Intangible Assets and Goodwill

Intangible Assets

Intangible assets consist of the following:



	Trade Names			Software			Customer Relationships			Other			Total
	(In millions)
December 31, 2012
Cost	$	37.7		$	58.4		$	21.2		$	26.8		$	144.1
Accumulated amortization	(6.0		)	(52.0		)	(1.0		)	(3.2		)	(62.2		)
Intangible assets, net	$	31.7		$	6.4		$	20.2		$	23.6		$	81.9
December 31, 2011
Cost	$	347.1		$	57.9		$	61.5		$	13.9		$	480.4
Accumulated amortization	(57.5		)	(51.1		)	(45.5		)	(4.6		)	(158.7		)
Intangible assets, net	$	289.6		$	6.8		$	16.0		$	9.3		$	321.7

During the fourth quarter of 2012, we determined that the results of our revised internal financial forecast, which was finalized during the quarter and took into account the expected actions and outcomes associated with the acceleration of our strategic transformation (as further described in Note 1 - Basis of Presentation.), qualified as a triggering event for impairment testing. This required the assessment of the recoverability of the long-lived assets (including definite-lived intangible assets) included in all of our asset groups with the exception of the recent acquisition of Nexsan.

We generally determined our asset groups to be associated with our various brands as that is the lowest level for which identifiable cash flows are largely independent of one another. Based on the facts that existed in the fourth quarter and as of December 31, 2012, all of our long-lived assets were evaluated for impairment under the "held and used" impairment model and, while we were in the process of exploring strategic options (including potential disposition) of our XtremeMac and Memorex brands (pertaining only to the consumer electronics products), such asset groups did not qualify as being classified as held-for-sale as of December 31, 2012 as the criteria for such classification were not met as of that date.

We compared the carrying value of our asset groups with their estimated undiscounted future cash flows and determined that the carrying value of certain asset groups exceeded the undiscounted cash flows expected to be generated by the asset group. For those asset groups, we then compared the carrying value of the asset group to its estimated fair value to determine the amount by which our long-lived assets (primarily intangible assets) within the asset group were impaired. As a result of these analyses, we recorded an impairment charge of $260.5 million in the Consolidated Statements of Operations.

In calculating the estimated fair value of the asset groups, we used the income approach, a valuation technique under which we estimate future cash flows using our financial forecasts associated with the asset groups. Our expected cash flows are affected by various significant assumptions, including projected sales, gross margin and expense expectations as well as a discount rate. Our analyses utilized forecasted cash flows ranging from a four year to a 10 year period depending on the asset group, and our business plans served as the basis for these cash flow assumptions. The analysis utilized discount rates ranging from 15.0 percent to 15.5 percent depending on the asset group.

As a part of this analysis, we also re-assessed the useful lives of any remaining intangible assets, excluding the intangible assets acquired in the recent Nexsan acquisition, and have adjusted the remaining lives accordingly.

Also during 2012, we accelerated the amortization of several intangible assets due to certain business decisions to abandon the intangible assets during year. The total charge for the accelerated amortization of these intangible assets was $1.9 million which was recorded in restructuring and other in the Consolidated Statements of Operations.

As of December 31, 2012, we had $80.2 million of definite-lived intangible assets subject to amortization and $1.7 million of indefinite-lived intangible assets not subject to amortization. While we believe that the current carrying value of these assets is recoverable, different assumptions regarding future performance of our businesses could result in significant impairment losses.

Amortization expense for intangible assets consisted of the following:



	Years Ended December 31,
	2012		2011		2010
	(In millions)
Amortization expense	$	27.5	$	26.0	$	23.6

Based on the intangible assets in service as of December 31, 2012, estimated amortization expense for each of the next five years ending December 31 is as follows:



	2013		2014		2015		2016		2017
	(In millions)
Amortization expense	$	14.1	$	12.7	$	11.2	$	9.2	$	8.2

Goodwill

The following table presents the changes in goodwill allocated to our reportable segments:



