Item 1.
Business Introduction
Xcerra Corporation (Xcerra or the Company), formerly known as LTX-Credence Corporation, is a global provider of test and handling capital equipment, interface products, test fixtures and related services to the semiconductor and electronics manufacturing industries. We design, manufacture and market products and services 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. We operate in the semiconductor and electronics manufacturing test markets through our atg-Luther & Maelzer, Everett Charles Technologies (ECT), LTX-Credence and Multitest businesses. We have a broad spectrum of semiconductor and printed circuit board (PCB) test expertise that drives innovative new products and services and our ability to deliver fully integrated semiconductor test solutions.
On November 30, 2015, we completed the sale of our semiconductor test interface board business based in Santa Clara, CA (the Interface Board Business) to Fastprint Hong Kong Co., Ltd., a wholly owned subsidiary of Shenzhen Fastprint Circuit Tech Co., Ltd, and its affiliates (collectively, Fastprint), pursuant to an Asset Purchase Agreement, entered into between us and Fastprint on September 8, 2015 (the Purchase Agreement). The Interface Board Business produces printed circuit boards that are specifically designed to serve as an interface between the tester and the semiconductor device, or the semiconductor wafer, being tested.
We sold and transferred to Fastprint certain assets used in or primarily related to the Interface Board Business (the Assets), and assigned, and Fastprint assumed, certain specified liabilities associated with the Interface Board Business (the Assumed Liabilities), along with the transfer of the employees associated with that business, all pursuant to the terms of the Purchase Agreement. The purchase price for the Assets and the Assumed Liabilities was $23.0 million (the Purchase Price). Fastprint also agreed to pay for the accrued and unpaid vacation of certain U.S. employees transferring to Fastprint (the Accrued U.S. Compensation Amount). At the Closing, Fastprint paid Everett Charles, as designated by us, the aggregate cash sum of $21.4 million consisting of $20.7 million of the Purchase Price and the Accrued U.S. Compensation Amount, plus certain prepaid amounts. Pursuant to the Purchase Agreement, $2.3 million of the purchase price has been withheld by Fastprint and is payable on the first anniversary of the closing subject to claims for indemnification by Fastprint, if any, prior to that time.
Semiconductor designers and manufacturers worldwide use our test and handling equipment and interface products (test contactors and probe pins) to test their devices during the manufacturing process. The devices our products test are incorporated into a wide range of products, including personal 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 tablets; consumer products such as televisions, videogame systems and digital cameras; automobile electronics; and power management devices used in portable and automotive electronics.
Our PCB test systems are used to verify the quality of the pre-assembled PCB before individual components, including integrated circuits, are installed onto the PCB. Our test fixture products are consumable components used by PCB test systems to test assembled PCBs. The types of PCBs that are tested using our systems are incorporated into a diverse set of electronic products including network servers, personal computers, tablets and mobile phones.
The chart below displays the semiconductor and PCB manufacturing processes and identifies the product and service offerings at the various steps where our systems or products are used:
Image of semiconductor wafer courtesy of Taiwan Semiconductor Manufacturing Co., Ltd.
For our semiconductor test-related businesses we focus our marketing and sales efforts on integrated device manufacturers (IDMs); outsourced semiconductor assembly and test providers (OSATs), which perform assembly and testing services for the semiconductor industry; and fabless semiconductor companies, which design integrated circuits but have no manufacturing capability. We offer our customers a comprehensive portfolio of semiconductor test systems, test handlers and interface products and provide a global network of strategically deployed applications and support resources. For our PCB test systems and PCB assembly test fixtures and design services, we focus our marketing and sales efforts on the manufacturers of PCBs, as well as the companies into whose products the PCBs are incorporated.
Our objective is to be the leading supplier of market-focused, cost-optimized test solutions for the semiconductor and electronics manufacturing test markets. Key elements of our growth strategy include:
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Continue to introduce new, innovative products. We intend to continue to invest in the development of new test solutions designed to meet evolving customer demands such as achieving the lowest cost of test and reducing the time to high volume production on new products. We intend to leverage our existing technical expertise and continue to invest significant resources both in our current solutions and in developing solutions that address new markets as well as new segments of existing markets.
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Leverage total test cell capabilities. We believe we are the only supplier capable of providing a total test cell solution and will continue to leverage this unique capability with our customers. Our customers historically have had to source disparate test products from multiple third-party providers to create their own solutions, which can lead to inefficiencies and increased costs. By offering a total test cell solution, we are able to help customers better fulfill their testing requirements and improve their overall manufacturing and testing process.
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Generate cross-selling opportunities between our leading brands. Our Multitest and ECT businesses offer significant cross-selling opportunities across our brands and product portfolio. We will continue
to build and strengthen our relationships with existing customers, as we believe there are significant opportunities to cross-sell load boards, test contactors and test handlers to our existing semiconductor ATE customers.
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Increase additional sales of test handlers and consumables through our existing distribution relationships. We have expanded our relationship with our largest distributor to include test handlers and consumables, which will enable us to better serve customers in fast-growing geographies, including China and Taiwan.
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Opportunistically pursue strategic acquisitions. We may pursue acquisitions that complement our strengths and help us execute our strategies. Our acquisition strategy is designed to accelerate our revenue growth, expand our technology portfolio and grow our addressable market.
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Continue to improve operational efficiency. In order to focus our resources, improve our responsiveness to customer needs, reduce fixed costs and working capital requirements and manage the cyclicality of our industry more effectively, we have implemented a lean, flexible business model. We intend to continue to identify and implement programs which enhance our ability to meet customers’ needs while reducing fixed costs.
We are headquartered and have a development facility in Norwood, Massachusetts. We also have manufacturing and other development facilities located in Milpitas, and Fontana, California; Rosenheim, Germany; Wertheim, Germany; Shenzhen, China; Singapore; Yerevan, Armenia and Penang, Malaysia and sales and service facilities located across the world to support our customer base. As a result of the sale of our Interface Board Business to Fastprint, we no longer operate a facility in Santa Clara, California.
We were incorporated in Massachusetts in 1976 as LTX Corporation. In connection with our August 2008 merger with Credence Systems Corporation, we changed our name to LTX-Credence Corporation and, following the acquisition of our Multitest and ECT businesses, we changed our name to Xcerra Corporation in May 2014. Our principal executive offices and global headquarters are located at 825 University Avenue, Norwood, Massachusetts 02062, and our telephone number is 781-461-1000. Our common stock trades on the NASDAQ Global Market under the symbol “XCRA.” The terms “Xcerra,” the “Company,” “we,” “our,” and “us” refer to Xcerra Corporation and its wholly-owned subsidiaries unless the context otherwise indicates. We make available our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports, free of charge, in the “Investors” section of our website at www.xcerra.com as soon as reasonably practicable after such material is electronically filed with, or furnished to, the U.S. Securities and Exchange Commission. We are not, however, including the information contained on our website, or information that may be accessed through links on our website, as part of, or incorporating such information by reference into, this Annual Report on Form 10-K.
Industry Overview
We provide test solutions to the large and growing electronics manufacturing industry, of which semiconductors and PCBs are key components.
Sales of capital equipment products are driven by the expansion of manufacturing and test capacity, or when customers replace existing equipment with new equipment. Sales of consumable products, which include service, are driven by the level of manufacturing and test activity, and need to be replaced based on usage levels or to accommodate new designs or test techniques. Therefore, overall demand for our capital equipment and consumable products and services is generally dependent on growth in the semiconductor and electronics industry.
In particular, three primary characteristics of the industry in which we operate drive the demand for our products and services:
i) Increases in unit production of semiconductor devices and PCBs. The proliferation of sophisticated electronic devices including tablets, consumer electronics, the growth of the telecommunications
industry and mobile devices capable of accessing the internet, the increased use of digital signal processing (DSP) devices, and the expansion of semiconductor devices in automotive and power management applications are driving a corresponding need for semiconductor and PCB test solutions.
ii) Increases in the complexity of semiconductor devices and PCBs used in electronic products. Increasing demand continues worldwide for smaller, more highly integrated electronic products. This has led to higher performance and increasing complexity of the semiconductor devices that operate and power these electronic products. To the extent a customer’s existing test equipment is not able to meet the requirements of these new devices, there is a corresponding increase in demand for equally sophisticated semiconductor and PCB test solutions.
iii) Emergence of next generation electronic products requiring new semiconductor and PCB technologies. The introduction of new generations of end-user electronics products requires the development of new semiconductor device and PCB technologies. The increase in complexity of leading edge end-user devices, and, ultimately, the emergence of new semiconductor device and PCB technologies have mandated changes in the design, architecture and complexity of semiconductor and PCB test solutions. Semiconductor and PCB manufacturers must be able to test the increasing volume and complexity of their devices in a reliable, cost-effective, efficient and flexible manner.
Products and Services
We offer a wide range of products and services to the semiconductor and electronics manufacturing industries, including semiconductor automated test equipment (ATE), test handlers, bare board PCB test equipment, test contactors, probe pins and loaded PCB test fixtures. In accordance with the provisions of Financial Accounting Standards Board (FASB) Topic 280, Segment Reporting to the FASB ASC (ASC 280), for the fiscal year ended July 31, 2016 (fiscal 2016), we determined that we have six operating segments (Semiconductor Test, Semiconductor Handlers, Contactors, PCB Test, Probes / Pins, and Fixtures). Based on the aggregation criteria of ASC 280, we 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, we have 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. This financial reporting structure was implemented effective as of December 1, 2013, the acquisition date of Multitest and ECT. Refer to Note 10, Segment, Industry and Geographic and Significant Customer Segment Information, contained in the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K, for more information on our reportable segments.
Our revenue from our capital equipment products is driven by the capital expenditure budgets and spending patterns of our customers, who often delay or accelerate purchases in reaction to variations in their business. The level of capital expenditures by these companies depends on the current and anticipated market demand for semiconductor devices and PCBs and the products that incorporate them.
Our consumable products are driven by an increase in the number of printed circuit boards and semiconductor devices that are tested. As a result, our consumable products provide a more stable recurring source of revenue and do not have the same degree of cyclicality as our capital equipment products.
Listed below is a summary of our various product offerings:
Semiconductor ATE Solutions. Semiconductor automated test equipment is used to test a device at two different points in the manufacturing process; first after it has been fabricated but before it has been packaged and then again after it has been packaged, in both cases to eliminate non-functioning parts. Our semiconductor ATE solutions consist of three scalable platforms focused primarily on the system on a chip (SoC) market. Our
Diamond series platform, which includes the flagship Diamondx test system, offers high-density packaging for low-cost testing of microcontrollers and cost sensitive consumer and digital-based ASSP and ASIC devices. Our X-Series platform offers configurations for optimal testing of analog-based ASSP and ASIC, power, automotive, mixed signal and RF applications. Our ASL platform is targeted at testing linear, low-end mixed signal, precision analog and power management devices.
Test Handlers. Test handlers are used in conjunction with automated test equipment and are used to automate the testing of packaged semiconductor devices. Our test handlers support a variety of package sizes and device types, including automotive, mobile, power, microelectromechanical systems (MEMS) and microcontrollers, among others. We offer a broad range of test handlers, including pick-and-place, gravity, strip and MEMS.
Bare Board PCB Test Systems. Bare board PCB test systems are used to test pre-assembled printed circuit boards. Our PCB test systems include flying probe testers, which are used to test low-volume, highly complex circuit boards and do not require the use of a separate test fixture, as well as universal grid testers, which require the use of a separate test fixture and are well-suited to test circuit boards that are produced in high volumes.
Test Contactors. Test contactors are used in the final test of semiconductor devices and serve as the interface between the test handler and the semiconductor device under test. Test contactors are specific to individual semiconductor device designs, need to be replaced frequently and grow with the number of devices tested in parallel. We offer a wide range of test contactors for standard, power and RF markets.
Probe Pins. Probe pins are physical devices that are used to connect electronic test equipment to the device under test. We offer probes that are incorporated into bare board test systems, loaded PCB test fixtures and semiconductor test contactors. We address a wide range of applications with our spring probes, voltage probes, current probes, near-field probes, temperature probes, demodulator probes and logic probes.
Loaded PCB Test Fixtures. Test fixtures enable the transmission of test signals from the loaded PCB to the tester. We offer a wide range of in-circuit and functional test fixtures that can be optimized based on the complexity of the loaded PCB and production volume requirements. Our solutions address highly complex and low-to-medium technology applications.
Services. Our worldwide service organization is capable of performing installations and necessary maintenance of test and handling systems sold by us, including routine servicing of spare parts manufactured by third parties. We provide various parts and labor warranties on test and handling systems and instruments designed and manufactured by us and warranties on certain components that have been purchased from other manufacturers and incorporated into our test and handling systems. We also provide training on the maintenance and operation of test and handling systems we sell. Service revenues from our Semiconductor Test segment maintenance and service contracts were $24.1 million, or 7% of net sales in fiscal 2016; $28.6 million, or 8% of net sales, in the fiscal year ended July 31, 2015 (fiscal 2015); and $33.3 million, or 10% of net sales, in the fiscal year ended July 31, 2014 (fiscal 2014).
Engineering and Product Development
The markets in which we compete are characterized by rapid technological change and new product introductions, as well as advancing industry standards. Our competitive position depends upon our ability to successfully enhance our products, develop new instrumentation, and introduce these new products on a timely and cost-effective basis. We seek to maintain close relationships with our customers to better enable us to be responsive to their product development and production needs.
Our engineering strategy is to continue to develop new and innovative products in the markets in which we compete, as well as leveraging those technologies into providing an efficient and effective total test cell solution.
Our engineering strategy for our test products includes continued development of our Diamond, X-Series and ASL platforms. Leveraging both hardware and software technologies across platforms is a key objective moving forward as we convert our knowledge and expertise into cost-effective solutions. The development and release of the Diamondx, ASLx and PAx products are examples of our technology leveraged focus. For our handler products, we are focused on continued development of our diverse product portfolio such as Pick and Place, Gravity, InStrip and InCarrier solutions. For our printed circuit board test equipment we are focused on continued development of flying probe grid array test products.
Sales and Distribution
We sell our products through a combination of a worldwide internal direct sales organization and external distributors for each of our reportable segments. Our direct sales organization is structured around key accounts, with a sales force of 134 people as of July 31, 2016. We also use third party distributors to sell our products in certain markets such as in Taiwan, China, Japan, South Korea, and other countries in Southeast Asia.
Our sales to customers outside the United States are primarily denominated in United States dollars, Euro and Malaysian Ringgit. Our sales outside the United States composed 82%, 79%, and 78% of total net sales in fiscal 2016, 2015, and 2014, respectively. See Note 10 to our Consolidated Financial Statements for additional information relating to revenues derived from sales to customers outside the United States.
Customers
Net sales to the top ten customers were 55%, 54%, and 51% of net sales in fiscal 2016, 2015, and 2014, respectively.
(1) Spirox is our third-party sales distributor for Taiwan and China. There are no end customers sold through Spirox that represent greater than 10% of our net sales for any period presented.
A representative list of our customers includes:
Amkor
Intersil
Rich Tek
Analog Devices
KYEC
Rohm
AT&S
Linear Technology Corporation
Samsung
Atmel
Maxim Integrated Products
Sigurd
ams AG
Mediatek
Skyworks Solutions
ASE
Melexis
Spirox
Robert Bosch GmbH
Microchip Technology
STATSChipPac
Carsem
Microsoft
STMicroelectronics
Continental
Murata
Texas Instruments
Elmos
Nordic Semiconductor
TTM Technologies
Giga Solution
NXP
Unisem
HiSilicon
OnSemiconductor
UTAC
Infineon Technologies
Qorvo
Wurth
We have concentrated our sales and support efforts on those semiconductor companies from which we believe we will receive the most return for our efforts. We believe that sales to a limited number of customers will continue to account for a high percentage of our net sales for the foreseeable future.
Manufacturing and Supply
We manufacture our products using a combination of internal and outsourced manufacturing solutions. We use Jabil Circuit as our outsourced partner for the manufacturing of our Semiconductor ATE products, and some of our Loaded PCB Test Fixture products.
We outsource certain components and subassemblies for our test equipment to contract manufacturers other than Jabil Circuit. Our products incorporate standard components and prefabricated parts manufactured to our specifications. These components and subassemblies are used to produce testers in configurations specified by our customers. Some of the standard components for our products are available from a number of different suppliers; however, many such standard components are purchased from a single supplier or a limited group of suppliers. Although we believe that all single sourced components currently are available in adequate amounts, shortages or delivery delays may develop in the future. We are dependent on certain semiconductor device manufacturers, who are sole source suppliers of custom components for our products. We have no written supply agreements with these sole source suppliers and purchase our custom components through individual purchase orders. We continuously evaluate alternative sources for the manufacture of our custom components and the supply of our standard components; however, such alternative sources may not meet our required qualifications or have capacity that is available to us.
Competition
There are other domestic and foreign companies that participate in the markets for each of our products and the industry for each of our reportable segments is highly competitive. We compete principally on the basis of product performance, cost of test, reliability, customer service, applications support, price and ability to deliver products and service on a timely basis. In addition, to increase our market share, we will also need to demonstrate an ability to overcome customer risks and costs associated with switching vendors, including training on unfamiliar hardware and software.
The semiconductor equipment and electronics manufacturing industries are highly competitive in all areas of the world. There are other domestic and foreign companies that participate in the markets for each of our products. Our main competitors include Advantest Corporation, Teradyne Inc., Johnstech, MicroCraft, Cohu, Inc., SPEA, Shenzhen Mason Electronics Co., Ltd., Bojay, OXO, Sanmina, Interconnect Devices, Inc., QA
Technology, and Ingun. Some of these competitors have substantially greater financial resources and more extensive engineering, manufacturing, marketing, and customer support capabilities than we have.
We expect our competitors to enhance their current products, introduce new products which may have comparable or better price and performance than ours, diligently defend their existing customer accounts, and attempt to grow their market share. In addition, new competitors, including semiconductor manufacturers themselves, may offer new testing technologies, which may compete with or otherwise reduce the value of our product lines.
We believe our key competitive strengths include:
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Technologically advanced products well suited for industry’s most challenging applications. Our breadth of capital equipment, including semiconductor ATE, test handlers and PCB testers, and consumables, including electronic interconnect and interface products, enable us to design solutions that lower the cost of testing, improve operating effectiveness of the test cell and reduce time to high volume production for our customers.
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Uniquely positioned as total test cell solutions provider. The combination of our semiconductor ATE, test handlers, load boards and test contactors products enables us to provide customers with a complete solution that optimizes performance for selected test cell configurations.
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Focused on fast growing segments within the semiconductor and PCB markets. We believe, based on management estimates, that we increased our addressable market to over $4 billion through the acquisition of Multitest and ECT businesses in 2013 and through strategic internal product development. We believe that our core end-markets, which include analog/mixed-signal, microcontroller, RF, power management and automotive, should grow in excess of broader semiconductor and electronics test markets.
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Long-standing customer relationships with limited concentration. Our acquisition of Multitest and ECT further diversified our blue chip customer base beyond semiconductor device suppliers to leading mobile, industrial, medical, automotive and printed circuit board companies. Our close customer relationships with leading innovators in the electronics industry have been built based on years of collaborative product development, which provides us with deep system-level knowledge and key insights into our customers’ needs.
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Highly leveraged operating model drives significant earnings growth in up cycle. We have a history of reducing costs and driving increased profitability. Our capital equipment products and fixed cost structure enable us to generate significant profitability during cycle upturns.
