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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K

(Mark One)

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended July 31, 2017

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File No. 000-10761

 

 

Xcerra Corporation

(Exact name of registrant as specified in its charter)

 

 

 

MASSACHUSETTS   04-2594045

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

825 University Ave

Norwood, Massachusetts

  02062
(Address of principal executive offices)   (Zip code)

Registrant’s telephone number, including area code: (781) 461-1000

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Name of each exchange on which registered

Common Stock, par value $0.05 per share   NASDAQ Global Market

Securities registered pursuant to Section 12(g) of the Act:

None

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ☐    No  ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ☐    No  ☒

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ☒    No  ☐

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ☒

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer    ☐                 Accelerated Filer    ☒                 Non-Accelerated Filer    ☐

Smaller Reporting Company Filer    ☐

Emerging growth company    ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standard provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.): Yes ☐ No ☒

The aggregate market value of the Common Stock held by non-affiliates of the registrant on January 31, 2017, the last business day of the registrant’s most recently completed second fiscal quarter was $400,580,260

Number of outstanding shares of Common Stock as of September 7, 2017: 54,711,698

 

 

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s definitive Proxy Statement in connection with its 2017 Annual Meeting of Stockholders, or an amendment on Form 10-K/A, are incorporated by reference into Part III of this Form 10-K, as indicated herein.

 

 

 


Table of Contents

XCERRA CORPORATION

TABLE OF CONTENTS

 

          Page  

PART I

     

Item 1.

   Business Introduction      1  
   Products and Services      4  
   Engineering and Product Development      6  
   Sales and Distribution      6  
   Customers      6  
   Manufacturing and Supply      7  
   Competition      7  
   Backlog      9  
   Proprietary Rights      9  
   Employees      9  
   Environmental Affairs      9  

Item 1A.

   Risk Factors      9  

Item 1B.

   Unresolved Staff Comments      21  

Item 2.

   Properties      22  

Item 3.

   Legal Proceedings      22  

Item 4.

   Mine Safety Disclosures      23  

PART II

     

Item 5.

   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities      24  

Item 6.

   Selected Financial Data      26  

Item 7.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      27  

Item 7A.

   Quantitative and Qualitative Disclosures About Market Risk      45  

Item 8.

   Financial Statements and Supplementary Data      46  

Item 9.

   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure      83  

Item 9A.

   Controls and Procedures      83  

Item 9B.

   Other Information      86  

PART III

     

Item 10.

   Directors, Executive Officers and Corporate Governance      86  

Item 11.

   Executive Compensation      86  

Item 12.

   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters      86  

Item 13.

   Certain Relationships and Related Transactions, and Director Independence      86  

Item 14.

   Principal Accountant Fees and Services      86  

PART IV

     

Item 15.

   Exhibits and Financial Statement Schedules      87  
   Financial Statements      87  
   Financial Statement Schedules      87  
   Signatures      89  
   Exhibit Index      90  
   Exhibits   


Table of Contents

PART I

Item 1.

Business Introduction

Xcerra Corporation (Xcerra, the Company, we or us), 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 was payable on the first anniversary of the Closing subject to claims for indemnification by Fastprint, if any, prior to that time. As of the first anniversary date of the Closing, there were no claims for indemnification made by Fastprint, and the holdback was paid to ECT on December 1, 2016.

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.

 

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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:

 

 

LOGO

 

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:

 

   

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.

 

   

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.

 

   

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

 

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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.

 

   

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.

 

   

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.

 

   

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; Penang, Malaysia and Hsinchu City, Taiwan 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 (SEC). 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.

Pending Acquisition

On April 7, 2017, we entered into an Agreement and Plan of Merger (as amended, the Merger Agreement) with Unic Capital Management Co., Ltd., a Chinese company (Unic Capital) and China Integrated Circuit Industry Investment Fund Co., Ltd., a Chinese company (Sponsor) and Unic Acquisition Corporation, a Massachusetts corporation (Merger Sub). On August 4, 2017, pursuant to that certain Assignment and Assumption Agreement, by and among Unic Capital, Hubei Xinyan Equity Investment Partnership (Limited Partnership), a Chinese limited partnership (Parent) and Xcerra, Unic Capital irrevocably transferred, conveyed, assigned and delivered to Parent all of Unic Capital’s right, interest, benefits, liabilities and obligations in and under the Merger Agreement, and Parent accepted, assumed and agreed to pay, perform, fulfill and discharge all obligations and liabilities of Unic Capital arising under or relating to the Merger Agreement; provided, however, that in the case where Parent is unable to pay, perform, fulfill or discharge all obligations and liabilities under the Merger Agreement, Unic Capital will remain wholly liable. Also on August 4, 2017, an amendment to the Merger Agreement was entered into by and among Parent, Sponsor and the Company, pursuant to which, upon

 

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the satisfaction or waiver of the conditions to the closing set forth in the Merger Agreement, Merger Sub will, at the closing, merge with and into the Company (the Merger), and the Company will become a controlled subsidiary of Parent and our stockholders will receive $10.25 in cash, without interest, less any required tax withholding, for each share of our common stock.

Assuming timely satisfaction of the necessary closing conditions, we anticipate that the Merger will be completed in our fiscal year ending July 31, 2018. For additional information related to the Merger Agreement, please refer to the final proxy statement on Schedule 14A filed with the SEC on September 5, 2017, which includes the full text of the Merger Agreement attached as Annex A.

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, 2017 (fiscal 2017), we determined that we have six operating segments

 

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(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.

 

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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 $22.1 million or 6 % of net sales for fiscal 2017, $24.1 million, or 7% of net sales in fiscal year ended July 31, 2016 (fiscal 2016); and $28.6 million, or 8% of net sales, in the fiscal year ended July 31, 2015 (fiscal 2015).

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 150 people as of July 31, 2017. 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%, 82%, and 79%, of total net sales in fiscal 2017, 2016, and 2015, 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

 

     For the fiscal
years ended July 31,
 
     2017     2016     2015  

The following customers had net sales in excess of 10% of our total net sales for the periods indicated:

      

Spirox (1)

     15     19     13

 

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Net sales to the top ten customers were 59%, 55%, and 54% of net sales in fiscal 2017, 2016, and 2015, 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    HiSilicon    Rohm
Analog Devices    Infineon Technologies    Samsung
AT&S    Intersil    Sigurd
ams AG    KYEC    Skyworks Solutions
ASE    Maxim Integrated Products    Spirox
Robert Bosch GmbH    Mediatek    STATSChipPac
Broadcom    Melexis    STMicroelectronics
Carsem    Microchip Technology    Texas Instruments
Chipmos    Murata    TTM Technologies
Continental    Nordic Semiconductor    Unisem
Elmos    RichTek    Wurth
Giga Solution      

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.

 

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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:

 

   

Technologically advanced products well suited for industry’s high volume 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.

 

   

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.

 

   

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 (including the since divested Interface Board Business) 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.

 

   

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.

 

   

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.

 

   

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 60% 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.

 

   

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.

 

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Backlog

At July 31, 2017, our backlog of unfilled orders for all products and services was $84.7 million, compared with $54.3 million at July 31, 2016. The $30.4 million, or 56%, increase was primarily due to stronger bookings during fiscal 2017 driven by strength in the mobility, automotive, and MEMS and sensors markets, primarily in the Semiconductor Test segment. 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, 2017 for our reportable segments was as follows (in millions):

 

Semiconductor Test Solutions

   $ 72.7  

Electronic Manufacturing Solutions

     12.0  
  

 

 

 

Total

   $ 84.7  
  

 

 

 

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, 2017, we had 1,640 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. 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

 

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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.

The proposed Merger may not be completed within the expected timeframe, or at all, and the failure to complete the Merger could adversely affect our business and the price of our common stock.

The closing of the Merger is subject to various customary conditions, including, among others, (i) adoption of the Merger Agreement by the affirmative vote of holders of two-thirds of the outstanding shares of our common stock, (ii) the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the HSR Act), (iii) filings and approvals with or by certain governmental authorities, including governmental authorities in the People’s Republic of China (PRC) and Taiwan and (iv) review and clearance by the Committee on Foreign Investment in the United States (CFIUS). In addition, the Merger Agreement may be terminated under specified circumstances. Failure to complete the Merger could adversely affect our business and the market price of our common stock in a number of ways, including:

 

   

our current stock price likely reflects a market assumption that the proposed Merger will occur, meaning that a failure to complete the proposed Merger could result in a decline in the price of our common stock;

 

   

we have incurred, and continue to incur, significant transaction costs in connection with the proposed Merger, for which we will have received little or no benefit if the Merger is not completed. Many of these costs will be payable even if the Merger is not completed and may relate to activities that we would not have undertaken other than to complete the Merger;

 

   

a failed Merger may result in negative publicity and/or give a negative impression of us in the investment community or business community generally, and could have an adverse effect on our on-going operations including, but not limited to, retaining and attracting employees; and

 

   

if the Merger Agreement is terminated under specified circumstances, we may be required to pay Parent a termination fee.

The announcement and pendency of our proposed acquisition by Parent could adversely affect our business, financial condition, and results of operations.

The announcement and pendency of the proposed Merger could disrupt our business and create uncertainty about it, which could have an adverse effect on our business, results of operations and financial condition, regardless of whether the Merger is completed. These risks to our business, all of which could be exacerbated by a delay in the completion of the Merger, include:

 

   

diversion of significant management and employee time and resources towards the completion of the Merger;

 

   

impairment of our ability to attract and retain key personnel;

 

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inability to take advantage of alternative business opportunities or effectively respond to competitive pressures or industry developments;

 

   

difficulties maintaining relationships with employees, customers and other business partners and suppliers;

 

   

restrictions on the conduct of our business prior to the completion of the Merger, which prevent us from taking specified actions without the prior consent of Parent, which we might otherwise take in the absence of the Merger Agreement; and

 

   

potential litigation relating to the Merger and the related costs of any such litigation.

