| 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 ASC
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
Semiconductor Test operating segment’s maintenance or service
contracts only. The Company’s other operating segments
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,
2017 2016
(in
thousands)
Material and purchased
components $ 30,746 $ 27,753
Work-in-process 26,211 20,218
Finished equipment,
including inventory consigned to customers 24,552 22,015
Total
inventories $ 81,509 $ 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 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, 2017 and July 31, 2016, inventory is stated net
of inventory reserves of $22.0 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.
The following
table shows sales of previously reserved inventory and the
inventory reserves released for these sales for the fiscal years
ended July 31, 2017, 2016, and 2015:
Fiscal Year Ended July 31,
2017 2016 2015
(in
thousands)
Sales of previously
reserved inventory $ 3,889 $ 3,822 $ 1,664
Inventory reserves
released for these sales 1,161 826 643
Goodwill
and Other Intangibles
In accordance
with ASC 350— Intangibles—Goodwill and
Other
Goodwill July 31, 2017 July 31, 2016
(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,
2017
Description Estimated Useful Life Gross
Carrying Amount Accumulated Amortization Net Amount
(in years) (in thousands) (in thousands) (in thousands)
Developed technology
(Credence, ECT, Multitest, atg-Luther & Maelzer, and
Titan) 6-20 $ 29,882 $ (28,266 ) $ 1,616
Customer
Relationships—ECT, Multitest, atg-Luther & Maelzer,
and Titan 2 670 (8 ) 662
Trade Names 10 70 (23 ) 47
Total amortizable
intangible assets $ 30,622 $ (28,297 ) $ 2,325
As of July 31,
2016
Description Estimated Useful Life Gross
Carrying Amount Accumulated Amortization 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
Trade Names 10 70 (15 ) 55
Total amortizable
intangible assets $ 31,796 $ (28,794 ) $ 3,002
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
9.0 years.
The Company
expects the remaining amortization for these intangible assets as
of July 31, 2017 to be:
Year
ending July 31, Amount (in
thousands)
2018 $ 548
2019 517
2020 403
2021 284
2022 188
Thereafter 385
Total $ 2,325
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, 2017, 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 ASC 360, Property, Plant and
Equipment
Foreign
Currency Remeasurement
The financial
statements of the Company’s foreign subsidiaries are
remeasured in accordance with
ASC 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 ASC 460, Guarantees, for the fiscal
years ended July 31, 2017 and 2016:
Product
Warranty Activity 2017 2016
(in
thousands)
Balance at beginning of
period $ 2,725 $ 2,983
Warranty expenditures for
current period (4,959 ) (4,735 )
Translation
adjustment 102 (12 )
Provision for warranty
costs in the period 5,742 4,489
Balance at end of
period $ 3,610 $ 2,725
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
ASC 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 $6.1 million, $6.4 million, and $7.1
million for fiscal years ended July 31, 2017, 2016, and 2015,
respectively.
Income
Taxes
The Company
recorded an income tax provision of $5.9 million for fiscal 2017,
primarily due to foreign taxes in profitable locations. The Company
recorded an income tax benefit of $1.7 million for fiscal 2016
primarily due to foreign taxes in profitable locations and tax
benefit associated with the intra-period tax allocation.
As of
July 31, 2017 and July 31, 2016, our liability for
unrecognized income tax benefits was $6.2 million and
$6.3 million respectively (of which $2.6 million and $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, 2017 and July 31, 2016, the Company had accrued
approximately $1.3 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 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 the 2010 Stock Incentive Plan
(“2010 Plan”) and can only grant awards from this 2010
Plan. During fiscal 2017, the Company granted 765,000 Restricted
Stock Units (“RSUs”) to certain executives, directors
and employees, with time-based vesting terms ranging from one to
four years. Of these, 229,000 RSUs were granted to
executives.
During fiscal
2017, the Company granted 229,000 Performance RSUs
(“PRUs”), 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 fiscal 2017 was estimated using
the Monte Carlo simulation model with the following
assumptions:
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.
Prior to the
end of the performance period, or July 31, 2017, the Company
modified the PRSU agreements and removed the market criteria, and
as a result they were considered to be 100% earned, with 25%
vesting immediately and the remaining 75% vesting annually in equal
installments over the next three years, as of July 31, 2017.
The Company accounted for this change as a modification, and as a
result the incremental fair value of the awards were $8.24 per
share. The Company will recognize the estimated fair value of these
awards over the remaining vesting period.
