Goodwill, Purchased Technology and Other Intangible Assets

Goodwill and Purchased Intangible Assets

Applied’s methodology for allocating the purchase price relating to purchase acquisitions is determined through established and generally accepted valuation techniques. Goodwill is measured as the excess of the purchase price over the sum of the amounts assigned to tangible and identifiable intangible assets acquired less liabilities assumed. Applied assigns assets acquired (including goodwill) and liabilities assumed to one or more reporting units as of the date of acquisition. Typically, acquisitions relate to a single reporting unit and thus do not require the allocation of goodwill to multiple reporting units. If the products obtained in an acquisition are assigned to multiple reporting units, the goodwill is distributed to the respective reporting units as part of the purchase price allocation process.

Goodwill and purchased intangible assets with indefinite useful lives are not amortized, but are reviewed for impairment annually during the fourth quarter of each fiscal year and whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. The process of evaluating the potential impairment of goodwill and intangible assets requires significant judgment, especially in emerging markets. Applied regularly monitors current business conditions and considers other factors including, but not limited to, adverse industry or economic trends, restructuring actions and lower projections of profitability that may impact future operating results.

To test goodwill for impairment, Applied first performs a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If it is concluded that this is the case, Applied then performs the two-step goodwill impairment test. Otherwise, the two-step goodwill impairment test is not required. Under the two-step goodwill impairment test, Applied would, in the first step, compare the estimated fair value of each reporting unit to its carrying value. Applied determines the fair value of each of its reporting units based on a weighting of income and market approaches. If the carrying value of a reporting unit exceeds its fair value, Applied would then perform the second step of the impairment test in order to determine the implied fair value of the reporting unit’s goodwill. If Applied determines that the carrying value of a reporting unit’s goodwill exceeds its implied fair value, Applied would record an impairment charge equal to the difference.

During the third quarter of fiscal 2015, Applied implemented a new management structure, which resulted in changes in Applied’s reporting units. Applied determined its reporting units by first identifying its operating segments, and then assessing whether components of these operating segments constitute a business for which discrete financial information is available and where segment management regularly reviews the operating results of that component. Applied aggregates reporting units within an operating segment that have similar economic characteristics and are similar in nature of their products and services, production processes, type or class of customers, distribution methods and operational environment. As a result of the change in management structure, there were no changes in Applied’s reportable segments identified in Note 16, Industry Segment Operations. However, Applied identified three reporting units, which include the Transistor and Interconnect Group, Patterning and Packaging Group, and Imaging and Process Control Group, which combine to form the Silicon Systems reporting segment. The new management structure did not affect Applied Global Services, Display and Energy and Environmental Solutions.

Based on these changes, Applied performed a goodwill impairment test for Silicon Systems immediately before the change in reporting units, allocated goodwill to each reporting unit in Silicon Systems based on the estimated fair value of each reporting unit and, then performed another goodwill impairment test for each of the new reporting units within the Silicon Systems segment.

In performing the goodwill impairment test, Applied utilized both the discounted cash flow method (weighted 75%) and the guideline company method (weighted 25%) to estimate the fair value of the reporting units. The estimates used in the impairment testing were consistent with the discrete forecasts that Applied uses to manage its business, and considered any significant developments that occurred during the quarter. Under the discounted cash flow method, cash flows beyond the discrete forecasts were estimated using a terminal growth rate, which considered the long-term earnings growth rate specific to the reporting units. The estimated future cash flows were discounted to present value using each reporting unit's weighted average cost of capital. The weighted average cost of capital measures a reporting unit's cost of debt and equity financing weighted by the percentage of debt and equity in a reporting unit's target capital structure. In addition, the weighted average cost of capital was derived using both known and estimated market metrics, and was adjusted to reflect both the timing and risks associated with the estimated cash flows. The tax rate used in the discounted cash flow method was the median tax rate of comparable companies and reflected Applied's current international structure, which is consistent with the market participant perspective. Under the guideline company method, market multiples were applied to forecasted revenues and earnings before interest, taxes, depreciation and amortization. The market multiples used were consistent with comparable publicly-traded companies and considered each reporting unit's size, growth and profitability relative to its comparable companies. Based on Applied’s analysis, the estimated fair value exceeded the carrying value for Silicon Systems as a single reporting unit and for each new reporting unit subsequent to the change, and therefore, the second step of the goodwill impairment test was not required.

In the fourth quarter of fiscal 2015, Applied performed a qualitative assessment to test goodwill for all of its reporting units for impairment. Applied determined that it was more likely than not that each of its reporting units' fair values exceeded their respective carrying values and that it was not necessary to perform the two-step goodwill impairment test for any of its reporting units.

Since fiscal 2012, the solar industry has faced a deterioration in market conditions associated with manufacturing overcapacity and weak operating performance and outlook, resulting in uncertainties regarding the timing and nature of a recovery in solar capital equipment expenditures. In fiscal 2013, Applied performed a two-step goodwill impairment test and, as a result, recorded $224 million of goodwill impairment charges in the Energy and Environmental Solutions segment. Applied also recorded a $54 million impairment charge related to the intangible assets in the Energy and Environmental Solutions segment in the same year. As of 2015, accumulated goodwill impairment charges from fiscal 2013 and prior periods amounted to $645 million, all of which were recorded in the Energy and Environmental Solutions segment.

