| Summary of Significant Accounting Policies | 2. SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
Basis of
Presentation
The 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 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 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, excluding
the Interface Board Business, are as follows:
As of
July 31,
2016 2015
(in
thousands)
Material and purchased
components $ 27,753 $ 27,249
Work-in-process 20,218 15,250
Finished equipment,
including inventory consigned to customers 22,015 18,094
Total
inventories $ 69,986 $ 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 the following: 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 July 31, 2016 and
July 31, 2015, inventory is stated net of inventory reserves
of $21.4 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.
The following table shows
sales of previously reserved inventory and the inventory reserves
released for these sales for the fiscal years ended July 31,
2016, 2015, and 2014:
Fiscal Year Ended July 31,
2016 2015 2014
(in
thousands)
Sales of previously
reserved inventory $ 3,822 $ 1,664 $ 821
Inventory reserves
released for these sales 826 643 483
Goodwill and Other
Intangibles
In accordance with FASB
ASC Topic 350— Intangibles—Goodwill and
Other
In accordance with ASC
350, the Company performed its goodwill impairment test as of
July 31, 2016 and 2015, and determined that no adjustment to
goodwill was necessary. As of July 31, 2016, the fair value of
the reporting units to which goodwill is allocated substantially
exceeded the carrying values of those reporting units. The
observable inputs used in the Company’s Discounted Cash Flow
(DCF) method for estimating the fair value of the reporting units
include discount rates at the Company’s weighted-average cost
of capital. The Company derives discount rates that are
commensurate with the risks and uncertainties inherent in its
respective businesses and its internally developed projections of
future cash flows. In addition, the Company determined the
projected future cash flows of the reporting units for the residual
period using the Gordon growth method which assumes that the
reporting unit will grow and generate free cash flow at a constant
rate. The Company believes that the Gordon growth method is the
most appropriate method for determining the residual value because
the residual value is calculated at the point at which the Company
has assumed that the reporting units have reached stable growth
rates. The Company’s goodwill consists of the
following:
Goodwill July 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-Luther & Maelzer, 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 July 31,
2016
Description Estimated Gross Carrying Accumulated Net Amount
(in years) (in thousands) (in thousands) (in thousands)
Developed technology
(Credence, ECT, Multitest, atg-Luther & Maelzer, and
Titan) 6-20 $ 29,882 $ (27,605 ) $ 2,277
Customer
Relationships—ECT, Multitest, atg-Luther & Maelzer,
and Titan 2 1,844 (1,174 ) 670
Maintenance
agreements—ASL & Diamond 7 1,900 (1,900 ) —
Trade Names 10 70 (15 ) 55
Non-compete
Agreements 1 8 (8 ) —
Total amortizable
intangible assets $ 33,704 $ (30,702 ) $ 3,002
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-Luther & Maelzer, and
Titan) 6-20 $ 29,882 $ (26,856 ) $ 3,026
Customer
Relationships—ECT, Multitest, atg-Luther & Maelzer,
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 amortizable
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 3.5
years.
The Company expects the
remaining amortization for these intangible assets as of
July 31, 2016 to be:
Year
ending July 31, Amount
2017 676
2018 548
2019 517
2020 403
Thereafter 858
Total $ 3,002
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. These
assets are subject to an annual impairment test or more frequently
if triggering events occur. For the year ended July 31, 2016,
the Company assessed qualitative factors to determine if a two-step
quantitative impairment test was necessary. The Company determined,
based on qualitative assessment, that it was more likely than not
that the trademarks’ fair value was greater than their
carrying amount, therefore no quantitative assessment was required,
and there was no adjustment to the carrying value of the
trademarks.
Long Lived
Assets
On an ongoing 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 these
amounts as necessary.
The following table shows
the change in the Company’s product warranty liability, as
required by Topic 460, Guarantees,
Product
Warranty Activity 2016 2015
(in
thousands)
Balance at beginning of
period $ 2,983 $ 3,206
Warranty expenditures for
current period (4,735 ) (5,468 )
Translation
adjustment (12 ) (299 )
Provision for warranty
costs in the period 4,489 5,544
Balance at end of
period $ 2,725 $ 2,983
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 Costs
The Company expenses all
engineering and product development costs as incurred. Expenses
relating to certain software development costs, which were subject
to capitalization in accordance with the Topic 985, Software,
Shipping and Handling
Costs
Shipping and handling
costs are included in cost of sales in the Consolidated Statement
of Operations and Comprehensive Income (Loss). Shipping and
handling costs were $6.4 million, $7.1 million, and $4.5 million
for fiscal years ended July 31, 2016, 2015, and 2014,
respectively.
Income
Taxes
The Company recorded an
income tax benefit of $1.7 million for fiscal 2016, primarily due
to foreign taxes in profitable locations and includes a tax benefit
associated with the intraperiod tax allocation. The Company
recorded an income tax provision of $2.6 million for fiscal 2015
primarily due to operating results of profitable foreign entities
in jurisdictions primarily in Asia and Europe.
