| Summary of Significant Accounting Policies | 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The unaudited consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries. All
significant inter-company transactions and balances have been
eliminated in consolidation.
Preparation of Financial Statements and Use of
Estimates
The accompanying financial statements have been prepared by the
Company, and reflect all adjustments, which, in the opinion of
management, are necessary for fair presentation. The preparation of
financial statements in conformity with generally accepted
accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities as
of the date of the financial statements and the reported amounts of
income and expenses during the reporting periods. Actual results
may differ from those estimates and such differences may be
material to the consolidated financial statements. Such estimates
relate to fair values ascribed to the assets and liabilities
acquired in connection with the acquisition of the Multitest and
ECT Businesses from Dover Printing & Identification, Inc.
(the “Dover Acquisition”), revenue recognition, the
allowance for doubtful accounts, inventory valuation, depreciation,
product warranty costs, stock-based compensation and income taxes,
among others.
Revenue Recognition
The Company recognizes revenue based on guidance provided in Topic
605, Revenue Recognition Multiple-Deliverable
Revenue Arrangements
Revenue related to equipment sales is recognized when: (a) the
Company has a written sales agreement; (b) delivery has
occurred or service has been rendered; (c) the price is fixed
or determinable; (d) collectability is reasonably assured;
(e) the equipment delivered is a standard product with
historically demonstrated acceptance; and (f) there is no
unique customer acceptance provision or payment tied to acceptance
or an undelivered element significant to the functionality of the
system. Generally, payment terms are time based after product
shipment. From time to time, sales to a customer may involve
multiple elements, in which case revenue is recognized on the
delivered element provided that (1) the undelivered element is
a proven technology, (2) there is a history of acceptance on
the equipment with the customer, (3) the undelivered element
is not essential to the customer’s application, (4) the
delivered item(s) has value to the customer on a stand-alone basis,
and (5) if the arrangement includes a general right of return
relative to the delivered item(s), delivery or performance of the
undelivered item(s) is considered probable and substantially in the
control of the Company. The arrangement consideration, or the
amount of revenue to be recognized on each separate unit of
accounting, is allocated at the inception of the arrangement to all
deliverables on the basis of their relative selling price.
Revenue related to maintenance and service contracts is recognized
ratably over the duration of the contracts. Net service sales as
presented in the Company’s Consolidated Statement of
Operations and Comprehensive Income (Loss) includes revenue
associated with LTX-Credence maintenance or service contracts only,
and excludes ECT and Multitest. ECT and Multitest generally do not
provide maintenance and service contracts, but rather sell spare
parts and other components, and as a result these sales are
recognized as net product sales in the Company’s Consolidated
Statement of Operations and Comprehensive Income (Loss). Revenue
related to spare parts and components is recognized when the four
main criteria listed above are met. Generally customer acceptance
is not required for spare parts and component sales.
Inventories
Inventories are stated at the lower of cost or market, determined
on the first-in, first-out (“FIFO”) method, and include
materials, labor and manufacturing overhead. The components of
inventories are as follows:
October 31, July 31,
(in
thousands)
Material and purchased components $ 29,107 $ 27,249
Work-in-process 15,078 15,250
Finished equipment, including inventory consigned to customers 18,202 18,094
Total inventories $ 62,387 $ 60,593
The Company establishes inventory reserves when conditions exist
that indicate inventory may be in excess of anticipated demand or
is obsolete based upon assumptions about future demand for the
Company’s products or market conditions. The Company
regularly evaluates its ability to realize the value of inventory
based on a combination of factors, including forecasted sales or
usage, estimated product end of life dates, estimated current and
future market value, and new product introductions.
Purchasing and usage alternatives are also explored to mitigate
inventory exposure. When recorded, reserves are intended to reduce
the carrying value of inventory to its net realizable value. As of
October 31, 2015 and July 31, 2015, inventory was stated
net of inventory reserves of $46.4 million and $46.9 million,
respectively. If actual demand for products deteriorates or market
conditions are less favorable than projected, additional inventory
reserves may be required. Such reserves are not reversed until the
related inventory is sold or otherwise disposed.
Goodwill and Other Intangibles
In accordance with FASB ASC Topic
350— Intangibles—Goodwill and Other
The testing of goodwill for impairment is performed at a level
referred to as a reporting unit. As of October 31, 2015, the
Company’s goodwill is allocated to its Semiconductor Test
reporting unit and its Contactors reporting unit. Based on ASC
350-20-35-3A, as of October 31, 2015, there were no triggering
events that required the Company to complete impairment
testing.