If the Merger Agreement is terminated, we may, under certain circumstances, be obligated to pay a termination fee to Parent. These costs could require us to use available cash that would have otherwise been available for other uses.

If the Merger is not completed, in certain circumstances, we could be required to pay a termination fee of $22.8 million to Parent. If the Merger Agreement is terminated, the termination fee we may be required to pay, if any, under the Merger Agreement may require us to use available cash that would have otherwise been available for general corporate purposes or other uses. For these and other reasons, termination of the Merger Agreement could materially and adversely affect our business, results of operations or financial condition, which in turn would materially and adversely affect the price of our common stock.

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.

 

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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 2017, fiscal 2016 and fiscal 2015 was Spirox, which accounted for 15%, 19%, and 13%, respectively, of our net sales in those years. Sales to the top ten customers were 59%, 55%, and 54%, of net sales in fiscal 2017, fiscal 2016, and fiscal 2015, 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.

 

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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, 2017, our outstanding indebtedness was approximately $22.2 million. Our existing indebtedness and any additional indebtedness that we may incur in the future could have important consequences, including:

 

   

making it more difficult for us to satisfy our obligations under our debt agreements, including financial and operational restrictions;

 

   

making it difficult for us to obtain any necessary future financing for working capital, capital expenditures, debt service requirements or other purposes;

 

   

limiting our future ability to refinance our indebtedness on terms acceptable to us or at all;

 

   

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;

 

   

limiting our flexibility in planning for, or reacting to changes in, our business and the industries in which we compete;

 

   

placing us at a possible competitive disadvantage with respect to less leveraged competitors and competitors that have better access to capital resource; and

 

   

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 $160.7 million as of July 31, 2017 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.

 

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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:

 

   

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;

 

   

order cancellations by customers;

 

   

lower gross margins in any particular period due to changes in:

 

   

our product mix;

 

   

the configurations of test systems sold;

 

   

the customers to whom we sell our test systems; or

 

   

volume;

 

   

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

 

   

changes in the timing of product orders due to:

 

   

unexpected delays in the introduction of products by our customers,

 

   

excess production capacity by our customers,

 

   

shorter than expected lifecycles of our customers’ semiconductor devices,

 

   

uncertain market acceptance of products developed by our customers, or

 

   

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

 

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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

 

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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 2017 and fiscal 2016, and 79% of our revenues for fiscal 2015. 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:

 

   

changes in law or policy resulting in burdensome government controls, tariffs, restrictions, embargoes or export license requirements;

 

   

political and economic instability in our target international markets;

 

   

longer payment cycles common in foreign markets;

 

   

difficulties of staffing and managing our international operations;

 

   

less favorable foreign intellectual property laws making it harder to protect our technology from appropriation by competitors;

 

   

difficulties collecting our accounts receivable;

 

   

the impact of the Foreign Corrupt Practices Act of 1977 and similar laws; and

 

   

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

 

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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.

We are a multinational organization faced with increasingly complex tax issues in many jurisdictions, and we could be obligated to pay additional taxes in various jurisdictions, including in the United States.

As a multinational organization, we are subject to taxation in jurisdictions around the world with increasingly complex tax laws, the application of which can be uncertain. The amount of taxes we pay in these jurisdictions could increase substantially as a result of changes in the applicable tax principles, including increased tax rates, new tax laws or revised interpretations of existing tax laws and precedents, which could have a material adverse effect on our liquidity and operating results. In addition, the authorities in these jurisdictions could review our tax returns and impose additional tax, interest and penalties, and the authorities could claim that various withholding requirements apply to us or our subsidiaries or assert that benefits of tax treaties are not available to us or our subsidiaries, any of which could have a material impact on us and the results of our operations.

There is growing pressure in many jurisdictions (including the United States) and from multinational organizations such as the Organization for Economic Co-operation and Development, or OECD, and the European Union, or EU, to amend existing international tax rules in order to render them more responsive to

 

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current global business practices. For example, the OECD has released guidance relating to various international tax related topics in an initiative referred to as Base Erosion and Profit Shifting, or BEPS, that aims to standardize and modernize global tax policy. Depending on the final form of the BEPS guidance and the legislation ultimately enacted by the OECD members, BEPS could have material adverse consequences on our effective tax rate, the amount of tax we pay and on our financial position and results of operations.

In addition, some members of the U.S. Congress have recently begun publicly considering potential tax reform, including the possibility of replacing large parts of the existing federal income tax with a so-called “destination-based cash flow tax” in addition to other potential tax reforms that the recently elected President and members of his administration may be considering.

Although we monitor these developments, it is very difficult to assess to what extent these changes may be implemented in the United States and other jurisdictions in which we conduct our business or may impact the way in which we conduct our business or our effective tax rate due to the unpredictability and interdependency of these potential changes. Changes in tax laws and related regulations and practices could have a material adverse effect on our business operations, effective tax rate and financial position and results of operations.

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

 

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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.

 

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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, 2017, our stock price ranged from a low of $5.14 to a high of $10.01. 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:

 

   

quarterly variations in operating results;

 

   

variances of our quarterly results of operations from securities analysts’ estimates;

 

   

changes in financial estimates and recommendations by securities analysts;

 

   

announcements of technological innovations, new products, acquisitions or strategic alliances; and

 

   

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.

 

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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. Unresolved Staff Comments

None.

 

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Item 2. Properties

The following table provides information about our principal facilities:

 

Location

  

Reportable Segment

   Major Activities      Approximate Square
Feet of Floor Space
 

Properties Owned

        

Rosenheim, Germany

   Semiconductor Test Solutions      2, 3, 4, 5        216,500  

Penang, Malaysia

   Semiconductor Test Solutions      2, 3, 4        18,000  

Properties Leased:

        

Norwood, Massachusetts

   Semiconductor Test Solutions      1, 2, 4, 5        56,400  

Fontana, California

   Electronic Manufacturing Solutions      2, 3, 4, 5        33,700  

Milpitas, California

   Semiconductor Test Solutions      2, 4, 5        31,400  

Other Properties Leased:

        

North America

   Semiconductor Test Solutions      2, 4        24,000  
   Electronic Manufacturing Solutions      2, 3, 4        18,800  

Europe

   Semiconductor Test Solutions      2, 4        103,400  
   Electronic Manufacturing Solutions      2, 3, 4, 5        42,700  

Asia

   Semiconductor Test Solutions      2, 4, 5        60,500  
   Electronic Manufacturing Solutions      2, 3, 4, 5        78,000  

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 4.0 acres of land in Hillsboro, Oregon as a result of our merger with Credence in 2008. As of July 31, 2017 this land is included in Assets Held for Sale on our Consolidated Balance Sheet, as we are actively marketing the property. One parcel was sold during fiscal 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. 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.

On August 22, 2017, a putative shareholder class action complaint was filed in the United States District Court for the District of Massachusetts against the Company and each member of the Board, captioned Chris Stallings v. Xcerra Corporation, et al., C.A. No. 1:17-cv-11579. The complaint alleges, among other things, that the Company and the Board violated federal securities laws and regulations by soliciting stockholder votes in connection with the Merger through a proxy statement that omits material facts necessary to make the statements therein not false or misleading. The complaint seeks, among other things, either to enjoin the Company and the Board from conducting the stockholder vote on the Merger unless and until the allegedly omitted material information is disclosed to the Company’s stockholders or, in the event the Merger is consummated, to recover damages resulting from the Company’s and the Board’s violations of federal securities laws and regulations.

 

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On August 23, 2017, a putative shareholder class action complaint was filed in the United States District Court for the District of Massachusetts against the Company, each member of the Board, Parent, Unic Capital, Sponsor and Merger Sub, captioned Robert Berg v. Xcerra Corporation et. al., Case No. 1:17-cv-11583. The complaint alleges, among other things, that the Company, the Board, Parent, Unic Capital, Sponsor and Merger Sub violated federal securities laws and regulations by soliciting stockholder votes in connection with the Merger through a proxy statement that omits material information with respect to the proposed Merger, which renders the proxy statement false and misleading. The complaint seeks, among other things, either to enjoin the Company, the Board, Parent, Unic Capital, Sponsor and Merger Sub from proceeding with, consummating or closing the Merger or, in the event the Merger is consummated, to rescind the Merger and set aside or award rescissory damages.

The Company is reviewing the complaints and has not yet formally responded to them, but believes that the plaintiffs’ allegations are without merit and intends to defend against them vigorously. However, litigation is inherently uncertain and there can be no assurance regarding the likelihood that the Company’s defense of the actions will be successful. Additional complaints containing substantially similar allegations may be filed in the future.

Item 4. Mine Safety Disclosures.

Not applicable.

