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.
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 held by other members of the entity. 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 October 31, 2017 and July 31, 2017, the
Company consolidated one and zero VIEs, respectively.
Xcerra is the primary beneficiary of ALBS which is qualified as a VIE. The assets and liabilities
and revenues and expenses of this VIE are included in the financial statements of ALBS and are further included in the consolidated financial statements. As of October 31, 2017, the VIE had assets of $491,000, liabilities of $177,000, and
operating income of $191,000. No assets were pledged or given as collateral against any borrowings.
Preparation of Financial Statements and Use of
Estimates
The accompanying financial statements have been prepared by the Company, and reflect all adjustments, which, in the opinion of
management, are necessary for fair presentation. The preparation of financial statements in conformity with United States generally accepted accounting principles (U.S. GAAP) requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the financial statements and the reported amounts of income and expenses during the reporting periods. Actual results may
differ from those estimates and such differences may be material to the consolidated financial statements.
Revenue Recognition
The Company recognizes revenue based on guidance provided in ASC 605,
Revenue Recognition
, 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
6
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.
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:
|
|
|
|
|
|
|
|
|
|
|
October 31,
2017
|
|
|
July 31,
2017
|
|
|
|
(in thousands)
|
|
Material and purchased components
|
|
$
|
37,011
|
|
|
$
|
30,746
|
|
Work-in-process
|
|
|
26,377
|
|
|
|
26,211
|
|
Finished equipment, including inventory consigned to customers
|
|
|
23,517
|
|
|
|
24,552
|
|
|
|
|
|
|
|
|
|
|
Total inventories
|
|
$
|
86,905
|
|
|
$
|
81,509
|
|
|
|
|
|
|
|
|
|
|
The Company establishes inventory reserves when conditions exist that indicate inventory may be in excess of anticipated
demand or is obsolete based upon assumptions about future demand for the 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 October 31, 2017 and July 31, 2017, inventory was stated
net of inventory reserves of $23.0 million and $22.0 million, respectively. If actual demand for products deteriorates or market conditions are less favorable than projected, additional inventory reserves may be required. Such reserves are
not reversed until the related inventory is sold or otherwise disposed.
Goodwill and Other Intangibles
In accordance with ASC 350
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 October 31, 2017, the
Companys goodwill is allocated to its Semiconductor Test reporting unit and its Contactors reporting unit. Based on ASC
350-20-35-3A,
as of October 31, 2017, there were no triggering events that required the Company to complete impairment
testing.
7
The Companys goodwill consists of the following:
|
|
|
|
|
|
|
|
|
Goodwill
|
|
October 31,
2017
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
Total goodwill
|
|
$
|
43,850
|
|
|
$
|
43,850
|
|
|
|
|
|
|
|
|
|
|
Amortizable intangible assets which relate to the acquisition of Titan Semiconductor Tool LLC (Titan), ECT,
Multitest, and atg, and the merger with Credence Systems Corporation (Credence), consist of the following, and are included in intangible assets, net on the Companys Consolidated Balance Sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of October 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
|
|
|
$
|
(28,403
|
)
|
|
$
|
1,479
|
|
Customer RelationshipsTitan
|
|
|
20
|
|
|
|
670
|
|
|
|
(27
|
)
|
|
|
643
|
|
Trade NamesTitan
|
|
|
10
|
|
|
|
70
|
|
|
|
(24
|
)
|
|
|
46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total amortizable intangible assets
|
|
|
|
|
|
$
|
30,622
|
|
|
$
|
(28,454
|
)
|
|
$
|
2,168
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 RelationshipsECT, Multitest, atg, and Titan
|
|
|
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 8.8 years.
8
The Company expects amortization for these intangible assets to be:
|
|
|
|
|
Year ending July 31, 2018
|
|
Amount
(in thousands)
|
|
Remainder of 2018
|
|
|
394
|
|
2019
|
|
|
520
|
|
2020
|
|
|
406
|
|
2021
|
|
|
287
|
|
2022
|
|
|
191
|
|
Thereafter
|
|
|
370
|
|
|
|
|
|
|
Total
|
|
$
|
2,168
|
|
|
|
|
|
|
The identifiable intangible assets associated with the Dover Acquisition include $6.4 million of trademarks. The Company
believes these trademarks will contribute to the 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 October 31, 2017, 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 October 31, 2017, 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 (Loss) Income as a component of other income
(expense), net, and were ($0.4) million and $0.2 million, for the three months October 31, 2017 and 2016, 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).