The Company’s goodwill consists of the following:
Goodwill October 31, July 31,
(in
thousands)
Semiconductor Test Reporting Unit
Merger with Credence Systems Corporation (August 29, 2008) $ 28,662 $ 28,662
Acquisition of Step Tech Inc. (June 10, 2003) 14,368 14,368
Contactors Reporting Unit
Acquisition of Titan Semiconductor Tool LLC (February 2, 2015) 820 820
Total goodwill $ 43,850 $ 43,850
Amortizable intangible assets which relate to the acquisition of
Titan Semiconductor Tool LLC (“Titan”), ECT, Multitest,
and atg, and the merger with Credence Systems Corporation
(“Credence”), consist of the following, and are
included in intangibles asset, net on the Company’s
Consolidated Balance Sheets:
As of October 31, 2015
Description Estimated Gross Carrying Accumulated Net Amount
(in years)
(in thousands)
(in thousands)
(in thousands)
Developed technology (Credence, ECT, Multitest, atg, and Titan) 6-20 $ 29,882 $ (27,069 ) $ 2,813
Customer Relationships – ECT, Multitest, atg, and Titan 2 1,844 (1,123 ) 721
Maintenance agreements—ASL & Diamond 7 1,900 (1,697 ) 203
Trade Names 10 70 (8 ) 62
Non-compete Agreements 1 8 (8 )
—
Total intangible assets $ 33,704 $ (29,905 ) $ 3,799
As of July 31, 2015
Description Estimated Gross Carrying Accumulated Net Amount
(in years)
(in thousands)
(in thousands)
(in thousands)
Developed technology (Credence, ECT, Multitest, atg, and Titan) 6-20 $ 29,882 $ (26,856 ) $ 3,026
Customer Relationships – ECT, Multitest, atg, and Titan 2 1,844 (992 ) 852
Maintenance agreements—ASL & Diamond 7 1,900 (1,629 ) 271
Trade Names 10 70 (6 ) 64
Non-compete Agreements 1 8 (8 )
—
Total intangible assets $ 33,704 $ (29,491 ) $ 4,213
Intangible assets, other than trademarks owned by the Company, are
amortized based upon the pattern of estimated economic use over
their estimated useful lives. The weighted average estimated
remaining useful life over which these intangible assets will be
amortized is 4.0 years.
The Company expects amortization for these intangible assets to be
to be:
Year ending July 31, Amount
Remainder of 2016 $ 792
2017 669
2018 472
2019 379
Thereafter 1,487
Total $ 3,799
The identifiable intangible assets associated with the Dover
Acquisition include $6.4 million of trademarks. The Company
believes these trademarks will contribute to the Company’s
cash flows indefinitely. Therefore, in accordance with ASC 350, the
Company has assigned an indefinite useful life to the trademarks,
and will not amortize the trademarks until their useful lives are
no longer indefinite.
Long Lived Assets
On an on-going basis, management reviews the value of and period of
amortization or depreciation of the Company’s long-lived
assets. In accordance with Topic 360, Property, Plant and
Equipment
Foreign Currency Remeasurement
The financial statements of the Company’s foreign
subsidiaries are remeasured in accordance with Topic 830,
Foreign Currency Matters,
Product Warranty Costs
Certain of the Company’s products are sold with warranty
provisions that require it to remedy deficiencies in quality or
performance of products over a specified period of time at no cost
to its customers. The Company generally offers a warranty for most
of its products, the standard terms and conditions of which are
based on the product sold and the customer. For all products sold,
subject to a warranty, the Company accrues a liability for the
estimated cost of standard warranty at the time of shipment.
Factors that impact the warranty liability include the number of
installed products, historical and anticipated product failure
rates, material usage and service labor costs. The Company
periodically assesses the adequacy of its recorded liability and
adjusts as amounts as necessary.