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Strong recurring revenue model enables through-cycle profitability. Our acquisition of Multitest and ECT more than doubled our recurring revenue base, which now comprises approximately 50% of our total revenue. Our consumables products are unit driven, recurring in nature, and less volatile during cycle downturns compared with our capital equipment products.
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Experienced management and engineering team with demonstrated ability to integrate accretive acquisitions. Our chief executive officer and chief financial officer/chief operating officer have over 35 years of combined experience with us and have successfully identified, executed, and integrated multiple accretive acquisitions. The acquisition of Credence Systems Corporation in 2008 broadened our semiconductor test capabilities and offered substantial cost savings opportunities. The acquisition of Multitest and ECT in 2013 has enabled us to become a diversified electronics test solutions provider with a larger base of recurring revenue.
Backlog
At July 31, 2016, our backlog of unfilled orders for all products and services was $54.3 million, compared with $56.7 million at July 31, 2015. The $2.4 million, or 4%, decrease was primarily due to lower bookings
during fiscal 2016. Historically, our test systems generally ship within twelve weeks of receipt of a customer’s purchase order. Our probes and contactors generally ship within one to three weeks of a customer’s purchase order. While backlog is calculated on the basis of firm orders, orders may be subject to cancellation or delay by the customer with limited or no penalty. Our backlog at any particular date, therefore, is not necessarily indicative of actual sales which may be generated for any succeeding period.
The backlog as of July 31, 2016 for our reportable segments was as follows (in millions):
Proprietary Rights
The development of our products is largely based on proprietary information. We rely upon a combination of contract provisions, intellectual property registration and copyright, trademark and trade secret laws to protect our proprietary rights in products. We also have a policy of seeking patents on technology considered to be of particular strategic importance. Our patents cover various technologies, including technology relating to proprietary instrumentation and pin electronics. Although we believe that the copyrights, trademarks and patents we own are of value, we also believe that they alone have not and will not determine our success. We believe that our overall success depends principally upon our management, engineering, applications, manufacturing, marketing and service skills. Regardless, we intend to protect our rights when, in our view, these rights are infringed upon.
We have at times been notified of claims that we may be infringing patents issued to others. Although there are no pending actions against us regarding any patents, claims of infringement by third parties could negatively impact our business and results of operations. As to any claims asserted against us, we may seek or be required to obtain a license under the third party’s intellectual property rights. However, a license may not be available under reasonable terms or at all. In addition, we could decide to engage in litigation to challenge such claims or a third party could engage in litigation to enforce such claims. Such litigation could be expensive and time consuming and could negatively impact our business and results of operations.
Employees
At July 31, 2016, we had 1,676 employees and temporary workers. None of our employees is represented by a labor union, and we have experienced no work stoppages during our history. Many of our employees are highly skilled, and we believe our future success will depend in large part on our ability to retain these employees and attract new, highly-skilled employees. We consider relations with our employees to be good.
Environmental Affairs
Our facilities are subject to numerous laws and regulations designed to protect the environment. We do not anticipate that compliance with these laws and regulations will have a material effect on our capital expenditures, results of operations, or financial condition.
Item 1A.
Item 1A. Risk Factors
This Annual Report includes or incorporates forward-looking statements that involve substantial risks and uncertainties and fall within the meaning of Section 27A of the Securities Exchange Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended. You can identify these forward-looking statements by our use of the words “believes,” “anticipates,” “plans,” “expects,” “may,” “will,” “would,” “should,” “intends,”
“estimates,” “seeks” or similar expressions, whether in the negative or affirmative. We cannot guarantee that we actually will achieve these plans, intentions or expectations. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have included below important factors that we believe could cause our actual results to differ materially from the forward-looking statements that we make. If any of these risks were to occur, our business, financial condition, results of operations or prospects, could be materially and adversely affected. These risks and uncertainties may be interrelated or co-related, and as a result, the occurrence of one risk might directly affect other risks described below, make them more likely to occur or magnify their impact. Moreover, the risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also affect our business. We do not assume any obligation to update any forward-looking statement we make.
Our mergers and acquisitions may be costly, be difficult to integrate, disrupt our business, dilute stockholder value, and divert management attention, which may limit our ability to realize the anticipated benefits of such transactions.
We have in the past, and may in the future, seek to acquire or invest in businesses, products, technologies or engineers which could put a strain on our resources, result in one-time charges (such as acquisition-related expenses, write-offs or restructuring charges) or in the future, impairment of goodwill, cause ownership dilution to our stockholders and adversely affect our financial results. Additionally, we may fund future acquisitions by utilizing our cash, raising debt, issuing shares of our common stock, or by other means, which could subject us to the risks described below in “We may need financing, which could be difficult to obtain or limit our operational flexibility.” We have also incurred and may continue to incur certain liabilities or other expenses in connection with acquisitions, which could materially adversely affect our business, financial condition and results of operations.
Mergers and acquisitions of high-technology companies are inherently risky, and future mergers or acquisitions may not be successful and could materially adversely affect our business, operating results or financial condition. Integrating newly acquired businesses, products or technologies into our company could put a strain on our resources, could be expensive and time consuming, may cause delays in product delivery and might not be successful. Future acquisitions and investments could divert management’s attention from other business concerns and expose our business to unforeseen liabilities (including liabilities related to acquired intellectual property and other assets), unanticipated costs associated with transactions, and risks associated with entering new markets. In addition, we might lose key employees while integrating new organizations. We might not be successful in integrating any acquired businesses, products and product development projects, technologies, personnel, operations, or systems, and might not achieve anticipated revenues and cost benefits. Investments that we make may not result in a return consistent with our projections upon which such investments are made, or may require additional investment that we did not originally anticipate. In addition, future acquisitions could result in customer dissatisfaction, performance problems with an acquired company, potentially dilutive issuances of equity securities or the incurrence of debt, contingent liabilities, possible impairment charges related to goodwill or other intangible assets or other unanticipated events or circumstances, any of which could harm our business, financial condition, results of operations, and could cause the price of our common stock to decline.
Our primary market is the highly volatile semiconductor industry, which causes significant fluctuations in our financial results.
We sell capital equipment and peripheral connectivity products to companies that design, manufacture, assemble, and test semiconductor devices. The semiconductor industry is highly volatile, causing significant fluctuations on our financial results. Our business typically is negatively impacted in the second quarter of each fiscal year due to weak seasonality that occurs at this time of the year. The ability to forecast the business outlook for our industry is typically limited to three months. Regardless of our outlook and forecasts, any failure to
expand in cycle upturns to meet customer demand and delivery requirements or contract in cycle downturns at a pace consistent with the industry could have an adverse effect on our business.
Any significant downturn in the markets for our customers’ semiconductor devices or in general economic conditions would likely result in a reduction in demand for our products and would negatively impact our business. Downturns in the semiconductor test equipment and electronics manufacturing industries have been characterized by diminished product demand, excess production capacity, accelerated erosion of selling prices and excessive inventory levels. We believe the markets for newer generations of semiconductor devices and electronic products will also have similar characteristics. Our market is also characterized by rapid technological change and changes in customer demand. In the past, we have experienced delays in purchase commitments, delays in collecting accounts receivable and significant declines in demand for our products during these downturns, and we may not be able to maintain or exceed our current level of sales.
Additionally, as a capital equipment provider, our revenue is driven by the capital expenditure budgets and spending patterns of our customers who often delay or accelerate purchases in reaction to variations in their businesses. Because a high portion of our costs are fixed, we are limited in our ability to reduce expenses and inventory purchases quickly in response to decreases in orders and revenues. In an economic contraction, we may not be able to reduce our significant fixed costs, such as continued investment in research and development, capital equipment requirements and materials purchased from our suppliers.
The market for capital equipment is highly concentrated, and we have limited opportunities to sell our products.
The semiconductor and electronics manufacturing industries are highly concentrated, and a small number of semiconductor device manufacturers, contract assemblers, and electronics manufacturers account for a substantial portion of the purchases of capital equipment generally, including our equipment. We expect customer concentration to increase because of continuing consolidation in the semiconductor manufacturing industry. Our top customer in fiscal 2016, fiscal 2015 and fiscal 2014 was Spirox, which accounted for 19%, 13% and 17%, respectively, of our net sales in those years. Sales to the top ten customers were 55%, 54%, and 51%, of net sales in fiscal 2016, fiscal 2015 and fiscal 2014, respectively. Our customers may cancel orders with few or no penalties. If a major customer reduces orders for any reason, our revenues, operating results, and financial condition may be negatively affected.
Our ability to increase our sales will depend, in part, on our ability to obtain orders from new customers. Semiconductor and electronics manufacturers typically select a particular vendor’s product for testing and handling its new generations of a device and make substantial investments to develop related test program applications and interfaces. Once a manufacturer has selected a test and/or handling system vendor for a new generation of a device, that manufacturer is more likely to purchase systems from that vendor for that generation of the device, and, possibly, subsequent generations of that device as well. Additionally, the continuing consolidation in the semiconductor manufacturing industry may slow or change capital equipment purchase decisions by customers. Therefore, the opportunities to obtain orders from new customers or existing customers that have combined with other companies may be limited, which may impair our ability to grow our revenue.
Our substantial debt and financial obligations could adversely affect our financial condition and ability to operate our business, we may not be able to pay our debt and other obligations, and we may incur additional debt.
As of July 31, 2016, our outstanding indebtedness was approximately $25.0 million. Our existing indebtedness and any additional indebtedness that we may incur in the future could have important consequences, including:
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making it more difficult for us to satisfy our obligations under our debt agreements, including financial and operational restrictions;
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making it difficult for us to obtain any necessary future financing for working capital, capital expenditures, debt service requirements or other purposes;
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limiting our future ability to refinance our indebtedness on terms acceptable to us or at all;
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requiring us to dedicate a substantial portion of any cash flow from operations to pay principal and interest on our indebtedness, thereby reducing the amount of cash flow available for other purposes, including capital expenditures;
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limiting our flexibility in planning for, or reacting to changes in, our business and the industries in which we compete;
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placing us at a possible competitive disadvantage with respect to less leveraged competitors and competitors that have better access to capital resource; and
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making us more vulnerable in the event of a downturn in our business.
Our debt level and the terms of our financing arrangements could adversely affect our financial condition and limit our ability to successfully implement our growth strategy.
We may not be able to meet our debt service obligations, including our obligations under a Credit Agreement (the Credit Agreement) with ECT (together with us, the Borrowers), Silicon Valley Bank, as lender, administrative agent and issuing lender (SVB), and the several lenders from time to time part thereto (the Lenders) dated December 15, 2014. The Credit Agreement provides for a senior secured credit facility, consisting of a term loan facility, in favor of the Borrowers in the aggregate principal amount of $25.0 million which was advanced to us on December 15, 2014 (the Facility). If we are unable to maintain certain financial covenants, we would be in default under the Facility, which could permit the Lenders to accelerate the maturity of the Facility. Any such default could have material adverse effect on our business, prospects, financial position and operating results, and could force us to refinance all or part of our existing debt, sell our assets, borrow more money or raise equity. There is no guarantee that we would be able to take any of these actions on a timely basis, on terms satisfactory to us, or at all. In addition, we may not be able to repay amounts due in respect of our obligations, if payment of those obligations were to be accelerated following the occurrence of any other event of default as defined in the instruments creating those obligations.
We may need additional financing, which could be difficult to obtain or limit our operational flexibility.
We believe our cash, cash equivalents, and marketable securities balance of $139.4 million as of July 31, 2016 will be sufficient to fund our ongoing operations for at least the next twelve months. However, we may need to raise additional funds in the future and, in such event, we may not be able to obtain such financing on favorable terms, if at all. Further, if we issue additional equity or equity-linked securities to obtain financing, stockholders may experience dilution. If we incur substantial additional indebtedness in the future, the risks described above under “Our substantial debt and financial obligations could adversely affect our financial condition and ability to operate our business, we may not be able to pay our debt and other obligations, and we may incur additional debt” would intensify.
Our sales and operating results have fluctuated significantly from period to period, including from one quarter to another, and they may continue to do so.
Our quarterly and annual operating results are affected by a wide variety of factors that have had and could continue to have material and adverse effects on our financial condition and stock price or lead to significant variability in our operating results or our stock price, including the following:
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the fact that sales of a limited number of test systems may account for a substantial portion of our net sales in any particular fiscal quarter;
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order cancellations by customers;
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lower gross margins in any particular period due to changes in:
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our product mix;
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the configurations of test systems sold;
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the customers to whom we sell our test systems; or
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volume;
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a long sales cycle due to the significant investment made by our customers in installing our test systems and the time required to incorporate our systems into our customers’ design or manufacturing process; and
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changes in the timing of product orders due to:
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unexpected delays in the introduction of products by our customers,
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excess production capacity by our customers,
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shorter than expected lifecycles of our customers’ semiconductor devices,
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uncertain market acceptance of products developed by our customers, or
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our own research and development.
We cannot predict the impact of these and other factors on our sales and operating results in any future period. Results of operations in any period, therefore, should not be considered indicative of the results to be expected for any future period. Because of this difficulty in predicting future performance, our operating results may fall below expectations of securities analysts or investors in some future quarter or quarters. Our failure to meet these expectations would likely adversely affect the market price of our common stock.
A substantial amount of the shipments of our systems for a particular quarter may occur late in the quarter. Our shipment pattern may expose us to significant risks of not meeting our expected financial results for each quarter in the event of problems during the complex process of final, test and acceptance prior to revenue recognition. If we were to experience problems of this type late in our quarter, shipments could be delayed and our operating results could fall below expectations.
Our dependence on subcontractors and sole source suppliers may prevent us from delivering an acceptable product on a timely basis.
We rely on one subcontractor to manufacture our test systems and multiple other subcontractors for the manufacture of the components and subassemblies used to produce our test systems. Certain of the suppliers for certain components and subassemblies are sole source suppliers. We have no long term supply agreements with our test system contract manufacturers and purchase products through individual purchase orders. For all of our products, we may be required to qualify new or additional subcontractors and suppliers due to capacity constraints, competitive or quality concerns or other risks that may arise, including as a result of a change in control of, or deterioration in the financial condition of, a supplier or subcontractor. The process of qualifying subcontractors and suppliers is lengthy. Our reliance on subcontractors gives us less control over the manufacturing process and exposes us to significant risks, especially inadequate capacity, late delivery, substandard quality, and high costs. In addition, the manufacture of certain of these components and subassemblies is an extremely complex process. If a supplier became unable to provide parts in the volumes needed, at the required standards of quality or at an acceptable price, we would have to identify and qualify acceptable replacement parts from alternative sources of supply or manufacture such components or subassemblies internally. The failure to qualify acceptable replacement subcontractors or suppliers quickly would delay the manufacturing and delivery of our products, which could cause us to lose revenues and customers.
We also may be unable to engage alternative sources for the production of our products on a timely basis or upon terms favorable to us, if at all. If we are required for any reason to seek a new manufacturer of our products, an alternate manufacturer may not be available and, in any event, transitioning to a new manufacturer would require a significant lead time of nine months or more and would involve substantial expense and disruption of our business. Our test systems are highly sophisticated and complex capital equipment, with many custom components, and final assembly requires specific technical know-how and expertise. These factors could make it more difficult for us to find a new manufacturer of our systems if our relationship with our outsource suppliers is terminated for any reason, which would cause us to lose revenues and customers.
We are dependent on certain semiconductor device manufacturers as sole source suppliers of certain sub-assemblies and components used in our test systems which are manufactured in accordance with our proprietary design and specifications. We have no written supply agreement with these sole source suppliers and purchase our custom components through individual purchase orders. If one of our sole source suppliers were to fail to produce or provide the parts they agreed to build for us at the specifications, price or volume required, we would face a significant delay in the final production of our products because we do not have redundant capacity available, and our revenue and results of operations would be materially and adversely affected.
Compliance with current and future environmental regulations may be costly and disruptive to our operations.
We may be subject to environmental and other regulations due to our production and marketing of products in certain states and countries that limit or restrict the amount of hazardous material in certain electronic components such as PCBs. One such regulation is Directive 2002/95/EC of the European Parliament and of the Council of 27 January 2003 that restricts the use of certain hazardous substances in electrical and electronic equipment. “RoHS” is short for restriction of hazardous substances. The RoHS Directive banned the placing on the European Union market of new electrical and electronic equipment containing more than agreed levels of lead, cadmium, mercury, hexavalent chromium, polybrominated biphenyl (PBB) and polybrominated diphenyl ether (PBDE), except where exemptions apply, from July 1, 2006. Manufacturers are required to ensure that their products, including their constituent materials and components, do not contain more than the minimum levels of the nine restricted materials in order to be allowed to export goods into the Single Market (i.e. of the European Community’s 28 Member States). Any interruption in supply due to the unavailability of restriction free products could have a significant impact on the manufacturing and delivery of our products. If a supplier became unable to provide parts in the volumes needed or at an acceptable price, we would have to identify and qualify acceptable replacements from alternative sources of supply or manufacture such components internally. As previously discussed, the failure to qualify acceptable replacements quickly would delay the manufacturing and delivery of our products, which could cause us to lose revenues and customers.
Regulations related to conflict minerals may adversely affect us.
The U.S. Securities and Exchange Commission has adopted disclosure rules for companies that use conflict minerals in their products, with substantial supply chain verification requirements in the event that the materials come from, or could have come from, the Democratic Republic of the Congo or adjoining countries. These rules and verification requirements, which have applied to our activities since 2013 and will apply to our activities going forward, impose additional costs on us and on our suppliers, and may limit the sources or increase the prices of materials used in our products. Further, if we are unable to certify that our products are conflict free, we may face challenges with our customers, which could place us at a competitive disadvantage, and our reputation may be harmed.
We may not be able to deliver custom hardware options and related applications to satisfy specific customer needs in a timely manner.
The success of our business relies in substantial part on our ability to develop and deliver customized hardware and applications to meet our customers’ specific requirements. Our equipment may fail to meet our
customers’ technical or cost requirements and may be replaced by competitive equipment or an alternative technology solution. Our inability to provide a test system that meets requested performance criteria when required by a device manufacturer would severely damage our reputation with that customer. This loss of reputation together with the risks discussed above under, “The market for capital equipment is highly concentrated, and we have limited opportunities to sell our products” may make it substantially more difficult for us to sell systems to that manufacturer for a number of years. We have, in the past, experienced delays in introducing some of our products and enhancements.
Our dependence on international sales and non-U.S. suppliers involves significant risk.
International sales have constituted a significant portion of our revenues in recent years, and we expect that to continue. International sales accounted for 82% of our revenues for fiscal 2016, 79% of our revenues for fiscal 2015, and 78% of our revenues for fiscal 2014. In addition, we rely on non-U.S. suppliers for several components of the equipment we sell. As a result, a major part of our revenues and the ability to manufacture our products are subject to the risks associated with international commerce. These international relationships make us particularly sensitive to economic, political, regulatory and environmental changes in the countries from which we derive sales and obtain supplies. Our sole source final assembly manufacturing supplier for our test systems in Malaysia increases our exposure to these types of international risks. International sales and our relationships with suppliers may be hurt by many factors, including:
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changes in law or policy resulting in burdensome government controls, tariffs, restrictions, embargoes or export license requirements;
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political and economic instability in our target international markets;
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longer payment cycles common in foreign markets;
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difficulties of staffing and managing our international operations;
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less favorable foreign intellectual property laws making it harder to protect our technology from appropriation by competitors;
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difficulties collecting our accounts receivable;
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the impact of the Foreign Corrupt Practices Act of 1977 and similar laws; and
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adverse weather and climate events.
