Acquisitions

Gennum Corporation (“Gennum”)

On March 20, 2012, the Company, through its wholly-owned subsidiary Semtech Canada Inc., completed the acquisition of all outstanding equity interests of Gennum (TSX: GND), a leading supplier of high speed analog and mixed-signal semiconductors for the optical communications and video broadcast markets.

Upon consummation of the acquisition, which constituted a change in control of Gennum, Gennum’s stock option awards and restricted shares became fully vested. Semtech acquired 100% of the outstanding shares and vested stock options, restricted shares, and deferred share units of Gennum for CDN $13.55 per share for a total purchase price of $506.5 million. The acquisition was financed with a combination of cash from Semtech’s international cash reserves and $347 million of five-year secured term loans, net of original issuance debt discount of $3 million (see Note 10).

The acquisition is accounted for under the acquisition method of accounting in accordance with the FASB’s ASC Topic 805, Business Combinations. As such, the Gennum assets acquired and liabilities assumed are recorded at their acquisition-date fair values. Acquisition-related transaction costs are not included as a component of consideration transferred, but are accounted for as an expense in the period in which the costs are incurred. Any excess of the acquisition consideration over the fair value of assets acquired and liabilities assumed is allocated to goodwill. The goodwill resulted from expected synergies from the transaction, including complementary products that will enhance the Company’s overall product portfolio, and opportunities within new markets, and is not deductible for tax purposes. The acquired in-process research and development is recorded at fair value as an indefinite-lived intangible asset at the acquisition date until the completion or abandonment of the associated research and development efforts.

In connection with the acquisition, certain Gennum employees became entitled to payments upon a change in control and their subsequent termination. These payments, which totaled approximately $9.6 million, have been recognized as a post-acquisition compensation expense and included in the Unaudited Consolidated Condensed Statements of Income for the nine months ended October 28, 2012 under “Selling, general and administrative.”

The Company’s preliminary allocation of the total purchase price as of March 20, 2012 is summarized below:




(in thousands)	At March 20, 2012
Cash	$	19,664
Inventories	62,941
Other current assets	35,753
Property, plant and equipment	25,702
Amortizable intangible assets	129,863
In-process research and development	29,100
Goodwill	262,815
Other non-current assets	31,243
Deferred tax liabilities	(47,934		)
Other current and non-current liabilities	(42,601		)
Total acquisition consideration	$	506,546
(in thousands)	At March 20, 2012
Amortizable intangible assets:
Developed technology	$	95,100
Customer relationships	28,000
Other intangible assets	6,763
	$	129,863

The purchase price allocation for the Gennum acquisition is preliminary and will be finalized upon collection of information regarding the fair values of assets and liabilities acquired. The primary areas of the preliminary purchase price allocation that are not yet finalized include fair values of income and non-income based taxes at foreign entities and residual goodwill.

Primarily due to a change in the preliminary allocation of fair value, the goodwill allocation related to Gennum increased by $4.4 million from $258.4 million as of July 29, 2012 to $262.8 million as of October 28, 2012. There was no impact to the Company’s Unaudited Consolidated Condensed Statements of Income for the three and nine months ended October 28, 2012.

The Company recognized approximately $1.5 million and $21.9 million of acquisition related costs that were expensed in the three and nine months ended October 28, 2012, respectively. These costs are included in the Unaudited Consolidated Condensed Statements of Income for the three and nine months ended October 28, 2012 under “Selling, general and administrative.”

Net revenues attributable to Gennum since the acquisition date were $45.3 million and $92.6 million, with a corresponding net income of $1.5 million and net loss of $49.8 million in the three and nine months ended October 28, 2012, respectively.

In May 2012, the Company settled two pre-acquisition contingencies related to legal matters for a total cash payment of $4.2 million.

Pro Forma Financial Information

The results of operations of Gennum have been included in the Company’s Unaudited Consolidated Condensed Statements of Income since the acquisition date of March 20, 2012. The following table reflects the unaudited consolidated pro forma information as if the acquisition had taken place at the beginning of each period presented, after giving effect to certain adjustments including the following for the three and nine months ended October 28, 2012 and October 30, 2011:


•	increase in cost of goods sold associated with the fair value adjustment related to acquired inventory of $4.3 million and $37.4 million for the three and nine months ended October 30, 2011, respectively, and subsequent decrease of $4.3 million and $35.0 million for the three and nine months ended October 28, 2012, respectively;


•	decrease in operating expense as a result of classifying recoveries of cost associated with product design and engineering services as a reduction to product development and engineering expense of $3.6 million and $9.2 million for the three and nine months ended October 30, 2011, respectively;


•	increase in operating expense as a result of the settlement of two pre-acquisition contingencies related to legal matters of $4.2 million for the nine months ended October 28, 2012;


•	increase in amortization expense as a result of acquired intangible assets of $5.7 million and $17.1 million for the three and nine months ended October 30, 2011, respectively, and $3.1 million for the nine months ended October 28, 2012;


•	increase in benefit for taxes of $23.4 million associated with the releasing of prior accrued taxes on foreign earnings for the nine months ended October 30, 2011 and subsequent decrease for the nine months ended October 28, 2012;


•	increase in interest expense of $4.2 million and $12.6 million associated with the $350 million term loans entered into to finance the acquisition for the three and nine months ended October 30, 2011, respectively, and $2.4 million for the nine months ended October 28, 2012; and


•	the related tax effects.

Unaudited Consolidated Pro-forma Information:



	Three Months Ended		Nine Months Ended
	October 28, 2012	October 30, 2011	October 28, 2012	October 30, 2011
(in thousands)	(unaudited)	(unaudited)	(unaudited)	(unaudited)
Revenue	160,878	157,049	452,464	469,959
Net income	20,835	18,496	35,503	42,000

The unaudited pro forma information presented does not purport to be indicative of the results that would have been achieved had the acquisition been consummated at the beginning of each period presented nor of the results which may occur in the future. The pro forma adjustments are based upon available information and certain assumptions that the Company believes are reasonable. The unaudited pro forma information does not include any adjustments for any restructuring activities, operating efficiencies or cost savings.

Cycleo SAS

On March 7, 2012, the Company completed the acquisition of Cycleo, a privately held company based in France that develops intellectual property (“IP”) for wireless long-range semiconductor products used in smart metering and other industrial and consumer markets. Under the terms of the agreement, Semtech paid the stockholders of Cycleo $5 million in cash at closing.

Additionally, pursuant to the earn-out arrangement with Cycleo stockholders, the Company potentially may make payments totaling up to approximately $16 million based on the achievement of a combination of certain revenue and operating income milestones by Cycleo over the period of four years beginning on April 30, 2012. For certain of the Cycleo stockholders, payment of the earn-out liability is contingent upon employment on the payout date and is accounted for as post-acquisition compensation expense over the service period. The portion of the earn-out liability that is not dependent on continued employment is included in the purchase price allocation at March 7, 2012.

The acquisition is accounted for under the acquisition method of accounting in accordance with the FASB’s ASC Topic 805, Business Combinations. Total acquisition consideration is allocated to the acquired tangible and intangible assets and assumed liabilities of Cycleo based on their respective estimated fair values as of the acquisition date. Any excess of the acquisition consideration over the fair value of assets acquired and liabilities assumed is allocated to goodwill. The Company expects that all such goodwill will not be deductible for tax purposes.

During the three months ended July 29, 2012, the Company completed the purchase price allocation for its acquisition of Cycleo.

Net revenues and earnings attributable to Cycleo since the acquisition date were not material. Pro forma results of operations have not been presented as the acquisition was not material to the Company’s consolidated financial statements.