Organization and Significant Accounting Policies (Policies) | 12 Months Ended |
Dec. 27, 2013 |
Accounting Policies [Abstract] | ' |
Organization | ' |
Organization — Ultra Clean Holdings, Inc. (Ultra Clean or the Company) was founded in November 2002 for the purpose of acquiring Ultra Clean Technology Systems and Service Inc. Ultra Clean Technology Systems and Service, Inc. was founded in 1991 by Mitsubishi Corporation and was operated as a subsidiary of Mitsubishi until November 2002, when it was acquired by Ultra Clean. Ultra Clean became a publicly traded company in March 2004. In June 2006, the Company completed the acquisition of Sieger Engineering, Inc. to better enhance its position as a subsystem supplier to the semiconductor, research, flat panel, energy and medical equipment industries. Ultra Clean Technology (Shanghai) Co., Ltd and Ultra Clean Micro-Electronics Equipment (Shanghai) Co., Ltd. were established in 2005 and 2007, respectively, to facilitate the Company’s operations in China. Ultra Clean Asia Pacific, Pte, Ltd. (Singapore), was established in fiscal year 2008 to facilitate the Company’s operations in Singapore. In July 2012, the Company acquired American Integration Technologies LLC (“AIT”) to immediately add to the Company’s customer base in the semiconductor and medical spaces and to provide additional manufacturing capabilities. The Company operates in one reportable segment. See Note 10 to the Consolidated Financial Statements. |
The Company is a leading developer and supplier of critical subsystems, for Original Equipment Manufacturers (OEMs) primarily in the semiconductor, flat panel, medical, energy and research industries. The Company develops, designs, prototypes, engineers, manufactures and tests systems and subsystems which are highly specialized and integral to the Company’s customers products. |
The Company provides its customers with complete solutions that combine its expertise in design, test, component characterization and highly flexible global manufacturing operations with excellence in quality control and financial stability. The Company’s global presence and supply chain management helps the Company to drive down total manufacturing costs, reduce design-to-delivery cycle times and maintain high quality standards for the Company’s customers. The Company believes that these characteristics provide global solutions for the Company’s customers’ growing product demands. |
The Company ships a majority of its products to U.S. registered customers with locations both in the U.S. and outside the U.S. In addition to US manufacturing, the Company manufactures products in its Asian facilities to support local and US based customers. The Company conducts its operating activities primarily through its wholly owned subsidiaries: Ultra Clean Technology Systems and Service, Inc., AIT LLC, Ultra Clean Technology (Shanghai) Co., Ltd., Ultra Clean Micro-Electronics Equipment (Shanghai) Co., Ltd. and Ultra Clean Asia Pacific, Pte Ltd. (Singapore). The Company’s international sales represented 28.5%, 22.2% and 21.1% of sales for fiscal years 2013, 2012 and 2011, respectively. See Note 10 to the Company’s Consolidated Financial Statements for further information about the Company’s geographic areas. |
Principles of Consolidation | ' |
Principles of Consolidation — The Company’s consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries and all intercompany accounts and transactions have been eliminated in consolidation. The Company uses a 52-53 week fiscal year ending on the Friday nearest December 31. All references to quarters refer to fiscal quarters and all references to years refer to fiscal years. |
Foreign Currency Translation | ' |
Foreign Currency Translation — The Company has reviewed its non-U.S. subsidiaries (of which all of its non-U.S. asset base resides in Asia) that operate in a local currency environment to determine their functional currency by examining how and in what currency each subsidiary generates cash through billings and cash receipts and how and in what currency the subsidiary expends cash through payment of its vendors and payment of its workforce. Also, these subsidiaries’ individual assets and liabilities that are primarily denominated in the local foreign currency are examined for their impact on the Company’s cash flows. All have been determined to have the U.S. dollar as its functional currency. All balance sheet accounts of these local functional currency subsidiaries are translated at the fiscal period-end exchange rate, and income and expense accounts are translated using average rates in effect for the period, except for costs related to those balance sheet items that are translated using historical exchange rates. Foreign currency transaction gains and losses are recorded in other income (expense), net. |
In July 2012, the Company completed its acquisition of AIT. Beginning in the third quarter of fiscal 2012, the acquired business is included in the Company’s consolidated results of operations. |
Use of Accounting Estimates | ' |