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.
9
The following table shows the change in the Companys product warranty liability, as required by ASC 460,
Guarantees
, to the FASB ASC for the three months ended October 31, 2017 and 2016:
|
|
|
|
|
|
|
|
|
|
|
Three months Ended
October 31,
|
|
Product Warranty Activity
|
|
2017
|
|
|
2016
|
|
|
|
(in thousands)
|
|
Balance at beginning of period
|
|
$
|
3,610
|
|
|
$
|
2,725
|
|
Warranty expenditures for current period
|
|
|
(929
|
)
|
|
|
(1,071
|
)
|
Changes in liability related to
pre-existing
warranties
|
|
|
22
|
|
|
|
(12
|
)
|
Provision for warranty costs in the period
|
|
|
898
|
|
|
|
788
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
3,601
|
|
|
$
|
2,430
|
|
|
|
|
|
|
|
|
|
|
Trade Accounts Receivable and Allowance for Doubtful Accounts
Trade accounts receivable are recorded at the invoiced amount, do not bear interest, and typically have a contractual maturity of ninety days or less. A
majority of the 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
(Loss). Shipping and handling costs were insignificant for the three months ended October 31, 2017 and 2016.
Income Taxes
The Company recorded an income tax provision of $2.8 million for the three months ended October 31, 2017, primarily due to foreign taxes in
profitable locations.
The Companys total liability for unrecognized income tax benefits was $6.2 million (of which $2.6 million, if
recognized, would impact the Companys income tax rate) as of both October 31, 2017 and July 31, 2017 respectively. The Company recognizes interest and penalties related to uncertain tax positions as a component of provision for
income taxes. As of October 31, 2017 and July 31, 2017, the Company had accrued approximately $1.4 million and $1.3 million, respectively, for potential payment of accrued interest and penalties.
The Company conducts business globally and, as a result, the Company and its subsidiaries or branches file income tax returns in the U.S. federal jurisdiction
and various U.S. state and foreign jurisdictions. In the normal course of business the Company is subject to examination by taxing authorities throughout the world, including such major jurisdictions as the United States, Singapore, Malaysia, China,
France and Germany. With few exceptions, the Company is no longer subject to U.S. federal, state and local or
non-U.S.
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 as defined in sections 382 and 383 of the Internal
Revenue Code. The Company currently estimates that the annual limitation on its use of net operating losses generated through August 29, 2008 will be approximately $10.1 million which, based on currently enacted federal carryforward
periods, limits the amount of net
10
operating losses that are available for utilization to approximately $202 million. The Company has recorded a valuation allowance against the full value of U.S. net operating loss and credit
carryforwards, and will continue to assess the realizability of these carryforwards in subsequent periods.
Accounting for Stock-Based Compensation
The Company has equity awards outstanding under the 2010 Stock Incentive Plan (2010 Plan) and can only grant awards from this 2010
Plan.
During the three months ended October 31, 2017, the Company granted 914,600 Restricted Stock Units (RSUs) which are subject to
service-based vesting and vest ratably over four years.
The Company recognizes stock-based compensation expense on its equity awards in accordance with
the provisions of ASC 718,
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 months ended October 31, 2017 and 2016, the Company recorded
stock-based compensation expense of approximately $2.0 million and $1.5 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
October 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(in thousands, except
per share data)
|
|
Net income attributable to Xcerra
|
|
$
|
17,531
|
|
|
$
|
18
|
|
Basic EPS:
|
|
|
|
|
|
|
|
|
Weighted average shares outstandingbasic
|
|
|
54,604
|
|
|
|
53,865
|
|
Basic income per share
|
|
$
|
0.32
|
|
|
$
|
0.00
|
|
Diluted EPS:
|
|
|
|
|
|
|
|
|
Weighted average shares outstandingbasic
|
|
|
54,604
|
|
|
|
53,865
|
|
Plus: impact unvested RSUs
|
|
|
1,024
|
|
|
|
160
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstandingdiluted
|
|
|
55,628
|
|
|
|
54,025
|
|
Diluted income per share
|
|
$
|
0.32
|
|
|
$
|
0.00
|
|
During the three months ended October 31, 2017 and 2016, there were no outstanding options to purchase stock of the
Company.
