Basis of Preparation and Summary of Significant Accounting Policies | 12 Months Ended |
Jun. 28, 2014 |
Accounting Policies [Abstract] | ' |
Basis of Preparation and Summary of Significant Accounting Policies | ' |
BASIS OF PREPARATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Business |
Oclaro, Inc., a Delaware corporation, is sometimes referred to in this Annual Report on Form 10-K as “Oclaro,” “we,” “us,” or “our.” |
During our fiscal year 2014, we were one of the leading providers of optical components, modules and subsystems for the core optical transport, service provider, wireless backhaul, enterprise and data center markets. Leveraging over three decades of laser technology innovation, photonic integration, and subsystem design, we provide differentiated solutions for optical networks and high-speed interconnects driving the next wave of streaming video, cloud computing, voice over IP, Software as a Service ("SaaS") and other bandwidth-intensive and high-speed applications. |
On November 1, 2013, we sold our optical amplifier and micro-optics business (the “Amplifier Business”) to II-VI Incorporated (II-VI). The sale is more fully discussed in Note 3, Business Combinations and Dispositions. |
On September 12, 2013, we sold our Oclaro Switzerland GmbH subsidiary and associated laser diodes and pump business (the “Zurich Business”) to II-VI. The sale is more fully discussed in Note 3, Business Combinations and Dispositions. |
These sales are reported as discontinued operations, which require retrospective restatement of prior periods to classify the assets, liabilities and results of operations as discontinued operations. We have classified the assets and liabilities to be sold as “assets of discontinued operations held for sale” and “liabilities of discontinued operations held for sale” within current assets and current liabilities, respectively, on the consolidated balance sheet as of June 29, 2013. The notes to our consolidated financial statements relate to our continuing operations only, unless otherwise indicated. |
On July 23, 2012, we completed a merger with Opnext, Inc. ("Opnext"). The acquisition is more fully discussed in Note 3, Business Combinations and Dispositions. The consolidated balance sheets as of June 28, 2014 and June 29, 2013, include the assets and liabilities assumed in the Opnext acquisition. The consolidated statements of operations, comprehensive income (loss) and cash flows for the years ended June 28, 2014 and June 29, 2013 include the results of operations of the combined entities from July 23, 2012, the date of the acquisition. Our statements of operations, comprehensive income (loss) and cash flows for the year ended June 30, 2012, do not include any results of operations from Opnext. |
Basis of Preparation |
The consolidated financial statements include the accounts of Oclaro and our subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. |
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"), which contemplate the continuation of a company as a going concern. As of June 28, 2014, we held $104.1 million in cash and short-term investments, comprised of $99.0 million in cash and cash equivalents, $5.1 million in restricted cash and $0.1 million of short-term investments; and we had working capital of $175.2 million. We have incurred significant operating losses from continuing operations and generated negative cash flows from operations for fiscal year 2014. Recoverability of a major portion of the recorded asset amounts shown in the accompanying balance sheet is dependent upon us having sufficient resources to operate our business. In addition to the availability of our cash resources as of June 28, 2014, the continued operation of our business is dependent upon our achieving cash flows expected to be generated from the execution of our current operating plan, including anticipated restructuring plans, together with amounts expected to be available under our Credit Agreement and from the sale of our Komoro, Japan industrial and consumer business. See Note 17, Subsequent Events for further details on the sale of our Komoro, Japan industrial and consumer business. We can make no assurances that we will be successful concluding the sale of our Komoro, Japan industrial and consumer business. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should we be unable to continue in existence. |
In the event that any of the sources of liquidity described in the preceding paragraph are, for any reason, not available to us in a timely manner or in the event that we need additional liquidity beyond our current expectations, such as to fund future growth or strengthen our balance sheet or to fund the cost of restructuring activities, we may find it necessary to lower our operating income break-even level and undertake additional cost cutting measures. We will continue to explore other sources of additional liquidity. These additional sources of liquidity could include one, or a combination, of the following: (i) issuing equity securities, (ii) incurring indebtedness secured by our assets, (iii) issuing debt and/or convertible debt securities, or (iv) selling product lines, other assets and/or portions of our business. There can be no guarantee that we will be able to raise additional funds on terms acceptable to us, or at all. |
