Business Acquisitions

12 Months Ended

Jun. 26, 2011

Business Acquisitions [Abstract]

Business Acquisitions

2. Business Acquisitions

CHiL Semiconductor Corporation

On February 24, 2011, the Company entered into an Agreement and Plan of Merger (“Merger Agreement”) by and among International Rectifier Corporation, a Delaware corporation, Cancun Merger Corp., a Delaware corporation (“Cancun”) wholly-owned subsidiary of the Company, and CHiL Semiconductor Corporation, a Delaware corporation (“CHiL”) (collectively, the “Merger”).  Pursuant to the Merger and related documents, the Company agreed to acquire CHiL for $75 million in cash subject to a working capital adjustment by means of a merger of Cancun with and into CHiL, with CHiL becoming a wholly-owned subsidiary of the Company. The Merger was closed on March 7, 2011.

CHiL designs, develops and markets intelligent mixed-signal products using digital power techniques.  The results of CHiL are included in the Company’s Enterprise Power (“EP”) business segment.

The acquisition of CHiL has been accounted for as a business combination and has been included in the Company’s results of operations from March 7, 2011, the date the Merger was closed.  CHiL contributed revenues of $2.8 million and a net loss of $3.2 million to the Company’s results for the period from acquisition through June 26, 2011.

The total estimated consideration as shown in the table below is allocated to CHiL’s tangible and intangible assets and liabilities based on their estimated fair value as of the date of the completion of the transaction, March 7, 2011.  The Company made adjustments to the preliminary allocation in the fourth quarter of fiscal year 2011 which resulted in changes to consideration transferred, residual amount allocated to goodwill, inventory, intangibles, net working capital and deferred taxes. The estimated consideration is allocated as follows (in thousands):

	Estimated Fair Value
Fair value of consideration transferred:
Cash consideration to CHiL shareholders, net of cash acquired	$	73,168
Allocation of consideration:
Inventory valuation adjustment	$	100
Property, plant, and equipment		207
Deferred tax asset		10,016
In-process research and development		100
Intangible assets		25,900
Goodwill		46,615
Net working capital		445
Deferred tax liability		(10,055	)
Taxes payable		(160	)
Total purchase price	$	73,168

Pursuant to the Merger Agreement, $11.3 million of the cash consideration was placed in an indemnification escrow account.  Subject to deductions for certain claims, net working capital adjustments and the settlement of pre-closing tax liabilities, the escrow cash will be released and distributed to the former CHiL shareholders one year after the acquisition closing date.  Pursuant to the Merger Agreement, to the extent funds remain in the escrow following satisfaction of the Company’s claims and conditions set forth in the Merger Agreement are satisfied, funds would be used by the Company to pay bonuses of up to $0.8 million to certain CHiL employees if the employees remain employed by the Company in good standing one year after the acquisition closing date.  These retention bonuses, if paid, would be recorded as compensation expense over the service period.  Subject to the satisfaction of conditions set forth in the Merger Agreement, any portion of the $0.8 million not paid as retention bonus will be distributed to the former CHiL shareholders.

Identifiable acquisition-related intangible assets and their estimated useful lives are as follows (in thousands):

	Asset Amount		Weighted Average Useful Life
Completed technology	$	19,500	5 years
Customer lists		5,100	6 years
Other intangible assets		1,300	3 years
Total acquisition-related intangible assets	$	25,900

The fair value of the identified intangible assets was estimated by performing a discounted cash flow analysis utilizing the “income” approach and are Level 3 measurements as described in Note 1. This approach is based on a probability weighted forecast of revenues and cash expenses associated with the respective intangible assets.  The net cash flows attributable to the identified intangible assets were discounted to their present value using a rate determined by the Company based on its evaluation of the risks related to the cash flows.

The useful lives of the completed technology rights are based on the number of years for which these technologies are expected to provide cash inflows.  The useful life of the customer lists is based on historical patterns, the customer’s industry and the potential for growth in the customer base.  The useful life of the trade name was based on the period for which the trade name will provide a benefit to the Company and the useful life of the non-compete agreement was based on the estimated period of utility of the agreement.

