Goodwill and Other Intangible Assets

12 Months Ended

Jan. 31, 2017

Goodwill and Intangible Assets Disclosure [Abstract]

Goodwill

Changes in the carrying amount of goodwill are as follows:



(In thousands)	North America			Europe			Total
Balance as of January 31, 2016	$	98,041		$	50,956		$	148,997
Impairments	(98,041		)	—			(98,041		)
Foreign currency translation	—			(1,038		)	(1,038		)
Balance as of January 31, 2017	$	—		$	49,918		$	49,918

We evaluate the carrying value of goodwill annually on November 1st during the fourth quarter of each fiscal year and more frequently if we believe indicators of impairment exist. In evaluating goodwill, a two-step goodwill impairment test is applied to each reporting unit.

In the first step of the impairment test, we compare the estimated fair value of the reporting unit to which the goodwill is assigned to the reporting unit's carrying amount, including goodwill. We estimate the fair value of our reporting units based on income and market approaches. If the carrying amount of a reporting unit exceeds its fair value, the amount of the impairment loss must be measured (the second step or "Step 2"). Any change in the assumptions input into the fair value model, which include market-driven assumptions, could result in future impairments.

Goodwill impairment tests during the fiscal year ended January 31, 2017:

During the quarter ended April 30, 2016, we encountered a reduction in our operating results in comparison to our forecast, primarily due to greater weakness in upstream oil and gas than anticipated, slower recovery in our construction business, and the delay of capital projects by refinery and power plants which can be seen through our lower volume of work with industrial service customers. As a result of the decline in demand for our products and services, we re-assessed our revenue and EBITDA forecast beginning with the fiscal year ended January 31, 2017 using a bottoms-up approach, having conversations with our key customers, and performing an analysis on current market conditions and industry spending behavior. Based on our assessment, we noted that despite the recent stabilization of oil prices, there will be continued uncertainty in the energy market resulting in a slow-down in capital spend. As a result, we updated our projections to reflect the decline in activity, adjusted our forecast for the outer years to maintain similar growth rates as our previous forecast, and performed the first step of the goodwill impairment test.

Under the first step of the impairment test, we determined the carrying value of the North American reporting unit exceeded fair value. We then performed the second step of the impairment test for the North American reporting unit and calculated the implied fair value of goodwill, which was less than its carrying value. Based on our analysis, we recorded a non-cash goodwill impairment charge of $65.7 million in our North American reporting unit. This impairment charge does not impact our operations, compliance with our debt covenants or our cash flows.

In connection with our annual goodwill impairment test that was conducted as of November 1, 2016, we bypassed the qualitative assessment for each reporting unit and proceeded directly to the first step of the goodwill impairment test. We were required to proceed to Step 2 as the fair value of the North American unit exceeded its carrying value by $119.7 million or 19.2%. Based on the results of step two, we determined that the carrying value of the goodwill allocated to the North American operating segment was not impaired as of November 1, 2016. The reason we passed the step two impairment test was due to the fair value of our Customer Relationship intangible asset being much lower than our carrying value.

We elected to early adopt ASU No. 2017-04 as of January 1, 2017 based upon impairment indicators identified during our annual impairment test as of November 1, 2016, where we failed step 1 of the impairment test. We proceeded to perform the goodwill impairment test as of January 31, 2017. The results of the impairment test determined the carrying value of the North American reporting unit exceeded its fair value by approximately $80.8 million, or 13.2%. Based on our analysis, we recorded a non-cash goodwill impairment charge of $32.3 million, the remaining carrying value, of our North American goodwill during the fiscal year ended January 31, 2017.

The fair value of the European reporting unit exceeded its carrying value, suggesting no indication of potential goodwill impairment.

Goodwill impairment tests during fiscal year ended January 31, 2016:

On October 1, 2015, we performed an interim impairment test due to deterioration in operating results, a revised forecast and negative industry trends. Under the first step of the impairment test, we determined the carrying value of the North American reporting unit exceeded fair value. We then performed the second step of the impairment test for the North American reporting unit and calculated the implied fair value of goodwill, which was less than its carrying value. Based on our analysis, we recorded a non-cash goodwill impairment charge of $65.7 million in our North American reporting unit during the third quarter of the fiscal year ended January 31, 2016.

