Business Acquisition

3 Months Ended

Apr. 01, 2016

Business Acquisition, Pro Forma Information [Abstract]

Business Combination Disclosure [Text Block]

BUSINESS ACQUISITION

On February 29, 2016, the Company, through its wholly-owned subsidiary Harmonic International AG, completed its acquisition of 100% of the share capital and voting rights of TVN, a global leader in advanced video compression solutions headquartered in Rennes, France, for approximately $84.6 million in cash. The purchase price consideration is provisional as it is still pending post-closing adjustments as set forth in the Securities Purchase Agreement entered into between the Company and the other parties thereto, dated February 11, 2016, (“TVN Purchase Agreement”). The $84.6 million provisional purchase price included an estimate for the contingent consideration of approximately $8.0 million, which has not been paid to date. Pursuant to the TVN Purchase Agreement, $13.5 million of the purchase consideration may remain in escrow for a period of up to 18 months and relates to certain indemnification obligations of TVN’s former equity holders. The TVN acquisition was primarily funded with cash proceeds from the issuance of convertible senior notes by the Company in December 2015. (See Note 11, “Convertible Notes, Other Debts and Capital Leases”for additional information on the notes).

The acquisition of TVN is intended to strengthen the Company’s competitive position in the video infrastructure market as well as to enhance the depth and scale of the Company’s research and development (“R&D”) and service and support capabilities in the video arena. The Company believes that the combined product portfolios, R&D teams and global sales and service personnel will allow the Company to accelerate innovation for its customers while leveraging greater scale to drive operational efficiencies.

The TVN acquisition has been accounted for using the acquisition method of accounting in accordance with ASC 805, Business Combinations, which requires, among other things, that the assets acquired and liabilities assumed be recognized at their acquisition date fair values, with any excess of the consideration transferred over the estimated fair values of the identifiable net assets acquired recorded as goodwill. The accounting for this business combination is based on currently available information and is considered preliminary.

The provisional purchase price has been allocated on a preliminary basis to tangible and intangible assets acquired and liabilities assumed on the basis of their respective estimated fair values on the acquisition date. The Company will continue to evaluate certain assets, liabilities and tax estimates that are subject to change within the measurement period (up to one year from the acquisition date).

The Company’s preliminary allocation of the estimated purchase consideration is as follows (in thousands):

Assets:
Cash and cash equivalents	$	7,063
Accounts receivable, net	14,581
Inventories	3,462
Prepaid expenses and other current assets	5,628
Property and equipment, net	9,988
French R&D tax credit receivables (1)	26,400
Other long-term assets	1,762
Total assets	$	68,884
Liabilities:
Other debts and capital leases, current	7,859
Accounts payable	14,906
Deferred revenue	2,504
Accrued liabilities	17,635
Other debts and capital leases, long-term	16,589
Income taxes payable, long-term	50
Other long-term liabilities	6,415
Deferred tax liabilities	1,216
Total liabilities	$	67,174
Goodwill	39,206
Intangibles	43,670
Total purchase consideration	$	84,586

(1) See Note 8, “Balance Sheet Components-Prepaid expenses and other current assets” for more information on French R&D tax credit receivables”.

The following table presents details of the intangible assets acquired through this business combination (in thousands, except years):

	Estimated Useful Life (in years)	Fair Value
Backlog	6 months	$	3,600
Developed technology	4 years	20,000
Customer relationships	5 years	18,500
In-process research and development	N/A	980
Trade name	4 years	590
		$	43,670

Acquired identifiable intangible assets were valued using the income method and are amortized on a straight line basis over their respective estimated useful lives. Goodwill of $39.2 million arising from the acquisition was derived from expected benefits from the business synergies to be derived from the combined entities and the experienced workforce who joined the Company in connection with the acquisition. The goodwill will be assigned to the Company’s video reporting unit and it is not expected to be deductible for income tax purposes.

The amortization for the developed technology is recorded in “Cost of revenues” for product and the amortization for the remaining intangibles is recorded in “Amortization of intangibles”, which are part of operating expenses, on the Condensed Consolidated Statement of Operations. The intangibles assets acquired will be assigned to the Company’s video reporting unit and are not expected to be deductible for income tax purposes.

The Company also has an indefinite lived asset of $980,000 which represents the fair value of in-process research and development activities. Once the related research and development efforts are completed, the Company will determine whether the asset will continue to be an indefinite lived asset or it has become a finite lived asset and apply the appropriate accounting accordingly. The in-process R&D efforts are estimated to be completed within three to six months of the acquisition date.

The results of operations of TVN are included in the Company’s Condensed Consolidated Statements of Operations beginning February 29, 2016. For the three months endedApril 1, 2016, $2.9 million of revenue and $5.5 million of net loss from TVN is included in the Company’s Condensed Consolidated Statement of Operations. For the three months endedApril 1, 2016, the Company incurred $3.1 million of acquisition-and integration-related expenses. These costs, which the Company expensed as incurred, consisted primarily of professional fees payable to financial and legal advisors.

Acquisition-and integration-related expenses for the TVN acquisition is summarized in the table below (in thousands):

	Three months ended
	April 1, 2016
Product cost of revenue	$	58
Research and development	50
Selling, general and administrative	2,988
Total acquisition and integration-related expenses in operating expenses	3,038
Total acquisition and integration-related expenses	$	3,096

Pro Forma Financial Information

The following unaudited pro forma summary presents consolidated information of the Company as if the acquisition of TVN had occurred on January 1, 2015, the beginning of the comparable prior annual period. The pro forma adjustments primarily relate to acquisition- and integration-related costs, amortization of acquired intangibles and interest expense related to financing arrangements. The unaudited pro forma combined results are provided for illustrative purpose only and are not indicative of the Company’s actual consolidation results.

	Three months ended
	April 1, 2016			April 3, 2015
	(in millions, except per share amounts)
Net revenue	$	90.6		$	114.8
Net loss	(24.9		)	(19.6		)
Net loss per share-basic and diluted	$	(0.32	)	$	(0.22	)