XPERI INC. You should read the following in conjunction with the attached unaudited
condensed consolidated financial statements and notes thereto, and with our
audited combined financial statements and notes thereto for the year ended
Management's discussion and analysis of Xperi's ("we", "our" or "the Company")
historical financial condition and results of operations presented below is that
of the product segment of Xperi Holding. The following refers to and should be
read in conjunction with the consolidated financial statements and accompanying
notes, which are included in this 10-Q filing. This management's discussion and
analysis has been included to help provide an understanding of Xperi's financial
condition, changes in financial condition and results of operations.
The consolidated financial information and results of operations that are
discussed in this section relate to Xperi, without giving effect to the Internal
Reorganization and Business Realignment that will occur in connection with the
Separation and Distribution. The discussion in this section does not reflect
Xperi as it will be constituted following the separation as a separate, publicly
traded company holding Xperi Holding's product business. As a result, the
discussion does not necessarily reflect the expected financial position, results
of operations and cash flows of Xperi following the separation or what Xperi's
financial position, results of operations and cash flows would have been had
Xperi been an independent, publicly traded company during the periods presented.
The following discussion may contain forward-looking statements that reflect the
plans, estimates and beliefs of Xperi. The words "plans," "expects," "will,"
"anticipates," "believes," "intends," "projects," "estimates" or other words of
similar meaning and similar expressions, among others, generally identify
"forward-looking statements," which speak only as of the date the statements
were made. The matters discussed in these forward-looking statements are subject
to risks, uncertainties and other factors that could cause actual results to
differ materially from those set forth in the forward-looking statements.
Factors that could cause actual results or events to differ materially from
those anticipated include the matters described under the sections entitled
"Risk Factors," "Business" and "Cautionary Statement Concerning Forward-Looking
Statements" of the Form 10. We disclaim and do not undertake any obligation to
update or revise any forward-looking statement, except as required by applicable
law.
Key Metrics
In evaluating our financial condition and operating performance, we focus on revenue and cash flow from operations.
For the three months ended
•
Revenue increased by$3.9 million , or 3%, from$117.7 million to$121.6 million . The change was primarily driven by an increase in minimum guarantee ("MG") revenue in Consumer Electronics due to the timing and duration of MG contracts up for renewal and executed during the third quarter of 2022, and secondarily, higher settlements of license compliance audits. These increases were partially offset by a decrease in Pay-TV revenue.
For the nine months ended
•
Revenue increased by$5.0 million , or 1%, from$361.7 million to$366.7 million . The change was primarily attributable to increased Consumer Electronics revenue from the settlement of a contract dispute with a large mobile imaging customer and an increase in MG revenue due to the timing and duration of MG contracts up for renewal and executed during the first nine months of 2022, partially offset by declines in Pay-TV and Connected Car revenue.