 

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PART II

 

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:

 

Period

   High      Low  

Fiscal Year Ended July 31, 2017

     

First Quarter

   $ 6.22      $ 5.14  

Second Quarter

     7.99        5.32  

Third Quarter

     10.01        7.21  

Fourth Quarter

     10.00        9.05  

Fiscal Year Ended July 31, 2016

     

First Quarter

   $ 7.26      $ 5.77  

Second Quarter

     7.36        5.06  

Third Quarter

     6.55        4.93  

Fourth Quarter

     7.60        5.51  

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, 2017, we had approximately 229 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, 2017:

 

Period

   Total
Number

of
Shares
Purchased
     Average
Price
Paid
per

Share
     Total
Number of
Shares
Purchased
as

Part of
Publicly
Announced
Plans or
Programs
(1)(2)
     Remaining Dollar
Value that
May Yet
Be Purchased

Under
the Plans or
Programs (excluding
commissions)
 

Inception of 2015 program – 9/3/2015

     —        $ —          —        $ 30,000,000  

Three months ended 10/31/2015

     1,206,605      $ 6.12        1,206,605      $ 22,622,937  

Three months ended 1/31/2016

     750,128      $ 6.11        750,128      $ 18,046,697  

Three months ended 4/30/2016

     —        $ —          —        $ 18,046,697  

Three months ended 7/31/2016

     —        $ —          —        $ 18,046,697  

Twelve months ended 7/31/17

     —        $ —          —        $ 18,046,697  
  

 

 

       

 

 

    

Total

     1,956,733      $ 6.12        1,956,733     

 

(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, 2017, we have repurchased 1,956,733 shares for $12.0 million under the 2015 Repurchase Plan.

 

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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, 2017.

 

     Equity Compensation Plan Information  

Plan Category

   Number of securities
to  be issued upon
exercise of
outstanding options,
warrants and rights
     Weighted average
exercise price of
outstanding options,
warrants and rights
     Number of securities  remaining
available for future issuance
under equity compensation
plans (excluding securities in
first column)
 

Equity compensation plans approved by security holders

     2,069,591      $ 6.85        3,433,998

Equity compensation plans not approved by security holders

     —          —          —    
  

 

 

       

 

 

 

Total

     2,069,591      $ 6.85        3,433,998
  

 

 

       

 

 

 

 

* Includes 920,737 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).

 

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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, 2017 are derived from our audited consolidated financial statements.

 

    Fiscal Years Ended July 31,
(In thousands except per share data)
 
    2017 (1)     2016 (1)     2015 (1)     2014 (1)     2013  

Consolidated Statements of Operations Data:

         

Net sales

  $ 390,771     $ 324,206     $ 397,978     $ 305,106     $ 151,982  

Cost of sales

    217,662       184,280       218,064       165,248       71,223  

Engineering and product development expenses

    61,689       60,929       64,157       60,733       52,314  

Selling, general and administrative expenses

    82,141       76,742       82,124       77,017       39,253  

Amortization of purchased intangible assets

    676       1,203       1,834       1,936       1,582  

Restructuring

    791       924       2,206       3,943       476  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

    27,812       128       29,593       (3,771     (12,866

Bargain purchase gain

    —         —         —         8,621       —    

Other income (expense), net

    687       671       4,513       (1,992     464  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before provision for income taxes

    28,499       799       34,106       2,858       (12,402

Provision for (benefit from) income taxes

    5,944       (1,660     2,588       767       (275
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

    22,555       2,459       31,518       2,091       (12,127

Income (loss) from discontinued operations, net of tax

    —         8,715       (3,292     (1,258     —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ 22,555     $ 11,174     $ 28,226     $ 833     $ (12,127
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic net income (loss) per share:

         

Net income (loss) from continuing operations

  $ 0.42     $ 0.05     $ 0.59     $ 0.04     $ (0.25

Net income (loss) from discontinued operations, net of tax

    —         0.16       (0.06     (0.02     —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic net income (loss) per share

  $ 0.42     $ 0.21     $ 0.53     $ 0.02     $ (0.25
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted net income (loss) per share:

         

Net income (loss) from continuing operations

  $ 0.41     $ 0.05     $ 0.58     $ 0.04     $ (0.25

Net income (loss) from discontinued operations, net of tax

    —         0.16       (0.06     (0.02     —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted net income (loss) per share

  $ 0.41     $ 0.21     $ 0.52     $ 0.02     $ (0.25
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares used in computing net income (loss) per share:

         

Basic

    54,127       53,783       53,658       48,214       47,719  

Diluted

    54,872       53,974       54,531       49,150       47,719  

Consolidated Balance Sheet Data:

         

Working capital

  $ 256,902     $ 230,688     $ 225,337     $ 192,109     $ 147,393  

Property and equipment, net

    28,509       25,483       31,450       32,153       16,647  

Total assets

    438,613       378,083       387,475       364,143       247,601  

Total debt

    21,327       24,019       26,447       68,748       —    

Stockholders’ equity

    313,679       281,838       278,468       204,619       198,497  

Other Information:

         

Current ratio

    3.61       4.48       4.04       3.31       4.91  

Asset turnover

    0.89       0.86       1.02       0.84       0.61  

Debt as a percentage of stockholders’ equity

    6.8     8.5     8.7     25     —    

Purchases of property and equipment

  $ 6,852     $ 3,907     $ 4,389     $ 7,743     $ 2,769  

Depreciation and amortization

  $ 6,190     $ 6,953     $ 8,084     $ 8,060     $ 8,044  

 

(1) The selected consolidated financial data for the fiscal years ended July 31, 2017, 2016, 2015 and 2014 includes the results of our Multitest, ECT and atg-Luther & Maelzer businesses, which we acquired from Dover Printing & Identification, Inc. on December 1, 2013.

 

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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 was payable on the first anniversary of the Closing subject to claims for indemnification by Fastprint, if any, prior to that time. As of the first anniversary date of the Closing, there were no claims for indemnification made by Fastprint, and the holdback was paid to Everett Charles on December 1, 2016.

 

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Agreement and Plan of Merger

On April 7, 2017, we entered into the Merger Agreement with Unic Capital and Sponsor, as joined by Parent on August 4, 2017. The Merger Agreement was unanimously approved by Xcerra’s Board of Directors (the “Board”). Pursuant to the terms and subject to the conditions of the Merger Agreement, at the effective time of the Merger (the “Effective Time”), each share of our common stock, that is outstanding immediately prior to the Effective Time (excluding any shares owned by Xcerra, Parent or Merger Sub or any direct or indirect wholly owned subsidiary of Parent or Merger Sub (which will be cancelled) and any shares with respect to which appraisal rights have been properly exercised under Massachusetts law) will be cancelled and automatically converted into the right to receive $10.25 in cash, without interest (the Merger Consideration).

On August 4, 2017, pursuant to that certain Assignment and Assumption Agreement, by and among Unic Capital, Parent and Xcerra, Unic Capital irrevocably transferred, conveyed, assigned and delivered to Parent all of Unic Capital’s right, interest, benefits, liabilities and obligations in and under the Merger Agreement, and Parent accepted, assumed and agreed to pay, perform, fulfill and discharge all obligations and liabilities of Unic Capital arising under or relating to the Merger Agreement; provided, however, that in the case where Parent is unable to pay, perform, fulfill or discharge all obligations and liabilities under the Merger Agreement, Unic Capital will remain wholly liable. Also on August 4, 2017, pursuant to that certain Amendment to the Agreement and Plan of Merger, by and among Parent, Sponsor and Xcerra, the words “wholly-owned Subsidiary of Parent” in the first paragraph of the Recitals, the second paragraph of the Recitals, Section 2.1, Section 6.19 and Section 9.3 of the Merger Agreement were deleted in their entirety and replaced by the words “controlled Subsidiary of Parent.” Therefore, upon the satisfaction or waiver of the conditions to the closing set forth in the Merger Agreement, Merger Sub will, at the closing, merge with and into the Company, and the Company will become a controlled subsidiary of Parent.

The obligations of the parties to consummate the Merger are subject to the satisfaction (or waiver, if applicable) of various customary conditions, including (i) adoption of the Merger Agreement by the affirmative holders of two-thirds of the outstanding shares of our common stock, (ii) the expiration or termination of the applicable waiting period under the HSR Act (iii) filings and approvals with or by certain governmental authorities, including governmental authorities in Taiwan, (iv) review and clearance by CFIUS, (v) the absence of certain governmental orders prohibiting the Merger, (vi) the accuracy of the representations and warranties of each party contained in the Merger Agreement (subject to certain materiality qualifications) and (vii) each party’s compliance with or performance of the covenants and agreements in the Merger Agreement in all material respects.

We have made customary representations, warranties and covenants in the Merger Agreement, including, among others, covenants (i) to carry on our business in the ordinary course consistent with past practice during the period between the execution of the Merger Agreement and the closing of the Merger, (ii) not to engage in specified types of transactions or take certain actions during the interim period unless consented to in writing by Parent, (iii) subject to certain exceptions, not to solicit alternative transactions and (iv) subject to certain exceptions, not to withhold or withdraw (or qualify or modify in a manner adverse to Parent) the recommendation of the Board that our stockholders adopt the Merger Agreement. The Merger Agreement contains certain termination rights for the Company and Parent. Upon termination of the Merger Agreement under specified circumstances, including in connection with the Company’s entry into a definitive agreement providing for the consummation of a superior proposal as permitted under the Merger Agreement, the Company will be required to pay Parent a termination fee of $22.8 million.

