Goodwill and Intangible Assets

Goodwill – Changes in the carrying amount of goodwill by applicable reporting unit were as follows:



(in thousands)	Signal Integrity		Gennum ⁽¹⁾			Advanced Communications ⁽¹⁾			Wireless, Sensing & Timing		Total
Balance as of January 27, 2013	$	—	$	261,891		$	116,686		$	15,007	$	393,584
Impairments	—		—			(116,686		)	—		(116,686		)
Transfers	261,891		(261,891		)	—			—		—
Balance as of January 26, 2014	$	261,891	$	—		$	—		$	15,007	$	276,898
Acquisitions	—		—			—			3,421		3,421
Balance as of January 26, 2015	$	261,891	$	—		$	—		$	18,428	$	280,319

(1)

In the fourth quarter of fiscal year 2014, the Gennum and former Advanced Communications reporting units were integrated to form the new reporting unit Signal Integrity and Timing, which in the first quarter of fiscal 2015 became the new reporting unit Signal Integrity with Timing becoming a part of Wireless, Sensing and Timing. There were no transfers of goodwill associated with the fiscal 2015 realignment.

Goodwill was tested for impairment at the reporting unit level as of November 30, 2014 and November 30, 2013, the dates of the Company’s annual impairment review for fiscal years 2015 and 2014, respectively. The Company estimated the fair values using an income approach, as well as other generally accepted valuation methodologies. The cash flows for each reporting unit were based on discrete financial forecasts developed by management for planning purposes. Cash flows beyond the discrete forecasts were estimated using a terminal value calculation, which incorporated historical and forecasted financial trends for each identified reporting unit and considered perpetual earnings growth rates for publicly traded peer companies. Future cash flows were discounted to present value by incorporating appropriate present value techniques. Specifically, the income approach valuations included the following assumptions:



	November 30, 2013	November 30, 2014
Discount rate	11.0% - 14.0%	12.0% - 15.0%
Perpetual growth rate	3.0%	3.0%
Tax rate	13.4% - 18.0%	10.1% - 28.1%
Risk-free rate	3.5%	2.6%
Peer company beta	1.0 - 1.5	1.0 - 1.8

In addition to its annual review, the Company performs a test of impairment when indicators of impairment are present. As of January 25, 2015, there were no indications of impairment of the Company's goodwill balances.

In December 2013, goodwill relating to the former Advanced Communications reporting unit was determined to be impaired by $116.7 million, prior to its integration with the Gennum reporting unit into the former Signal Integrity and Timing reporting unit, as a result of a reduction in forecasted revenue resulting from the Company's decision to reduce investments in the optical long-haul market. This impairment is included in the consolidated statements of operations under “Goodwill impairment.” See Note 19.

Purchased Intangibles - The following table sets forth the Company’s finite-lived intangible assets resulting from business acquisitions and technology licenses purchased, which continue to be amortized:



		January 25, 2015							January 26, 2014
(in thousands)	Estimated Useful Life	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Core technologies	6-8 years	$	134,155	$	(53,286	)	$	80,869	$	146,925	$	(35,357	)	$	111,568
Customer relationships	7-10 years	28,030		(11,480		)	16,550		28,630		(7,505		)	21,125
Technology licenses ⁽¹⁾	2 years	263		(169		)	94		3,842		(367		)	3,475
Other intangibles assets	1-5 years	6,600		(6,513		)	87		6,600		(5,824		)	776
Total finite-lived intangible assets		$	169,048	$	(71,448	)	$	97,600	$	185,997	$	(49,053	)	$	136,944


(1)	Technology licenses relate to licensing agreements entered into by the Company that are used in research and development activities and have alternative future uses. Amortization expense related to technology licenses is reported as “Product development and engineering” in the consolidated statements of operations.

The Company reviews finite-lived intangible assets for impairment when there are indicators of impairment, by comparing the carrying amount of the asset to the future discounted cash flows that asset is expected to generate. In December 2014, certain intangible assets relating to the Systems Innovation reporting unit were determined to be impaired as a result of the Company's strategic decision to reduce its investment in the defense and microwave communications markets and its additional reductions in the long-haul optical market.

