Business Combinations

Acquisition of Zentrum Mikroelektronik Dresden AG

On December 7, 2015, the Company completed its purchase all of the outstanding no-par-value shares of Zentrum Mikroelektronik Dresden AG (ZMDI), a privately-held company mainly operating in Germany, in an all-cash transaction for approximately $307.0 million. ZMDI is a global supplier of sensing products for mobile, automotive and industrial solutions. The acquisition provides the Company a significant new growth opportunity in the automotive and industrial business.

Total consideration consisted of the following:



(in thousands)
Cash paid to ZMDI shareholders	$	307,030
Less: cash acquired	(27,892		)
Total purchase price, net of cash acquired	$	279,138

The total cash consideration paid includes a Euro-equivalent of $20.0 million which is maintained in an escrow account and will be released to the selling shareholders upon meeting of certain conditions in accordance with the escrow agreement.

The Company allocated the purchase price to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values. The excess purchase price over those fair values was recorded as goodwill. Because the Acquisition was structured as a stock acquisition for income tax purposes, none of the asset step-up or asset recognition required by purchase accounting, including the goodwill described below, is deductible for tax purposes.

The fair value of cash, accounts receivable, other current assets, accounts payable, and other accrued liabilities were generally determined using historical carrying values given the short-term nature of these assets and liabilities. The fair values for acquired inventory, property, plant and equipment and intangible assets were determined with the assistance of third-party valuation using discounted cash flow analysis, and estimate made by management. The fair values of certain other liabilities were determined internally using historical carrying values and estimates made by management. As additional information becomes available, the Company may revise the preliminary purchase price allocation during the remainder of the measurement period (which will not exceed 12 months from the acquisition date). Any such revisions or changes may be material.

The financial results of the ZMDI business have been included in the Company’s Consolidated Statements of Operations from December 7, 2015, the closing date of the acquisition. The Company's results of continuing operations for fiscal 2016 include $24.4 million of net revenue attributable to ZMDI. The Company incurred approximately $2.5 million of acquisition related costs for fiscal 2016 which were included in Selling, General and Administrative Expenses in the Consolidated Statements of Operations. Goodwill is primarily attributable to the assembled workforce of ZMDI, anticipated synergies and economies of scale expected from the operations of the combined company.

The Company's preliminary allocation of the purchase price is as follows:



(in thousands)	Estimated Fair Value
Cash	$	27,892
Accounts receivable	10,618
Inventories	19,892
Other current assets	1,551
Property, plant and equipment	9,287
Other non-current assets	2,003
Intangible assets	126,200
Goodwill	170,089
Accounts payable	(5,633		)
Accrued and other current liabilities	(19,141		)
Loans payable	(9,437		)
Deferred tax liability	(23,467		)
Other long term liabilities	(2,824		)
Total purchase price	$	307,030

A summary of the preliminary allocation of intangible assets is as follows:



(in thousands)	Estimated Fair Value		Estimated Useful Life (in years)
Developed technology	$	75,600	7
Customer relationships	44,000		7
Order backlog	5,800		1
Trademark	800		1
Total	$	126,200

Identifiable Tangible Assets and Liabilities:

Assets and liabilities were reviewed and adjusted, if required, to their estimated fair value.

Inventory:

The value allocated to inventories reflects the estimated fair value of the acquired inventory based on the expected sales price of the inventory, less reasonable selling margin.

Bank Loans:

The Company assumed liabilities of ZMDI which include outstanding bank loans of approximately $9.4 million as of December 7, 2015. The Company subsequently paid the full assumed amount which reduced the outstanding balance to zero as of April 3, 2016.

Intangible Assets:

The allocation of the purchase price to tangible and identified intangible assets acquired was based on the Company's best estimate of the fair value of such assets as of the acquisition date. The fair value of acquired tangible and identified intangible assets was determined based on inputs that are unobservable and significant to the overall fair value measurement.

Developed technology consists of ZMDI's products that have reached technological feasibility. The Company valued the developed technology utilizing a multi-period excess earnings (MPEE) method, which uses the discounted future earnings specifically attributed to this intangible asset that is in excess of returns for other assets that contributed to those earnings. The economic useful life was determined based on the technology cycle related to the products and its expected contribution to forecasted revenue. The Company utilized a discount rate of 13.5% in estimating the fair value of the developed technology.

Customer relationships represent the fair value of future projected revenue that is expected to be derived from sales of products to existing customers of the acquired company. Customer contracts and related relationships value has been estimated utilizing a with-and-without method, which uses projected cash flows with and without the intangible asset in place. Cash flow differentials are then discounted to present value to arrive at an estimate of fair value for the asset. The economic useful life was determined based on the life of the developed technology, assuming that the existing customers will remain with the Company until the developed technology becomes obsolete. The Company utilized a discount rate of 13.5% in estimating the fair value of the customer relationships.

Order backlog represents business under existing contractual obligations as of the acquisition date. The fair value of backlog was determined using the MPEE method under the income approach based on expected operating cash flows from future contractual revenue. The economic useful life was determined based on the expected life of the backlog and the cash flows over the forecast period. The Company utilized a discount rate of 5.4% in estimating the fair value of the order backlog.

Trademark relates to ZMDI’s product brand and its fair value was determined by applying the relief-from-royalty method under the income approach. This valuation method is based on the application of a royalty rate to forecasted revenue under the respective trade name and involves discounting net cash flows resulting from the forecast of avoided royalties over a transition period, giving consideration to the cost of capital estimate as well as the risk and timing of the cash flows associated with this asset relative to the other asset classes. The economic useful life was determined based on the expected life of the trade name and the cash flows anticipated over the forecasted periods. The Company utilized a discount rate of 13.5% in estimating the fair value of the trade name and trademark.

Pro Forma Financial Information (unaudited):

The following unaudited pro forma financial information present combined results of operations for each of the periods presented, as if ZMDI had been acquired as of the beginning of fiscal year 2015. The pro forma financial information include the business combination effect of the amortization charges from acquired intangible assets, the amortization of fair market value inventory write-up and acquisition-related costs. The pro forma data are for informational purposes only and are not necessarily indicative of the consolidated results of operations of the combined business had the acquisition actually occurred at the beginning of fiscal year 2015 or of the results of future operations of the combined business. Consequently, actual results will differ from the unaudited pro forma information presented below:



	Fiscal Year
(Unaudited in thousands, except per share data)	2016		2015
Revenues	$	760,232	$	650,815
Net income	$	202,213	$	67,690
Basic net income per share - continuing operations	$	1.42	$	0.46
Diluted net income per share - continuing operations	$	1.37	$	0.44