Summary of Significant Accounting Policies (Policies) | 12 Months Ended |
Jun. 29, 2014 |
Accounting Policies [Abstract] | ' |
Description of Business | ' |
Description of Business |
Emulex Corporation (Emulex or the Company), a Delaware corporation, creates high-performance network connectivity, monitoring and management products, providing solutions for global networks that support enterprise, cloud, government and telecommunications. The Company’s products enable industry leading end-to-end application visibility, optimization, and acceleration in the data center and have been designed into server and storage solutions from leading Original Equipment Manufacturers (OEMs). |
Emulex’s storage and server networking offerings include host bus adapters (HBAs), mezzanine cards for blade servers, Converged Network Adapters (CNAs), Universal Converged Network Adapters (UCNAs), Local Area Network on Motherboards (LOMs), embedded storage bridges, routers, and switches, storage Input/Output controllers (IOCs), and data center networking solutions. HBAs and mezzanine cards are the data communication products that enable servers to connect to storage networks by offloading communication processing tasks as information is delivered and sent to the storage network. CNAs efficiently move data between local area networks and storage area networks using Ethernet and Fibre Channel over Ethernet protocols. UCNAs provide for efficiency of data center operations by consolidating the usage of single protocol cards into using a single card to handle multiple protocol traffic for all applications and leading server architectures. LOMs are Ethernet Controllers targeting enterprise applications requiring high wire-speed performance, multi-protocol offload capabilities, and advanced Input/Output virtualization. Embedded storage bridges, routers, switches, and IOCs are deployed inside storage arrays, tape libraries and other storage appliances. |
The Company’s monitoring and management solutions, including its portfolio of Intelligent Network Recorders (INR) and network visibility products, provide organizations with complete network performance management at speeds up to 100 gigabit (Gb) Ethernet. INR technology provides data packet capture ability to respond efficiently to network problems and establish the true root cause of service-affecting issues, which is critical for large organizations that depend on their networks for business continuity. |
Principles of Consolidation | ' |
Principles of Consolidation |
The consolidated financial statements include the accounts of Emulex Corporation, and its wholly-owned subsidiaries. Material intercompany transactions and balances have been eliminated in consolidation. |
Fiscal Period | ' |
The Company operates under a 52 to 53 week fiscal year that ends on the Sunday nearest to June 30. Accordingly, every fifth or sixth fiscal year will be a 53-week fiscal year. The last 53 week fiscal year was fiscal 2011. All references to years in these notes to consolidated financial statements represent fiscal years unless otherwise noted. |
Prior Period Reclassification Adjustment | ' |
Certain reclassifications have been made to prior year amounts to conform to current year’s presentation on the consolidated balance sheets, and in Notes 7, 14 and 15 and Schedule II. |
Use of Estimates | ' |
Use of Estimates |
The preparation of the consolidated financial statements, notes, and related disclosures in conformity with U.S. generally accepted accounting principles requires management to make a number of estimates and assumptions relating to the reported amount of assets and liabilities, and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period. Estimates are used for, but not limited to, valuation of goodwill; deferred taxes and any associated valuation allowances; tax uncertainties; allowances for doubtful accounts; sales allowances; inventory valuation; warranty and other accrued liabilities; cost of an acquired entity and allocation of purchase price; fair value measurements; and litigation costs and related accruals. Actual results could differ materially from management’s estimates. |
Foreign Currency Translation | ' |
Foreign Currency Translation |
Assets and liabilities are translated into U.S. dollars at the exchange rate at each balance sheet date, whereas revenues and expenses are translated into U.S. dollars at the average exchange rate for the reporting period. Translation adjustments are included in accumulated other comprehensive income (loss) and realized transaction gains and losses are recorded within other income (expense), net in the consolidated statements of operations. Foreign exchange (losses)/gains were approximately $(0.2) million, $(5.0) million and $0.4 million in fiscal 2014, 2013 and 2012, respectively. |
Cash Equivalents | ' |
Cash Equivalents |
Cash equivalents consist of short term, highly liquid investments with original maturities of three months or less. |
Restricted Cash | ' |
Restricted Cash |
Restricted cash primarily represents deposits under lien to secure bank rental guarantees and letters of credit. Restricted cash was approximately $0.3 million at both June 29, 2014 and June 30, 2013, and is included within prepaid expenses and other current assets in the Consolidated Balance Sheets. |