In the past, we have incurred expenses to meet new regulatory requirements in Europe, experienced periodic difficulties in obtaining timely payment from non-U.S. customers, and been affected by economic conditions in several Asian countries. Some of our foreign sales are invoiced and collected in U.S. dollars. A strengthening in the U.S. dollar relative to the currencies of those countries where we do business would increase the prices of our products as stated in those currencies and could hurt our sales in those countries. Significant fluctuations in the exchange rates between the U.S. dollar and foreign currencies could cause us to lower our prices and thus reduce our profitability. These fluctuations could also cause prospective customers to push out or delay orders because of the increased relative cost of our products. In the past, there have been significant fluctuations in the exchange rates between the U.S. dollar and the currencies of countries in which we do business. From time to time we may enter into foreign currency hedging arrangements.
Our market is highly competitive, and we have limited resources to compete.
The semiconductor equipment and electronics manufacturing industries are highly competitive in all areas of the world. There are other domestic and foreign companies that participate in the markets for each of our
products. Our competitors include Advantest Corporation and Teradyne Inc., Johnstech, MicroCraft, Cohu, Inc., SPEA, Shenzhen Mason Electronics Co., Ltd., Bojay, OXO, Sanmina, Interconnect Devices, Inc., QA Technology, and Ingun. Some of these competitors have substantially greater financial resources and more extensive engineering, manufacturing, marketing, and customer support capabilities than we have.
We expect our competitors to enhance their current products and to introduce new products that may have comparable or better price and performance. The introduction of competing products could hurt sales of our current and future products. In addition, new competitors, including semiconductor and electronics manufacturers themselves, may offer new technologies, which may in turn reduce the value of our products. Increased competition could lead to intensified price-based competition, which would hurt our business and results of operations. Unless we are able to invest significant financial resources in developing products and maintaining customer support centers worldwide, we may not be able to compete effectively.
We are exposed to the risks associated with the volatility of the U.S. and global economies.
Slow or negative growth in the domestic or global economies may continue to materially and adversely affect our business, financial condition and results of operations for the foreseeable future. The strength of the domestic and global economies impact business capital spending and the sale of electronic goods and information technology equipment, which impacts our sales, revenues, and profits. The lack of visibility regarding whether there will be sustained growth in domestic and global economies creates uncertainty regarding the amount of our sales, and underscores the need for caution in predicting growth in the semiconductor test equipment industry in general and in our revenues and profits specifically. Our results of operations would be further adversely affected if we were to experience lower than anticipated order levels, cancellations of orders in backlog, extended customer delivery requirements or pricing pressure as a result of a slowdown. At lower levels of revenue, there is a higher likelihood that these types of changes in our customers’ requirements would adversely affect our results of operations because in any particular quarter a limited number of transactions accounts for an even greater portion of sales for the quarter.
Development of our products requires significant lead-time and expenditures, and we may fail to correctly anticipate the technical needs of our customers.
Our systems are used by our customers to develop, test and manufacture their new semiconductor and electronics devices. We therefore must anticipate industry trends and develop products in advance of the commercialization of our customers’ semiconductor and electronics devices, requiring us to make significant capital investments to develop new equipment for our customers well before their devices are introduced. If our customers fail to introduce their devices in a timely manner or the market does not accept their devices, we may not recover our capital investment, in whole or in part. In addition, even if we are able to successfully develop enhancements or new generations of our products, these enhancements or new generations of products may not generate revenue in excess of the costs of development, and they may be quickly rendered obsolete by changing customer preferences or the introduction of products embodying new technologies or features by our competitors. Furthermore, if we were to make announcements of product delays, or if our competitors were to make announcements of new systems, these announcements could cause our customers to defer or forego purchases of our systems, which would also hurt our business.
We may not be able to recover capital expenditures.
We continue to make capital expenditures in the ordinary course of our business. We may not be able to recover the expenditures for capital projects within the assumed timeframe, or at all, which may have an adverse impact on our profitability.
We have significant guarantees, indemnification and customer confidentiality obligations.
From time to time, we make guarantees to customers regarding the delivery and performance of our products and guarantee certain indebtedness, performance obligations or lease commitments of our subsidiary
and affiliate companies. We also have agreed to provide indemnification to our officers, directors, employees and agents, to the extent permitted by law, arising from certain events or occurrences while the officer, director, employee or agent, is or was serving at our request in such capacity. Additionally, we have confidentiality obligations to certain customers. If we become liable under any of these obligations, it could materially and adversely affect our business, financial condition or operating results.
Our success depends on attracting and retaining key personnel.
Our success depends substantially upon the continued service of our executive officers and key personnel, none of whom is bound by an employment or non-competition agreement. Our success also depends on our ability to attract and retain highly qualified managers and technical, engineering, marketing, sales and support personnel. Competition for such specialized personnel is intense, and it may become more difficult for us to hire or retain them. Our volatile business cycles only aggravate this problem. If we implement layoffs during an industry downturn, our ability to hire or retain qualified personnel may be diminished. Our business, financial condition and results of operations could be materially adversely affected by the loss of any of our key employees, by the failure of any key employee to perform in his or her current position, or by our inability to attract additional skilled employees.
We may not be able to protect our intellectual property rights.
Our success depends in part on our ability to obtain intellectual property rights and licenses and to preserve other intellectual property rights covering our products and development and testing tools. To that end, we have obtained certain domestic and international patents and may continue to seek patents on our inventions when appropriate. We have also obtained certain trademark registrations. The process of seeking intellectual property protection can be time consuming and expensive. We cannot ensure that:
•
patents will issue from currently pending or future applications;
•
our existing patents or any new patents will be sufficient in scope or strength to provide meaningful protection or any commercial advantage to us;
•
foreign intellectual property laws will protect our intellectual property rights; or
•
others will not independently develop similar products, duplicate our products or design around our technology.
If we do not successfully enforce our intellectual property rights, our competitive position could suffer, which could harm our operating results. We also rely on trade secrets, proprietary know-how and confidentiality provisions in agreements with employees and consultants to protect our intellectual property. Other parties may not comply with the terms of their agreements with us, and we may not be able to adequately enforce our rights against these parties.
Third parties may claim we are infringing their intellectual property, and we could incur significant litigation costs and licensing expenses or be prevented from selling our products.
Intellectual property rights are uncertain and involve complex legal and factual questions. We may be unknowingly infringing on the intellectual property rights of others and may be liable for that infringement, which could result in a significant liability for us. If we do infringe the intellectual property rights of others, we could be forced to either seek a license to intellectual property rights of others or alter our products so that they no longer infringe the intellectual property rights of others. A license could be very expensive to obtain or may not be available at all. Similarly, changing our products or processes to avoid infringing the rights of others may be costly or impractical.
If we were to become involved in a dispute regarding intellectual property, whether ours or that of another company, we may have to participate in legal proceedings. These types of proceedings may be costly and time
consuming for us, even if we eventually prevail. If we do not prevail, we might be forced to pay significant damages, obtain licenses, modify our products or processes, stop making products or stop using processes.
In the future we may be subject to litigation that could have an adverse effect on our business.
From time to time, we may be subject to litigation or other administrative and governmental proceedings that could require significant management time and resources and cause us to incur expenses and, in the event of an adverse decision, pay damages in an amount that could have a material adverse effect on our financial position or results of operations.
Product defects and any damages stemming from product liability could harm our reputation among existing and potential customers and could have a material adverse effect upon our business results and financial condition
We cannot guarantee that there are no defects in the products we manufacture or that our product liability insurance will sufficiently cover the ultimate amount of any damages caused by such defects. Large scale accidents due to product defects or any discovery of defects in our products could harm our reputation, result in claims for damages, and have a material adverse effect upon our business results and financial condition.
Our operations and the operations of our customers and suppliers are subject to risks of natural catastrophic events, widespread health epidemics, acts of war, and the threat of domestic and international terrorist attacks, any one of which could result in cancellation of orders, delays in deliveries or other business activities, or loss of customers and could negatively affect our business and results of operations.
Our operations and those of our customers and suppliers are subject to disruption for a variety of reasons, including work stoppages, acts of war, terrorism, health epidemics, fires, earthquakes, hurricanes, volcanic eruptions, energy shortages, telecommunication failures, tsunamis, flooding or other natural disasters. Such disruption could materially increase our costs and expenses as well as cause delays in, among other things, shipments of products to our customers, our ability to perform services requested by our customers, or the installation and acceptance of our products at customer sites. Any of these conditions could have a material adverse effect on our business, financial conditions or results of operations.
Damage, interference or interruption to our information technology networks and systems could hinder business continuity and lead to substantial costs or harm to our reputation.
We rely on various information technology networks and systems, some of which are managed by third parties, to process, transmit and store electronic information, including confidential data, and to carry out and support a variety of business activities, including manufacturing, research and development, supply chain management, sales and accounting. Attacks by hackers or computer viruses, wrongful use of the information security system, careless use, accidents or disasters could undermine the defenses we have established for these systems and disrupt business continuity, which could not only risk leakage or tampering of information but could also result in a legal claim, litigation, damages liability or an obligation to pay fines. If this were to occur, our reputation could be harmed, we could incur substantial costs, and it may have a material adverse effect upon our financial condition and results of operation.
Our stock price is volatile.
In the twelve months ended July 31, 2016, our stock price ranged from a low of $4.93 to a high of $7.60. The price of our common stock has been and likely will continue to be subject to wide fluctuations in response to a number of events and factors, such as:
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quarterly variations in operating results;
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variances of our quarterly results of operations from securities analysts’ estimates;
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changes in financial estimates and recommendations by securities analysts;
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announcements of technological innovations, new products, acquisitions or strategic alliances; and
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news reports relating to trends in our markets.
In addition, the stock market in general, and the market prices for semiconductor-related and electronics manufacturing companies in particular, have experienced significant price and volume fluctuations that often have been unrelated to the operating performance of the companies affected by these fluctuations. These broad market fluctuations may adversely affect the market price of our common stock, regardless of our operating performance.
We may record impairment charges, which would adversely impact our results of operations.
We review our goodwill and indefinite-lived intangible assets for impairment at least annually, or whenever events or changes in circumstances indicate that the carrying amounts of these assets may not be recoverable, in accordance with FASB Topic 350, Intangibles-Goodwill and Other to the FASB ASC. We also review our other long lived assets for impairment whenever events or changes in circumstances indicate that the carrying amounts of these assets may not be recoverable.
One potential indicator of goodwill impairment is whether our fair value, as measured by our market capitalization, has remained below our net book value for a significant period of time. Whether our market capitalization triggers an impairment charge in any future period will depend on the underlying reasons for the decline in stock price, the significance of the decline, and the length of time the stock price has been trading at such prices.
In the event that we determine in a future period that impairment exists for any reason, we would record an impairment charge, which would reduce the underlying asset’s value in the period such determination is made, which would adversely impact our financial position and results of operations
Internal control deficiencies or weaknesses that are not yet identified could emerge.
Over time we may identify and correct deficiencies or weaknesses in our internal controls and, where and when appropriate, report on the identification and correction of these deficiencies or weaknesses. However, our internal control procedures can provide only reasonable, and not absolute, assurance that deficiencies or weaknesses are identified. Deficiencies or weaknesses that have not been identified by us could emerge and the identification and correction of these deficiencies or weaknesses could have a material impact on our results of operations. If our internal control over financial reporting are not considered adequate, we may experience a loss of public confidence, which could have an adverse effect on our business and stock price.
Fluctuation in foreign currency exchange rates may adversely affect our results of operations and financial position.
Our results of operations and financial position could be adversely affected as a result of adverse fluctuations in foreign currency exchange rates that reduce the purchasing power of the U.S. dollar, increase our costs and expenses and otherwise harm our business. Although our financial statements are denominated in U.S. dollars, a sizable portion of our revenues and costs are denominated in other currencies, primarily the Euro. Any hedging strategies that we may use in an effort to reduce the adverse impact of fluctuations in foreign currency exchange rates may not be successful. In addition, our foreign currency exposure on assets and liabilities for which we do not hedge could have a material impact on our results of operations in periods when the U.S. dollar significantly fluctuates in relation to unhedged non-U.S. currencies in which we transact business.
Item 1B.
Item 1B. Unresolved Staff Comments
None.
Item 2.
Item 2. Properties
The following table provides information about our principal facilities:
(1) During the year ending July 31, 2016, the Company executed an operating lease for a new site in Milpitas, California. The operations in the California Circle location will cease in February 2017 when that lease ends, and the operations will move to the new facility at McCarthy Blvd in that month.
Major activities have been separated into the following categories: 1. Corporate Administration/Principal Executive Offices and Global Headquarters, 2. Sales, Service and Customer Support, 3. Manufacturing, 4. Engineering and Product Development, and 5. Marketing, Finance and General Administration
We also own 9.4 acres of land in Hillsboro, Oregon as a result of our merger with Credence in 2008. As of July 31, 2016 this land is included in Assets Held for Sale on our Consolidated Balance Sheet, as we have executed two purchase and sale agreements for the properties. We expect the transactions to be completed during the fiscal year ending July 31, 2017.
We have achieved worldwide ISO 9001:2008 certification at the following facilities: Norwood, Massachusetts; Milpitas, California; Rosenheim, Germany; and Penang, Malaysia.
We believe that our existing facilities are adequate to meet our current and foreseeable future requirements.
Item 3.
Item 3. Legal Proceedings
We are subject to various legal proceedings, claims and litigation which arise in the ordinary course of operations. We believe we have meritorious defenses against all pending claims and intend to vigorously pursue them. While it is not possible to predict or determine the outcomes of any pending actions, we believe the amount of liability, if any, with respect to such actions, would not materially affect our financial position, results of operations or cash flows.
Item 4.
Item 4. Mine Safety Disclosures.
Not applicable.
PART II
Item 5.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock trades on the NASDAQ Global Market under the symbol XCRA. The following table shows the high and low sale prices per share of our common stock, as reported on the NASDAQ Global Market, for the periods indicated:
We have never declared or paid any dividends on our common stock. We currently intend to retain future earnings to fund the development and growth of our business and, therefore, we do not anticipate paying any cash dividends in the foreseeable future.
As of September 1, 2016, we had approximately 253 stockholders of record of our common stock.
Stock Repurchases
The following table provides information regarding repurchases of common stock made by us from the inception of our stock repurchase program on September 15, 2011 through July 31, 2016:
(1) On September 3, 2015, our Board of Directors authorized a stock repurchase program, pursuant to which we are authorized to repurchase up to $30 million of our common stock from time to time in open market transactions (the “2015 Repurchase Plan”). This repurchase program supersedes the 2011 repurchase program, and as a result there are no shares available for repurchase under the 2011 plan. As of the July 31, 2016, we have repurchased 1,956,733 shares for $12.0 million under the 2015 Repurchase Plan.
Securities Authorized for Issuance under Equity Compensation Plans
Under our equity compensation plans, we can issue stock options and restricted stock units (RSUs). The following table shows information relating to our equity compensation plans as of July 31, 2016.
* Includes 237,007 shares available for issuance under an employee stock purchase plan which is intended to qualify as such under Section 423 of the Internal Revenue Code (IRC).
Item 6.
Item 6. Selected Financial Data
The following table contains our selected consolidated financial data and is qualified by the more detailed consolidated financial statements and notes thereto included elsewhere in this report. The selected consolidated financial data for and as of the end of each of the five fiscal years in the period ended July 31, 2016 are derived from our audited consolidated financial statements.
(1) The selected consolidated financial data for the fiscal years ended July 31, 2016 and July 31, 2015 includes the results of our Multitest, ECT and atg-Luther & Maelzer businesses, which we acquired from Dover Printing & Identification, Inc. on December 1, 2013.
Item 7.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read together with the Consolidated Financial Statements and Notes thereto appearing elsewhere in this Annual Report on Form 10-K. Certain statements in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” are forward-looking statements that involve risks and uncertainties. Words such as may, will, should, could, would, anticipates, expects, intends, plans, predicts, projects, believes, seeks, estimates and similar expressions identify such forward-looking statements. The forward-looking statements contained herein are based on current expectations and entail various risks and uncertainties that could cause actual results to differ materially and adversely from those expressed in such forward-looking statements. Factors that might cause such a difference include, among other things, those set forth under “Risk Factors” and those appearing elsewhere in this Annual Report on Form 10-K. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof and reflect management’s estimates and analysis only as of the date hereof. We assume no obligations to update any forward-looking statements to reflect actual results or changes in factors or assumptions affecting forward-looking statements.
Overview
We are a global provider of test and handling capital equipment, interface products, test fixtures and related services to the semiconductor and electronics manufacturing industries. We design, manufacture and market products and services 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. We operate in the semiconductor and electronics manufacturing test markets through our atg-Luther & Maelzer, Everett Charles Technologies (ECT), LTX-Credence and Multitest businesses. We have a broad spectrum of semiconductor and printed circuit board (PCB) test expertise that drives innovative new products and services and our ability to deliver fully integrated semiconductor test solutions. For more information on our business and industry, please refer to Part 1, Item I of this Form 10-K, Business Introduction and Industry Overview.
On November 30, 2015, we completed the sale of our semiconductor test interface board business based in Santa Clara, CA (the Interface Board Business) to Fastprint Hong Kong Co., Ltd., a wholly owned subsidiary of Shenzhen Fastprint Circuit Tech Co., Ltd, and its affiliates (collectively, Fastprint), pursuant to an Asset Purchase Agreement, entered into between us and Fastprint on September 8, 2015 (the Purchase Agreement). The Interface Board Business produces printed circuit boards that are specifically designed to serve as an interface between the tester and the semiconductor device, or the semiconductor wafer, being tested.
We sold and transferred to Fastprint certain assets used in or primarily related to the Interface Board Business (the Assets), and assigned, and Fastprint assumed, certain specified liabilities associated with the Interface Board Business (the Assumed Liabilities), along with the transfer of the employees associated with that business, all pursuant to the terms of the Purchase Agreement. The purchase price for the Assets and the Assumed Liabilities was $23.0 million (the Purchase Price). Fastprint also agreed to pay for the accrued and unpaid vacation of certain U.S. employees transferring to Fastprint (the Accrued U.S. Compensation Amount). At the Closing, Fastprint paid Everett Charles, as designated by us, the aggregate cash sum of $21.4 million consisting of $20.7 million of the Purchase Price and the Accrued U.S. Compensation Amount, plus certain prepaid amounts. Pursuant to the Purchase Agreement, $2.3 million of the purchase price has been withheld by Fastprint and is payable on the first anniversary of the closing subject to claims for indemnification by Fastprint, if any, prior to that time.
Industry Conditions and Outlook
We provide test solutions to the large and growing electronics manufacturing industry, of which semiconductors and PCBs are key components. Sales of capital equipment products are driven by the expansion
of manufacturing and test capacity, or when customers replace existing equipment with new equipment. Sales of consumable products, which include service, are driven by the level of manufacturing and test activity, and need to be replaced based on usage levels or to accommodate new designs or test techniques. Therefore, overall demand for our capital equipment and consumable products and services is generally dependent on growth in the semiconductor and electronics industry.
Critical Accounting Policies and the Use of Estimates
The preparation of financial statements in conformity with United States generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets, liabilities, revenues, and expenses, and related disclosure of contingent assets and liabilities. We base these estimates and assumptions on historical experience and evaluate them on an on-going basis to ensure they remain reasonable under current conditions. Actual results could differ from those estimates. We believe that our most critical accounting policies upon which our financial reporting depends and which involve the most complex and subjective judgments or assessments are as follows: revenue recognition, inventory reserves, income taxes, product warranty costs, goodwill and other identifiable intangible assets, impairment of long-lived assets, and allowances for doubtful accounts.
