Note 6: Goodwill and Intangible Assets
Goodwill
Goodwill allocated to HP's reportable segments as of October 31, 2013 and 2012 and changes in the carrying amount of goodwill during the fiscal years ended October 31, 2013 and 2012 are as follows:
| |
Personal Systems |
Printing | Enterprise Group |
Enterprise Services |
Software | HP Financial Services |
Corporate Investments |
Total | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
In millions |
||||||||||||||||||||||||
|
Net balance at October 31, 2011(1) |
$ | 2,498 | $ | 2,471 | $ | 17,349 | $ | 8,001 | $ | 14,063 | $ | 144 | $ | 25 | $ | 44,551 | |||||||||
|
Goodwill acquired during the period |
— | 16 | — | — | — | — | — | 16 | |||||||||||||||||
|
Goodwill adjustments/reclassifications |
— | — | (308 | ) | (40 | ) | 580 | — | (25 | ) | 207 | ||||||||||||||
|
Impairment loss |
— | — | — | (7,961 | ) | (5,744 | ) | — | — | (13,705 | ) | ||||||||||||||
|
Net balance at October 31, 2012(2) |
$ | 2,498 | $ | 2,487 | $ | 17,041 | $ | — | $ | 8,899 | $ | 144 | $ | — | $ | 31,069 | |||||||||
|
Goodwill acquired during the period |
— | — | — | 112 | — | — | — | 112 | |||||||||||||||||
|
Goodwill adjustments/reclassifications |
— | — | 39 | (15 | ) | (81 | ) | — | — | (57 | ) | ||||||||||||||
|
Impairment loss |
— | — | — | — | — | — | — | — | |||||||||||||||||
|
Net balance at October 31, 2013(2) |
$ | 2,498 | $ | 2,487 | $ | 17,080 | (3) | $ | 97 | (4) | $ | 8,818 | $ | 144 | $ | — | $ | 31,124 | |||||||
In the first quarter of fiscal 2013, HP implemented certain organizational realignments. As a result of these realignments, HP has re-evaluated its reportable segment structure and, effective in the first quarter of fiscal 2013, created two new reportable segments, the EG segment and the ES segment, and eliminated two other reportable segments, the ESSN segment and the Services segment. The EG segment consists of the business units within the former ESSN segment and most of the services offerings of the TS business unit, which was previously a part of the former Services segment. The ES segment consists of the Applications and Business Services ("ABS") and Infrastructure Technology Outsourcing ("ITO") business units from the former Services segment, along with the end-user workplace support services business that was previously part of TS. As a result of the reportable segment changes described above, the net goodwill balance at October 31, 2012 and at October 31, 2011 includes the reclassification of $9.3 billion of goodwill related to the movement of the TS business unit from the former Services segment to the EG segment. See Note 18 for a full description of the segment realignments.
Based on the results of its annual impairment tests, HP determined that no impairment of goodwill existed as of August 1, 2013. However, future goodwill impairment tests could result in a charge to earnings. HP will continue to evaluate goodwill on an annual basis as of the beginning of its fourth fiscal quarter and whenever events and changes in circumstances indicate that there may be a potential impairment.
During fiscal 2012, HP determined that sufficient indicators of potential impairment existed to require an interim goodwill impairment analysis for the ES reporting unit. These indicators included the trading values of HP's stock at the time of the impairment test, coupled with market conditions and business trends within ES. The fair value of the ES reporting unit was based on the income approach. The decline in the fair value of the ES reporting unit resulted from lower projected revenue growth rates and profitability levels as well as an increase in the risk factor that was included in the discount rate used to calculate the discounted cash flows. The increase in the discount rate was due to the implied control premium resulting from trading values of HP stock at the time of the impairment test. The resulting adjustments to discount rates caused a significant reduction in the fair value for the ES reporting unit. Based on the step one and step two analyses, HP recorded an $8.0 billion goodwill impairment charge in fiscal 2012, and there was no remaining goodwill in the ES reporting unit as of October 31, 2012. Prior to completing the goodwill impairment test, HP tested the recoverability of the ES long-lived assets (other than goodwill) and concluded that such assets were not impaired.
