KLA Corporation Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

Goodwill and Purchased Intangible Assets

Goodwill and Purchased Intangible Assets

9 Months Ended

Mar. 31, 2020

Goodwill and Intangible Assets Disclosure [Abstract]

GOODWILL AND PURCHASED INTANGIBLE ASSETS

Goodwill

Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in the current and prior business combinations. We have four reportable segments and six reporting units. For additional details, refer to Note 18 “Segment Reporting and Geographic Information” of the Notes to the Condensed Consolidated Financial Statements. The following table presents goodwill carrying value and the movements during the nine months ended March 31, 2020⁽¹⁾:



(In thousands)	Wafer Inspection and Patterning			Global Service and Support (“GSS”)		Specialty Semiconductor Process			PCB and Display			Component Inspection		Total
Balance as of June 30, 2019	$	360,615		$	25,908	$	821,842		$	989,918		$	13,575	$	2,211,858
Acquired goodwill	54,001			—		—			—			—		54,001
Goodwill adjustments	70			—		4,195			29,773			—		34,038
Goodwill impairment	—			—		(144,179		)	(112,470		)	—		(256,649		)
Foreign currency adjustments	(119		)	—		—			—			—		(119		)
Balance as of March 31, 2020	$	414,567		$	25,908	$	681,858		$	907,221		$	13,575	$	2,043,129

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(1)	No goodwill was assigned to the Other reporting unit, and accordingly was excluded in the table above.

Goodwill is not subject to amortization but is tested for impairment annually during the third fiscal quarter as well as whenever events or changes in circumstances indicate that the carrying value may not be recoverable. In testing goodwill for impairment, we utilize a qualitative assessment to evaluate whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. When performing the qualitative assessment, we consider the following factors: declines in our stock price or market capitalization, declines in our market share, and declines in revenues or profitability at our reporting units. Any impairment charges could have a material adverse effect on our operating results and net asset value in the quarter in which we recognize the impairment charge.

If our qualitative assessment indicates that goodwill impairment is more likely than not, we perform a quantitative assessment by comparing the carrying value of net assets to the fair value of the reporting units. If the fair value is determined to

be less than the carrying value, the amount of impairment is computed as the excess of the carrying value over the estimated fair value, not to exceed the carrying value of goodwill. We completed the required annual testing of goodwill for impairment for all reporting units as of February 28, 2020 and concluded that goodwill was not impaired for the Wafer Inspection and Patterning, Global Service and Support, and Component Inspection reporting units.

However, due to the downward revision of financial outlook for the Specialty Semiconductor Process and PCB and Display reporting units as well as the impact of elevated risk and macroeconomic slowdown driven by the COVID-19 pandemic, we performed a quantitative goodwill impairment assessment for these reporting units. To determine the fair value of these reporting units, we utilized income and market approaches and applied a weighting of 75 percent and 25 percent, respectively. As a result, we recorded impairment charges of $144.2 million and $112.5 million in the Specialty Semiconductor Process and PCB and Display reporting units, respectively, in the three months ended March 31, 2020. The estimated fair value of each reporting unit was computed by adding the present value of the estimated annual discounted cash flows over a discrete projection period to the residual value of the business at the end of the projection period. This technique requires us to use significant estimates and assumptions, including long-term growth rates, discount rates, and other inputs. The estimated growth rates for the projection period are based on our internal forecasts of anticipated future performance of the business. The residual value is estimated based on a perpetual nominal growth rate, which is based on projected long-range inflation and long-term industry projections. The discount rates are determined based on the weighted average cost of capital of comparable peer companies. There can be no assurance that these estimates and assumptions will prove to be an accurate prediction of the future, and a downward revision of these estimates and / or assumptions would decrease the fair values of our reporting units, which could result in additional impairment charges in the future.

For our fiscal year ended June 30, 2019, we performed our annual qualitative assessment of goodwill by reporting unit during the third quarter and concluded that there was no impairment. For additional details, refer to Note 7 “Goodwill and Purchased Intangible Assets” of the Notes to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2019. The next annual assessment of goodwill by reporting unit is scheduled to be performed in the third quarter of the fiscal year ending June 30, 2021.

Purchased Intangible Assets

The components of purchased intangible assets as of the dates indicated below were as follows:



(In thousands)		As of March 31, 2020						As of June 30, 2019
Category	Range of Useful Lives (in years)	Gross Carrying Amount		Accumulated Amortization, and Impairment		Net Amount		Gross Carrying Amount		Accumulated Amortization and Impairment		Net Amount
Existing technology	4-8	$	1,266,088	$	305,640	$	960,448	$	1,224,629	$	196,582	$	1,028,047
Customer relationships	4-9	305,017		90,606		214,411		297,250		66,471		230,779
Trade name / Trademark	4-7	117,133		35,650		81,483		114,573		25,052		89,521
Backlog and other	<1-9	50,403		44,636		5,767		43,969		19,146		24,823
Intangible assets subject to amortization		1,738,641		476,532		1,262,109		1,680,421		307,251		1,373,170
In-process research and development		175,835		100		175,735		187,500		—		187,500
Total		$	1,914,476	$	476,632	$	1,437,844	$	1,867,921	$	307,251	$	1,560,670

Purchased intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. These events or changes in circumstances primarily include declines in our operating cash flows from the use of these assets. Therefore, due to the downward revision of financial outlook for the acquired Orbotech business as well as the impact of elevated risk and macroeconomic slowdown driven by the COVID-19 pandemic, we performed a quantitative test for impairment of our purchased intangible assets during the third quarter of fiscal 2020.

Long-lived assets and liabilities were grouped at the lowest levels for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. For the legacy Orbotech business, the asset group levels were determined to be the same as Specialty Semiconductor Process and PCB and Display reporting unit levels, respectively.

The fair values of the long-lived asset groups were determined using estimated future undiscounted cash flows which involves the use of significant estimates and assumptions including long-term revenue growth rates, expected useful lives of the intangible assets and salvage value of the long-lived assets. Based on our assessment, the purchased intangible asset values were not impaired as of March 31, 2020.

The change in the gross carrying amounts of intangible assets is due to acquisition of certain assets and liabilities of privately-held companies. For additional details, refer to Note 6 “Business Combinations” of the Notes to the Condensed Consolidated Financial Statements.

Amortization expense for purchased intangible assets for the periods indicated below was as follows:



	Three Months Ended March 31,				Nine Months Ended March 31,
(In thousands)	2020		2019		2020		2019
Amortization expense - Cost of revenues	$	36,850	$	15,770	$	108,835	$	17,628
Amortization expense - Selling, general and administrative	17,724		10,086		60,237		10,973
Amortization expense - Research and development	31		12		193		12
Total	$	54,605	$	25,868	$	169,265	$	28,613

Based on the purchased intangible assets gross carrying amount recorded as of March 31, 2020, the underlying assets, the remaining estimated annual amortization expense is expected to be as follows:



Fiscal year ending June 30:	Amortization (In thousands)
2020 (remaining three months)	$	51,137
2021	196,847
2022	194,269
2023	193,177
2024	190,660
2025 and thereafter	436,019
Total	$	1,262,109