A summary of those accounting policies and estimates that we believe to be most critical to fully understand and evaluate our financial results is set forth below. The summary should be read in conjunction with our Consolidated Financial Statements and Notes and related disclosures elsewhere in this Annual Report on Form 10-K.
Revenue Recognition
We recognize revenue when persuasive evidence of an arrangement exists, delivery or customer acceptance (if required) has occurred or services have been rendered, the price is fixed or determinable and collectability is reasonably assured. Our revenue recognition policy is described in Note 2, Summary of Significant Accounting Policies, contained in the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K and is incorporated herein by reference.
Inventory Reserves
We are exposed to a number of economic and industry factors that could result in portions of our inventory becoming either obsolete or in excess of anticipated customer demand. These factors include changes in our customers’ capital expenditures, technological changes in our markets, our ability to meet changing customer requirements, competitive pressures in products and prices, and the availability of key components from our suppliers. Our policy is to establish inventory reserves when conditions exist that suggest our inventory may be in excess of anticipated demand or is obsolete based upon our assumptions about future demand for our products or market conditions. We regularly evaluate the ability to realize the value of our inventory based on a combination of factors including the following: historical usage rates, forecasted sales or usage, estimated product end of life dates, estimated current and future market values and new product introductions. Purchasing and alternative usage options are also explored to mitigate inventory exposure. When recorded, our reserves are intended to reduce the carrying value of our inventory to its net realizable value. Such reserves are not reversed until the related inventory is sold or otherwise disposed. Our inventory reserves policy is described in Note 2, Summary of Significant Accounting Policies, contained in the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K and is incorporated herein by reference.
Foreign Currency Remeasurement
The financial statements of our foreign subsidiaries are remeasured in accordance with Topic 830, Foreign Currency Matters, to the Financial Accounting Standards Board Certification, or FASB ASC. The functional
currency of our tester group is the U.S. dollar. Accordingly, our 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 our Consolidated Statements of Operations and Comprehensive Income (Loss) as a component of other income (expense), net, and were $1.3 million, $2.1 million and $0.1 million, respectively, for the fiscal years ended July 31, 2016, 2015 and 2014. The functional currency of each of our acquired businesses is local currency, predominantly Euro, Malaysian Ringgit and Singapore dollars, and net gains or losses resulting from foreign currency remeasurement and translation gains or losses are recorded in stockholders’ equity as accumulated other comprehensive income (loss).
Income Taxes
In accordance with Topic 740, Income Taxes to the FASB ASC (Topic 740), we recognize deferred income taxes based on the expected future tax consequences of differences between the financial statement basis and the tax basis of assets and liabilities calculated using enacted tax rates for the year in which the differences are expected to be reflected in the tax return. Valuation allowances are established when necessary to reduce deferred taxes to the amount expected to be realized. We have deferred tax assets resulting from tax credit carryforwards, net operating losses and other deductible temporary differences, which are available to reduce taxable income in future periods. Topic 740 requires that a valuation allowance be established when it is “more likely than not” that all or a portion of deferred tax assets will not be realized. A review of all available positive and negative evidence needs to be considered, including a company’s performance, the market environment in which it operates, the length of carryback and carryforward periods, existing sales backlog and future sales projections. Where there have been cumulative losses in recent years, Topic 740 creates a strong presumption that a valuation allowance is needed. This presumption can be overcome in very limited circumstances. As a result of our cumulative loss position in recent years and the increased uncertainty relative to the timing of profitability in future periods, we continue to maintain a valuation allowance for our entire U.S. net deferred tax assets, and full valuation allowance against the net deferred tax assets of foreign jurisdictions without a history of profitability. The valuation allowance for deferred tax assets decreased from $209.7 million at July 31, 2015 to $206.9 million at July 31, 2016. The decrease in our valuation allowance compared to the prior year was primarily due to a decrease in U.S. deferred tax assets associated with sources of income in the current year which included the Company’s sale of its Interface Board Business to Fastprint (see Note 3 to our Consolidated Financial Statements). We expect to record a full valuation allowance on future U.S. tax benefits and in certain foreign tax jurisdictions until we sustain an appropriate level of profitability. We will continue to monitor the recoverability of our deferred tax assets on a periodic basis. As a result of our merger with Credence in 2008 and Internal Revenue Code Section 382 guidance, the future utilization of our net operating losses will be subject to annual limitation. See Note 7 to our Consolidated Financial Statements for more information on Income Taxes.
Business Combinations
We account for acquired businesses using the purchase method of accounting which requires that the assets acquired and liabilities assumed be recorded at the date of the acquisition at their respective estimated fair values. The judgments made in determining the estimated fair value assigned to each class of assets acquired, as well as the estimated life of each asset, can materially impact the net income of the periods subsequent to the acquisition through depreciation and amortization, and in certain instances through impairment charges, if the asset becomes impaired in the future. In determining the estimated fair value for intangible assets, we typically utilize the income approach, which discounts the projected future net cash flow using an appropriate discount rate that reflects the risks associated with such projected future cash flow.
Determining the useful life of an intangible asset also requires judgment, as different types of intangible assets will have different useful lives and certain assets may even be considered to have indefinite useful lives. Intangible assets determined to have an indefinite useful life are reassessed periodically based on the expected
use of the asset by us, legal or contractual provisions that may affect the useful life or renewal or extension of the asset’s contractual life without substantial cost, and the effects of demand, competition and other economic factors.
Valuation of Goodwill and other Indefinite-Lived Intangible Assets
We perform our annual goodwill impairment test as required under the provisions of Topic 350-10, Intangibles-Goodwill and Other, to the FASB ASC (Topic 350) as of July 31 of each fiscal year or more often if there are interim indicators of impairment. Goodwill is considered to be impaired when the net book value of a reporting unit exceeds its estimated fair value. Our goodwill represents the excess of acquisition costs over estimated fair value of net assets acquired from StepTech, Inc on June 10, 2003, from our merger with Credence Systems Corporation (Credence) on August 29, 2008, and from our purchase of Titan Semiconductor LLC (Titan) on February 2, 2015.
As of July 31, 2016, our goodwill is allocated to our Semiconductor Test reporting unit and our Contactors reporting unit.
Goodwill impairment testing is a two-step process. The first step of the goodwill impairment test, used to identify potential impairment, compares the fair value of each reporting unit to its respective carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered impaired. If the reporting unit’s carrying amount exceeds the fair value, the second step of the goodwill impairment test must be completed to measure the amount of the impairment loss, if any. The second step compares the implied fair value of goodwill with the carrying value of goodwill. The implied fair value is determined by allocating the fair value of the reporting unit to all of the assets and liabilities of that unit, the excess of the fair value over amounts assigned to its assets and liabilities is the implied fair value of goodwill. The implied fair value of goodwill determined in this step is compared to the carrying value of goodwill. If the implied fair value of goodwill is less than the carrying value of goodwill, an impairment loss is recognized equal to the difference.
In accordance with Topic 350, we performed our goodwill impairment test as of July 31, 2016 and 2015, and determined that no adjustment to goodwill was necessary. As of July 31, 2016, the fair value of the reporting units to which goodwill is allocated substantially exceeded the carrying values of those reporting units. The observable inputs used in our Discounted Cash Flow (DCF) method for estimating the fair value of the reporting units include discount rates at our weighted-average cost of capital. We derive discount rates that are commensurate with the risks and uncertainties inherent in its respective businesses and its internally developed projections of future cash flows. In addition, we determined the projected future cash flows of the reporting units for the residual period using the Gordon growth method which assumes that the reporting unit will grow and generate free cash flow at a constant rate. We believe that the Gordon growth method is the most appropriate method for determining the residual value because the residual value is calculated at the point at which we have assumed that the reporting units have reached stable growth rates
The identifiable intangible assets associated with the Dover Acquisition include $6.4 million of trademarks. We believe these trademarks will contribute to our cash flows indefinitely. Therefore, in accordance with ASC 350, we have 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 fiscal year ended July 31, 2016, we assessed qualitative factors to determine if a two-step quantitative impairment test was necessary. We 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.
Valuation of Identifiable Intangible Assets
Our identifiable intangible assets include developed technology, distributor and key customer relationships, and trademarks.
We primarily use the income approach to value the existing technology and other intangible assets as of the date of acquisition. This approach calculates fair value by estimating future cash flows attributable to each intangible asset and discounting them to present value at a risk-adjusted discount rate.
In estimating the useful life of the acquired intangible assets, we considered paragraph 11 of Topic 350, which lists the pertinent factors to be considered when estimating the useful life of an intangible asset. These factors include a review of the expected use by the combined company of the assets acquired, the expected useful life of another asset (or group of assets) related to the acquired assets, legal, regulatory or other contractual provisions that may limit the useful life of an acquired asset or may enable the extension of the useful life of an acquired asset without substantial cost, the effects of obsolescence, demand, competition and other economic factors, and the level of maintenance expenditures required to obtain the expected future cash flows from the asset. We have amortized these intangible assets over their estimated useful lives using a method that is based on estimated future cash flows as we believe this amortization methodology approximates the pattern in which the economic benefits of the intangible assets will be derived.
Impairment of Long-Lived Assets Other Than Goodwill
On an ongoing basis, our management reviews the carrying value and period of amortization or depreciation of long-lived assets. In accordance with Topic 360, Property, Plant and Equipment, to the FASB ASC, we review whether impairment losses exist on long-lived assets when indicators of impairment are present. During this review, we re-evaluate the significant assumptions used in determining the original cost and estimated useful life of long-lived assets. 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 extent of the impairment amount recognized is based upon the difference of the impaired asset’s estimated fair value and its carrying value. As of July 31, 2016, there were no indicators that required us to conduct a recoverability test of long-lived assets other than goodwill, as of that date.
Product Warranty Costs
We provide standard warranty coverage on our tester, handler and PCB test systems, providing labor and parts necessary to repair the systems during the warranty period. We account for the estimated warranty cost as a charge to cost of sales when the revenue is recognized. Our product warranty cost policy is described in Note 2, Summary of Significant Accounting Policies, contained in the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K and is incorporated herein by reference.
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 our trade receivables are derived from sales to large multinational semiconductor manufacturers throughout the world. The volatility of the industries that we serve can cause certain of our customers to experience shortages of cash, which can impact their ability to make required payments. In order to monitor potential credit losses, we perform ongoing credit evaluations of our customers’ financial condition. An allowance for doubtful accounts is maintained for potential credit losses based upon our 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 we are aware of a customer’s inability to meet its financial obligations, we provide an allowance, which is based on the age of the receivables, the circumstances surrounding the customer’s financial situation and our historical experience. If circumstances change, and the financial condition of our customers were adversely affected, resulting in their inability to meet their financial obligations to us, we may need to record additional allowances. Account balances are charged off against the allowance when it is determined the receivable will not be recovered.
Results of Operations
The following table sets forth for the periods indicated the principal items included in the Consolidated Statements of Operations and Comprehensive Income (Loss) (in thousands, except for percentage changes and per share data):
The following table sets forth for the periods indicated the principal items included in the Consolidated Statements of Operations and Comprehensive Income (Loss) expressed in each case as percentages of net sales:
Fiscal 2016 Compared to Fiscal 2015
The results of our Interface Board Business are being presented as discontinued operations in the consolidated statement of income for all periods presented. See Note 3-Discontinued Operations in the notes to the consolidated financial statements for additional information regarding these discontinued operations. Unless otherwise indicated, any reference to income statement items in this Management’s Discussion and Analysis of Financial Condition and Results of Operations refers to results from continuing operations.
Net sales. The decrease in net sales for fiscal 2016 compared to the fiscal year ended July 31, 2015 was due principally to weaker demand from customers in the semiconductor markets driven by weaker macro-economic conditions.
Our Semiconductor Test Solutions (STS) segment reported net sales of $252.0 million for fiscal 2016 as compared to $313.9 million for fiscal 2015. This segment includes our Semiconductor Test group, Handler group and Integrated Products group. The decrease of 20% was driven by lower Semiconductor Test and Handler segment sales for the twelve months ended July 31, 2016.
Our Electronic Manufacturing Solutions segment reported net sales of $72.2 million in fiscal 2016 as compared to $84.1 million in fiscal 2015. This segment is comprised of our PCB Test Group, our Probes/Pins Group and our Fixtures Services Group. The decrease in net sales of 14% from fiscal 2015 to fiscal 2016 is largely driven by decreases in our PCB Test segment and Fixtures segment.
Service revenue from the Semiconductor Test segment decreased by 16% in fiscal 2016 as compared to fiscal 2015 primarily due to increased reliability of our test equipment which reduces the demand for post-warranty service contracts and due to lower value service contracts based on the lower average selling price of the underlying testers.
Gross profit. The decrease in gross profit for fiscal 2016 as compared to fiscal 2015 was due primarily to a decrease in net sales for the comparative periods. The decrease in net sales resulted in less absorption of fixed costs of sales.
Gross profit percentage decreased from 45.2% for the twelve months ended July 31, 2015 to 43.2% for the twelve months ended July 31, 2016, largely driven by product mix.
For fiscal 2016, we recorded $3.8 million in sales of previously reserved inventory, as compared to $1.7 million in the prior fiscal year. We released reserves of $0.8 million and $0.6 million related to these sales for fiscal years 2016 and 2015, respectively.
Engineering and product development expenses. The decrease in engineering and product development expenses for fiscal 2016 as compared to fiscal 2015 was primarily related to lower project spending in the comparative period.
Selling, general and administrative expenses. The decrease in selling, general and administrative expenses for fiscal 2016 as compared to fiscal 2015 was primarily due to lower commission compensation and profit sharing expenses on lower sales for the comparative periods.
Amortization of purchased intangible assets. The decrease in amortization for fiscal 2016 as compared to fiscal 2015 follows accelerated amortization using the cash flows of certain intangible assets. Amortization expense is primarily related to the intangible assets from our acquisition of ECT, Multitest and atg in 2014.
Restructuring. The restructuring expense recorded in fiscal 2016 included relocation costs and severance related to our announcement in March 2015 of our decision to reorganize portions of our Fixtures Services Group, severance costs associated with the movement of our Customer Repair Center from Milpitas to Asia which was announced in July 2016, as well as costs associated with the sale of our Interface Board Business in November 2015.
Income (loss) from continuing operations. We reported income from continuing operations of $0.1 million for fiscal 2016, as compared to $29.6 million for fiscal 2015, This decrease was primarily driven by lower net sales in the comparative periods.
Our Semiconductor Test Solutions segment reported loss from continuing operations of $0.2 million, as compared to income from continuing operations of $26.3 million for fiscal 2015. This decrease was largely driven by the Semiconductor Test segment and the Semiconductor Handlers segment, both of which experienced weaker industry conditions
Our Electronic Manufacturing Solutions segment reported income from continuing operations of $1.3 million in fiscal 2016 as compared to income from continuing operations of $5.5 million in fiscal 2015. Slowdown in our PCB Test segment and sustained losses in our Fixtures segment drove these results.
Interest expense. The decrease in interest expense fiscal 2016 compared to fiscal 2015 was driven by a reduction in our outstanding indebtedness from $27.4 million at July 31, 2015 to $25.0 million at July 31, 2016.
Interest income. Interest income increased slightly in fiscal 2016 compared fiscal 2015 due to limited changes in the core composition of marketable securities invested within our portfolio.
Other (expense) income, net. Other (expense) income, net for the year ended July 31, 2016 was $1.2 million as compared to income of $5.1 million for the year ended July 31, 2015. The decrease in other income was primarily related to a $1.8 million gain pursuant to a reduction in principal to which we were entitled under the original seller promissory notes due to prepayment of the promissory notes before January 1, 2015, and
a $1.5 million gain due to reversal of an indemnification accrual due to the passing of the statute of limitations that did not recur in fiscal 2016. Net foreign exchange gains were $1.3 million for fiscal 2016 as compared to $2.1 million in fiscal 2015, associated with the fluctuation of the Euro compared to the U.S. Dollar in both periods.
Provision for (benefit from) income taxes. We recorded an income tax benefit of $1.7 million for fiscal 2016 primarily due to foreign taxes in profitable locations and includes a tax benefit associated with the intraperiod tax allocation. We recorded an income tax provision of $2.6 million for fiscal 2015 primarily due to operating results of profitable foreign entities in jurisdictions primarily in Asia and Europe.
As a result of the Company’s sale of the Interface Board Business to Fastprint, the Company is reporting all financial activity for that business (including revenues, direct expenses, gain on sale of discontinued operations, and the tax impact of the gain on the sale and the related tax impact of discontinued operations) as discontinued operations. For details on the tax impact on discontinued operations, see Note 3 to Consolidated Financial Statements included in this Annual Report on Form 10-K. The income tax provision reported in this section relates to the tax position of the Company’s continuing operations.
Generally, the amount of tax expense or benefit allocated to continuing operations is determined without regard to the tax effects of other categories of income or loss, such as income from discontinued operations. However, an exception is provided when there is a pre-tax loss from continuing operations and pre-tax income from other categories in the current year. The intraperiod tax allocation rules in Topic 740, Income Taxes to the FASB ASC (Topic 740), related to items charged directly to discontinued operations can result in disproportionate tax effects that remain in discontinued operations for interim reporting periods.
During fiscal 2016, because the Company incurred a U.S. loss in continuing operations for 2016 and generated a U.S. gain on sale on discontinuing operations for the three months ended January 31, 2016, the intraperiod tax allocation exception contained in Topic 740 is applied. Specifically, the Company recorded a tax expense of approximately $3.3 million in its discontinued operations, related primarily to the gain on sale of its discontinued operations, during fiscal 2016; however, since the Company incurred losses on its continuing operations in the U.S. in fiscal 2016, it fully off-set the tax expense from discontinued operations with tax benefits in continuing operations in fiscal 2016. Accordingly, during fiscal 2016, the Company recorded a tax benefit in continuing operations of approximately $3.3 million which was fully offset by $3.3 million of tax provision related to the sale of the discontinued operations during fiscal 2016.
As of both July 31, 2016 and July 31, 2015, our liability for unrecognized income tax benefits was $6.3 million (of which $2.7 million, if recognized, would impact our income tax rate).
We expect to record a full valuation allowance on future U.S. deferred tax benefits and in certain foreign jurisdictions until we sustain an appropriate level of profitability. We will continue to monitor the recovery of our deferred tax assets on a periodic basis.
Discontinued Operations. We completed the sale of our Interface Board Business on November 30, 2015. This business generated a loss from operations of $1.5 million for the year ended July 31, 2016, as compared to a loss from operations of $3.3 million for the year ended July 31, 2015.
During fiscal 2016, we recognized a gain from the sale of the Interface Board Business of $8.7 million, net of tax. This gain includes a receivable of $2.3 million that was a holdback provision of the sale agreement, and is payable to us by the buyer on the twelve month anniversary of the sale, or November 30, 2016. This amount is included in Prepaid Expenses and Other Current Assets on our Consolidated Balance Sheet as of July 31, 2016.
Comprehensive income (loss). During fiscal 2016 and fiscal 2015, we recognized ($2.2) million and ($13.2) million, respectively, of unrealized gains (losses) from currency translation, largely driven by the weakening of the Euro to the U.S. dollar in the year ended July 31, 2015, which rebounded in fiscal 2016.