Also during fiscal 2012, the Software segment included two reporting units, which were Autonomy and the legacy HP Software business. HP initiated its annual goodwill impairment analysis in the fourth quarter of fiscal 2012 and concluded that fair value was below carrying amount for the Autonomy reporting unit. The fair value of the Autonomy reporting unit was based on the income approach.
The decline in the estimated fair value of the Autonomy reporting unit resulted from lower projected revenue growth rates and profitability levels as well as an increase in the risk factor that was included in the discount rate used to calculate the discounted cash flows. The increase in the discount rate was due to the implied control premium that resulted from trading values of HP stock at the time of the impairment test. The lower projected operating results reflected changes in assumptions related to organic revenue growth rates, market trends, business mix, cost structure, expected deal synergies and other expectations about the anticipated short-term and long-term operating results of the Autonomy business. These assumptions incorporated HP's analysis of what it believes were accounting improprieties, incomplete disclosures and misrepresentations at Autonomy that occurred prior to the Autonomy acquisition with respect to Autonomy's pre-acquisition business and related operating results. In addition, as noted above, when estimating the fair value of a reporting unit HP may need to adjust discount rates and/or other assumptions in order to derive a reasonable implied control premium when comparing the sum of the fair values of HP's reporting units to HP's market capitalization. Due to the trading values of HP stock at the time of the impairment test, the resulting adjustments to the discount rate to arrive at an appropriate control premium caused a significant reduction in the fair value for the Autonomy reporting unit as well as the fair values for HP's other reporting units.
Prior to conducting step one of the goodwill impairment test for the Autonomy reporting unit, HP first evaluated the recoverability of the long-lived assets, including intangible assets. When indicators of impairment are present, HP tests long-lived assets (other than goodwill) for recoverability by comparing the carrying amount of an asset group to its undiscounted cash flows. HP considered the lower-than-expected revenue and profitability levels over a sustained period of time, the trading values of HP stock and downward revisions to management's short-term and long-term forecast for the Autonomy business to be indicators of impairment for the Autonomy long-lived assets. Based on the results of the recoverability test, HP determined that the carrying amount of the Autonomy asset group exceeded its undiscounted cash flows and was therefore not recoverable. HP then compared the fair value of the asset group to its carrying amount and determined the impairment loss. The impairment loss was allocated to the carrying values of the long-lived assets but not below their individual fair values. Based on the analysis, HP recorded an impairment charge of $3.1 billion on intangible assets, which resulted in a remaining carrying amount of approximately $0.8 billion as of October 31, 2012. The decline in the fair value of the Autonomy intangible assets was attributable to the same factors as discussed above for the fair value of the Autonomy reporting unit.
The decline in the fair value of the Autonomy reporting unit and Autonomy intangibles, as well as fair value changes for other assets and liabilities in the step two goodwill impairment test, resulted in an implied fair value of goodwill substantially below the carrying amount of the goodwill for the Autonomy reporting unit. As a result, HP recorded a goodwill impairment charge of $5.7 billion, which resulted in a $1.2 billion remaining carrying amount of Autonomy goodwill as of October 31, 2012. Both the goodwill impairment charge and the intangible assets impairment charge, totaling $8.8 billion, were included in the Impairment of goodwill and intangible assets line item in the Consolidated Statements of Earnings.
Subsequent to the Autonomy purchase price allocation period, which concluded in the first quarter of fiscal 2012, and in conjunction with HP's annual goodwill impairment testing, HP identified certain indicators of impairment. The indicators of impairment included lower-than-expected revenue and profitability levels over a sustained period of time, the trading values of HP stock and downward revisions to management's short-term and long-term forecast for the Autonomy business. HP revised its multi-year forecast for the Autonomy business, and the timing of this forecast revision coincided with the timing of HP's overall forecasting process for all reporting units, which is completed each year in the fourth fiscal quarter in conjunction with the annual goodwill impairment analysis. The change in assumptions used in the revised forecast and the fair value estimates utilized in the impairment testing of the Autonomy goodwill and long-lived assets incorporated insights gained from having owned the Autonomy business for the preceding year. The revised forecast reflected changes related to organic revenue growth rates, current market trends, business mix, cost structure, expected deal synergies and other expectations about the anticipated short-term and long-term operating results of the Autonomy business, driven by HP's analysis regarding certain accounting improprieties, incomplete disclosures and misrepresentations at Autonomy that occurred prior to the Autonomy acquisition with respect to Autonomy's pre-acquisition business and related operating results. Accordingly, the change in fair values represented a change in accounting estimate that occurred outside the purchase price allocation period, resulting in the recorded impairment charge.
