Customer Deposits and Payment Terms. The Company's payment terms with equipment customers typically include a deposit which is recorded as customer deposits until such time as the products are shipped. The Company sometimes is requested by its equipment customers to issue letters of credit, in order to secure customer deposits. Generally, such a letter of credit expires upon shipment to the customer. In addition to cash deposits, customers are also generally required to either post a letter of credit at least equal to 90% of the value of the equipment prior to shipment. Upon shipment, the Company will invoice all but a final portion (typically 10%) for each product shipped with the remainder due upon customer acceptance. The Company's contracts with equipment customers do not provide for any refunds for services or products and therefore no specific reserve for such is maintained. The Company classifies customer deposits that are expected to be on hand beyond one year, or one operating cycle, as non-current in the consolidated balance sheets.
At December 31, 2013 and December 31, 2012, the Company had $1,330 and $33,540, respectively, of standby letters of credit outstanding representing primarily performance guarantees issued against customer deposits. These standby letters of credit have not been included in the consolidated financial statements and are cash collateralized.
Business Combinations. The Company accounts for business combinations at fair value. All changes that do not qualify as measurement period adjustments are included in current period earnings. Significant judgment is required to determine the estimated fair value for assets and liabilities acquired and to assigning their respective useful lives. The fair values assigned to tangible and intangible assets acquired and liabilities assumed, including contingent consideration, are based on management's estimates and assumptions, as well as other information compiled by management, including available historical information and valuations that utilize customary valuation procedures and techniques.
The Company generally employs the income method to estimate the fair value of intangible assets, which is based on forecasts of the expected future cash flows attributable to the respective assets. Significant estimates and assumptions inherent in the valuations reflect a consideration of other marketplace participants, and include the amount and timing of future cash flows (including expected growth rates and profitability), the underlying product life cycles, economic barriers to entry, a brand's relative market position and the discount rate applied to the cash flows, among others.
If the actual results differ from the estimates and judgments used in these estimates, the amounts recorded in the financial statements could result in the impairment of the intangible assets and goodwill, or require acceleration of the amortization expense of finite-lived intangible assets.
The consideration for our acquisitions often includes future payments that are contingent upon the occurrence of a particular event. We record a contingent consideration obligation for such contingent consideration payments at fair value on the acquisition date. We estimate the acquisition date fair value of contingent consideration obligations through valuation models that incorporate probability adjusted assumptions related to the achievement of the milestones and the likelihood of making related payments. Each period the Company revalues the contingent consideration obligations associated with the acquisition to fair value and records changes in the fair value as contingent consideration expense. Increases or decreases in the fair value of the contingent consideration obligations can result from changes in assumed discount periods and rates, changes in the assumed timing and amount of revenue and expense estimates and changes in assumed probability with respect to the attainment of certain financial and operational metrics, among others. Significant judgment is employed in determining these assumptions as of the acquisition date and for each subsequent period. Accordingly, future business and economic conditions, as well as changes in any of the assumptions described above, can materially impact the amount of contingent consideration expense recorded in any given period.
Purchase Commitments and Vendor Advances. The Company enters into commitments to purchase material from various suppliers in the ordinary course of business. These commitments are entered into to satisfy the material requirements of a specific contract or the overall production plan and often require the Company to make payments in advance. The Company evaluates these advances for recoverability on a periodic basis and more frequently if indicators of asset impairment arise.
In the event the Company reschedules and/or cancels a portion of these commitments due to customer delivery delays, customer contract terminations or changes to its production plans, the Company may be liable for cancellation penalties or be required to purchase material in excess of its current expected demand. In such instances, the Company reviews the contractual terms of its purchase commitments and may seek to negotiate with the vendor to minimize any potential loss. In cases where the cancellation is the result of a customer contract termination or delay in customer delivery, the Company may seek to recover the costs incurred. For additional information refer to footnote 15, Commitments and Contingencies.
The Company accrues as cost of revenue, losses estimated on advances which are not considered recoverable because of a deterioration in the financial condition of the vendor or because the advances are expected to be forfeited as part of a planned order termination and any termination fees which may be paid to vendors when the Company terminates the contract in accordance with the contract terms.
Concentration of Credit Risk. Financial instruments that potentially subject the Company to significant concentration of credit risk would include its money market fund investments (categorized as cash and cash equivalents). The Company's policy is to invest only with high quality issuers and has policies limiting, among other things, the amount of credit exposure to any one issuer. As of December 31, 2013, the Company held its cash and cash equivalents in money market mutual funds, time deposits and deposit accounts with its financial institutions.