The allocation of the purchase price resulted in the Company recognizing $46.6 million of goodwill in the EP business segment related to the acquisition.  The goodwill is not deductible for tax purposes.  The factors that contributed to the recognition of goodwill for this acquisition include the expansion of the Company’s product offerings in the EP segment to include digital solutions, the Company’s expectation that the acquisition will improve the cost structure and efficiencies of the CHiL operations and the premium paid for the acquisition of CHiL.

Transaction costs related to the acquisition of CHiL were immaterial.

Technology Acquisition

On February 3, 2011, the Company entered into a Purchase and Sale Agreement (“the Agreement”) with a privately held domestic corporation, and its shareholders, to acquire tangible personal property and intellectual property (the “Technology Acquisition”) for $2.5 million in cash plus semiannual payments of $0.4 million for a period of three years and additional amounts contingent upon the achievement of certain financial and other operating results.  The semiannual payments are contingent upon the continued employment of the shareholders to be employed by the Company and will be expensed as compensation expense as incurred.  Any portion of the semi-annual payments not paid to the shareholders will be retained by the Company.  The seller was a development stage enterprise engaged in the development of power management technology solutions.

The Technology Acquisition has been accounted for as a business combination and is included in the Company’s results of operations from February 3, 2011, the date the Technology Acquisition closed.  The revenues and expenses for the Technology Acquisition during this period were immaterial.  The operating results of the Technology Acquisition are included in the Company’s Energy Saving Products (“ESP”) segment from the date of acquisition.

The total estimated consideration for the Technology Acquisition as shown in the table below is allocated to the tangible and intangible assets and liabilities based on their estimated fair value as of the date of the completion of the transaction, February 3, 2011.  Acquisition costs were not material. The consideration is allocated as follows:
 

	Estimated Fair Value
Fair value of consideration transferred:
Cash consideration to the Technology Acquisition shareholders	$	2,500
Contingent consideration		400
Total consideration transferred	$	2,900

Allocation of consideration:
Intangible assets	$	2,867
Long-term deferred tax asset		150
Other assets		33
Long-term deferred tax liability		(150	)
Net assets acquired	$	2,900

The contingent consideration arrangement requires the Company to pay additional consideration to the shareholders of the seller in the Technology Acquisition based on a percentage of cumulative pro forma earnings net of cumulative losses.  The fair value of the contingent consideration was estimated using a probability weighted discounted cash flow model and is a Level 3 measurement as described in Note 1.  The key assumptions in applying the income approach were a discount rate of 46 percent and estimated net cash flows from operations. As of June 26, 2011, there were no significant changes in the semi-annual payments or in the range of outcomes for the contingent consideration recognized as a result of the technology acquisition.

The Company identified one type of intangible asset acquired in the Technology Acquisition, completed technology rights.  The fair value of the completed technology was estimated utilizing a discounted cash flow analysis using the “income” approach, a Level 3 measurement, which estimates the fair value of the asset based on a discounted cash flow approach.  The completed technology has an estimated fair value of $2.9 million and will be amortized on a straight-line basis over the estimated useful life of the technology of 5 years.  The useful lives of the completed technology rights are based on the number of years for which cash flows have been projected.

Pro Forma Information (unaudited)

The results of operations for CHiL and the Technology Acquisition have been included in the Company’s consolidated statement of operations since the consummation of the acquisitions on March 7, 2011 and February 3, 2011, respectively.  The following unaudited pro forma financial information presents the combined results as if the acquisitions had occurred at the beginning of the current and prior fiscal year reporting periods (in thousands):

		Twelve Months Ended
	June 26, 2011			June 27, 2010
Combined revenues		$	1,180,250	$	896,411
Combined net income			155,085		62,860
Net income per share-basic		$	2.19	$	0.88
Net income  per share-diluted		$	2.17	$	0.88

These amounts have been calculated after adjusting the results of CHiL and the Technology Acquisition to include the additional amortization expense that would have been charged assuming the fair value adjustments to intangible assets had been applied as of the beginning of the fiscal years 2011 and 2010.