NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. THE COMPANY
Xcerra Corporation (Xcerra or the Company, we or us), is a global provider of test and handling capital
equipment, interface products, test fixtures, and services to the semiconductor, industrial, and electronics manufacturing industries. The Company designs, manufactures, markets and services systems and products that address the broad, divergent
requirements of the mobility, industrial, medical, automotive and consumer end markets, offering a comprehensive portfolio of solutions and technologies, and a global network of strategically deployed applications and support resources. Xcerra
operates in the semiconductor and electronics manufacturing test markets and is the parent company to the
atg-Luther &
Maelzer (atg), Everett Charles Technologies (ECT),
LTX-Credence
(LTXC) and Multitest (Multitest) businesses.
Semiconductor designers and
manufacturers worldwide use the Companys test and handling equipment and interface products to test their devices during the manufacturing process. The Companys interface products include the design, manufacture and marketing of
contactors and pins used in various types of test equipment, as well as in a wide variety of commercial and consumer applications. After testing, these semiconductor devices are incorporated into a wide range of products, including personal and
tablet computers, mobile internet equipment such as wireless access points and interfaces, broadband access products such as cable modems and set top boxes, personal communication and entertainment products such as mobile phones and personal digital
music players, consumer products such as televisions, videogame systems and digital cameras, automobile electronics and power management devices used in portable and automotive electronics.
The Company also designs, manufactures and markets printed circuit board (PCB) test systems used in the testing of
pre-assembly
PCBs. These testers are used to verify the quality of the PCB prior to the installation of components. The types of PCBs that are tested using the Companys systems include a diverse set of
electronic products including network servers, personal computers, tablet computers and mobile phones. The Companys test fixture service offerings include the design, manufacture, and marketing of
in-circuit
and functional-circuit test fixtures for testing assembled PCBs. The Company also sells hardware and software support and maintenance services for its products.
On April 7, 2017, the Company entered into an Agreement and Plan of Merger with Unic Capital Management Co., Ltd., a Chinese company (Unic
Capital) and China Integrated Circuit Industry Investment Fund Co., Ltd., a Chinese company (Sponsor), as joined by Unic Acquisition Corporation, a Massachusetts corporation (Unic Merger Sub) (as amended, the 2017
Merger Agreement), providing for the merger of Unic Merger Sub with and into the Company (the 2017 Merger), with the Company surviving the 2017 Merger. On August 4, 2017, pursuant to that certain Assignment and Assumption
Agreement, by and among Unic Capital, Hubei Xinyan Equity Investment Partnership (Limited Partnership), a Chinese limited partnership (Hubei) and Xcerra, Unic Capital irrevocably transferred, conveyed, assigned and delivered to Hubei all
of Unic Capitals right, interest, benefits, liabilities and obligations in and under the 2017 Merger Agreement, and Hubei accepted, assumed and agreed to pay, perform, fulfill and discharge all obligations and liabilities of Unic Capital
arising under or relating to the 2017 Merger Agreement; provided, however, that in the case where Hubei is unable to pay, perform, fulfill or discharge all obligations and liabilities under the 2017 Merger Agreement, Unic Capital will remain wholly
liable.
The closing of the 2017 Merger was subject to certain conditions, including clearance by the Committee on Foreign Investment in the United States
(CFIUS). After careful review of feedback received from CFIUS that approval of the 2017 Merger was highly unlikely and further discussions between the Company and Hubei, the parties determined to cease efforts to seek CFIUS clearance and
entered into a Termination Agreement, dated February 22, 2018 (the Termination Agreement), pursuant to which they mutually terminated the 2017 Merger Agreement and agreed to release each other and certain related parties from
certain claims and liabilities relating to the 2017 Merger Agreement and the transactions contemplated thereby. Neither the Company nor Hubei incurred or will incur any termination fees in connection with the termination of the 2017 Merger
Agreement.
Following the close of our quarter ending April 30, 2018, as further described in Note 12 to the Consolidated Financial Statements, on
May 7, 2018, the Company entered into an Agreement and Plan of Merger (the 2018 Merger Agreement) with Cohu, Inc., a Delaware corporation (Parent), and Xavier Acquisition Corporation, a Delaware corporation (Xavier
Merger Sub), providing for the merger of Xavier Merger Sub with and into the Company (the 2018 Merger), with the Company surviving the 2018 Merger as a wholly owned subsidiary of Parent.
6
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
(ASC 810).
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
interest in ALBS Solutions Sdn Bhd (ALBS) represents the
88.89% equity interest that is not held by the Company. All significant consolidated transactions and balances have been eliminated in consolidation.
Variable Interest EntitiesPrinciples of Consolidation
The Company follows ASC
810-10-15
guidance with respect to accounting for VIEs.
These entities do not have sufficient equity at risk to finance their activities without additional subordinated financial support from other parties or whose equity investors lack any of the characteristics of a controlling financial interest. A
variable interest is an investment or other interest that will absorb portions of a VIEs expected losses or receive portions of its expected residual returns and are contractual, ownership, or pecuniary in nature and that change with changes
in the fair value of the entitys net assets. A reporting entity is the primary beneficiary of a VIE and must consolidate it when that party has a variable interest, or combination of variable interests, that provides it with a controlling
financial interest. A party is deemed to have a controlling financial interest if it meets both of the power and losses/benefits criteria. The power criterion is the ability to direct the activities of the VIE that most significantly impact its
economic performance. The losses/benefits criterion is the obligation to absorb losses from, or right to receive benefits from, the VIE that could potentially be significant to the VIE. The VIE model requires an ongoing reconsideration of whether a
reporting entity is the primary beneficiary of a VIE due to changes in facts and circumstances.