As of both July 31,
2016 and July 31, 2015, our liability for unrecognized income
tax benefits was $6.3 million (of which $2.7 million, if
recognized, would impact our income tax rate). The Company
recognizes interest and penalties related to uncertain tax
positions as a component of provision for income taxes. For
July 31, 2016 and July 31, 2015, the Company had accrued
approximately $1.2 million and $1.0 million, respectively, 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 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 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 the
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 is 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 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”), 2004 Stock
Plan, 2001 Stock Plan, 1999 Stock Plan, and 1993 Stock Plan. In
addition, the Company assumed the Credence 2005 Stock Incentive
Plan in connection with its acquisition of Credence. The Company
can only grant awards from the 2010 Plan.
During fiscal 2016, the
Company granted 838,300 Restricted Stock Units (“RSUs”)
to certain executives, directors and employees, with time-based
vesting terms ranging from one to four years. Of these, 305,000
RSUs were granted to executives.
The Company recognizes
stock-based compensation expense on its equity awards in accordance
with the provisions of Topic 718, Compensation—Stock
Compensation,
For the fiscal years
ended July 31, 2016, 2015, and 2014, the Company recorded
stock-based compensation expense as follows:
Fiscal Year Ended
July 31,
2016 2015 2014
(in
thousands)
Cost of sales $ 216 $ 224 $ 164
Engineering and product
development expenses 897 913 632
Selling, general and
administrative expenses 5,656 6,414 4,623
Total stock-based
compensation expense $ 6,769 $ 7,551 $ 5,419
As of July 31, 2016,
there was approximately $10.4 million of unrecognized stock-based
compensation expense related to share-based equity grants to
employees that is expected to be recognized over the next
2.59 weighted-average years.
Net income per
Share
Basic net income per
common share is computed by dividing net income available to common
stockholders by the weighted average number of common shares
outstanding for the period. Diluted net 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 income by the
weighted average number of common shares and the dilutive effect of
all securities outstanding.
Reconciliation between
basic and diluted net income (loss) per share is as
follows:
Fiscal Year Ended
July 31,
2016 2015 2014
(in thousands, except per share data)
Net income
(loss) $ 11,174 $ 28,226 $ 833
Basic EPS
Weighted average shares
outstanding—basic 53,783 53,658 48,214
Basic EPS $ 0.21 $ 0.53 $ 0.02
Diluted EPS
Weighted average shares
outstanding—basic 53,783 53,658 48,214
Plus: impact of stock
options and unvested restricted stock units 191 873 936
Weighted average shares
outstanding—diluted 53,974 54,531 49,150
Diluted EPS $ 0.21 $ 0.52 $ 0.02
For the fiscal years
ended July 31, 2016, 2015 and 2014, options to purchase
approximately 0.0 million, 0.1 million, and
0.4 million shares, respectively, of common stock were not
included in the calculation of diluted earnings per share because
the effect of including the options would have been anti-dilutive.
As of July 31, 2016 there were no remaining options
outstanding. In accordance with the contingently issuable shares
guidance of the FASB ASC 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)
July 31,
2016
Due in less than one
year $ 25,257
Due in 1 to 3
years 31,099
Total marketable
securities $ 56,356
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 Amortized
(in
thousands)
July 31,
2016
Corporate (a) $ 22,574 $ 22,405
Government 18,321 18,249
Mortgage-Backed 1,665 1,672
Asset-Backed 13,796 13,739
Total $ 56,356 $ 56,065
Market Amortized
(in
thousands)
July 31,
2015
Corporate (a) $ 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
(a) There are no held to
maturity investments included in the above figures as of
July 31, 2016 and 2015, respectively.
Realized gains, losses
and interest income are included in interest income in the
Statements of Operations. Unrealized gains and losses are reflected
as a separate component of comprehensive income (loss) within
Stockholders’ Equity. The Company analyzes its securities
portfolio for other-than-temporary impairment on a quarterly basis
or upon occurrence of a significant change in circumstances. There
were no other-than-temporary impairment losses recorded in the
fiscal years ended July 31, 2016 or 2015.