Cash and Cash Equivalents and Marketable Securities
The Company considers all highly liquid investments that are readily convertible to cash and that have original maturity dates of three months or less to be
cash equivalents. Cash and cash equivalents consist primarily of operating cash, money market accounts and reverse repurchase agreements. Marketable securities consist primarily of debt securities that are classified as
available-for-sale,
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.
11
The market value and maturities of the Companys marketable securities are as follows:
|
|
|
|
|
|
|
Total Amount
|
|
|
|
(in thousands)
|
|
October 31, 2017
|
|
|
|
|
Due in less than one year
|
|
$
|
28,600
|
|
Due in 1 to 3 years
|
|
|
28,319
|
|
|
|
|
|
|
Total marketable securities
|
|
$
|
56,919
|
|
|
|
|
|
|
|
|
|
|
Total Amount
|
|
|
|
(in thousands)
|
|
July 31, 2017
|
|
|
|
|
Due in less than one year
|
|
$
|
25,458
|
|
Due in 1 to 3 years
|
|
|
31,629
|
|
|
|
|
|
|
Total marketable securities
|
|
$
|
57,087
|
|
|
|
|
|
|
The market value and amortized cost of marketable securities are as follows:
|
|
|
|
|
|
|
|
|
|
|
Market
Value
|
|
|
Amortized
Cost
|
|
|
|
(in thousands)
|
|
October 31, 2017
|
|
|
|
|
|
|
|
|
Corporate (a)
|
|
$
|
28,191
|
|
|
$
|
28,047
|
|
Government
|
|
|
11,804
|
|
|
|
11,808
|
|
Mortgage-Backed
|
|
|
1,858
|
|
|
|
1,858
|
|
Asset-Backed
|
|
|
15,066
|
|
|
|
15,059
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
56,919
|
|
|
$
|
56,772
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market
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 October 31, 2017 or July 31, 2017
|
Unrealized gains and losses on investments held by the Company are reflected as a separate component of comprehensive income (loss) within Stockholders
Equity. Realized gains, losses and interest on investments held by the Company are included in interest income in the Consolidated Statements of Operations and Comprehensive Income (Loss). The Company analyzes its investments for impairment on a
quarterly basis or upon occurrence of indicators of possible impairment. There were no other than temporary impairment losses recorded in the three months ended October 31, 2017 or 2016.
