Goodwill and Intangible Assets

Goodwill – Goodwill balances as of January 27, 2013 and January 29, 2012 are presented below:



(in thousands)	Carrying Amount
Balance as of January 29, 2012	$	129,651
Acquisition of Gennum Corporation	261,891
Acquisition of Cycleo SAS	2,042
Balance as of January 27, 2013	$	393,584

During fiscal year 2013, goodwill increased by approximately $263.9 million due to the Company’s acquisitions of Gennum and Cycleo (see Note 3).

In fiscal year 2012, the Company reorganized its reporting structure in a manner that changed the composition of its product lines within its reporting units. The components of the Advanced Communications and Sensing reporting unit were split into two reporting units consisting of the Advanced Communications and the Wireless and Sensing reporting units. As a result of the change, in fiscal year 2012, goodwill was reassigned to the reporting units affected using a relative fair value allocation approach. Subsequent to the reorganization in the third quarter of fiscal year 2012, the goodwill associated with the Advanced Communications and Sensing reporting unit was reassigned (as of November 2011) such that 10% of goodwill is allocated to the Wireless and Sensing reporting unit and 90% of the goodwill is allocated to the Advanced Communications reporting unit. In connection with the reorganization, the Company assessed whether an indicator of impairment existed prior to the reorganizations and concluded that no such indicators were present in fiscal year 2012.

As a result of the acquisition of Gennum and Cycleo (see Note 3), the Company acquired $261.9 million of goodwill, associated with the newly formed Gennum reporting unit, and added $2.0 million to the Wireless and Sensing reporting unit.

Goodwill was tested for impairment as of November 30, 2012, the date of the Company’s annual impairment review. The Company concluded that the fair values of each of the Advanced Communications, the Wireless and Sensing, and Gennum reporting units exceeded their respective carrying values of goodwill and no impairment existed as of January 27, 2013. The Company estimated the fair values of its reporting units using the income approach, which utilizes estimates of discounted future cash flows. The discounted cash flows for each reporting unit were based on discrete financial forecasts developed by management for planning purposes. Cash flows beyond the discrete forecasts were estimated using a terminal value calculation, which incorporated historical and forecasted financial trends for each identified reporting unit and considered perpetual earnings growth rates for publicly traded peer companies. Future cash flows were discounted to present value by incorporating appropriate present value techniques. Specifically, the income approach valuations included the following assumptions:



Discount rate	10.0% - 13.0%
Perpetual growth rate	3.0%
Tax rate	14.7% - 20.0%
Risk-free rate	2.4%
Peer company beta	1.3 - 1.6

Purchased Intangibles - The following table sets forth the Company’s finite-lived intangible assets resulting from business acquisitions and technology licenses purchased, which continue to be amortized:



		January 27, 2013							January 29, 2012
(in thousands)	Estimated Useful Life	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Core technologies	2-10 years	$	173,724	$	(40,867	)	$	132,857	$	65,900	$	(21,031	)	$	44,869
Customer relationships	7-10 years	40,130		(7,736		)	32,394		12,130		(2,929		)	9,201
Technology licenses (1)	5-10 years	8,164		(1,056		)	7,108		3,000		(250		)	2,750
Other intangibles assets	1-5 years	6,600		(4,601		)	1,999		—		—			—
Total finite-lived intangible assets		$	228,618	$	(54,260	)	$	174,358	$	81,030	$	(24,210	)	$	56,820


(1)	Technology licenses relate to licensing agreements entered into by the Company. Amortization expense related to technology licenses is reported as “Product development and engineering” in the consolidated statements of income.

During fiscal year 2013, acquired finite-lived intangible assets increased by approximately $147.6 million mainly due to $129.9 million due to the acquisition of Gennum, $6.1 million from the acquisition of Cycleo and $5.0 million from additional technology licenses purchased. In addition, acquired finite-lived intangible assets increased by $6.6 million due to the transfer from indefinite-lived intangible assets to core technologies upon the completion of one in-process research and development project from the acquisition of Sierra Monolithics, Inc. (“SMI”) in 2009.

Core technologies include $95.1 million and $6.1 million of finite-lived intangible assets from the acquisition of Gennum and the acquisition of Cycleo, respectively (see Note 3). The Company concluded that the intangible assets classified as core technologies were identifiable intangible assets, separate from goodwill, since they were capable of being separated from Gennum or Cycleo and sold, transferred or licensed, regardless of whether the Company intended to do so. Each product technology was valued separately since each was determined to have a different remaining useful life. The value for the underlying core IP technology from the acquisition of Gennum and Cycleo was assessed utilizing a discounted cash flow methodology and/or a relief from royalty method.

