Acquisitions

In April 2015, we acquired Vitesse Semiconductor Corporation ("Vitesse"), which designs and markets a diverse portfolio of high-performance semiconductors, application software, and integrated turnkey systems solutions for carrier, enterprise and Internet of Things ("IoT") networks worldwide. Vitesse products enable the fastest-growing network infrastructure markets including mobile access/IP edge, cloud access and industrial-IoT networking. The consideration for this acquisition was $383.2 million for all the equity interests of Vitesse.

We recorded Vitesse's tangible and intangible assets and liabilities based on their estimated fair values as of the acquisition date and allocated the remaining purchase consideration to goodwill. The preliminary allocation is as follows (amounts in thousands):



Cash and cash equivalents	$	16,231
Accounts receivable	10,020
Inventories	33,757
Other current assets	3,324
Property and equipment	2,423
Other assets	2,299
Identifiable intangible assets	102,370
Goodwill	257,488
Current liabilities	(26,688		)
Long term debt	(17,714		)
Other non-current liabilities	(281		)
Total consideration	$	383,229

As of the acquisition date, the gross contractual amount of acquired accounts receivable of $10.7 million was expected to be fully collectible.

The valuation of identifiable intangible assets and their estimated useful lives are as follows (dollar amounts in thousands):



	Asset Amount		Weighted Average Useful Life (Years)
Completed technology	$	87,000	7
Customer relationships	14,370		9
Other	1,000		1
	$	102,370

Valuation methodology

The fair value of the identified intangible assets for the acquisition noted above was estimated by performing a discounted cash flow analysis using the "income" approach. This method includes a forecast of direct revenues and costs associated with the respective intangible assets and charges for economic returns on tangible and intangible assets utilized in cash flow generation. Net cash flows attributable to the identified intangible assets were discounted to their present value at a rate commensurate with the perceived risk. The projected cash flow assumptions considered contractual relationships, customer attrition, eventual development of new technologies and market competition.

The valuation of completed technology and trade names for the acquisition noted above was based on the relief-from-royalty income approach, a variation of the income approach. The premise of the relief-from-royalty income approach is that if we had not been assigned the rights to the technology and trade names, we would have to pay royalties to continue to exploit the technology and trade names covered by their claims. To arrive at an estimate of royalty charges, the acquired entity's revenue and profit margins were analyzed to determine the ability to pay a royalty. In addition, the license databases were searched for actual royalty terms based on transactions involving technology and trade name licensing.

The useful lives of completed technology rights are based on the number of years in which net cash flows have been projected. The useful lives of customer relationships are estimated based upon the length of the relationships currently in place, historical attrition patterns and natural growth and diversification of other potential customers. The useful life of a trade name was estimated based on the period in which a benefit could be ascribed to the identified trade names.

Assumptions used in forecasting cash flows for each of the identified intangible assets included consideration of the following:


•	Historical performance including sales and profitability.


•	Business prospects and industry expectations.


•	Estimated economic life of asset.


•	Development of new technologies.


•	Acquisition of new customers.


•	Attrition of existing customers.


•	Obsolescence of technology over time.

Depending on the structure of a particular acquisition, goodwill and identifiable intangible assets may not be deductible for tax purposes. We determined that goodwill and identifiable intangible assets related to the acquisition noted above are not deductible.

The factors that contributed to a purchase price resulting in the recognition of goodwill include:


•	The premium paid over market capitalization immediately prior to the merger announcement.


•	Our belief that the merger will create a more diverse semiconductor company with expansive offerings which will enable us to expand our product offerings.


•	Our belief that we are committed to improving cost structures in accordance with our operational and restructuring plans which should result in a realization of cost savings and an improvement of overall efficiencies.

The purchase price allocation described above is preliminary, primarily with respect to tax contingency matters. A final determination of fair values of assets acquired and liabilities assumed relating to the transaction could differ from the preliminary purchase price allocation and if material differences exist they could result in retrospective revisions to the purchase price allocation. We utilized the straight line method of amortization for completed technology, customer relationships and trade name.

Supplemental pro forma data

The following supplemental pro forma data summarizes the results of operations for the periods presented, as if we completed the acquisition listed above as of the first day of 2014. The supplemental pro forma data reports actual operating results, adjusted to include the pro forma effect and timing of the impact in cost of goods sold from manufacturing profit in acquired inventory, amortization expense of identified intangible assets, incremental interest expense and the related tax effects of the acquisition. Post-acquisition net sales and earnings on a standalone basis are impracticable to determine, as on the acquisition date, we implemented a plan developed prior to the completion of the acquisition and began to immediately integrate the acquisitions into existing operations, engineering groups, sales distribution networks and management structure. The supplemental pro forma information presented is for illustrative purposes only and is not necessarily indicative of the financial position or results of operations that would have been realized if the transaction had been completed on the date indicated, does not reflect synergies that might have been achieved, nor is it indicative of future operating results or financial position. The pro forma adjustments are based upon currently available information and certain assumptions that we believe are reasonable under the circumstances. Supplemental pro forma data is as follows (amounts in thousands, except per share data):



	Nine Months Ended
	June 28, 2015		June 29, 2014
Net sales	$	966,021	$	914,774
Net income (loss)	$	40,038	$	(45,696	)
Earnings (loss) per share:
Basic	$	0.42	$	(0.49	)
Diluted	$	0.42	$	(0.49	)