12
The following table summarizes marketable securities and related unrealized gains and losses as of
October 31, 2017 and July 31, 2017:
|
|
|
|
|
|
|
|
|
October 31, 2017
|
|
Market
Value
|
|
|
Unrealized
Gain/(Loss)
|
|
|
|
(in thousands)
|
|
Securities < 12 months unrealized losses
|
|
$
|
24,633
|
|
|
$
|
(28
|
)
|
Securities > 12 months unrealized losses
|
|
|
22,674
|
|
|
|
(57
|
)
|
Securities < 12 months unrealized gains
|
|
|
3,967
|
|
|
|
2
|
|
Securities > 12 months unrealized gains
|
|
|
5,645
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
56,919
|
|
|
$
|
(77
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
July 31, 2017
|
|
Market
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 October 31, 2017 and July 31, 2017 are
summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31,
2017
|
|
|
July 31,
2017
|
|
|
Estimated
Useful Lives
|
|
|
|
(in thousands)
|
|
|
(in years)
|
|
Equipment spares
|
|
$
|
27,887
|
|
|
$
|
27,680
|
|
|
|
7
|
|
Machinery, equipment and internally manufactured systems
|
|
|
31,663
|
|
|
|
30,707
|
|
|
|
3-7
|
|
Office furniture and equipment
|
|
|
1,546
|
|
|
|
1,302
|
|
|
|
3-7
|
|
Purchased software
|
|
|
524
|
|
|
|
547
|
|
|
|
3
|
|
Land
|
|
|
2,508
|
|
|
|
2,508
|
|
|
|
|
|
Buildings
|
|
|
7,990
|
|
|
|
7,990
|
|
|
|
10-40
years
|
|
Leasehold improvements
|
|
|
9,677
|
|
|
|
9,679
|
|
|
|
Term of lease or
useful life, not to
exceed 10 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, gross
|
|
|
81,795
|
|
|
|
80,413
|
|
|
|
|
|
Accumulated depreciation and amortization
|
|
|
(53,239
|
)
|
|
|
(51,904
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
28,556
|
|
|
$
|
28,509
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
3. MERGER AGREEMENT
On April 7, 2017, the Company entered into an Agreement and Plan of Merger (as amended, the Merger Agreement) with Unic Capital Management
Co., Ltd., a Chinese company (Unic Capital) and China Integrated Circuit Industry Investment Fund Co., Ltd., a Chinese company (Sponsor) and Unic Acquisition Corporation, a Massachusetts corporation (Merger Sub).
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 (Parent) and Xcerra, Unic
Capital irrevocably transferred, conveyed, assigned and delivered to Parent all of Unic Capitals right, interest, benefits, liabilities and obligations in and under the Merger Agreement, and Parent accepted, assumed and agreed to pay, perform,
fulfill and discharge all obligations and liabilities of Unic Capital arising under or relating to the Merger Agreement; provided, however, that in the case where Parent is unable to pay, perform, fulfill or discharge all obligations and liabilities
under the Merger Agreement, Unic Capital will remain wholly liable. Also on August 4, 2017, an amendment to the Merger Agreement was entered into by and among Parent, Sponsor and the Company, pursuant to which, upon the satisfaction or waiver
of the conditions to the closing set forth in the Merger Agreement, Merger Sub will, at the closing, merge with and into the Company (the Merger), and the Company will become a controlled subsidiary of Parent and our stockholders will
receive $10.25 in cash, without interest, less any required tax withholding, for each share of our common stock.
Assuming timely satisfaction of the
necessary closing conditions, the Company anticipates that the Merger will be completed in our fiscal year ending July 31, 2018. For additional information related to the Merger Agreement, please refer to the final proxy statement on Schedule
14A filed with the SEC on September 5, 2017, which includes the full text of the Merger Agreement attached as Annex A.
See Part I, Item 2.
Managements Discussion and Analysis of Financial Condition and Results of Operations
Agreement and Plan of Merger
for additional details related to the pending Merger.
4. 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.
14
Segment information for the three ended October 31, 2017 and 2016 is as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Semiconductor
Test Solutions
|
|
|
Electronic
Manufacturing Solutions
|
|
|
Consolidated
|
|
Three months ended October 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
100,056
|
|
|
$
|
20,230
|
|
|
$
|
120,286
|
|
Income from operations
|
|
$
|
19,270
|
|
|
$
|
1,429
|
|
|
$
|
20,699
|
|
Depreciation and amortization expense