•
Net cash from operating activities increased by
Business Overview
OnDecember 18, 2019 ,Xperi Corporation ("Pre-Merger Xperi") entered into an Agreement and Plan of Merger and Reorganization (the "Merger Agreement") withTiVo Corporation ("Pre-Merger TiVo") to combine in an all-stock merger of equals transaction (the "Mergers"). Immediately following the consummation of the Mergers onJune 1, 2020 (the "Merger Date"), Xperi Holding Corporation ("Xperi Holding " or "Parent"), aDelaware corporation founded inDecember 2019 under the name "XRAY-TWOLF HoldCo Corporation ," became the parent company of both Pre-Merger Xperi andPre-Merger TiVo . 31 -------------------------------------------------------------------------------- Following the Mergers, Xperi Holding announced plans to separate into two independent publicly-traded companies (the "Separation"), one comprising its intellectual property ("IP") licensing business and one comprising its product business. OnOctober 1, 2022 , Xperi Holding completed the separation and distribution (the "Spin-Off") through a pro-rata distribution (the "Distribution") of all of the outstanding common stock of its product-related business ("Xperi", "we", "our", or the "Company") to the stockholders of record of Xperi Holding as of the close of business onSeptember 21, 2022 , the record date (the "Record Date"), for the Distribution. Each Xperi Holding stockholder of record received four shares of Xperi common stock,$0.001 par value, for every ten shares of Xperi Holding common stock,$0.001 par value, held by such stockholder as of the close of business on the Record Date. Cash was paid in lieu of any fractional shares of Xperi common stock. Xperi Holding distributed 42,023,632 shares of Xperi common stock in the Distribution, which was effective onOctober 1, 2022 . As a result of the Distribution, Xperi became an independent, publicly traded company and its common stock is listed under the symbol "XPER" on theNew York Stock Exchange ("NYSE"). In connection with the Separation and the Distribution, Xperi Holding was renamed and continues asAdeia Inc. ("Adeia") and also changed its stock symbol to "ADEA" on the Nasdaq Global Select Market. The Parent is referred to as "Xperi Holding " throughout this Form 10-Q as that was its name during all time periods presented. Xperi is a leading consumer and entertainment technology company. We create extraordinary experiences at home and on the go for millions of consumers around the world, elevating content and how audiences connect with it in a way that is more intelligent, immersive and personal. Powering smart devices, connected cars, entertainment experiences and more, we have created a unified ecosystem that reaches highly engaged consumers, uncovering significant new business opportunities, now and in the future. Our technologies are integrated into billions of consumer devices and media platforms worldwide, driving increased value for partners, customers and consumers. We operate in one reportable business segment and currently group our business into four categories based on the markets served: Pay-TV, Consumer Electronics, Connected Car and Media Platform. Headquartered inSilicon Valley with operations around the world, we have approximately 2,100 employees and more than 35 years of operating experience.
COVID-19 Impact
The COVID-19 pandemic has had, and may continue to have, an adverse impact on our business. The impact to date has included periods of significant volatility in markets we serve, in particular the automotive and broad consumer electronics markets. Additionally, the pandemic has caused some challenges and delays in acquiring new customers and executing license renewals. These factors have negatively impacted our financial condition and results of operations, and may result in an impairment of our long-lived assets, including goodwill, increased credit losses and impairments of investments in other companies. Our operations and those of our customers have also been negatively impacted by certain trends arising from the COVID-19 pandemic, including labor market constraints, shortage of semiconductor components and manufacturing capacities, and delays in shipments, product development and product launches. Moreover, the COVID-19 pandemic, its related impact, andUnited States federal, state and foreign government policies enacted to combat the pandemic have contributed to a recent rise of inflation that may increase the cost of our operations and reduce demand for our products and services and those of our customers, which may adversely affect our financial performance. Our per-unit and variable-fee based revenue will continue to be susceptible to the volatility, labor shortages, supply chain disruptions, microchip shortages, high energy prices and inflation, and potential market downturns precipitated by the COVID-19 pandemic.
The impact of the pandemic on our overall results of operations remains uncertain for the foreseeable future. Further discussion of the potential impacts on our business from the COVID-19 pandemic is provided under the section entitled "Risk Factors" of the Form 10.
Basis of Presentation
For a detailed discussion of the basis of presentation, refer to "Note 1 - The Company and Basis of Presentation" of Notes to the Condensed Consolidated Financial Statements.
Results of Operations
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We derive the majority of our revenue from licensing our technology to customers. For our revenue recognition policy including descriptions of revenue-generating activities, refer to "Note 3 - Revenue" of the Notes to Condensed Consolidated Financial Statements.