In December 2013, certain intangible assets relating to the former Advanced Communications reporting unit were determined to be impaired prior to its integration with the Gennum reporting unit into the Signal Integrity and Timing reporting unit (the Signal Integrity reporting unit since the first quarter of fiscal 2015), as a result of the reduction in forecasted revenue resulting from the Company’s decision to reduce investments in the optical long-haul market. Impairments for technology licenses are included in “Product development and engineering” on the consolidated statements of operations. The impairment of core technologies and customer relationships is included in “Intangible asset impairments” on the consolidated statements of operations. Impairment charges for these items, which resulted in a new basis for the affected intangible assets, are included in the consolidated statements of operations as follows:



(in thousands)	January 25, 2015		January 26, 2014		January 27, 2013
Product development and engineering	$	3,119	$	2,354	$	—
Intangible asset impairments	11,636		29,938		700
Impairment of finite-lived intangible assets	$	14,755	$	32,292	$	700

The following table sets forth the Company’s additions to finite-lived intangible assets resulting from purchases, additions from acquisitions, and transfers from IPR&D:



(in thousands)	Gross Carrying Amount
Gross carrying value at January 27, 2013	$	228,618
Purchased intangible assets	833
Reduction of finite-lived intangible assets	(501		)
Transfers from in-process research and development	25,100
Decrease in gross carrying value due to impairment of finite-lived intangible assets	(68,053		)
Gross carrying value at January 26, 2014	185,997
Purchased intangible assets	1,100
Acquired intangible assets	1,430
Decrease in gross carrying value due to impairment of finite-lived intangible assets	(19,479		)
Gross carrying value at January 25, 2015	$	169,048

Amortization expense related to finite-lived intangible assets is reported as “Intangible amortization” in the consolidated statements of operations. The estimated annual amount of future amortization expense for finite-lived intangible assets is expected to be as follows:



(in thousands)
To be recognized in:	Core Technologies		Customer relationships		Technology licenses		Other Intangibles		Total
Fiscal year 2016	$	18,641	$	4,000	$	50	$	87	$	22,778
Fiscal year 2017	18,641		4,000		44		—		22,685
Fiscal year 2018	18,641		4,000		—		—		22,641
Fiscal year 2019	15,229		4,000		—		—		19,229
Fiscal year 2020	7,398		550		—		—		7,948
Thereafter	2,319		—		—		—		2,319
Total expected amortization expense	$	80,869	$	16,550	$	94	$	87	$	97,600

The following table sets forth the Company’s indefinite-lived intangible assets from additions to IPR&D, acquisitions, impairments, and transfers to core technologies:



(in thousands)	Gross Carrying Amount
Net carrying value at January 27, 2013	$	31,700
In-process research and development through acquisitions	—
In-process research and development impairment	(2,600		)
Transfers to core technologies	(25,100		)
Net carrying value at January 26, 2014	$	4,000
In-process research and development through acquisitions	—
In-process research and development impairment	—
Transfers to core technologies	—
Net carrying value at January 25, 2015	$	4,000

The Company reviews indefinite-lived intangible assets for impairment as of November 30, each year, by comparing the carrying amount of the asset to the future discounted cash flows that asset is expected to generate.

When performing the annual impairment assessment for fiscal year 2015, the fair value of the IPR&D project was determined using an income approach. The valuation measured the returns attributable to the IPR&D project, discounted to present value using a risk-adjusted rate of return, including, as appropriate, any tax benefits derived from amortizing the intangible asset for tax purposes. Significant factors considered in the calculation of the rate of return were the weighted-average cost of capital and return on assets, as well as the risk inherent in the development process, including the likelihood of achieving technology success and market acceptance. The key unobservable inputs utilized in the model include a discount rate of 12.0%, a market participant tax rate of 28.1%, and expected future cash flows based on current product and market data. In addition to its annual review, the Company performs a test of impairment when indicators are present. As of January 25, 2015, there were no indications of impairment in the balance of the IPR&D asset.

When performing the annual impairment assessment for fiscal year 2014, the fair value of the IPR&D projects was determined using an income approach or replacement cost approach as applicable. The replacement cost approach was used for IPR&D projects that were considered long-term core investments and were not anticipated to be profitable for a period of time. IPR&D projects which were valued using an income approach, measured the returns attributable to each specific IPR&D project, discounted to present value using a risk-adjusted rate of return, including as appropriate, any tax benefits derived from amortizing the intangible assets for tax purposes. Significant factors considered in the calculation of the rate of return are the weighted average cost of capital and return on assets, as well as the risk inherent in the development process, including the likelihood of achieving technology success and market acceptance. For IPR&D projects valued using a replacement cost approach, value was estimated by developing the cost to either replace or reproduce (replicate) the IPR&D to its current state. The key unobservable inputs utilized in the model includes a discount rate of 12.0%, a market participant tax rate of 19.0%, and a probability adjusted level of future cash flows based on current product and market data. In addition to its annual review, the Company performs a test of impairment when indicators of impairment are present. As of January 26, 2014, there were no indications of impairment in the balance of IPR&D assets. In the second quarter of fiscal year 2014, the Company recorded $2.6 million of impairment as a result of its decision to cease development of certain IPR&D associated with the Sierra Monolithics, Inc. (“SMI”) acquisition that was completed in fiscal year 2010. This impairment expenses are included in “Intangible asset impairments” in the consolidated statements of operations.