Reclassifications |
For presentation purposes, we have reclassified certain prior period amounts to conform to the current period financial statement presentation. These reclassifications did not affect our consolidated net income (loss), cash flows, cash and cash equivalents or stockholders’ equity as previously reported. |
Use of Estimates |
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reported periods. Examples of significant estimates and assumptions made by management involve the fair value of goodwill and long-lived assets, the fair value of purchase consideration paid, assets acquired and liabilities assumed in business combinations, valuation allowances for deferred tax assets, the fair value of stock-based compensation, estimates used to determine facility lease loss liabilities, estimates for allowances for doubtful accounts, the evaluation of insurance recoveries, and valuation of excess and obsolete inventories. These judgments can be subjective and complex and consequently actual results could differ materially from those estimates and assumptions. |
Out of Period Adjustment |
In fiscal 2014, we recorded an out-of-period adjustment of approximately $2.0 million in flood-related (income) expense in our consolidated statements of operations. The adjustment, which decreased flood-related income and decreased property and equipment, net, was made to account for the impairment of leased assets assumed pursuant to the Opnext merger that had been damaged in the 2011 Thailand flood (see Note 6, Flood-Related (Income) Expense, Net). We determined that this adjustment did not have a material impact to our current or prior period consolidated financial statements. |
Fiscal Years |
We operate on a 52/53 week year ending on the Saturday closest to June 30. Our fiscal years ended June 28, 2014, June 29, 2013 and June 30, 2012 were each 52 week years. |
Cash and Cash Equivalents |
Cash and cash equivalents are carried at market value. We consider all liquid investment securities with an original maturity date of three months or less to be cash equivalents. Any realized gains and losses on liquid investment securities are included in other income (expense) in our consolidated statements of operations. |
The following table provides details regarding our cash and cash equivalents at the dates indicated: |
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| June 28, 2014 | | June 29, 2013 |
| (Thousands) |
Cash and cash equivalents: | |
Cash-in-bank | $ | 97,759 | | | $ | 82,634 | |
|
Money market funds | 1,214 | | | 2,001 | |
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| $ | 98,973 | | | $ | 84,635 | |
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As of June 28, 2014, $74.7 million of the $99.0 million of our cash and cash equivalents was held by our foreign subsidiaries. If these funds are needed for our operations in the United States, we could be required to accrue and pay U.S. taxes to repatriate these funds (subject to an adjustment for foreign tax credits). |
As of June 28, 2014, we also had restricted cash of $5.1 million, consisting of approximately $2.6 million which serves as collateral for the performance of our obligations under certain facility lease agreements and $2.4 million (equivalent to RMB 15 million) of cash held in Oclaro Shenzhen’s bank account in China that was frozen by the Xi'an Court in connection with our litigation with Xi’an Raysung Photonics Inc. (see Note 9, Commitments and Contingencies, for additional details regarding this litigation.) |
Concentration of Credit Risks |
We place our cash and cash equivalents with and in the custody of financial institutions, which at times, are in excess of amounts insured. Management monitors the ongoing creditworthiness of these institutions. Our investment policy limits the amounts invested with any one institution, type of security and issuer. To date, we have not experienced significant losses on these investments. |
Our trade accounts receivable are concentrated with companies in the telecom industry. At June 28, 2014, three customers accounted for a total of 42 percent of our gross accounts receivable. At June 29, 2013, three customers accounted for a total of 33 percent of our gross accounts receivable. |
Allowance for Doubtful Accounts and Sales Return Allowance |
We perform ongoing credit evaluations of our customers and record specific allowances for doubtful accounts when a customer is unable to meet its financial obligations, as in the case of bankruptcy filings or deteriorated financial position. Estimates are used in determining allowances for customers based on factors such as current trends, the length of time the receivables are past due and historical collection experience. We write-off a receivable account when all rights, remedies and recourses against the account and its principals are exhausted and record a benefit when previously reserved accounts are collected. We recorded minimal provisions as allowances for doubtful accounts in fiscal year 2014 and $0.7 million and $0.1 million as allowances for doubtful accounts in fiscal years 2013 and 2012, respectively. |