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
, and Accounting Standards Update
2009-13,
Multiple-Deliverable Revenue Arrangements
(ASU
2009-13).
The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery
has occurred or services have been rendered, the sellers price is fixed or determinable and collectability is reasonably assured.
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 customers 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.
7
Revenue related to maintenance and service contracts is recognized ratably over the duration of the contracts.
Net service sales as presented in the Companys 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 Companys 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
(FIFO) method, and include materials, labor and manufacturing overhead. The
components of inventories are as follows:
|
|
|
|
|
|
|
|
|
|
|
April 30,
2018
|
|
|
July 31,
2017
|
|
|
|
(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 Companys 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
IntangiblesGoodwill and Other
(ASC 350), goodwill is not amortized. Rather, the Companys
goodwill is subject to periodic impairment testing. ASC 350 requires that the Company assign its goodwill to reporting units and test each reporting units goodwill for impairment at least on an annual basis and between annual tests if an event
occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The Company completed its goodwill impairment testing at July 31, 2017 and determined no adjustment to goodwill
was necessary.
The testing of goodwill for impairment is performed at a level referred to as a reporting unit. As of April 30, 2018, the
Companys 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,
as of April 30, 2018, there were no triggering events that required the Company to complete impairment testing.
The Companys goodwill consists of the following:
|
|
|
|
|
|
|
|
|
Goodwill
|
|
April 30,
2018
|
|
|
July 31,
2017
|
|
|
|
(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
|
|
|
|
|
|
|
|
|
|
|
8
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
Singapore Pte.
Ltd, entered into a Development, Manufacturing, and Distribution Agreement for development, manufacturing, and distribution work with ALBS and Subscription and Investment Agreement dated October 23, 2017 for the acquisition of ALBSs
entire business and equity. ALBS is a privately held corporation which provides high-tech semiconductor automation systems to different industrial users.
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 Companys Consolidated Balance Sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of April 30, 2018
|
|
Description
|
|
Estimated
Useful Life
|
|
|
Gross Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net Amount
|
|
|
|
(in years)
|
|
|
(in thousands)
|
|
|
(in thousands)
|
|
|
(in thousands)
|
|
Developed technologyCredence, ECT, Multitest, atg, and Titan
|
|
|
6-20
|
|
|
$
|
29,882
|
|
|
$
|
(28,628
|
)
|
|
$
|
1,254
|
|
Customer RelationshipsTitan
|
|
|
20
|
|
|
|
670
|
|
|
|
(64
|
)
|
|
|
606
|
|
Trade NamesTitan
|
|
|
10
|
|
|
|
70
|
|
|
|
(28
|
)
|
|
|
42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total amortizable intangible assets
|
|
|
|
|
|
$
|
30,622
|
|
|
$
|
(28,720
|
)
|
|
$
|
1,902
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 technologyCredence, ECT, Multitest, atg, and Titan
|
|
|
6-20
|
|
|
$
|
29,882
|
|
|
$
|
(28,266
|
)
|
|
$
|
1,616
|
|
Customer RelationshipsTitan
|
|
|
20
|
|
|
|
670
|
|
|
|
(8
|
)
|
|
|
662
|
|
Trade NamesTitan
|
|
|
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.
9
The Company expects amortization for these intangible assets to be:
|
|
|
|
|
Year ending July 31, 2018
|
|
Amount
(in thousands)
|
|
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 Companys 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. As of April 30, 2018, there were no triggering events that required the Company to complete impairment testing on
its trademarks.
Long Lived Assets
On an
on-going
basis, management reviews the value of and period of amortization or depreciation of the Companys long-lived assets. In accordance with ASC 360,
Property, Plant and Equipment
, the Company
reviews whether impairment losses exist on its long-lived assets other than goodwill when indicators of impairment are present. During this review, the Company assesses future cash flows and
re-evaluates
the
significant assumptions used in determining the original cost of long-lived assets other than goodwill. Although the assumptions may vary, they generally include revenue growth, operating results, cash flows and other indicators of value. Management
then determines whether there has been a permanent impairment of the value of long-lived assets based upon events or circumstances that have occurred since acquisition. The impairment amount recognized is based upon a determination of the impaired
assets fair value compared to its carrying value. As of April 30, 2018, there were no indicators that required the Company to conduct a recoverability test.
Foreign Currency Remeasurement and Translation
The financial statements of the Companys foreign subsidiaries are remeasured in accordance with ASC 830, Foreign Currency Matters. The functional
currency of the Companys tester group is the U.S. Dollar (USD). Accordingly, the Companys foreign subsidiaries that are included in this group remeasure monetary assets and liabilities at
month-end
exchange rates while long-term
non-monetary
items are remeasured at historical rates. Income and expense accounts are remeasured at the average rates in effect
during the month. Net gains (losses) resulting from foreign currency remeasurement and transaction gains (losses) are included in the Companys Consolidated Statements of Operations and Comprehensive Income as a component of other income
(expense), net, and were $(0.1) million and $(2.0) million, for the three and nine months ended April 30, 2018, respectively, and $(0.1) million and $0.7 million for the three and nine months ended April 30, 2017,
respectively. The functional currency of ECT, Multitest and atg is local currency, predominantly Euro, USD, Malaysian Ringgit and Singapore Dollars, and net gains or losses resulting from foreign currency translation are recorded in
stockholders equity as accumulated other comprehensive income (loss).
10
Product Warranty Costs
Certain of the Companys 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 Companys product warranty liability, as required by ASC 460,
Guarantees
, for the nine months ended
April 30, 2018 and 2017:
|
|
|
|
|
|
|
|
|
|
|
Nine
months Ended
April 30,
|
|
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
warranties
|
|
|
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 Companys 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 Companys 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 customers inability to meet its financial obligations, an
allowance is provided, which is based on the age of the receivables, the circumstances surrounding the customers 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
, were insignificant.
