| 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 United States generally
accepted accounting principles (“U.S. GAAP”) 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.
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 LTXC 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 are as follows:
October 31, July 31,
(in
thousands)
Material and purchased components $ 28,719 $ 27,753
Work-in-process 19,219 20,218
Finished equipment, including inventory consigned to customers 22,301 22,015
Total inventories $ 70,239 $ 69,986
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, 2016 and July 31, 2016, inventory was stated net
of inventory reserves of $23.7 million and $21.4 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, 2016, the
Company’s goodwill is allocated to its Semiconductor Test
reporting unit and its Contactors reporting unit. Based on Topic
350-20-35-3A, as of October 31, 2016, 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 intangible assets, net on the Company’s
Consolidated Balance Sheets:
As of October 31, 2016
Description Estimated Gross Carrying Accumulated Net Amount
(in years)
(in thousands)
(in thousands)
(in thousands)
Developed technology (Credence, ECT, 6-20 $ 29,882 $ (27,791 ) $ 2,091
Customer Relationships – 20 670 (2 ) 668
Trade Names – Titan 10 70 (17 ) 53
Total amortizable intangible assets $ 30,622 $ (27,810 ) $ 2,812
Trademarks 6,427
— 6,427
Total intangible assets $ 37,049 $ (27,810 ) $ 9,239
As of July 31, 2016
Description Estimated Gross Carrying Accumulated Net Amount
(in years)
(in thousands)
(in thousands)
(in thousands)
Developed technology (Credence, ECT, 6-20 $ 29,882 $ (27,605 ) $ 2,277
Customer Relationships – ECT, Multitest, atg, and Titan 2-20 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
Trademarks 6,427
— 6,427
Total intangible assets $ 40,131 $ (30,702 ) $ 9,429
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 the remaining amortization for these intangible
assets to be:
Year ending July 31, Amount
Remainder of 2017 $ 486
2018 548
2019 517
2020 403
Thereafter 858
Total $ 2,812
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 the 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
Three Months Ended
Product Warranty Activity 2016 2015
(in
thousands)
Balance at beginning of period $ 2,725 $ 2,983
Warranty expenditures for current period (1,071 ) (1,135 )
Changes in liability related to pre-existing warranties (12 ) 28
Provision for warranty costs in the period 788 952
Balance at end of period $ 2,430 $ 2,828
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
expenses as incurred. Expenses relating to certain software
development costs, which were subject to capitalization in
accordance with Topic 485, 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 Income (Loss). Shipping and handling costs were
insignificant for the three months ended October 31, 2016 and
2015.
Income Taxes
The Company recorded an income tax provision of $0.6 million for
the three months ended October 31, 2016, primarily due to foreign
taxes in profitable locations.
The Company’s total liability for unrecognized income tax
benefits was $6.1 million and $6.3 million (of which $2.6 million
and $2.7 million, if recognized, would impact the Company’s
income tax rate) as of October 31, 2016 and July 31, 2016,
respectively. The Company recognizes interest and penalties related
to uncertain tax positions as a component of provision for income
taxes. As of October 31, 2016 and July 31, 2016, the Company
had accrued approximately $1.1 million and $1.2 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 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
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
Under Xcerra’s stock compensation plans, the Company grants
restricted stock units (“RSUs”) and performance-based
restricted stock units (“PRSUs”), and employees are
eligible to purchase Xcerra’s common stock through its
Employee Purchase Plan (“ESPP”). 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, 2016, the Company
granted 701,500 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.
During the three months ended October 31, 2016, the Company granted
229,000 PRSUs, with a grant date fair value of $1.84 per share to
its executive officers with a market metric based on total
shareholder return (“TSR”) relative to the TSR of
selected peers during the performance period from August 1, 2016 to
July 31, 2017. After completion of the performance period, the
portion of PRSUs that are earned will be subject to time-based
vesting conditions with 25% vesting immediately and the remaining
75% vesting annually in equal installments over the next three
years. PRSUs are valued using a Monte Carlo simulation
model. The number of units expected to be earned, based upon
the achievement of the TSR market condition, is factored into the
grant date Monte Carlo valuation. Compensation expense is
recognized regardless of the eventual number of units that are
earned based upon the market condition, provided the executive
officer remains an employee at the end of the vesting period.