The following table presents our historical operating results for the periods indicated as a percentage of revenue:
Three Months Ended Nine Months Ended
September 30, September 30, September 30,
2022 September 30, 2021 2022 2021
Revenue: 100 % 100 % 100 % 100 %
Operating expenses:
Cost of revenue, excluding
depreciation and amortization of
intangible assets 26 27 24 24
Research and development 47 42 43 40
Selling, general and administrative 46 39 42 41
Depreciation expense 4 6 4 5
Amortization expense 14 24 13 23
Goodwill impairment 291 - 97 -
Total operating expenses 428 138 223 133
Operating loss (328 ) (38 ) (123 ) (33 )
Other income (expense), net - - - -
Loss before taxes (328 ) (38 ) (123 ) (33 )
Provision for income taxes 2 2 3 2
Net loss (330 )% (40 )% (126 )% (35 )%
Revenue (in thousands, except for percentages):
Three Months Ended
September September 30, Increase/
30, 2022 2021 (Decrease) % Change
Revenue $ 121,637 $ 117,732 $ 3,905 3 %
The $3.9 million , or 3% increase in revenue for the three months ended September
30, 2022 , compared to the same period in the prior year, was primarily driven by
an increase in minimum guarantee ("MG") revenue in Consumer Electronics due to
the timing and duration of MG contracts up for renewal and executed during the
third quarter of 2022, and secondarily, higher settlements of license compliance
audits. These increases were partially offset by a decrease in Pay-TV revenue.
Nine Months Ended
September September
30, 2022 30, 2021 Increase/ (Decrease) % Change
Total revenue $ 366,728 $ 361,738 $ 4,990 1 %
The $5.0 million , or 1% increase in revenue for the nine months ended September
30, 2022 , compared to the same period in the prior year, was primarily
attributable to increased Consumer Electronics revenue from the settlement of a
contract dispute with a large mobile imaging customer and an increase in MG
revenue due to the timing and duration of MG contracts up for renewal and
executed during 2022, partially offset by declines in Pay-TV and Connected Car
revenue.
Cost of Revenue, Excluding Depreciation and Amortization of Intangible Assets
Cost of revenue, excluding depreciation and amortization of intangible assets,
consists primarily of employee-related costs, royalties paid to third parties,
hardware product-related costs, maintenance costs and an allocation of
facilities costs, as well as service center and other expenses related to
providing our technology solution offerings and NRE services.
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Cost of revenue, excluding depreciation and amortization of intangible assets,
for the three months ended September 30, 2022 was $31.4 million , as compared to
$32.3 million for the three months ended September 30, 2021 , a decrease of $0.9
million primarily attributable to lower hardware product-related costs due to a
decline in hardware product sales in the three months ended September 30, 2022 .
Cost of revenue, excluding depreciation and amortization of intangible assets,
for the nine months ended September 30, 2022 was $85.7 million , as compared to
$88.0 million for the nine months ended September 30, 2021 , a decrease of $2.3
million primarily attributable to lower hardware product-related costs due to a
decline in hardware product sales in the nine months ended September 30, 2022 .
Research and Development
Research and development ("R&D expense") is comprised primarily of
employee-related costs, stock-based compensation expense, engineering consulting
expenses associated with new product and technology development, product
commercialization, quality assurance and testing costs, as well as costs related
to information technology, patent applications and examinations, materials,
supplies and allocation of facilities costs. All R&D expense is expensed as
incurred.
R&D expense for the three months ended September 30, 2022 was $57.1 million as
compared to $50.0 million for the three months ended September 30, 2021 , an
increase of $7.1 million . The increase was primarily due to employees hired in
connection with the Vewd Acquisition in July 2022 , as well as increased bonus
expense driven by expected higher bonus percentage attainment.
R&D expense for the nine months ended September 30, 2022 was $158.6 million as
compared to $144.4 million for the nine months ended September 30, 2021 , an
increase of $14.2 million . The increase was primarily due to increased hiring of
employees, primarily due to the MobiTV Acquisition in May 2021 and the Vewd
Acquisition in July 2022 , as well as increased bonus expense driven by expected
higher bonus percentage attainment.