|
|
$
|
1,343
|
|
|
$
|
277
|
|
|
$
|
1,620
|
|
Three months ended October 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
64,813
|
|
|
$
|
15,272
|
|
|
$
|
80,085
|
|
(Loss) income from operations
|
|
$
|
(317
|
)
|
|
$
|
623
|
|
|
$
|
306
|
|
Depreciation and amortization expense
|
|
$
|
1,350
|
|
|
$
|
196
|
|
|
$
|
1,546
|
|
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 months ended October 31, 2017 and 2016, along with its long-lived assets by location at
October 31, 2017 and July 31, 2017, are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
October 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(in thousands)
|
|
Net sales:
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
12,328
|
|
|
$
|
10,205
|
|
Philippines
|
|
|
25,094
|
|
|
|
11,970
|
|
Thailand
|
|
|
11,653
|
|
|
|
5,682
|
|
Hong Kong/China
|
|
|
11,106
|
|
|
|
7,417
|
|
Austria
|
|
|
10,951
|
|
|
|
3,051
|
|
Taiwan
|
|
|
9,547
|
|
|
|
16,610
|
|
Germany
|
|
|
9,435
|
|
|
|
6,430
|
|
Malaysia
|
|
|
9,015
|
|
|
|
4,511
|
|
Singapore
|
|
|
4,698
|
|
|
|
4,994
|
|
All other countries
|
|
|
16,459
|
|
|
|
9,215
|
|
|
|
|
|
|
|
|
|
|
Total Net Sales
|
|
$
|
120,286
|
|
|
$
|
80,085
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31,
2017
|
|
|
July 31,
2017
|
|
|
|
(in thousands)
|
|
Long-lived assets:
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
14,266
|
|
|
$
|
14,426
|
|
Germany
|
|
|
8,553
|
|
|
|
8,579
|
|
Malaysia
|
|
|
3,114
|
|
|
|
3,069
|
|
China
|
|
|
795
|
|
|
|
285
|
|
Singapore
|
|
|
364
|
|
|
|
416
|
|
Japan
|
|
|
727
|
|
|
|
791
|
|
Philippines
|
|
|
63
|
|
|
|
82
|
|
Taiwan
|
|
|
331
|
|
|
|
375
|
|
All other countries
|
|
|
343
|
|
|
|
486
|
|
|
|
|
|
|
|
|
|
|
Total long-lived assets
|
|
$
|
28,556
|
|
|
$
|
28,509
|
|
|
|
|
|
|
|
|
|
|
15
Transfer prices on products sold to foreign subsidiaries are intended to produce profit margins that correspond
to the subsidiarys sales and support efforts.
5. 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 three months ended October 31, 2017, the Company incurred costs associated with the closing of its engineering development site in Yerevan,
Armenia.
The following table sets forth the Companys restructuring accrual activity for the three months ended October 31, 2017 and
October 31, 2016. 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
|
|
|
15
|
|
|
|
120
|
|
|
|
135
|
|
Cash paid
|
|
|
(15
|
)
|
|
|
(185
|
)
|
|
|
(200
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance October 31, 2017
|
|
$
|
21
|
|
|
|
|
|
|
$
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance
Costs
|
|
|
Facility
Leases
|
|
|
Total
|
|
|
|
(in thousands)
|
|
Balance July 31, 2016
|
|
$
|
142
|
|
|
$
|
734
|
|
|
$
|
876
|
|
Additions to expense
|
|
|
80
|
|
|
|
27
|
|
|
|
107
|
|
Accretion
|
|
|
|
|
|
|
108
|
|
|
|
108
|
|
Cash paid
|
|
|
(111
|
)
|
|
|
(386
|
)
|
|
|
(497
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance October 31, 2016
|
|
$
|
111
|
|
|
$
|
483
|
|
|
$
|
594
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6. 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 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, Parent, Unic Capital, Sponsor and 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 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 alleges, among other things, that the Company and the Board violated federal securities laws and regulations by soliciting stockholder votes
in connection with the Merger through a proxy statement that includes false and misleading material information with respect to the proposed Merger, which renders the proxy statement false and misleading. The complaint seeks damages. The Company is
reviewing the complaint and has not yet formally responded to it, but believes that the plaintiffs allegations are without merit and intends to defend against them vigorously. However, litigation is inherently uncertain and there can be no
assurance regarding the likelihood that the Companys defense of the actions will be successful. Additional complaints containing substantially similar allegations may be filed in the future.
16
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 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 October 31, 2017 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 October 31, 2017 or July 31, 2017.