Fiscal 2015 Compared to Fiscal 2014
The results of our Interface Board Business are being presented as discontinued operations in the consolidated statement of income for all periods presented. See Note 3-Discontinued Operations in the notes to the consolidated financial statements for additional information regarding these discontinued operations. Unless otherwise indicated, any reference to income statement items in this Management’s Discussion and Analysis of Financial Condition and Results of Operations refers to results from continuing operations.
Net sales. The increase in net sales for fiscal 2015 compared to the fiscal year ended July 31, 2014 (fiscal 2014) was due principally to the completion of the Dover Acquisition in December 2013. During fiscal 2015, $178.5 million of net sales were generated by the LTX-Credence business and $219.5 million of net sales resulted from the operations of the acquired atg-Luther & Maelzer, Multitest and ECT businesses, for total net sales of $398.0 million. Excluding net sales from the acquired businesses, our net sales of $178.5 million increased 15% as compared to net sales of $154.6 million for fiscal 2014, driven by slightly increased net sales in all product lines due to higher customer demand for our test equipment, resulting from higher demand in our customers’ end markets.
Service revenue from the LTX-Credence business decreased by 14% in fiscal 2015 as compared to fiscal 2014 primarily due to increased reliability of our test equipment which reduces the demand for post-warranty service contracts and due to lower value service contracts based on the lower average selling price of the underlying testers.
Our Semiconductor Test Solutions segment reported net sales of $313.9 million for fiscal 2015 as compared to $246.9 million for fiscal 2014. The primary growth driver for this segment was our Tester Group, which had an increase of 15%, or $23.7 million, during fiscal 2015 due largely from higher sales of PAx and Diamond products. The Handler Group and Interface Products Group also had increases of 44% and 59%, respectively; however this growth was largely due to the fact that fiscal 2014 included only 8 months of net sales, as compared to a full year for fiscal 2015.
Our Electronic Manufacturing Solutions segment reported net sales of $84.1 million in fiscal 2015 as compared to $58.2 million for fiscal 2014. This segment is comprised of our PCB Test Group, our Probes/Pins Group and our Fixtures Services Group. The increase in net sales of 45% from fiscal 2014 to fiscal 2015 is largely driven by the fact that fiscal 2014 included only 8 months of net sales, as compared to year for fiscal 2015.
Gross profit. The increase in gross profit for fiscal 2015 as compared to fiscal 2014 was due principally to the completion of the Dover Acquisition in December 2013. During fiscal 2015, gross profit for the former LTX-Credence business was $98.0 million and $82.0 million resulted from the operations of the newly acquired business, for a total gross profit of $180 million. For fiscal 2014, gross profit for the former LTX-Credence business was $84.2 million and $55.7 million resulted from the operations of the acquired ECT, atg-Luther & Maelzer and Multitest businesses for a total gross profit of $139.9 million. Excluding the gross profit of the acquired businesses, our gross profit of $98.0 million for fiscal 2015 increased 16.4% over gross profit of $84.2 million for fiscal 2014. This increase was driven by higher net sales from the former LTX-Credence business of $178.5 million for fiscal 2015 as compared to $154.6 million for fiscal 2014, as well as more profitable configuration mix on the testers sold during 2015 that influenced product margin.
Gross profit percentage decreased slightly from 45.8% for the twelve months ended July 31, 2014 to 45.2% for the twelve months ended July 31, 2015, largely driven by product mix.
For fiscal 2015, we recorded $1.7 million in sales of previously reserved inventory, as compared to $0.8 million in the prior fiscal year. We released reserves of $0.6 million and $0.5 million related to these sales for fiscal years 2015 and 2014, respectively.
Engineering and product development expenses. The increase in engineering and product development expenses for fiscal 2015 compared to fiscal 2014 was due primarily to a full year of product development expenses incurred by the ECT, atg-Luther & Maelzer and Multitest businesses. Excluding expenses associated with these acquired businesses, engineering and product development expenses for LTX-Credence was $47.5 million for fiscal 2015, as compared to $50.6 million for fiscal 2014. This decrease was due to lower personnel related expenses in the comparable periods resulting from headcount reductions completed at the end of January 2014.
Selling, general and administrative expenses. The increase in selling, general, and administrative expenses for fiscal 2015 compared to fiscal 2014 was due primarily to the completion of the Dover Acquisition in December 2013. During fiscal 2015, the LTX-Credence business had selling, general and administrative expenses of $42.3 million and $39.8 million was driven by the ECT, atg-Luther & Maelzer and Multitest businesses. During fiscal 2014, the LTX-Credence business had selling, general and administrative expenses of $44.4 million and the ECT, atg-Luther & Maelzer and Multitest businesses had selling, general and administrative expenses of $32.6 million for 8 months. The decrease in selling general and administrative expenses in fiscal 2015 compared to fiscal 2014 for the LTX-Credence business was due to costs incurred in 2014 associated with integration activities related to the Dover Acquisition.
Amortization of purchased intangible assets. The decrease in amortization for the periods shown is a result of the decreasing amortization from the intangibles from the Credence merger as some of the underlying intangibles have become fully amortized. This decrease is slightly offset by the addition of intangible assets from the Dover Acquisition, which are being amortized over their expected useful lives.
Restructuring. During fiscal 2015, we incurred $2.2 million of restructuring expense, primarily related to headcount reductions, post-employment obligations and facility costs associated with a plan to reorganize our Fixtures Services Group that was announced in March 2015. Also included in restructuring is the impact of changing our sublease assumptions for our Milpitas, CA facility. The restructuring expense recorded in fiscal 2014 included $3.5 million of estimated severance and post-employment obligations related to headcount reductions during the period that were part of the plan announced on January 31, 2014. The remainder of the expense recognized in fiscal 2014, or $0.4 million, was associated with costs to vacate our Beaverton, Oregon facility. These expenses were partially offset by sublease income assumptions, as well as costs associated with updating sublease assumptions for our Milpitas, California facility.
Income (loss) from continuing operations. We reported income from continuing operations of $29.6 million for fiscal 2015, as compared to a loss from continuing operations for fiscal 2014 of $3.8 million. This increase year over year was primarily driven by stronger gross profit partially offset by higher operating expenses. Fiscal 2015 results included a full year of net sales, costs of sales and operating expenses, as compared to fiscal 2014 which only included 8 months of net sales, cost of sales and operating expenses, from the acquired companies.
Our Semiconductor Test Segment reported income from continuing operations of $26.3 million for fiscal 2015, as compared to loss from continuing operations of $4.4 million for fiscal 2014. This increase year over year is largely driven by the Contactor business, which had significant growth in fiscal 2015, buoyed by the acquisition of Titan Semiconductor in February 2015. Also contributing to the growth in income was our Tester Group, which generated income from continuing operations of $5.2 million in fiscal 2015 as compared to a loss from continuing operations of $14.6 million in fiscal 2014. This growth was primarily driven by higher net sales in fiscal 2015.
Our Electronic Manufacturing Solutions segment reported income from continuing operations of $5.5 million in fiscal 2015, as compared to income from continuing operations of $4.5 million in fiscal 2014. This increase was driven by our PCB Test Group, which generated $4.2 million higher income from continuing operations in fiscal 2015 as compared to fiscal 2014 due to a 49% increase in revenues in fiscal 2015 as compared to fiscal 2014.
Interest expense. The decrease in interest expense for fiscal 2015 compared to fiscal 2014 was driven by the reversal of $0.9 million of interest accrued since December 1, 2013 on seller promissory notes associated with the Dover Acquisition. Since the seller promissory notes were repaid prior to the one year anniversary of the Dover Acquisition, we had no obligation to pay interest on the notes. Also driving the reduction in interest expense year over year was a repayment of $24.1 principal of our Term Loan with Silicon Valley Bank, and a refinancing of that loan in December 2014.
Interest income. Interest income remained flat in fiscal 2015 as compared to fiscal 2014 due to limited changes in the core composition of marketable securities held within our portfolio.
Other (expense) income, net. Other (expense) income, net for the year ended July 31, 2015 was $5.1 million of other income and $0.2 million of other expense for the year ended July 31, 2014. The increase in other income was primarily related to a $1.8 million gain pursuant to a reduction in principal to which we were entitled under the original seller promissory notes due to prepayment of the promissory notes before January 1, 2015, a $1.5 million gain due to reversal of an indemnification accrual due to the passing of the statute of limitations, as well as net foreign exchange gains of $2.1 million associated with the weakening of the Euro compared to the U.S. Dollar during the year ended July 31, 2015.
Provision for (benefit from) income taxes. We recorded an income tax provision of $2.6 million for fiscal 2015 primarily due to foreign tax expense in profitable locations.
We recorded an income tax provision of $0.8 million for fiscal 2014 primarily due to $1.3 million of foreign tax expense in profitable locations, partially offset by $0.5 million of tax benefit relating to the Dover Acquisition. Purchase accounting for the Dover Acquisition required the establishment of a deferred tax liability related to the book-tax basis differences of identifiable intangible assets. The deferred tax liability created an additional source of U.S. future taxable income which resulted in a release of $0.5 million of our U.S. valuation allowance recorded in our Statement of Operations.
As of July 31, 2015 and July 31, 2014, our liability for unrecognized income tax benefits was $6.3 million and $6.6 million, respectively. As of July 31, 2015 and July 31, 2014, unrecognized tax benefits of $2.7 million and $3.0 million, respectively, if recognized, would impact the effective income tax rate.
We expect to record a full valuation allowance on future U.S. deferred tax benefits and in certain foreign jurisdictions until we sustain an appropriate level of profitability. We will continue to monitor the recovery of our deferred tax assets on a periodic basis.
Discontinued Operations. Our Interface Board Business generated a loss of $3.3 million for fiscal 2015 as compared to a $1.3 million loss for fiscal 2014. Despite an increase in revenue of $9.0 million, or 36%, costs for the same periods increased $11.0 million or 41%. These costs are largely fixed manufacturing costs that could not be avoided despite the decrease in revenue.
Comprehensive income (loss). During fiscal 2015 and fiscal 2014, we recognized $13.2 million and $0.3 million, respectively, of unrealized losses from currency translation, largely driven by the weakening of the Euro to the U.S. dollar in the year ended July 31, 2015. The impact of foreign currency translation adjustment in the comparative periods was minimal.
Liquidity and Capital Resources
The following is a summary of significant items impacting our liquidity and capital resources for fiscal 2016 and fiscal 2015:
Fiscal 2016 Compared to Fiscal 2015
As of July 31, 2016, we had $139.4 million in cash and cash equivalents and marketable securities and working capital of $230.7 million, as compared to $138.5 million of cash and cash equivalents and marketable securities and $225.3 million net working capital at July 31, 2015. The increase in cash and cash equivalents and marketable securities during the twelve months ended July 31, 2016 was due to proceeds from the sale of the Interface Board Business of $21.4 million, offset by cash used for principal and interest payments for bank loans of $2.5 million, $12.0 million of repurchases of common stock, purchases of property and equipment of $2.9 million, and cash used for operations.
Accounts receivable from trade customers, net of allowances, was $76.5 million at July 31, 2016, as compared to $81.3 million at July 31, 2015. This decrease was driven by lower revenue in the three months ended July 31, 2016 as compared to the three months ended July 31, 2015.
Purchases of property and equipment totaled $2.9 million for fiscal 2016, as compared to $4.4 million for fiscal 2015. Expenditures for fiscal 2016 related primarily to certain engineering projects. Additions in fiscal 2015 related to costs associated with the relocation of two newly acquired facilities.
Net cash used in operating activities for fiscal 2016 was $0.2 million as compared to net cash provided by operating activities of $42.3 million for fiscal 2015. The net cash used in operating activities for fiscal 2016 was primarily related to our net income of $11.2 million, adjusted for non-cash items, principally depreciation and amortization, gain on the sale of business and stock-based compensation, of $4.9 million, and an increase in net working capital of $16.3 million. The net cash provided by operating activities for fiscal 2015 was primarily related to our net income of $28.2 million, adjusted for non-cash items, principally depreciation and amortization, and stock-based compensation, of $15.8 million, offset in part by an increase in net working capital of $1.7 million.
Net cash provided by investing activities for fiscal 2016 was $22.1 million as compared to net cash used in investing activities of $28.6 million for fiscal 2015. The net cash provided by investing activities for fiscal 2016 was primarily related to $21.4 million of proceeds from the sale of our Interface Board Business and $61.2 million of proceeds from sales and maturities of available-for-sale securities, offset by $57.6 million in purchases of available-for-sale securities and $3.9 million in purchases of property and equipment, offset by
proceeds from the sale of fixed assets of $1.0 million. The net cash used in investing activities for fiscal 2015 was primarily related to $76.6 million in purchases of available-for-sale securities, $4.4 million in purchases of property and equipment, and $2.4 million in cash paid for Titan Semiconductor Tool LLC (Titan), offset in part by $54.8 million of proceeds from sales and maturities of available-for-sale securities.
Net cash used in financing activities for fiscal 2016 was $15.0 million as compared to net cash provided by financing activities of $10.5 million for fiscal 2015. The net cash used in financing activities for fiscal 2016 was primarily related to $12.0 million of repurchases of our common stock, $2.5 million of payments of principal and interest on our term loans, payments of tax withholdings for vested RSU’s of $1.4 million, offset by proceeds from employee stock purchase plan of $0.9 million. The net cash provided by financing activities for fiscal 2015 was primarily related to net proceeds from our underwritten public offering that closed in September 2014 of $52.1 million and proceeds from the employee stock purchase plan of $0.9 million, offset by principal payments of bank term loan of $24.4 million, repayment of subordinated debt of $16.3 million, and by payments of tax withholdings for vested RSUs of $1.9 million.
We believe our cash, cash equivalents and marketable securities balance of $139.4 million as of July 31, 2016 will be sufficient to meet our working capital and expenditures needs for at least the next twelve months. In addition, the amount of cash, cash equivalents and marketable securities in the U.S. and our results of operations in the U.S. provide sufficient liquidity to fund our business activities in the U.S. Inflation has not had a significant long-term impact on our revenue or earnings.
Fiscal 2015 Compared to Fiscal 2014
As of July 31, 2015, we had $138.5 million in cash and cash equivalents and marketable securities and working capital of $225.3 million, as compared to $98.9 million of cash and cash equivalents and marketable securities and $192.1 million net working capital at July 31, 2014. The increase in cash and cash equivalents and marketable securities was primarily due to proceeds from our underwritten public offering in September 2014, less $24.5 million paid on our bank loans, and $16.3 million used to repay the promissory notes issued to Dover in connection with the Dover Acquisition.
Accounts receivable from trade customers, net of allowances, was $81.3 million at July 31, 2015, as compared to $88.1 million at July 31, 2014. This decrease was driven by lower revenue in the three months ended July 31, 2015 as compared to the three months ended July 31, 2014.
Purchases of property and equipment totaled $4.4 million for fiscal 2015, as compared to $7.7 million for fiscal 2014. Expenditures for fiscal 2015 and fiscal 2014 related to costs associated with the relocation of two newly acquired facilities which included the purchase of our Rosenheim, Germany facility in 2014 for approximately $5.0 million.
Net cash provided by operating activities for fiscal 2015 was $42.3 million as compared to net cash provided by operating activities of $1.0 million for fiscal 2014. The net cash provided by operating activities for fiscal 2015 was primarily related to our net income of $28.2 million, adjusted for non-cash items, principally depreciation and amortization, and stock-based compensation, of $15.8 million, offset in part by an increase in net working capital of $1.7 million. The net cash provided by operating activities for fiscal 2014 was primarily related to our net income of $0.8 million, adjusted for non-cash items, principally depreciation and amortization, bargain purchase gain and stock-based compensation, of $6.1 million, offset in part by an increase in net working capital of $5.9 million.
Net cash used in investing activities for fiscal 2015 was $28.6 million as compared to net cash used in investing activities of $22.1 million for fiscal 2014. The net cash used in investing activities for fiscal 2015 was primarily related to $76.6 million in purchases of available-for-sale securities, $4.4 million in purchases of property and equipment, and $2.4 million in cash paid for the Titan businesses, offset in part by $54.8 million of
proceeds from sales and maturities of available-for-sale securities. The net cash used in investing activities for fiscal 2014 was primarily related to $55.4 million in purchases of available-for-sale securities, $70.0 million paid for the ECT, atg-Luther & Maelzer and Multitest businesses, and $7.7 million in purchases of property and equipment, offset by $111.0 million of proceeds from sales and maturities of available-for-sale securities.
Net cash provided by financing activities for fiscal 2015 was $10.5 million as compared to net cash provided by financing activities of $52.1 million for fiscal 2014. The net cash provided by financing activities for fiscal 2015 was primarily related to net proceeds from our underwritten public offering that closed in September 2014 of $52.1 million and proceeds from the employee stock purchase plan of $0.9 million, offset by principal payments of bank term loan of $24.4 million, repayment of subordinated debt of $16.3 million, and by payments of tax withholdings for vested RSUs of $1.9 million. The net cash provided by financing activities for fiscal 2014 was primarily related to proceeds from bank term loans of $53.8 million and proceeds from the employee stock purchase plan of $0.8 million offset in part by principal payments of bank term loan of $1.9 million and by payments of tax withholdings for vested RSUs of $0.8 million.
We believe our cash, cash equivalents and marketable securities balance of $138.5 million as of July 31, 2015 will be sufficient to meet our working capital and expenditures needs for at least the next twelve months. In addition, the amount of cash, cash equivalents and marketable securities in the U.S. and our results of operations in the U.S. provide sufficient liquidity to fund our business activities in the U.S. Inflation has not had a significant long-term impact on our revenue or earnings.
Credit Agreement and Seller Financing
On December 15, 2014, we and ECT (the Borrowers) entered into an amended Credit Agreement (the Credit Agreement) with Silicon Valley Bank (SVB), and the several lenders from time to time party thereto (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 us on December 15, 2014 (the Facility).
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 the 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 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.
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 the Leverage Ratio, or at a 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 July 31, 2016, the interest rate in effect on the Facility was 2.75%.
The proceeds of the Term Loan were used to pay off $25.0 million of the outstanding indebtedness under our previous credit facility that was advanced to us 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 Facility). The balance of outstanding indebtedness of approximately
$2.5 million was funded through our cash flow from operations. As of December 15, 2014, the previous facility had been terminated.
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.
Our 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.
As of July 31, 2016, we were in compliance with all covenants under the Credit Agreement.
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 we could repurchase up to $30 million of our capital stock provided that we comply with certain financial covenants.
We expect that the outstanding debt obligations under the Credit Agreement to have a material impact on our liquidity and capital resources in the near future.
Seller Financing
In connection with the closing of the Dover Acquisition, we issued promissory notes having an aggregate principal amount of $20.0 million to Dover. On November 26, 2014, we repaid in full all outstanding amounts under the promissory notes. The $16.3 million payoff amount reflected the principal amount of $18.0 million that was outstanding under the original promissory notes, less a $1.8 million reduction triggered by the prepayment in full of the notes prior to January 1, 2015, and was recorded as a gain on repayment of subordinated debt as a component of other income in the fiscal year ended July 31, 2015 in our Consolidated Statements of Operations and Comprehensive Income (Loss).
Bank Term Loan-Commerzbank
In May 2014, we entered into a loan agreement with Commerzbank to finance the purchase of our leased facility in Rosenheim, Germany. The principal amount of the term loan is 2.9 million Euros, payable over 10 years in Euro at an annual interest rate of 2.35%. Principal plus accrued interest is due quarterly over the duration of the term loan.