In addition, the Company has credit risk from (i) derivative financial instruments used in hedging activities and (ii) accounts receivable. The Company invests in a variety of financial instruments and limits the amount of financial exposure to any one financial institution. The Company has a comprehensive credit policy in place and exposure to credit risk is monitored on an ongoing basis. Credit evaluations are performed on all customers requiring credit over a certain amount. Credit risk is, in most cases, mitigated through collateral such as letter of credit, bank guarantees or payment terms like cash in advance. The credit risk from derivative financial instrument is described further under the following caption—Derivative Financial Instruments and Hedging Instruments.
Derivative Financial Instruments and Hedging Agreements. The Company enters into forward foreign currency exchange contracts to hedge cash flow exposures from the impact of changes in foreign exchange rates. Such exposures result primarily from purchase orders for inventory and equipment that are denominated in currencies other than the U.S. dollar, primarily the Euro. These foreign forward currency exchange contracts are entered into to support purchases made in the normal course of business and to hedge operational risks, and accordingly, are not speculative in nature. The Company does not enter into any hedging arrangements for speculative purposes. The Company's hedges relate to anticipated transactions, are designated and documented at the inception of the respective hedges as cash flow hedges and are evaluated for effectiveness quarterly.
The Company records all derivative financial instruments in the consolidated financial statements in other current assets or accrued liabilities, depending on their net position, at fair value. Changes in the fair value of the derivative financial instruments are either recognized periodically in earnings or in stockholders' equity as a component of accumulated other comprehensive income ("AOCI") or loss depending on whether the derivative financial instrument qualifies for hedge accounting. The effective portion of any changes in the fair value of forward contracts that have been designated and qualify as cash flow hedges is recorded in AOCI until the hedged transaction occurs or the recognized currency transaction affects earnings. Once the hedged transaction occurs or the recognized currency transaction affects earnings, the effective portion of any related gains or losses on the cash flow hedge is reclassified from AOCI to earnings. Changes in fair values of derivatives not qualifying for hedge accounting are reported in earnings as they occur. The Company classifies the cash flows from hedging transactions in the same categories as the cash flows from the respective hedged items.
Hedge accounting is discontinued when it is determined that a derivative instrument is no longer an effective hedge. Any gains or losses that were AOCI from hedging a forecasted transaction no longer considered probable of occurring will be recognized immediately in current period earnings due to changes in expectations on the original forecasted transaction.
Derivative financial instruments involve, to a varying degree, elements of market and risk not recognized in consolidated financial statements. The market risk associated with these instruments resulting from currency exchange rate or interest rate movements is expected to offset the market risk of the underlying transactions, assets and liabilities being hedged. The counterparties to the agreements relating to the Company's foreign exchange instruments are major international financial institutions with high credit ratings. The Company does not believe that there is significant risk of nonperformance by the counterparties because the Company monitors the credit rating of such counterparties. While the contract or notional amounts of derivative financial instruments provide one measure of the volume of these transactions, they do not represent the amount of the Company's exposure to credit risk. The amounts potentially subject to credit risk (arising from the possible inability of the counterparty to meet the terms of the contracts) are generally limited to the amounts, if any, by which the counterparty's obligations under the contracts exceed the obligations of the Company to the counterparty.
Fiscal Year End. On April 16, 2012, the board of directors of the Company voted to amend the Company's amended and restated by-laws to provide that the Company's fiscal year will end on December 31 of each year. Prior to this amendment, the Company's by-laws had provided that fiscal years ended on the Saturday closest to March 31st of each year. As a result of this change to the fiscal year end, the Company reported a nine-month transition period consisting of the period from April 1, 2012 to December 31, 2012, and the 2013 fiscal year began on January 1, 2013 and ended on December 31, 2013.
The Company will report interim quarters, other than fourth quarters which will always end on December 31, on a 13-week basis ending on the last Saturday within such period. The 2014 interim quarter ends will be March 29, June 28 and September 27. The interim quarter ends for the year ended December 31, 2013 were March 30, June 29 and September 28.
Foreign Currency Translation. For foreign subsidiaries where the functional currency is the local currency, assets and liabilities are translated into U.S. dollars at the current exchange rate on the balance sheet date. Revenue and expenses are translated at average rates of exchange prevailing during each period. Translation adjustments for these subsidiaries are included in accumulated other comprehensive income.
For foreign subsidiaries where the functional currency is the U.S. dollar, monetary assets and liabilities are translated into U.S. dollars at the current exchange rate on the balance sheet date. Nonmonetary assets and liabilities are remeasured into U.S. dollars at historical exchange rates. Revenue and expense items are translated at average rates of exchange prevailing during each period.
