Goodwill and Intangible Assets

The following table presents a summary of the net carrying value of the Company’s intangible assets (in thousands):



	May 3, 2014		October 26, 2013
Indefinite-lived intangible assets
Goodwill	$	1,556,733	$	1,645,437
In-process research and development ⁽¹⁾	12,260		21,590
Finite-lived intangible assets
Total intangible assets subject to amortization	11,126		18,668
Total intangible assets	$	1,580,119	$	1,685,695

⁽¹⁾

Acquired in-process research and development (“IPRD”) is an intangible asset accounted for as an indefinite-lived asset until the completion or abandonment of the associated research and development effort. As an indefinite-lived asset, the IPRD intangible asset is subject to testing for impairment annually, which the Company conducts as of the first day of the second fiscal quarter, and whenever events or changes in facts and circumstances indicate that it is more likely than not that IPRD is impaired. If the research and development effort associated with the IPRD is successfully completed, then the IPRD intangible asset will be amortized over its estimated useful life to be determined at the date the effort is completed. During the three months ended May 3, 2014, development work was completed on $9.3 million of the IPRD intangible asset and this completed IPRD intangible asset is being amortized as Core/developed technology. The development effort on the remaining IPRD intangible asset is expected to be completed in the first half of fiscal year 2015.

The Company performed its annual IPRD impairment test using measurement data as of the first day of the second fiscal quarter of 2014. During the test, the Company elected the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of its IPRD asset is less than its carrying amount. After assessing the totality of events and circumstances, the Company determined that it was not more likely than not that the fair value of its IPRD assets is less than its carrying amount and no further testing is required.

The following table summarizes goodwill activity by reportable segment for the six months ended May 3, 2014 (in thousands):



	SAN Products			IP Networking Products			Global Services		Total
Balance at October 26, 2013
Goodwill	$	176,878		$	1,358,975		$	155,416	$	1,691,269
Accumulated impairment losses	—			(45,832		)	—		(45,832		)
	176,878			1,313,143			155,416		1,645,437
Impairment ⁽¹⁾	—			(83,382		)	—		(83,382		)
Divestitures⁽²⁾	(474		)	(3,657		)	—		(4,131		)
Tax and other adjustments during the six months ended May 3, 2014 ⁽³⁾	(40		)	(1,151		)	—		(1,191		)
Balance at May 3, 2014
Goodwill	176,364			1,354,167			155,416		1,685,947
Accumulated impairment losses	—			(129,214		)	—		(129,214		)
	$	176,364		$	1,224,953		$	155,416	$	1,556,733

⁽¹⁾

In the second quarter of fiscal year 2014, the Company has made a strategic shift in the allocation of its engineering resources and has reduced its investment in the hardware-based ADX products and increased investment in the software-based ADX products for the Layer 4-7 market. As a result of this change in strategy, the Company expects hardware-based ADX and related support revenue to be negatively impacted. Based on these changes in estimates, the Company recognized an impairment charge because the book value of its Application Delivery Products (“ADP”) reporting unit net assets, which includes the ADX products, exceeded the estimated fair value of these assets. The goodwill amount related to the Company’s other reporting units was not impacted.


⁽²⁾	The goodwill disposed relates to the sale of the Company’s network adapter business, see Note 3, “Acquisitions and Divestitures,” of the Notes to Condensed Consolidated Financial Statements.


⁽³⁾	The goodwill adjustments during the six months ended May 3, 2014, were primarily a result of tax benefits from the exercise of stock awards of acquired companies.

The Company conducts its goodwill impairment test annually, as of the first day of the second fiscal quarter, and whenever events occur or facts and circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. For the annual goodwill impairment test, the Company uses the income approach, the market approach or a combination thereof to determine each reporting unit’s fair value. The income approach provides an estimate of fair value based on discounted expected future cash flows (“DCF”). The market approach provides an estimate of fair value applying various observable market-based multiples to the reporting unit’s operating results and then applying an appropriate control premium. For the fiscal year 2014 annual goodwill impairment test, the Company used a combination of approaches to estimate each reporting unit’s fair value. The Company believed that at the time of the impairment testing performed in the second fiscal quarter of 2014, the income approach and the market approach were equally representative of a reporting unit’s fair value.