The Merger Agreement also provides that, upon termination of the Merger Agreement under specified circumstances, Parent will be required to pay the Company a termination fee of $22.8 million (the Parent Termination Fee). The Parent Termination Fee will become payable from Parent to the Company if the Merger Agreement is terminated by the Company in the event that (i) Parent breaches its representations and warranties or covenants such that the applicable closing condition regarding representations and warranties or performance

 

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of covenants would not be satisfied (subject to specified cure rights), (ii) all of Parent’s conditions to closing are satisfied or waived and Parent has failed to consummate the Merger, (iii) the Merger is not consummated by the Termination Date (as defined in the Merger Agreement) and, at such time, all conditions to the Merger have been satisfied other than those resulting from any failure to obtain certain required approvals from governmental authorities in the PRC or (iv) any governmental authority in the PRC shall have enacted, issued or promulgated any law or order making the Merger illegal or otherwise preventing the consummation of the Merger; provided, that the Parent Termination Fee payable by Parent as a result of termination of the Merger Agreement under the circumstances described in clauses (iii) and (iv) is equal to $14.25 million. The foregoing description of the Merger Agreement does not purport to be complete and is subject to, and qualified in its entirety by, the full text of the Merger Agreement, a copy of which is attached as Exhibit 2.1 to the Current Report on Form 8-K filed by the Company on April 10, 2017. In addition, see Part I, Item 1A. Risk Factors of this Form 10-K, which is incorporated herein by reference, for a discussion of certain risks due to the announcement and pendency of the Merger or the failure of the Merger to be completed that could have a material adverse effect on our business and operating results. These risks include, but are not limited to, the diversion of management and employee attention, potential employee attrition, potential adverse reactions or changes to our business relationships with customers, partners, and suppliers and uncertainty surrounding our future plans and prospects.

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.

 

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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 ASC 830, Foreign Currency Matters. 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 ($0.1) million, $1.3 million, and $2.1 million, respectively, for the fiscal years ended July 31, 2017, 2016 and 2015. 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 ASC 740, Income Taxes (ASC 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. ASC 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, ASC 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 $206.9 million at July 31, 2016 to $203.3 million at July 31, 2017. 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. 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

 

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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 ASC 350-10, Intangibles—Goodwill and Other, (ASC 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, 2017, our goodwill is allocated to our Semiconductor Test reporting unit and our Contactors reporting unit.

As part of the new simplification guidance issued by the FASB, the goodwill test involves a one-step comparison of the reporting unit’s fair value to its carrying value, including goodwill (“Step 1”). The prior guidance required a hypothetical purchase price allocation as the second step of the goodwill impairment test, but this step has been eliminated. If the reporting unit’s fair value exceeds its carrying value, no further procedures are required. However, if the reporting unit’s fair value is less than the carrying value, an impairment charge is recorded for the difference between the fair value and carrying value of the reporting unit. In applying the goodwill impairment test, we may assess qualitative factors to determine whether it is more likely than not that the fair value of the reporting units is less than its carrying value (“Step 0”). Qualitative factors may include, but are not limited to, economic, market and industry conditions, cost factors, and overall financial performance of the reporting unit. If after assessing these qualitative factors, the Company determines it is “more-likely-than-not” that the carrying value is less than the fair value, then performing Step 1 of the goodwill impairment test is unnecessary. We periodically engages third-party valuation consultants to assist in evaluating the Company’s estimated fair value calculations. In accordance with ASC 350, we performed our goodwill impairment test as of July 31, 2017 and 2016, and determined that no adjustment to goodwill was necessary. As of July 31, 2017, we determined using a Step 0 analysis in accordance with ASC 350 that it was more likely than not that the fair value of the reporting units to which goodwill is allocated exceeded the carrying values of those reporting units.

 

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As of July 31, 2016, we completed a Step 1 analysis using a Discounted Cash Flow (DCF) method for estimating the fair value of the reporting units, including 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, 2017, 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 consider the guidance in ASC 350-30-35, 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 ASC 360, Property, Plant and Equipment, 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, 2017, there were no indicators that required us to conduct a recoverability test of long-lived assets other than goodwill, as of that date.

 

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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.

 

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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):

 

     Year End July 31,     %
Change
    Year End July 31,     %
Change
 
     2017     2016       2016     2015    

Net product sales

   $ 368,754     $ 300,072       23     $ 300,072     $ 369,347       (19

Net service sales

     22,017       24,134       (9     24,134       28,631       (16
  

 

 

   

 

 

     

 

 

   

 

 

   

Net sales

     390,771       324,206       21       324,206       397,978       (19

Cost of sales

     217,662       184,280       18       184,280       218,064       (15
  

 

 

   

 

 

     

 

 

   

 

 

   

Gross profit

     173,109       139,926       24       139,926       179,914       (22

Engineering and product development expenses

     61,689       60,929       1       60,929       64,157       (5

Selling, general and administrative expenses

     82,141       76,742       7       76,742       82,124       (7

Amortization of purchased intangible assets

     676       1,203       (44     1,203       1,834       (34

Restructuring

     791       924       (14     924       2,206       (58
  

 

 

   

 

 

     

 

 

   

 

 

   

Income from continuing operations

     27,812       128       >100       128       29,593       (100

Other (expense) income:

            

Interest expense

     (1,122     (1,079     4       (1,079     (995     8  

Interest income

     733       571       28       571       452       26  

Other (expense) income, net

     1,076       1,179       (9     1,179       5,056       (77
  

 

 

   

 

 

     

 

 

   

 

 

   

Income from continuing operations before income taxes

     28,499       799       >100       799       34,106       (98

Provision for (benefit from) income taxes

     5,944       (1,660     458       (1,660     2,588       (164
  

 

 

   

 

 

     

 

 

   

 

 

   

Income from continuing operations

     22,555       2,459       817       2,459       31,518       (92

Income (loss) from discontinued operations, net of tax

     —         8,715       (100     8,715       (3,292     (365
  

 

 

   

 

 

     

 

 

   

 

 

   

Net income

   $ 22,555     $ 11,174       102   $ 11,174     $ 28,226       (60 %) 
  

 

 

   

 

 

     

 

 

   

 

 

   

Basic net income (loss) per share:

            

Net income from continuing operations

   $ 0.42     $ 0.05       $ 0.05     $ 0.59    

Income (loss) from discontinued operations, net of tax

     —         0.16         0.16     $ (0.06  
  

 

 

   

 

 

     

 

 

   

 

 

   

Basic net income per share

   $ 0.42     $ 0.21       $ 0.21     $ 0.53    
  

 

 

   

 

 

     

 

 

   

 

 

   

Diluted net income (loss) per share:

            

Net income from continuing operations

   $ 0.41     $ 0.05       $ 0.05     $ 0.58    

Income (loss) from discontinued operations, net of tax

     —         0.16         0.16     $ (0.06  
  

 

 

   

 

 

     

 

 

   

 

 

   

Diluted net income per share

   $ 0.41     $ 0.21       $ 0.21     $ 0.52    
  

 

 

   

 

 

     

 

 

   

 

 

   

Weighted average common shares used in computing net income (loss) per share:

            

Basic

     54,127       53,783         53,783       53,658    

Diluted

     54,872       53,974         53,974       54,531    

 

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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:

 

     Percentage of Net
Sales
Year Ended July 31,
 
     2017     2016     2015  

Net sales

     100     100     100

Cost of sales

     55.7       56.8       54.8  
  

 

 

   

 

 

   

 

 

 

Gross profit

     44.3       43.2       45.2  

Engineering and product development expenses

     15.8       18.8       16.1  

Selling, general and administrative expenses

     21.0       23.7       20.6  

Amortization of purchased intangible assets

     0.2       0.4       0.5  

Restructuring

     0.2       0.3       0.6  
  

 

 

   

 

 

   

 

 

 

Income from operations

     7.1       0.0       7.4  

Other (expense) income:

      

Interest expense

     (0.3     (0.3     (0.2

Interest income

     0.2       0.2       0.1  

Other income (expense), net

     0.3       0.4       1.3  
  

 

 

   

 

 

   

 

 

 

Income before income taxes

     7.3       0.3       8.6  

Provision for (benefit from) income taxes

     1.5       (0.5     0.7  
  

 

 

   

 

 

   

 

 

 

Income from continuing operations

     5.8       0.8       7.9  

Income (loss) from discontinued operations, net of tax

     —         2.7       (0.8
  

 

 

   

 

 

   

 

 

 

Net income

     5.8     3.5     7.1
  

 

 

   

 

 

   

 

 

 

Fiscal 2017 Compared to Fiscal 2016

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 2017 compared to the fiscal year ended July 31, 2016 was driven by positive business trends in our Semiconductor Test Solutions (STS) reportable segment. For the year ended July 31, 2017, increases in the STS reportable segment more than offset decreases in the EMS reportable segment.

Our STS segment reported net sales of $319.3 million for fiscal 2017 as compared to $252.0 million for fiscal 2016. This segment includes our Semiconductor Test group, Handler group and Integrated Products group. The increase of 26.7% was driven by higher Semiconductor Test and Handler segment sales for the twelve months ended July 31, 2017 primarily in the automotive, mobility, and MEMS and sensors markets. Service revenue from the Semiconductor Test segment decreased by 8.8% in fiscal 2017 as compared to fiscal 2016 primarily due to increased reliability of our test equipment which reduces the demand for post-warranty service contracts and lower priced service contracts based on the lower average selling price of the underlying testers.

Our Electronic Manufacturing Solutions segment reported net sales of $71.5 million in fiscal 2017 as compared to $72.2 million in fiscal 2016 or less than a 1% decrease. This segment is comprised of our PCB Test Group, our Probes/Pins Group and our Fixtures Services Group.

Gross profit. The increase in gross profit for fiscal 2017 as compared to fiscal 2016 was due primarily to an increase in net sales for the comparative periods in all segments.

 

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Gross profit percentage increased from 43.2% for the twelve months ended July 31, 2016 to 44.3% for the twelve months ended July 31, 2017, largely driven by increased revenue and product mix.

For fiscal 2017, we recorded $3.9 million in sales of previously reserved inventory, as compared to $3.8 million in the prior fiscal year. We released reserves of $1.2 million and $0.8 million related to these sales for fiscal years 2017 and 2016, respectively.

Engineering and product development expenses. Engineering and product development expenses for fiscal 2017 as compared to fiscal 2016 increased slightly as we continue to focus on further product enhancements and new products for our customers.

