Acquisition of Validity | 6 Months Ended |
Dec. 31, 2013 |
Business Combinations [Abstract] | ' |
Acquisition of Validity | ' |
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13. Acquisition of Validity |
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On November 7, 2013, or the Acquisition Date, we acquired 100% of the outstanding common and preferred shares and voting interest of Validity. This acquisition has been accounted for as a business combination. The results of Validity’s operations have been included in the consolidated financial statements since the Acquisition Date. Validity was a privately held company, which was a leading provider of capacitive-based biometric fingerprint authentication solutions for notebook applications. Validity had begun to target its biometric fingerprint authentication solutions for smartphone and tablet applications and had one revenue-generating design win with one customer as of the Acquisition Date. We believe this acquisition brings together substantial synergies through the combination of the Validity technologies and workforce and our financial stability, scale, infrastructure, customer relationships, and technology delivery performance record. With this acquisition, we expect to gain access to the fast growing biometrics market, significantly expanding our market opportunity and underscoring our commitment to making smart devices easier to use. |
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The Acquisition Date fair value of the consideration transferred totaled $127.8 million, which consisted of the following (in thousands): |
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Cash | | $ | 19,985 | | | | | | | | | | | | | |
Shares issued | | | 70,280 | | | | | | | | | | | | | |
Contingent consideration | | | 37,499 | | | | | | | | | | | | | |
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| | $ | 127,764 | | | | | | | | | | | | | |
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In connection with the acquisition, we issued 1,577,559 shares to the former Validity shareholders valued at $70.3 million based on the Acquisition Date closing price of our common stock of $44.55. The contingent consideration arrangement requires us to make earn-out consideration payments of up to $162.5 million, which is based primarily on sales, during certain time periods, ending on March 31, 2016, of certain products embodying Validity fingerprint sensor technology. The earn-out consideration will be payable in cash, except for the initial $16.3 million of contingent consideration, which will be satisfied by delivery of 338,427 shares of our common stock, based on the transaction reference price of $48.278. Under certain conditions, we may be required to deliver additional shares to ensure that at least 40% of the value of consideration transferred to the former Validity shareholders is paid in shares of our common stock. |
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The estimated fair value of the contingent consideration arrangement as of the Acquisition Date was $37.5 million. We estimated the fair value of the contingent consideration using a probability-weighted discounted cash flow model. These fair value measurements were based on significant inputs not observable in the market and thus represent a Level 3 measurement. The key assumptions in applying the probability-weighted discounted cash flow model was a 23% discount rate under three unequally weighted cash flow scenarios reviewed by senior management and our board to assess the transaction. The contingent consideration will be remeasured to fair value in future reporting periods and any adjustments will be recorded through earnings. |
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The following table summarizes the estimated fair values of the assets acquired and liabilities assumed as of the Acquisition Date (in thousands): |
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Cash | | $ | 365 | | | | | | | | | | | | | |
Accounts receivable | | | 3,840 | | | | | | | | | | | | | |
Inventory | | | 2,154 | | | | | | | | | | | | | |
Prepaid expenses and other | | | 984 | | | | | | | | | | | | | |
Property and equipment | | | 326 | | | | | | | | | | | | | |
Deferred tax assets | | | 13,602 | | | | | | | | | | | | | |
Acquired intangible assets | | | 76,400 | | | | | | | | | | | | | |
Other assets | | | 1,283 | | | | | | | | | | | | | |
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Total identifiable assets acquired | | | 98,954 | | | | | | | | | | | | | |
Accounts payable | | | 2,141 | | | | | | | | | | | | | |
Accrued liabilities | | | 1,497 | | | | | | | | | | | | | |
Non-current deferred tax liabilities | | | 5,327 | | | | | | | | | | | | | |
Non-current taxes payable | | | 700 | | | | | | | | | | | | | |
Other non-current accrued liabilities | | | 500 | | | | | | | | | | | | | |
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Net identifiable assets acquired | | | 88,789 | | | | | | | | | | | | | |
Goodwill | | | 38,975 | | | | | | | | | | | | | |
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Net assets acquired | | $ | 127,764 | | | | | | | | | | | | | |
