Goodwill and Long-Lived Intangible Assets

Purchased Intangible Assets

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



		As of December 31, 2018								As of December 31, 2017
	Weighted average original useful life (in years)	Gross carrying amount		Accumulated amortization			Weighted average remaining useful life (in years)	Net carrying amount		Gross carrying amount		Accumulated amortization			Net carrying amount
Goodwill	—	$	390,109	$	—		—	$	390,109	$	403,278	$	—		$	403,278
Customer relationships and other	5.9	$	79,558	$	(47,224	)	3.1	$	32,334	$	95,862	$	(45,862	)	$	50,000
Existing technology	4.0	189,737		(164,814		)	1.0	24,923		196,693		(149,300		)	47,393
Trademarks and trade names	10.9	70,326		(53,250		)	4.7	17,076		72,048		(46,822		)	25,226
IPR&D	0	389		—			0	389		389		—			389
Amortizable intangible assets	5.9	$	340,010	$	(265,288	)	2.8	$	74,722	$	364,992	$	(241,984	)	$	123,008

Acquired customer relationships, existing technology, and trademarks and trade names are amortized over their estimated useful lives of 1 to 16 years using the straight-line method, which approximates the pattern in which the economic benefits of the identified intangible assets are realized. There was no change in useful life of intangible assets during the year ended December 31, 2018. During the years ended December 31, 2017 and 2016, the remaining useful lives of certain amortizable intangible assets were reduced based on re-assessment, resulted in a $0.2 million and $1.6 million increase in amortization expense, respectively. Aggregate amortization expense was $45.3, $47.3, and $39.6 million during the years ended December 31, 2018, 2017, and 2016, respectively.

IPR&D is subject to amortization after product completion over the estimated 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, 2018, 2017, or 2016.

Future estimated amortization expense on identified intangible assets as of December 31, 2018 is as follows (in thousands):



Fiscal Year	Future amortization expense
2019	$	34,782
2020	15,948
2021	7,721
2022	5,756
2023	2,863
Thereafter	7,652
Total	$	74,722

Goodwill Rollforward

The goodwill rollforward for the years ended December 31, 2018 and 2017 is as follows (in thousands):



	Industrial Inkjet			Productivity Software			Fiery			Total
As of 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
As of December 31, 2017	154,373			174,644			74,261			403,278
Foreign currency adjustments	(6,441		)	(6,458		)	(270		)	(13,169		)
As of December 31, 2018	$	147,932		$	168,186		$	73,991		$	390,109
Accumulated impairment as of December 31, 2018, recognized in 2008	$	103,991		$	—		$	—		$	103,991

Goodwill Assessment

As further described in Note 1 – The Company and Summary of Significant Accounting Policies, ASU 2011-08, Intangibles – Goodwill and Other (ASC 350): Testing Goodwill for Impairment, requires that a good will impairment test be performed at least annually and whenever there are indications of potential impairment.

Our goodwill valuation analysis is based on our respective goodwill reporting units (Industrial Inkjet, Productivity Software, and Fiery), which are consistent with our operating segments identified in Note 3 – Segment, Geographic, and Major Customer Information of Notes to Consolidated Financial Statements. We determined the fair value of our reporting units as of December 31, 2018 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, 2018, by $95.0, $49.0 and $362.0 million, respectively, or 22%, 28%, and 331%, 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. Six suitable guideline companies were identified for the Industrial Inkjet, reporting unit. Seven 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.

The income approach requires that we project future revenues, earnings, and cash flows and discount them to their present value. Such an approach involves numerous assumptions and predictions about future performance. Despite ongoing economic uncertainty, our reporting units’ revenue is assumed to grow at historical normalized rates between 2019 and 2024 for the following primary reasons:


•	Our Industrial Inkjet segment is positioned to outpace the market with the successful introductions of several new products, including the Nozomi corrugated packaging printer platform, the VUTEk h3 and h5 & the BOLT textile printing platform expected to launch in 2019. Additional new product introductions are expected through the forecast horizon.


•	Our acquisition of Rialco in 2016 will contribute to the achievement of historical normalized Industrial Inkjet revenue growth rates through the forecast horizon.


•	Our acquisitions of Escada and CRC in 2017 and Optitex in 2016 will contribute to the achievement historical normalized Productivity Software revenue growth rates through the forecast horizon.


•	Other assumptions include:


▪	Long-term industry growth rates.


▪	Gross profit percentages will approximate historical average levels.

Our discounted cash flow projections are twelve-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 twelve-year financial forecasts included consolidated annual revenue growth rates ranging from 4% to 9% which equates to a consolidated compound annual growth rate of 8%. The upper end of the range exceeds our historical normalized growth rates due to the factors described above. Future cash flows were discounted to present value using a mid-year convention and a consolidated discount rate of 11.9%. 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 growth over the forecast horizon were compared to approximate percentages realized by the guideline companies. To assess the reasonableness of the estimated control premium 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, as well as considering the historical and current price of our common stock, to conclude that our estimated control premium is reasonable.

We assess the impairment of identifiable intangibles and long-lived assets annually and 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. We recognized no impairments of identifiable intangibles during the three years ended December 31, 2018.

Given the uncertainty of the economic environment and the potential impact on our business, there can be no assurance that our estimates and assumptions used in the evaluation of goodwill and identified intangible assets for impairment as of December 31, 2018 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 2019 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 flows 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 total impairment losses of $0.5 million during the year ended December 31, 2018 related to the reassessment of the One Vutek Building in Meredith, NH, which is classified as held-for-sale on the Consolidated Balance Sheets, and other long-lived assets. We recognized an impairment loss of $0.9 million during the year ended December 31, 2017 on the properties in Meredith, NH. Please refer to Note 9 – Property and Equipment, net, for additional information. There were no asset impairment charges recognized during the year ended December 31, 2016.