Selling, general and administrative expenses. The increase in selling, general and administrative expenses for fiscal 2017 as compared to fiscal 2016 was primarily due to higher variable compensation on higher revenue and profits, and an increase in legal expenses associated with the Merger Agreement.

Amortization of purchased intangible assets. The decrease in amortization for fiscal 2017 as compared to fiscal 2016 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-LM in 2014.

Restructuring. The restructuring expense recorded in fiscal 2017 included severance and moving costs associated with the closure of our engineering development site in Yerevan, Armenia that we announced in April 2017, and relocation costs associated with moving our Milpitas, California location.

Income (loss) from continuing operations. We reported income from continuing operations of $27.8 million for fiscal 2017 as compared to $0.1 million for fiscal 2016. This increase was primarily driven by higher net sales in the comparative periods.

Our Semiconductor Test Solutions segment reported income from continuing operations of $23.5 million, as compared to loss from continuing operations of $0.2 million for fiscal 2016. This increase was largely driven by the Semiconductor Test segment and the Semiconductor Handlers segment, both of which experienced strengthened industry conditions.

Our Electronic Manufacturing Solutions segment reported income from continuing operations of $4.4 million in fiscal 2017 as compared to income from continuing operations of $1.3 million in fiscal 2016. Improvement in our PCB Test segment drove these results.

Interest expense. Interest expense increased slightly from fiscal 2016 to fiscal 2017.

Interest income. Interest income increased slightly in fiscal 2017 compared fiscal 2016 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, 2017 was $1.1 million as compared to income of $1.2 million for the year ended July 31, 2016 and includes the impact of fluctuations in foreign exchange rates. For the twelve months ended July 31, 2017 we recognized $0.1 million of foreign exchange losses, as compared to $1.3 million of gains for the twelve months ended July 31, 2016. This fluctuation is largely driven by the relationship of the USD to the Euro and Malaysian Ringgit. For the twelve months ended July 31, 2017, other income also includes approximately $0.6 million of proceeds from the sale of unused IP addresses.

Provision for (benefit from) income taxes. We recorded an income tax provision of $5.9 million for fiscal 2017 primarily due to foreign taxes in profitable locations. 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.

 

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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 ASC 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 ASC 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 July 31, 2017 and July 31, 2016, our liability for unrecognized income tax benefits was $6.2 million and $6.3 million respectively (of which $2.6 million and $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.

Comprehensive income (loss). During fiscal 2017 and fiscal 2016, we recognized $3.8 million and ($2.2) 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 2017.

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-

 

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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

 

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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 ASC 740, Income Taxes, 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 ASC 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 was payable to us by the buyer on the twelve month anniversary of the sale. As of the first anniversary date of the Closing, there were no claims for indemnification made by Fastprint, and the holdback was paid to ECT on December 1, 2016. This amount is included in Prepaid Expenses and Other Current Assets on our Consolidated Balance Sheet as of July 31, 2016 and was received on December 1, 2016.

 

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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.

Liquidity and Capital Resources

Working Capital: The following summarizes our cash, cash equivalents, marketable securities and working capital:

 

(in thousands)    July 31, 2017      July 31, 2016      July 31, 2015      % Change
2017 vs 2016
    % Change
2016 vs 2015
 

Cash, cash equivalents and marketable securities

   $ 160,724      $ 139,421      $ 138,451        15.3     0.7

Working capital

   $ 256,902      $ 230,688      $ 225,337        11.4     2.4

The following is a summary of significant items impacting our liquidity and capital resources for fiscal 2017 and fiscal 2016:

 

     2017     2016  
     (in millions)  

Cash and cash equivalents and marketable securities at July 31, 2017 and 2016

   $ 139.4     $ 138.5  

Proceeds from the sale of property and equipment

     1.4       —    

Proceeds from the sale of the Interface Board Business

     2.3       21.4  

Cash used for stock repurchases

     —         (12.0

Capital expenditures

     (6.9     (3.9

Payments of bank term loan

     (2.8     (2.5

Payments on tax withholdings for vested RSU’s

     (1.5     (1.4

Effect of exchange rate changes in cash

     1.2       (1.7

Other cash provided primarily by operating activities, net

     27.6       1.0  
  

 

 

   

 

 

 

Cash and cash equivalents and marketable securities at July 31, 2017 and 2016

   $ 160.7     $ 139.4  
  

 

 

   

 

 

 

Fiscal 2017 as compared to Fiscal 2016

Operating Activities: Operating cash flows consist of our net income, adjusted for-non cash expenses and changes in operating assets and liabilities. These adjustments include depreciation expense on property plant and equipment, share-based compensation expense, and amortization of intangible assets. Our net cash generated by operating activities was $27.2 million for the twelve months ended July 31, 2017. Net cash generated by operating activities were impacted by changes in current assets and liabilities and included increases in accounts receivable of $14.3 million, inventories of $13.5 million, prepaid expenses and other assets of $11.7 million, and higher accounts payable $10.2 million, accrued expenses of $17.2 million and deferred revenue and customer advances of $1.9 million.

Net cash used in operating activities for the twelve months ended July 31, 2016 was $0.2 million. Net cash used by operating activities were impacted by changes in current assets and liabilities and included a decrease in accounts receivable of $4.6 million, increases in inventories of $9.9 million, decreases in prepaid expenses and other assets of $2.0 million, and lower accounts payable $1.3 million, lower accrued expenses of $10.4 million and lower deferred revenue and customer advances of $1.3 million.

Investing Activities: Investing cash flows consist primarily of cash used for capital expenditures in support of our businesses, proceeds from investments maturities, asset disposals and cash used for purchase of investments and business acquisitions. Net cash used in investing activities for the twelve months ended July 31,

 

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2017 totaled $4.4 million and included $6.9 million of capital expenditures primarily related to our new leased facility in Milpitas, California, and certain engineering projects, partially offset by $2.3 million proceeds from the sale of our Interface Board Business and $1.5 million proceeds from the sale of fixed assets, primarily one of our parcels of land in Oregon.

Net cash provided by investing activities for the twelve months ended July 31, 2016 was $22.0 million, driven by $21.4 million of proceeds from the sale of our Interface Board Business, partially offset by $2.9 million of capital expenditures primarily related certain engineering projects.

Financing Activities: Cash flows used in financing activities consisted primarily of net proceeds from issuance of employee stock purchase program, repayment of bank term loans, repurchases of common stock, and settlement of the minimum statutory tax withholding requirements paid by us on behalf of our employees upon vesting of restricted and performance stock awards. For the twelve months ended July 31, 2017 the net cash used of $3.5 million consisted of the repayment of term loans of $2.8 million and payment of tax withholdings from employee’s vested restricted stock units of $1.5 million, partially offset by $0.8 million from the proceeds of the employee’s stock purchase plan.

Net cash used in financing activities for the twelve months ended July 31, 2016 was $15.0 million and consisted repurchases of common stock $12.0 million, the repayment of term loans of $1.8 million and payment of tax withholdings from employee’s vested restricted stock units of $1.4 million, partially offset by $0.9 million from the proceeds of the employee’s stock purchase plan.

Fiscal 2016 as compared to Fiscal 2015

Operating Activities: Operating cash flows consist of our net income, adjusted for-non cash expenses and changes in operating assets and liabilities. These adjustments include depreciation expense on property plant and equipment, share-based compensation expense, amortization of intangible assets and deferred income taxes. Net cash used in operating activities for the twelve months ended July 31, 2016 was $0.2 million. Net cash used by operating activities were impacted by changes in current assets and liabilities and included a decrease in accounts receivable of $4.5 million, increases in inventories of $9.9 million, decreases in prepaid expenses and other assets of $2.0 million, and lower accounts payable $1.3 million, lower accrued expenses of $10.4 million and lower deferred revenue and customer advances of $1.3 million.

Net cash provided by operating activities for the twelve months ended July 31, 2015 was $42.3 million. Net cash provided by operating activities were impacted by changes in current assets and liabilities and included a decrease in accounts receivable of $0.2 million, decrease in inventories of $1.5 million, decreases in prepaid expenses and other assets of $1.3 million, and lower accounts payable $0.6 million, lower accrued expenses of $2.8 million and lower deferred revenue and customer advances of $1.3 million.

Investing Activities: Investing cash flows consist primarily of cash used for capital expenditures in support of our businesses, proceeds from investments maturities, asset disposals and cash used for purchase of investments and business acquisitions. Net cash provided by investing activities for the twelve months ended July 31, 2016 was $22.0 million, driven by $21.4 million of proceeds from the sale of our Interface Board Business, $61.2 million of proceeds from sales and maturities of available-for-sale securities, and $1.0 million in proceeds from the sale of fixed assets offset by $57.6 million in purchases of available-for-sale securities and $3.9 million of capital expenditures primarily related certain engineering projects

Net cash used in investing activities for the twelve months ended July 31, 2015 was $28.6 million, driven by purchases of available-for-sale securities of $76.7 million capital expenditures of $4.4 million and $2.4 million of cash paid for the Titan business, partially offset by proceeds from sales and maturities of available-for-sale securities of $54.8 million.

Financing Activities: Cash flows used in financing activities consisted primarily of net proceeds from issuance of employee stock purchase program, repayment of bank term loans, repurchases of common stock, and

 

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settlement of the minimum statutory tax withholding requirements paid by us on behalf of our employees upon vesting of restricted and performance stock awards. Net cash used in financing activities for the twelve months ended July 31, 2016 was $15.0 million and consisted repurchases of common stock $12.0 million, the repayment of term loans of $2.5 million and payment of tax withholdings from employee’s vested restricted stock units of $1.4 million, partially offset by $0.5 million from the proceeds of the employee’s stock purchase plan.