Shipping and Handling Costs
Shipping and handling costs are included in cost of sales in the Companys 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 Companys 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.
11
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
and as such, the lower corporate federal income tax rate will be
phased-in
resulting in a blended U.S. federal statutory rate of 26.48% for the fiscal year ending July 31, 2018 and a 21.0% rate for subsequent periods. The new taxes for certain foreign-sourced earnings
under the Act are effective for the Company after the fiscal year ending July 31, 2018. The SEC staff has acknowledged the challenges companies face in incorporating the effects of the tax reform under the Act by their financial reporting
deadlines. In response, the SEC staff issued Staff Accounting Bulletin No. 118 (SAB 118) to address the application of U.S. GAAP in situations when companies do not have the necessary information available, prepared, or analyzed in
reasonable detail to complete the accounting for certain income tax effects of the Act as of the first reporting deadline following the enactment of the Act.
As of April 30, 2018, the Company had not fully completed its accounting for the tax effects of the enactment of the Act. The Companys 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
of certain of the Companys deferred tax assets and liabilities based
on the Acts new corporate tax rate of 21.0%. The Company is still analyzing certain aspects of the Act and refining the estimate of the expected reversal of its deferred tax balances. This can potentially affect the measurement of these
balances or potentially give rise to new deferred tax amounts. The Company is also currently estimating that it will not be subject to the transition tax because the aggregate cumulative post-1986 earnings and profits of its foreign subsidiaries are
in an overall deficit. However, the Company has not yet completed its calculations of the total post-1986 earnings and profits and associated tax pools for its foreign subsidiaries. Additionally, the Company understands that there could be further
interpretations from U.S. federal and state governments and regulatory organizations that may impact its final calculation. The Company will continue to refine its estimates related to the impact of the Act during the one year measurement period
allowed under SAB 118.
The Act also includes provisions relating to Global Intangible
Low-Taxed
Income
(GILTI) wherein taxes on foreign income are imposed in excess of a deemed return on tangible assets of foreign corporations. In general, this income will effectively be taxed at a 10.5% tax rate. As a result, the Companys deferred
tax assets and liabilities are being evaluated to determine if the deferred tax assets and liabilities should be recognized for the basis differences expected to reverse as a result of GILTI provisions that are effective for the Company after the
fiscal year ending July 31, 2018, or if the tax on GILTI should be recognized in the period the Act was signed into law. Because of the complexity of the new provisions, the Company is continuing to evaluate on how the provisions will be
accounted for under the U.S. generally accepted accounting principles permitting companies to make an accounting policy election of either (i) accounting for GILTI as a component of tax expense in the period in which the Company is subject to
the rules (the period cost method), or (ii) accounting for GILTI in the Companys measurement of deferred taxes (the deferred method). Currently, the Company has not elected a method and will only do so after its
completion of the analysis of the GILTI provisions. The Companys election method will depend, in part, on analyzing its global income to determine whether the Company expects to have future U.S. inclusions in its taxable income related to
GILTI and, if so, the impact that is expected.
The Companys 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 Companys 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
tax examinations for the years
prior to 1998.
As a result of the Companys 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 Companys 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.
12
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,
CompensationStock
Compensation
(ASC 718). Under ASC 718, the Company is required to recognize as expense the estimated fair value as of the grant date of all share-based awards to employees. In accordance with this standard, the Company recognizes the
compensation cost of each service-based award on a straight-line basis over the vesting period of such award. For the three and nine months ended April 30, 2018, the Company recorded stock-based compensation expense of approximately
$1.9 million and $5.9 million, respectively, in connection with its share-based awards. For the three and nine months ended April 30, 2017, the Company recorded stock-based compensation expense of approximately $1.5 million and
$4.6 million respectively, in connection with its share-based awards.
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
April 30,
|
|
|
Nine Months Ended
April 30,
|
|
|
|
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,
in accordance with ASC 320,
InvestmentsDebt and Equity Securities
. The Company also holds certain investments in commercial paper that it
considers to be held to maturity, based on their maturity dates. Securities available for sale include corporate and governmental obligations with various contractual maturity dates some of which are greater than one year. The Company considers the
securities to be liquid and convertible to cash within 30 days. The Company has the ability and intent to liquidate any security that the Company holds to fund operations over the next twelve months if necessary, and as such has classified all of
its marketable securities as short-term. Governmental obligations include U.S. Government, State, Municipal and Federal Agency securities. The Company has an overnight sweep investment arrangement with its bank for certain accounts to allow the
Company to enter into diversified overnight investments via a money market mutual fund which generally provides a higher investment yield than a regular operating account.
13
The market value and maturities of the Companys 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
Value
|
|
|
Amortized
Cost
|
|
|
|
(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
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
|
|
|
|
|
|
|
|
|
|
|
(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
Value
|
|
|
Unrealized
Gain/
(Loss)
|
|
|
|
(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
|
)
|
|
|
|
|
|
|
|
|
|
14
|
|
|
|
|
|
|
|
|
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
|
)
|
|
|
|
|
|
|
|
|
|
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 Companys property and equipment as of April 30, 2018 and July 31, 2017 are summarized
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 30,
2018
|
|
|
July 31,
2017
|
|
|
Estimated
Useful Lives
|
|
|
|
(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
years
|
|
Leasehold improvements
|
|
|
9,825
|
|
|
|
9,679
|
|
|
|
Term of lease or
useful life, not to
exceed 10 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
)
|
|
$
|
|
|
15
The fair values of the forward contracts are recorded in the Companys 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.