Use of Accounting Estimates — The presentation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosures of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Such estimates and assumptions include reserves on inventory, valuation of deferred tax assets and impairment of goodwill and other long-lived assets. The Company bases its estimates and judgments on historical experience and on various other assumptions that it believes are reasonable under the circumstances. However, future events are subject to change and the best estimates and judgments routinely require adjustment. Actual amounts may differ from those estimates. |
Certain Significant Risks and Uncertainties | ' |
Certain Significant Risks and Uncertainties — The Company operates in a dynamic industry and, accordingly, can be affected by a variety of factors. For example, any of the following areas could have a negative effect on the Company in terms of its future financial position, results of operations or cash flows: the general state of the U.S. and world economies, the highly cyclical nature of the industries the Company serves; the loss of any of a small number of customers; ability to obtain additional financing; inability to meet certain debt covenants; failure to successfully integrate completed acquisitions; ineffectiveness in pursuing acquisition opportunities; regulatory changes; fundamental changes in the technology underlying semiconductor, flat panel, solar and medical device manufacturing processes or manufacturing equipment; the hiring, training and retention of key employees; successful and timely completion of product design efforts; and new product design introductions by competitors. |
Concentration of Credit Risk | ' |
Concentration of Credit Risk — Financial instruments which subject the Company to concentrations of credit risk consist principally of cash and cash equivalents and accounts receivable. The Company sells its products primarily to semiconductor capital equipment manufacturers in the United States. The Company performs credit evaluations of its customers’ financial condition and generally requires no collateral. |
Significant sales to customers | ' |
Significant sales to customers— The Company’s most significant customers (having accounted for 10% or more of annual sales) and their related sales as a percentage of total sales for each of the previous three years, were as follows: |
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| | Fiscal Year Ended | | | | | |
| | 2013 | | | 2012 | | | 2011 | | | | | |
Applied Materials, Inc. (1) | | | 35 | % | | | 38 | % | | | 40 | % | | | | |
Lam Research Corporation (2) | | | 33 | % | | | 33 | % | | | 31 | % | | | | |
ASM International, Inc. | | | 13 | % | | | — | | | | — | | | | | |
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Total | | | 81 | % | | | 71 | % | | | 71 | % | | | | |
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-1 | In November 2011, Applied Materials Inc. (Applied) completed the acquisition of Varian Semiconductor Equipment Associates, Inc. (Varian), one of the Company’s customers. The sales percentages for Applied for 2011 include sales to Varian. The sales percentages for Applied for all periods presented have been updated to reflect the inclusion of sales to Varian for comparison purposes. | | | | | | | | | | | | | | | |
-2 | In June 2012, Lam Research Corporation (Lam) completed the acquisition of Novellus Systems, Inc.(Novellus), one of the Company’s customers. The sales percentages for Lam for 2012 and 2011 include sales to Novellus. The sales percentages for Lam for all periods presented have been updated to reflect the inclusion of sales to Novellus for comparison purposes. | | | | | | | | | | | | | | | |
Three customers’ accounts receivable balances: Applied, Lam and ASM International, were individually greater than 10% of accounts receivable as of December 27, 2013 and, in the aggregate, represented approximately 82% of accounts receivable. Three customers’ accounts receivable balances: Applied, Lam and ASM International, were individually greater than 10% of accounts receivable as of December 28, 2012 and, in the aggregate, represented approximately 84% of accounts receivable. |
Fair Value of Financial Instruments | ' |
Fair Value of Financial Instruments — The Company’s financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable and bank borrowings. The carrying value of cash and cash equivalents, accounts receivable and accounts payable approximates their fair value because of their short-term nature. |
The accounting guidance for fair value measurements prioritizes the inputs used in measuring fair value in the following hierarchy: |
Level 1 — Quoted prices in active markets for identical assets or liabilities, |
Level 2 — Observable inputs other than the Level 1 prices for similar assets or liabilities; quoted prices in active and inactive markets or other inputs that are observable or can be corroborated by observable market data for substantially the full term of assets or liabilities, |
Level 3 — Unobservable inputs in which there is little or no market data, and that are significant to the fair value of the assets or liabilities. |