Realized and unrealized foreign currency gains and losses arising from transactions denominated in currencies other than the subsidiary's functional currency are reflected in earnings.
For the fiscal year ended December 31, 2013, the nine-month period ended December 31, 2012, and the fiscal year ended March 31, 2012, net foreign currency transaction losses of $313, $1,194 and $1,866, respectively, are included in other, net, in the consolidated statements of operations.
Goodwill. Goodwill represents the excess of the cost of acquired businesses over the fair value of identifiable net assets acquired. Goodwill is tested for impairment on an annual basis, as well as on an interim basis, as warranted, whenever events and changes in circumstances indicate there may be an impairment. Goodwill is evaluated at the reporting unit level and is attributable to the Company's PV and sapphire reporting units. To test for impairment, the Company compares the carrying value of the reporting unit to its fair value. If the reporting unit's carrying value exceeds its fair value, the Company would record an impairment loss to the extent that the carrying value of goodwill exceeds its implied fair value.
During the fiscal year ended December 31, 2013, the Company tested its goodwill for impairment as of September 29, 2013 and concluded there was no impairment of the carrying value of goodwill as of that date.
Income Taxes. The Company provides for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
The Company records net deferred tax assets to the extent it believes these assets will more likely than not be realized. All available positive and negative evidence is reviewed in making a determination. The evidence includes future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial operations. In the event the Company determines that it would be able to realize deferred income tax assets in the future in excess of their net recorded amount, an adjustment to the valuation allowance would be recorded which would reduce the provision for income taxes.
The Company assesses its income tax positions and records tax benefits based upon management's evaluation of the facts, circumstances, and information available at the reporting date. For those tax positions where it is more-likely-than-not that a tax benefit will be sustained, the Company records the largest amount of tax benefit with a greater than 50 percent likelihood of being realized upon ultimate settlement with a taxing authority having full knowledge of all relevant information. For those income tax positions where it is not more-likely-than-not that a tax benefit will be sustained, no tax benefit is recognized in the financial statements. The Company classifies liabilities for uncertain tax positions as non-current liabilities unless the uncertainty is expected to be resolved within one year. The Company classifies charges for interest and penalties on uncertain tax positions as income tax expense.
The Company classifies tax benefits realized upon the exercise of stock options in excess of that which is associated with the expense recognized for financial reporting purposes, along with any deficiencies to the extent of prior period gains, within additional paid-in capital. The excess tax benefits realized from stock compensation deductions are presented as a financing cash inflow rather than as a reduction of income taxes paid in the consolidated statement of cash flows.
Intangibles and other Long-Lived Assets. The Company periodically assesses its intangible and other long-lived assets for impairment whenever events or changes in circumstances suggest that the carrying value of an asset may not be recoverable. The Company recognizes an impairment loss for intangibles and other long-lived assets if the carrying amount of a long-lived asset is not recoverable based on its undiscounted future cash flows. A long-lived asset or asset group that is held for use is required to be grouped with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. These lowest levels of cash flows are used in the calculation of whether or not the carrying amount of the long-lived asset is recoverable. Any such impairment loss is measured as the difference between the carrying amount and the fair value of the asset.
IPR&D. In-process research and development ("IPR&D") assets are considered indefinite-lived intangible assets until completion or abandonment of the associated research and development efforts. IPR&D represents the fair value assigned to incomplete technologies that the Company acquires, which at the time of acquisition have not reached technological feasibility and have no alternative future use. A technology is considered to have an alternative future use if it is probable that the acquirer will use the asset in its incomplete state as it exists at the acquisition date, in another research and development project that has not yet commenced, and economic benefit is anticipated from that use. Substantial additional research and development may be required before any of the Company's IPR&D programs reach technological feasibility. Upon completion of the projects, the IPR&D assets will be amortized over their estimated useful lives.
The Company tests its indefinite-lived IPR&D assets for impairment on an annual basis, or more frequently if an impairment indicator is present, by comparing the fair value of each IPR&D asset to the carrying value for the asset. If the carrying value is greater than the fair value of the asset, the Company is required to write down the value of the IPR&D asset to its fair value. The Company will test its indefinite-lived IPR&D assets for potential impairment until the projects are completed or abandoned.
Inventories. Inventories are stated at the lower of cost or market. The cost of inventory is determined using the first-in, first-out (FIFO) method. The Company records excess and obsolete inventory charges for both inventories on site as well as inventory at contract manufacturers and suppliers when the net realizable value exceeds the carrying amount.
