Goodwill and Intangible Assets

9 Months Ended

Jul. 04, 2020

Goodwill and Intangible Assets Disclosure [Abstract]

Goodwill and Intangible Assets

GOODWILL AND INTANGIBLE ASSETS 

During the quarter ended July 4, 2020, we noted no indications of impairment or triggering events, not already considered in the quarter ended April 4, 2020, to cause us to review goodwill for potential impairment. We will conduct our annual goodwill testing during the fourth fiscal quarter.

In the quarter ended April 4, 2020, the worldwide spread of coronavirus ("COVID-19") created significant volatility, uncertainty and disruption to the global economy, representing an indicator to test our goodwill for impairment. Based on our internal projections and the preparation of our financial statements for the quarter ended April 4, 2020, and considering the forecasted decrease in demand due to the COVID-19 pandemic and other factors, we believed that the fair value of our ILS reporting unit might no longer have exceeded its carrying value and performed an interim goodwill impairment test on the ILS reporting unit. We also performed an interim goodwill impairment test on the OLS reporting unit.

Our goodwill impairment tests for the ILS and OLS reporting units were performed by comparing the fair value of the reporting units with their carrying values and recognizing an impairment charge for the amount by which the carrying value exceeded the fair value. Based on the estimated fair value of the ILS reporting unit, in the quarter ended April 4, 2020, we recorded a non-cash pre-tax charge related to the ILS reporting unit of $327.2 million, reducing the goodwill balance of the reporting unit to zero. The impairment charge was primarily the result of a decline in projected cash flows of the ILS reporting unit driven by lower forecasted sales volumes and profitability in several business units. The impairment charge was also the result of changes in certain market-related inputs to the analysis to reflect macro-economic changes caused by the impact of COVID-19, including lower pricing multiples for comparable public companies. No impairment charge was recognized for the OLS reporting unit as the fair value significantly exceeded the carrying value of the reporting unit.

In assessing goodwill for impairment, we were required to make significant judgments related to the fair value of our reporting units. We used a combination of the Income (discounted cash flow) approach and the Market (market comparable) approach to estimate the fair value of our reporting units. The Income approach utilizes the discounted cash flow model to provide an estimation of fair value based on the cash flows that a business expects to generate. These cash flows are based on forecasts developed internally by management which are then discounted at an after tax rate of return required by equity and debt market participants of a business enterprise. Our assumptions used in the forecasts are based on historical data, supplemented by current and anticipated market conditions, estimated growth rates and management’s plans. The rate of return on cost of capital is weighted based on the capitalization of comparable companies. We utilized a discount rate for each of our reporting units that represents the risks that our businesses face, considering their sizes, their current economic environment and other industry data as we believe is appropriate. The Market approach determines fair value by comparing the reporting units to comparable companies in similar lines of business that are publicly traded. The selection of comparable companies is based on the markets in which the reporting units operate giving consideration to risk profiles, size, geography and diversity of products and services. Total Enterprise Value (TEV) multiples such as TEV to revenues and TEV to earnings (if applicable) before interest and taxes of the publicly traded companies are calculated. We utilized multiples for each of our reporting units that represent the risks that our businesses face, considering their sizes, their current economic environment and other industry data as we believe is appropriate. The interim goodwill impairment

testing results were also reconciled with our market capitalization as of April 4, 2020, as the final step in the impairment testing.

Before performing the goodwill impairment test for the ILS reporting unit, we performed impairment tests on the long-lived assets allocated to the asset group of the ILS reporting unit, including intangible assets, property, plant and equipment and ROU assets as of April 4, 2020, due primarily to the same indicators that led to the interim goodwill impairment testing. Based on the impairment tests performed, we concluded that some of the long-lived assets allocated to the asset group of the ILS reporting unit were impaired as of April 4, 2020. Accordingly, we recorded non-cash pre-tax charges in the quarter ended April 4, 2020 related to the intangible assets, property, plant and equipment and right-of-use ("ROU") assets of the ILS reporting unit of $33.9 million, $85.6 million and $1.8 million, respectively. We did not identify any indicators that would lead us to believe that the carrying value of the long-lived assets allocated to the asset group of the OLS reporting unit may not be recoverable as of April 4, 2020.

In assessing our long-lived assets for impairment, we were required to make significant judgments related to the fair value of our long-lived assets, which are comprised of personal property, real property, and intangible assets. We used a combination of the Income, the Market approach, and the Cost (cost to create) approach to estimate the fair value of our long-lived assets. Our personal property assets consist of laser manufacturing and assembly equipment, semiconductor tools, laboratory and test equipment, furniture and fixtures and computer hardware and software. We used the Cost Approach (with support from the Market Approach) to estimate the fair value of our personal property, taking into consideration the physical deterioration, functional obsolescence and economic obsolescence of our personal property assets. Our real property assets consist of land and buildings, land rights (ground leased) and ROU assets. In determining the fair value of our real property assets, we used a combination of the Income, Market (sales comparison) and Cost approaches. We considered historical transaction information, current market conditions, operating performance, forecast growth and market-derived rates of return in our real property determination of fair value. The fair value of our ROU assets was determined using the Income approach by considering off-market components of the associated ROU leases. Our intangible assets consist of technology and customer relationship assets, and we used the Income approach to estimate the fair value of our intangible assets. We identified cash flows associated with each intangible asset, which were discounted at an after-tax rate of return appropriate for the risk profile of each intangible asset.

The changes in the carrying amount of goodwill by segment for the period from September 28, 2019 to July 4, 2020 are as follows (in thousands):

	OEM Laser Sources		Industrial Lasers & Systems		Total
Balance as of September 28, 2019	$	96,820	$	330,281	$	427,101
Impairment charges	—		(327,203)		(327,203)
Translation adjustments	1,827		(3,078)		(1,251)
Balance as of July 4, 2020	$	98,647	$	—	$	98,647

Components of our amortizable intangible assets are as follows (in thousands):

	July 4, 2020						September 28, 2019
	Gross Carrying Amount		Accumulated Amortization		Net		Gross Carrying Amount		Accumulated Amortization		Net
Existing technology	$	43,114	$	(32,181)	$	10,933	$	193,704	$	(131,429)	$	62,275
Customer relationships	24,076		(12,503)		11,573		42,083		(21,512)		20,571
Trade name	—		—		—		5,261		(5,138)		123
Production know-how	2,300		(801)		1,499		2,300		(456)		1,844
Total	$	69,490	$	(45,485)	$	24,005	$	243,348	$	(158,535)	$	84,813

For accounting purposes, when an intangible asset is fully amortized, it is removed from the disclosure schedule. The gross carrying amounts as of July 4, 2020, have been reduced by impairment charges of $27.7 million and $6.2 million for existing technology and customer relationships, respectively.

Amortization expense for intangible assets for the nine months ended July 4, 2020 and June 29, 2019 was $27.2 million and $47.7 million, respectively. The change in the accumulated amortization also includes $1.8 million (decrease) and $2.1 million (decrease) of foreign exchange impact for the nine months ended July 4, 2020 and June 29, 2019, respectively.

At July 4, 2020, estimated amortization expense for the remainder of fiscal 2020, the next five succeeding fiscal years and all fiscal years thereafter are as follows (in thousands):

	Estimated Amortization Expense
2020 (remainder)	$	2,918
2021	9,404
2022	3,186
2023	2,639
2024	1,854
2025	1,852
Thereafter	2,152
Total	$	24,005