We record a provision for estimated sales returns, which is netted against revenues, in the same period as the related revenues are recorded. These estimates are based on historical sales returns, other known factors and our return policy. In fiscal year 2014, 2013 and 2012, we recorded a provision of zero, $3.1 million and zero as sales return allowances, respectively. |
Inventories |
Inventories, consisting of raw materials, work-in-process and finished goods are stated at the lower of cost (first in, first out basis) or market. We plan production based on orders received and a forecast demand. These production estimates are dependent on assessment of current and expected orders from our customers, including consideration that orders are subject to cancellation with limited advance notice prior to shipment. We assess the valuation of our inventory, including significant inventories held by contract manufacturers on our behalf, on a quarterly basis. Products may be unsalable because they are technically obsolete due to substitute products, specification changes or excess inventory relative to customer forecasts. We adjust the carrying value of inventory using methods that take these factors into account. If we find that the cost basis of our inventory is greater than the current market value, we write the inventory down to the estimated selling price, less the estimated costs to complete and sell the product. |
The following table provides details regarding our inventories at the dates indicated: |
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| | | | | | | |
| June 28, 2014 | | June 29, 2013 |
| (Thousands) |
Inventories: | |
Raw materials | $ | 20,036 | | | $ | 32,678 | |
|
Work-in-process | 20,505 | | | 26,760 | |
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Finished goods | 30,558 | | | 26,591 | |
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| $ | 71,099 | | | $ | 86,029 | |
|
Property and Equipment |
Property and equipment are stated at cost. Depreciation is computed using the straight-line method based upon the estimated useful lives of the assets, which generally range from three to seven years. Leasehold improvements are amortized using the straight-line method over the estimated useful lives or the term of the related lease, whichever is shorter. When assets are retired or otherwise disposed of, the assets and related accumulated depreciation are removed from the accounts. Gains or losses resulting from asset dispositions are included in (gain) loss on sale of property and equipment in the accompanying consolidated statements of operations. Repair and maintenance costs are expensed as incurred. |
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The following table provides details regarding our property and equipment, net at the dates indicated: |
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| | | | | | | |
| June 28, 2014 | | June 29, 2013 |
| (Thousands) |
Property and equipment, net: | |
Buildings and improvements | $ | 12,989 | | | $ | 10,271 | |
|
Plant and machinery | 47,247 | | | 72,144 | |
|
Fixtures, fittings and equipment | 9,701 | | | 4,295 | |
|
Computer equipment | 13,723 | | | 13,940 | |
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| 83,660 | | | 100,650 | |
|
Less: accumulated depreciation | (32,892 | ) | | (28,622 | ) |
| $ | 50,768 | | | $ | 72,028 | |
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Depreciation expense was $25.3 million, $30.0 million and $12.9 million for the fiscal years ended June 28, 2014, June 29, 2013 and June 30, 2012, respectively. In fiscal year 2014, we recorded an impairment charge of $0.6 million related to the write-off of certain machinery that was not being utilized. |
Property and equipment includes assets under capital leases of $9.9 million and $18.2 million at June 28, 2014 and June 29, 2013, respectively, the majority of which were assumed in connection with the Opnext acquisition. Amortization associated with assets under capital leases is recorded in depreciation expense. |
Goodwill and Other Intangible Assets |
We review our goodwill and other intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable and also review goodwill annually. The values assigned to goodwill and other intangible assets are based on estimates and judgments regarding expectations for the success and life cycle of products and technologies acquired. |
In fiscal year 2013, our goodwill was tested for impairment using a two-step process. In the first step, the estimated fair value of a reporting unit is compared to its carrying value. If the fair value of a reporting unit exceeds the carrying value of the net assets assigned to a reporting unit, goodwill is considered not impaired and no further testing is required. If the carrying value of the net assets assigned to a reporting unit exceeds the fair value of a reporting unit, a second step of the impairment test is performed whereby we hypothetically apply purchase accounting to the reporting unit using the fair value from the first step in order to determine the implied fair value of a reporting unit’s goodwill. We estimate the fair value of the reporting unit using the expected present value of future cash flows and also compare our market capitalization plus a control premium for reasonableness. See Note 4. Goodwill and Other Intangible Assets. |
