Goodwill |
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Mar. 28, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Goodwill and Intangible Assets Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Goodwill | Goodwill The following table summarizes the changes in the carrying amount of goodwill for the three months ended March 28, 2020:
Goodwill Impairment Testing
The Company tests goodwill at the reporting unit level on an annual basis or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount.
In the first quarter of 2020, the World Health Organization characterized COVID-19 a pandemic, and the President of the United States declared the COVID-19 outbreak a national emergency. The United States, France, Canada and many other countries have issued formal stay-at-home orders to combat the pandemic, which require residents to stay home and non-essential businesses to temporarily close.
Beginning in the first quarter of 2020 the pandemic negatively impacted the global economy and aerospace industry resulting in an abrupt and significant decrease of airline passenger travel. In response, the global airlines grounded a significant portion of
their fleet and are likely to defer or cancel aircraft scheduled for delivery this year. Additionally, airlines have announced plans to reduce capital and discretionary spending to conserve cash in the immediate future. In turn, aircraft manufacturers and tier one suppliers have experienced a disruption in production and demand as their customers defer delivery of new aircraft, resulting in slowed or halted production at facilities throughout the world. Commercial airlines and manufacturers are focusing on conserving cash to preserve liquidity, which will have a negative impact on airframe and aftermarket sales as compared with pre-pandemic forecasts.
Management considered these qualitative factors and the impact to each reporting unit’s revenue and earnings, and determined that it is more likely than not that the fair value of several reporting units is less than its carrying value. Therefore, we performed a quantitative test for all eight reporting units with goodwill as of March 28, 2020.
Quantitative testing requires a comparison of the fair value of each reporting unit to its carrying value. We use the discounted cash flow method to estimate the fair value of our reporting units. The discounted cash flow method incorporates various assumptions, the most significant being projected sales growth rates, operating margins and cash flows, the terminal growth rate and the weighted average cost of capital. If the carrying value of the reporting unit exceeds its fair value, goodwill is considered impaired and any loss must be measured. Accordingly, goodwill impairment is measured as the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying value of goodwill.
We determined that the estimated fair value of four of the eight reporting units with goodwill significantly exceeded their respective carrying values and therefore, did not result in a goodwill impairment.
For the remaining four reporting units with goodwill, we determined that the estimated fair value was less than their respective carrying values. As a result, we recorded non-cash goodwill impairment charges of approximately $73.7 million in the Aerospace segment, reported within the Impairment Loss line of the Consolidated Condensed Statements of Operations in the three months ended March 28, 2020.
We recognized full impairments of the goodwill of our Astronics Connectivity Systems and Certification (“ACSC”), PGA and Custom Control Concepts (“CCC”) reporting units, and a partial impairment of the goodwill of our PECO reporting unit. The goodwill remaining in our PECO reporting unit after the write off is $32.8 million. For the PECO reporting unit with a partial goodwill write-off, the Company performed sensitivity analyses, utilizing reasonably possible changes in the assumption for the discount rate and revenue growth rates to demonstrate the potential impacts to the estimated fair value. In isolation, a 100 basis point increase to the discount rate or a 100 basis point decrease to the normalized revenue growth rate, would result in incremental impairment charges of $9.3 million or $4.4 million, respectively.
There is greater risk of future impairments in the reporting unit with partial impairment as any further deterioration in its performance compared to forecast, as well as any changes in economic forecasts and expected recovery in the aerospace industry, may require the Company to complete additional interim impairment tests in future quarters and could result in the reporting unit’s fair value again falling below carrying value in subsequent quarters. Further, if the composition of the reporting unit’s assets and liabilities were to change and result in an increase in the reporting unit’s carrying value, it could lead to additional impairment testing and further impairment losses.
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