Intangible Assets and Goodwill

Intangible Assets

Intangible assets consist of the following:



	Trade Names			Software			Customer Relationships			Other			Total
	(In millions)
December 31, 2013
Cost	$	34.3		$	58.5		$	20.4		$	26.3		$	139.5
Accumulated amortization	(9.2		)	(53.3		)	(2.1		)	(6.3		)	(70.9		)
Intangible assets, net	$	25.1		$	5.2		$	18.3		$	20.0		$	68.6
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

For purposes of long-lived asset impairment assessments, we have generally determined our asset groups to be at the level of each brand as this is the lowest level for which identifiable cash flows are available and are largely independent of the cash flows of other assets. Each reporting period, we review our long-lived assets and associated asset groups to determine if there is a triggering event which would require that we perform an impairment test.

2013 Intangible Asset Analysis

As a part of our annual goodwill impairment test for our Storage Solutions and Mobile Security reporting units (as further discussed below), we also tested for impairment the long-lived assets, including intangible assets, within the asset groups included in our Mobile Security and Storage Solutions reporting units. In performing these tests, we compared the carrying values of these asset groups with their estimated undiscounted future cash flows and determined that the undiscounted cash flows expected to be generated by the asset groups exceeded their carrying values resulting in no impairment. There were no interim triggering events that occurred during 2013 that warranted an impairment test to be performed on our long-lived assets (including intangible assets) other than goodwill.

2012 Intangible Asset Analysis

During the second and third quarters of 2012, as noted below under our 2012 goodwill analysis discussion, we performed interim goodwill impairment testing for our Mobile Security business (referred to as our Americas-Mobile Security business in 2012) due to changes in the timing of expected cash flows and lower than expected short-term revenues and gross margins. We also determined these factors to be an event that warranted interim tests as to whether our intangible assets associated with the Mobile Security business were impaired. Based on our impairment analysis performed in the second and third quarters of 2012, we concluded that we did not have an impairment of our intangible assets in the Mobile Security asset group at those times.

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.

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 our Consolidated Statements of Operations for the year ended December 31, 2012. During 2013, the impairment charge of $8.7 million that related to our Memcorp Asset Group was reclassified to discontinued operations and thus the 2012 impairment charge from continuing operations in our Consolidated Statement of Operations as of December 31, 2013 is reported as $251.8 million. See Note 4 - Acquisitions and Divestitures for more information on our discontinued operations.

The impairment of these intangible assets was accounted for in accordance with ASC 360-10. The following illustrates the carrying values, estimated fair values and impairment losses recorded, by asset group, associated with the fourth quarter 2012 impairment charge:



	Carrying Value		Estimated Fair Value		Impairment
	(In millions)
Memorex Asset Group	$	164.1	$	8.6	$	155.5
TDK Asset Group	96.7		6.3		90.4
Memcorp Asset Group	8.7		—		8.7
Imation Asset Group	5.9		—		5.9
Total					$	260.5

The intangible assets included within each of the above asset groups (all of which were impaired) consisted primarily of trade names, customer lists and intellectual property relating to each brand. The remaining intangible assets within the Memorex and TDK asset groups as of December 31, 2012 subsequent to the impairment charge consisted of trade names.

In reviewing these asset groups to determine whether a triggering event had occurred which would require an impairment test, we assessed factors impacting the asset groups including our views associated with changes in the estimated future cash flows associated with each of our asset groups. Revenues for the Memorex, TDK and Imation asset groups are derived primarily from sales of optical and magnetic media with each asset group having its own separately identifiable stream of cash flows. Revenues for the Memcorp asset group are derived primarily from sales of consumer electronics under the Memorex brand name. During the fourth quarter of 2012, the magnitude of decline in certain of our key product lines across the aforementioned asset groups widened and, at that time, we determined that we now expected this rate of decline to continue into the foreseeable future. This determination resulted in our decision in the fourth quarter of 2012 to accelerate our strategic transformation (as further described in Note 1 - Basis of Presentation) and to further focus our efforts on our growth categories in data storage and data security. As a result of this determination in the fourth quarter of 2012, we revised our revenue forecast and projected cash flows and accordingly, concluded that a triggering event to test our long-lived assets for impairment had occurred.

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 adjusted the remaining lives as necessary.

