KLA Corporation Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Goodwill and Purchased Intangible Assets

Goodwill and Purchased Intangible Assets

12 Months Ended

Jun. 30, 2019

Goodwill and Intangible Assets Disclosure [Abstract]

GOODWILL AND PURCHASED INTANGIBLE ASSETS

NOTE 7 — 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. Following the update of the organizational structure during the fiscal year 2019, as described in Note 17, “Segment Reporting and Geographic Information”, we have four reportable segments and six reporting units. To reflect our new segment structure, goodwill arising from the Orbotech Acquisition has been allocated to the Specialty Semiconductor Process; and the PCB and Display reporting units using an acquisition accounting method. The following table presents goodwill carrying value and the movements during the fiscal years ended June 30, 2019 and 2018⁽¹⁾:



(In thousands)	Wafer Inspection			Patterning			GSS		SPC Others			Wafer Inspection and Patterning			Specialty Semiconductor Process		PCB and Display		Component Inspection		Total
Balance as of June 30, 2017	$	281,095		$	53,255		$	2,856	$	12,320		$	—		$	—	$	—	$	—	$	349,526
Acquired goodwill	—			—			5,163		—			—			—		—		—		5,163
Foreign currency adjustment	(90		)	—			20		79			—			—		—		—		9
Balance as of June 30, 2018	281,005			53,255			8,039		12,399			—			—		—		—		354,698
Acquired goodwill	—			26,362			17,869		1,176			—			821,842		989,918		—		1,857,167
Reallocation due to change in segments	(281,005		)	(79,617		)	—		(13,575		)	360,622			—		—		13,575		—
Foreign currency and other adjustments				—			—		—			(7		)	—		—		—		(7		)
Balance as of June 30, 2019	$	—		$	—		$	25,908	$	—		$	360,615		$	821,842	$	989,918	$	13,575	$	2,211,858

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(1)	No goodwill was assigned to the Other reporting unit, and accordingly not disclosed in the table above.

Goodwill is net of accumulated impairment losses of $277.6 million, which were recorded prior to the fiscal year ended June 30, 2014. As of June 30, 2019, all of accumulated impairment losses were included in the Wafer Inspection and Patterning reporting unit. As of June 30, 2018 and 2017, approximately $1.0 million and $276.6 million of accumulated impairment losses were included in the Wafer Inspection reporting unit and the Patterning reporting unit, respectively.

The change in goodwill during the fiscal year ended June 30, 2019 is due to $1.81 billion related to the acquisition of Orbotech and $45.4 million related to the acquisition of the privately-held companies during the period. For additional details, refer to Note 6 “Business Combinations”.

We performed a qualitative assessment of the goodwill for our reporting units during the three months ended March 31, 2019. Based on this assessment we concluded that it was more likely than not that the fair value of each of the reporting units exceeded its carrying amount. As a result of our determination based on our qualitative assessment, it was not necessary to perform the quantitative goodwill impairment test at this time. In assessing the qualitative factors, we considered the impact of key factors, including changes in the industry and competitive environment, market capitalization, stock price, earnings multiples, budgeted-to-actual revenue performance from prior year, gross margin and cash flows from operating activities. In addition, subsequent to the update of the organizational structure, we performed a qualitative assessment of the goodwill for our reporting units, which were impacted by the organizational change, and concluded that there were no impairment indicators identified.

Based on our assessment, goodwill in the reporting units was not impaired as of June 30, 2019 and 2018. 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, 2020.

Purchased Intangible Assets

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



(In thousands)		As of June 30, 2019						As of June 30, 2018
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	$	1,224,629	$	196,582	$	1,028,047	$	160,859	$	144,202	$	16,657
Trade name/trademark	4-7	114,573		25,052		89,521		20,993		20,060		933
Customer relationships	4-9	297,250		66,471		230,779		56,680		55,136		1,544
Backlog and other	<1- 9	43,969		19,146		24,823		660		461		199
Intangible assets subject to amortization		1,680,421		307,251		1,373,170		239,192		219,859		19,333
In-process research and development		187,500		—		187,500		—		—		—
Total		$	1,867,921	$	307,251	$	1,560,670	$	239,192	$	219,859	$	19,333

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. The change in the gross carrying amounts of intangible assets is due to the acquisition of Orbotech and other privately-held companies. For additional details, refer to Note 6 “Business Combinations.”

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



	Year ended June 30,
(In thousands)	2019		2018
Amortization expense- Cost of revenues	$	52,387	$	4,095
Amortization expense- Selling, general and administrative	34,992		535
Amortization expense- Research and development	13		—
Total	$	87,392	$	4,630

Based on the purchased intangible assets gross carrying amount recorded as of June 30, 2019, the underlying assets, the remaining estimated annual amortization expense is expected to be as follows:



Fiscal year ending June 30:	Amortization (In thousands)
2020	$	206,293
2021	186,609
2022	185,159
2023	184,060
2024	182,113
Thereafter	428,936
Total	$	1,373,170