3. SEGMENT REPORTING AND GEOGRAPHIC INFORMATION
Segment Reporting
In accordance with the
provisions of ASC 280,
Segment Reporting
(ASC 280), the Company has determined that it has six operating segments (Semiconductor Test, Semiconductor Handlers, Contactors, PCB Test, Probes / Pins, and Fixtures). Based on the
aggregation criteria of ASC 280, the Company determined that several of the operating segments can be aggregated due to these segments having similar economic characteristics and meeting all of the other aggregation criteria in ASC 280.
Consequently, the Company has two reportable segments: the Semiconductor Test Solutions (STS) reportable segment, which is comprised of the Semiconductor Test, Semiconductor Handlers and Contactors operating segments, and the Electronic
Manufacturing Solutions (EMS) reportable segment, which is comprised of the PCB Test, Probes / Pins and Fixtures operating segments.
The
Semiconductor Test operating segment includes operations related to the design, manufacture and sale of automated test equipment for the semiconductor industry that is used to test
system-on-a-chip,
digital, analog and mixed signal integrated circuits. The Semiconductor Handlers operating segment includes operations related to the design, manufacture and sale of test handlers
used in the testing of integrated circuits. The Contactors segment includes operations related to the design, manufacture and sale of test contactors which serve as the interface between the test handler and the semiconductor device under test. The
PCB Test operating segment includes operations related to design, manufacture and sale of equipment used in the testing of bare and printed circuit boards. The Probes / Pins operating segment includes operations related to the design, manufacture
and sale of the physical devices used to connect electronic test equipment to the device under test. The Fixtures segment includes operations related to the design, manufacture and sale of PCB Test fixtures that enable the transmission of test
signals from the loaded PCB to the tester. Each operating segment has a segment manager who is directly accountable to and maintains regular contact with the Companys chief operating decision maker (chief executive officer and chief operating
officer) to discuss operating activities, financial results, forecasts, and plans for the segment.
The Company evaluates performance using several
factors, of which the primary financial measures are revenue and operating segment operating income. The accounting policies of the operating segments are the same as those described in Note 2 Summary of Significant Accounting Policies.
Segment information for the three and nine months ended April 30, 2018 and 2017 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Semiconductor
Test Solutions
|
|
|
Electronic
Manufacturing
Solutions
|
|
|
Consolidated
|
|
Three months ended April 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
96,907
|
|
|
$
|
18,810
|
|
|
$
|
115,717
|
|
Income from operations
|
|
$
|
12,347
|
|
|
$
|
489
|
|
|
$
|
12,836
|
|
Depreciation and amortization expense
|
|
$
|
1,250
|
|
|
$
|
161
|
|
|
$
|
1,411
|
|
Three months ended April 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
83,521
|
|
|
$
|
20,114
|
|
|
$
|
103,635
|
|
Income from operations
|
|
$
|
6,679
|
|
|
$
|
2,207
|
|
|
$
|
8,886
|
|
Depreciation and amortization expense
|
|
$
|
1,175
|
|
|
$
|
359
|
|
|
$
|
1,534
|
|
|
|
|
|
|
|
Semiconductor
Test Solutions
|
|
|
Electronic
Manufacturing
Solutions
|
|
|
Consolidated
|
|
Nine months ended April 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
288,805
|
|
|
$
|
57,474
|
|
|
$
|
346,279
|
|
Income from operations
|
|
$
|
43,932
|
|
|
$
|
888
|
|
|
$
|
44,820
|
|
Depreciation and amortization expense
|
|
$
|
3,980
|
|
|
$
|
712
|
|
|
$
|
4,692
|
|
Nine months ended April 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
212,604
|
|
|
$
|
51,241
|
|
|
$
|
263,845
|
|
Income from operations
|
|
$
|
7,784
|
|
|
$
|
2,618
|
|
|
$
|
10,402
|
|
Depreciation and amortization expense
|
|
$
|
3,754
|
|
|
$
|
887
|
|
|
$
|
4,641
|
|
16
The Company is not disclosing total assets for each of its reportable segments, as total assets by reportable
segment is not a key metric utilized by the Companys chief operating decision maker.
Geographic Information
The Companys net sales by geographic area for the three and nine months ended April 30, 2018 and 2017, along with its long-lived assets by location
at April 30, 2018 and July 31, 2017, are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
April 30,
|
|
|
Nine Months Ended
April 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
(in thousands)
|
|
Net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taiwan
|
|
$
|
26,899
|
|
|
$
|
13,654
|
|
|
$
|
55,417
|
|
|
$
|
39,208
|
|
Philippines
|
|
|
17,726
|
|
|
|
14,582
|
|
|
|
71,837
|
|
|
|
32,975
|
|
Germany
|
|
|
13,044
|
|
|
|
6,615
|
|
|
|
29,544
|
|
|
|
20,694
|
|
Hong Kong/China
|
|
|
11,622
|
|
|
|
14,943
|
|
|
|
31,594
|
|
|
|
31,464
|
|
United States
|
|
|
9,921
|
|
|
|
23,223
|
|
|
|
33,899
|
|
|
|
49,928
|
|
Malaysia
|
|
|
8,980
|
|
|
|
8,318
|
|
|
|
24,356
|
|
|
|
21,447
|
|
Singapore
|
|
|
7,056
|
|
|
|
5,197
|
|
|
|
19,202
|
|
|
|
17,464
|
|
Thailand
|
|
|
6,091
|
|
|
|
5,251
|
|
|
|
26,931
|
|
|
|
17,217
|
|
All other countries
|
|
|
14,378
|
|
|
|
11,852
|
|
|
|
53,499
|
|
|
|
33,448
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Net Sales
|
|
$
|
115,717
|
|
|
$
|
103,635
|
|
|
$
|
346,279
|
|
|
$
|
263,845
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 30,
2018
|
|
|
July 31,
2017
|
|
|
|
(in thousands)
|
|
Long-lived assets:
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
12,923
|
|
|
$
|
14,426
|
|
Germany
|
|
|
9,743
|
|
|
|
8,579
|
|
Malaysia
|
|
|
4,570
|
|
|
|
3,069
|
|
Taiwan
|
|
|
828
|
|
|
|
375
|
|
China
|
|
|
859
|
|
|
|
285
|
|
Japan
|
|
|
630
|
|
|
|
791
|
|
Singapore
|
|
|
305
|
|
|
|
416
|
|
Philippines
|
|
|
38
|
|
|
|
82
|
|
All other countries
|
|
|
295
|
|
|
|
486
|
|
|
|
|
|
|
|
|
|
|
Total long-lived assets
|
|
$
|
30,191
|
|
|
$
|
28,509
|
|
|
|
|
|
|
|
|
|
|
Transfer prices on products sold to foreign subsidiaries are intended to produce profit margins that correspond to the
subsidiarys sales and support efforts.