Follow-On Public Offering
On September 17, 2014, we closed an underwritten public offering of 4,682,927 shares of our common stock at $10.25 per share. We granted to the underwriters a 30-day option to purchase up to an aggregate of 702,439 additional shares of common stock to cover over-allotments which they exercised on September 22, 2014. All of the shares were sold pursuant to an effective shelf registration statement previously filed with the U.S. Securities and Exchange Commission (the SEC).
The offering resulted in net proceeds to us, after deducting underwriting discounts and commissions and offering expenses, of approximately $52.1 million. We used approximately $20 million of the net proceeds from the offering to repay a portion of the outstanding principal of the Original and approximately $16 million to repay the outstanding principal balance of the promissory notes issued to Dover Corporation. The balance of the proceeds was used for general corporate purposes, including capital expenditures and potential strategic acquisitions.
Stock Repurchases
On September 3, 2015, we announced that our Board of Directors authorized a stock repurchase program, pursuant to which we are authorized to repurchase up to $30 million of our common stock from time to time in open market transactions (2015 Plan). This repurchase program supersedes the repurchase program approved by our Board of Directors in September 2011, and as a result there were no shares available for repurchase under the 2011 Plan following approval of this plan. We may suspend or discontinue the 2015 Plan at any time and the 2015 Plan has no expiration date. As of September 1, 2016, we have repurchased 1,956,733 shares for approximately $12.0 million.
Commitments and Contingencies
As of July 31, 2016, our major outstanding contractual obligations are related to our Term Loan, operating leases for our rental properties and other equipment, inventory purchase commitments and severance obligations.
In the ordinary course of business, we agree from time to time to indemnify some of our customers against certain third party claims for property damage, bodily injury, personal injury or intellectual property infringement arising from the operation or use of our products. Also, from time to time in agreements with suppliers, licensors and other business partners, we agree to indemnify these partners against certain liabilities arising out of the sale or use of our products. The maximum potential amount of future payments we could be required to make under these indemnification obligations is theoretically unlimited; however, we have general and umbrella insurance policies that enable us to recover a portion of any amounts paid and many of these agreements contain a limit on the maximum amount, as well as limits on the types of damages recoverable. Based on our experience with such indemnification claims, we believe the estimated fair value of these obligations is minimal. Accordingly, we had no liabilities recorded for these agreements as of July 31, 2016 or July 31, 2015.
In July 2016 we settled a litigation matter incidental to our business that related to customer expectations of test system performance for a product that was shipped in 2006 by Credence, prior to the merger with LTX. As a result of this settlement agreement, we incurred $1.4 million related to our estimated obligation under this settlement offer. This accrual was included in Accrued Expenses on our Consolidated Balance Sheet as of July 31, 2016, and the charge was recorded as Other Expense in the twelve months ended July 31, 2016.
Subject to certain limitations, we indemnify our current and former officers and directors for liability or costs they may incur upon certain events or occurrences encountered in the course of performing their duties. Although the maximum potential amount of future payments we could be required to make under these agreements is theoretically unlimited, as there were no known or pending claims, we had not accrued a liability for these agreements as of July 31, 2016 or July 31, 2015.
The aggregate outstanding amount of our contractual obligations was $91.8 million as of July 31, 2016. These obligations and commitments represent maximum payments based on current operating forecasts. Certain of the commitments could be reduced if changes to our operating forecasts occur in the future.
The following summarizes our contractual obligations as of July 31, 2016, and the effect such obligations are expected to have on our liquidity and cash flows in the future periods:
We also expect to invest approximately $7.0 million in capital expenditures in fiscal 2017.
Off-Balance Sheet Arrangements
As of July 31, 2016 and July 31, 2015, we did not have any off-balance sheet arrangements.
Recent Accounting Pronouncements
See Note 2 to the consolidated financial statements included in this Annual Report on Form 10-K regarding the impact of certain recently issued accounting pronouncements on our consolidated financial statements.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Financial instruments that potentially subject us to concentrations of credit-risk consist principally of investments in cash equivalents, marketable securities and trade receivables. We place our marketable securities with high-quality financial institutions, limit the amount of credit exposure to any one institution and have established investment guidelines relative to diversification and maturities designed to maintain capital preservation and liquidity.
Our primary exposure to market risks is fluctuations in foreign currency exchange rates and interest rates.
Foreign Currency Exchange Risk
Operating in international markets involves exposure to movements in currency exchange rates. Currency exchange rate movements typically also reflect economic growth, inflation, interest rates, government actions and other factors. We transact business in various foreign currencies and, accordingly, we are subject to exposure from adverse movements in currency exchange rates. As currency exchange rates fluctuate, translation of the statements of financial condition and statements of operations of our international businesses into U.S. dollars may affect year-over-year comparability and could cause us to adjust our financing and operating strategies. To date, the effect of changes in currency exchange rates on our statements of financial condition and results of operations has not been material. Our trade receivables result primarily from sales to companies located in North America, Asia, and Europe. In fiscal 2016, our revenues derived from sales outside the United States constituted 82% of our total revenues. Accounts receivable in currencies other than U.S. dollars composed 46% of the trade accounts receivable at July 31, 2016. Receivables generally are from major corporations. We maintain reserves for potential credit losses and such losses have been immaterial. Accounts payable in currencies other than U.S. dollars composed 30% of accounts payable at July 31, 2016.
Based on a hypothetical 10% adverse movement in foreign currency exchange rates, the potential losses in future earnings, fair value of risk-sensitive financial instruments and cash flows are immaterial due to entities from which payments are received in currencies other than the U.S. Dollar being naturally hedged, although the actual effects may differ materially from the hypothetical analysis.
Interest Rate Risk
As of the date of this filing, we have approximately $21.9 million of long-term debt due under a credit facility with Silicon Valley Bank that is subject to quarterly interest payments that are based on either a base rate plus a margin of up to 2.50% per annum, or the London Interbank Offered Rate (LIBOR) plus a margin of up to 3.50% per annum, in either case based on our ratio of consolidated senior debt to consolidated earnings before interest, taxes, depreciation and amortization (EBITDA) (the Leverage Ratio), or at a LIBOR rate plus a margin (such margin not to exceed a per annum rate of 3.50%) based on the Leverage Ratio. The selection of the interest rate formula is at our discretion. The interest rate otherwise payable under the credit 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 under the credit agreement. At July 31, 2016, the interest rate in effect on these borrowings was 2.75%.
We may from time to time have other outstanding short-term and long-term borrowings with variable interest rates.
Item 8.
Item 8. Financial Statements and Supplementary Data
XCERRA CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
The accompanying notes are an integral part of these consolidated financial statements.
XCERRA CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(In thousands, except per share data)
The accompanying notes are an integral part of these consolidated financial statements.
XCERRA CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands, except share data)
The accompanying notes are an integral part of these consolidated financial statements.
XCERRA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
The accompanying notes are an integral part of these consolidated financial statements.
XCERRA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY
Xcerra Corporation (“Xcerra” or the “Company”), formerly known as LTX-Credence Corporation, 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, Everett Charles Technologies, LTX-Credence and Multitest businesses. Semiconductor designers and manufacturers worldwide use the Company’s test and handling equipment and interface products to test their devices during the manufacturing process. The Company’s 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 Company’s systems include a diverse set of electronic products including network servers, personal computers, tablet computers and mobile phones. The Company’s test fixture products 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 November 30, 2015, the Company completed the sale of its semiconductor test interface board business based in Santa Clara, CA (“Interface Board Business”) to Fastprint Hong Kong Co., Ltd., a wholly owned subsidiary of Shenzhen Fastprint Circuit Tech Co., Ltd, and its affiliates (collectively, “Fastprint”), pursuant to an Asset Purchase Agreement, entered into between the company and Fastprint on September 8, 2015 (the “Purchase Agreement”). As a result, the Company had identified certain assets and liabilities associated with this business to be held for sale certain assets, including this product line, that are included as assets held for sale in the historical financial results for fiscal 2015 in this Annual Report on Form 10-K. The Interface Board Business produces printed circuit boards that are specifically designed to serve as an interface between the tester and the semiconductor device, or the semiconductor wafer, being tested.
The Company sold and transferred to Fastprint certain assets used in or primarily related to the Interface Board Business (the “Assets”), and assigned, and Fastprint assumed, certain specified liabilities associated with the Interface Board Business (the “Assumed Liabilities”), along with the transfer of the employees associated with that business, all pursuant to the terms of the Purchase Agreement. The purchase price for the Assets and the Assumed Liabilities was $23.0 million (the “Purchase Price”). Fastprint also agreed to pay for the accrued and unpaid vacation of certain U.S. employees transferring to Fastprint (the “Accrued U.S. Compensation Amount”). At the Closing Fastprint paid Everett Charles, as designated by the Company, the aggregate cash sum of $21.4 million, consisting of $20.7 million of the Purchase Price and the Accrued U.S. Compensation Amount, plus certain prepaid amounts. Pursuant to the Purchase Agreement, $2.3 million of the purchase price has been withheld by Fastprint and is payable on the first anniversary of the closing subject to claims for indemnification by Fastprint, if any, prior to that time. The Company recorded this $2.3 million in prepaid expenses and other current assets on its consolidated balance sheet as of January 31, 2016.
XCERRA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant inter-company transactions and balances have been eliminated in consolidation.
Preparation of Financial Statements and Use of Estimates
The accompanying financial statements have been prepared by the Company, and reflect all adjustments, which, in the opinion of management, are necessary for fair presentation. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the financial statements and the reported amounts of income and expenses during the reporting periods. Actual results may differ from those estimates and such differences may be material to the consolidated financial statements. Such estimates relate to fair values ascribed to revenue recognition, the allowance for doubtful accounts, inventory valuation, depreciation, product warranty costs, stock-based compensation and income taxes, among others.
Revenue Recognition
The Company recognizes revenue based on guidance provided in Topic 605, Revenue Recognition, to the Financial Accounting Standards Board Codification (“FASB ASC”) 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 seller’s 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 customer’s application, (4) the delivered item(s) has value to the customer on a stand-alone basis, and (5) if the arrangement includes a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) is considered probable and substantially in the control of the Company. The arrangement consideration, or the amount of revenue to be recognized on each separate unit of accounting, is allocated at the inception of the arrangement to all deliverables on the basis of their relative selling price.
Revenue related to maintenance and service contracts is recognized ratably over the duration of the contracts. Net service sales as presented in the Company’s Consolidated Statement of Operations and Comprehensive Income (Loss) includes revenue associated with LTX-Credence maintenance or service contracts only, and excludes ECT and Multitest. ECT and Multitest generally do not provide maintenance and service contracts, but rather sell spare parts and other components, and as a result these sales are recognized as net product sales in the Company’s Consolidated Statement of Operations and Comprehensive Income (Loss). Revenue related to spare parts and components is recognized when the main criteria listed above are met. Generally customer acceptance is not required for spare parts and component sales.
XCERRA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Inventories
Inventories are stated at the lower of cost or market, determined on the first-in, first-out (“FIFO”) method, and include materials, labor and manufacturing overhead. The components of inventories, excluding the Interface Board Business, are as follows:
The Company establishes inventory reserves when conditions exist that indicate inventory may be in excess of anticipated demand or is obsolete based upon assumptions about future demand for the Company’s products or market conditions. The Company regularly evaluates its ability to realize the value of inventory based on a combination of factors including the following: forecasted sales or usage, estimated product end of life dates, estimated current and future market value and new product introductions.
Purchasing and usage alternatives are also explored to mitigate inventory exposure. When recorded, reserves are intended to reduce the carrying value of inventory to its net realizable value. As of July 31, 2016 and July 31, 2015, inventory is stated net of inventory reserves of $21.4 million and $46.9 million, respectively. If actual demand for products deteriorates or market conditions are less favorable than projected, additional inventory reserves may be required. Such reserves are not reversed until the related inventory is sold or otherwise disposed.
The following table shows sales of previously reserved inventory and the inventory reserves released for these sales for the fiscal years ended July 31, 2016, 2015, and 2014:
Goodwill and Other Intangibles
In accordance with FASB ASC Topic 350-Intangibles-Goodwill and Other (“ASC 350”), goodwill is not amortized. Rather, the Company’s goodwill is subject to periodic impairment testing. ASC 350 requires that the Company assign its goodwill to reporting units and test each reporting unit’s 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.
In accordance with ASC 350, the Company performed its goodwill impairment test as of July 31, 2016 and 2015, and determined that no adjustment to goodwill was necessary. As of July 31, 2016, the fair value of the reporting units to which goodwill is allocated substantially exceeded the carrying values of those reporting units. The observable inputs used in the Company’s Discounted Cash Flow (DCF) method for estimating the fair value of the reporting units include discount rates at the Company’s weighted-average cost of capital. The Company
XCERRA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
derives discount rates that are commensurate with the risks and uncertainties inherent in its respective businesses and its internally developed projections of future cash flows. In addition, the Company determined the projected future cash flows of the reporting units for the residual period using the Gordon growth method which assumes that the reporting unit will grow and generate free cash flow at a constant rate. The Company believes that the Gordon growth method is the most appropriate method for determining the residual value because the residual value is calculated at the point at which the Company has assumed that the reporting units have reached stable growth rates. The Company’s goodwill consists of the following:
Amortizable intangible assets which relate to the acquisition of Titan Semiconductor Tool LLC (“Titan”), ECT, Multitest, and atg-Luther & Maelzer, and the merger with Credence Systems Corporation (“Credence”), consist of the following, and are included in intangibles asset, net on the Company’s Consolidated Balance Sheets:
XCERRA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 3.5 years.
The Company expects the remaining amortization for these intangible assets as of July 31, 2016 to be:
The identifiable intangible assets associated with the Dover Acquisition include $6.4 million of trademarks. The Company believes these trademarks will contribute to the Company’s cash flows indefinitely. Therefore, in accordance with ASC 350, the Company has assigned an indefinite useful life to the trademarks, and will not amortize the trademarks until their useful lives are no longer indefinite. These assets are subject to an annual impairment test or more frequently if triggering events occur. For the year ended July 31, 2016, the Company assessed qualitative factors to determine if a two-step quantitative impairment test was necessary. The Company determined, based on qualitative assessment, that it was more likely than not that the trademarks’ fair value was greater than their carrying amount, therefore no quantitative assessment was required, and there was no adjustment to the carrying value of the trademarks.
Long Lived Assets
On an ongoing basis, management reviews the value of and period of amortization or depreciation of the Company’s long-lived assets. In accordance with Topic 360, Property, Plant and Equipment, to the FASB ASC, 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 asset’s fair value compared to its carrying value. As of July 31, 2016 and July 31, 2015, there were no indicators that required the Company to conduct a recoverability test as of those dates.
Foreign Currency Remeasurement
The financial statements of the Company’s foreign subsidiaries are remeasured in accordance with Topic 830, Foreign Currency Matters, to the FASB ASC. The functional currency of the Company’s tester group is the U.S. dollar. Accordingly, the Company’s 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 or losses resulting from foreign currency remeasurement and transaction gains or losses are included in the Consolidated Statements of Operations and Comprehensive Income (Loss) as a component of other income
XCERRA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(expense), net, and were $1.3 million, $2.1 million, and $0.1 million for the fiscal years ended July 31, 2016, 2015 and 2014. The functional currency of ECT, Multitest and atg is local currency, predominately Euro, U.S. Dollar, Malaysian Ringgit and Singapore Dollars, and net gains or losses resulting from foreign currency remeasurement and translation gains or losses are recorded in stockholders’ equity as accumulated other comprehensive income (loss).
Product Warranty Costs
Certain of the Company’s products are sold with warranty provisions that require it to remedy deficiencies in quality or performance of products over a specified period of time at no cost to its customers. The Company generally offers a warranty for most of its products, the standard terms and conditions of which are based on the product sold and the customer. For all products sold, subject to a warranty, the Company accrues a liability for the estimated cost of standard warranty at the time of shipment. Factors that impact the warranty liability include the number of installed products, historical and anticipated product failure rates, material usage and service labor costs. The Company periodically assesses the adequacy of its recorded liability and adjusts these amounts as necessary.
The following table shows the change in the Company’s product warranty liability, as required by Topic 460, Guarantees, to the FASB ASC, for the fiscal years ended July 31, 2016 and 2015:
Trade Accounts Receivable and Allowance for Doubtful Accounts
Trade accounts receivable are recorded at the invoiced amount, do not bear interest, and typically have a contractual maturity of ninety days or less. A majority of the Company’s trade receivables are derived from sales to large multinational semiconductor manufacturers throughout the world. The volatility of the industries that the Company serves can cause certain of its customers to experience shortages of cash, which can impact their ability to make required payments. An allowance for doubtful accounts is maintained for potential credit losses based upon the Company’s assessment of the expected collectability of all accounts receivable. The allowance for doubtful accounts is reviewed periodically to assess the adequacy of the allowances. In any circumstances in which the Company is aware of a customer’s inability to meet its financial obligations, an allowance is provided, which is based on the age of the receivables, the circumstances surrounding the customer’s financial situation, and historical experience. If circumstances change, and the financial condition of customers is adversely affected resulting in their inability to meet their financial obligations to the Company, additional allowances may be recorded.
Engineering and Product Development Costs
The Company expenses all engineering and product development costs as incurred. Expenses relating to certain software development costs, which were subject to capitalization in accordance with the Topic 985, Software, to the FASB ASC, were insignificant.
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Shipping and Handling Costs
Shipping and handling costs are included in cost of sales in the Consolidated Statement of Operations and Comprehensive Income (Loss). Shipping and handling costs were $6.4 million, $7.1 million, and $4.5 million for fiscal years ended July 31, 2016, 2015, and 2014, respectively.
Income Taxes
The Company recorded an income tax benefit of $1.7 million for fiscal 2016, primarily due to foreign taxes in profitable locations and includes a tax benefit associated with the intraperiod tax allocation. The Company recorded an income tax provision of $2.6 million for fiscal 2015 primarily due to operating results of profitable foreign entities in jurisdictions primarily in Asia and Europe.
As of both July 31, 2016 and July 31, 2015, our liability for unrecognized income tax benefits was $6.3 million (of which $2.7 million, if recognized, would impact our income tax rate). The Company recognizes interest and penalties related to uncertain tax positions as a component of provision for income taxes. For July 31, 2016 and July 31, 2015, the Company had accrued approximately $1.2 million and $1.0 million, respectively, for potential payment of accrued interest and penalties.
The Company conducts business globally and, as a result, the Company and its subsidiaries or branches file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. In the normal course of business, the Company is subject to examination by taxing authorities throughout the world, including such major jurisdictions as the United States, Singapore, Malaysia, China, France and Germany. With few exceptions, the Company is no longer subject to U.S. federal, state and local or non-U.S. income tax examinations for years prior to 1998.
As a result of the Company’s merger with Credence on August 29, 2008, a greater than 50% cumulative ownership change in both entities triggered a significant limitation on net operating loss carryforward utilization. The Company’s ability to use the acquired U.S. net operating loss and credit carryforwards is subject to annual limitation as defined in sections 382 and 383 of the Internal Revenue Code. The Company currently estimates that the annual limitation on its use of net operating losses generated through August 29, 2008 is approximately $10.1 million which, based on currently enacted federal carryforward periods, limits the amount of net operating losses that are available for utilization to approximately $202.0 million. The Company will continue to assess the realizability of these carryforwards in subsequent periods.
