Memorex 2013 Annual Report Download - page 30

Research and Development (R&D)
Years Ended December 31, Percent Change
2013 2012 2011 2013 vs. 2012 2012 vs. 2011
(In millions)
Research and development ................................. $18.4 $20.4 $18.3 (9.8)% 11.5%
As a percent of revenue .................................. 2.1% 2.0% 1.6%
R&D expense decreased in 2013 compared with 2012 as we reduced legacy R&D spending and have channeled our
investments into higher margin projects in TSS, primarily through the Nexsan acquisition.
R&D expense increased in 2012 compared with 2011 due to our acquisitions and investment to support growth
initiatives in security solutions products.
Goodwill Impairment
Years Ended December 31,
2013 2012 2011
(In millions)
Goodwill impairment ............................................................. $— $23.3 $1.6
We test the carrying amount of a reporting unit’s goodwill for impairment on an annual basis during the fourth quarter of
each year or if an event occurs or circumstances change that would warrant impairment testing during an interim period. Our
reporting units for goodwill are the Mobile Security reporting unit and the Storage Solutions reporting unit, which are one level
below our TSS reporting segment. We do not have any goodwill in our CSA reporting segment. Goodwill resulting from the
acquisition of the Memory Experts International, Inc. (MXI Security) and IronKey Systems Inc. (IronKey) businesses is
allocated to the Mobile Security reporting unit. Goodwill resulting from the acquisition of Nexsan is allocated to the Storage
Solutions reporting unit. See Note 6 — Intangible Assets and Goodwill in our Notes to Consolidated Financial Statements for
more information on goodwill including our valuation approach and assumptions.
2013 Goodwill Analysis
During the fourth quarter of 2013, we performed our annual impairment testing of goodwill for our Mobile Security and
Storage Solutions reporting units. In performing Step 1 of these tests, we compared the estimated fair value of these reporting
units to their carrying value. These impairment tests resulted in no impairment of goodwill as the estimated fair value of each
reporting unit exceeded the carrying value in Step 1 of the impairment tests by 25.7 percent and 34.2 percent, for the Storage
Solutions and Mobile Security reporting units, respectively. There were no triggering events that occurred during 2013 that
warranted an interim goodwill impairment test to be performed.
Mobile Security Reporting Unit — For the 2013 impairment test for the Mobile Security reporting unit, the estimated fair
value of the reporting unit exceeded the carrying value in Step 1 of the impairment test by 34.2 percent. We used forecasted
cash flows over a ten year period, a terminal growth rate of 3.0 percent and a discount rate of 15.5 percent. The discount rate
reflects the relative risk of achieving cash flows as well as any other specific risks or factors related to the Mobile Security
reporting unit. We calculated the impact of a potential change in our assumptions to determine the impact on the results of the
impairment test. Holding all other assumptions constant, an unfavorable change in various components of our projected cash
flows, including revenue growth, of less than 5.0 percent would potentially result in an indication of impairment. Additionally, a
decrease in the residual growth rate and an increase in the discount rate of less than 5.0 basis points would potentially result
in an indication of impairment.
During the fourth quarter of 2013, our internal business plan and estimated cash flows associated with our Mobile
Security business was updated. Although there were some downward adjustments to the near-term projections as compared
to our previous forecast utilized during our fourth quarter 2012 impairment test, our longer-term projections and estimated fair
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