Acquisitions

Current Fiscal Year Acquisitions

Acquisition of Ruckus Wireless, Inc. (“Ruckus”)

On May 27, 2016 (“Acquisition Date”), the Company completed its acquisition of Ruckus, a public company incorporated in the state of Delaware, to strengthen its Internet Protocol (“IP”) Networking product portfolio by adding Ruckus’ wireless products and services to the Company’s networking solutions.

Pursuant to the terms of the Agreement and Plan of Merger entered into between the Company, Ruckus, and a Company subsidiary, Ruckus stockholders were entitled to receive $6.45 in cash and 0.75 shares of the Company’s common stock in exchange for each outstanding share of Ruckus common stock. The results of operations for the acquired business are included in the Company’s Condensed Consolidated Statements of Income from the Acquisition Date. Immediately prior to the completion of the acquisition, there were 92.2 million outstanding shares of Ruckus common stock, which included 3.2 million shares of Ruckus common stock owned by a dissenting former Ruckus stockholder who has submitted and not withdrawn a demand for appraisal of the fair value of those shares under Delaware law. As a result, no cash payment had been made and no shares had been issued to the dissenting stockholder as of July 30, 2016.

Based on the $8.60 per share closing price of the Company’s common stock on May 27, 2016, the total preliminary purchase consideration paid or payable was $1.3 billion, consisting of $574.0 million in cash for outstanding Ruckus shares less dissenting shares, $78.3 million in cash for outstanding vested Ruckus stock options allocated to preliminary purchase consideration, $574.0 million of equity interests in the Company, $7.4 million of the fair value of replacement awards allocated to the preliminary purchase consideration, and $41.7 million relating to the appraisal demand submitted by the dissenting former Ruckus stockholder, which was accrued as of July 30, 2016, and reported within “Other accrued liabilities” on the Company’s Condensed Consolidated Balance Sheets.

The Company recorded direct acquisition costs of $10.2 million and $15.2 million for the three and nine months ended July 30, 2016, respectively, and integration costs of $4.6 million and $5.4 million for the three and nine months ended July 30, 2016, respectively. These costs were expensed as incurred and are presented in the Company’s Condensed Consolidated Statements of Income for the three and nine months ended July 30, 2016, as “Acquisition and integration costs.”

In connection with this acquisition, the Company allocated the total preliminary purchase consideration to the net assets acquired and liabilities assumed, including identifiable intangible assets, based on their respective fair values at the Acquisition Date. The following table summarizes the preliminary allocation of the total preliminary purchase consideration to the fair value of the assets acquired and liabilities assumed (in thousands):



Assets acquired:
Cash and cash equivalents	$	95,515
Short-term investments	149,615
Accounts receivable, net of allowances for doubtful accounts of $2,100	41,339
Inventories	66,000
Prepaid expenses and other current assets	5,953
Property and equipment, net	21,777
Identifiable intangible assets	380,000
Other assets	1,697
Total assets acquired	761,896
Liabilities assumed:
Accounts payable	16,375
Accrued employee compensation	17,514
Deferred revenue	13,923
Other accrued liabilities	33,810
Non-current deferred revenue	9,364
Non-current deferred tax liabilities	57,677
Other non-current liabilities	40,561
Total liabilities assumed	189,224
Net assets acquired, excluding goodwill (a)	572,672
Total preliminary purchase consideration (b)	1,275,448
Estimated goodwill (b) - (a)	$	702,776

Goodwill represents the excess of the total preliminary purchase consideration over the fair value of the underlying assets acquired and liabilities assumed. Goodwill is attributable to planned growth in new markets and synergies expected to be achieved from the combined operations of the Company and Ruckus. Goodwill of $303.8 million was assigned to the IP Networking Products reporting unit, and goodwill of $398.9 million was assigned to the Global Services reporting unit. Goodwill recognized in the acquisition is not deductible for tax purposes.

A preliminary assessment of the fair value of identified intangible assets and their respective useful lives are as follows (in thousands, except for estimated useful life):



	Approximate Fair Value		Estimated Useful Life (In years)
Trade name/trademark	$	44,000	15.00
Customer relationships	118,000		1 - 7
Developed technology	195,000		6 - 7
In-process research and development (“IPR&D”) ⁽¹⁾	23,000		N/A ⁽¹⁾
Total intangible assets	$	380,000


⁽¹⁾	IPR&D will be accounted for as an indefinite-lived intangible asset until the underlying projects are completed or abandoned.

The total preliminary purchase consideration and allocation reflects the Company’s preliminary estimates and is subject to revision as additional information in relation to the preliminary purchase consideration and the fair value of the underlying assets acquired and liabilities assumed becomes available. Additional information that existed as of the Acquisition Date may become known to the Company during the remainder of the measurement period. This period is not to exceed 12 months from the acquisition date.

Pursuant to the terms of the Agreement and Plan of Merger, all unvested Ruckus awards, then comprised of restricted stock units (“RSUs”), performance-based RSUs, and stock options, were canceled and replaced with Company RSUs and stock options (“replacement awards”). Per ASC 805, Business Combinations, the replacement of stock options or other share-based payment awards in conjunction with a business combination represents a modification of share-based payment awards that must be accounted for in accordance with ASC 718, Compensation—Stock Compensation. As a result of the Company’s obligation to issue replacement awards, a portion of the fair-value-based measure of replacement awards is included in measuring the purchase consideration transferred in the business combination. To determine the portion of the replacement awards that is part of the purchase consideration, the Company measured the fair value of both the replacement awards and the historical Ruckus awards as of the Acquisition Date, in accordance with ASC 718. The fair value of the replacement awards, whether vested or unvested, was included in the preliminary purchase consideration to the extent that pre-acquisition services had been rendered. The preliminary purchase consideration also included the fair value of accelerated vesting for awards that vested at the Acquisition Date due to change-in-control provisions.

