| 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 April 30, 2018 and July 31, 2017, the Company
consolidated one and zero VIEs, respectively.
Xcerra is the primary beneficiary of ALBS which qualifies as a VIE
that meets the definition of a business. As such, the assets,
liabilities, and noncontrolling interest of ALBS were measured at
fair value in accordance with ASC 805. 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 April 30, 2018, the
VIE had assets of $691,000 and liabilities of $371,000. For the
three and nine months ended April 30, 2018, ALBS had operating
income of $175,000 and $190,000, respectively. 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
April 30, July 31,
(in
thousands)
Material and purchased components $ 37,172 $ 30,746
Work-in-process 29,674 26,211
Finished equipment, including inventory consigned to customers 21,677 24,552
Total inventories $ 88,523 $ 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
April 30, 2018 and July 31, 2017, inventory was stated
net of inventory reserves of $23.8 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 April 30, 2018, the
Company’s goodwill is allocated to its Semiconductor Test
reporting unit, its Contactors reporting unit and its Semiconductor
Handler reporting unit. Based on ASC 350-20-35-3A,
The Company’s goodwill consists of the following:
Goodwill April 30, 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
Semiconductor Handler Reporting Unit
Investment in ALBS Solutions Sdn Bhd (October 23, 2017) 2,023
—
Total goodwill $ 45,873 $ 43,850
During the quarter ending January 31, 2018, the Company
recorded approximately $2.0 million of goodwill related to its
investment in ALBS Solutions Sdn Bhd (“ALBS”). During
the quarter ending October 31, 2017, the Company, through one
of its wholly-owned subsidiaries, LTX-Credence
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 April 30, 2018
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 $ (28,628 ) $ 1,254
Customer Relationships—Titan 20 670 (64 ) 606
Trade Names—Titan 10 70 (28 ) 42
Total amortizable intangible assets $ 30,622 $ (28,720 ) $ 1,902
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—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 7.9 years.
The Company expects amortization for these intangible assets to
be:
Year ending July 31, 2018 Amount
Remainder of 2018 128
2019 520
2020 406
2021 287
2022 191
Thereafter 370
Total $ 1,902
The identifiable intangible assets associated with ECT, Multitest
and atg 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. The functional currency of the
Company’s tester group is the U.S. Dollar
(“USD”). Accordingly, the Company’s foreign
subsidiaries that are included in this group remeasure monetary
assets and liabilities at 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
Nine months Ended
Product Warranty Activity 2018 2017
(in
thousands)
Balance at beginning of period $ 3,610 $ 2,725
Warranty expenditures for current period (3,224 ) (2,778 )
Changes in liability related to pre-existing 114 (14 )
Provision for warranty costs in the period 3,486 3,243
Balance at end of period $ 3,986 $ 3,176
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. Shipping and handling costs were
insignificant for the three and nine months ended April 30,
2018 and 2017.
Income Taxes
The Company recorded an income tax provision of $6.1 million
for the nine months ended April 30, 2018, primarily due to
foreign taxes in profitable locations.
The Company’s effective tax rate during the nine months ended
April 30, 2018 was not significantly impacted by the Tax Cuts
and Jobs Act (the “Act”), which was enacted into law on
December 22, 2017.
The income tax effects resulting from changes in tax laws are
accounted for by the Company in accordance with the authoritative
guidance, which requires that these tax effects be recognized in
the period in which the law is enacted and the effects are recorded
as a component of provision for income taxes. As a result, the
Company recorded an income tax benefit of $0.2 million
resulting from the enactment of the Act during the nine months
ended April 30, 2018.
The Act includes significant changes to the U.S. corporate income
tax system, such as reducing the U.S. federal corporate tax rate
from 35.0% to 21.0% as of January 1, 2018; shifting to a
modified territorial tax regime which requires companies to pay a
transition tax on earnings of certain foreign subsidiaries that
were previously tax deferred; and imposing new taxes on certain
foreign-sourced earnings. The Company has a July 31 fiscal
year-end phased-in
As of April 30, 2018, the Company had not fully completed its
accounting for the tax effects of the enactment of the Act. The
Company’s provision for income taxes for the nine months
ended April 30, 2018 is based in part on a reasonable estimate
of the effects on its transition tax and existing deferred tax
balances. For the amounts which the Company was able to reasonably
estimate, the provision for income taxes decreased by
$0.2 million during the nine months ended April 30, 2018
due to the re-measurement
The Act also includes provisions relating to Global Intangible
Low-Taxed
The Company’s total liability for unrecognized income tax
benefits was $6.3 million and $6.2 million (of which
$2.7 million and $2.6 million, if recognized, would
impact the Company’s income tax rate) as of April 30,
2018 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 April 30, 2018
and July 31, 2017, the Company had accrued approximately
$1.5 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. income
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 under Sections 382
and 383 of the Internal Revenue Code of 1986, as amended. 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 such net
operating losses that are available for utilization to
approximately $202 million. The Company has recorded a
valuation allowance against the full value of its 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.