The Company’s only financial asset measured at fair value on a recurring basis is an overnight sweep account invested in money market funds with maturities of less than 90 days from purchase and are thus classified as cash and cash equivalents on the Company’s balance sheet. These money market funds had a carrying value and fair value of $13.4 million at December 27, 2013, based on Level 2 inputs. The Company’s financial liabilities measured at fair value are related to the Company’s credit facility. Specifically, the fair value of the Company’s long term debt was based on level 2 inputs and fair value was determined using quoted prices for similar liabilities in inactive markets. The fair value of the Company’s outstanding borrowings under the Company’s revolving credit facility were based on level 2 inputs and fair value was determined using inputs other than quoted prices that are observable, specifically, discounted cash flows of expected payments at current borrowing rates. The Company’s carrying value approximates fair value for the Company’s long term debt and revolving credit facility. |
Financial assets and liabilities measured at fair value as of December 27, 2013 and December 28, 2012 are summarized below: |
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| | Quoted Prices | | | Significant | | | Quoted Prices | | | Significant | |
in Active | Other | in Active | Other |
Markets for | Observable | Markets for | Observable |
Identical | Inputs | Identical | Inputs |
Assets | | Assets | |
| | 27-Dec-13 | | | 28-Dec-12 | |
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| | (level 1) | | | (level 2) | | | (level 1) | | | (level 2) | |
Money market fund deposits (1) | | $ | 13,414,482 | | | | — | | | $ | 13,414,482 | | | | — | |
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-1 | Included in cash and cash equivalents on the Consolidated Balance Sheet. The carrying amounts approximate fair value due to the short-term maturities of the cash equivalents. | | | | | | | | | | | | | | | |
Inventories | ' |
Inventories — Inventories are stated at the lower of standard cost (which approximates actual cost on a first-in, first-out basis) or market. The Company evaluates the valuation of all inventories, including raw materials, work-in-process, finished goods and spare parts on a periodic basis. Obsolete inventory or inventory in excess of management’s estimated usage is written-down to its estimated market value less costs to sell, if less than its cost. Inherent in the estimates of market value are management’s estimates related to economic trends, future demand for products, and technological obsolescence of the Company’s products. |
Inventory write downs inherently involve judgments as to assumptions about expected future demand and the impact of market conditions on those assumptions. Although the Company believes that the assumptions it used in estimating inventory write downs are reasonable, significant changes in any one of the assumptions in the future could produce a significantly different result. There can be no assurances that future events and changing market conditions will not result in significant increases in inventory write downs. |
At December 27, 2013 and December 28, 2012, inventory balances were $63.9 million and $54.0 million, respectively, net of reserves of $6.8 million and $6.2 million, respectively. The inventory write-downs are recorded as an inventory valuation allowance established on the basis of obsolete inventory or specific identified inventory in excess of estimated usage. Inventory write-downs were $1.5 million, $1.2 million and $1.4 million in the years ended December 27, 2013, December 28, 2012 and December 30, 2011, respectively. |
Equipment and Leasehold Improvements | ' |
Equipment and Leasehold Improvements — Equipment and leasehold improvements are stated at cost, or, in the case of equipment under capital leases, the present value of future minimum lease payments at inception of the related lease. Depreciation and amortization are computed using the straight-line method over the lesser of the estimated useful lives of the assets or the terms of the leases. Useful lives range from three to fifteen years. |
Product Warranty | ' |
Product Warranty — The Company provides a warranty on its products for a period of up to two years, and provides for warranty costs at the time of sale based on historical activity. Determination of the warranty reserve requires the Company to make estimates of product return rates and expected costs to repair or replace the products under warranty. If actual return rates and/or repair and replacement costs differ significantly from these estimates, adjustments to recognize additional cost of sales may be required in future periods. The warranty reserve is included in other current liabilities on the consolidated balance sheet. Product warranty cost activity consisted of the following (in thousands): |
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| | Year Ended | | | | | |
| | December 27, | | | December 28, | | | December 30, | | | | | |
2013 | 2012 | 2011 | | | | |