4. RESTRUCTURING
In accordance with the provisions of ASC 420,
Exit or Disposal Cost Obligation
, the Company recognizes certain costs associated with headcount
reductions, office vacancies and other costs to move or relocate operations or employees as restructuring costs in the period in which such actions are initiated and approved by management or the obligations are incurred, as applicable.
During the nine months ended April 30, 2018, the Company incurred costs associated with the closing of its Fixture Services Group manufacturing site in
Shenzhen, China. The Company has decided to cease manufacturing related operations located at its ECT Shenzhen site and move the production operations to its third-party outsource partner in Asia. Also during the nine months ended April 30,
2018, the Company incurred costs associated with the closing of its engineering development site in Yerevan, Armenia.
17
During the quarter ending April 30, 2018, the Company announced additional restructuring plans related to
its Fixtures Services Group. It will end production of certain products and concentrate its operations from its Hungary facility. The restructuring will result in headcount reductions and office closures that will be effective during the quarter
ending July 31, 2018. The Company expects to incur approximately $0.5 million in severance and other costs associated with this action. As the employees impacted are required to provide service during the transition period, the Company did
not accrue the severance obligation as of April 30, 2018.
18
The following table sets forth the Companys restructuring accrual activity for the nine months ended
April 30, 2018 and April 30, 2017. The balance at the end of each period is included in the Companys Consolidated Balance Sheet in Accrued Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance
Costs
|
|
|
Facility
Leases
|
|
|
Total
|
|
|
|
(in thousands)
|
|
Balance July 31, 2017
|
|
$
|
21
|
|
|
$
|
65
|
|
|
$
|
86
|
|
Additions to expense
|
|
|
359
|
|
|
|
329
|
|
|
|
688
|
|
Cash paid
|
|
|
(379
|
)
|
|
|
(320
|
)
|
|
|
(699
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance April 30, 2018
|
|
$
|
1
|
|
|
|
74
|
|
|
$
|
75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance
Costs
|
|
|
Facility
Leases
|
|
|
Total
|
|
|
|
(in thousands)
|
|
Balance July 31, 2016
|
|
$
|
142
|
|
|
$
|
734
|
|
|
$
|
876
|
|
Additions to expense
|
|
|
348
|
|
|
|
244
|
|
|
|
592
|
|
Accretion
|
|
|
|
|
|
|
253
|
|
|
|
253
|
|
Cash paid
|
|
|
(348
|
)
|
|
|
(1,105
|
)
|
|
|
(1,453
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance April 30, 2017
|
|
$
|
142
|
|
|
$
|
126
|
|
|
$
|
268
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5. COMMITMENTS AND CONTINGENCIES
From time to time, the Company is subject to certain legal proceedings and other contingencies, the outcomes of which are subject to significant uncertainty.
The Company accrues for estimated losses if it is probable that an asset has been impaired or a liability has been incurred and the amount of the loss can be reasonably estimated. The Company uses judgment and evaluates, with the assistance of legal
counsel, whether a loss contingency arising from litigation should be disclosed or recorded. The outcome of legal proceedings and other contingencies is inherently uncertain and often difficult to estimate. Accordingly, if the outcome of legal
proceedings and other contingencies is different than is anticipated by the Company, the Company would record the difference between any previously recorded amount and the full amount at which the matter was resolved, in earnings in the period
resolved, which could negatively impact the Companys results of operations and financial position for the period.
On August 22, 2017, a
putative shareholder class action complaint was filed in the United States District Court for the District of Massachusetts against the Company and each member of the Board, captioned Chris Stallings v. Xcerra Corporation, et al., C.A.
No. 1:17-cv-11579.
The complaint alleged, among other things, that the Company and each member of the Board violated federal securities laws and regulations by soliciting
stockholder votes in connection with the 2017 Merger through a proxy statement that omitted material facts. The parties agreed on certain additional disclosures to the Companys definitive proxy statement, which were filed on October 3,
2017. The plaintiffs dismissed the complaint on November 1, 2017.
On August 23, 2017, a putative shareholder class action complaint was filed
in the United States District Court for the District of Massachusetts against the Company, each member of the Board, Hubei, Unic Capital, Sponsor and Unic Merger Sub, captioned Robert Berg v. Xcerra Corporation et. al., Case No.
1:17-cv-11583.