Based on the results of the annual impairment test for all other reporting units, HP concluded that no other goodwill impairment existed as of August 1, 2012, apart from the impairment charges discussed above.
Intangible Assets
HP's intangible assets associated with completed acquisitions for each of the following fiscal years ended October 31 are composed of:
| |
October 31, 2013 | October 31, 2012 | |||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
Gross | Accumulated Amortization |
Accumulated Impairment Loss |
Net | Gross | Accumulated Amortization |
Accumulated Impairment Loss |
Net | |||||||||||||||||
| |
In millions |
||||||||||||||||||||||||
|
Customer contracts, customer lists and distribution agreements |
$ | 5,321 | $ | (2,709 | ) | $ | (856 | ) | $ | 1,756 | $ | 5,807 | $ | (2,625 | ) | $ | (856 | ) | $ | 2,326 | |||||
|
Developed and core technology and patents |
5,331 | (1,966 | ) | (2,138 | ) | 1,227 | 6,580 | (2,501 | ) | (2,138 | ) | 1,941 | |||||||||||||
|
Trade name and trade marks |
1,730 | (211 | ) | (1,336 | ) | 183 | 1,732 | (155 | ) | (1,336 | ) | 241 | |||||||||||||
|
In-process research and development |
3 | — | — | 3 | 7 | — | — | 7 | |||||||||||||||||
|
Total intangible assets |
$ | 12,385 | $ | (4,886 | ) | $ | (4,330 | ) | $ | 3,169 | $ | 14,126 | $ | (5,281 | ) | $ | (4,330 | ) | $ | 4,515 | |||||
For fiscal 2013, the majority of the decrease in gross intangibles was related to $1.7 billion of fully amortized intangible assets that have been eliminated from both the gross and accumulated amounts.
In fiscal 2012, HP recorded total intangible asset impairment charges of $4.3 billion, of which $3.1 billion was related to the Autonomy reporting unit as described above. The remaining $1.2 billion was related to a change in the Compaq branding strategy. In May 2012, HP approved a change to its branding strategy for personal computers, which has resulted in a more limited and focused use of the "Compaq" trade name acquired in fiscal 2002. In conjunction with the change in branding strategy, HP revised its assumption as to the useful life of that intangible asset, which resulted in a reclassification of the asset from an indefinite-lived intangible to a finite-lived intangible. These changes triggered an impairment review of the "Compaq" trade name intangible asset. In conducting an impairment review of an intangible asset, HP compares the fair value of the asset to its carrying amount. If the fair value of the asset is less than the carrying amount, the difference is recorded as an impairment loss. HP estimated the fair value of the "Compaq" trade name by calculating the present value of the royalties saved that would have been paid to a third party had HP not owned the trade name. Following the completion of that analysis, HP determined that the fair value of the trade name asset was less than the carrying amount due primarily to the change in the useful life assumption and a decrease in expected future revenues related to Compaq-branded products resulting from the more focused branding strategy. As a result, HP recorded an impairment charge of $1.2 billion in the third quarter of fiscal 2012, which was included in the Impairment of goodwill and intangible assets line item in the Consolidated Statements of Earnings.
The weighted-average useful lives of intangible assets at the time of acquisition are as follows:
|
Finite-Lived Intangible Assets |
Weighted-Average Useful Lives |
|||
|---|---|---|---|---|
|
Customer contracts, customer lists and distribution agreements |
8 | |||
|
Developed and core technology and patents |
7 | |||
|
Trade name and trade marks |
7 | |||
Estimated future amortization expense related to finite-lived intangible assets at October 31, 2013 is as follows:
|
Fiscal year: |
In millions | |||
|---|---|---|---|---|
|
2014 |
$ | 1,060 | ||
|
2015 |
871 | |||
|
2016 |
646 | |||
|
2017 |
230 | |||
|
2018 |
145 | |||
|
Thereafter |
214 | |||
|
Total |
$ | 3,166 | ||