Net cash provided by financing activities for the twelve months ended July 31, 2015 was $10.5 million and consisted of 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 $24.5 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 $160.7 million as of July 31, 2017 will be sufficient to meet our working capital and expenditures needs for at least the next twelve months. 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, 2017, the interest rate in effect on the Facility was 3.69%.

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

 

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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, 2017, 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.

 

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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, 2017, we have repurchased 1,956,733 shares for approximately $12.0 million.

Commitments and Contingencies

As of July 31, 2017, 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, 2017 or 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, 2017 or July 31, 2016.

The aggregate outstanding amount of our contractual obligations was $102.0 million as of July 31, 2017. 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, 2017, and the effect such obligations are expected to have on our liquidity and cash flows in the future periods:

 

     Fiscal year-end  
     Total      2018      2019 – 2020      2021 – 2022      Thereafter  
     (in thousands)  

Contractual Obligations:

              

Operating leases

   $ 20,728      $ 4,760      $ 6,777      $ 4,348      $ 4,843  

Inventory commitments

     58,113        54,047        3,737        329        —    

Severance

     21        21        —          —          —    

Bank Term Loans—principal and interest

     23,174        4,553        16,997        883        741  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Contractual Obligations

   $ 102,036      $ 63,381      $ 27,511      $ 5,560      $ 5,584  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

We also expect to invest approximately $9.0 million in capital expenditures in fiscal 2018.

Off-Balance Sheet Arrangements

As of July 31, 2017 and July 31, 2016, we did not have any off-balance sheet arrangements.

 

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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. 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 2017, 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 48% of the trade accounts receivable at July 31, 2017. 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 36% of accounts payable at July 31, 2017.

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 $19.4 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, 2017, the interest rate in effect on these borrowings was 3.69%.

We may from time to time have other outstanding short-term and long-term borrowings with variable interest rates.

 

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Item 8. Financial Statements and Supplementary Data

XCERRA CORPORATION

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

 

     July 31,  
     2017     2016  
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 103,637     $ 83,065  

Marketable securities

     57,087       56,356  

Accounts receivable—trade, net of allowances of $72 and $126, respectively

     92,689       76,513  

Accounts receivable—other

     274       304  

Inventories, net

     81,509       69,986  

Prepaid expenses and other current assets

     19,087       8,546  

Assets held for sale

     994       2,448  
  

 

 

   

 

 

 

Total current assets

     355,277       297,218  

Property and equipment, net

     28,509       25,483  

Intangible assets, net

     8,752       9,429  

Goodwill

     43,850       43,850  

Other assets

     2,225       2,103  
  

 

 

   

 

 

 

Total assets

   $ 438,613     $ 378,083  
  

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY     

Current liabilities:

    

Current portion of long term debt

   $ 3,779     $ 2,822  

Accounts payable

     36,249       25,924  

Deferred revenues

     8,085       6,196  

Other accrued expenses

     50,262       31,588  
  

 

 

   

 

 

 

Total current liabilities

     98,375       66,530  

Other long-term liabilities

     9,012       8,518  

Long-term debt

     17,547       21,197  

Commitments and contingencies (Note 11)

    

Stockholders’ equity:

    

Common stock, $0.05 par value:

    

150,000,000 shares authorized; 54,318,179 and 53,613,242 shares issued and outstanding on July 31, 2017 and 2016, respectively

     2,716       2,678  

Additional paid-in capital

     809,914       804,316  

Accumulated other comprehensive loss

     (11,896     (15,546

Accumulated deficit

     (487,055     (509,610
  

 

 

   

 

 

 

Total stockholders’ equity

     313,679       281,838  
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 438,613     $ 378,083  
  

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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XCERRA CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(In thousands, except per share data)

 

     Year ended July 31,  
     2017     2016     2015  

Net product sales

   $ 368,754     $ 300,072     $ 369,347  

Net service sales

     22,017       24,134       28,631  
  

 

 

   

 

 

   

 

 

 

Net sales

     390,771       324,206       397,978  

Cost of sales

     217,662       184,280       218,064  
  

 

 

   

 

 

   

 

 

 

Gross profit

     173,109       139,926       179,914  

Engineering and product development expenses

     61,689       60,929       64,157  

Selling, general and administrative expenses

     82,141       76,742       82,124  

Amortization of purchased intangible assets

     676       1,203       1,834  

Restructuring

     791       924       2,206  
  

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

     27,812       128       29,593  

Other (expense) income:

      

Interest expense

     (1,122     (1,079     (995

Interest income

     733       571       452  

Other income (expense), net

     1,076       1,179       5,056  
  

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

     28,499       799       34,106  

Provision for (benefit from) income taxes

     5,944       (1,660     2,588  
  

 

 

   

 

 

   

 

 

 

Income from continuing operations

     22,555       2,459       31,518  

Income (loss) from discontinued operations, net of tax

     —         8,715       (3,292
  

 

 

   

 

 

   

 

 

 

Net income

   $ 22,555     $ 11,174     $ 28,226  
  

 

 

   

 

 

   

 

 

 

Basic net income (loss) per share:

      

Net income from continuing operations

   $ 0.42     $ 0.05     $ 0.59  

Net income (loss) discontinued operations, net of tax

     —         0.16       (0.06
  

 

 

   

 

 

   

 

 

 

Basic net income per share

   $ 0.42     $ 0.21     $ 0.53  
  

 

 

   

 

 

   

 

 

 

Diluted net income (loss) per share:

      

Net income from continuing operations

   $ 0.41     $ 0.05     $ 0.58  

Net income (loss) discontinued operations, net of tax

     —         0.16       (0.06
  

 

 

   

 

 

   

 

 

 

Diluted net income per share

   $ 0.41     $ 0.21     $ 0.52  
  

 

 

   

 

 

   

 

 

 

Weighted-average common shares used in computing net income (loss) per share:

      

Basic

     54,127       53,783       53,658  

Diluted

     54,872       53,974       54,531  

Comprehensive income (loss):

      

Net income

   $ 22,555     $ 11,174     $ 28,226  

Unrealized (loss) gain on marketable securities

     (105     92       (19

Change in pension liability

     (19     (54     81  

Unrealized gain (loss) on currency translation

     3,774       (2,160     (13,182
  

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 26,205     $ 9,052     $ 15,106  
  

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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XCERRA CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands, except share data)

 

    Common Stock     Additional
Paid–In
Capital
    Accumulated
Other
Comprehensive
Income (Loss)
    Accumulated
Deficit
    Total
Stockholders’
Equity
 
    Shares
(#)
    Amount
($)
         

Balance at July 31, 2014

    48,448,608     $ 2,422     $ 751,511     $ (304   $ (549,010   $ 204,619  

Vesting of stock based awards, net of shares withheld for taxes

    641,208       30       5,302       —         —         5,332  

Stock option exercises

    48,640       2       279       —         —         281  

Issuance of shares under employees’ stock purchase plan

    169,624       9       985       —         —         994  

Unrealized loss on marketable securities

    —         —         —         (19     —         (19

Change in pension liability

    —         —         —         81       —         81  

Accumulated currency translation adjustment

    —         —         —         (13,182     —         (13,182

Sale of common stock, net of issuance costs of $3.1 million

    5,385,366       269       51,867       —         —         52,136  

Net income

    —         —         —         —         28,226       28,226  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at July 31, 2015

    54,693,446       2,732       809,944       (13,424     (520,784     278,468  

Vesting of stock based awards, net of shares withheld for taxes

    684,620       34       5,294       —         —         5,328  

Issuance of shares under employees’ stock purchase plan

    191,909       10       931       —         —         941  

Stock repurchases

    (1,956,733     (98     (11,853     —         —         (11,951

Unrealized loss on marketable securities

    —         —         —         92       —         92  

Change in pension liability

    —         —         —         (54     —         (54

Accumulated currency translation adjustment

    —         —         —         (2,160     —         (2,160

Net income

    —         —         —         —         11,174       11,174  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at July 31, 2016

    53,613,242       2,678       804,316       (15,546     (509,610     281,838  

Vesting of stock based awards, net of shares withheld for taxes

    588,667       30       4,763       —         —         4,793  

Issuance of shares under employees’ stock purchase plan

    116,270       8       835       —         —         843  

Unrealized gain on marketable securities

    —         —         —         (105     —         (105

Change in pension liability

    —         —         —         (19     —         (19

Accumulated currency translation adjustment

    —         —         —         3,774       —         3,774  

Net income

    —         —         —         —         22,555       22,555  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at July 31, 2017

    54,318,179     $ 2,716     $ 809,914     $ (11,896   $ (487,055   $ 313,679  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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XCERRA CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

     Year ended July 31,  
     2017     2016     2015  

Cash Flows from Operating Activities:

    

Net income

   $ 22,555     $ 11,174     $ 28,226  

Add (deduct) non-cash items:

    

Stock-based compensation

     6,318       6,769       7,551  

Depreciation and amortization

     6,190       6,953       8,989  

Gain on reduction of promissory note

     —         —         (1,750

Gain on the sale of the Interface Board Business, net of tax

     —         (10,277     —    

Impairment of asset held for sale

     —         694       —    

Other non-cash items

     2,353       773       1,032  

Changes in operating assets and liabilities, net of purchase accounting:

    

Accounts receivable

     (14,293     4,538       216  

Inventories

     (13,471     (9,919     1,470  

Prepaid expenses

     (11,681     1,971       1,280  

Accounts payable

     10,160       (1,283     (594

Accrued expenses

     17,228       (10,357     (2,812

Deferred revenues

     1,871       (1,263     (1,266
  

 

 

   

 

 

   

 

 

 

Net cash provided (used in) by operating activities

     27,230       (227     42,342  
  

 