The complaint alleged, among other things, that the Company and each member of the Board violated federal securities laws and regulations by soliciting
stockholder votes in connection with the 2017 Merger through a proxy statement that omitted material facts. The parties agreed on certain additional disclosures to the Companys definitive proxy statement, which were filed on October 3,
2017. The plaintiff dismissed the complaint on November 1, 2017.
On November 10, 2017, a putative shareholder class action complaint was filed
in the United States District Court for the District of Massachusetts against the Company and each member of the Board, captioned Waseem Khan v. Xcerra Corporation et. al., Case No.
1:17-cv-12226.
The complaint alleged, among other things, that the Company and the Board violated federal securities laws and regulations by soliciting stockholder votes
in connection with the 2017 Merger through a proxy statement that included false and misleading material information with respect to the proposed 2017 Merger, which rendered the proxy statement false and misleading. The complaint sought damages. The
plaintiff dismissed the complaint on March 9, 2018.
In the ordinary course of business, the Company agrees from time to time to indemnify certain
customers against certain third party claims for property damage, bodily injury, personal injury or intellectual property infringement arising from the operation or use of the Companys products. Also, from time to time in agreements with
suppliers, licensors, and other business partners, the Company agrees to indemnify these partners against certain liabilities arising out of the sale or use of the Companys products. The maximum
19
potential amount of future payments the Company could be required to make under these indemnification obligations is theoretically unlimited; however, the Company has general and umbrella
insurance policies that enable it to recover a portion of any amounts paid, and many of its agreements contain a limit on the maximum amount, as well as limits on the types of damages recoverable. Based on the Companys experience with such
indemnification claims, it believes the estimated fair value of these obligations is minimal. Accordingly, the Company has no liabilities recorded for these agreements as of April 30, 2018 or July 31, 2017.
Subject to certain limitations, the Company indemnifies its current and former officers and directors for liabilities or costs that they may incur in certain
circumstances in connection with their services as directors and officers of the Company. Although the maximum potential amount of future payments the Company could be required to make under these agreements is theoretically unlimited, as there were
no known or pending claims, the Company had not accrued a liability for these agreements as of April 30, 2018 or July 31, 2017.
As of
April 30, 2018 the Company had approximately $66.8 million of
non-cancelable
inventory commitments with its suppliers. The Company expects to consume this inventory through normal operating activity.
The Company has operating lease commitments for certain facilities and equipment lease obligations that expire at various dates through 2024. The Company
has an option to extend the term for its Norwood, Massachusetts facility lease for a single extension term of five years provided that the Company notifies its landlord at least 425 days prior to expiration of the current extension term.
Minimum lease payment obligations under
non-cancelable
leases as of April 30, 2018 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year ending July 31,
|
|
Facilities
|
|
|
Equipment
|
|
|
Total
Operating
Leases
|
|
|
|
(in thousands)
|
|
Remainder of 2018
|
|
$
|
1,151
|
|
|
$
|
156
|
|
|
$
|
1,307
|
|
2019
|
|
|
4,410
|
|
|
|
502
|
|
|
|
4,912
|
|
2020
|
|
|
3,737
|
|
|
|
306
|
|
|
|
4,043
|
|
2021
|
|
|
2,770
|
|
|
|
117
|
|
|
|
2,887
|
|
2022
|
|
|
1,832
|
|
|
|
42
|
|
|
|
1,874
|
|
Thereafter
|
|
|
4,669
|
|
|
|
|
|
|
|
4,669
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total minimum lease payments
|
|
$
|
18,569
|
|
|
$
|
1,123
|
|
|
$
|
19,692
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6. OTHER ACCRUED EXPENSES
Other accrued expenses consisted of the following at April 30, 2018 and July 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
April 30,
2018
|
|
|
July 31,
2017
|
|
|
|
(in thousands)
|
|
Accrued compensation
|
|
$
|
19,188
|
|
|
$
|
18,864
|
|
Accrued income and other taxes
|
|
|
9,947
|
|
|
|
13,163
|
|
Warranty reserve
|
|
|
3,986
|
|
|
|
3,610
|
|
Accrued vendor liability
|
|
|
2,340
|
|
|
|
2,229
|
|
Accrued commissions
|
|
|
3,386
|
|
|
|
2,931
|
|
Accrued professional fees
|
|
|
1,844
|
|
|
|
3,218
|
|
Other accrued expenses
|
|
|
5,879
|
|
|
|
6,247
|
|
|
|
|
|
|
|
|
|
|
Total accrued expenses
|
|
$
|
46,570
|
|
|
$
|
50,262
|
|
|
|
|
|
|
|
|
|
|
20
7. LONG-TERM DEBT
Long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
|
|
April 30, 2018
|
|
|
July 31, 2017
|
|
|
|
(in thousands)
|
|
Bank Term Loan under Credit Agreement
|
|
$
|
|
|
|
$
|
19,375
|
|
Bank Term LoanCommerzbank
|
|
|
2,544
|
|
|
|
2,791
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
2,544
|
|
|
|
22,166
|
|
Less: financing fees
|
|
|
|
|
|
|
(840
|
)
|
Less: current portion
|
|
|
(359
|
)
|
|
|
(3,779
|
)
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
$
|
2,185
|
|
|
$
|
17,547
|
|
|
|
|
|
|
|
|
|
|
The debt principal payments for the next five years and thereafter are as follows:
|
|
|
|
|
Payments due by fiscal year
|
|
Debt Principal
Payments
|
|
|
|
(in thousands)
|
|
Remainder of 2018
|
|
$
|
106
|
|
2019
|
|
|
424
|
|
2020
|
|
|
424
|
|
2021
|
|
|
424
|
|
2022
|
|
|
424
|
|
Thereafter
|
|
|
742
|
|
|
|
|
|
|
Total
|
|
$
|
2,544
|
|
|
|
|
|
|
Credit Agreement
On
December 15, 2014, the Company entered into a credit agreement (the Credit Agreement) with ECT, a wholly owned subsidiary of the Company ( together with the Company, the Borrowers), Silicon Valley Bank, as lender,
administrative agent and issuing lender (SVB), and the several lenders from time to time party thereto (collectively, the Lenders). The Credit Agreement provides for a senior secured credit facility, consisting of a term loan
facility (the Term Loan), in favor of the Borrowers in the aggregate principal amount of $25.0 million which was advanced to the Company on December 15, 2014.
