Goodwill and Other Purchased Intangible Assets
Goodwill
The following table summarizes the activity related to the carrying value of our goodwill:
|
| | | | | | | | | | | | | | | | | | | |
| Reportable Segments | | | | |
| Broadband Communications | | Mobile and Wireless | | Infrastructure and Networking | | Foreign Currency | | Consolidated |
| (In millions) |
Goodwill | $ | 597 |
| | $ | 1,013 |
| | $ | 2,021 |
| | $ | (15 | ) | | $ | 3,616 |
|
Accumulated impairment losses | — |
| | (543 | ) | | (1,286 | ) | | — |
| | (1,829 | ) |
Goodwill at December 31, 2011 | 597 |
| | 470 |
| | 735 |
| | (15 | ) | | 1,787 |
|
Goodwill recorded in connection with acquisitions | 125 |
| | — |
| | 1,805 |
| | — |
| | 1,930 |
|
Transfer | 48 |
| | — |
| | (48 | ) | | — |
| | — |
|
Effects of foreign currency translation | — |
| | — |
| | — |
| | 9 |
| | 9 |
|
Goodwill at December 31, 2012 | 770 |
| | 470 |
| | 2,492 |
| | (6 | ) | | 3,726 |
|
Goodwill recorded in connection with acquisitions | — |
| | 40 |
| | — |
| | — |
| | 40 |
|
Effects of foreign currency translation | — |
| | — |
| | — |
| | 27 |
| | 27 |
|
Goodwill at December 31, 2013 | $ | 770 |
| | $ | 510 |
| | $ | 2,492 |
| | $ | 21 |
| | $ | 3,793 |
|
Purchased Intangible Assets
The following table presents details of our purchased intangible assets:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2013 | | December 31, 2012 |
| Gross | | Accumulated Amortization | | Net | | Gross | | Accumulated Amortization | | Net |
| | | | | (In millions) | | | | |
Developed technology | $ | 1,492 |
| | $ | (539 | ) | | $ | 953 |
| | $ | 1,748 |
| | $ | (443 | ) | | $ | 1,305 |
|
In-process research and development | 130 |
| | — |
| | 130 |
| | 311 |
| | — |
| | 311 |
|
Customer relationships | 232 |
| | (176 | ) | | 56 |
| | 380 |
| | (222 | ) | | 158 |
|
Other | 34 |
| | (29 | ) | | 5 |
| | 37 |
| | (25 | ) | | 12 |
|
| $ | 1,888 |
| | $ | (744 | ) | | $ | 1,144 |
| | $ | 2,476 |
| | $ | (690 | ) | | $ | 1,786 |
|
In 2013 we reclassified $83 million of in-process research and development, or IPR&D, costs to developed technology primarily related to digital front end (DFE) processors from our acquisition of NetLogic. These purchased intangible assets were subsequently impaired as discussed below.
Impairment of Purchased Intangible Assets
Goodwill
We evaluate goodwill for potential impairment on October 1 of each year or more frequently if indicators of impairment exist. For our annual impairment evaluation, in 2013 and 2011 we made a qualitative assessment of whether goodwill impairment exists and determined that it was more likely than not that the fair value of our reporting units exceeded their carrying values. Therefore, we did not perform the quantitative two-step goodwill impairment test. As discussed below, during our August 31, 2013 evaluation and our 2012 annual impairment evaluation, we performed the first step of the quantitative goodwill impairment assessment for each of our reporting units and determined no impairment was indicated as the estimated fair value of each of the reporting units exceeded its respective carrying value. At December 31, 2013 our book value was $8.37 billion while the market capitalization was $17.23 billion.
In light of the reduction in estimated future cash flows that resulted in the significant impairment of purchased intangible assets related to our Infrastructure and Networking reporting unit in the three months ended June 30, 2013 (as discussed below), and as a result of our stock price decline in the three months ended September 30, 2013, we determined our goodwill had potentially been impaired. Accordingly, we performed the first step of the quantitative goodwill impairment assessment for each of our reporting units for recoverability of goodwill at August 31, 2013 but determined no impairment was indicated as the estimated fair value of each of the reporting units exceeded its respective carrying value by greater than 20%.
For the August 31, 2013 evaluation and 2012 annual impairment evaluation, we estimated the fair values of our reporting units using a combination of the income and market approach. The income approach utilizes estimates of discounted future cash flows. The market approach, based on a peer group of each reporting unit, utilizes market multiples for revenue and earnings before income taxes. The discounted 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. These techniques utilized several unobservable inputs categorized as Level 3 inputs, including discount rates, perpetual growth rates, a market participant tax rate and estimated future cash flows.