The Company performs periodic reviews of inventory items to identify excess inventories on hand by comparing on-hand balances to anticipated usage using recent historical activity as well as anticipated or forecasted demand. If estimates of customer demand diminish further or market conditions become less favorable than those projected by the Company, additional inventory write-downs may be required.
The Company classifies inventory that is expected to be on hand beyond one year or one operating cycle as non-current inventory and is included in other assets on the consolidated balance sheets.
Recent Accounting Pronouncements
In July 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2013-11, Income Taxes (Topic 740): Presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The guidance eliminates diversity in practice surrounding the presentation of unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The new guidance requires entities to net an unrecognized tax benefit with a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward if the carryforward would be used to settle additional tax due upon disallowance of a tax position. The amendment is effective for fiscal periods beginning after December 15, 2013 with early adoption permitted. We do not expect the adoption of this guidance to have a material impact on our financial statements.
Recently Adopted Accounting Pronouncements
Effective January 1, 2013, the Company adopted Accounting Standards Update (ASU) No. 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. The guidance is intended to provide disclosure on items reclassified out of accumulated other comprehensive income either in the notes or parenthetically on the face of the income statement. The required disclosure is in Note 23 below.
Property, Plant and Equipment. Land, land improvements, leasehold improvements, buildings, manufacturing equipment and computer equipment are stated at cost. Depreciation is provided, primarily using the straight-line method, over estimated useful lives, ranging from 3 to 15 years for manufacturing equipment and furniture and fixtures, and up to 40 years for buildings. Leasehold improvements are capitalized and depreciated over the lesser of the useful life or the initial lease term. The Company capitalizes certain computer software and software development costs incurred in connection with developing our computer software for internal use. Capitalized software costs are included in property, plant and equipment, net, on the Company's consolidated balance sheet and depreciated on a straight-line basis over the estimated useful lives of the software. Expenditures for repairs and maintenance are charged to expenses as incurred.
The Company starts depreciating its assets when they are placed into service. An asset is considered to be placed into service when it is both in the location and condition for its intended use.
Revenue Recognition. The majority of the Company's contracts involve the sale of equipment or materials and services under multiple element arrangements. The Company recognizes revenue when persuasive evidence of an arrangement exists, the sale price is fixed or determinable, collectability is reasonably assured through historical collection results and regular credit evaluations, and delivery has occurred and there are no uncertainties regarding customer acceptance.
The Company allocates revenue in an arrangement on the basis of the relative selling price of deliverables at the inception of the arrangement. When applying the relative selling price method, the selling price for each deliverable is determined using vendor-specific objective evidence of selling price ("VSOE"), if it exists, or third-party evidence of selling price ("TPE"). If neither VSOE nor TPE exists, then the Company uses its best estimate of the selling price ("ESP") for that deliverable.
The multiple-deliverable revenue guidance requires that the Company evaluate each deliverable in an arrangement to determine whether such deliverable would represent a separate unit of accounting. The product or service constitute a separate unit of accounting when it fulfills the following criteria: (a) the delivered item(s) has value to the customer on a standalone basis and (b) if the arrangement includes a general right of return relative to the delivered item, delivery or performance of the undelivered item(s) is considered probable and substantially in the control of the Company. The Company's equipment sales arrangements typically do not include a general right of return and the majority of the Company's products and services qualify as separate units of accounting.
Prior to the adoption of ASU 2009-13 on April 3, 2011, the Company's products or services constitute separate units of accounting when it fulfilled the following criteria: (a) the delivered item(s) has value to the customer on a standalone basis, (b) there is objective and reliable evidence of the fair value of the undelivered item(s), and (c) if the arrangement includes a general right of return relative to the delivered item, delivery or performance of the undelivered item(s) is considered probable and substantially in the control of the Company. Given the differences created in the pre ASU 2009-13 accounting model in comparison to the ASU 2009-13 accounting model, for transactions entered into prior to the adoption of ASU 2009-13, where objective evidence of fair value exists for all undelivered elements, but not delivered elements, the Company applies the residual method for recognizing revenue. If objective evidence of fair value does not exist for the undelivered elements of the arrangement, all revenue is deferred until such evidence does exist, or until all elements for which the Company does not have objective evidence of fair value are delivered, whichever is earlier assuming all other revenue recognition criteria are met. In certain arrangements, the Company provided customers with contractual rights that extend for a specific period of time. The Company considered these rights a separate element, for which objective evidence of fair value did not exist. Revenue for these arrangements is recognized ratably over the period commencing when all other elements had been delivered through the period when such rights expire.
