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 business 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 $347.0 million of five-year secured term loans, net of original issuance debt discount of $3.0 million (see Note 10).

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 allocation of the total purchase price as of March 20, 2012 is summarized below:



(in thousands)	At March 20, 2012
Cash	$	19,664
Accounts receivable, less allowances	14,032
Inventories	62,941
Prepaid expenses	3,832
Income taxes receivable	1,467
Deferred tax assets - current	8,590
Other current assets	7,804
Property, plant and equipment	25,702
Amortizable intangible assets	129,863
In-process research and development	29,100
Goodwill	261,891
Deferred tax assets - non-current	31,235
Other non-current assets	8
Deferred tax liabilities	(47,077		)
Accounts payable	(18,232		)
Accrued liabilities	(24,274		)
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
Total amortizable intangible assets	$	129,863

The Company completed the purchase price allocation for its acquisition of Gennum in fiscal year 2013.

The Company recorded the following transaction and integration related costs in the three and nine months ended October 27, 2013 and October 28, 2012:



	Three Months Ended				Nine Months Ended
(in thousands)	October 27, 2013		October 28, 2012		October 27, 2013		October 28, 2012
Transaction and integration related costs	$	356	$	1,495	$	1,343	$	21,884

These costs are included in the unaudited consolidated condensed statements of income for the respective periods under “Selling, general and administrative.”

For the three and nine months ended October 27, 2013 and October 28, 2012 (for the period after acquisition), the Company recognized the following net revenues and corresponding net income (loss) attributable to Gennum:



	Three Months Ended					Nine Months Ended
(in thousands)	October 27, 2013			October 28, 2012		October 27, 2013		October 28, 2012
Net revenue - Gennum	$	36,018		$	45,278	$	123,675	$	92,618
Net (loss) income - Gennum	(1,069		)	1,510		3,251		(49,764		)

Pro Forma Financial Information

The results of operations of Gennum have been included in the Company’s consolidated 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 been completed on January 29, 2011, after giving effect to certain adjustments including the following for the three and nine months ended October 28, 2012:


•	decrease in cost of goods sold associated with fair value adjustment related to acquired inventory of $4.3 million and $32.6 million for the three and nine months ended October 28, 2012, 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;


•	decrease in amortization expense as a result of acquired intangible assets of $0.8 million for the three months ended October 28, 2012 and decrease of $2.1 million for the nine months ended October 28, 2012;


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


•	decrease in interest expense of $0.2 million associated with the $350 million term loans entered into to finance the acquisition for the three months ended October 28, 2012 and increase of $1.9 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 28, 2012
(in thousands)	(unaudited)		(unaudited)
Revenue	$	160,878	$	452,464
Net income	$	21,765	$	36,789

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 on January 29, 2011 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 (“Cycleo”)

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 $5.0 million in cash at closing.

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.

The Company completed the purchase price allocation for its acquisition of Cycleo in fiscal year 2013.

Additionally, pursuant to the earn-out arrangement with Cycleo stockholders, the Company potentially may make payments totaling up to approximately $16.0 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.

As of October 27, 2013, the Company does not expect to make any earn-out payments related to year 1 and year 2 milestones resulting in immaterial changes in estimates that increased pretax income during fiscal year 2014. For the earn-outs related to year 3 and year 4, the Company continues to expect achievement of certain revenue and operating income milestones and has not changed its estimated earn-out payments for year 3 and year 4.

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.