In fiscal year 2013, we adopted the Financial Accounting Standard Board's ("FASB") Accounting Standards Update ("ASU") 2012-2, Intangibles—Goodwill and Other (Topic 350)—Testing Indefinite-Lived Intangible Assets for Impairment, which established an optional two-step analysis for impairment testing of indefinite-lived intangibles other than goodwill. The two-step analysis establishes an optional qualitative assessment to precede our quantitative assessment, if necessary. In the qualitative assessment, we must evaluate the totality of qualitative factors, including any recent fair value measurements, that impact whether our indefinite-lived intangibles other than goodwill have a carrying amount that more likely than not exceeds their fair value. |
Impairment of Long-Lived Assets |
We review property and equipment and certain identifiable intangibles, excluding goodwill, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of these assets is measured by comparing their carrying amounts to market prices or the future undiscounted cash flows the assets are expected to generate. If property and equipment or certain identifiable intangibles are considered to be impaired, the impairment to be recognized would equal the amount by which the carrying value of the asset exceeds its fair value based on market prices or future discounted cash flows. |
Intangible assets with definite lives are amortized over their estimated useful lives, which is generally from 1 to 11.5 years and 15 years as to one specific customer contract. |
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Non-Marketable Cost Method Investments |
We account for our non-marketable cost method investments, which consist of less than 20 percent equity ownership interests of common stock and/or preferred stock in privately-held companies, under the cost method of accounting. As of June 28, 2014 and June 29, 2013, we no longer held any investments in privately-held companies. During fiscal year 2013, we sold our remaining cost method investment for $3.9 million of cash proceeds. We had previously acquired this investment in fiscal year 2010 for a purchase price of $7.5 million. We recorded a $3.6 million impairment charge during fiscal year 2013 in other income (expense) in our consolidated statement of operations. |
Derivative Financial Instruments |
Our operating results are subject to fluctuations based upon changes in the exchange rates between the currencies in which we collect revenues and pay expenses. A majority of our revenues are denominated in U.S. dollars, while a significant portion of our expenses are denominated in United Kingdom (U.K.) pounds sterling, Japanese yen, Chinese yuan and euros, in which we pay expenses in connection with operating our facilities in the United Kingdom, Japan, China and Italy. Prior to our sale of our Zurich Business, we also incurred a significant portion of our expenses in Swiss francs. Historically, we have entered into foreign currency forward exchange contracts in an effort to mitigate a portion of our exposure to exchange rate fluctuations between the U.S. dollar and the U.K. pound sterling. |
We recognize all derivatives, such as foreign currency forward exchange contracts, on our consolidated balance sheets at fair value regardless of the purpose for holding the instrument. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of the derivative will either be offset against the change in fair value of the hedged assets, liabilities or firm commitments through operating results or recognized in accumulated other comprehensive income until the hedged item is recognized in operating results in our consolidated statements of operations. |
At June 28, 2014 and June 29, 2013, we had no outstanding foreign currency forward exchange contracts. |
Accrued Expenses and Other Liabilities |
The following table provides details for our accrued expenses and other liabilities at the dates indicated: |
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| | | | | | | |
| June 28, 2014 | | June 29, 2013 |
| (Thousands) |
Accrued expenses and other liabilities: | | | |
Trade payables | $ | 18,612 | | | $ | 10,391 | |
|
Compensation and benefits related accruals | 10,242 | | | 13,117 | |
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Warranty accrual | 4,672 | | | 4,670 | |
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Accrued restructuring, current | 2,220 | | | 5,363 | |
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Other accruals | 15,746 | | | 18,469 | |
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| $ | 51,492 | | | $ | 52,010 | |
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Warranty |
We generally provide a warranty for our products ranging from 12 months to 36 months from the date of sale, although warranties for certain of our products may be longer. We accrue for the estimated costs to provide warranty services at the time revenue is recognized. Our estimate of costs to service our warranty obligations is based on historical experience and expectation of future conditions. To the extent we experience increased warranty claim activity or increased costs associated with servicing those claims, our warranty costs would increase, resulting in a decrease in gross profit. |