On November 28, 2017, the Companys Board of Directors approved management to repay in full the outstanding obligation under the Term Loan with SVB.
On December 1, 2017, the Company repaid $18.8 million of principal, accrued interest and fees to SVB, releasing the Company from its obligation under the Credit Agreement and the Credit Agreement was terminated.
Bank Term LoanCommerzbank
In May 2014, the Company
entered into a loan agreement with Commerzbank to finance the purchase of the Companys leased facility in Rosenheim, Germany. The principal amount of the term loan is 2.9 million euro ($3.9 million, using a July 31, 2014
exchange rate), payable over 10 years at an annual interest rate of 2.35%. Principal plus accrued interest is due quarterly over the duration of the term loan.
8. FAIR VALUE MEASUREMENTS
The Company determines its
fair value measurements for assets and liabilities based upon the provisions of ASC 820,
Fair Value Measurements and Disclosures.
The Company
holds short-term money market investments and certain other financial instruments which are carried at fair value. The Company determines fair value based upon quoted prices, when available or through the use of alternative approaches when market
quotes are not readily accessible or available.
Valuation techniques for fair value are based upon observable and unobservable inputs. Observable inputs
reflect market data obtained from independent sources, while unobservable inputs reflect the Companys best estimate, considering all relevant information. These valuation techniques involve some level of management estimation and judgment. The
valuation process to determine fair value also includes making appropriate adjustments to the valuation model outputs to consider risk factors.
21
The fair value hierarchy of the Companys inputs used in the determination of fair value for assets and
liabilities during the current period consists of three levels. Level 1 inputs are composed of unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date. Level 2 inputs include quoted prices
for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, inputs other than quoted prices that are observable for the asset or liability, and inputs that are derived principally
from or corroborated by observable market data by correlation or other means. Level 3 inputs incorporate the Companys own best estimate of what market participants would use in pricing the asset or liability at the measurement date where
consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model. If inputs used to measure an asset or liability fall within different levels of the hierarchy, the categorization is based on
the lowest level input that is significant to the fair value measurement of the asset or liability. The Companys assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and
consideration of factors specific to the asset or liability.
The following table presents financial assets and liabilities measured at fair value and
their related valuation inputs as of April 30, 2018 and July 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
(in thousands)
|
|
April 30, 2018
|
|
Total Fair Value
of Asset
or Liability
|
|
|
Quoted Prices in Active
Markets for Identical
Assets (Level 1)
|
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
|
Significant
Unobservable Inputs
(Level 3)
|
|
Cash and cash equivalents (1)
|
|
$
|
127,807
|
|
|
$
|
127,267
|
|
|
$
|
540
|
|
|
$
|
|
|
Marketable securities
|
|
|
51,292
|
|
|
|
5,846
|
|
|
|
45,446
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
179,099
|
|
|
$
|
133,113
|
|
|
$
|
45,986
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 31, 2017
|
|
Total Fair Value
of Asset
or Liability
|
|
|
Quoted Prices in Active
Markets for Identical
Assets (Level 1)
|
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
|
Significant
Unobservable Inputs
(Level 3)
|
|
Cash and cash equivalents (1)
|
|
$
|
103,637
|
|
|
$
|
103,637
|
|
|
$
|
|
|
|
$
|
|
|
Marketable securities
|
|
|
57,087
|
|
|
|
12,109
|
|
|
|
44,978
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
160,724
|
|
|
$
|
115,746
|
|
|
$
|
44,978
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Cash and cash equivalents as of April 30, 2018 and July 31, 2017 includes cash held in operating accounts of approximately $125.7 million and $103.5 million, respectively, that are not subject to
fair value measurements. For purposes of this disclosure, they are included as having Level 1 inputs.
|
The carrying value of accounts
receivable, prepaid expenses, accounts payable, and accrued expenses, including hedge liabilities, approximate fair value due to their short-term nature.
There were no assets or liabilities not measured at fair value but for which fair value is required to be disclosed. The carrying value of the Companys
debt, which includes term loans, approximates fair value due to market interest. Debt at April 30, 2018 and July 31, 2017 was $2.5 million and $22.2 million, respectively. Within the hierarchy of fair value measurement, these are
Level 2 inputs.
9. STOCKHOLDERS EQUITY
Stock Repurchases
On September 3, 2015, the Company
announced that its Board of Directors authorized a stock repurchase program, pursuant to which the Company is authorized to repurchase up to $30 million of its common stock from time to time in open market transactions or in privately
negotiated transactions (the 2015 Plan). This repurchase program supersedes the repurchase program that was announced on September 15, 2011 (the 2011 Plan) and as a result there are no shares available for repurchase
under the 2011 Plan. The Company may suspend or discontinue the 2015 Plan at any time and the 2015 plan has no expiration date. As of June 7, 2018, since the inception of the 2015 Plan, the Company had repurchased 1,956,733 shares for
approximately $12 million under the 2015 Plan. There have been no shares repurchased during the three or nine months ended April 30, 2018.