 

   

 

 

   

 

 

 

Cash Flows from Investing Activities:

    

Purchases of property and equipment

     (6,852     (3,907     (4,389

Purchases of available-for-sale securities

     (50,492     (57,630     (76,659

Proceeds from sales and maturities of available-for-sale securities

     49,184       61,232       54,827  

Proceeds from sale of Interface Board Business

     2,300       21,410       —    

Proceeds from sale of fixed assets

     1,491       975       —    

Cash paid for acquired businesses, net of cash acquired

     —         —         (2,360
  

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by investing activities

     (4,369     22,080       (28,581
  

 

 

   

 

 

   

 

 

 

Cash Flows from Financing Activities:

    

Repurchases of common stock

     —         (11,951     —    

Proceeds from sale of common stock, net of issuance costs

     —         —         52,136  

Proceeds from employees’ stock purchase plan

     843       941       994  

Payments of tax withholdings for vested RSUs, net of proceeds from stock option exercises

     (1,525     (1,442     (1,935

Repayment of promissory notes

     —         —         (16,250

Payments of bank term loan

     (2,800     (2,513     (24,456
  

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by financing activities

     (3,482     (14,965     10,489  
  

 

 

   

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     1,193       (1,681     (5,661
  

 

 

   

 

 

   

 

 

 

Net increase in cash and cash equivalents

     20,572       5,207       18,589  

Cash and cash equivalents at beginning of year

     83,065       77,858       59,269  
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of year

   $ 103,637     $ 83,065     $ 77,858  
  

 

 

   

 

 

   

 

 

 
     Year ended July 31,  
     2017     2016     2015  

Supplemental Disclosures of Cash Flow Information:

    

Cash paid during the year for interest

   $ 750     $ 588     $ 1,090  

Cash paid during the year for taxes

   $ 3,056     $ 2,900     $ 2,919  

The accompanying notes are an integral part of these consolidated financial statements.

 

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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 was payable on the first anniversary of the Closing subject to claims for indemnification by Fastprint, if any, prior to that time. As of the first anniversary date of the Closing, there were no claims for indemnification made by Fastprint, and the holdback was paid to ECT on December 1, 2016. This receivable was included as a component of prepaid expenses and other current assets on in the Company’s consolidated balance sheet as of July 31, 2016.

 

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XCERRA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

On April 7, 2017, the Company entered into an Agreement and Plan of Merger (as amended, the Merger Agreement) with Unic Capital Management Co., Ltd., a Chinese company (Unic Capital) and China Integrated Circuit Industry Investment Fund Co., Ltd., a Chinese company (Sponsor) and Unic Acquisition Corporation, a Massachusetts corporation (Merger Sub). On August 4, 2017, pursuant to that certain Assignment and Assumption Agreement, by and among Unic Capital, Hubei Xinyan Equity Investment Partnership (Limited Partnership), a Chinese limited partnership (Parent) and Xcerra, Unic Capital irrevocably transferred, conveyed, assigned and delivered to Parent all of Unic Capital’s right, interest, benefits, liabilities and obligations in and under the Merger Agreement, and Parent accepted, assumed and agreed to pay, perform, fulfill and discharge all obligations and liabilities of Unic Capital arising under or relating to the Merger Agreement; provided, however, that in the case where Parent is unable to pay, perform, fulfill or discharge all obligations and liabilities under the Merger Agreement, Unic Capital will remain wholly liable. Also on August 4, 2017, an amendment to the Merger Agreement was entered into by and among Parent, Sponsor and the Company, pursuant to which, upon the satisfaction or waiver of the conditions to the closing set forth in the Merger Agreement, Merger Sub will, at the closing, merge with and into the Company (the Merger), and the Company will become a controlled subsidiary of Parent and our stockholders will receive $10.25 in cash, without interest, less any required tax withholding, for each share of our common stock. If the Merger is not completed, in certain circumstances, the Company could be required to pay a termination fee of $22.8 million to Parent.

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 ASC 605, Revenue Recognition, and Accounting Standards Update 2009-13, Multiple-Deliverable Revenue Arrangements (“ASU 2009-13”). The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the 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

 

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XCERRA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

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 Semiconductor Test operating segment’s maintenance or service contracts only. The Company’s other operating segments generally do not provide maintenance and service contracts, but rather sell spare parts and other components, and as a result these sales are recognized as net product sales in the Company’s Consolidated Statement of Operations and Comprehensive Income (Loss). Revenue related to spare parts and components is recognized when the main criteria listed above are met. Generally customer acceptance is not required for spare parts and component sales.

Inventories

Inventories are stated at the lower of cost 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:

 

     As of July 31,  
     2017      2016  
     (in thousands)  

Material and purchased components

   $ 30,746      $ 27,753  

Work-in-process

     26,211        20,218  

Finished equipment, including inventory consigned to customers

     24,552        22,015  
  

 

 

    

 

 

 

Total inventories

   $ 81,509      $ 69,986  
  

 

 

    

 

 

 

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, 2017 and July 31, 2016, inventory is stated net of inventory reserves of $22.0 million and $21.4 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.

 

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XCERRA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

The following table shows sales of previously reserved inventory and the inventory reserves released for these sales for the fiscal years ended July 31, 2017, 2016, and 2015:

 

     Fiscal Year Ended July 31,  
     2017      2016      2015  
     (in thousands)  

Sales of previously reserved inventory

   $ 3,889      $ 3,822      $ 1,664  

Inventory reserves released for these sales

     1,161        826        643  

Goodwill and Other Intangibles

In accordance with ASC 350—Intangibles—Goodwill and Other (“ASC 350”), goodwill is not amortized. Rather, the Company’s goodwill is subject to periodic impairment testing. As part of the new simplification guidance issued by the FASB, the goodwill test involves a one-step comparison of the reporting unit’s fair value to its carrying value, including goodwill (“Step 1”). The prior guidance required a hypothetical purchase price allocation as the second step of the goodwill impairment test, but this step has been eliminated. If the reporting unit’s fair value exceeds its carrying value, no further procedures are required. However, if the reporting unit’s fair value is less than the carrying value, an impairment charge is recorded for the difference between the fair value and carrying value of the reporting unit. In applying the goodwill impairment test, the Company may assess qualitative factors to determine whether it is more likely than not that the fair value of the reporting units is less than its carrying value (“Step 0”). Qualitative factors may include, but are not limited to, economic, market and industry conditions, cost factors, and overall financial performance of the reporting unit. If after assessing these qualitative factors, the Company determines it is “more-likely-than-not” that the carrying value is less than the fair value, then performing Step 1 of the goodwill impairment test is unnecessary. The Company periodically engages third-party valuation consultants to assist in evaluating the Company’s estimated fair value calculations. In accordance with ASC 350, the Company performed its goodwill impairment test as of July 31, 2017 and 2016, and determined that no adjustment to goodwill was necessary. As of July 31, 2017, we determined using a Step 0 analysis in accordance with Topic 350 that it was more likely than not that the fair value of the reporting units to which goodwill is allocated exceeded the carrying values of those reporting units. As of July 31, 2016, we completed a Step 1 analysis using a Discounted Cash Flow (DCF) method for estimating the fair value of the reporting units including discount rates at the Company’s weighted-average cost of capital. The Company 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:

 

Goodwill

   July 31,
2017
     July 31,
2016
 
     (in thousands)  

Semiconductor Test Reporting Unit

     

Merger with Credence Systems Corporation (August 29, 2008)

   $ 28,662      $ 28,662  

Acquisition of Step Tech Inc. (June 10, 2003)

     14,368        14,368  

Contactors Reporting Unit

     

Acquisition of Titan Semiconductor Tool LLC (February 2, 2015)

     820        820  
  

 

 

    

 

 

 

Total goodwill

   $ 43,850      $ 43,850  
  

 

 

    

 

 

 

 

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XCERRA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

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:

 

            As of July 31, 2017  

Description

   Estimated
Useful  Life
     Gross  Carrying
Amount
     Accumulated
Amortization
    Net Amount  
     (in years)      (in thousands)      (in thousands)     (in thousands)  

Developed technology (Credence, ECT, Multitest, atg-Luther & Maelzer, and Titan)

     6-20      $ 29,882      $ (28,266   $ 1,616  

Customer Relationships—ECT, Multitest, atg-Luther & Maelzer, and Titan

     2        670        (8     662  

Trade Names

     10        70        (23     47  
     

 

 

    

 

 

   

 

 

 

Total amortizable intangible assets

      $ 30,622      $ (28,297   $ 2,325  
     

 

 

    

 

 

   

 

 

 

 

            As of July 31, 2016  

Description

   Estimated
Useful  Life
     Gross  Carrying
Amount
     Accumulated
Amortization
    Net Amount  
     (in years)      (in thousands)      (in thousands)     (in thousands)  

Developed technology (Credence, ECT, Multitest, atg-Luther & Maelzer, and Titan)

     6-20      $ 29,882      $ (27,605   $ 2,277  

Customer Relationships—ECT, Multitest, atg-Luther & Maelzer, and Titan

     2        1,844        (1,174     670  

Trade Names

     10        70        (15     55  
     

 

 

    

 

 

   

 

 

 

Total amortizable intangible assets

      $ 31,796      $ (28,794   $ 3,002  
     

 

 

    

 

 

   

 

 

 

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 9.0 years.

