L. Goodwill and Intangible Assets

Goodwill

Teradyne performs its annual goodwill impairment test as required under the provisions of ASC 350-10, “Intangibles—Goodwill and Other” on December 31 of each fiscal year unless interim indicators of impairment exist. Goodwill is considered impaired when the net book value of a reporting unit exceeds its estimated fair value.

In the second quarter of 2016, the Wireless Test reporting unit (which is Teradyne’s Wireless Test operating and reportable segment) reduced headcount by 11% as a result of a sharp decline in projected demand attributable to an estimated smaller future wireless test market. The decrease in projected demand was due to lower forecasted buying from Teradyne’s largest Wireless Test segment customer (who has contributed between 51% and 73% of annual Wireless Test sales since the LitePoint acquisition in 2011) as a result of the customer’s numerous operational efficiencies; slower smartphone growth rates; and a slowdown of new wireless technology adoption. Teradyne considered the headcount reduction and sharp decline in projected demand to be a triggering event for an interim goodwill impairment test.

Teradyne used the income and market approaches to determine the fair value of the Wireless Test reporting unit for step 1 of the goodwill impairment test. With respect to the income approach, Teradyne used the discounted cash flow method, which included seven year future cash flow projections and an estimated terminal value. The cash flow projections were prepared using Teradyne’s forecast, which was based upon underlying estimates of the total market size, and Teradyne’s market share in the wireless test market developed using Teradyne and independent third party data. The estimated terminal value was calculated using the Gordon Growth model. The market approach used a revenue multiple to develop an estimate of fair value. The revenue multiple was estimated using enterprise value as a ratio of next twelve months revenue for comparable companies. Teradyne equally weighted the income and market approaches to determine the fair value of the Wireless Test reporting unit. The carrying amount of the Wireless Test reporting unit exceeded its fair value; therefore, the second step of the goodwill impairment test was performed to calculate implied goodwill and to measure the amount of the impairment loss.

Teradyne allocated the fair value of the Wireless Test reporting unit to all of its assets and liabilities (including unrecognized intangible assets). The net book value of raw materials inventory was estimated as an approximation of current replacement costs. The fair value of finished goods inventory was estimated at the present value of selling price less direct selling costs and profit on the selling effort. The selling price used in the inventory fair values was based upon the product gross margins included in Teradyne’s forecast. The fair value of the deferred revenue liability was estimated by assessing the costs required to service the obligation plus a reasonable profit margin. The fair value for personal property assets, which consisted of furniture and fixtures, machinery and equipment, computer equipment, software and leasehold improvements, was estimated using the replacement cost approach, which approximated carrying value. The fair value of intangible assets was estimated using the income approach and, in particular, developed technology and trademarks/trade names were valued using the relief-from-royalty method and customer relationships and customer backlog were valued using the discounted cash flow method. Royalty rates were estimated using rates applicable to wireless testing equipment and other similar technologies. Based upon this allocation, Teradyne determined that goodwill is valued at $8.0 million and recorded an impairment loss of $255 million in the second quarter of 2016.

The changes in the carrying amount of goodwill by reportable segments for the six months ended July 3, 2016, were as follows:


	Wireless Test			Industrial Automation		System Test			Semiconductor Test			Total
	(in thousands)
Balance at December 31, 2015:
Goodwill	$	361,819		$	214,975	$	158,699		$	260,540		$	996,033
Accumulated impairment losses		(98,897	)		—		(148,183	)		(260,540	)		(507,620	)

		262,922			214,975		10,516			—			488,413
Foreign currency translation adjustment		—			3,743		—			—			3,743
Goodwill impairment loss		(254,946	)		—		—			—			(254,946	)

Balance at July 3, 2016:
Goodwill		361,819			218,718		158,699			260,540			999,776
Accumulated impairment losses		(353,843	)		—		(148,183	)		(260,540	)		(762,566	)

	$	7,976		$	218,718	$	10,516		$	—		$	237,210

Intangible Assets

Teradyne reviews long-lived assets for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable or that the useful lives of these assets are no longer appropriate. As a result of the Wireless Test segment goodwill impairment review in the second quarter of 2016, Teradyne performed an impairment test of the Wireless Test segment’s intangible and long-lived assets. The impairment test is based on a comparison of the estimated undiscounted cash flows to the carrying value of the asset group. If undiscounted cash flows for the asset group are less than the carrying amount, the asset group is written down to its estimated fair value based on a discounted cash flow analysis. The cash flow estimates used to determine the impairment contain management’s best estimates using appropriate assumptions and projections at that time. The fair value of intangible assets was estimated using the income approach and, in particular, developed technology and trademarks/trade names were valued using the relief-from-royalty method and customer relationships were valued using the discounted cash flow method. Royalty rates were estimated using rates applicable to wireless testing equipment and other similar technologies. As a result of the analysis, Teradyne recorded an $83 million impairment charge in the second quarter of 2016 in acquired intangible assets impairment on the statement of operations.

Amortizable intangible assets consist of the following and are included in intangible assets, net on the balance sheet:


	July 3, 2016
	Gross Carrying Amount (1)		Accumulated Amortization (1)(2)		Foreign Currency Translation Adjustment			Net Carrying Amount		Weighted Average Useful Life
	(in thousands)
Developed technology	$	333,421	$	259,364		(1,138	)	$	72,919		6.0 years
Customer relationships		110,602		89,674		(119	)		20,809		7.9 years
Tradenames and trademarks		53,034		24,581		(292	)		28,161		9.5 years
Non-compete agreement		320		140		—			180		4.0 years
Customer backlog		170		170		—			—		0.3 years

Total intangible assets	$	497,547	$	373,929		(1,549	)	$	122,069		6.8 years

(1)	In 2016, $48 million of amortizable intangible assets became fully amortized and have been eliminated from the gross carrying amount and accumulated amortization.

(2)	Includes an $83 million impairment of Wireless Test amortizable intangible assets.


	December 31, 2015
	Gross Carrying Amount		Accumulated Amortization		Foreign Currency Translation Adjustment			Net Carrying Amount		Weighted Average Useful Life
	(in thousands)
Developed technology	$	382,262	$	220,346		(2,444	)	$	159,472		6.0 years
Customer relationships		110,602		63,722		(258	)		46,622		7.9 years
Tradenames and trademarks		53,034		18,889		(628	)		33,517		9.5 years
Non-compete agreement		320		100		—			220		4.0 years
Customer backlog		170		170		—			—		0.3 years

Total intangible assets	$	546,388	$	303,227		(3,330	)	$	239,831		6.7 years

Aggregate intangible asset amortization expense was $16.2 million and $36.2 million, respectively, for the three and six months ended July 3, 2016 and $15.3 million and $29.1 million, respectively, for the three and six months ended July 5, 2015. Estimated intangible asset amortization expense for each of the five succeeding fiscal years is as follows:


Year	Amortization Expense
	(in thousands)
2016 (remainder)	$	16,519
2017		30,410
2018		28,142
2019		24,244
2020		10,626
Thereafter		12,128