As of October 31, 2017 the Company had approximately $55.1 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 October 31, 2017 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year ending July 31, 2018
|
|
Facilities
|
|
|
Equipment
|
|
|
Total
Operating
Leases
|
|
|
|
(in thousands)
|
|
Remainder of 2018
|
|
$
|
3,157
|
|
|
$
|
441
|
|
|
$
|
3,598
|
|
2019
|
|
|
3,594
|
|
|
|
414
|
|
|
|
4,008
|
|
2020
|
|
|
3,002
|
|
|
|
232
|
|
|
|
3,234
|
|
2021
|
|
|
2,460
|
|
|
|
63
|
|
|
|
2,523
|
|
2022
|
|
|
1,788
|
|
|
|
40
|
|
|
|
1,828
|
|
Thereafter
|
|
|
4,657
|
|
|
|
|
|
|
|
4,657
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total minimum lease payments
|
|
$
|
18,658
|
|
|
$
|
1,190
|
|
|
$
|
19,848
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7. OTHER ACCRUED EXPENSES
Other accrued expenses consisted of the following at October 31, 2017 and July 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
October 31,
2017
|
|
|
July 31,
2017
|
|
|
|
(in thousands)
|
|
Accrued income and other taxes
|
|
$
|
20,177
|
|
|
$
|
13,163
|
|
Accrued compensation
|
|
|
15,454
|
|
|
|
18,864
|
|
Warranty reserve
|
|
|
3,601
|
|
|
|
3,610
|
|
Accrued commissions
|
|
|
2,393
|
|
|
|
2,931
|
|
Accrued vendor liability
|
|
|
2,152
|
|
|
|
2,229
|
|
Accrued professional fees
|
|
|
1,308
|
|
|
|
3,218
|
|
Other accrued expenses
|
|
|
4,740
|
|
|
|
6,247
|
|
|
|
|
|
|
|
|
|
|
Total accrued expenses
|
|
$
|
49,825
|
|
|
$
|
50,262
|
|
|
|
|
|
|
|
|
|
|
17
8. LONG-TERM DEBT
Long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
|
|
October 31, 2017
|
|
|
July 31, 2017
|
|
|
|
(in thousands)
|
|
Bank Term Loan under Credit Agreement
|
|
$
|
18,750
|
|
|
$
|
19,375
|
|
Bank Term LoanCommerzbank
|
|
|
2,707
|
|
|
|
2,791
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
21,457
|
|
|
|
22,166
|
|
Less: financing fees
|
|
|
(812
|
)
|
|
|
(840
|
)
|
Less: current portion
|
|
|
(4,095
|
)
|
|
|
(3,779
|
)
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
$
|
16,550
|
|
|
$
|
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
|
|
$
|
3,125
|
|
2019
|
|
|
16,354
|
|
2020
|
|
|
416
|
|
2021
|
|
|
416
|
|
2022
|
|
|
416
|
|
Thereafter
|
|
|
730
|
|
|
|
|
|
|
Total
|
|
$
|
21,457
|
|
|
|
|
|
|
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 (the Facility).
The proceeds of the Term Loan were used to pay off $25.0 million of the outstanding indebtedness under the previous credit facility that was advanced to
the Company pursuant to that certain credit agreement entered into on November 27, 2013 with ECT, SVB as lender, administrative agent and issuing lender, and the lenders from time to time party thereto (the Original Credit
Agreement). As of December 15, 2014, no amounts remained outstanding under the credit facility issued under the Original Credit Agreement.
All
obligations under the Facility are secured by a first priority security interest in substantially all of the Borrowers existing and future assets, including a pledge of the stock or other equity interests of the Borrowers domestic
subsidiaries and of any first tier foreign subsidiaries, provided that not more than 66% of the voting stock of any such foreign subsidiaries shall be required to be pledged.
The Credit Agreement requires that the Term Loan be repaid in quarterly installments, with 5% of the principal due the first year, 10% of principal due in
each of the second and third years, 15% of principal due the fourth year, and a final payment of $15 million due on December 14, 2018 (the Maturity Date). The outstanding balance of the Term Loan may, at the Borrowers
option, be prepaid at any time in whole or in part without premium or penalty, other than customary breakage costs, if any, subject to the terms and conditions of the Credit Agreement.
As the terms of the Credit Agreement were not substantially different from the terms of the Original Credit Agreement, the Company accounted for this
transaction as a modification of debt, and accordingly continues to recognize deferred financing fees over the term of the Credit Agreement.
