Expenditures for repairs and maintenance are charged to expense as incurred. The
costs for major renewals and improvements are capitalized and depreciated over
their estimated useful lives. The cost and related accumulated depreciation of
the assets are removed from the accounts upon disposition and any resulting gain
or loss is reflected in operating income.
Shipping and Handling Costs
Shipping and handling costs are included in cost of revenues and are recognized
as a period expense during the period in which they are incurred.
Goodwill and Intangible Assets
The Company recognizes the assets acquired and liabilities assumed in business
combinations at their respective fair values at the date of acquisition, with
any excess purchase price recognized as goodwill. Valuation of intangible assets
and in-process research and development entails significant estimates and
assumptions including, but not limited to, determining the timing and expected
costs to complete development projects, estimating future cash flows from
product sales, developing appropriate discount rates, estimating probability
rates for the successful completion of development projects, continuation of
customer relationships and renewal of customer contracts, and approximating the
useful lives of the intangible assets acquired.
The Company recognizes goodwill as an asset representing the future economic
benefits arising from other assets acquired in a business combination that are
not individually identified and separately recognized. The Company tests
goodwill for impairment annually as of the first day of the fiscal fourth
quarter, or when indications of potential impairment exist. The Company monitors
the existence of potential impairment indicators throughout the fiscal year.
The Company conducts impairment testing for goodwill at the reporting unit
level. Reporting units may be operating segments as a whole or an operation one
level below an operating segment, referred to as a component. The Company has
determined that its reporting units are its three operating and reportable
The Company may initiate goodwill impairment testing by considering qualitative
factors to determine whether it is more likely than not that a reporting unit's
carrying value is greater than its fair value. Such factors may include the
following, among others: a significant decline in the reporting unit's expected
future cash flows; a sustained, significant decline in the Company's stock price
and market capitalization; a significant adverse change in legal factors or in
the business climate; unanticipated competition; and slower growth rates as well
as changes in management, key personnel, strategy, and/or customers. If the
Company's qualitative assessment reveals that goodwill impairment is more likely
than not, the Company performs the two-step goodwill impairment test.
Alternatively, the Company may bypass the qualitative test and initiate goodwill
impairment testing with the first step of the two-step goodwill impairment test.
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During the first step of the goodwill impairment test, the Company compares the fair value of the reporting unit to its carrying value, including goodwill. The Company derives a reporting unit's fair value through a combination of the market approach (a guideline transaction method) and the income approach (a discounted cash flow analysis). The income approach utilizes a discount rate from the capital asset pricing model. If all reporting units are analyzed during the first step of the goodwill impairment test, their respective fair values are reconciled back to the Company's consolidated market capitalization. If the fair value of a reporting unit exceeds its carrying value, then the Company concludes that no goodwill impairment has occurred. If the carrying value of the reporting unit exceeds its fair value, the Company performs the second step of the goodwill impairment test to measure possible goodwill impairment loss. During the second step, the Company hypothetically values the reporting unit's tangible and intangible assets and liabilities as if the reporting unit had been acquired in a business combination. Then, the implied fair value of the reporting unit's goodwill is compared to the carrying value of its goodwill. If the carrying value of the reporting unit's goodwill exceeds the implied fair value of the goodwill, the Company recognizes an impairment loss in an amount equal to the excess, not to exceed the carrying value of the reporting unit's goodwill. Once an impairment loss is recognized, the adjusted carrying value of the goodwill becomes the new accounting basis of the goodwill for the reporting unit.