Impairment Expense |
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Dec. 31, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Goodwill and Intangible Assets Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Impairment Expense |
Note T – Impairment Expense
The table below presents the impairment expense recorded during the following periods:
During the second quarter of 2022, there was a significant and prolonged decline in the Company’s market capitalization driven by general economic conditions, including heightened inflation, rising interest rates and volatility in the capital markets. Specifically for the Mission Solutions reporting unit, the Company observed a significant decline in discounted future cash flows, primarily attributable to a decrease in forecasted revenues as well as increased production costs and subcontractor delays that have extended the timeline for fulfillment of existing performance obligations and deferred pipeline realization. After considering the totality of events and circumstances, the Company determined that these triggering events indicated that certain recorded intangible assets, including goodwill, and property, plant and equipment may be impaired. After considering the totality of events and circumstances described above, the Company performed an interim quantitative impairment assessment of all reporting units and asset groups as of June 30, 2022, which resulted in a partial impairment of goodwill and certain tangible and intangible assets recorded on the Mission Solutions reporting unit and its underlying asset groups.
During the fourth quarter of 2022, the Company’s market capitalization continued to decline alongside other macroeconomic factors discussed in the previous paragraph. For purposes of its annual goodwill impairment test as of October 1, 2022, the Company performed a qualitative assessment of goodwill at the Space Components and Engineering Services reporting units and concluded that it was not more likely than not that the carrying value of each of those reporting units was in excess of its fair value. However, due to the aforementioned partial impairment and underperformance relative to previously forecasted results, the Company elected to proceed directly to a quantitative impairment test of the Mission Solutions reporting unit and underlying asset groups during the fourth quarter of 2022. As a result of the quantitative impairment test, the remaining balance of goodwill on the Mission Solutions reporting unit was reduced to zero and a full impairment was also recognized on certain tangible and intangible assets for certain asset groups within the reporting unit.
Fair value estimates used in the Company’s quantitative impairment assessments result from a complex series of judgments about future events and uncertainties and rely heavily on estimates and assumptions that have been deemed reasonable by management as of the measurement date. Additional information related to these impairment activities is provided below.
Impairment activities during the year ended December 31, 2022 did not have any impact on the Company’s compliance with the Adams Street Credit Agreement or other contract related covenants.
Property, plant and equipment, net
As a result of the qualitative factors described above, the Company performed an annual and interim quantitative impairment test in accordance with ASC 360 and determined that the carrying value of three asset groups within the Mission Solutions reporting unit were not recoverable based on entity-specific, undiscounted net cash flows. Accordingly, impairment expense was measured as the amount by which the carrying value of the asset groups exceeded their fair value as of the respective reporting dates. The fair value of the three asset groups was determined using an income approach based on a discounted cash flow model.
Impairment expense was measured as the amount by which the carrying value of the asset groups exceeded their fair value as of the respective reporting dates. Based on the results of the quantitative impairment tests performed during 2022, the Company recognized impairment expense related to personal property and equipment, leasehold improvements and construction in progress of $13.1 million.
Right-of-use assets
Impairment testing for right of use assets is consistent with the methodologies previously discussed for ASC 360. Based on the results of the quantitative impairment tests performed during 2022, the Company recognized impairment expense related to right-of-use assets of $2.7 million.
Intangible assets, net
As a result of the qualitative factors described above, the Company performed an annual and interim quantitative impairment test of certain indefinite-lived intangible assets and definite-lived intangible assets in accordance with ASC 350 and ASC 360, respectively. Under ASC 350, the fair value of the Company’s indefinite-lived intangible assets was determined using the relief from royalty method, which assumes that the asset’s fair value is the present value of license fees avoided by owning it. Please refer to the discussions above regarding the methodologies prescribed under ASC 360.
Impairment expense was measured as the amount by which the carrying value of the intangible assets exceeded their fair value as of the respective reporting dates. Based on the results of the quantitative impairment tests, the Company recognized impairment expense related to customer relationships, technology, trademarks, internal-use software licenses and IPR&D of $30.9 million during the year
ended December 31, 2022.
Goodwill
As a result of the qualitative factors described above, the Company performed an annual and interim quantitative goodwill impairment test in accordance with ASC 350. The fair value of the Company’s reporting units was determined using a combination and applied weighting of an income approach based on a discounted cash flow model as well as two market approaches based on (i) guideline public company revenues and earnings before interest, tax, depreciation and amortization multiples and (ii) guideline transactions, whereby consideration is given to prices paid in market comparable transactions.
Based on the interim and annual impairment tests, the Company determined that the estimated fair value of the Mission Solutions reporting unit was lower than its carrying value as of June 30, 2022 and October 1, 2022. Accordingly, the Company recorded total non-cash, pre-tax and post-tax impairment charges of $49.9 million during the year ended December 31, 2022, which reduced the reporting unit’s goodwill balance to zero as of December 31, 2022. The impairment of goodwill on the Mission Solutions reporting unit was due to a significant decline in discounted future cash flows, primarily attributable to a decrease in forecasted revenues as well as increased production costs and subcontractor delays that have extended the timeline for fulfillment of existing performance obligations and deferred pipeline realization.
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