Selling, General and Administrative
Selling expenses consist primarily of compensation and related costs for sales
and marketing personnel engaged in sales and licensee support, marketing
programs, public relations, promotional materials, travel, trade show expenses,
and stock-based compensation expense. General and administrative expenses
consist primarily of compensation and related costs for general management,
information technology, finance personnel, legal fees and expenses, facilities
costs, stock-based compensation expense, and professional services. Our general
and administrative expenses, other than facilities-related expenses, are not
allocated to other expense line items.
Selling, general and administrative expenses ("SG&A expenses") for the three
months ended September 30, 2022 , were $56.7 million , as compared to $46.1
million for the three months ended September 30, 2021 , an increase of $10.6
million . The increase was primarily due to transaction and integration costs
related to the Vewd Acquisition, as well as an increase in bonus expense driven
by expected higher bonus percentage attainment in the third quarter of 2022.
Selling, general and administrative expenses for the nine months ended September
30, 2022 , were $156.9 million , as compared to $148.1 million for the nine months
ended September 30, 2021 , an increase of $8.8 million . The increase was
primarily due to transaction and integration costs related to the Vewd
Acquisition and an increase in bonus expense driven by expected higher bonus
percentage attainment, partially offset by a reduction in provision for credit
losses in the first nine months of 2022.
Depreciation Expense
Depreciation expense for the three months ended
Depreciation expense for the nine months ended
Amortization Expense
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Amortization expense for the three months ended September 30, 2022 was $16.6
million , as compared to $27.8 million for the three months ended September 30,
2021 , a decrease of $11.2 million . The decrease was due to certain intangible
assets becoming fully amortized in the fourth quarter of 2021, partially offset
by new amortization expense as a result of the Vewd Acquisition in July 2022 .
Amortization expense for the nine months ended September 30, 2022 was $46.2
million , as compared to $83.3 million for the nine months ended September 30,
2021 , a decrease of $37.1 million . The decrease was due to certain intangible
assets becoming fully amortized in the fourth quarter of 2021, partially offset
by new amortization expense as a result of the Vewd Acquisition in July 2022 .
As a result of previous mergers and acquisitions, we anticipate that
amortization expenses will continue to be a significant expense over the next
several years. See "Note 8- Goodwill and Identified Intangible Assets" of the
Notes to Condensed Consolidated Financial Statements for additional detail.
Stock-based Compensation Expense
The following table sets forth our stock-based compensation ("SBC") expense for
the three and nine months ended
Three Months Ended Nine Months Ended
September 30 , September
2022 30, 2021 2022 30, 2021
Cost of revenue, excluding depreciation
and amortization of intangible assets $ 779 $ 525 $ 2,177 $ 1,377
Research and development 5,515 4,604 16,295 12,808
Selling, general and administrative 4,291 2,991 11,289 10,178
Total stock-based compensation expense
$ 29,761 $ 24,363 Stock-based compensation awards include restricted stock awards and units, employee stock plan purchases and employee stock options. The increases in SBC expense for the three and nine months endedSeptember 30, 2022 , compared to the corresponding periods in 2021, were primarily a result of the vesting of stock award grants made in 2021 to increased employees resulting from the Mergers, the MobiTV Acquisition and certain insourcing activity.
Goodwill Impairment
During the three months endedSeptember 30, 2022 , indicators of potential impairment for the Product reporting unit of Xperi Holding were identified such that we concluded it was more-likely-than-not that goodwill was impaired and a quantitative interim goodwill impairment assessment should be performed as ofSeptember 30, 2022 . Indicators of potential impairment included a sustained decline in Xperi Holding's stock price during the second half of the third quarter of 2022 reflective of rising interest rates and continued decline in macroeconomic conditions. We proceeded to perform a fair value analysis of the Product reporting unit using the market capitalization approach. Under this approach, we estimated the fair value of the Product reporting unit as ofSeptember 30, 2022 using quoted market prices of Xperi's common stock over its first ten trading days following the Separation, and a control premium representing the synergies a market participant would achieve upon obtaining control of Xperi. As a result of the fair value analysis, we recognized a goodwill impairment charge of$354.0 million during the three months endedSeptember 30, 2022 . To the extent the trading price of our common stock declines below the average referred to above, we may conclude it is necessary to record further impairment to the value of our goodwill in future periods, and any such impairment could have a material impact on our consolidated financial statements.