Accounts Receivable | ' |
Accounts Receivable |
Accounts receivable are recorded at the invoiced amount and do not bear interest. The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of the Company’s customers to make requested payments based upon historical write-offs as a percentage of net revenues and management’s review of outstanding accounts receivable. Amounts due from customers are charged against the allowance for doubtful accounts when management believes the collectability of the amount is unlikely. Although the Company has not experienced significant losses on accounts receivable historically, its accounts receivable are concentrated with a small number of customers. Consequently, any write-off associated with one of these customers could have a significant impact on the Company’s allowance for doubtful accounts and results of operations. |
Inventories | ' |
Inventories |
Inventories are stated at the lower of cost on a first-in, first-out basis or market. The Company regularly compares forecasted demand for its products against inventory on hand and open purchase commitments and adjusts the carrying value of inventories to their net realizable value. |
Property and Equipment | ' |
Property and Equipment |
Property and equipment are stated at cost. Depreciation is calculated using the straight-line method over estimated useful lives of 1 to 5 years for building improvements, up to 39 years for buildings and land improvements, 1 to 7 years for production and test equipment, and 1 to 10 years for furniture and fixtures. Leasehold improvements are amortized using the straight-line method over the shorter of the remaining lease term or the estimated useful life of the asset. Depreciation expense related to property and equipment used in the production process is recorded in cost of sales. Depreciation expense related to property and equipment used in all other activities is recorded in operating expenses. |
Goodwill | ' |
Goodwill |
Goodwill is recorded as the difference, if any, between the aggregate consideration paid for an acquisition and the fair value of the acquired net tangible and intangible assets. Goodwill is not amortized, but instead, is tested at least annually for impairment, or more frequently when events or changes in circumstances indicate that goodwill might be impaired. In assessing goodwill impairment for each of its reporting units, the Company has the option to first assess the qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The Company’s qualitative assessment of the recoverability of goodwill considers various macroeconomic, industry-specific and company-specific factors including: (i) severe adverse industry or economic trends; (ii) significant company-specific actions; (iii) current, historical or projected deterioration of the Company’s financial performance; or (iv) a sustained decrease in the Company’s market capitalization below its net book value. If, after assessing the totality of events or circumstances, the Company determines it is unlikely that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. However, if the Company concludes otherwise, then the Company is required to perform the first step of the two-step impairment test by comparing the fair value of the reporting unit, determined using future projected discounted operating cash flows, with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill is not considered impaired; otherwise, goodwill is considered impaired and the loss is measured by performing step two. Under step two, the impairment loss is measured by comparing the implied fair value of the reporting unit goodwill with the carrying amount of goodwill. The Company also has the option to bypass the qualitative assessment and proceed directly to performing the first step of the two-step goodwill impairment test. The Company may resume performing the qualitative assessment in any subsequent period. The annual impairment test is performed during the fourth fiscal quarter. See Note 6, “Goodwill and Intangible Assets, Net,” for additional information. |
Intangible Assets and Other Long-Lived Assets | ' |
Intangible Assets and Other Long-Lived Assets |
Intangible assets resulting from acquisitions or licensing agreements are carried at cost less accumulated amortization and impairment charges, if any. For assets with determinable useful lives, amortization is computed using the straight-line method over the estimated economic lives of the respective intangible assets, ranging from one to thirteen years. Acquired in-process research and development (IPR&D) is recorded at fair value as an indefinite-lived intangible asset at the acquisition date until the completion or abandonment of the associated research and development efforts or impairment. IPR&D projects relate to in-process projects that have not reached technological feasibility as of the acquisition date and have no alternative future use. Upon completion of development, acquired in-process research and development assets are transferred to finite-lived intangible assets and amortized over their useful lives. |