The fair value of the PRSUs granted during the three months ending
October 31, 2016 was estimated using the Monte Carlo simulation
model with the following assumptions:
For the Three Months
October 31,
Risk-free interest rate 0.58%
Xcerra volatility-historical 36.6%
Peer group index volatility-historical (average) 37.5%
Dividend yield 0.00%
Expected volatility was based on the historical volatility of
Xcerra’s stock and its peer group, over the most recent 0.93
year period. The risk-free interest rate was determined using the
U.S. Treasury yield curve in effect at the time of grant. Dividend
yield was consistent with Xcerra’s current dividend
policy.
The Company recognizes stock-based compensation expense on its
equity awards in accordance with the provisions of Topic
718, Compensation—Stock
Compensation
Net income (loss) per share
Basic net income (loss) 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 (loss) income per
common share is as follows:
Three Months Ended
2016 2015
(in thousands,
except
Net income (loss) $ 18 $ (1,666 )
Basic EPS:
Weighted average shares outstanding- basic 53,865 54,490
Basic EPS $ 0.00 $ (0.03 )
Diluted EPS:
Weighted average shares outstanding- basic 53,865 54,490
Plus: impact of unvested RSUs 160
—
Weighted average shares outstanding- diluted 54,025 54,490
Diluted net income (loss) per share $ 0.00 $ (0.03 )
For the three months ended October 31, 2016, there were no
outstanding options to purchase stock of the Company. For the three
months ended October 31, 2015, options to purchase approximately
0.1 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 and money market
accounts. Marketable securities consist primarily of debt
securities that are classified as available-for-sale and
held-to-maturity, 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, 2016
Due in less than one year $ 24,052
Due in 1 to 3 years 32,243
Total marketable securities $ 56,295
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
The market value and amortized cost of marketable securities are as
follows:
Market Amortized
(in
thousands)
October 31, 2016
Corporate $ 22,130 $ 21,976
Government 17,750 17,719
Mortgage-Backed 1,758 1,760
Asset-Backed 14,657 14,615
Total $ 56,295 $ 56,070
Market Amortized
(in
thousands)
July 31, 2016
Corporate $ 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
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 Income (Loss). The Company analyzes its investments
for impairment on a quarterly basis or upon occurrence of
indicators of possible impairment. There was no other than
temporary impairment losses recorded in the three months ended
October 31, 2016 and 2015.
The following table summarizes marketable securities and related
unrealized gains and losses as of October 31, 2016 and
July 31, 2016:
October 31, 2016 Market Unrealized
(in
thousands)
Securities < 12 months unrealized losses $ 8,399 $ (6 )
Securities > 12 months unrealized losses 16,649 (23 )
Securities < 12 months unrealized gains 15,654 13
Securities > 12 months unrealized gains 15,593 39
Total $ 56,295 $ 23
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
Property and Equipment
The Company records acquired property and equipment at cost. The
Company provides for 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
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 October
31, 2016 and July 31, 2016 are summarized as follows:
October 31, July 31, Estimated
(in thousands) (in years)
Equipment spares $ 29,513 $ 30,784 7
Machinery, equipment and internally manufactured systems 29,751 31,206 3-7
Office furniture and equipment 2,243 2,157 3-7
Purchased software 731 725 3
Land 2,508 2,508
—
Buildings 7,950 7,944 10-40 years
Leasehold improvements 10,302 10,312 Term of lease or
Property and equipment, gross 82,998 $ 85,636
Accumulated depreciation and amortization (57,150 ) (60,153 )
Property and equipment, net $ 25,848 $ 25,483 |