Specifically, the income approach valuations included the following assumptions for August 31, 2013 and October 1, 2012:
|
| | | | | |
| 2013 | | 2012 |
Discount rate | 10.5 - 12.4% |
| | 12.0% - 14.3% |
|
Perpetual growth rate | 3.0% - 4.0% |
| | 4.0 | % |
Market participant tax rate | 15.0 | % | | 15.1 | % |
Risk free rate | 3.5 | % | | 2.4 | % |
Peer company beta | 0.82 - 1.30 |
| | 1.19 - 1.21 |
|
Purchased Intangible Assets
During the six months ended June 30, 2013 we had a steady reduction in near-term sales forecasts for NetLogic products included in the Infrastructure and Networking reportable segment, sold into the service provider market, which caused us to review our long-term forecasts. In addition, we downwardly revised our longer-term expectations of the size of the addressable market for these products. As a result of these triggering events, we performed a detailed impairment analysis of the long-lived assets associated with these products during the three months ended June 30, 2013. Based on our analysis, we determined certain assets acquired from NetLogic were not recoverable, requiring us to reduce the associated carrying value to fair value. Specifically, we impaired $238 million of completed technology, $88 million of IPR&D and $48 million of customer relationships related to our embedded and knowledge-based processor products. We also impaired $87 million of completed technology related to our DFE processor products. For DFE, one of our smaller product lines, our customers indicated that they prefer custom solutions as opposed to standard merchant solutions. In response, we have decided to redirect our efforts by focusing on developing customized solutions and have consequently fully impaired the assets related to the acquired DFE merchant product line.
In 2013 and 2012 we recorded impairment charges of $41 million and $49 million, respectively, related to our acquisition of Provigent, Inc. included in the Infrastructure and Networking reportable segment. The primary factor contributing to the Provigent impairments was the continued reduction in revenue outlook for certain products and the resulting decrease to the estimated cash flows identified with impaired assets over those respective years.
In 2011 we recorded impairment charges of $74 million, primarily related to our 2010 acquisition of Beceem Communications, Inc., or Beceem, included in our Mobile and Wireless reportable segment. The primary factor contributing to this impairment charge was the continued reduction in the forecasted cash flows derived from the acquired WiMAX products as wireless service providers have accelerated their adoption of Long Term Evolution (LTE) products.
In 2013, 2012 and 2011 we recorded additional impairment charges of $9 million, $38 million and $18 million related to eight acquisitions. The primary factor contributing to the other impairment charges was the reduction in the revenue outlook for certain products and the resulting decrease to the estimated cash flows identified with the impaired assets. We also recorded an impairment charge of $3 million related to certain computer software and equipment in 2012.
In determining the amount of the impairment charges we calculated fair values as of the impairment date for acquired intangible assets. The fair value was determined using the multiple period excess earnings method, described in Note 3. The fair values were determined using significant unobservable inputs categorized as Level 3 inputs. The key unobservable inputs utilized in the model include discount rates ranging from 15% to 25%, a market participant tax rate of 15%, and a probability adjusted level of future cash flows based on current product and market data.
The following table presents details of the amortization of purchased intangible assets included in the cost of product revenue and other operating expense categories:
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2013 | | 2012 | | 2011 |
| (In millions) |
Cost of product revenue | $ | 171 |
| | $ | 198 |
| | $ | 54 |
|
Other operating expenses | 57 |
| | 113 |
| | 30 |
|
| $ | 228 |
| | $ | 311 |
| | $ | 84 |
|
The following table presents details of the amortization of existing purchased intangible assets (including IPR&D), which is currently estimated to be expensed in 2014 and thereafter:
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| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Purchased Intangible Asset Amortization by Year |
| 2014 | | 2015 | | 2016 | | 2017 | | 2018 | | Thereafter | | Total |
| (In millions) |
Cost of product revenue | $ | 197 |
| | $ | 180 |
| | $ | 159 |
| | $ | 137 |
| | $ | 116 |
| | $ | 294 |
| | $ | 1,083 |
|
Other operating expenses | 34 |
| | 14 |
| | 5 |
| | 3 |
| | 2 |
| | 3 |
| | 61 |
|
| $ | 231 |
| | $ | 194 |
| | $ | 164 |
| | $ | 140 |
| | $ | 118 |
| | $ | 297 |
| | $ | 1,144 |
|