Accounting for Stock-Based Compensation
The Company has equity awards outstanding under various stock-based compensation plans, including the 2010 Stock Plan (“2010 Plan”), 2004 Stock Plan, 2001 Stock Plan, 1999 Stock Plan, and 1993 Stock Plan. In addition, the Company assumed the Credence 2005 Stock Incentive Plan in connection with its acquisition of Credence. The Company can only grant awards from the 2010 Plan.
During fiscal 2016, the Company granted 838,300 Restricted Stock Units (“RSUs”) to certain executives, directors and employees, with time-based vesting terms ranging from one to four years. Of these, 305,000 RSUs were granted to executives.
The Company recognizes stock-based compensation expense on its equity awards in accordance with the provisions of Topic 718, Compensation-Stock Compensation, to the FASB ASC (“ASC 718”). Under ASC 718, the Company is required to recognize, as expense, the estimated fair value of all share-based payments to employees. In accordance with this standard, the Company has elected to recognize the compensation cost of all service based awards on a straight-line basis over the vesting period of the award.
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For the fiscal years ended July 31, 2016, 2015, and 2014, the Company recorded stock-based compensation expense as follows:
As of July 31, 2016, there was approximately $10.4 million of unrecognized stock-based compensation expense related to share-based equity grants to employees that is expected to be recognized over the next 2.59 weighted-average years.
Net income per Share
Basic net income per common share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted net income per common share reflects the maximum dilution that would have resulted from the assumed exercise and share repurchase related to dilutive stock options and RSUs, and is computed by dividing net income by the weighted average number of common shares and the dilutive effect of all securities outstanding.
Reconciliation between basic and diluted net income (loss) per share is as follows:
For the fiscal years ended July 31, 2016, 2015 and 2014, options to purchase approximately 0.0 million, 0.1 million, and 0.4 million shares, respectively, of common stock were not included in the calculation of diluted earnings per share because the effect of including the options would have been anti-dilutive. As of July 31, 2016 there were no remaining options outstanding. In accordance with the contingently issuable shares guidance of the FASB ASC Topic 260, Earnings Per Share, the calculation of diluted net income per share excludes 0 RSUs for the fiscal years ended July 31, 2016, 2015, and 2014, as to include them would have been anti-dilutive.
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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 Topic 320, Investments-Debt and Equity Securities, to the FASB ASC. 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.
The market value and maturities of the Company’s marketable securities are as follows:
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The market value and amortized cost of marketable securities are as follows:
(a) There are no held to maturity investments included in the above figures as of July 31, 2016 and 2015, respectively.
Realized gains, losses and interest income are included in interest income in the Statements of Operations. Unrealized gains and losses are reflected as a separate component of comprehensive income (loss) within Stockholders’ Equity. The Company analyzes its securities portfolio for other-than-temporary impairment on a quarterly basis or upon occurrence of a significant change in circumstances. There were no other-than-temporary impairment losses recorded in the fiscal years ended July 31, 2016 or 2015.
The following table summarizes marketable securities and related unrealized gains and losses as of July 31, 2016 and 2015:
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Interest income and realized gains and losses from sales of marketable securities, included in interest income in the Statement of Operations, are as follows:
Fair Value of Financial Instruments
The Company determines its fair value measurements for assets and liabilities based upon the provisions of Topic 820, Fair Value Measurements and Disclosures, to FASB ASC.
Topic 825 to the FASB ASC, Financial Instruments, requires that disclosure be made of estimates of the fair value of financial instruments. The carrying amounts of certain of the Company’s financial instruments, including cash equivalents, accounts receivable, accounts payable and other accrued liabilities approximate fair value due to their short maturities. Marketable securities classified as available-for-sale are all debt securities and are recorded at fair value based upon quoted market prices.
Concentration of Credit and Supplier Risk
Financial instruments, which potentially subject the Company to concentrations of credit risk, are cash equivalents, marketable securities and accounts receivable. All of the Company’s cash equivalents and marketable securities are maintained by major financial institutions. The Company periodically reviews these investments to evaluate and minimize credit risk. Concentration of credit risk with respect to accounts receivable is limited to certain customers to whom the Company makes substantial sales. To reduce risk, the Company routinely assesses the financial strength of its customers. The Company does not require collateral, although the Company does obtain letters of credit on sales to certain foreign customers. During fiscal 2016 the Company did not write off any accounts receivable. During fiscal 2015, the Company wrote off $0.1 million of accounts receivable. There were no write-offs for the fiscal year ended July 31, 2014.
The Company outsources certain components and subassemblies for our test equipment to contract manufacturers other than its sole source supplier manufacturer. The Company’s products incorporate standard components and prefabricated parts manufactured to its specifications. These components and subassemblies are used to produce testers in configurations specified by its customers. Some of the standard components for the Company’s products are available from a number of different suppliers; however, many such standard components are purchased from a single supplier or a limited group of suppliers. Although the Company believes that all single sourced components currently are available in adequate amounts, shortages or delivery delays may develop in the future. The Company is dependent on certain semiconductor device manufacturers, who are sole source suppliers of custom components for its products. The Company has no written supply agreements with these sole source suppliers and purchases its custom components through individual purchase orders. The Company continuously evaluates alternative sources for the manufacture of our custom components and the
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supply of our standard components; however, such alternative sources may not meet its required qualifications or have capacity that is available to the Company.
Property and Equipment
Property and equipment acquired is recorded at cost. The Company provides for depreciation and amortization using the straight-line method. Charges are made to operating expenses in amounts that are sufficient to amortize the cost of the assets over their estimated useful lives. Equipment spares used for service and internally manufactured test systems used for testing components and engineering projects are recorded at cost and depreciated over three to seven years. Repair and maintenance costs that do not extend the lives of property and equipment are expensed as incurred. The Company’s property and equipment as of July 31, 2016 and July 31, 2015 are summarized as follows:
During the fiscal year ended July 31, 2016 the Company executed two purchase and sale agreements for land owned in Hillsboro, Oregon. As a result these assets have been moved to Assets Held for Sale on the Company’s Consolidated Balance Sheet as of July 31, 2016. The Company expects the sale transactions to be complete during the fiscal year ending July 31, 2017.
Depreciation expense was $5.7 million, $6.4 million, and $6.1 million for the fiscal years ended July 31, 2016, 2015, and 2014, respectively.
Recent Accounting Pronouncements
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 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. 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
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the standard would be recognized at the date of initial application. The Company has not yet selected a transition method. The Company is currently evaluating the impact of this ASU on its financial position and results of operations.
In April 2015, the FASB issued ASU No. 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, which requires that debt issuance costs related to a recognized debt liability, be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The update takes effect for public companies for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption is permitted. The Company does not expect the adoption of this update to have a material impact on its financial position and results of operation.
In September 2015, the FASB issued ASU No. 2015-16, Simplifying the Accounting for Measurement-Period Adjustments, which requires adjustments to provisional amounts that are identified during the measurement period after a business combination to be recognized in current period financial statements. The update takes effect for public companies for financial statements issued for fiscal years beginning after December 15, 2015, including interim periods within that reporting period. Early adoption is permitted. The Company does not expect the adoption of this update to have a material impact on its financial position or results of operation.
In November 2015, the Financial Accounting Standards Board issued Accounting Standards Update 2015-17, “Balance Sheet Classification of Deferred Taxes”, which requires that all deferred tax assets and liabilities be classified as non-current on the balance sheet. The amendments in ASU 2015-17 are intended to simplify the presentation of deferred income taxes. As of July 31, 2016, the Company has adopted ASU 2015-17 on a prospective basis and has not adjusted prior periods as a result of the adoption. As required by ASU 2015-17, all deferred tax assets and liabilities are now classified as non-current in the Company’s consolidated balance sheets.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 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 2016-09, “Compensation-Stock Compensation (Topic 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 is currently evaluating the impact of this ASU on its financial position and results of operations.
3. DISCONTINUED OPERATIONS
On November 30, 2015, the Company completed the sale of its Interface Board Business to Fastprint pursuant to the Purchase Agreement. The Interface Board Business produced printed circuit boards that are
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specifically designed to serve as an interface between the tester and the semiconductor device, or the semiconductor wafer, being tested. The Company sold and transferred the Assets to Fastprint, and assigned, and Fastprint assumed, the Assumed Liabilities, along with the transfer of the employees associated with that business, all pursuant to the terms of the Purchase Agreement. The purchase price for the Assets and the Assumed Liabilities was $23.0 million (the “Purchase Price”). Fastprint also agreed to pay for the accrued and unpaid vacation of certain U.S. employees transferring to the buyer (the “Accrued U.S. Compensation Amount”). At the Closing, Fastprint paid Everett Charles, as designated by the Company, the aggregate cash sum of $21.4 million, consisting of $20.7 million of the Purchase Price and the Accrued U.S. Compensation Amount, plus certain prepaid amounts. Pursuant to the Agreement, $2.3 million of the Purchase Price has been withheld by Fastprint and is payable on the first anniversary of the Closing subject to claims for indemnification by Fastprint, if any, prior to that time. The Company’s historical financials have been revised to present the operating results of the Interface Board Business as a discontinued operation. In the three months ended January 31, 2016, the Company recognized a gain of approximately $9.4 million, net of taxes, associated with the sale of the Interface Board Business. As of July 31, 2016, the recognized gain is approximately $10.2 million, net of taxes, due to a decrease in intraperiod tax allocation of $2.0 million recorded during the three months ended April 30, 2016, offset by a provision of $1.1 million recorded during the three months ended July 31, 2016.
The Company’s historical financials have been revised to present the operating results of the Interface Board Business as a discontinued operation. The Interface Board Business was acquired from Dover on December 1, 2013, and as a result there was no impact to the Company’s historical financial results for the year ended July 31, 2013.
Summarized results of the discontinued operation are as follows for the years ended July 31, 2016 and 2015:
The operating results of the Interface Board Business were historically included in the results of operations for the Interface Products Group that were included in the Semiconductor Test Solutions segment.
The presentation of the Interface Board Business as a discontinued operation has no impact on the previously reported net income (loss) or stockholder’s equity.
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Assets and liabilities identifiable within the Interface Board Business are reported as “Assets held for sale” and “Liabilities held for sale”, respectively, in the Consolidated Balance Sheets. The major classes of assets and liabilities of the discontinued operation as of July 31, 2015 are as follows:
4. BUSINESS COMBINATIONS
Acquisition of Titan Semiconductor
On February 2, 2015, the Company completed an acquisition of substantially all of the assets and certain specified liabilities of Titan. The purchase price of Titan was approximately $2.4 million, which was paid in cash from the Company’s available cash-on-hand. Titan develops, manufactures and sells products for semiconductor test serving the automotive, RF/Wireless, and mixed signal test markets. The acquired products will be developed, supported, and marketed by Xcerra’s Contactors operating segment which is part of the Semiconductor Test Solutions reportable segment. The Company has recorded approximately $1.4 million and $0.8 million of intangible assets and goodwill, respectively, from this transaction.
Acquisition of Everett Charles Technologies LLC and Multitest
On September 6, 2013, in connection with the Dover Acquisition, the Company entered into a Master Sale and Purchase Agreement (the “Dover Purchase Agreement”) with Dover and, solely for the limited purposes set forth in the Purchase Agreement, Dover Corporation (“Dover Parent”). Pursuant to the Dover Purchase Agreement, the Company purchased from Dover or its specified affiliates (collectively, the “Sellers”) all assets of the Sellers used exclusively or primarily in connection with the research and development, design, manufacture, assembly, production, marketing, distribution, sale and repair of probes, assembled board and bare board test equipment, and fixturing products and the provision of services related thereto (the “ECT Business,” and such assets and intellectual property, the “ECT Assets”) and all assets of the Sellers used exclusively or primarily in connection with the research and development, design, manufacture, assembly, production, marketing, distribution, sale and repair of semiconductor test handlers, semiconductor test contactors and sockets and semiconductor test load boards, and the provision of services related thereto (the “MT Business,” and such assets and intellectual property, the “MT Assets”). The Company also assumed certain specified liabilities of the Sellers related primarily or exclusively to the Acquired Businesses or the Acquired Assets (as defined below). Under the Dover Purchase Agreement, the Company also acquired all of the issued and outstanding capital stock and other equity interests of specified indirect subsidiaries of Dover Parent and its affiliates engaged in the
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Acquired Businesses, including Everett Charles Technologies LLC (such capital stock and other equity interests, the “Acquired Shares”). The ECT Assets, the MT Assets and the Acquired Shares are collectively referred to as the “Acquired Assets.”
On December 1, 2013, the Company acquired the Multitest and ECT businesses of Dover for $93.5 million, of which $73.5 million was paid in cash through a combination of existing cash-on-hand and bank debt and $20.0 million was paid by the issuance of promissory notes. Pursuant to the Dover Purchase Agreement, the cash purchase price was increased by $12.5 million to reflect, among other required adjustments, specified cash balances held by the Acquired Businesses, acquired indebtedness, certain transaction costs, employee related liabilities, working capital adjustments and reductions in the principal amount of the promissory notes payable to Dover in connection with the satisfaction of certain conditions.
Subject to certain conditions, the original principal amount of the promissory notes were subject to reduction upon written certification from the Company to Dover prior to January 1, 2015 of certain specified events related to the Company’s relocation from or refurbishment of certain properties of the Acquired Businesses, or the prepayment of the promissory notes in full prior to such date. In January 2014, the Company executed leases for two new facilities, and in February 2014, the Company provided Dover with written certification of a planned relocation from certain properties of the Acquired Businesses. Consequently, the original principal amount of the promissory notes issued to Dover was reduced by $2.0 million. The promissory notes were subject to further reduction by $1.75 million upon certification from the company to Dover of other specified events that had not yet occurred. The promissory notes were to accrue interest on the unpaid balance for each day that they remained outstanding after December 1, 2014 at a per annum rate equal to the London Interbank Offered Rate plus 10%, and could be prepaid by the Company at any time without penalty prior to May 1, 2019. After giving effect to the post-Closing purchase price adjustments described above, and including the principal amount reduction of the promissory notes to Dover, the aggregate purchase price paid to the Sellers as of the date of this report was $106.0 million.
In November 2014, the Company prepaid the outstanding amounts under the promissory notes. The $16.3 million payoff amount reflected the principal amounts of $18.0 million that was outstanding under the original promissory notes, less a $1.8 million reduction triggered by the prepayment in full of the notes prior to January 1, 2015.
The Company, Dover, and certain of their affiliates also entered into a transition services agreement, an intellectual property termination agreement and a license agreement which govern certain ongoing relationships between the Company and Dover and their respective affiliates following the Closing.
In accordance with Topic 805, Business Combinations, to the FASB ASC and based on the terms of the Dover Acquisition, the Company is the accounting acquirer.
The following is a summary of the purchase price for the Acquired Assets:
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The following table summarizes the amounts recognized for the Acquired Assets and liabilities assumed as of the date of Closing:
The purchase price has been allocated based on the fair value of net assets acquired as follows:
The overall fair value of the net assets acquired by the Company exceeded the amount paid, which resulted in the recognition of a bargain purchase gain by the Company during fiscal 2014. This bargain purchase gain was recorded as a component of the other (expense) income section on the Company’s Consolidated Statement of Operations and Comprehensive Income (Loss). The Company believes it was able to acquire ECT and Multitest for less than the fair value of their net assets since ECT and Multitest had been held as discontinued operations by Dover Parent for more than one year.
Valuation of Intangible Assets and Goodwill
The overall fair value of the Multitest and ECT businesses of Dover has been allocated to tangible assets acquired, assumed liabilities, and identifiable intangible assets, based upon a detailed valuation that uses information and assumptions provided by management, as further described below.
Identifiable Intangible Assets
As part of the preliminary purchase price allocation, identifiable intangible assets of the Acquired Businesses include developed technology, customer relationships and trademarks.
At the date of acquisition, the consolidated financial statements include estimated identifiable intangible assets with a fair value aggregating $12.0 million, which will be amortized based on the pattern and period over which the economic benefits of the intangible assets are realized. The estimated weighted average period was 8.0 years. The Company engaged independent valuation advisors to assist the Company in estimating the identifiable intangible asset value. The estimated identifiable intangible asset value is primarily based on information and assumptions developed by the Company’s management, certain publicly available information, and discussions with management of the Acquired Businesses.
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The Company primarily used the income approach to value the developed technology and other acquired identifiable intangible assets of the Acquired Businesses. This approach calculates fair value by estimating future cash flows attributable to each intangible asset and discounting the future cash flows to present value using a risk adjusted discount rate.
In estimating the useful life of the acquired intangible assets of the Acquired Businesses, the Company considered paragraph 11 of ASC 350, which lists the pertinent factors to be considered when estimating the useful life of an intangible asset. These factors include a review of the expected use by the combined company of the assets acquired, the expected useful life of another asset (or group of assets) related to the acquired assets, legal, regulatory or other contractual provisions that may limit the useful life of an acquired asset or may enable the extension of the useful life of an acquired asset without substantial cost, the effects of obsolescence, demand, competition and other economic factors, and the level of maintenance expenditures required to obtain the expected future cash flows from the asset. The Company is amortizing these intangible assets over their estimated useful lives using a method that is based on estimated future cash flows as the Company believes this amortization methodology approximates the pattern in which the economic benefits of the intangible assets will be derived.
The identifiable intangible assets associated with the Dover Acquisition include $6.4 million of trademarks. The Company believes these trademarks will contribute to the Company’s cash flows indefinitely. Therefore, in accordance with ASC 350, the Company has assigned an indefinite useful life to the trademarks, and will not amortize the trademarks until their useful lives are no longer indefinite.
5. OTHER ACCRUED EXPENSES
Other accrued expenses consisted of the following:
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6. LONG-TERM DEBT
Long-term debt consisted of the following:
The debt principal payments for the next five years and thereafter are as follows:
Credit Agreement
On December 15, 2014, the Company entered into a credit agreement (the “ Credit Agreement”) with Everett Charles Technologies LLC, a wholly owned subsidiary of the Company (“ECT” and 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 (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
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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 Company’s consolidated senior debt to consolidated earnings before interest, taxes, depreciation and amortization (EBITDA) (the “Leverage Ratio”), or at a 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 July 31, 2016, the interest rate in effect on the Facility was 2.75%.
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 Company’s 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
As of July 31, 2016, the Company was in compliance with all covenants under the Credit Agreement.
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.
Seller Financing-Promissory Notes
In connection with the closing of the Dover Acquisition the Company issued promissory notes having an aggregate principal amount of $20.0 million to Dover. During the three months ended January 31, 2014, the original principal amount of the promissory notes issued to Dover was reduced by $2.0 million, when the company executed leases for two new facilities, which triggered a reduction to the notes in accordance with their terms. On November 26, 2014, the Company repaid in full all outstanding amounts under these promissory notes. The $16.3 million payoff amount reflected the principal amount of $18.0 million that was outstanding under the
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
original promissory notes, less $1.8 million pursuant to a reduction in principal for which the Company was entitled under the original promissory notes. Such reduction related to prepayment of the promissory notes before January 1, 2015 and was recorded as a gain on repayment of subordinated debt as a component of other income in the Company’s Consolidated Statements of Operations and Comprehensive Income (Loss) for the fiscal year ended July 31, 2015 (“fiscal 2015”). As a result of this repayment during the interest-free period, the Company reversed approximately $0.9 million of accrued interest and recorded the benefit as a component of other income in the Company’s Consolidated Statement of Operations and Comprehensive Income (Loss) for fiscal 2015.
Bank Term Loan-Commerzbank
In May 2014, the Company entered into a loan agreement with Commerzbank to finance the purchase of the Company’s 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.
