Note 5: Goodwill and Long-Lived Intangible Assets

Purchased Intangible Assets

Our purchased identified intangible assets resulting from acquisitions that closed during the years ended December 31, 2013 and 2012 are as follows (in thousands, except for weighted average useful life):


			December 31, 2013									December 31, 2012
	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		—	$	233,203	$	—			—	$	233,203	$	219,456	$	—		$	219,456

Customer relationships and other		5.6	$	109,906	$	(77,922	)		3.5	$	31,984	$	103,891	$	(69,800	)	$	34,091
Existing technology		4.3		132,192		(122,857	)		1.5		9,335		129,320		(115,411	)		13,909
Trademarks and trade names		13.2		58,867		(31,614	)		8.3		27,253		59,235		(27,191	)		32,044
IPR&D		—		150		—			—		150		200		—			200

Amortizable intangible assets		6.6	$	301,115	$	(232,393	)		5.1	$	68,722	$	292,646	$	(212,402	)	$	80,244

Acquired customer relationships and other; existing technology; trademarks and trade names; and IPR&D are amortized over their estimated useful lives of 2 to 18 years using the straight-line method, which approximates the pattern in which the economic benefits of the identified intangible assets are realized. Aggregate amortization expense was $19.4, $18.6, and $11.2 million for the years ended December 31, 2013, 2012, and 2011, respectively.

As of December 31, 2013, 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
2014	$	19,105
2015		15,112
2016		11,252
2017		7,708
2018		4,127
Thereafter		11,418

	$	68,722

Goodwill Rollforward

The goodwill rollforward for the years ended December 31, 2013 and 2012 as required by ASC 805 is as follows (in thousands):


	Industrial Inkjet			Productivity Software			Fiery		Total
Ending Balance, December 31, 2011	$	36,508		$	63,403		$	64,412	$	164,323

Additions (Cretaprint, Metrics, OPS, and Technique)	$	22,794		$	31,100		$	—	$	53,894
Cretaprint opening balance sheet adjustment		215			—			—		215
Metrics opening balance sheet adjustment		—			(588	)		—		(588	)
Opening balance sheet adjustments recognized in 2013		801			386			—		1,187
Foreign currency adjustments		427			(116	)		114		425

Ending Balance, December 31, 2012	$	60,745		$	94,185		$	64,526	$	219,456

Additions (PrintLeader, GamSys, Metrix, and Lector acquisitions)	$	—		$	13,365		$	—	$	13,365
GamSys opening balance sheet adjustment		—			(52	)		—		(52	)
Foreign currency adjustments		959			(801	)		276		434

Ending Balance, December 31, 2013	$	61,704		$	106,697		$	64,802	$	233,203

Accumulated Impairment, December 31, 2013	$	(103,991	)	$	—		$	—		(103,991	)

In accordance with ASC 805, we revised previously issued post-acquisition financial information to reflect adjustments to the preliminary accounting for these business acquisitions as if the adjustments occurred on the acquisition date. Accordingly, we have increased goodwill and accrued and other liabilities by $1.2 million in the aggregate at December 31, 2012 to reflect opening balance sheet adjustments related to our acquisitions of Cretaprint, OPS, and Technique.

The initial preliminary allocation of the GamSys purchase price was adjusted during the third quarter of 2013 to reflect a $0.1 million decrease to goodwill, offset by a corresponding increase in other current assets. The initial preliminary allocation of the Cretaprint purchase price was adjusted during the third quarter of 2012 to reflect a $0.2 million increase in goodwill, offset by a corresponding decrease in deferred tax assets, income taxes receivable, and other current assets. The initial preliminary allocation of the Metrics purchase price was adjusted during the fourth quarter of 2012 to reflect a $0.6 million decrease to goodwill, offset by a corresponding decrease in deferred tax liabilities, resulting from a decision to remain on the deemed profit method of reporting income tax liabilities in Brazil through 2013. These adjustments were recorded as an adjustment to the opening balance sheet of each of these acquired businesses as of the effective date of each acquisition.

Based on the outcome of conditions existing during the fourth quarter of 2008, we determined that a triggering event requiring an interim impairment analysis had occurred relating to the Industrial Inkjet reporting unit. The resulting impairment analysis resulted in a non-cash goodwill impairment charge of $104 million. The goodwill valuation analysis was performed based on our respective reporting units—Industrial Inkjet, Productivity Software, and Fiery—which are consistent with our operating segments identified in Note 15—Segment Information, Geographic Regions, and Major Customers of the Notes to Consolidated Financial Statements.

