Note 5: Goodwill and Long-Lived Intangible Assets

Purchased Intangible Assets

Our purchased intangible assets resulting from acquisitions are as follows (in thousands, except for weighted average useful life):


			December 31, 2017									December 31, 2016
	Weighted average useful life (years)		Gross carrying amount		Accumulated amortization			Weighted remaining average useful life (years)		Net carrying amount		Gross carrying amount		Accumulated amortization			Net carrying amount
Goodwill		—	$	403,278	$	—			—	$	403,278	$	359,841	$	—		$	359,841

Customer relationships and other		4.6	$	95,862	$	(45,862	)		3.6	$	50,000	$	88,557	$	(49,527	)	$	39,030
Existing technology		4.1		196,693		(149,300	)		2.9		47,393		173,543		(122,654	)		50,889
Trademarks and trade names		4.9		72,048		(46,822	)		5.5		25,226		67,701		(38,300	)		29,401
IPR&D		—		389		—			—		389		3,677		—			3,677

Amortizable intangible assets		4.4	$	364,992	$	(241,984	)		3.8	$	123,008	$	333,478	$	(210,481	)	$	122,997

Acquired customer relationships and other, existing technology, and trademarks and trade names are amortized over their estimated useful lives of two to sixteen years using the straight-line method, which approximates the pattern in which the economic benefits of the identified intangible assets are realized. The useful lives of certain amortizable identifiable intangible assets were reduced based on a re-assessment of their useful lives with a $0.2 and $1.6 million impact on amortization expense during 2017 and 2016, respectively. No changes have been made to the useful lives of amortizable identifiable intangible assets in 2015. Aggregate amortization expense was $47.3, $39.6, and $26.5 million for the years ended December 31, 2017, 2016, and 2015, respectively.

IPR&D is subject to amortization after product completion over the product life or otherwise assessed for impairment in accordance with acquisition accounting guidance. There were no impairments of IPR&D recognized during the years ended December 31, 2017, 2016, or 2015.

As of December 31, 2017, future estimated amortization expense for each of the next five years and thereafter related to the amortization of identified intangible assets is as follows (in thousands):


For the years ended December 31,	Future amortization expense
2018	$	43,652
2019		35,770
2020		19,331
2021		7,253
2022		5,003
Thereafter		11,999

	$	123,008

Goodwill Rollforward

The goodwill rollforward for the years ended December 31, 2017 and 2016 is as follows (in thousands):


	Industrial Inkjet			Productivity Software			Fiery			Total
Ending Balance, December 31, 2015	$	142,183		$	133,128		$	63,482		$	338,793

Additions (Rialco and Optitex acquisitions)	$	1,426		$	28,147		$	—		$	29,573
Opening balance sheet adjustments		(171	)		(663	)		—			(834	)
Foreign currency adjustments		(2,370	)		(5,137	)		(184	)		(7,691	)

Ending Balance, December 31, 2016	$	141,068		$	155,475		$	63,298		$	359,841

Additions (FFPS, Generation Digital, CRC, and Escada acquisitions)	$	—		$	11,632		$	9,602		$	21,234
Opening balance sheet adjustments		—			10			679			689
Foreign currency adjustments		13,305			7,527			682			21,514

Ending Balance, December 31, 2017	$	154,373		$	174,644		$	74,261		$	403,278

Accumulated Impairment as of December 31, 2017, recognized in 2008	$	103,991		$	—		$	—		$	103,991

Goodwill Assessment

ASU 2011-08, Intangibles—Goodwill and Other (ASC 350): Testing Goodwill for Impairment, provides that a simplified analysis of goodwill impairment may be performed consisting of a qualitative assessment to determine whether further impairment testing is necessary. Due to the significant additions to goodwill resulting from the business combinations completed during 2017 and 2016 and because our reporting units are susceptible to fair value fluctuations, we determined that the quantitative analysis should be performed.