We did not recognize a goodwill impairment charge in the three and nine months
ended
Provision for Income Taxes For the three months endedSeptember 30, 2022 , we recorded an income tax expense of$2.0 million on a pretax loss of$399.7 million , which resulted in an effective tax rate of (0.5)%. The income tax expense was primarily related to foreign withholding taxes and state income taxes, partially offset by a tax benefit due to an impairment of goodwill. 35 -------------------------------------------------------------------------------- For the nine months endedSeptember 30, 2022 , we recorded an income tax expense of$12.5 million on a pretax loss of$450.7 million , which resulted in an effective tax rate of (2.8)%. The income tax expense was primarily related to foreign withholding taxes, state income taxes, and foreign income tax expense, partially offset by a tax benefit due to an impairment of goodwill. For the three months endedSeptember 30, 2021 , we recorded an income tax expense of$2.8 million on a pretax loss of$44.8 million , which resulted in an effective tax rate of (6.3)%. The income tax expense was primarily related to foreign withholding taxes and foreign income taxes. For the nine months endedSeptember 30, 2021 , we recorded an income tax expense of$8.2 million on a pretax loss of$118.5 million , which resulted in an effective tax rate of (6.9)%. The income tax expense was primarily related to foreign withholding taxes and foreign andU.S. state income taxes. AtSeptember 30, 2022 , our 2017 through 2021 tax years are generally open and subject to potential examination in one or more jurisdictions. In addition, in theU.S. , any net operating losses or credits that were generated in prior years but not yet fully utilized in a year that is closed under the statute of limitations may also be subject to examination. The need for a valuation allowance requires an assessment of both positive and negative evidence when determining whether it is more-likely-than-not that deferred tax assets are recoverable. Such assessment is required on a jurisdiction-by-jurisdiction basis. In making such assessment, significant weight is given to evidence that can be objectively verified. After considering both positive and negative evidence to assess the recoverability of our net deferred tax assets, we determined that it was unlikely that we would realize our federal, certain state and certain foreign deferred tax assets given the substantial amount of tax attributes that will remain unutilized to offset reversing deferred tax liabilities. We intend to continue maintaining a full valuation allowance on our federal deferred tax assets until there is sufficient evidence to support the reversal of all or some portion of these allowances. Release of the valuation allowance would result in the recognition of certain federal deferred tax assets and a decrease to income tax expense for the period the release is recorded. The exact timing and amount of the valuation allowance release depends on the level of profitability that we are able to achieve.
Segment Operating Results
In connection with the Separation, we evaluated our reportable segments and
determined we have one reportable segment. Operating segments are defined as
components of an enterprise for which separate financial information is
available and that is evaluated on a regular basis by the chief operating
decision-maker ("CODM") in deciding how to allocate resources to an individual
segment and in assessing performance. The CODM reviews financial information
presented on a consolidated basis for purposes of making operating decisions,
allocating resources and evaluating financial performance. Our Chief Executive
Officer has been determined to be the CODM in accordance with the authoritative
guidance on segment reporting.
Liquidity and Capital Resources
The following table presents selected financial information related to our liquidity and significant sources and uses of cash and cash equivalents as of and for the periods presented.