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 2013 and 2012 and because our reporting units are susceptible to fair value fluctuations, we determined that the quantitative analysis should be performed.

According to the provisions of ASC 350-20-35, a two-step impairment test of goodwill is required. 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 15—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, 2013 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 reporting units exceed their carrying values. Industrial Inkjet, Productivity Software, and Fiery fair values are $540, $262, and $368 million, respectively, which exceed carrying value by 284%, 209%, and 398%, 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 company relative to those of similar publicly traded companies (i.e., guideline companies), which are actively traded. In applying the Public Company Market Multiple Method (“PCMMM”), 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. Four, six, and four suitable guideline companies were identified for the Industrial Inkjet, 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:

•

Industrial Inkjet revenue growth of 11% in 2013 was comparable to historical normalized growth rates.

•

Productivity Software revenue growth of 14% in 2013 exceeded historical normalized growth rates due to ten acquisitions completed during the years ended December 31, 2013, 2012, and 2011.

•

Fiery revenue growth of 11% in 2013 significantly exceeded historical normalized growth rates in the Fiery operating segment. This significant increase followed a decrease of 15% in 2012, due to the delayed launch of products that utilize our Fiery DFEs by the leading printer manufacturers, which indicates that the growth rate should be normalized in the forecast horizon.

•

Despite the ongoing economic uncertainty, our reporting units’ revenue is assumed to grow at historical normalized rates between 2014 and 2018 for the following primary reasons:

•

Our Industrial Inkjet revenue is positioned to outpace the slow economy and achieve historical normalized growth rates due to 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.

•

Our Cretaprint industrial inkjet ceramic tile decoration business is in a sector of the market that is growing at a faster rate than the remainder of the industrial inkjet market due to a rapid adoption of digital technology and the ceramic tile industry’s demand for equipment to support its partial geographic relocation to China, India, Brazil, and Indonesia.

•

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 the Productivity Software operating segment to further consolidate the business process automation and cloud-based order entry and order management software industries in both the Americas and world-wide.

•

Long-term industry growth after 2019.

•

Gross profit percentages will approximate historical average levels in the Productivity Software and Fiery reporting units. Industrial Inkjet gross profit will remain at the 40 percent level, which is the approximate level achieved in 2013 and 2012, as we have resolved significant warranty issues and exposures.

Our discounted cash flow projections are five-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 five-year financial forecasts included consolidated annual revenue growth rates ranging from 6% to 10%, which equates to a consolidated compound annual growth rate of 7%. These are our historical normalized growth rates. Future cash flows were discounted to present value using a mid-year convention and a consolidated discount rate of 10%. Terminal values were calculated using the Gordon growth methodology with a consolidated long-term growth rate of 4.0%, except for Fiery at 2.5%. 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. Percentage of revenue over the five-year forecast horizon were compared to approximate percentages realized by

the guideline companies. To assess the reasonableness of the estimated control premium of 6.5%, 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:

•

significant negative industry or economic trends,

•

significant decline in our stock price for a sustained period,

•

our market capitalization relative to net book value,

•

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

•

significant changes in the strategy for our overall business, and

•

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, 2013 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 2014 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. No asset impairment charges were recognized during the years ended December 31, 2013, 2012, or 2011.

Intangible assets are evaluated for impairment based on their estimated future undiscounted cash flows. Based on this analysis, no impairment of intangible assets, excluding goodwill, was recognized in 2013, 2012, or 2011.

Other investments, included within other assets, consist of equity and debt investments in privately-held companies that develop products, markets, and services that are strategic to us. In-substance common stock investments in which we exercise significant influence over operating and financial policies, but do not have a majority voting interest, are accounted for using the equity method of accounting. Investments not meeting these requirements are accounted for using the cost method of accounting. As of December 31, 2013, our investments in privately-held companies were accounted for under the cost method.

We previously assessed each investee’s technology pipeline and market conditions in the industry and ability to sustain an earnings capacity that would justify its carrying amount in accordance with ASC 323-10-35-32. We determined it is no longer probable that they will generate sufficient positive future cash flows to recover the carrying amount of each investment. Therefore, we previously fully reserved our equity and debt investments in privately-held companies. We received proceeds from the sale of certain of these investments of $0.1 and $2.9 million during the years ended December 31, 2013 and 2011, respectively.