MICROSEMI CORP - FORM 10-Q - XML - IDEA: XBRL DOCUMENT - February 8, 2012

2. ACQUISITION

During the quarter ended January 1, 2012, we completed our acquisition of Zarlink Semiconductor, Inc. (“Zarlink”) through a wholly-owned subsidiary. Following the expiration of the previously announced offers for all of the issued and outstanding common shares (“Zarlink Shares”) and 6% unsecured, subordinated convertible debentures maturing September 30, 2012 (“Zarlink Debentures” and together with the Zarlink Shares, the “Zarlink Securities”) of Zarlink, we acquired all remaining Zarlink Shares and Zarlink Debentures through compulsory acquisitions under, respectively, the Canada Business Corporations Act and the trust indenture governing the Zarlink Debentures. Zarlink delivers world-leading, mixed-signal chip technologies for a broad range of communication and medical applications. Its core capabilities include timing solutions that manage time-sensitive communication applications over wireless and wired networks, line circuits supporting high-quality voice services over cable and broadband connections, and ultra low-power radios enabling new wireless medical devices and therapies. Serving the world’s largest original equipment manufacturers, Zarlink’s highly integrated chip solutions help customers simplify design, lower costs and reach market quickly. We sometimes refer to this division herein as “Microsemi – CMPG.”

The fair value of the identified intangible assets for the Zarlink acquisition was estimated by performing a discounted cash flow analysis using the “income” approach. This method includes a forecast of direct revenues and costs associated with the respective intangible assets and charges for economic returns on tangible and intangible assets utilized in cash flow generation. Net cash flows attributable to the identified intangible assets were discounted to their present value at a rate commensurate with the perceived risk. The projected cash flow assumptions considered contractual relationships, customer attrition, eventual development of new technologies and market competition.

The useful lives of completed technology rights are based on the number of years in which net cash flows have been projected. The useful life of backlog is estimated based upon the fulfillment period. The useful lives of customer relationships are estimated based upon the length of the relationships currently in place, historical attrition patterns and natural growth and diversification of other potential customers. The useful life of a trade name was estimated based on the period in which a benefit could be ascribed to the identified trade names.

Assumptions used in forecasting cash flows for each of the identified intangible assets included consideration of the following:

 

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Historical performance including sales and profitability.

 

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Business prospects and industry expectations.

 

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Estimated economic life of asset.

 

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Development of new technologies.

 

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Acquisition of new customers.

 

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Attrition of existing customers.

 

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Obsolescence of technology over time.

Generally, the allocation of purchase prices result in an allocation to goodwill. Depending on the tax treatment of a particular acquisition, goodwill and identifiable intangible assets may not be deductible for tax purposes. The factors that contributed to a purchase price resulting in the recognition of goodwill include:

 

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The premium paid over market capitalization immediately prior to the merger announcement.

 

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Our belief that the merger will create a more diverse semiconductor company with expansive offerings which will enable us to expand our product offerings.

 

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Our belief that both companies are committed to improving cost structures and that our combined efforts after the merger should result in a realization of cost savings and an improvement of overall efficiencies.

The purchase price allocation described below is preliminary. A final determination of fair values of assets acquired and liabilities assumed relating to the transaction could differ from the preliminary purchase price allocation and if material differences exist they could result in retrospective revision to the purchase price allocation.

 

The total estimated consideration as shown in the table below is preliminarily allocated to Zarlink’s tangible and intangible assets and liabilities based on their estimated fair values as of the date of the completion of the transaction. The preliminary estimated consideration is allocated as follows (in thousands):

 

Calculation of consideration:
Cash consideration for Zarlink Securities		$	623,782
Preliminary allocation of consideration:
Book value of Zarlink’s net assets			151,576
Adjustments to historical net book value:
Inventories			7,230
Other intangible assets			210,100
Deferred tax liability, net			(35,963	)
Adjustment to goodwill		$	290,839

Identifiable intangible assets and their estimated useful lives are as follows (amounts in thousands):

 

		Asset Amount				Weighted Average Useful Life (Years)
Completed technology		$	47,800				6
Customer relationships			144,600				6
Backlog			15,700				1
Trade name			2,000				2
		$	210,100

We utilized the straight line method of amortization for completed technology, customer relationships and trade name and the estimated fulfillment period for backlog.

Supplemental pro forma data

The following supplemental pro forma data summarizes the results of operations for the quarters ended January 1, 2012 and January 2, 2011, as if the acquisitions we completed in 2012 and 2011 were completed as of the first day of 2011. The supplemental pro forma information presented is for illustrative purposes only and is not necessarily indicative of the financial position or results of operations that would have been realized if the transactions had been completed on the dates indicated, nor is it indicative of future operating results or financial position. Net sales and earnings for the acquisitions on a standalone basis since their acquisition dates are impracticable to determine as on the acquisition date, we began to immediately integrate these acquisitions into existing operations, engineering groups, sales distribution networks and management structure. The pro forma adjustments are based upon currently available information and certain assumptions that we believe are reasonable under the circumstances.

The supplemental pro forma data reports actual operating results, adjusted to include the pro forma effect of, among others, the impact in cost of goods sold from manufacturing profit in acquired inventory, amortization expense of identified intangible assets, timing of the impact of restructuring expenses, timing of credit facility issuance costs, foregone interest income, incremental interest expense and the related tax effect of these items. Supplemental pro forma earnings for the quarter ended January 1, 2012 were adjusted to exclude $7.2 million in cost of goods sold from manufacturing profit in acquired inventory, $6.1 million in acquisition costs and $34.0 million in credit facility refinancing costs and supplemental pro forma earnings for the quarter ended January 2, 2011 were adjusted to include these items. Supplemental pro forma data is as follows (amounts in thousands, except per share data):

 

		Quarters Ended
		January 1, 2012				January 2, 2011
Net sales		$	247,754			$	266,746
Net loss		$	(18,258	)		$	(10,129	)
Net loss per share
Basic		$	(0.21	)		$	(0.12	)
Diluted		$	(0.21	)		$	(0.12	)