The nature of Gennum’s core technology was categorized as follows:



	January 27, 2013
(in thousands)	Fair Value		Estimated Useful Life
Underlying intellectual property - Clock and data recovery	$	31,000	8 years
Video broadcast and surveillance	39,000		7-8 years
Optical communication	21,000		6 years
Other	4,100		6-7 years
Total	$	95,100

For the fiscal years 2013, 2012 and 2011, amortization expense related to finite-lived intangible assets was $29.2 million, $8.4 million and $9.5 million, respectively. Amortization expense related to finite-lived intangible assets is reported as “Intangible amortization and impairments” in the consolidated statements of income.

The estimated annual amount of future amortization expense for finite-lived intangible assets will be as follows:



(in thousands)
To be recognized in:	Technology license		Sierra Monolithics		Gennum		Cycleo		Total
Fiscal year 2014	$	1,507	$	8,870	$	18,778	$	1,007	$	30,162
Fiscal year 2015	1,465		8,870		18,132		1,007		29,474
Fiscal year 2016	1,436		8,870		17,586		1,007		28,899
Fiscal year 2017	1,186		8,870		17,499		1,007		28,562
Fiscal year 2018	776		8,160		17,499		1,007		27,442
Thereafter	738		8,490		20,510		81		29,819
Total expected amortization expense	$	7,108	$	52,130	$	110,004	$	5,116	$	174,358

The following table sets forth the Company’s indefinite-lived intangible assets resulting from business acquisitions:



	January 27, 2013							January 29, 2012
(in thousands)	Gross Carrying Amount		Accumulated Impairment Loss			Net Carrying Amount		Gross Carrying Amount		Accumulated Impairment Loss			Net Carrying Amount
In-process research and development	$	34,870	$	(3,170	)	$	31,700	$	12,370	$	(2,470	)	$	9,900
Total indefinite-lived intangible assets	$	34,870	$	(3,170	)	$	31,700	$	12,370	$	(2,470	)	$	9,900

During fiscal year 2013, acquired indefinite-lived intangible assets increased by approximately $22.5 million mainly due to $29.1 million related to the acquisition of Gennum, partially offset by $6.6 million due to the transfer from indefinite-lived intangible assets to core technologies upon the completion of one in-process research and development project from SMI acquisition.

Acquired in-process research and development projects (“IPR&D”) was tested for impairment as of November 30, 2012, the date of the Company’s annual impairment review. With the exception of the impairment charge of $700,000 recorded to write-off acquired IPR&D from SMI acquisition, the Company concluded that the fair value of the acquired in-process research and developments exceeded the carrying value and no impairment existed as of January 27, 2013. The fair value of the IPR&D projects was determined using using an income approach or replacement cost approach as applicable. The replacement cost approach was used for IPR&D projects that were considered long-term core investments and were not anticipated to be profitable for a period of time. IPR&D projects which were valued using an income approach, measured the returns attributable to each specific IPR&D project, discounted to present value using a risk-adjusted rate of return, including as appropriate, any tax benefits derived from amortizing the intangible assets for tax purposes. Significant factors considered in the calculation of the rate of return are the weighted average cost of capital and return on assets, as well as the risk inherent in the development process, including the likelihood of achieving technology success and market acceptance. For IPR&D projects valued using a replacement cost approach, value was estimated by developing the cost to either replace or reproduce (replicate) the IPR&D to its current state. The key unobservable inputs utilized in the model include discount rates ranging from 12.0% to 18.0%, a market participant tax rate of 12.3% to 17.0%, and a probability adjusted level of future cash flows based on current product and market data.

During the third quarter of fiscal year 2012, the Company abandoned certain development efforts related to acquired intangible assets. As a result of these actions, the Company concluded that a portion of the net carrying amount of in-process research and development was not recoverable and therefore it recorded an impairment charge against the net carrying value in the three month period ended October 30, 2011, as summarized below:



(in thousands)	Net Carrying
In-process research and development impairment	Amount		Impairment
High-speed switching technology for power management applications (1)	$	2,070	$	(2,070	)
Integrated driver for telecommunications applications (2)	400		(400		)
Total	$	2,470	$	(2,470	)


(1)	related to the February 2009 Leadis Technology Inc. acquisition.


(2)	related to the December 2009 Sierra Monolithics, Inc. acquisition.

These impairment charges are included in “Intangible amortization and impairments” on the consolidated statements of income.