Intangible assets and other long-lived assets are tested for recoverability whenever events or circumstances indicate that their carrying value may not be recoverable. The amount of impairment, if any, is measured based on fair value, which is determined using future projected discounted operating cash flows. Assets to be disposed of are reported at the lower of the carrying amount or fair value less selling costs. |
Revenue Recognition | ' |
Revenue Recognition |
The majority of the Company’s hardware sales are made to OEM customers. Emulex generally recognizes revenue for hardware sales at the time of shipment when title and risk of loss have passed, evidence of an arrangement has been obtained, pricing is fixed or determinable, and collectability is reasonably assured. Additionally, the Company maintains sales related reserves for its expected returns and sales incentive programs. Based on the specific program criteria, the Company classifies the costs of these incentive programs as a reduction to revenue, a cost of sale, or an operating expense. |
The Company makes certain sales through two tier distribution channels using selected distributors and Master Value Added Resellers (collectively, Distributors). These Distributors are subject to distribution agreements that may be terminated upon written notice by either party, and that generally provide privileges to return a portion of inventory and to participate in price protection and cooperative marketing programs that limit the Company's ability to reasonably estimate product returns and the final price of inventory sold to distributors. Accordingly, the Company recognizes revenue on standard non-OEM specific products sold to its Distributors based on a sell-through model. OEM specific models sold to Distributors are generally governed under the related OEM agreements rather than under these distribution agreements; accordingly, the Company generally recognizes revenue at the time of shipment for OEM specific products shipped to its Distributors. |
The Company also enters into certain sales transactions, referred to as multiple-element arrangements, which generally include the sale of hardware with standalone value that includes embedded software that is essential to the functionality of such hardware, and related maintenance services for a period of one to three years. These sale arrangements do not include return rights or contingent payment terms. The Company uses the following hierarchy to determine the selling price to be used for allocating revenue to each deliverable: (i) vendor-specific evidence (VSOE) of fair value, if available, (ii) third-party evidence (TPE) of selling price if VSOE is not available, and (iii) best estimate of the selling price (BESP) if neither VSOE nor TPE is available. BESPs reflect the Company’s best estimates of what the selling prices of elements would be if they were sold regularly on a stand-alone basis. The Company utilizes BESP as VSOE and TPE was determined not to exist for its deliverables in these arrangements. The Company’s process for determining its BESPs considers multiple factors including prices charged by the Company for similar offerings; historical pricing practices; and product-specific profit objectives. Such factors can impact the timing and amount of revenues and net income recognized over the term of the contract. Consideration allocated to equipment is recognized in accordance with our general revenue recognition criteria for product sales discussed above. Consideration allocated to the maintenance element is recognized on a straight-line basis over the term of the maintenance agreement. Amounts received in advance of revenue recognition are recorded as deferred revenues. |
Warranty | ' |
Warranty |
The Company provides a warranty of between one and five years on its products. The Company records a provision for estimated warranty related costs at the time of sale based on historical product return rates and the Company’s estimates of future costs of fulfilling its warranty obligations. The Company evaluates its ongoing warranty obligation on a quarterly basis. |
Research and Development | ' |
Research and Development |
Research and development costs, including costs related to the development of new products and process technology, are expensed as incurred. |
Advertising Expenses | ' |
Advertising Expenses |
Advertising costs are expensed as incurred. Advertising expenses amounted to approximately $6.9 million, $5.0 million, $6.3 million and for fiscal years 2014, 2013 and 2012, respectively. |
Income Taxes | ' |
Income Taxes |
The Company accounts for income taxes using the asset and liability method, under which the Company recognizes deferred tax assets and liabilities for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and for net operating loss and tax credit carryforwards. Tax positions that meet a more-likely-than-not recognition threshold are recognized in the first reporting period that it becomes more-likely-than-not such tax position will be sustained upon examination. A tax position that meets this more-likely-than-not recognition threshold is recorded at the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. Previously recognized income tax positions that fail to meet the recognition threshold in a subsequent period are derecognized in that period. Differences between actual results and the Company's assumptions, or changes in the assumptions in future periods, are recorded in the period they become known. The Company records potential accrued interest and penalties related to unrecognized tax benefits in income tax expense. |