A two-step impairment test of goodwill is required by ASC 350-20-35. 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 (Industrial Inkjet, Productivity Software, and Fiery), which are consistent with our operating segments identified in Note 14—Segment Information, Geographic Regions, and Major Customers of the Notes to Consolidated Financial Statements. We determined the fair value of our reporting units as of December 31, 2017 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 Industrial Inkjet, Productivity Software, and Fiery reporting units exceed their carrying values as of December 31, 2017, by $398.1, $78.7 and $207.9 million, respectively, or 90%, 43%, and 197%, 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 companies relative to those of similar publicly traded companies (i.e., guideline companies), which are actively traded. In applying the Public Company Market Multiple Method, 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 suitable guideline companies were identified for the Industrial Inkjet, reporting unit. Six suitable guideline companies were identified for the Productivity Software and Fiery reporting units, respectively.

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 Industrial Inkjet, Productivity Software, and Fiery reporting units, we made the following assumptions:

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Industrial Inkjet revenue was comparable in 2017 with 2016. Industrial Inkjet revenue would have been higher by $3.4 million when considering out-of-period adjustments related to certain bill and hold transactions, which were recorded during the year ended December 31, 2017. Industrial Inkjet revenue is assumed to return to historical normalized growth rates during the forecast horizon.

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Productivity Software revenue growth was 3% in 2017 compared with 2016. Productivity Software revenue is assumed to return to historical normalized growth rates during the forecast horizon.

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Fiery revenue declined by 4% in 2017 primarily due to the leading printer manufacturers tightly managing their inventory levels in the first half of 2017, which decreased demand, partially offset by increased inventory levels and increased demand during the second half of 2017. This decrease was partially offset by post-acquisition FFPS revenue, which was acquired in January 2017, and a small amount of Generation Digital revenue, which was acquired in August 2017. Fiery revenue growth of 2% per year is assumed in the forecast horizon commencing in 2019 as printer distributor / manufacturer inventories and end user demand return to normal levels and APAC demand recovers.

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Despite ongoing economic uncertainty, our reporting units’ revenue is assumed to grow at historical normalized rates between 2018 and 2023 for the following primary reasons:

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Our Industrial Inkjet revenue is positioned to outpace the market due to launch of the Nozomi corrugated packaging industrial digital inkjet printer and 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.

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Our acquisitions of Rialco in 2016 and Reggiani and Matan in 2015 will enable us to continue to achieve historical normalized Industrial Inkjet revenue growth rates through the forecast horizon.

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Our acquisitions of Escada and CRC in 2017, Optitex in 2016, and CTI and Shuttleworth in 2015 will enable us to continue to achieve historical normalized Productivity Software revenue growth rates through the forecast horizon.

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Our acquisition strategy in the Productivity Software 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 this operating segment to further consolidate the business process automation and cloud-based order entry and order management software industries.

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Other assumptions include:

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Long-term industry growth after 2023.

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Gross profit percentages will approximate historical average levels in the Industrial Inkjet, Productivity Software and Fiery reporting units.

Our discounted cash flow projections are six-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 six-year financial forecasts included consolidated annual revenue growth rates ranging from 4% to 12% which equates to a consolidated compound annual growth rate of 6%. The upper end of the range exceeds our historical normalized growth rates due to the addition of the Nozomi printer, Reggiani textile, and Optitex software businesses to our portfolio. Future cash flows were discounted to present value using a mid-year convention and a consolidated discount rate of 10.8%. Terminal values were calculated using the Gordon growth methodology with a consolidated long-term growth rate of 4% for Industrial Inkjet and Productivity Software and 2.5% for Fiery. The sum of the fair values of the Industrial Inkjet, Productivity Software, and Fiery reporting units was reconciled to our current market capitalization (based on our stock price) plus an estimated control premium. Percentages of revenue over the six-year forecast horizon were compared to approximate percentages realized by the guideline companies. To assess the reasonableness of the estimated control premium of 8.8%, 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:

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significant negative industry or economic trends,

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significant decline in our stock price for a sustained period,

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our market capitalization relative to net book value,

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

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significant changes in the strategy for our overall business, and

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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, 2017 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 2018 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. An asset is considered impaired if its carrying amount exceeds the undiscounted future cash flow the asset is expected to generate. An impairment loss is recorded for long-lived assets held-for-sale when the carrying amount of the asset exceeds its fair value less cost to sell. A long-lived asset is not depreciated while it is classified as held-for-sale.

We recorded an impairment loss of $0.9 million during the year ended December 31, 2017 related to the Meredith manufacturing facility and related land, For additional information, please refer to Note 15 – Property and Equipment, net, for details. There were no asset impairment charges recognized during the years ended December 31, 2016 and 2015.