Download Annual Report, 2.44 MB - Xyratex

compete. Identifiable intangible assets are amortized over time, while in-process research anddevelopment is recorded as a charge on the date of acquisition and goodwill is capitalized, subject toperiodic review for impairment. Accordingly, the allocation of the acquisition cost to identifiableintangible assets has a significant impact on our future operating results. The allocation processrequires extensive use of estimates and assumptions, including estimates of future cash flows expectedto be generated by the acquired assets. Should conditions be different than management’s currentassessment, material write-downs of the fair value of intangible assets may be required. We periodicallyreview the estimated remaining useful lives of our other intangible assets. A reduction in the estimateof remaining useful life could result in accelerated amortization expense or a write-down in futureperiods. As such, any future write-downs of these assets would adversely affect our operating results.We evaluate the impairment of goodwill on an annual basis, or sooner if events or changes incircumstances indicate that the carrying amount of an asset may not be recoverable. Triggering eventsfor impairment reviews may be indicators such as adverse industry or economic trends, restructuringactions or lower projections of profitability. Evaluations of possible impairment and, if applicable,adjustments to carrying values, require us to estimate, among other factors, future cash flows, usefullives, and fair market values of our reporting units and assets. Actual results may vary from ourexpectations. Accordingly, goodwill recorded in business combinations may significantly affect ourfuture operating results to the extent impaired, but the magnitude and timing of any such impairmentis uncertain. When we conduct our annual evaluation of goodwill the fair value of goodwill isre-assessed using valuation techniques that require significant management judgment. Should conditionsbe different than management’s last assessment, significant write-downs of goodwill may be required.Intangible assets as of November 30, 2005 were $50.9 million, and any future write-downs ofgoodwill would adversely affect our operating margin.Recent Accounting PronouncementsIn November 2004, the Financial Accounting Standards Board (FASB) issued Statement ofFinancial Accounting Standards No. 151, ‘‘Inventory Costs’’ (FAS 151). FAS 151 amends the guidance inAccounting Research Bulletin No. 43, Chapter 4, ‘‘Inventory Pricing’’, to clarify that abnormal amountsof idle facility expense, freight, handling costs and wasted materials (spoilage) should be recognized ascurrent-period charges and requires the allocation of fixed production overheads to inventory based onnormal capacity of the production facilities. This statement is effective for inventory costs incurredduring fiscal years beginning after June 15, 2005. The adoption of FAS 151 is not expected to have animpact on our financial position, results of operations or cash flows.In December 2004, the FASB issued FAS 123 (revised 2004), ‘‘Share-Based Payment’’ (FAS 123R)which will be effective in our 2006 fiscal year and will require that we use the fair value method tocalculate the expense related to our employee share based awards. We currently use the intrinsic valuemethod to measure compensation expense for share-based awards to our employees. Included inNote 2 to the consolidated financial statements is the pro forma net income and earnings per share asif we had used a fair-value-based method similar to the methods required under SFAS 123R tomeasure the compensation expense for employee share awards during our 2005, 2004 and 2003 fiscalyears.In March 2005, the SEC issued Staff Accounting Bulletin (‘‘SAB’’) 107, which offers guidance onFAS 123R. SAB 107 was issued to assist preparers by simplifying some of the implementationchallenges of FAS 123R while enhancing the information that investors receive. SAB 107 creates aframework that is premised on two overarching themes: (a) considerable judgment will be required bypreparers to successfully implement FAS 123R, specifically when valuing employee stock options; and(b) reasonable individuals, acting in good faith, may conclude differently on the fair value of employeestock options. Key topics covered by SAB 107 include valuation models, expected volatility and60