| 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. The Company evaluates the need to
consolidate affiliates based on standards set forth in ASC
810 Consolidation
The consolidated financial statements include the accounts of the
Company and a variable interest entity (“VIE”) in which
the Company has been determined to be the primary beneficiary.
The Non-controlling
Variable Interest Entities—Principles of
Consolidation
The Company follows ASC 810-10-15
As of October 31, 2017 and July 31, 2017, the Company
consolidated one and zero VIEs, respectively.
Xcerra is the primary beneficiary of ALBS which is qualified as a
VIE. The assets and liabilities and revenues and expenses of this
VIE are included in the financial statements of ALBS and are
further included in the consolidated financial statements. As of
October 31, 2017, the VIE had assets of $491,000, liabilities
of $177,000, and operating income of $191,000. No assets were
pledged or given as collateral against any borrowings.
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 ASC
605, Revenue Recognition 2009-13, Multiple-Deliverable
Revenue
Arrangements 2009-13”).
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 and net realizable
value, determined on the first-in, first-out
October 31, July 31,
(in
thousands)
Material and purchased components $ 37,011 $ 30,746
Work-in-process 26,377 26,211
Finished equipment, including inventory consigned to customers 23,517 24,552
Total inventories $ 86,905 $ 81,509
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, 2017 and July 31, 2017, inventory was stated
net of inventory reserves of $23.0 million and
$22.0 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 ASC 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, 2017, the
Company’s goodwill is allocated to its Semiconductor Test
reporting unit and its Contactors reporting unit. Based on
ASC 350-20-35-3A,
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, 2017
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 $ (28,403 ) $ 1,479
Customer Relationships—Titan 20 670 (27 ) 643
Trade Names—Titan 10 70 (24 ) 46
Total amortizable intangible assets $ 30,622 $ (28,454 ) $ 2,168
As of July 31, 2017
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 $ (28,266 ) $ 1,616
Customer Relationships—ECT, Multitest, atg, and Titan 20 670 (8 ) 662
Trade Names—Titan 10 70 (23 ) 47
Total amortizable intangible assets $ 30,622 $ (28,297 ) $ 2,325
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 8.8 years.
The Company expects amortization for these intangible assets to
be:
Year ending July 31, 2018 Amount
Remainder of 2018 394
2019 520
2020 406
2021 287
2022 191
Thereafter 370
Total $ 2,168
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
Long Lived Assets
On an on-going Property, Plant and
Equipment re-evaluates
Foreign Currency Remeasurement and Translation
The financial statements of the Company’s foreign
subsidiaries are remeasured in accordance with
ASC 830, Foreign Currency Matters month-end non-monetary
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 ASC
460, Guarantees
Three months Ended
Product Warranty Activity 2017 2016
(in
thousands)
Balance at beginning of period $ 3,610 $ 2,725
Warranty expenditures for current period (929 ) (1,071 )
Changes in liability related to pre-existing 22 (12 )
Provision for warranty costs in the period 898 788
Balance at end of period $ 3,601 $ 2,430
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 ASC
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 Income (Loss). Shipping and handling costs were
insignificant for the three months ended October 31, 2017 and
2016.
Income Taxes
The Company recorded an income tax provision of $2.8 million
for the three months ended October 31, 2017, primarily due to
foreign taxes in profitable locations.
The Company’s total liability for unrecognized income tax
benefits was $6.2 million (of which $2.6 million, if
recognized, would impact the Company’s income tax rate) as of
both October 31, 2017 and July 31, 2017 respectively. The
Company recognizes interest and penalties related to uncertain tax
positions as a component of provision for income taxes. As of
October 31, 2017 and July 31, 2017, the Company had
accrued approximately $1.4 million and $1.3 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.
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
The Company has equity awards outstanding under the 2010 Stock
Incentive Plan (“2010 Plan”) and can only grant awards
from this 2010 Plan.
During the three months ended October 31, 2017, the Company
granted 914,600 Restricted Stock Units (“RSUs”) which
are subject to service-based vesting and vest ratably over four
years.
The Company recognizes stock-based compensation expense on its
equity awards in accordance with the provisions of ASC
718, Compensation—Stock
Compensation
Net income per share
Basic net income per common share is computed by dividing net
income attributable to Xcerra 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 per common
share is as follows:
Three Months Ended
2017 2016
(in thousands,
except
Net income attributable to Xcerra $ 17,531 $ 18
Basic EPS:
Weighted average shares outstanding—basic 54,604 53,865
Basic income per share $ 0.32 $ 0.00
Diluted EPS:
Weighted average shares outstanding—basic 54,604 53,865
Plus: impact unvested RSUs 1,024 160
Weighted average shares outstanding—diluted 55,628 54,025
Diluted income per share $ 0.32 $ 0.00
During the three months ended October 31, 2017 and 2016, there
were no outstanding options to purchase stock of the Company.
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, 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, 2017
Due in less than one year $ 28,600
Due in 1 to 3 years 28,319
Total marketable securities $ 56,919
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
The market value and amortized cost of marketable securities are as
follows:
Market Amortized
(in
thousands)
October 31, 2017
Corporate (a) $ 28,191 $ 28,047
Government 11,804 11,808
Mortgage-Backed 1,858 1,858
Asset-Backed 15,066 15,059
Total $ 56,919 $ 56,772
Market Amortized
(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
(a) There are no held to maturity
investments included in the above figures as of October 31,
2017 or July 31, 2017
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 were no other than
temporary impairment losses recorded in the three months ended
October 31, 2017 or 2016.
The following table summarizes marketable securities and related
unrealized gains and losses as of October 31, 2017 and
July 31, 2017:
October 31, 2017 Market Unrealized
(in
thousands)
Securities < 12 months unrealized losses $ 24,633 $ (28 )
Securities > 12 months unrealized losses 22,674 (57 )
Securities < 12 months unrealized gains 3,967 2
Securities > 12 months unrealized gains 5,645 6
Total $ 56,919 $ (77 )
July 31, 2017 Market Unrealized
(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 )
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 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, 2017 and July 31, 2017
are summarized as follows:
October 31, July 31, Estimated
(in thousands) (in years)
Equipment spares $ 27,887 $ 27,680 7
Machinery, equipment and internally manufactured systems 31,663 30,707 3-7
Office furniture and equipment 1,546 1,302 3-7
Purchased software 524 547 3
Land 2,508 2,508
—
Buildings 7,990 7,990 10-40
Leasehold improvements 9,677 9,679
Term of lease or
Property and equipment, gross 81,795 80,413
Accumulated depreciation and amortization (53,239 ) (51,904 )
Property and equipment, net $ 28,556 $ 28,509 |