Determining the fair value of a reporting unit or an intangible asset requires judgment and involves the use of significant estimates and assumptions. The Company based its fair value estimates on assumptions it believes to be reasonable, but inherently uncertain. Estimates and assumptions with respect to the determination of the fair value of its reporting units using the income approach include, among other inputs:


•	The Company’s operating forecasts;


•	Revenue growth rates; and


•	Risk-commensurate discount rates and costs of capital.

The Company’s estimates of revenues and costs are based on historical data, various internal estimates and a variety of external sources, and are developed as part of our regular long-range planning process. The control premium used in market or combined approaches is determined by considering control premiums offered as part of the acquisitions that have occurred in market segments that are comparable with the Company’s reporting units.

Based on the results of the annual goodwill impairment analysis performed during the second fiscal quarter of 2014, the Company determined that no impairment needed to be recorded for Storage Area Networking (“SAN”) Products, Ethernet Switching & Internet Protocol (“IP”) Routing, and Global Services reporting units as these reporting units passed the first step of goodwill impairment testing.

However, the Company determined that the fair value of the ADP reporting unit was below the reporting unit’s carrying value. Accordingly, the Company performed the second step of the goodwill impairment test to measure the amount of the impairment. During the second step, the Company assigned the ADP reporting unit’s fair value to the reporting unit’s assets and liabilities, using the relevant acquisition accounting guidance, to determine the implied fair value of the reporting unit’s goodwill. The implied fair value of the reporting unit’s goodwill was then compared with the carrying value of the ADP reporting unit’s goodwill to record an impairment loss of $83.4 million, which is equal to the difference in values.

Intangible assets other than goodwill are amortized on a straight-line basis over the following estimated remaining useful lives, unless the Company has determined these lives to be indefinite. The following tables present details of the Company’s finite-lived intangible assets (in thousands, except for weighted-average remaining useful life):



May 3, 2014	Gross Carrying Value		Accumulated Amortization		Net Carrying Value		Weighted- Average Remaining Useful Life (in years)
Trade name	$	460	$	167	$	293	2.51
Core/developed technology	10,370		812		9,558		4.65
Customer relationships	1,080		321		759		3.51
Non-compete agreements	810		294		516		2.51
Total intangible assets ⁽¹⁾	$	12,720	$	1,594	$	11,126	4.41

October 26, 2013	Gross Carrying Value		Accumulated Amortization		Net Carrying Value		Weighted- Average Remaining Useful Life (in years)
Trade name	$	460	$	110	$	350	3.01
Core/developed technology	192,340		185,254		7,086		0.35
Customer relationships	287,090		276,473		10,617		0.51
Non-compete agreements	810		195		615		3.01
Total intangible assets	$	480,700	$	462,032	$	18,668	0.58


⁽¹⁾	During the six months ended May 3, 2014, $477.3 million of intangible assets became fully amortized and, therefore, were removed from the balance sheet.

The following table presents the amortization of finite-lived intangible assets included in the Condensed Consolidated Statements of Operations (in thousands):



	Three Months Ended				Six Months Ended
	May 3, 2014		April 27, 2013		May 3, 2014		April 27, 2013
Cost of revenues	$	396	$	9,651	$	6,858	$	20,431
Operating expenses	131		13,151		10,014		28,007
Total	$	527	$	22,802	$	16,872	$	48,438

The following table presents the estimated future amortization of finite-lived intangible assets as of May 3, 2014 (in thousands):



Fiscal Year	Estimated Future Amortization
2014 (remaining six months)	$	1,366
2015	2,731
2016	2,419
2017	2,104
2018	1,884
Thereafter	622
Total	$	11,126