Borrowings
made under the Facility bear interest, at a base rate plus a margin (such margin not to exceed a per annum rate of 1.75%) based on a ratio of the Companys consolidated senior debt to consolidated earnings before interest, taxes, depreciation
and amortization (EBITDA) (the Leverage Ratio), or at a London Interbank Offered Rate (LIBOR) rate plus a margin (such margin not to exceed a per annum rate of 2.75%) based on the Leverage Ratio. The interest rate
otherwise payable under the Facility will be subject to increase by 2.0% per annum during the continuance of a payment default and may be subject to increase by 2.0% per annum during the continuance of any other event of default. As of
October 31, 2017, the interest rate in effect on the Facility was 3.76%.
18
Covenants
The Credit Agreement contains customary affirmative and negative covenants, subject in certain cases to baskets and exceptions, including negative covenants
with respect to indebtedness, liens, fundamental changes, dispositions, restricted payments, investments, ERISA matters, matters relating to subordinated debt, affiliate transactions, sale and leaseback transactions, swap agreements, accounting
changes, negative pledge clauses, clauses restricting subsidiary distributions, lines of business, amendments to certain documents and use of proceeds. The Credit Agreement also contains customary reporting and other affirmative covenants. The
Credit Agreement contains a consolidated fixed charge coverage ratio and consolidated leverage ratio.
The Companys obligations under the Facility
may be accelerated upon the occurrence of an event of default under the Credit Agreement, which includes customary events of default, including payment defaults, the inaccuracy of representations or warranties, the failure to comply with covenants,
ERISA defaults, judgment defaults, bankruptcy and insolvency defaults and cross defaults to material indebtedness.
On September 16, 2015 the
Borrowers entered into the First Amendment to the Credit Agreement and Waiver with SVB and the Lenders, pursuant to which SVB and the Lenders waived the delivery of monthly financial statements for the month ending June 30, 2015, and the
parties agreed to amend the Credit Agreement to provide that the delivery of financial statements would occur on a quarterly basis as opposed to monthly, and that the Company may repurchase up to $30 million of its capital stock provided that
it comply with certain financial covenants.
As of October 31, 2017, the Company was in compliance with all covenants under the Credit Agreement.
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.
9. 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.
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.
19
The following table presents financial assets and liabilities measured at fair value and their related valuation
inputs as of October 31, 2017 and July 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
(in thousands)
|
|
October 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)
|
|
$
|
104,388
|
|
|
$
|
104,388
|
|
|
$
|
|
|
|
$
|
|
|
Marketable securities
|
|
|
56,919
|
|
|
|
10,405
|
|
|
|
46,514
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
161,307
|
|
|
$
|
114,793
|
|
|
$
|
46,514
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 October 31, 2017 and July 31, 2017 includes cash held in operating accounts of approximately $104.0 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 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 October 31, 2017 and
July 31, 2017 was $21.5 million and $22.2 million, respectively. Within the hierarchy of fair value measurement, these are Level 2 inputs.
10. 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 December 8, 2017, the Company had repurchased 1,956,733 shares for approximately $12 million under the 2015 Plan.
11. 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. 2015-14,
Revenue from Contracts with Customers (ASC 606): Deferral of the Effective Date
, which delays the effective date of ASU
2014-09
by one year. The FASB agreed to allow entities to choose to adopt the standard as of the original effective date. 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 currently anticipates adopting the standard using the modified retrospective method. We are in the process of completing our analysis on the impact
this guidance will have on our Consolidated Financial Statements and related disclosures, as well as identifying the required changes to our policies, processes and controls. The Company anticipates that it will complete its assessment of the new
standard and its potential impact by the end of the third quarter of fiscal 2018.
20
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.
12. SUBSEQUENT EVENTS
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.
On November 30, 2017, the Company announced further restructuring in its Fixtures Services Group that impacted one of its facilities and employees in
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. As a result, the Company expects to incur costs for severance
and relocation of the production operations during the quarter ending January 31, 2018. The estimated cost of this restructuring is not expected to have a material impact on the Companys operating income or liquidity.