As of
(in thousands, except for percentages) September 30, 2022 December 31, 2021
Cash and cash equivalents $ 180,118 $ 120,695
Current ratio 2.4 2.3
Nine Months Ended
September 30, 2022 September 30, 2021
Net cash from operating activities $ (11,333 ) $ (14,061 )
Net cash from investing activities $ (61,097 ) $ (30,540 )
Net cash from financing activities $ 136,037 $ 63,188
Our primary sources of liquidity and capital resources are our cash on hand and cash provided by Parent. Cash and cash equivalents were$180.1 million atSeptember 30, 2022 , an increase of$59.4 million from$120.7 million atDecember 31, 2021 . This increase resulted primarily from$52.8 million of net cash transfers from Parent and$83.2 million of net proceeds from Parent capital contributions, partially offset by$11.3 million in cash used in operating activities and$61.1 million in cash used in investing activities including the acquisition of Vewd inJuly 2022 . 36 -------------------------------------------------------------------------------- For information about our material cash requirements as of and for the year endedDecember 31, 2021 , see "Liquidity and Capital Resources" in the Form 10. Other than the borrowing of$50.0 million in long-term debt in connection with the Vewd Acquisition, discussed in detail in "Cash Flows from Financing Activities" below, our cash requirements have not changed materially sinceDecember 31, 2021 .
Cash Flows from Operating Activities
Net cash used by operations was$11.3 million for the nine months endedSeptember 30, 2022 , primarily due to our net loss of$463.2 million , partially offset by non-cash items of goodwill impairment charge of$354.0 million , depreciation of$15.7 million , amortization of intangible assets of$46.2 million , stock-based compensation expense of$29.8 million and$6.8 million in changes in operating assets and liabilities. Net cash used by operations was$14.1 million for the nine months endedSeptember 30, 2021 , primarily due to our net loss of$126.7 million and$18.1 million in changes in operating assets and liabilities, partially offset by non-cash items of depreciation of$17.1 million , amortization of intangible assets of$83.3 million , stock-based compensation expense of$24.4 million and an increase in deferred income taxes of$3.5 million .
Cash Flows from Investing Activities
Net cash used in investing activities was
Net cash used in investing activities was$30.5 million for the nine months endedSeptember 30, 2021 , primarily related to capital expenditures of$14.8 million , cash paid for intangible assets of$3.4 million and$12.4 million of net cash used for the MobiTV Acquisition.
Capital Expenditures
Our capital expenditures for property, plant, and equipment consist primarily of purchases of computer hardware and software, information systems, production and test equipment. During the nine months endedSeptember 30, 2022 and 2021, we spent$10.5 million and$14.8 million on capital expenditures, respectively, and we expect capital expenditures in 2022 to be between$12.0 million to$15.0 million . These expenditures are expected to be financed with existing cash and cash equivalents. There can be no assurance that current expectations will be realized and plans are subject to change upon further review of our capital expenditure needs.
Cash Flows from Financing Activities
Net cash provided by financing activities was
Net cash provided by financing activities was
Following the separation from Xperi Holding, our capital structure and sources of liquidity changed significantly from our historical capital structure and sources of liquidity. Subsequent to the separation, we no longer participate in cash management and funding arrangements managed by Parent. Xperi Holding capitalized us such that we carried an amount of cash and cash equivalents of over$180.0 million at the distribution date.
This cash and cash equivalents balance will be sufficient to support our operations, capital expenditures and income tax payments, in addition to any investments and other capital allocation needs, for at least the next 12 months.
Poor financial results, unanticipated expenses, unanticipated acquisitions of
technologies or businesses or unanticipated strategic investments could give
rise to additional financing requirements sooner than we expect. There can be no
assurance that equity or debt financing will be available when needed or, if
available, that such equity financing will be on terms satisfactory to us and
not dilutive to our then-current stockholders or that debt financing will not
impose significant restrictions on the operation of our business.
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We plan to supplement this short-term liquidity, if necessary, with access to
capital markets. Our access to capital markets may be constrained and our cost
of borrowing may increase under certain business and market conditions, and our
liquidity is subject to various risks including the risks identified in "Risk
Factors" included in Item 1A of this Form 10-Q.