10. RECENT ACCOUNTING PRONOUNCEMENTS
In May 2014, the
FASB issued Accounting Standards Update
2014-09,
Revenue from Contracts with Customers (ASC 606),
which will replace numerous requirements in U.S. GAAP, including industry-specific requirements, and
provide companies with a single revenue recognition model for recognizing revenue from contracts with customers. In August 2015, the FASB issued ASU No. 2015-
22
14,
Revenue from Contracts with Customers (ASC 606): Deferral of the Effective Date
, which delays the effective date of ASU
2014-09
by one year. In
March 2016, the FASB issued ASU No
2016-08,
Revenue from Contracts with Customers (ASC 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)
which clarifies the implementation
guidance on principal versus agent considerations. The core principle of the new standard is that a company should recognize revenue to show the transfer of promised goods or services to customers in an amount that reflects the consideration to
which the company expects to be entitled in exchange for those goods or services. The new standard will be effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. For
Xcerra, the standard will be effective for the fiscal year starting August 1, 2018. The two permitted transition methods under the new standard are the full retrospective method, in which case the standard would be applied to each prior
reporting period presented, or the modified retrospective method, in which case the cumulative effect of applying the standard would be recognized at the date of initial application. The Company has selected the modified retrospective method and
will make accounting policy elections to 1) treat shipping and handling activities that occur after the customer obtains control of the goods as fulfillment costs, 2) exclude sales (and similar) taxes from the measurement of the transaction price
and 3) expense costs to obtain a contract if the period of benefit is expected to be less than one year. The Company has completed its preliminary assessment of the financial statement impact of the new standard and does not expect this ASU to have
a material impact on its financial position and results of operations. This preliminary assessment is based on a review of the types of revenue arrangements currently in place including the review of individual customer contracts related to these
revenue streams. The exact impact of the new standard will be dependent on facts and circumstances at adoption and could vary from quarter to quarter. Based on our preliminary assessment, the Company does not expect any significant changes to be
made to existing accounting systems or internal controls. The Company will continue to evaluate the potential impacts of the new standard, including potential disclosures that will be required, through the implementation date. The Company will be
required to record cumulative effect adjustments, if any, to retained earnings upon adopting the new standard on August 1, 2018.
In February 2016,
the FASB issued ASU
No. 2016-02,
Leases (ASC 842),
which requires companies that are lessees to recognize a
right-of-use
asset and lease liability for most leases that do not meet the definition of a short-term lease. For income statement purposes, leases will continue to be
classified as either operating or financing. Classification will be based on criteria that are largely similar to those applied in current lease accounting. This standard will result in extensive qualitative and quantitative disclosure changes. This
standard will be effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period. For Xcerra, the standard will be effective for the fiscal year starting August 1, 2019, with
early adoption permitted. The Company is currently evaluating the impact of this ASU on its financial position and results of operations.
In March 2016,
the FASB issued ASU
No. 2016-09,
Compensation-Stock Compensation (ASC 718): Improvements to Employee Share-Based Payment Accounting
. This ASU changes how companies account for certain aspects of
share-based payment awards to employees, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. This pronouncement is effective for annual periods
beginning after December 15, 2016. Early adoption is permitted. The Company adopted this ASU in the first quarter of fiscal 2018. Adoption of this ASU did not have a material impact on its financial position or results of operation.
In August 2016, the FASB issued ASU
No. 2016-15,
Classification of Certain Cash Receipts and Cash Payments
(a consensus of the FASB Emerging Issues Task Force), which addresses eight classification issues related to the statement of cash flows: Debt prepayment or debt extinguishment costs; Settlement of
zero-coupon
bonds; Contingent consideration payments made after a business combination; Proceeds from the settlement of insurance claims; Proceeds from the settlement of corporate-owned life insurance
policies, including bank-owned life insurance policies; Distributions received from equity method investees; Beneficial interests in securitization transactions; and Separately identifiable cash flows and application of the predominance principle.
ASU
2016-15
is effective for public business entities for annual and interim periods in fiscal years beginning after December 15, 2017. Early adoption is permitted, including adoption in an interim
period. Entities should apply this ASU using a retrospective transition method to each period presented. If it is impracticable for an entity to apply the ASU retrospectively for some of the issues, it may apply the amendments for those issues
prospectively as of the earliest date practicable. The Company does not expect the adoption of this ASU to have a material impact on its financial position or results of operation.
In August 2017, the FASB issued ASU
2017-12,
Targeted Improvements to Accounting for Hedging Activities
. The
standard better aligns an entitys hedging activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results
in the financial statements. The standard will prospectively make hedge accounting easier to apply to hedging activities and also enhances disclosure requirements for how hedge transactions are reflected in the financial statements when hedge
accounting is elected. The standard is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the impact of this ASU on its financial position and results of operations.
11. SUBSEQUENT EVENTS
On May 7, 2018, the
Company entered into the 2018 Merger Agreement with Parent, and Xavier Merger Sub, providing for the 2018 Merger, with the Company surviving the 2018 Merger as a wholly owned subsidiary of Parent.
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Pursuant to the terms and subject to the conditions of the 2018 Merger Agreement, at the effective time of the
2018 Merger (the Effective Time), each share of our common stock that is outstanding immediately prior to the Effective Time (excluding any shares owned by Xcerra, Parent or Xavier Merger Sub (which will be cancelled) and any shares with
respect to which appraisal rights have been properly exercised under Massachusetts law) will be cancelled and automatically converted into the right to receive (A) $9.00 in cash, without interest thereon, and (B) 0.2109 of a validly issued, fully
paid and nonassessable share of common stock, par value $1.00 per share, of Parent.