Goodwill and Intangible Assets

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



	November 1, 2014		October 26, 2013
Indefinite-lived intangible assets:
Goodwill	$	1,567,723	$	1,645,437
In-process research and development ⁽¹⁾	15,110		21,590
Finite-lived intangible assets:
Total intangible assets subject to amortization	11,548		18,668
Total intangible assets	$	1,594,381	$	1,685,695

⁽¹⁾

Acquired IPRD is an intangible asset accounted for as an indefinite-lived asset until the completion or abandonment of the associated research and development effort. While accounted as an indefinite-lived asset, the IPRD intangible asset is subject to testing for impairment annually, 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 fiscal year ended November 1, 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 by the first half of fiscal year 2016.

The Company performs its IPRD impairment test annually, as of the first day of the second fiscal quarter, or when events or changes in circumstances indicate that the assets might more likely than not be impaired. During the annual IPRD impairment test for fiscal year 2014, the Company performed a qualitative assessment and determined that it was not more likely than not that the fair value of the IPRD assets were less than its carrying amount. No further testing was required. As of November 1, 2014, there were no events or changes in facts and circumstances that indicated that it is more likely than not that IPRD is impaired.

The following table summarizes goodwill activity by reportable segment during the fiscal years ended November 1, 2014, and October 26, 2013 (in thousands):



	SAN Products			IP Networking Products			Global Services		Total
Balance at October 27, 2012
Goodwill	$	176,956		$	1,337,549		$	155,416	$	1,669,921
Accumulated impairment losses	—			(45,832		)	—		(45,832		)
	176,956			1,291,717			155,416		1,624,089
Acquisition	—			25,681			—		25,681
Tax and other adjustments ⁽¹⁾	(78		)	(4,255		)	—		(4,333		)
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 ⁽²⁾	—			(83,382		)	—		(83,382		)
Divestitures ⁽³⁾	(474		)	(3,657		)	—		(4,131		)
Acquisition	—			11,475			—		11,475
Tax and other adjustments ⁽¹⁾	(58		)	(1,618		)	—		(1,676		)
Balance at November 1, 2014
Goodwill	176,346			1,365,175			155,416		1,696,937
Accumulated impairment losses	—			(129,214		)	—		(129,214		)
	$	176,346		$	1,235,961		$	155,416	$	1,567,723


⁽¹⁾	The goodwill adjustments were primarily a result of tax benefits from the exercise of stock awards of acquired companies.

⁽²⁾

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


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

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 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 goodwill in the Storage Area Networking (“SAN”) Products, Ethernet Switching & Internet Protocol (“IP”), and Global Services reporting units was not impaired 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.

As of November 1, 2014, there were no other facts and circumstances that indicated that the fair value of the reporting units may be less than their current carrying amount since the annual goodwill impairment analysis performed during the second quarter of fiscal year 2014.

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):



	Gross Carrying Value		Accumulated Amortization		Net Carrying Value		Weighted- Average Remaining Useful Life (in years)
November 1, 2014
Trade name	$	590	$	227	$	363	3.00
Core/developed technology	12,080		1,964		10,116		4.30
Customer relationships	1,080		427		653		3.01
Non-compete agreements	810		394		416		2.01
Total finite-lived intangible assets⁽¹⁾	$	14,560	$	3,012	$	11,548	4.10



	Gross Carrying Value		Accumulated Amortization		Net Carrying Value		Weighted- Average Remaining Useful Life (in years)
October 26, 2013
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 finite-lived intangible assets	$	480,700	$	462,032	$	18,668	0.58


⁽¹⁾	During the fiscal year ended November 1, 2014, $477.3 million of finite-lived 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 on the Consolidated Statements of Income (in thousands):



	Fiscal Year Ended
	November 1, 2014		October 26, 2013		October 27, 2012
Cost of revenues	$	8,010	$	39,731	$	46,229
Operating expenses	10,280		54,256		59,204
Total	$	18,290	$	93,987	$	105,433

The following table presents the estimated future amortization of finite-lived intangible assets as of November 1, 2014 (in thousands):



Fiscal Year	Estimated Future Amortization
2015	$	3,099
2016	2,787
2017	2,472
2018	2,252
2019	938
Total	$	11,548