Beginning Balance | | $ | 152 | | | $ | 350 | | | $ | 204 | | | | | |
Additions related to sales | | | 48 | | | | 47 | | | | 726 | | | | | |
Warranty costs incurred | | | (99 | ) | | | (245 | ) | | | (580 | ) | | | | |
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Ending Balance | | $ | 101 | | | $ | 152 | | | $ | 350 | | | | | |
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Income Taxes | ' |
Income Taxes — The Company utilizes the asset and liability method of accounting for income taxes, under which deferred taxes are determined based on the temporary differences between the financial statement and tax basis of assets and liabilities using tax rates expected to be in effect during the years in which the basis differences reverse. A valuation allowance is recorded when it is more likely than not that some of the deferred tax assets will not be realized. |
Income tax positions must meet a more-likely-than-not recognition threshold to be recognized. Income tax positions that previously failed to meet the more-likely-than-not threshold are recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not threshold are derecognized in the first subsequent financial reporting period in which that threshold is no longer met. The Company recognizes potential accrued interest and penalties related to unrecognized tax benefits within the consolidated statements of income as income tax expense. |
The determination of the Company’s tax provision is subject to judgments and estimates. The carrying value of the Company’s net deferred tax assets, which is made up primarily of tax deductions, assumes it will be able to generate sufficient future income to fully realize these deductions. In determining whether the realization of these deferred tax assets may be impaired, the Company makes judgments with respect to whether it is likely to generate sufficient future taxable income to realize these assets. The Company has a valuation allowance on the deferred tax assets of one of its China subsidiaries in the amounts of $654,000 and $851,000 as of December 27, 2013 and December 28, 2012, respectively. |
The calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in the application of complex tax laws. Resolution of these uncertainties in a manner inconsistent with the Company’s expectations could have a material impact on its results of operations and financial position. Management believes that it has adequately provided for any adjustments that may result from these examinations, however, the outcome of tax audits cannot be predicted with certainty. |
Revenue Recognition | ' |
Revenue Recognition — Product revenue is generally recorded upon shipment. In arrangements which specify title transfer upon delivery, revenue is not recognized until the product is delivered. The Company recognizes revenue when persuasive evidence of an arrangement exists, shipment has occurred, price is fixed or determinable and collectability is reasonably assured. If the Company has not substantially completed a product or fulfilled the terms of a sales agreement at the time of shipment, revenue recognition is deferred until fulfillment. The Company’s standard arrangement for its customers includes a signed purchase order or contract, no right of return of delivered products and no customer acceptance provisions. |
The Company assesses collectability based on the credit worthiness of the customer and past transaction history. The Company performs on-going credit evaluations of customers and generally does not require collateral from customers. |
Research and Development Costs | ' |
Research and Development Costs — Research and development costs are expensed as incurred. |
Net Income per Share | ' |
Net Income per Share — Basic net income per share is computed by dividing net income by the weighted average number of shares outstanding for the period. Diluted net income per share is calculated by dividing net income by the weighted average number of common shares outstanding and common equivalent shares from dilutive stock options and restricted stock using the treasury stock method, except when such shares are anti-dilutive (see Note 9 to Consolidated Financial Statements). |
Comprehensive Income (Loss) | ' |
Comprehensive Income (Loss) — The Company reports by major components and as a single total, the change in its net assets during the period from non-owner sources. Comprehensive income (loss) for all periods presented was the same as net income (loss). |
Segments | ' |
Segments — The Financial Accounting Standards Board’s (FASB) guidance regarding disclosure about segments in an enterprise and related information establishes standards for the reporting by public business enterprises of information about reportable segments, products and services, geographic areas, and major customers. The method for determining what information to report is based on the manner in which management organizes the reportable segments within the Company for making operational decisions and assessments of financial performance. The Company’s chief operating decision-maker is considered to be the Chief Executive Officer. The Company operates in one reporting segment. |