On November 1, 2015, our annual impairment anniversary date, we performed our annual assessment of impairment on goodwill and concluded there were no additional indicators of impairment noted since the test performed on October 1, 2015.

During the fourth quarter of fiscal year 2016, we experienced a continued decrease in demand from our upstream oil and gas customers following a substantial reduction in crude oil prices, which resulted in further revised projections for the fiscal year ended January 31, 2017 and declining trends in our company valuation. As a result, we performed the first step of the goodwill impairment test. We determined the carrying value of the North American reporting unit exceeded fair value. We then performed the second step of the impairment test for the North American reporting unit and calculated the implied fair value of goodwill, which was less than its carrying value. As a result, we recorded a non-cash goodwill impairment charge of $93.3 million. There were no indications of potential goodwill impairment for the European reporting unit.

We did not record any impairment charges to goodwill during the fiscal year ended January 31, 2015.

In calculating the fair value of our North American reporting unit under the first step of the goodwill impairment test we gave equal weight to the income approach, which analyzed projected discounted cash flows, and the market approach, which considered comparable public companies as well as comparable industry transactions.

Under the income approach, we estimate future capital expenditures required to maintain our rental fleet under normalized operations and utilize the following Level 3 estimates and assumptions in the discounted cash flow analysis:

January 31, 2017

November 1, 2016

April 30, 2016

January 31, 2016

October 31, 2015

Range of long-term EBITDA margin

26.2% to 31.5%

27.7% to 30.5%

25.8% to 30.5%

29.3% to 32.8%

Range of long-term revenue growth

3.0% to 10.3%

3.0% to 9.5%

3.0% to 8.0%

3.0% to 7.7%

3.0% to 5.2%

Discount rate based on our weighted average cost of capital

10.%

10.0%

10.0

9.0

Revenue market multiples

1.50x to 2.00x

1.75x to 2.00x

1.75x to 2.50x

2.00x to 2.75x

EBITDA market multiples

5.50x to 7.50x

7.50x to 8.50x

6.50x to 7.50x

6.00x to 8.00x

7.50x to 9.00x

Under the market approach, we used other significant observable market inputs including various peer company comparisons and industry transaction data. In evaluating our market multiples, we placed higher consideration on generally similar results and trends in revenue and EBITDA declines.

Intangible Assets, Net

The components of intangible assets were the following as of:



	January 31, 2017							January 31, 2016
(In thousands)	Gross		Accumulated Amortization			Net		Gross		Accumulated Amortization			Net
Carrying amount:
Customer relationships (25 years)	$	400,455	$	(90,770	)	$	309,685	$	400,814	$	(74,819	)	$	325,995
Customer backlog (2 years)	200		(200		)	—		200		(200		)	—
Developed technology (11 years)	1,634		(467		)	1,167		1,639		(319		)	1,320
Trade name (Indefinite)	43,566		—			43,566		62,030		—			62,030
Total carrying amount	$	445,855	$	(91,437	)	$	354,418	$	464,683	$	(75,338	)	$	389,345

We assess the impairment of definite-lived intangible assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The asset is impaired if its carrying value exceeds the undiscounted cash flows expected to result from the use and eventual disposition of the asset. In assessing recoverability, we must make assumptions regarding estimated future cash flows and other factors. The impairment loss is the amount by which the carrying value of the asset exceeds its fair value. We estimate fair value utilizing the projected discounted cash flow method and a discount rate determined by our management to be commensurate with the risk inherent in our current business model. When calculating fair value, we must make assumptions regarding estimated future cash flows, discount rates and other factors.

We evaluate the carrying value of our indefinite-lived intangible asset (trade name) annually during the fourth quarter of each fiscal year and more frequently if we believe indicators of impairment exist. To test our indefinite-lived intangible asset for impairment, we compare the fair value of our indefinite-lived intangible asset to carrying value. We estimate the fair value using an income approach and the asset's projected discounted cash flows. We recognize an impairment loss when the estimated fair value of the indefinite-lived intangible asset is less than the carrying value.