The following table shows the change in the Company’s product
warranty liability, as required by Topic 460, Guarantees
Three Months Ended
Product Warranty Activity 2015 2014
(in
thousands)
Balance at beginning of period $ 2,983 $ 3,206
Warranty expenditures for current period (1,135 ) (1,440 )
Changes in liability related to pre-existing warranties 28 (108 )
Provision for warranty costs in the period 952 1,734
Balance at end of period $ 2,828 $ 3,392
Trade Accounts Receivable and Allowance for Doubtful
Accounts
Trade accounts receivable are recorded at the invoiced amount, do
not bear interest, and typically have a contractual maturity of
ninety days or less. A majority of the Company’s trade
receivables are derived from sales to large multinational
semiconductor manufacturers throughout the world. The volatility of
the industries that the Company serves can cause certain of its
customers to experience shortages of cash, which can impact their
ability to make required payments. An allowance for doubtful
accounts is maintained for potential credit losses based upon the
Company’s assessment of the expected collectability of all
accounts receivable. The allowance for doubtful accounts is
reviewed periodically to assess the adequacy of the allowances. In
any circumstances in which the Company is aware of a
customer’s inability to meet its financial obligations, an
allowance is provided, which is based on the age of the
receivables, the circumstances surrounding the customer’s
financial situation, and historical experience. If circumstances
change, and the financial condition of customers is adversely
affected resulting in their inability to meet their financial
obligations to the Company, additional allowances may be
recorded.
Engineering and Product Development Expenses
The Company expenses all engineering and product development costs
as incurred. Expenses relating to certain software development
costs, subject to capitalization in accordance with Topic 985,
Software,
Shipping and Handling Costs
Shipping and handling costs are included in cost of sales in the
Company’s Consolidated Statements of Operations and
Comprehensive (Loss) Income. Shipping and handling costs were
insignificant for the three months ended October 31, 2015 and
2014.
Income Taxes
The Company recorded an income tax provision of $0.9 million for
the three months ended October 31, 2015, primarily due to
foreign taxes in profitable locations.
The Company’s total liability for unrecognized income tax
benefits was $6.3 million (of which $2.7 million, if
recognized, would impact the Company’s income tax rate) as of
October 31, 2015 and July 31, 2015. The Company
recognizes interest and penalties related to uncertain tax
positions as a component of provision for income taxes. As of
October 31, 2015 and July 31, 2015, the Company had
accrued approximately $1.0 million for potential payment of accrued
interest and penalties.
The Company conducts business globally and, as a result, the
Company and its subsidiaries or branches file income tax returns in
the U.S. federal jurisdiction and various U.S. state and foreign
jurisdictions. In the normal course of business the Company is
subject to examination by taxing authorities throughout the world,
including such major jurisdictions as the United States, Singapore,
Malaysia, China, France and Germany. With few exceptions, the
Company is no longer subject to U.S. federal, state and local or
non-U.S. income tax examinations for the years prior to 1998.
As a result of the Company’s merger with Credence on
August 29, 2008, a greater than 50% cumulative ownership
change in both entities triggered a significant limitation on net
operating loss carryforward utilization. The Company’s
ability to use acquired U.S. net operating loss and credit
carryforwards is subject to annual limitation as defined in
sections 382 and 383 of the Internal Revenue Code. The Company
currently estimates that the annual limitation on its use of net
operating losses generated through August 29, 2008 will be
approximately $10.1 million which, based on currently enacted
federal carryforward periods, limits the amount of net operating
losses that are available for utilization to approximately $202.0
million. The Company has recorded a valuation allowance against the
full value of U.S. net operating loss and credit carryforwards, and
will continue to assess the realizability of these carryforwards in
subsequent periods.
Accounting for Stock-Based Compensation
The Company has equity awards outstanding under various stock-based
compensation plans, including the 2010 Stock Plan (“2010
Plan”) and 2004 Stock Plan, The Company can only grant awards
from the 2010 Plan.
During the three months ended October 31, 2015, the Company
granted 776,300 Restricted Stock Units (“RSUs”) to
certain employees, with such shares vesting in equal installments
in each of the next four years. The stock-based compensation
expense related to these awards is recognized over their vesting
periods.
The Company recognizes stock-based compensation expense on its
equity awards in accordance with the provisions of Topic 718,
Compensation—Stock Compensation
Net (loss) income per share
Basic net (loss) income per common share is computed by dividing
net (loss) income available to common stockholders by the weighted
average number of common shares outstanding for the period. Diluted
net (loss) income per common share reflects the maximum dilution
that would have resulted from the assumed exercise and share
repurchase related to dilutive stock options and RSUs, and is
computed by dividing net (loss) income by the weighted average
number of common shares and the dilutive effect of all securities
outstanding.
Reconciliation between basic and diluted net (loss) income per
common share is as follows:
Three Months Ended October 31,
2015 2014
Net (loss) income $ (1,666 ) $ 12,062
Basic EPS
Weighted average shares outstanding- basic 54,490 51,128
Basic EPS $ (0.03 ) $ 0.24
Diluted EPS
Weighted average shares outstanding- basic 54,490 51,128
Plus: impact of stock options and unvested RSUs
— 1,175
Weighted average shares outstanding- diluted 54,490 52,303
Diluted net (loss) income per share $ (0.03 ) $ 0.23
For the three months ended October 31, 2015, there were no
outstanding options to purchase stock of the company. For the three
months ended October 31, 2014, options to purchase
approximately 0.2 million shares of common stock were not
included in the calculation of diluted net loss per share because
the effect of including the options would have been anti-dilutive.