The evaluation of goodwill and intangible assets for impairment requires the exercise of significant judgment. In the event of future changes in business conditions, Applied will be required to reassess and update its forecasts and estimates used in future impairment analyses. If the results of these future analyses are lower than current estimates, a material impairment charge may result at that time.

Details of goodwill and other indefinite-lived intangible assets were as follows:



	October 25, 2015						October 26, 2014
	Goodwill		Other Intangible Assets		Total		Goodwill		Other Intangible Assets		Total

	(In millions)
Silicon Systems	$	2,151	$	—	$	2,151	$	2,151	$	103	$	2,254
Applied Global Services	1,027		5		1,032		1,027		6		1,033
Display	124		18		142		126		18		144
Energy and Environmental Solutions	—		2		2		—		—		—
Carrying amount	$	3,302	$	25	$	3,327	$	3,304	$	127	$	3,431

Other intangible assets that are not subject to amortization consist primarily of in-process technology, which will be subject to amortization upon commercialization. The fair value assigned to in-process technology was determined using the income approach taking into account estimates and judgments regarding risks inherent in the development process, including the likelihood of achieving technological success and market acceptance. If an in-process technology project is abandoned, the acquired technology attributable to the project will be written-off.

During fiscal 2015, goodwill and other indefinite lived intangible assets decreased by $104 million primarily due to commercialization of in-process technology in the Silicon Systems segment.

A summary of Applied's purchased technology and intangible assets is set forth below:



	October 25, 2015		October 26, 2014

	(In millions)
Purchased technology, net	$	575	$	636
Intangible assets - finite-lived, net	162		188
Intangible assets - indefinite-lived	25		127
Total	$	762	$	951

Finite-Lived Purchased Intangible Assets

Applied amortizes purchased intangible assets with finite lives using the straight-line method over the estimated economic lives of the assets, ranging from 1 to 15 years.

Applied evaluates long-lived assets for impairment whenever events or changes in circumstances indicate the carrying value of an asset group may not be recoverable. Applied assesses the fair value of the assets based on the amount of the undiscounted future cash flow that the assets are expected to generate and recognizes an impairment loss when estimated undiscounted future cash flow expected to result from the use of the asset, plus net proceeds expected from disposition of the asset, if any, are less than the carrying value of the asset. When Applied identifies an impairment, Applied reduces the carrying value of the group of assets to comparable market values, when available and appropriate, or to its estimated fair value based on a discounted cash flow approach.

Intangible assets, such as purchased technology, are generally recorded in connection with a business acquisition. The value assigned to intangible assets is usually based on estimates and judgments regarding expectations for the success and life cycle of products and technology acquired. Applied evaluates the useful lives of its intangible assets each reporting period to determine whether events and circumstances require revising the remaining period of amortization. In addition, Applied reviews intangible assets for impairment when events or changes in circumstances indicate their carrying value may not be recoverable. Management considers such indicators as significant differences in actual product acceptance from the estimates, changes in the competitive and economic environments, technological advances, and changes in cost structure.

Details of finite-lived intangible assets were as follows:



	October 25, 2015									October 26, 2014
	Purchased Technology			Other Intangible Assets			Total			Purchased Technology			Other Intangible Assets			Total

	(In millions)
Gross carrying amount:
Silicon Systems	$	1,449		$	252		$	1,701		$	1,346		$	252		$	1,598
Applied Global Services	28			44			72			28			44			72
Display	110			33			143			110			33			143
Energy and Environmental Solutions	4			12			16			5			17			22
Gross carrying amount	$	1,591		$	341		$	1,932		$	1,489		$	346		$	1,835
Accumulated amortization:
Silicon Systems	$	(876	)	$	(95	)	$	(971	)	$	(716	)	$	(77	)	$	(793	)
Applied Global Services	(26		)	(44		)	(70		)	(24		)	(44		)	(68		)
Display	(110		)	(33		)	(143		)	(110		)	(31		)	(141		)
Energy and Environmental Solutions	(4		)	(7		)	(11		)	(3		)	(6		)	(9		)
Accumulated amortization	$	(1,016	)	$	(179	)	$	(1,195	)	$	(853	)	$	(158	)	$	(1,011	)
Carrying amount	$	575		$	162		$	737		$	636		$	188		$	824

Details of amortization expense for each fiscal year by segment were as follows:



	2015		2014		2013

	(In millions)
Silicon Systems	$	179	$	173	$	172
Applied Global Services	1		3		5
Display	2		2		6
Energy and Environmental Solutions	4		6		16
Total	$	186	$	184	$	199

Amortization expense for each fiscal year was charged to the following categories:



	2015		2014		2013

	(In millions)
Cost of products sold	$	163	$	159	$	166
Research, development and engineering	1		1		1
Marketing and selling	20		21		26
General and administrative	2		3		6
Total	$	186	$	184	$	199

As of October 25, 2015, future estimated amortization expense is expected to be as follows:



	Amortization Expense
	(In millions)
2016	189
2017	186
2018	185
2019	44
2020	39
Thereafter	94
Total	$	737