The following table
summarizes marketable securities and related unrealized gains and
losses as of July 31, 2016 and 2015:
July 31, 2016 Market Unrealized
(in
thousands)
Securities < 12 months
unrealized losses $ 3,363 $ (4 )
Securities > 12 months
unrealized losses 6,925 (17 )
Securities < 12 months
unrealized gains 21,894 19
Securities > 12 months
unrealized gains 24,174 74
Total $ 56,356 $ 72
July 31, 2015 Market Unrealized
(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 )
Interest income and
realized gains and losses from sales of marketable securities,
included in interest income in the Statement of Operations, are as
follows:
Fiscal Year Ended
July 31,
2016 2015 2014
(in
thousands)
Interest income on
marketable securities $ 280 $ 1,221 $ 1,326
Realized gain (loss) from
sales of securities (1 ) 22 16
Total $ 279 $ 1,243 $ 1,342
Fair Value of
Financial Instruments
The Company determines
its fair value measurements for assets and liabilities based upon
the provisions of Topic 820, Fair Value Measurements and
Disclosures,
Topic 825 to the FASB
ASC, Financial
Instruments,
Concentration of
Credit and Supplier Risk
Fiscal Year Ended
July 31,
2016 2015 2014
(in millions except
%’s)
Revenue from top ten
customers 55 % 54 % 51 %
Accounts receivable from
the same top ten customers $ 42.3 $ 43.1 $ 48.6
Sales to customers
outside the United States $ 266.0 $ 312.5 $ 239.2
Financial instruments,
which potentially subject the Company to concentrations of credit
risk, are cash equivalents, marketable securities and accounts
receivable. All of the Company’s cash equivalents and
marketable securities are maintained by major financial
institutions. The Company periodically reviews these investments to
evaluate and minimize credit risk. Concentration of credit risk
with respect to accounts receivable is limited to certain customers
to whom the Company makes substantial sales. To reduce risk, the
Company routinely assesses the financial strength of its customers.
The Company does not require collateral, although the Company does
obtain letters of credit on sales to certain foreign customers.
During fiscal 2016 the Company did not write off any accounts
receivable. During fiscal 2015, the Company wrote off $0.1 million
of accounts receivable. There were no write-offs for the fiscal
year ended July 31, 2014.
The Company outsources
certain components and subassemblies for our test equipment to
contract manufacturers other than its sole source supplier
manufacturer. The Company’s products incorporate standard
components and prefabricated parts manufactured to its
specifications. These components and subassemblies are used to
produce testers in configurations specified by its customers. Some
of the standard components for the Company’s products are
available from a number of different suppliers; however, many such
standard components are purchased from a single supplier or a
limited group of suppliers. Although the Company believes that all
single sourced components currently are available in adequate
amounts, shortages or delivery delays may develop in the future.
The Company is dependent on certain semiconductor device
manufacturers, who are sole source suppliers of custom components
for its products. The Company has no written supply agreements with
these sole source suppliers and purchases its custom components
through individual purchase orders. The Company continuously
evaluates alternative sources for the manufacture of our custom
components and the supply of our standard components; however, such
alternative sources may not meet its required qualifications or
have capacity that is available to the Company.
Property and
Equipment
Property and equipment
acquired is recorded at cost. The Company provides for depreciation
and amortization 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 three 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 July 31, 2016 and July 31, 2015 are
summarized as follows:
As of
July 31, Estimated Useful
2016 2015
(in thousands) (in
years)
Equipment
spares $ 30,784 $ 41,398 7
Machinery, equipment and
internally manufactured systems 31,206 32,068 3-7
Office furniture and
equipment 2,157 2,518 3-7
Purchased
software 725 506 3
Land 2,508 6,106 —
Buildings 7,944 8,634 10 – 40 years
Leasehold
improvements 10,312 11,029 Term of lease or
exceed 10 years
Property and equipment,
gross $ 85,636 102,259
Accumulated depreciation
and amortization (60,153 ) (70,809 )
Property and equipment,
net $ 25,483 $ 31,450
During the fiscal year
ended July 31, 2016 the Company executed two purchase and sale
agreements for land owned in Hillsboro, Oregon. As a result these
assets have been moved to Assets Held for Sale on the
Company’s Consolidated Balance Sheet as of July 31, 2016. The
Company expects the sale transactions to be complete during the
fiscal year ending July 31, 2017.
Depreciation expense was
$5.7 million, $6.4 million, and $6.1 million for the fiscal years
ended July 31, 2016, 2015, and 2014,
respectively.
Recent Accounting
Pronouncements
In May 2014, the FASB
issued ASU 2014-09, Revenue from Contracts with
Customers (Topic 606),
In April 2015, the FASB
issued ASU No. 2015-03, Interest – Imputation
of Interest (Subtopic 835-30): Simplifying the Presentation of Debt
Issuance Costs
In September 2015, the
FASB issued ASU No. 2015-16, Simplifying the Accounting
for Measurement-Period Adjustments
In November 2015, the
Financial Accounting Standards Board issued Accounting Standards
Update 2015-17, “Balance Sheet Classification of Deferred
Taxes”, which requires that all deferred tax assets and
liabilities be classified as non-current on the balance sheet. The
amendments in ASU 2015-17 are intended to simplify the presentation
of deferred income taxes. As of July 31, 2016, the Company has
adopted ASU 2015-17 on a prospective basis and has not adjusted
prior periods as a result of the adoption. As required by ASU
2015-17, all deferred tax assets and liabilities are now classified
as non-current in the Company’s consolidated balance
sheets.
In February 2016, the
FASB issued ASU No. 2016-02, Leases (Topic
842),
In March 2016, the FASB
issued ASU 2016-09, “Compensation-Stock Compensation
(Topic 718): Improvements to Employee Share-Based Payment
Accounting.” |