	Americas			Europe			North Asia			Total
	(In millions)
Balance as of December 31, 2010:
Goodwill	$	102.9		$	39.2		$	10.2		$	152.3
Accumulated impairment losses	(102.9		)	(39.2		)	(10.2		)	(152.3		)
	—			—			—			—

Encryptx acquisition	1.6			—			—			1.6
MXI Security acquisition	21.9			—			—			21.9
IronKey acquisition	9.4			—			—			9.4
Goodwill impairment	(1.6		)	—			—			(1.6		)
Balance as of December 31, 2011:
Goodwill	135.8			39.2			10.2			185.2
Accumulated impairment losses	(104.5		)	(39.2		)	(10.2		)	(153.9		)
	31.3			—			—			31.3

Nexsan acquisition	65.5			—			—			65.5
Goodwill impairment	(23.3		)	—			—			(23.3		)
Balance as of December 31, 2012:
Goodwill	201.3			39.2			10.2			250.7
Accumulated impairment losses	(127.8		)	(39.2		)	(10.2		)	(177.2		)
	$	73.5		$	—		$	—		$	73.5

See Note 4 - Acquisitions for information associated with goodwill acquired during various business acquisitions that occurred during 2012 and 2011.

We test the carrying amount of a reporting unit's goodwill for impairment on an annual basis during the fourth quarter of each year or if an event occurs or circumstances change that would warrant impairment testing during an interim period. Our reporting units for goodwill are our operating segments (Americas, Europe, North Asia and South Asia) with the exception of the Americas operating segment which is further divided between the Americas-Consumer, Americas-Commercial and Americas-Mobile Security reporting units. Goodwill resulting from the acquisition of the MXI Security and IronKey businesses is allocated to the Americas-Mobile Security reporting unit. Goodwill resulting from the acquisition of Nexsan is allocated to its own reporting unit, Americas-Nexsan, as it functions as a business with discrete financial information. This goodwill was not tested for impairment during 2012 as it was acquired on December 31, 2012 and represents fair value based on the acquisition.

During the second and third quarters of 2012, we adjusted our internal financial forecast for our Americas-Mobile Security reporting unit due to changes in the timing of expected cash flows and lower than expected short-term revenues and gross margins. As we considered these factors to be an event that warranted an interim test as to whether the goodwill was impaired we performed an impairment test as of each of these periods. These impairment tests resulted in no impairment of goodwill as the estimated fair value of the reporting units exceeded the carrying value in step 1 of the impairment tests by 43.3 percent and 17.7 percent, during the second and third quarter of 2012, respectively. During the fourth quarter of 2012, our internal financial forecast for our Americas-Mobile Security reporting unit was again adjusted with further declines in our revenue and gross margin projections resulting from lower expectations in the high-security market segment. In accordance with our policy, we performed our annual assessment of goodwill in the Americas-Mobile Security reporting unit during the fourth quarter of 2012 and, as a result of this assessment, it was determined that carrying value of our Americas-Mobile Security reporting unit exceeded its estimated fair value as our internal financial forecasts were again lowered. Accordingly, we performed a Step 2 goodwill impairment test which compared the implied value of the goodwill associated with Mobile Security to the carrying value of such goodwill. Based on this analysis, the carrying value of the Mobile Security goodwill exceeded its implied value and, consequently, we recorded an impairment charge of $23.3 million in restructuring and other in the Consolidated Statements of Operations.

In determining the estimated fair value of the reporting unit, we used the income approach, a valuation technique under which we estimate future cash flows using the reporting unit's financial forecasts. Our expected cash flows are affected by various significant assumptions, including the discount rate, revenue and gross margin expectations and terminal value growth rate. Our analysis utilized discounted forecasted cash flows over a 10 year period with an estimation of residual growth rates thereafter. We use our business plans and projections as the basis for expected future cash flows. The assumptions included utilized a discount rate of 16.0 percent and a terminal growth rate of 2.5 percent.

During 2011, we determined that the $1.6 million of carrying value of goodwill in the Americas-Commercial reporting unit exceeded its implied fair value and consequently, the goodwill was fully impaired. As a result, a $1.6 million charge was recorded in 2011 in restructuring and other in the Consolidated Statements of Operations.