Impairment test for the fiscal year ended January 31, 2017

Due to certain indicators of impairment identified during our April 30, 2016 interim impairment test of goodwill, we assessed our indefinite and definite-lived intangible assets for impairment. Based on our analysis, we concluded that the carrying value of our indefinite-lived intangible asset (trade name) exceeded its fair value and recorded an impairment charge of $18.3 million in our North American reporting unit. This impairment charge does not impact our operations, compliance with our debt covenants or our cash flows. We estimated the fair value of our trade name using the relief-from-royalty method, which uses several significant assumptions, including an estimate of useful life and revenue projections that consider historical and estimated future results, general economic and market conditions, as well as the impact of planned business and operational strategies.

Impairment test for the year fiscal ended January 31, 2016

Due to certain indicators of impairment identified during our October 1, 2015 and January 31, 2016 interim impairment test of goodwill, we assessed our indefinite and definite-lived intangible assets for impairment. Based on our analysis, we concluded that the carrying value of our indefinite-lived intangible assets (trade name) exceeded its fair value and recorded an impairment charge of $23.8 million during the fiscal year ended January 31, 2016 in our North American reporting unit.

There was no impairment recorded for our definite lived intangible assets during the fiscal years ended January 31, 2017, 2016 and 2015.

We estimated the fair value of our trade name in the impairment tests above using the relief-from-royalty method and the following Level 3 inputs:



	January 31,
	2017	2016	2015
Royalty rate	1.5%	2.0%	2.0%
Discount rate	11.5%	10.0% to 12.0%	12.0%

Estimated amortization expense for the fiscal periods ending January 31 is as follows:



(In thousands)
2018	$	16,167
2019	16,167
2020	16,167
2021	16,167
2022	16,167
Thereafter	230,017
Total	$	310,852

Amortization expense for other intangible assets was $16.2 million, $16.3 million and $16.4 million for the fiscal years ended January 31, 2017, 2016 and 2015, respectively.

- Definition

The entire disclosure for the aggregate amount of goodwill and a description of intangible assets, which may include (a) for amortizable intangible assets (also referred to as finite-lived intangible assets), the carrying amount, the amount of any significant residual value, and the weighted-average amortization period, (b) for intangible assets not subject to amortization (also referred to as indefinite-lived intangible assets), the carrying amount, and (c) the amount of research and development assets acquired and written off in the period, including the line item in the income statement in which the amounts written off are aggregated, if not readily apparent from the income statement. Also discloses (a) for amortizable intangibles assets in total and by major class, the gross carrying amount and accumulated amortization, the total amortization expense for the period, and the estimated aggregate amortization expense for each of the five succeeding fiscal years, (b) for intangible assets not subject to amortization the carrying amount in total and by major class, and (c) for goodwill, in total and for each reportable segment, the changes in the carrying amount of goodwill during the period (including the aggregate amount of goodwill acquired, the aggregate amount of impairment losses recognized, and the amount of goodwill included in the gain (loss) on disposal of a reporting unit). If any part of goodwill has not been allocated to a reportable segment, discloses the unallocated amount and the reasons for not allocating. For each impairment loss recognized related to an intangible asset (excluding goodwill), discloses: (a) a description of the impaired intangible asset and the facts and circumstances leading to the impairment, (b) the amount of the impairment loss and the method for determining fair value, (c) the caption in the income statement or the statement of activities in which the impairment loss is aggregated, and (d) the segment in which the impaired intangible asset is reported. For each goodwill impairment loss recognized, discloses: (a) a description of the facts and circumstances leading to the impairment, (b) the amount of the impairment loss and the method of determining the fair value of the associated reporting unit, and (c) if a recognized impairment loss is an estimate not finalized and the reasons why the estimate is not final. May also disclose the nature and amount of any significant adjustments made to a previous estimate of an impairment loss.

+ References + Details

BakerCorp International, Inc. 10-K