7. INCOME TAXES
The components of income (loss) before income taxes and the provision (benefit) from income taxes consist of the following:
XCERRA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Reconciliation of the U.S. federal statutory rate to the Company’s effective tax rate is as follows:
Deferred tax assets and liabilities as of July 31, 2016, and 2015 are as follows:
Cumulative unremitted foreign earnings that are considered to be indefinitely reinvested outside of the U.S. and on which no U.S. taxes have been provided are approximately $35.7 million and $29.9 million as of July 31, 2016 and 2015. Due to net operating loss and credit carryforwards, the residual U.S. tax liability, if such amounts were remitted, would be minimal.
Compliance with section 10-30 of FASB ASC Topic 740, Income Taxes, requires the Company to periodically evaluate the necessity of establishing or increasing a valuation allowance for deferred tax assets depending on whether it is more likely than not that a related benefit will be realized in future periods. A valuation allowance has been recorded against net deferred tax assets in the U.S. and in certain foreign jurisdictions with a history of losses. The valuation allowance totaled $206.9 million and $209.7 million as of July 31, 2016 and 2015, respectively. The decrease in the Company’s valuation allowance compared to the prior
XCERRA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
year was primarily due to a decrease in U.S. deferred tax assets associated with sources of income in the current year which included the Company’s sale of its Interface Board Business to Fastprint (see Note 3).
As of July 31, 2016, the Company had federal net operating loss carryforwards of $358.9 million, which expire from 2019 to 2036, federal tax credit carryforwards, including research and development and foreign tax credits, of $10.2 million which expire from 2018 to 2036, state net operating loss carryforwards of $253.6 million, which expire from 2017 to 2036, and state tax credits and carryforwards of $36.8 million, of which the majority have an indefinite credit carryforward period. The remaining state tax credit carryforwards begin expiring in 2017 to 2031. The Company also has foreign net operating loss carryforwards of approximately $15.9 million in various foreign jurisdictions.
As of July 31, 2015, the Company had federal net operating loss carryforwards of $344.4 million, which expire from 2019 to 2034, federal tax credit carryforwards, including research and development and foreign tax credits, of $9.2 million which expire from 2018 to 2035, state net operating loss carryforwards of $255.8 million, which expire from 2016 to 2034, and state tax credits and carryforwards of $36.3 million, of which the majority have an indefinite credit carryforward period. The remaining state tax credit carryforwards begin expiring in 2016 to 2030. The Company also has foreign net operating loss carryforwards of approximately $16.6 million in various foreign jurisdictions.
As a result of the merger with Credence Systems Corporation on August 29, 2008, a greater than 50% cumulative ownership change in both entities triggered a significant limitation in net operating loss carryforward utilization. The Company’s ability to use the acquired U.S. net operating loss and credit carryforwards is subject to annual limitations as defined in sections 382 and 383 of the Internal Revenue Code. The Company currently estimates that the annual limitation on its use of net operating losses generated through August 29, 2008 is approximately $10.1 million, which, based on the currently enacted federal carryforward period, limits the amount of net operating losses that are available for utilization to approximately $202.0 million. The Company will continue to assess the realizability of these carryforwards in subsequent periods.
A summary of the Company’s adjustments to its uncertain tax positions in the fiscal years ended July 31, 2016, 2015 and 2014 is as follows:
As of both July 31, 2016 and July 31, 2015, our liability for unrecognized income tax benefits was $6.3 million (of which $2.7 million, if recognized, would impact our income tax rate). The Company recognizes interest and penalties related to uncertain tax positions as a component of income tax expense. The Company has accrued a total of $1.2 million and $1.0 million, respectively, for the potential payment of interest and penalties at July 31, 2016 and July 31, 2015. The Company does not anticipate a material reduction of uncertain tax positions over the next 12 months.
XCERRA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company files income tax returns with the U.S. federal government and various state and international jurisdictions, which are subject to potential examination by tax authorities. With few exceptions, the Company’s 1998 and subsequent federal and state tax years remain open by statute, principally relating to net operating loss carryforwards.
Net cash paid for income taxes during the fiscal years ended July 31, 2016, July 31, 2015 and July 31, 2014 was $2.9 million, $2.9 million, and $1.1 million, respectively.
8. 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 2015 Plan at any time and the 2015 Plan has no expiration date. As of June 9, 2016, the Company had repurchased 1,956,733 shares for approximately $12 million under the 2015 Plan.
Equity Offering
On September 17, 2014, the Company closed an underwritten public offering of 4,682,927 shares of its common stock at $10.25 per share. The Company also granted to the underwriters a 30-day option to purchase up to an aggregate of 702,439 additional shares of common stock to cover over-allotments which they exercised on September 22, 2014. All of the shares were sold by the Company pursuant to an effective shelf registration statement previously filed with the SEC.
The offering, and the follow-on option to sell additional shares, resulted in net proceeds to Xcerra, after deducting underwriting discounts and commissions and offering expenses, of approximately $52.1 million. Xcerra used approximately $20 million of the net proceeds from the offering to repay a portion of the outstanding principal of the Company’s bank term loan with SVB and syndicate.
Reserved Unissued Shares
At July 31, 2016 and July 31, 2015, the Company had reserved 3,683,812 and 4,632,441 of unissued shares of its common stock for possible issuance under stock-based compensation plans and the Company’s Employee Stock Purchase Plan.
9. EMPLOYEE BENEFIT PLANS
Stock Option Plans
In connection with the Company’s stock-based compensation plans, at July 31, 2016, there were no options outstanding and exercisable under any plan.
XCERRA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the fiscal years ended July 31, 2016, 2015 and 2014 the Company’s stock option activity was as follows:
The intrinsic value of options exercised during the years ended July 31, 2015 and 2014 was $0, and $207,708, respectively.
Restricted Stock Units
For the years presented, the Company granted RSUs to certain executives, directors and employees, with vesting terms ranging from one to four years:
For the fiscal years ended July 31, 2016, 2015, and 2014 the status of the Company’s outstanding RSUs is as follows:
The fair value of RSUs vested during the fiscal years ended July 31, 2016, 2015, and 2014 was $6.9 million, $5.9 million, and $4.7 million, respectively.
Employee Stock Purchase Plan
In December 2003, the shareholders approved an employee stock purchase plan, which was subsequently amended in September 2005, July 2009 and October 2012 (“2004 ESPP”). Under the 2004 ESPP, as amended,
XCERRA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
eligible employees may contribute up to 15% of their annual compensation for the purchase of common stock of the Company, subject to an annual limit of $25,000. The price paid for the common stock is equal to 85% of the price of the Company’s common stock on the last business day of a six-month offering period. The 2004 ESPP limited the number of shares that can be issued over the term of the plan to eligible employees to 400,000 shares, and the July 2009 amendment increased the number of shares that may be issued by an additional 400,000 shares. An October 2012 amendment increased the number of shares that may be issued by an additional 800,000 shares. In fiscal years 2016, 2015, and 2014, the total number of shares issued under the 2004 ESPP were 191,909, 169,624, and 114,346, respectively. As of July 31, 2016, there are 237,007 shares available for issuance under the 2004 ESPP.
Other Compensation Plans
The Company has established a Profit Sharing Bonus Plan, whereby a percentage of pretax profits are distributed quarterly to all eligible non-executive employees. Under the Profit Sharing Bonus Plan, the Company recorded profit sharing expense for all eligible employees of approximately $0.0 million, $0.9 million, and $0.3 million for the fiscal years ended July 31, 2016, 2015, and 2014 respectively.
The Company also has other established incentive compensation plans for its ECT, atg-Luther & Maelzer and Multitest employees. Under these plans, individuals are compensated based on company performance as well as individual performance, in addition to other specific criteria for each plan. Under these plans, the Company recorded expense of approximately $1.0 million, $2.0 million and $1.3 million for fiscal 2016, fiscal 2015 and fiscal 2014, respectively.
The Company has an Executive Profit Sharing Plan pursuant to which the Company’s executives are eligible to receive cash awards based on the Company’s achievement of certain profitability milestones. For fiscal 2014, the plan included milestones for achieving certain synergy savings targets, all of which were met. Executive employees included in this plan are excluded from the Profit Sharing Bonus Plan. Under the Executive Profit Sharing Plan, the Company recognized expense of $0.1 million for fiscal 2016, $2.7 million for fiscal 2015, and $3.2 million for fiscal 2014.
The Company maintains a 401(k) Growth and Investment Plan (“401(k) Plan”). Eligible employees may make voluntary contributions to the 401(k) Plan through a salary reduction contract up to the statutory limit or 20% of their annual compensation. The Company matches 50% of employees’ first 6% of voluntary contributions. Company contributions vest at a rate of 20% per year and employees are 100% vested after 5 years of service. The Company funded the match with a contribution of $1.2 million for fiscal 2016, and $1.4 million and $1.2 million for each of the fiscal years ended July 31, 2015, and 2014, respectively.
10. SEGMENT, INDUSTRY AND GEOGRAPHIC AND SIGNIFICANT CUSTOMER SEGMENT INFORMATION
In accordance with the provisions of Topic 280, Segment Reporting to the FASB ASC (“ASC 280”), starting in fiscal 2014, the Company 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. This financial reporting structure was implemented effective as of December 1, 2013, the acquisition date of Multitest and ECT.
XCERRA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Semiconductor Test 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 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 segment includes operations related to design, manufacture and sale of equipment used in the testing of bare and loaded printed circuit boards. The Probes / Pins 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 Company’s 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 years ended July 31, 2016, 2015 and 2014 is as follows (in thousands):
Included in Corporate is restructuring charges.
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 Company’s chief operating decision maker.
XCERRA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company’s sales to its top ten customers for the fiscal years ended July 31, 2016, 2015, and 2014, along with the accounts receivable for the same customers at July 31, 2016, 2015, and 2014, are summarized as follows:
The Company’s net sales to geographic area for the fiscal years ended July 31, 2016, 2015, and 2014, along with the long-lived assets by location at July 31, 2016 and July 31, 2015, are summarized as follows:
XCERRA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Transfer prices on products sold to foreign subsidiaries are intended to produce profit margins that correspond to the subsidiary’s sales and support efforts.
11. 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 Company’s results of operations and financial position for the period.
In July 2016 the Company settled a litigation matter incidental to its business that related to customer expectations of test system performance for a product that was shipped in 2006 by Credence prior to the merger with LTX. As a result of this settlement agreement, the Company incurred $1.4 million related to its estimated obligation under this settlement offer. This accrual was included in Accrued Expenses on the Company’s Consolidated Balance Sheet as of July 31, 2016, and the charge was recorded as Other Expense in the twelve months ended July 31, 2016.
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 Company’s 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 Company’s 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 Company’s 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 July 31, 2016 or July 31, 2015.
Subject to certain limitations, the Company indemnifies its current and former officers and directors for liability or costs that 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 has not accrued a liability for these agreements as of July 31, 2016 or July 31, 2015.
As of July 31, 2016, the Company had approximately $42.7 million of non-cancelable inventory commitments with its suppliers. The Company expects to consume this inventory through normal operating activity.
XCERRA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company has operating lease commitments for certain facilities and equipment 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 July 31, 2016, are as follows:
Total rent expense for the fiscal years ended July 31, 2016, 2015, and 2014 were $5.4 million, $5.8 million, and $6.9 million, respectively.
12. RESTRUCTURING
In accordance with the provisions of Topic 420, Exit or Disposal Cost Obligation, to the FASB ASC, 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.
As of July 31, 2016, the Company’s restructuring accrual represented obligations related to remaining lease and property tax payments associated with the Company’s decision to vacate a facility during fiscal year 2009, as well as severance and other post-employment obligations payable in connection with headcount reductions related to the Company’s announcement in March 2015 to reorganize parts of its Fixtures segment and a decision to move its Customer Repair Center function from Milpitas, California to Asia.
In the fiscal year ended July 31, 2009, the Company vacated certain facilities in an effort to consolidate operations and align the Company’s capacity after the merger with Credence. During fiscal 2015, the Company recognized expense of $0.3 million as a result of modifying sublease assumptions for its facility accrual associated with its Milpitas, California location. As of July 31, 2016 and 2015, the accrual for the previously restructured facility leases was $0.5 million and $1.4 million, respectively. This liability is included in other accrued expenses on the Company’s consolidated balance sheets as of July 31, 2016.
The restructuring expense recorded in the twelve months ended July 31, 2016 included relocation costs and severance related to our announcement in March 2015 of our decision to reorganize portions of our Fixtures Services Group as well as costs associated with the sale of our Interface Board Business in November 2015.
XCERRA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table sets forth the Company’s restructuring accrual activity for the three years ended July 31, 2016:
13. FAIR VALUE MEASUREMENTS
The Company determines its fair value measurements for assets and liabilities based upon the provisions of Topic 820, Fair Value Measurements and Disclosures, to the FASB ASC.
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 Company’s 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 Company’s 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 Company’s 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 Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.
XCERRA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table presents financial assets and liabilities measured at fair value and their related valuation inputs as of July 31, 2016 and July 31, 2015, respectively.
(1) Cash and cash equivalents as of July 31, 2016 and July 31, 2015 includes cash held in operating accounts of approximately $82.7 million and $76.3 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 Company’s long-term debt, which includes term loans, approximates fair value due to market interest. Long-term debt at July 31, 2016 and 2015 was $25.0 million and $27.5 million, respectively. Within the hierarchy of fair value measurement, these are level 2 inputs.
14. QUARTERLY RESULTS OF OPERATIONS (unaudited)
XCERRA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Net income for fiscal 2016 includes the following activity associated with non-recurring transactions:
Net income for fiscal 2015 includes the following activity associated with non-recurring transactions:
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
Xcerra Corporation
Norwood, Massachusetts
We have audited the accompanying consolidated balance sheets of Xcerra Corporation as of July 31, 2016 and 2015 and the related consolidated statements of operations and comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years in the period ended July 31, 2016. In connection with our audits of the financial statements, we have also audited the financial statement schedules listed in the accompanying index. These financial statements and schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements and schedules. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Xcerra Corporation at July 31, 2016 and 2015, and the results of its operations and its cash flows for each of the three years in the period ended July 31, 2016, in conformity with accounting principles generally accepted in the United States of America.
Also, in our opinion, the financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Xcerra Corporation’s internal control over financial reporting as of July 31, 2016, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated, September 16, 2016 expressed an unqualified opinion thereon.
/s/BDO USA, LLP
Boston, Massachusetts
September 16, 2016
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
There has been no change of accountants nor any disagreements with accountants on any matter of accounting principles or practices or financial disclosure required to be reported under this Item.
Item 9A.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures as of July 31, 2016. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e)) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time period specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of the Company’s disclosure controls and procedures as of July 31, 2016, the Company’s Chief Executive Officer and Chief Financial Officer concluded that, as of such date, the Company’s disclosure controls and procedures were effective at the reasonable assurance levels.
Management’s report on the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f)) under the Exchange Act) and the independent registered public accounting firm’s related audit report are included in this Item 9A.
Management’s Annual Report on Internal Control Over Financial Reporting
The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers and effected by the Company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
•
pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;
•
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
•
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of July 31, 2016. In making this assessment, the Company’s management used the criteria based on the framework in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Based on our assessment, management concluded that, as of July 31, 2016, the Company’s internal control over financial reporting is effective based on those criteria.
The Company’s independent registered public accounting firm has issued a report on its assessment of the Company’s internal control over financial reporting. This report appears below.
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
Xcerra Corporation
Norwood, Massachusetts
We have audited Xcerra Corporation’s internal control over financial reporting as of July 31, 2016, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Xcerra Corporation’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying “Item 9A, Management’s Annual Report on Internal Control Over Financial Reporting”. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Xcerra Corporation maintained, in all material respects, effective internal control over financial reporting as of July 31, 2016, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Xcerra Corporation as of July 31, 2016 and 2015, and the related consolidated statements of operations and comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years in the period ended July 31, 2016 and our report dated September 16, 2016 expressed an unqualified opinion thereon.
/s/BDO USA, LLP
Boston, Massachusetts
September 16, 2016
Changes in Internal Controls
There was no change in our internal control over financial reporting during the three months ended July 31, 2016 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 9B.
Item 9B. Other Information
None.
PART III
Item 10.
Item 10. Directors, Executive Officers and Corporate Governance
The information required by this item, including information relating to our directors and executive officers, Section 16(a) beneficial ownership reporting compliance, code of ethics, director nomination procedures and audit committee, is incorporated herein by reference from our definitive proxy statement in connection with our 2016 Annual Meeting of Stockholders (the “2016 Proxy Statement”). The 2016 Proxy Statement will be filed with the SEC not later than 120 days after the close of the fiscal year.
Item 11.
Item 11. Executive Compensation
The information required by this item, including information relating to our executive compensation and compensation committee, is incorporated herein by reference from the 2016 Proxy Statement.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item, including information relating to our security ownership of certain beneficial owners, is incorporated herein by reference from the 2016 Proxy Statement. In addition, the information under the heading “Securities Authorized for Issuance under Equity Compensation Plans” in Part II, Item 5 of this Form 10-K is incorporated herein by reference.
Item 13.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this item, including information relating to our related person transactions and director independence, is incorporated herein by reference from the 2016 Proxy Statement.
Item 14.
Item 14. Principal Accountant Fees and Services
The information required by this item, including information relating to our principal accountant fees and services, is incorporated herein by reference from the 2016 Proxy Statement.
PART IV
Item 15.
Item 15. Exhibits and Financial Statement Schedules
(a) 1. Financial Statements
The following consolidated financial statements of the Company for the fiscal year ended July 31, 2016, are included in Item 8, herein.
2. Financial Statement Schedules
Consolidated financial statement Schedule II for the Company is included in Item 15(c). All other schedules for which provision is made in the applicable security regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted.
(b) Exhibits
The exhibits filed as part of this Annual Report on Form 10-K are set forth on the Exhibit Index immediately preceding such exhibits, and are incorporated herein by reference.
(c) Financial Statement Schedules
SCHEDULE II
XCERRA CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
For Years Ended July 31, 2016, 2015 and 2014
(in thousands)
(1) Represents transfers from fully reserved vendor liability obligations and internal capital equipment and transfers to fixed assets. This figure also represents reserves related to the discontinued operations.
(2) Represents amounts written off or utilization of reserve or recovery of previously written off amounts.
(3) Amounts charged to expense and recorded in cost of sales are costs relating to product deemed defective or unusable during the normal manufacturing process. Deductions are also recorded to cost of sales and primarily represent scrapping of inventory no longer in use, with some release of reserves related to sales of previously reserved inventory.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
September 16, 2016
Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
EXHIBIT INDEX
+ This exhibit is a compensatory plan or arrangement in which executive officers or directors of the Registrant participate.
Pursuant to Item 601 of Regulation S-K, certain instruments with respect to long-term debt not exceeding 10% of the total assets of the Company and its subsidiaries on a consolidated basis are not filed herewith. The Company hereby agrees to furnish to the Commission a copy of each such instrument upon request.
Shareholder Return on Common Stock
The graph below compares Xcerra Corporation’s cumulative 5-year total shareholder return on common stock with the cumulative total returns of the NASDAQ Composite Index and the Philadelphia Semiconductor Sector Index. The graph tracks the performance of a $100 investment in our common stock and in each index (with the reinvestment of all dividends) from 7/31/2012 to 7/31/2016.
* $100 invested on 7/31/12 in stock or index, including reinvestment of dividends.
Fiscal year ending July 31. 2016
The stock price performance included in this graph is not necessarily indicative
of future stock price performance.