Revenue Recognition |
We recognize product revenue when (i) persuasive evidence of an arrangement exists, (ii) the product has been shipped and title has transferred, (iii) collectability is reasonably assured, (iv) the fees are fixed or determinable and (v) there are no uncertainties with respect to customer acceptance. We record a provision for estimated sales returns in the same period as the related revenues are recorded, which is netted against revenue. These estimates are based on historical sales returns, other known factors and our return policy. |
Research and Development Costs |
Research and development costs are expensed as incurred. |
Advertising Costs |
Advertising costs are expensed as incurred. Our advertising costs for the years ended June 28, 2014, June 29, 2013 and June 30, 2012 were not significant. |
Restructuring Expenses |
We record costs associated with employee terminations and other exit activities when the liability is incurred. Employee termination benefits are recorded when the benefit arrangement is communicated to the employee and no significant future services are required. If employees are required to render service until they are terminated in order to receive the termination benefits, the fair value of the termination date liability is recognized ratably over the future service period. Lease cancellation and commitment costs are recorded when we cease using the facility. Lease cancellation and commitment costs are calculated using estimated future lease commitments less estimated sublease income, based on current market conditions. See Note 5, Restructuring Liabilities. |
Insurance Recoveries |
Insurance recoveries related to impairment losses previously recorded and other recoverable expenses will be recognized up to the amount of our related loss or expense in the period that recoveries become realizable. Insurance recoveries under business interruption coverage and insurance recovery gains in excess of amounts previously written off related to impaired inventory and equipment or in excess of other recoverable expenses previously recognized will be recognized when they become realizable and all contingencies have been resolved. |
During the year ended June 28, 2014 and June 29, 2013, we received $3.7 million and $30.8 million in settlement payments, respectively, relating to losses we incurred due to flooding at our contract manufacturer in Thailand. As there were no contingencies associated with these payments, we recorded these payments within flood-related (income) expense, net in our consolidated statements of operations for the year ended June 28, 2014 and June 29, 2013, respectively. |
The evaluation of insurance recoveries requires estimates and judgments about future results which affect reported amounts and certain disclosures. Actual results could differ from those estimates. |
Stock-Based Compensation |
We use the Black-Scholes option pricing model to value the fair value of stock options, purchase rights under our employee stock purchase program and stock appreciation rights. We use grant date fair value to value restricted stock awards, restricted stock units and performance shares. |
We record compensation expense using the straight-line method and estimate forfeitures when recognizing compensation expense, and we adjust our estimate of forfeitures over the requisite service period based on the extent to which actual forfeitures differ, or are expected to differ, from such estimates. Changes in estimated forfeitures will be recognized through a cumulative catch-up adjustment in the period of change and will also impact the amount of compensation expense to be recognized in future periods. The amount of stock-based compensation expense recognized in any one period related to performance shares can vary based on the achievement or anticipated achievement of the performance conditions. If the performance conditions are not met or not expected to be met, no compensation cost would be recognized on the underlying performance shares, and any previously recognized compensation expense related to those performance shares would be reversed. |
Stock options have a term of seven to ten years and generally vest over a two to four year service period, and restricted stock awards generally vest over a one to four year service period, and in certain cases each may vest earlier based upon the achievement of specific performance-based objectives as set by our board of directors or may be subject to additional vesting conditions based upon achievement of such performance-based objectives. |
Foreign Currency Transactions and Translation Gains and Losses |