Long-Term Debt
In connection with the Vewd acquisition onJuly 1, 2022 , we issued a senior unsecured promissory note (the "Promissory Note") to the sellers of Vewd in the principal amount of$50.0 million . Our obligations under the Promissory Note are guaranteed by Xperi Holding prior to the Spin-Off. Indebtedness outstanding under the Promissory Note bears an interest rate of 6.00% per annum, payable in cash on a quarterly basis. If a certain qualified spin-off transaction occurs, the interest rate will be increased to the greater of (a) 6.00% and (b) the sum of (i) the highest interest rate payable under any credit facility or bonds, debentures, notes or similar instruments where we or any guarantor borrows money or guarantees obligations on a secured basis on or after the date of such spin-off transaction, plus (ii) 2.00%. The Promissory Note will mature onJuly 1, 2025 . We may, at any time and on any one or more occasions, prepay all or any portion of the outstanding principal amount, plus accrued and unpaid interest, if any, under the Promissory Note without premium or penalty. In addition, the Promissory Note has mandatory prepayment provisions upon certain change of control or asset sale events. AtSeptember 30, 2022 ,$50.0 million was outstanding under the Promissory Note with an annual interest rate of 6.0%. Interest is payable quarterly. Under the Promissory Note agreement, we are obligated to make a balloon principal payment of$50.0 million in 2025. The Promissory Note contains certain customary covenants, and as ofSeptember 30, 2022 , we were in full compliance with such covenants.
Critical Accounting Policies and Estimates
Except as described below, there have been no significant changes to our critical accounting estimates as compared to those disclosed in "Critical Accounting Policies and Estimates" in the Form 10.
Valuation of
We make judgments about the recoverability of intangible assets whenever events or changes in circumstances indicate that impairment may exist. If such facts and circumstances exist, we assess recoverability by comparing the projected undiscounted net cash flows associated with the related asset or group of assets over their remaining lives against their respective carrying amounts. Impairments, if any, are based on the excess of the carrying amount over the fair value of those assets. If the useful life is shorter than originally estimated, we accelerate the rate of amortization and amortize the remaining carrying value over the new shorter useful life. Such changes could result in impairment charges or higher amortization expense in future periods, which could have a significant impact on our operating results and financial condition. We perform an annual review of the valuation of goodwill in the fourth quarter, or more often if indicators of impairment exist. Triggering events for impairment reviews may be indicators such as adverse industry or economic trends, restructuring actions, lower projections of profitability, or a sustained decline in our market capitalization. Evaluations of possible impairment and, if applicable, adjustments to carrying values require us to estimate, among other factors, future cash flows, useful lives, and fair market values of our assets. When we conduct our evaluation of goodwill, the fair value of goodwill is assessed using valuation techniques that require significant management estimates and judgment. Should conditions be different from management's last assessment, significant impairments of goodwill may be required, which would adversely affect our operating results. In performing the quantitative impairment test for goodwill, the fair value of the reporting unit is compared to its carrying amount. We utilize the market capitalization approach to determine the fair value of a reporting unit. Under the market capitalization approach, the fair value of a reporting unit is estimated based on the trading price of our stock as of the test date, or trading prices over a short period of time immediately prior or subsequent to the test date if such prices more reasonably represent the estimated fair value as of the test date, which is further adjusted by a control premium representing the synergies a market participant would achieve when obtaining control of the business. To the extent the trading price of our common stock declines in future periods as compared to the average trading price during the first ten trading days after the Separation, we may conclude it is necessary to record impairment to the value of our goodwill in future periods, and any such impairment could have a material impact on our consolidated financial statements.
Recent Accounting Pronouncements
See "Note 2 - Summary of Significant Accounting Policies" of the Notes to Condensed Consolidated Financial Statements for a full description of recent accounting pronouncements including the respective expected dates of adoption.
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