ACQUISITION, GOODWILL, AND ACQUIRED INTANGIBLE ASSETS

Polycom Acquisition

On July 2, 2018, the Company completed the acquisition of Polycom based upon the terms and conditions contained in the Purchase Agreement dated March 28, 2018 ("the Acquisition"). The Company believes the Acquisition will better position Plantronics with our channel partners, customers, and strategic alliance partners by allowing us to pursue additional opportunities across the Unified Communications & Collaboration "UC&C" market in both hardware end points and services.

At the closing of the Acquisition, Plantronics acquired Polycom for approximately $2.2 billion with the total consideration consisting of (1) 6.4 million shares of the Company's common stock (the "Stock Consideration") valued at approximately $0.5 billion and (2) approximately $1.7 billion in cash net of cash acquired (the "Cash Consideration"), resulting in Triangle, which was Polycom’s sole shareholder, owning approximately 16.0% of Plantronics following the acquisition. The consideration paid at closing is subject to a working capital, tax and other adjustments. This transaction was accounted for as a business combination and we have included the financial results of Polycom in our condensed consolidated financial statements since the date of acquisition.

The preliminary allocation of the purchase price to the estimated fair value of the assets acquired and liabilities assumed at the acquisition date is as follows:



(in thousands)	July 2, 2018
ASSETS
Cash and cash equivalents	$	80,139
Trade receivables, net	168,595
Inventories	107,820
Prepaid expenses and other current assets	32,551
Property and equipment, net	80,310
Intangible assets	985,400
Other assets	28,572
Total assets acquired	$	1,483,387

LIABILITIES
Accounts payable	$	81,854
Accrued payroll and related liabilities	45,317
Accrued expenses	120,167
Income tax payable	30,153
Deferred revenue	114,264
Deferred income taxes	150,112
Other liabilities	35,912
Total liabilities assumed	$	577,779

Total identifiable net assets acquired	905,608
Goodwill	1,319,036
Total Purchase Price	$	2,224,644

The Company’s purchase price allocation is preliminary and subject to revision as additional information related to the fair value of assets and liabilities are finalized. The estimate of fair value and purchase price allocation were based on information available at the time of closing the Acquisition and the Company continues to evaluate the underlying inputs and assumptions that are being used in fair value estimates. The fair values for acquired inventory, property, plant and equipment, intangible assets, and deferred revenue were determined with the input from third–party valuation specialists. The fair values of certain other assets and certain other liabilities were determined internally using historical carrying values and estimates made by management In addition, the Company is in process of finalizing the net working capital adjustment. Accordingly, these preliminary estimates are subject to retrospective adjustments during the measurement period, not to exceed one year, based upon new information obtained about facts and circumstances that existed as of the date of closing the Acquisition. The acquisition has preliminarily resulted in $1,319 million of goodwill, which represents the excess of the purchase price over the fair value of identifiable assets acquired and liabilities assumed. Additionally, the purchase price is subject to change due to working capital adjustments, tax reimbursements, and other potential reimbursements from escrow.

The Company incurred approximately $26.3 million in acquisition and integration related expenses which are recorded in selling, general, and administrative expenses in our condensed consolidated statement of operations for the quarter ended September 30, 2018.

The details of the acquired intangible assets are as follows:



(in thousands, except for remaining life)	Value as of July 2, 2018		Amortization for the Three Months Ended September 30, 2018		Value as of September 30, 2018		Weighted Remaining Life of Intangibles
Existing technology	$	538,600	$	27,568	$	511,032	4.71
In-process technology	58,000		—		58,000		N/A
Customer relationships	245,100		12,066		233,034		5.22
Backlog	28,100		28,100		—		0
Trade name/Trademarks	115,600		3,211		112,389		8.75
Total acquired intangible assets	$	985,400	$	70,945	$	914,455

Existing technology relates to products for voice, video and platform products. We valued the developed technology using the discounted cash flow method under the income approach. This method reflects the present value of the projected cash flows that are expected to be generated by the developed technology less charges representing the contribution of other assets to those cash flows. The economic useful life was determined based on the technology cycle related to each developed technology, as well as the cash flows over the forecast period.

Customer relationships represent the fair value of future projected revenue that will be derived from sales of products to existing customers of Polycom. Customer relationships were valued using the discounted cash flow method as described above and the distributor method under the income approach. Under the distributor method, the economic profits generated by a distributor are deemed to be attributable to the customer relationships. The economic useful life was determined based on historical customer turnover rates.

Order backlog was valued separately from customer relationships using the discounted cash flow method under the income approach. This method reflects the present value of the projected cash flows that are expected to be generated by order backlog less costs to fulfill. The economic useful life was determined based on the period over which the order backlog is expected to be fulfilled.

Trade name/trademarks relate to the “Polycom” trade name and related trademarks. The fair value was determined by applying the profit allocation method under the income approach. This valuation method estimates the value of an asset by the profit saved because the company owns the asset. The economic useful life was determined based on the expected life of the trade name and trademarks and the cash flows anticipated over the forecasted periods.

The fair value of in-process technology was determined using the discounted cash flow method under the income approach. This method reflects the present value of the projected cash flows that are expected to be generated by thin-process technology, less charges representing the contribution of other assets to those cash flows.

We believe the amounts of purchased intangible assets recorded above represent the fair values of, and approximate the amounts a market participant would pay for, these intangible assets as of the Acquisition Date.

For the three and six months ended September 30, 2018, we recognized $70.9 million in amortization of acquired intangibles related to this acquisition. The remaining weighted-average useful life of intangible assets acquired is 5.38 years.

Goodwill is primarily attributable to the assembled workforce, market expansion, and anticipated synergies and economies of scale expected from the integration of the Polycom business. The synergies include certain cost savings, operating efficiencies, and other strategic benefits projected to be achieved. Goodwill is not expected to be deductible for tax purposes.

The following summarizes our goodwill activity for the six months ended September 30, 2018:



(in thousands)	Amount
Goodwill- March 31, 2018	$	15,498
Polycom Acquisition	1,319,036
Goodwill- September 30, 2018	$	1,334,534

The actual total net revenues and net loss of Polycom included in our condensed consolidated statement of operations for the period July 2, 2018 to September 30, 2018 are as follows:



(in thousands)	July 2, 2018 to September 30, 2018
Total net revenues	$	255,038
Net loss	$	(96,469	)

The following unaudited pro forma financial information presents combined results of operations for each of the periods presented, as if Polycom had been acquired as of the beginning of fiscal year 2018. The unaudited pro forma information includes adjustments to amortization for intangible assets acquired, the purchase accounting effect on deferred revenue assumed and inventory acquired, restructuring charges related to the acquisition, and transaction and integration costs. For the two fiscal quarters ended September 30, 2017 and 2018, non-recurring pro forma adjustments directly attributable to the Polycom acquisition included (i) the purchase accounting effect of deferred revenue assumed of $36.6 million, (ii) the purchase accounting effect of inventory acquired of $30.4 million, and (iii) acquisition costs of $12.3 million.

The unaudited pro forma information presented below is for informational purposes only and is not necessarily indicative of our consolidated results of operations of the combined business had the acquisition actually occurred at the beginning of fiscal year 2018 or of the results of our future operations of the combined business.



	Pro Forma (unaudited)
	Three Months Ended September 30,					Six Months Ended September 30,
(in thousands)	2017		2018			2017			2018
Total net revenues	$	483,233	$	511,639		$	920,404		$	1,002,524
Operating income (loss)	3,270		21,298			(117,252		)	2,468
Net income (loss)	$	250	$	(1,026	)	$	(116,516	)	$	(30,209	)