The assets and liabilities of our foreign operations are translated from their respective functional (local) currencies into U.S. dollars at the rates in effect at the consolidated balance sheet dates, and revenue and expense amounts are translated at the average rate during the applicable periods reflected on the consolidated statements of operations. Foreign currency translation adjustments are recorded as accumulated other comprehensive income, except for the translation adjustment of short-term intercompany loans or payables which are recorded as gain (loss) on foreign currency transactions in our consolidated statements of operations. Gains and losses from foreign currency transactions, realized and unrealized in the event of foreign currency transactions not designated as hedges, and those transactions denominated in currencies other than our functional currency, are recorded as gain (loss) on foreign currency transactions in our consolidated statements of operations. |
Income Taxes |
We account for income taxes using an asset and liability based approach. Deferred income tax assets and liabilities are recorded based on the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates. Valuation allowances are provided against deferred income tax assets which are not likely to be realized. |
Net Income (Loss) Per Share |
Basic net income (loss) per share is computed using only the weighted-average number of shares of common stock outstanding for the applicable period, while diluted net income (loss) per share is computed assuming conversion of all potentially dilutive securities, such as stock options, stock appreciation rights, unvested restricted stock awards, warrants, shares issuable in connection with convertible notes and obligations under escrow agreements during such period. For the fiscal years ended June 28, 2014, June 29, 2013 and June 30, 2012, we excluded such dilutive securities from the computation of diluted shares outstanding since we incurred a net loss from continuing operations in these periods and their inclusion would have an anti-dilutive effect. |
Recent Accounting Pronouncements |
In March 2013, the FASB issued ASU No. 2013-5, Foreign Currency Matters (Topic 830): Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity. This guidance amends a parent company’s accounting for the cumulative translation adjustment recorded in accumulated other comprehensive income associated with a foreign entity. The amendment requires a parent to release into net income the cumulative translation adjustment related to its investment in a foreign entity when it either sells a part or all of its investment, or no longer holds a controlling financial interest in a subsidiary or group of assets within a foreign entity. We elected to early adopt this guidance during our first quarter of fiscal year 2014. Accordingly, we treated our sale of our Zurich Business in the first quarter of fiscal year 2014 in accordance with this guidance and recorded $3.1 million in income from discontinued operations related to the cumulative translation adjustment from deconsolidating our Swiss subsidiary during the year ended June 28, 2014 within the consolidated statement of operations. This guidance will continue to impact our financial position and results of operations prospectively in the instance of an event or transaction described above. |
In July 2013, the FASB issued amended guidance that resolves the diversity in practice for the presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. This new accounting guidance requires the netting of unrecognized tax benefits ("UTBs") against a deferred tax asset for a loss or other carryforward that would apply in settlement of the uncertain tax positions. Under the new standard, UTBs will be netted against all available same-jurisdiction loss or other tax carryforwards that would be utilized, rather than only against carryforwards that are created by the UTBs. The new standard requires prospective adoption but allows retrospective adoption for all periods presented. We have adopted this guidance during our second quarter of fiscal year 2014. The adoption of the guidance did not have a significant impact on our financial position, results of operations or cash flows. |
In April 2014, the FASB issued ASU No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. This update requires that a disposal representing a strategic shift that has (or will have) a major effect on an entity's financial results or a business activity classified as held for sale should be reported as discontinued operations. The standard also expands the disclosures for discontinued operations and requires new disclosures related to individually material disposals that do not meet the definition of a discontinued operation. The provisions of this ASU are effective for interim and annual periods beginning after December 15, 2014. This guidance is effective for us prospectively in the third quarter of fiscal year 2015. We do not expect these changes to have a material impact on our consolidated financial statements. |
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. The FASB issued ASU 2014-09 to clarify the principles for recognizing revenue and to develop a common revenue standard for GAAP and International Financial Reporting Standards. The standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance. This guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2016. This guidance is effective for us prospectively in the first quarter of fiscal year 2018. We are currently evaluating the impact that the implementation of this standard will have on our financial statements. |