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Of the $76.4 million of acquired intangible assets, $57.0 million was assigned to in-process research and development and will be amortized over an estimated useful life to be determined at the date the underlying projects are determined to be substantively complete, $18.6 million was assigned to developed technology and will be amortized over an estimated useful life of 2-3 years, and $750,000 was assigned to backlog and was amortized during the quarter ended December 31, 2013. In-process research and development refers to the next generation fingerprint authentication technology designed for the mobile product and PC markets and developed technology refers to the established fingerprint authentication technology initially designed for and sold into the PC market and adapted for the mobile product market. We anticipate that all in-process research and development projects will be substantially completed within the next six to twelve months. The value of goodwill reflects the anticipated synergies of the combined operations and workforce of Validity as of the Acquisition Date. |
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As of December 31, 2013, our purchase price allocation is preliminary and has not been finalized. Additional information, which existed as of the Acquisition Date but is yet unknown to us, may become known to us during the remainder of the measurement period, which will not exceed 12 months from the Acquisition Date. Changes to amounts recorded as assets or liabilities will be recorded as retrospective adjustments to the provisional amounts recognized as of the Acquisition Date and may result in a corresponding adjustment to goodwill. |
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In connection with the acquisition, we recognized $1.2 million of indemnification assets, consisting of $700,000 for income tax and $500,000 for service tax. These amounts represent estimated tax settlement plus interest and penalties. Under the merger agreement, we are indemnified for any additional tax liability incurred (as well as other reasonable expenses) before the acquisition. |
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The Validity fingerprint authentication products are an extension of our existing interactive user interface solution products and are marketed to our existing customer base. We intend to report these products based on device type. Accordingly, we continue to operate in one segment and therefore the goodwill applies to a company-wide reporting unit. None of the goodwill is expected to be deductible for income tax purposes. |
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We recognized approximately $2.0 million of legal and consulting costs that were expensed in fiscal 2014. These costs are included in our consolidated statements of income as selling, general, and administrative expenses. |
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Prior to the acquisition, we did not have a preexisting relationship with Validity. |
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The condensed consolidated financial statements include $4.3 million revenue and approximately $2.5 million of operating loss of Validity from the date of the acquisition through December 31, 2013. |
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The following unaudited pro forma financial information presents the combined results of operations for us and Validity as if the acquisition had occurred on July 1, 2012. The unaudited pro forma financial information has been prepared for comparative purposes only and does not purport to be indicative of the actual operating results that would have been recorded had the acquisition actually taken place on July 1, 2012, and should not be taken as indicative of future consolidated operating results. Additionally, the unaudited pro forma financial results do not include any anticipated synergies or other expected benefits from the acquisition. |
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| | Three Months Ended | | | Six Months Ended | |
| | December 31, | | | December 31, | |
| | 2013 | | | 2012 | | | 2013 | | | 2012 | |
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Revenue | | $ | 206,844 | | | $ | 146,869 | | | $ | 436,253 | | | $ | 276,924 | |
Net income | | | 16,354 | | | | 4,732 | | | | 45,785 | | | | 5,807 | |
Net income per share—diluted | | | 0.44 | | | | 0.14 | | | | 1.25 | | | | 0.16 | |
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Pro forma adjustments used to arrive at pro forma net income for the three and six months ended December 31, 2013 and December 31, 2012, were as follows (in thousands): |
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| | Three Months Ended | | | Six Months Ended | |
| | December 31, | | | December 31, | |
| | 2013 | | | 2012 | | | 2013 | | | 2012 | |
Buyer transaction costs | | $ | 969 | | | $ | — | | | $ | 2,000 | | | $ | — | |
Seller transaction costs | | | — | | | | — | | | | 517 | | | | — | |
Inventory adjustment | | | 575 | | | | — | | | | 575 | | | | — | |
Share-based compensation | | | 140 | | | | 87 | | | | 280 | | | | 174 | |
Intangible amortization | | | (2,060 | ) | | | (2,060 | ) | | | (4,121 | ) | | | (3,497 | ) |
Deferred compensation | | | 49 | | | | (19 | ) | | | 31 | | | | (37 | ) |
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Total | | $ | (327 | ) | | $ | (1,992 | ) | | $ | (718 | ) | | $ | (3,360 | ) |
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