As a multinational corporation, the Company is subject to complex tax laws and regulations in various jurisdictions. The application of tax laws and regulations is subject to legal and factual interpretation, judgment, and uncertainty. Tax laws themselves are subject to change as a result of changes in fiscal policy, changes in legislation, evolution of regulations and court rulings. Therefore, the actual liability for U.S. or foreign taxes may be materially different from the Company's estimates, which could result in the need to record additional liabilities or potentially to reverse previously recorded tax liabilities. |
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date. A valuation allowance is recorded against any deferred tax assets when, in the judgment of management, it is more likely than not that all of or part of a deferred tax asset will not be realized. In assessing the need for a valuation allowance, the Company considers all positive and negative evidence, including recent financial performance, scheduled reversals of temporary differences, projected future taxable income, availability of taxable income in carryback periods, and tax planning strategies. |
Stock-Based Compensation | ' |
Stock-Based Compensation |
The Company accounts for its stock-based awards to employees and non-employees using the fair value method. Although the Company grants unvested stock awards, cash-settled stock unit awards and stock options, the majority of the awards granted and stock based compensation recognized consists of unvested stock awards. The fair value of each unvested stock award is determined based on the closing price of the underlying common stock on the date of grant. The fair value of each cash-settled stock unit award is determined based on the closing price of the Company's common stock upon vesting, and therefore, is subject to remeasurement at each reporting period until the award is vested. For stock options, the fair value of each option is based on several criteria including, but not limited to, the valuation model used and associated input factors including principally stock price volatility and, to a lesser extent, expected term, dividend rate, and risk-free interest rate. The input factors used in the valuation model are based on subjective future expectations combined with management judgment. Expected volatilities are based on methodologies utilizing equal weighting involving both historical periods equal to the expected term and implied volatilities based on traded options to buy the Company’s common stock. Stock-based compensation expense is recognized on a straight-line basis over the requisite service period for each separate vesting tranche of the award. A forfeiture rate assumption is applied in computing stock-based compensation expense related to both unvested stock awards and stock options based on future expectations. In addition, a probability assessment is applied to unvested performance-based stock awards. These adjustments may materially impact the Company's results of operations in the period such changes are made. |
Litigation Costs | ' |
Litigation Costs |
The Company records a charge equal to at least the minimum estimated liability for a loss contingency or litigation settlement when both of the following conditions are met: (i) information available prior to issuance of the financial statements indicates that it is probable that a liability had been incurred at the date of the financial statements and (ii) the range of loss can be reasonably estimated. Liabilities related to litigation settlements with multiple elements are recorded based on the fair value of each element. Legal and other litigation related costs are recognized as the services are provided. The Company records insurance and other indemnity recoveries for litigation costs when both of the following conditions are met: (i) the recovery is probable and (ii) collectability is reasonably assured. There are many uncertainties associated with any litigation, and the Company cannot provide assurance that any actions or other third party claims against the Company will be resolved without costly litigation or substantial settlement charges. If any of those events were to occur, the Company’s business, financial condition and results of operations could be materially and adversely affected. |
Net Income (Loss) per Share | ' |
Net Income (Loss) per Share |
Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share is computed by dividing adjusted net income (loss) by the weighted average number of common shares outstanding during the period increased to include, if dilutive, the number of additional common shares that would be outstanding if the dilutive potential common shares and unvested stock from stock option plans. In periods with net income, the dilutive effect of outstanding stock options and unvested stock is reflected in diluted net income per share by application of the treasury stock method. |