In addition, the Company accelerated 20% to 50% of the vesting of unvested replacement awards granted to eight Ruckus executives and modified the vesting schedules of unvested replacement awards granted to those eight plus an additional four Ruckus executives. As a result, the Company recorded $4.7 million as an expense in the three and nine months ended July 30, 2016.

As of July 30, 2016, the fair value of the remaining unvested replacement awards of $28.6 million will be recorded as stock-based compensation expense over the applicable future vesting periods.

For the three and nine months ended July 30, 2016, the Company’s Condensed Consolidated Statements of Income included revenue and loss from operations of $77.8 million and $37.6 million, respectively, attributable to the operations of the Ruckus business since the Acquisition Date.

Unaudited Pro Forma Financial Information

The following unaudited pro forma financial information presents the consolidated results of the Company and Ruckus for the three and nine months ended July 30, 2016, and August 1, 2015, giving effect to the acquisition and the related debt financing as if they had occurred on November 2, 2014, and combines the historical financial results of the Company and Ruckus. The unaudited pro forma financial information includes adjustments to give effect to pro forma events that are directly attributable to the acquisition and the related debt financing. The pro forma financial information includes adjustments to amortization and depreciation for intangible assets and property, plant, and equipment acquired, adjustments to stock-based compensation expense, the effect of acquisition on inventory acquired and deferred revenue, interest expense for the additional indebtedness, and acquisition and integration costs. The unaudited pro forma financial information is presented for illustrative purposes only and is not necessarily indicative of the results of operations of future periods. The unaudited pro forma financial information does not give effect to the potential impact of current financial conditions, regulatory matters, or any anticipated synergies, operating efficiencies, or cost savings that may be associated with the acquisition. Consequently, actual results will differ from the unaudited pro forma financial information presented below (in thousands, except for per share amounts):



	Three Months Ended					Nine Months Ended
	July 30, 2016			August 1, 2015		July 30, 2016		August 1, 2015
Unaudited pro forma consolidated results:
Pro forma revenues	$	600,530		$	655,663	$	1,900,664	$	1,953,490
Pro forma net income (loss)	$	(21,936	)	$	85,843	$	100,982	$	168,212
Pro forma net income (loss) per share—basic	$	(0.05	)	$	0.21	$	0.25	$	0.40
Pro forma net income (loss) per share—diluted	$	(0.05	)	$	0.20	$	0.24	$	0.38

Unaudited pro forma net income for the nine months ended August 1, 2015, includes nonrecurring pro forma adjustments directly attributable to the acquisition to the effect of inventory acquired and acquisition and integration costs of $39.8 million and $20.6 million, respectively. No such adjustments are included in any other periods.

Other Fiscal Year 2016 Acquisition

In March 2016, the Company completed its acquisition of a privately held developer of software for data center automation to strengthen its IP Networking product portfolio. The Company does not consider this acquisition to be material to its results of operations or financial position. Therefore, the Company is not presenting pro forma financial information of combined operations.

Prior Fiscal Year Acquisitions

In March 2015, the Company completed its acquisition of two businesses to strengthen its software networking portfolio. The total aggregate purchase price of the acquisitions was $96.1 million. The total net aggregate purchase price of the acquisitions, net of $0.1 million of cash acquired as part of the acquisitions, was $95.5 million in cash consideration and $0.5 million in non-cash consideration.

The Company recorded direct acquisition costs of $1.5 million for the nine months ended August 1, 2015, and integration costs of $0.8 million and $1.7 million for the three and nine months ended August 1, 2015, respectively. These costs were expensed as incurred and are presented in the Company’s Condensed Consolidated Statements of Income for the three and nine months ended August 1, 2015, as “Acquisition and integration costs.”

The results of operations for both acquisitions are included in the Company’s Condensed Consolidated Statements of Income from the respective dates of acquisition. The Company does not consider these acquisitions to be significant, individually or in the aggregate, to its results of operations or financial position. Therefore, the Company is not presenting pro forma financial information of combined operations.

In connection with these acquisitions, the Company allocated the total purchase consideration to the net assets acquired and liabilities assumed, including identifiable intangible assets, based on their respective fair values at the acquisition dates. The Company also granted RSU awards and cash awards to transferring or continuing employees of the acquired businesses. These awards require the employees to continue providing services to the Company for the duration of the vesting or payout periods.

The RSUs are accounted for as stock-based compensation expense and reported, as applicable, within “Cost of revenues,” “Research and development,” “Sales and marketing,” and “General and administrative” on the Company’s Condensed Consolidated Statements of Income. For the three and nine months ended July 30, 2016, the Company recognized $0.5 million and $1.4 million, respectively, of stock-based compensation expense related to these RSU awards. For the three and nine months ended August 1, 2015, the Company recognized $0.9 million and $1.1 million, respectively, of stock-based compensation expense related to these RSU awards.

The cash awards are accounted for as employee compensation expense and reported within “Research and development” on the Company’s Condensed Consolidated Statements of Income. For the three and nine months ended July 30, 2016, the Company recognized $0.9 million and $3.4 million, respectively, of compensation expense related to these cash awards. For the three and nine months ended August 1, 2015, the Company recognized $1.6 million and $2.0 million, respectively, of compensation expense related to these cash awards.