There were no grants of equity awards made by the Company during
the three months ended April 30, 2018.
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 Nine Months Ended
2018 2017 2018 2017
(in thousands,
except per share data)
Net income attributable to Xcerra $ 11,754 $ 7,548 $ 37,216 $ 10,138
Basic EPS:
Weighted average shares outstanding- basic 54,909 54,259 54,781 54,080
Basic net income per share $ 0.21 $ 0.14 $ 0.68 $ 0.19
Diluted EPS:
Weighted average shares outstanding- basic 54,909 54,259 54,781 54,080
Plus: impact of unvested RSUs 879 784 1,032 581
Weighted average shares outstanding- diluted 55,788 55,043 55,813 54,661
Diluted net income per share $ 0.21 $ 0.14 $ 0.67 $ 0.19
During the nine months ended April 30, 2018 and 2017, 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)
April 30, 2018
Due in less than one year $ 24,285
Due in 1 to 3 years 27,007
Total marketable securities $ 51,292
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)
April 30, 2018
Corporate (a) $ 27,461 $ 27,490
Government 7,039 7,047
Mortgage-Backed 2,435 2,450
Asset-Backed 14,357 14,442
Total $ 51,292 $ 51,429
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 April 30, 2018
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. 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 nine months ended April 30, 2018 or
2017.
The following table summarizes marketable securities and related
unrealized gains and losses as of April 30, 2018 and
July 31, 2017:
April 30, 2018 Market Unrealized
(in
thousands)
Securities < 12 months unrealized losses $ 20,113 $ (61 )
Securities > 12 months unrealized losses 26,279 (288 )
Securities < 12 months unrealized gains 4,172 1
Securities > 12 months unrealized gains 728 1
Total $ 51,292 $ (347 )
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 April 30, 2018 and July 31, 2017 are
summarized as follows:
April 30, July 31, Estimated
(in thousands) (in years)
Equipment spares $ 24,333 $ 27,680 7
Machinery, equipment and internally manufactured systems 34,602 30,707 3-7
Office furniture and equipment 1,566 1,302 3-7
Purchased software 568 547 3
Land 2,508 2,508
—
Buildings 7,995 7,990 10-40
Leasehold improvements 9,825 9,679
Term of lease or
Property and equipment, gross 81,397 80,413
Accumulated depreciation and amortization (51,206 ) (51,904 )
Property and equipment, net $ 30,191 $ 28,509
Derivative Instruments
The Company has transactions and balances denominated in currencies
other than the U.S. dollar. Most of these transactions or balances
are denominated in Euros. The Company enters into foreign exchange
contracts to reduce its exposure to currency fluctuations. The
forward contract arrangements that the Company enters into
typically mature in three months or less. These transactions
do not qualify for hedge accounting. Net gains and losses related
to these contracts are recorded as a component of “Other
expenses, net” in the accompanying unaudited Consolidated
Statements of Operations and Comprehensive Income and are as
follows for the three and nine months ended
April 30, 2018 and 2017 (in thousands):
Three Months Ended
Nine Months Ended
April 30, April 30,
2018 2017 2018 2017
Unrealized gains (losses) on derivatives not designated as hedging
instruments $ (188 ) $
— $ (188 ) $
—
Realized gains (losses) on derivatives not designated as hedging
instruments $ (57 ) $
— $ (57 ) $
—
The fair values of the forward contracts are recorded in the
Company’s accompanying unaudited Consolidated Balance Sheets
as “Other accrued expenses”. Foreign exchange contract
liabilities are measured and reported at fair value based on
observable market inputs and classified within Level 2 of the
fair value hierarchy due to a lack of an active market for these
contracts. |