Supplemental Cash Flow Information | ' |
Supplemental Cash Flow Information |
Cash paid during the year for: |
|
| | | | | | | | | | | |
| 2014 | | 2013 | | 2012 |
| (In thousands) |
Interest | $ | 1,538 | | | $ | 24 | | | $ | 14 | |
|
Income taxes | 4,486 | | | 3,611 | | | 6,966 | |
|
Non-cash investing and financing activities: | | | | | |
Purchases of property and equipment not paid, net | 594 | | | 353 | | | 336 | |
|
Accrued payroll tax withholdings for shares issued to employees | — | | | — | | | 382 | |
|
Release of In-Process Research & Development (IPRD) to Developed Technology | 13,800 | | | — | | | — | |
|
Comprehensive Income (Loss) | ' |
Comprehensive Income (Loss) |
Comprehensive income (loss) represents the net change in stockholders’ equity during a period from sources other than transactions with stockholders and, as such, includes net income (loss) and other specified components. For the Company, the only component of comprehensive income (loss), other than net income (loss), is the change in the cumulative foreign currency translation adjustments recognized in stockholders’ equity. |
Fair Value of Financial Instruments | ' |
Fair Value of Financial Instruments |
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value hierarchy is based on three levels of inputs, that may be used to measure fair value, of which the first two are considered observable and the last unobservable. A description of the three levels of inputs is as follows: |
Level 1 — Quoted prices in (unadjusted) active markets for identical assets or liabilities; |
Level 2 — Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and |
Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
Business and Credit Concentration | ' |
Business and Credit Concentration |
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents, investments, and accounts receivable. Cash and cash equivalents are primarily maintained at three major financial institutions in the United States. Deposits held with banks may exceed the amount of insurance provided on such deposits, if any. |
The majority of the Company’s revenues are derived from sales to OEMs in the computer storage and server industry. Consequently, the Company’s net revenues and accounts receivable are highly concentrated among a few customers. Direct sales to the Company’s top five customers accounted for 65%, 71% and 70% of total net revenues in fiscal years 2014, 2013 and 2012, respectively. The level of sales to any single customer may vary and the loss of any one of these customers, or a decrease in the level of sales to any one of these customers, could have a material adverse impact on the Company. In addition, the recent growth of white box manufacturers and web giants has shifted server market share away from the Company’s traditional OEM customers, which may also impact future revenue. Although the Company sells to customers throughout the world, sales in the United States and Asia Pacific accounted for approximately 85% of the Company’s net revenues in fiscal years 2014, 2013 and 2012, and the Company expects for the foreseeable future, these sales will account for the substantial majority of the Company’s revenues. The Company maintains an allowance for doubtful accounts, and has not historically experienced significant loss on its accounts receivable. The majority of sales are denominated in U.S. dollars. Consequently, the Company believes its foreign currency risk is minimal. The Company performs ongoing credit evaluations of its customers’ financial condition and generally requires no collateral from its customers. |
Additionally, the Company currently relies on limited supply sources for several key components used in the manufacturing of its products. Also, the Company relies on five Electronics Manufacturing Services (EMS) providers for the manufacturing of its products. The inability or unwillingness of any single and limited source suppliers or the inability or unwillingness of any of the Company’s EMS providers to fulfill supply and production requirements, respectively, could materially impact future operating results. |
Segment Information | ' |
Segment Information |
Emulex has two reportable business segments, Connectivity and Visibility. The Visibility segment was formed as a result of the acquisition of Endace on February 26, 2013. The Connectivity segment includes the operating results of Network Connectivity Products (NCP) and Storage Connectivity and Other Products (SCOP). The Visibility segment includes the operating results of Network Visibility Products (NVP) arising from the Endace acquisition. |
Recently Adopted and Issued Accounting Standards | ' |
Recently Issued Accounting Standards |
On May 28, 2014, the Financial Accounting Standards Board issued Accounting Standards Update 2014-09, "Revenue from Contracts with Customers" (ASU 2014-09). The Company is currently evaluating the impact on its financial statements of the new revenue recognition guidance, which will become effective for the Company beginning in fiscal 2018. |