The Company establishes VSOE based upon the price charged when the same element is sold separately or established by management having the relevant pricing authority. When VSOE exists, it is used to determine the selling price of a deliverable. Objective evidence of fair value for installation and training services is based upon the estimated time to complete the installation and training at the established fair value hourly rates that the Company charges for similar professional services on a stand-alone basis. The Company has not been able to establish VSOE for certain of its products and for certain of its services because the Company has not sold such products or services on a stand-alone basis.
When VSOE is not established, the Company attempts to establish the selling price of each element based on TPE. The Company's products and services differ from that of its competitors and therefore, comparable pricing of competitors' products and services with similar functionality generally cannot be obtained. Accordingly, the Company is generally not able to determine TPE for its products or services.
When the Company is unable to establish selling price using VSOE or TPE, the Company uses ESP in its allocation of arrangement consideration for the relevant deliverables. The objective of ESP is to determine the price at which the Company would transact a sale if a product or service was sold on a stand-alone basis. The Company determines ESP for its products and certain services by considering multiple factors including, but not limited to, overall market conditions, profit objectives and historical pricing practices for such deliverables.
The Company's ASF and DSS equipment contracts contain customer-specified acceptance provisions. Polysilicon reactors contracts do not contain customer-specified acceptance provisions, and are generally deemed to be contractually accepted at the time the reactor is initially delivered to the customer's facility. For arrangements containing products that the Company considers to be "established," revenue is recognized for the product deliverable upon delivery, assuming all other revenue recognition criteria are met. For arrangements containing products considered to be "new" or containing customer acceptance provisions that are deemed to be more than perfunctory, product revenue is recorded upon customer acceptance or at the time the product is determined to be "established".
Products are classified as "established" products if post-delivery acceptance provisions and the installation process have been determined to be routine and there is a demonstrated history of achieving the predetermined contractual objective specifications.
In determining when a "new" product is considered "established", the Company considers the following factors: (i) the stability of the product's technology, (ii) the test results of products prior to shipment, (iii) successful installations at customer's sites and (iv) the performance results once installed. The Company generally believes that the satisfaction of the first two criteria, coupled with the satisfaction of final two criteria for multiple product units in the facilities of at least three to five separate customers that, in each case, results in acceptance in accordance with the standard contract terms are necessary to support the conclusion that there are no uncertainties regarding customer acceptances of the standard objective specifications and therefore the installation process can be considered perfunctory.
SDR-400™
During the three months ended June 29, 2013, the Company determined that it had obtained sufficient evidence that the SDR-400™, a product within the Polysilicon business unit, is an established product in accordance with the Company's revenue recognition policy, and accordingly, there is no longer uncertainty around meeting the requirements of customer acceptance conditions in agreements that contain the standard or demonstrated specifications of the SDR-400™. In concluding that the SDR-400™ is now an established product, the Company considered the stability of the product's technology, the ability to test the product prior to shipment, and the historical performance results of over 30 product installations at one of our customers' facilities. As a result of classifying the SDR-400™ an established product, the Company recognized revenue and gross profit of $148,935 and $58,907, in the twelve months ended December 31, 2013, from two customer arrangements that included SDR-400™'s, prior to formal customer acceptance of the products. Non-refundable payments received under these customer arrangements exceed the recognized revenue and were previously recorded as deferred revenue. The Company continues to report deferred revenue related to these arrangements for advance payments on other deliverables included in the arrangements.
The Company's contracts generally do not contain cancellation provisions. When a customer fails to perform its contractual obligations and such failure continues after notice of breach and a cure period the Company may terminate the contract and the customer may be liable for contractual damages. At the time of termination, the Company records as revenues any non-refundable deposits or deferred revenue amounts and records as cost of revenue any previously deferred cost as well as any related costs to terminate the contract including excess or obsolete inventory or unrecoverable vendor advances or other purchase commitment costs as a result of the termination. During the fiscal year ended December 31, 2013, the nine-month period ended December 31, 2012, and the fiscal year ended March 31, 2012, the Company recognized $19,256, $8,538 and $35,519 in revenue as a result of contract terminations, respectively.
Spare parts revenue is generally recognized upon shipment and services revenue is generally recognized as the services are provided.
The Company records reimbursable out-of-pocket expenses and shipping as both revenue and as a direct cost of revenue, as applicable. The Company records revenue net of applicable sales and value added taxes collected. Taxes collected from customers are recorded as part of accrued expenses on the consolidated balance sheet and are remitted to state and local taxing jurisdictions based on the filing requirements of each jurisdiction.