The Company
recognizes stock-based compensation expense on its equity awards in
accordance with the provisions of ASC
718, Compensation—Stock
Compensation,
For the
fiscal years ended July 31, 2017, 2016, and 2015, the Company
recorded stock-based compensation expense as follows:
Fiscal Year Ended
July 31,
2017 2016 2015
(in
thousands)
Cost of sales $ 227 $ 216 $ 224
Engineering and product
development expenses 801 897 913
Selling, general and
administrative expenses 5,290 5,656 6,414
Total stock-based
compensation expense $ 6,318 $ 6,769 $ 7,551
As of
July 31, 2017, 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 2.74 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,
2017 2016 2015
(in thousands, except per share data)
Net income
(loss) $ 22,555 $ 11,174 $ 28,226
Basic Earnings per Share
(“EPS”)
Weighted average shares
outstanding—basic 54,127 53,783 53,658
Basic EPS $ 0.42 $ 0.21 $ 0.53
Diluted EPS
Weighted average shares
outstanding—basic 54,127 53,783 53,658
Plus: impact of unvested
restricted stock units 745 191 873
Weighted average shares
outstanding—diluted 54,872 53,974 54,531
Diluted EPS $ 0.41 $ 0.21 $ 0.52
During the
twelve months ended July 31, 2017 and July 31, 2016,
there were no outstanding options to purchase stock of the Company.
During the twelve months ended July 31, 2015, there were
approximately 0.1 million options outstanding to purchase
stock of the Company, which were excluded from the calculation of
diluted earnings per share because the effect of including them
would have been anti-dilutive.
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. Marketable securities consist
primarily of debt securities that are classified as
available-for-sale, in accordance with ASC
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,
2017
Due in less than one
year $ 25,458
Due in 1 to 3
years 31,629
Total marketable
securities $ 57,087
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 Value Amortized Cost
(in
thousands)
July 31,
2017
Corporate (a) $ 24,969 $ 24,828
Government 12,408 12,410
Mortgage-Backed 2,335 2,332
Asset-Backed 17,375 17,348
Total $ 57,087 $ 56,918
Market Value Amortized Cost
(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
(a) There are no held to
maturity investments included in the above figures as of
July 31, 2017 and 2016, 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, 2017 or
2016.
The following
table summarizes marketable securities and related unrealized gains
and losses as of July 31, 2017 and 2016:
July 31, 2017 Market Value Unrealized Gain/(Loss)
(in
thousands)
Securities < 12 months
unrealized losses $ 23,378 $ (28 )
Securities > 12 months
unrealized losses 18,411 (32 )
Securities < 12 months
unrealized gains 2,080 3
Securities > 12 months
unrealized gains 13,218 23
Total $ 57,087 $ (34 )
July 31, 2016 Market Value Unrealized Gain/(Loss)
(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
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,
2017 2016 2015
(in
thousands)
Interest income on
marketable securities $ 265 $ 280 $ 1,221
Realized gain (loss) from
sales of securities (1 ) (1 ) 22
Total $ 264 $ 279 $ 1,243
Fair Value
of Financial Instruments
The Company
determines its fair value measurements for assets and liabilities
based upon the provisions of ASC 820, Fair
Value Measurements and Disclosures
ASC
825, Financial
Instruments,
Concentration of Credit and Supplier Risk
Fiscal Year Ended
July 31,
2017 2016 2015
(in millions except
%’s)
Customer over 10% of net
sales—Spirox (% of revenue) 15 % 19 % 13 %
Net sales from top ten
customers (% of total revenue) 59 % 55 % 54 %
Accounts receivable from
the same top ten customers $ 51.2 $ 42.3 $ 43.1
Net sales to customers
outside the United States $ 321.9 $ 266.0 $ 312.5
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 2017 and fiscal 2016 the Company
did not write off any accounts receivable. During fiscal 2015, the
Company wrote off $0.2 million of accounts receivable.
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
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, 2017 and
July 31, 2016 are summarized as follows:
As of
July 31, Estimated
Useful Lives
2017 2016
(in thousands) (in
years)
Equipment
spares $ 27,680 $ 30,784 7
Machinery, equipment and
internally manufactured systems 30,707 31,206 3-7
Office furniture and
equipment 1,302 2,157 3-7
Purchased
software 547 725 3
Land 2,508 2,508 —
Buildings 7,990 7,944 10 –
40 years
Leasehold
improvements 9,679 10,312 Term of lease or
useful life, not to
exceed 10 years
Property and equipment,
gross $ 80,413 $ 85,636
Accumulated depreciation
and amortization (51,904 ) (60,153 )
Property and equipment,
net $ 28,509 $ 25,483
Depreciation
expense was $5.5 million, $5.7 million, and $6.4 million for the
fiscal years ended July 31, 2017, 2016, and 2015,
respectively.
Recent
Accounting Pronouncements
In May 2014,
the FASB issued Accounting Standards Update
2014-09, Revenue from Contracts with Customers
(Topic 606), Revenue from Contracts with
Customers (Topic 606): Deferral of the Effective Date Revenue from Contracts with Customers
(Topic 606): Principal versus Agent Considerations (Reporting
Revenue Gross versus Net)
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 February
2016, the FASB issued ASU
No. 2016-02, Leases (Topic
842),
In March
2016, the FASB issued ASU
No. 2016-09, Compensation-Stock Compensation (Topic
718): Improvements to Employee Share-Based Payment
Accounting.
In August
2016, the FASB issued ASU
No. 2016-15, Classification of Certain
Cash Receipts and Cash Payments
In January
2017, the FASB issued
ASU 2017-04, Intangibles—Goodwill and Other
(Topic 350): Simplifying the Accounting for Goodwill
Impairment. |
