where we consider such diminution in value to be other than temporary, we record an impairment charge to reduce such equity investment to its estimated fair value.

We previously assessed each investment's technology pipeline and market conditions in the industry and determined it is no longer probable that they will generate sufficient positive future cash flows to recover the full carrying amount of the investment. As such, we recognized an impairment charge of $6.1 million. During the second quarter of 2010, we further assessed each remaining investment's ability to sustain an earnings capacity that would justify the carrying amount of the investment in accordance with ASC 323-10-35-32. Based on this assessment, we impaired the remaining carrying value of these investments of $0.3 million.

Our consolidated results of operations for the year ended December 31, 2009 include, as a component of other income (expense), net, our share of the net losses of equity method investees of $1.4 million. On September 1, 2011, we received the proceeds from the sale of one of these investments of $2.9 million.