Business Combinations | ' |
Business Combinations—The Company recognizes assets acquired (including goodwill and identifiable intangible assets) and liabilities assumed at fair value on the acquisition date. Subsequent changes to the fair value of such assets acquired and liabilities assumed are recognized in earnings, after the expiration of the measurement period, a period not to exceed 12 months from the acquisition date. Acquisition-related expenses and acquisition-related restructuring costs are recognized in earnings in the period in which they are incurred. |
Stock-based compensation | ' |
Stock-based compensation |
The Company maintains stock-based compensation plans which allow for the issuance of equity-based awards to executives and certain employees. These equity-based awards include stock options, restricted stock awards and restricted stock units. The Company also maintains an employee stock purchase plan (“ESPP”) that provides for the issuance of shares to all eligible employees of the Company at a discounted price. |
Stock-based compensation expense includes compensation costs related to estimated fair values of stock options, units and awards granted. Stock-based compensation expense from stock options, restricted stock units and stock awards and the related income tax benefit recognized were $4.7 million and $0.8 million, respectively, for fiscal year 2013, $5.1 million and $1.2 million, respectively, for fiscal year 2012 and $4.4 million and $1.0 million, respectively, for fiscal year 2011. |
The estimated fair value of the Company’s equity-based awards, net of expected forfeitures, is amortized over the awards’ vesting period on a straight-line basis over a weighted average period of four years for stock options, three years for restricted stock units and one year for restricted stock awards and will be adjusted for subsequent changes in estimated forfeitures and future option grants. |
The stockholders of the Company approved an increase in the number of shares available for issuance under our amended and restated stock incentive plan by 1,500,000 and 3,100,000 on June 10, 2010 and May 22, 2013, respectively. |
Determining Fair Value for stock based compensation | ' |
Determining Fair Value for stock based compensation |
Valuation and amortization method. The Company estimates the fair value of stock options granted using the Black-Scholes option valuation model and a single option award approach. All options are amortized over the requisite service periods of the awards, which are generally the vesting periods, and are amortized using the straight-line basis method. |
Expected term. The expected term of options granted represents the period of time that they are expected to be outstanding. The Company estimates the expected term of options granted based on historical exercise patterns, which the Company believes are reasonably representative of future behavior. |
Expected volatility. The Company estimates the volatility of its common stock at the date of grant based on historical volatility rates of the Company’s stock over the expected term. |
Risk-free interest rate. The Company bases the risk-free interest rate on the implied yield in effect at the time of option grant on U.S. Treasury zero-coupon issues with equivalent remaining term. |
Dividend yield. The Company has never paid any cash dividends on its common stock and does not anticipate paying any cash dividends in the foreseeable future. Consequently, the Company uses an expected dividend yield of 0.0%. |
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Forfeiture rate. Guidance per the Financial Accounting Standards Board regarding stock-based compensation requires the Company to estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. |
The exercise price of each stock option equals the market price of the Company’s stock on the date of grant. There were no employee stock option grants by the Company for years 2013, 2012 and 2011. Generally, options vest over four years and expire no later than ten years from the grant date. During fiscal years 2013, 2012 and 2011, the Company recorded $3.9 million, $3.9 million and $3.3 million, respectively, of stock-based compensation expense, net of tax, associated with employee and director stock plans and employee stock purchase plan programs. As of December 27, 2013, there was $4.6 million, net of forfeitures of $0.8 million, of unrecognized compensation cost related to employee and director stock which is expected to be recognized on a straight-line basis over a weighted average period of approximately 1.5 years, and will be adjusted for subsequent changes in estimated forfeitures and future grants. |
Total stock-based compensation during the fiscal years 2013, 2012 and 2011, respectively, to various operating expense categories was as follows (in thousands): |
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| | Year Ended | | | | | |
| | December 27, | | | December 28, | | | December 30, | | | | | |
2013 | 2012 | 2011 | | | | |
Cost of goods sold (1) | | $ | 1,197 | | | $ | 1,263 | | | $ | 1,397 | | | | | |