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 our Consolidated Statements of Operations.

As of December 31, 2013, we had $66.9 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 from continuing operations for intangible assets consisted of the following:



	Years Ended December 31,
	2013		2012		2011
	(In millions)
Amortization expense	$	13.2	$	23.9	$	22.2

Based on the intangible assets in service as of December 31, 2013, estimated amortization expense for each of the next five years ending December 31 is as follows:



	2014		2015		2016		2017		2018
	(In millions)
Amortization expense	$	12.6	$	11.9	$	8.5	$	7.7	$	6.3

Goodwill

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



	TSS			CSA			Total
	(In millions)
Balance as of December 31, 2011:
Goodwill	$	135.8		$	49.4		$	185.2
Accumulated impairment losses	(104.5		)	(49.4		)	(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			49.4			250.7
Accumulated impairment losses	(127.8		)	(49.4		)	(177.2		)
	73.5			—			73.5

Nexsan purchase price adjustment	(1.6		)	—			(1.6		)
Foreign currency translation	0.2			—			0.2
Balance as of December 31, 2013:
Goodwill	199.9			49.4			249.3
Accumulated impairment losses	(127.8		)	(49.4		)	(177.2		)
	$	72.1		$	—		$	72.1

See Note 4 - Acquisitions for information on goodwill acquired in the Nexsan acquisition during 2012.

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 the Mobile Security reporting unit and the Storage Solutions reporting unit which are one level below our TSS reporting segment. We do not have any goodwill in our CSA operating segment. Goodwill resulting from the acquisition of the MXI Security and IronKey businesses is allocated to the Mobile Security reporting unit. Goodwill resulting from the acquisition of Nexsan is allocated to the Storage Solutions reporting unit.

2013 Goodwill Analysis

During the fourth quarter of 2013, we performed our annual impairment testing of goodwill for our Mobile Security and Storage Solutions reporting units. In performing Step 1 of these tests, we compared the estimated fair value of these reporting units to their carrying value. These impairment tests resulted in no impairment of goodwill as the estimated fair value of each reporting unit exceeded the carrying value in Step 1 of the impairment tests by 25.7 percent and 34.2 percent, for the Storage Solutions and Mobile Security reporting units, respectively. There were no triggering events that occurred during 2013 that warranted an interim goodwill impairment test to be performed.

In determining the estimated fair value of the reporting units, we used the income approach, a valuation technique under which we estimate future cash flows using the reporting unit's financial forecasts and the market approach, a valuation technique that provides an estimate of the value of the reporting unit based on a comparison to other similar businesses. Our expected cash flows are affected by various significant assumptions, including projected revenue, gross margin and expense expectations, terminal growth rate and a discount rate. Our analyses utilized discounted forecasted cash flows of a ten year period with an estimation of residual growth rates thereafter. We use our business plans and projections as the basis for these cash flow assumptions. The analysis utilized discount rates of 13.5 percent and 15.5 percent depending on the reporting unit and a terminal growth rate of 3.0 percent.

2012 Goodwill Analysis

During the second and third quarters of 2012, we adjusted our internal financial forecast for our Mobile Security reporting unit (referred to as our Americas-Mobile Security reporting unit in 2012) 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 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 Mobile Security reporting unit during the fourth quarter of 2012 and, as a result of this assessment, it was determined that the carrying value of our Mobile Security reporting unit exceeded its estimated fair value as our internal financial forecasts were again lowered. Accordingly, we performed Step 2 of the 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 our 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 and the market approach, a valuation technique that provides an estimate of the value of the reporting unit based on a comparison to other similar businesses. Our expected cash flows are affected by various significant assumptions, including projected revenue, gross margin and expense expectations, terminal growth rate and a discount 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 analysis utilized a discount rate of 16.0 percent and a terminal growth rate of 2.5 percent.

The goodwill assigned to our Storage Solutions reporting unit from the acquisition of Nexsan was not tested for impairment during 2012 as it was acquired on December 31, 2012 and represents fair value based on the acquisition.

During 2011, we determined that the $1.6 million of carrying value of goodwill in the Mobile Security reporting unit as a result of acquisition of the assets of Encryptx was fully impaired and as a result, a $1.6 million charge was recorded in 2011 in our Consolidated Statements of Operations.