The calculation of diluted net loss per share also excludes
2.4 million RSUs, for the three months ended October 31,
2015 in accordance with the contingently issuable shares guidance
of Topic 260, Earnings Per Share
Cash and Cash Equivalents and Marketable
Securities
The Company considers all highly liquid investments that are
readily convertible to cash and that have original maturity dates
of three months or less to be cash equivalents. Cash and cash
equivalents consist primarily of operating cash, money market
accounts and reverse repurchase agreements. Marketable securities
consist primarily of debt securities that are classified as
available-for-sale, in accordance with Topic 320,
Investments—Debt and Equity Securities,
The market value and maturities of the Company’s marketable
securities are as follows:
Total Amount
(in thousands)
October 31, 2015
Due in less than one year $ 25,543
Due in 1 to 3 years 33,581
Total marketable securities $ 59,124
Total Amount
(in thousands)
July 31, 2015
Due in less than one year $ 36,447
Due in 1 to 3 years 24,146
Total marketable securities $ 60,593
The market value and amortized cost of marketable securities are as
follows:
Market Value Amortized Cost
(in
thousands)
October 31, 2015
Corporate $ 14,941 $ 14,922
Government 25,641 25,448
Mortgage-Backed 2,442 2,444
Asset-Backed 16,100 16,077
Total $ 59,124 $ 58,891
Market Value Amortized Cost
(in
thousands)
July 31, 2015
Corporate $ 15,996 $ 15,951
Government 25,567 25,381
Mortgage-Backed 2,670 2,674
Asset-Backed 16,360 16,335
Total $ 60,593 $ 60,341
Unrealized gains and losses on investments held by the Company are
reflected as a separate component of comprehensive income (loss)
within Stockholders’ Equity. Realized gains, losses and
interest on investments held by the Company are included in
interest income in the Consolidated Statements of Operations and
Comprehensive (Loss) Income. The Company analyzes its investments
for impairment on a quarterly basis or upon occurrence of
indicators of possible impairment. There were no
other-than-temporary impairment losses recorded in the three months
ended October 31, 2015 or 2014.
The following table summarizes marketable securities and related
unrealized gains and losses as of October 31, 2015 and
July 31, 2015:
October 31, 2015 Market Value Unrealized Gain/(Loss)
(in
thousands)
Securities < 12 months unrealized losses $ 11,916 $ (5 )
Securities > 12 months unrealized losses 22,743 (45 )
Securities < 12 months unrealized gains 13,627 15
Securities > 12 months unrealized gains 10,838 17
Total $ 59,124 $ (18 )
July 31, 2015 Market Value Unrealized Gain/(Loss)
(in
thousands)
Securities < 12 months unrealized losses $ 17,767 $ (28 )
Securities > 12 months unrealized losses 11,592 (23 )
Securities < 12 months unrealized gains 18,681 12
Securities > 12 months unrealized gains 12,553 20
Total $ 60,593 $ (19 )
Property and Equipment
Property and equipment acquired is recorded at cost. The Company
records depreciation using the straight-line method. Charges are
made to operating expenses in amounts that are sufficient to
amortize the cost of the assets over their estimated useful lives.
Equipment spares used for service and internally manufactured test
systems used for testing components and engineering projects are
recorded at cost and depreciated over five to seven years. Repair
and maintenance costs that do not extend the lives of property and
equipment are expensed as incurred. The Company’s property
and equipment as of October 31, 2015 and July 31, 2015
are summarized as follows:
October 31, 2015 July 31, 2015 Estimated Useful Lives
(in thousands) (in years)
Equipment spares $ 40,245 $ 41,398 5 or 7
Machinery, equipment and internally manufactured systems 32,333 32,068 3-7
Office furniture and equipment 2,494 2,518 3-7
Purchased software 602 506 3
Land 6,106 6,106
—
Buildings 8,634 8,634 5 or 7
Leasehold improvements 10,653 11,029 10-40 years
useful life, not to
Property and equipment, gross 101,067 102,259
Accumulated depreciation and amortization (70,504 ) (70,809 )
Property and equipment, net $ 30,563 $ 31,450 |