Sales and marketing | | | 474 | | | | 475 | | | | 380 | | | | | |
Research and development | | | 290 | | | | 339 | | | | 325 | | | | | |
General and administrative | | | 2,724 | | | | 2,992 | | | | 2,257 | | | | | |
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| | | 4,685 | | | | 5,069 | | | | 4,359 | | | | | |
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Income tax benefit | | | (810 | ) | | | (1,171 | ) | | | (1,046 | ) | | | | |
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Net stock-based compensation expense | | $ | 3,875 | | | $ | 3,898 | | | $ | 3,313 | | | | | |
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-1 | Stock-based compensation expenses capitalized in inventory for fiscal years 2012 and 2013 were considered immaterial. There were no stock-based compensation expenses capitalized in inventory for fiscal year 2011. At the end of fiscal 2012, the Company began including stock compensation as a component of the absorption calculation for inventory. | | | | | | | | | | | | | | | |
Intangible Assets | ' |
Intangible Assets |
Goodwill and indefinite-lived intangible assets are not amortized, but are reviewed for impairment annually. Purchased intangible assets are presented at cost, net of accumulated amortization, and are amortized on either a straight-line method or on an accelerated method over their estimated future discounted cash flows. The Company accounts for intangible assets in accordance with ASC 360. The Company reviews goodwill and purchased intangible assets with indefinite lives for impairment annually and whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable, such as when reductions in demand or significant economic slowdowns in the semiconductor industry are present. |
Intangible assets reviews are performed to determine whether the carrying value is impaired, based on comparisons to undiscounted expected future cash flows. If this comparison indicates that there is impairment, the impaired asset is written down to fair value, which is typically calculated using: (i) quoted market prices or (ii) discounted expected future cash flows utilizing a discount rate. See Note 4 for further discussion. |
Goodwill is recorded as the difference, if any, between the aggregate consideration paid for an acquisition and the fair value of the net tangible and intangible assets acquired. In accordance with ASC No. 350, Intangibles-Goodwill and Other, (“ASC 350”), the Company tests goodwill for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis in the fourth quarter of each fiscal year or more frequently if the Company believes indicators of impairment exist. The performance of the test involves a two-step process. The first step of the impairment test involves comparing the fair values of the applicable reporting units with their aggregate carrying values, including goodwill. The Company generally determines the fair value of the Company’s reporting units using the income approach methodology of valuation that includes the discounted cash flow method as well as other generally accepted valuation methodologies. If the carrying amount of a reporting unit exceeds the reporting unit’s fair value, the Company performs the second step of the goodwill impairment test to determine the amount of impairment loss. The second step of the goodwill impairment test involves comparing the implied fair value of the affected reporting unit’s goodwill with the carrying value of that goodwill. The Company would then record a charge based on the results of the second step. |
Long-lived Assets | ' |
Long-lived Assets |
The Company evaluates long-lived assets for impairment whenever events or changes in circumstances indicate the carrying value of an asset group may not be recoverable. The Company assesses the fair value of the assets based on the amount of the undiscounted future cash flows that the assets are expected to generate and recognizes an impairment loss when estimated undiscounted future cash flows expected to result from the use of the asset are less than the carrying value of the asset. If the Company identifies an impairment, the Company reduces the carrying value of the group of assets to comparable market values, when available and appropriate, or to its estimated fair value based on a discounted cash flow approach. |
At the end of fiscal years 2013, 2012 and 2011, the Company assessed the useful lives of its long-lived assets, including property, plant and equipment as well as its intangible assets and concluded that no impairment was required. |
Recently Issued Accounting Standards | ' |
Recently Issued Accounting Standards |
In July 2013, the Financial Accounting Standards Board (FASB) issued authoritative guidance that will require an unrecognized tax benefit to be presented as a reduction of a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward, with certain exceptions. The authoritative guidance becomes effective for the Company in the first quarter of fiscal 2014. The guidance is not expected to have an impact on the Company’s financial position or results of operations. |