The Company expects the remaining amortization for these intangible assets as of July 31, 2017 to be:

 

Year ending July 31,

   Amount
(in  thousands)
 

2018

   $ 548  

2019

     517  

2020

     403  

2021

     284  

2022

     188  

Thereafter

     385  
  

 

 

 

Total

   $ 2,325  
  

 

 

 

The identifiable intangible assets associated with the Dover Acquisition include $6.4 million of trademarks. The Company believes these trademarks will contribute to the Company’s cash flows indefinitely. Therefore, in accordance with ASC 350, the Company has assigned an indefinite useful life to the trademarks, and will not amortize the trademarks until their useful lives are no longer indefinite. These assets are subject to an annual impairment test or more frequently if triggering events occur. For the year ended July 31, 2017, the Company

 

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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 ASC 360, Property, Plant and Equipment, the Company reviews whether impairment losses exist on its long-lived assets other than goodwill when indicators of impairment are present. During this review, the Company assesses future cash flows and re-evaluates the significant assumptions used in determining the original cost of long-lived assets other than goodwill. Although the assumptions may vary, they generally include revenue growth, operating results, cash flows and other indicators of value. Management then determines whether there has been a permanent impairment of the value of long-lived assets based upon events or circumstances that have occurred since acquisition. The impairment amount recognized is based upon a determination of the impaired asset’s fair value compared to its carrying value. As of July 31, 2017 and July 31, 2016, 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 ASC 830, Foreign Currency Matters. The functional currency of the Company’s tester group is the U.S. Dollar (“USD”). Accordingly, the Company’s foreign subsidiaries that are included in this group remeasure monetary assets and liabilities at month-end exchange rates while long-term non-monetary items are remeasured at historical rates. Income and expense accounts are remeasured at the average rates in effect during the month. Net gains (losses) resulting from foreign currency remeasurement and transaction gains (losses) are included in the Company’s Consolidated Statements of Operations and Comprehensive (Loss) Income as a component of other income (expense), net, were $(0.1) million, $1.3 million, and $2.1 million for the fiscal years ended July 31, 2017, 2016 and 2015. 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.

 

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The following table shows the change in the Company’s product warranty liability, as required by ASC 460, Guarantees, for the fiscal years ended July 31, 2017 and 2016:

 

Product Warranty Activity

   2017      2016  
     (in thousands)  

Balance at beginning of period

   $ 2,725      $ 2,983  

Warranty expenditures for current period

     (4,959      (4,735

Translation adjustment

     102        (12

Provision for warranty costs in the period

     5,742        4,489  
  

 

 

    

 

 

 

Balance at end of period

   $ 3,610      $ 2,725  
  

 

 

    

 

 

 

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 ASC 985, Software, were insignificant.

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 $6.1 million, $6.4 million, and $7.1 million for fiscal years ended July 31, 2017, 2016, and 2015, respectively.

Income Taxes

The Company recorded an income tax provision of $5.9 million for fiscal 2017, primarily due to foreign taxes in profitable locations. The Company recorded an income tax benefit of $1.7 million for fiscal 2016 primarily due to foreign taxes in profitable locations and tax benefit associated with the intra-period tax allocation.

As of July 31, 2017 and July 31, 2016, our liability for unrecognized income tax benefits was $6.2 million and $6.3 million respectively (of which $2.6 million and $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

 

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provision for income taxes. For July 31, 2017 and July 31, 2016, the Company had accrued approximately $1.3 million and $1.2 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 the 2010 Stock Incentive Plan (“2010 Plan”) and can only grant awards from this 2010 Plan. During fiscal 2017, the Company granted 765,000 Restricted Stock Units (“RSUs”) to certain executives, directors and employees, with time-based vesting terms ranging from one to four years. Of these, 229,000 RSUs were granted to executives.

During fiscal 2017, the Company granted 229,000 Performance RSUs (“PRUs”), with a grant date fair value of $1.84 per share to its executive officers with a market metric based on total shareholder return (“TSR”) relative to the TSR of selected peers during the performance period from August 1, 2016 to July 31, 2017. After completion of the performance period, the portion of PRSUs that are earned will be subject to time-based vesting conditions with 25% vesting immediately and the remaining 75% vesting annually in equal installments over the next three years. PRSUs are valued using a Monte Carlo simulation model. The number of units expected to be earned, based upon the achievement of the TSR market condition, is factored into the grant date Monte Carlo valuation. Compensation expense is recognized regardless of the eventual number of units that are earned based upon the market condition, provided the executive officer remains an employee at the end of the vesting period.

The fair value of the PRSUs granted during fiscal 2017 was estimated using the Monte Carlo simulation model with the following assumptions:

 

Risk-free interest rate

     0.58

Xcerra volatility-historical

     36.6

Peer group index volatility-historical (average)

     37.5

Dividend yield

     0.00

Expected volatility was based on the historical volatility of Xcerra’s stock and its peer group, over the most recent 0.93 year period. The risk-free interest rate was determined using the U.S. Treasury yield curve in effect at the time of grant. Dividend yield was consistent with Xcerra’s current dividend policy.

 

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Prior to the end of the performance period, or July 31, 2017, the Company modified the PRSU agreements and removed the market criteria, and as a result they were considered to be 100% earned, with 25% vesting immediately and the remaining 75% vesting annually in equal installments over the next three years, as of July 31, 2017. The Company accounted for this change as a modification, and as a result the incremental fair value of the awards were $8.24 per share. The Company will recognize the estimated fair value of these awards over the remaining vesting period.

The Company recognizes stock-based compensation expense on its equity awards in accordance with the provisions of ASC 718, Compensation—Stock Compensation, (“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.

For the fiscal years ended July 31, 2017, 2016, and 2015, the Company recorded stock-based compensation expense as follows:

 

     Fiscal Year Ended July 31,  
     2017      2016      2015  
     (in thousands)  

Cost of sales

   $ 227      $ 216      $ 224  

Engineering and product development expenses

     801        897        913  

Selling, general and administrative expenses

     5,290        5,656        6,414  
  

 

 

    

 

 

    

 

 

 

Total stock-based compensation expense

   $ 6,318      $ 6,769      $ 7,551  
  

 

 

    

 

 

    

 

 

 

As of July 31, 2017, 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 2.74 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:

 

     Fiscal Year Ended July 31,  
          2017                2016                2015       
     (in thousands, except per share data)  

Net income (loss)

   $ 22,555      $ 11,174      $ 28,226  

Basic Earnings per Share (“EPS”)

        

Weighted average shares outstanding—basic

     54,127        53,783        53,658  

Basic EPS

   $ 0.42      $ 0.21      $ 0.53  

Diluted EPS

        

Weighted average shares outstanding—basic

     54,127        53,783        53,658  

Plus: impact of unvested restricted stock units

     745        191        873  
  

 

 

    

 

 

    

 

 

 

Weighted average shares outstanding—diluted

     54,872        53,974        54,531  
  

 

 

    

 

 

    

 

 

 

Diluted EPS

   $ 0.41      $ 0.21      $ 0.52  

 

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During the twelve months ended July 31, 2017 and July 31, 2016, there were no outstanding options to purchase stock of the Company. During the twelve months ended July 31, 2015, there were approximately 0.1 million options outstanding to purchase stock of the Company, which were excluded from the calculation of diluted earnings per share because the effect of including them would have been anti-dilutive.

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. Marketable securities consist primarily of debt securities that are classified as available-for-sale, in accordance with ASC 320, Investments—Debt and Equity Securities. The Company may also hold from time to time 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:

 

     Total Amount  
     (in thousands)  

July 31, 2017

  

Due in less than one year

   $ 25,458  

Due in 1 to 3 years

     31,629  
  

 

 

 

Total marketable securities

   $ 57,087  
  

 

 

 

 

     Total Amount  
     (in thousands)  

July 31, 2016

  

Due in less than one year

   $ 25,257  

Due in 1 to 3 years

     31,099  
  

 

 

 

Total marketable securities

   $ 56,356  
  

 

 

 

 

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The market value and amortized cost of marketable securities are as follows:

 

     Market
Value
     Amortized
Cost
 
     (in thousands)  

July 31, 2017

     

Corporate (a)

   $ 24,969      $ 24,828  

Government

     12,408        12,410  

Mortgage-Backed

     2,335        2,332  

Asset-Backed

     17,375        17,348  
  

 

 

    

 

 

 

Total

   $ 57,087      $ 56,918  
  

 

 

    

 

 

 
     Market
Value
     Amortized
Cost
 
     (in thousands)  

July 31, 2016

     

Corporate (a)

   $ 22,574      $ 22,405  

Government

     18,321        18,249  

Mortgage-Backed

     1,665        1,672  

Asset-Backed

     13,796        13,739  
  

 

 

    

 

 

 

Total

   $ 56,356      $ 56,065  
  

 

 

    

 

 

 

 

(a) There are no held to maturity investments included in the above figures as of July 31, 2017 and 2016, 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, 2017 or 2016.

The following table summarizes marketable securities and related unrealized gains and losses as of July 31, 2017 and 2016:

 

July 31, 2017

   Market
Value
     Unrealized
Gain/(Loss)
 
     (in thousands)  

Securities < 12 months unrealized losses

   $ 23,378      $ (28

Securities > 12 months unrealized losses

     18,411        (32

Securities < 12 months unrealized gains

     2,080        3  

Securities > 12 months unrealized gains

     13,218        23  
  

 

 

    

 

 

 

Total

   $ 57,087      $ (34
  

 

 

    

 

 

 

 

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July 31, 2016

   Market
Value
     Unrealized
Gain/(Loss)
 
     (in thousands)  

Securities < 12 months unrealized losses

   $ 3,363      $ (4

Securities > 12 months unrealized losses

     6,925        (17

Securities < 12 months unrealized gains

     21,894        19  

Securities > 12 months unrealized gains

     24,174        74  
  

 

 

    

 

 

 

Total

   $ 56,356      $ 72  
  

 

 

    

 

 

 

Interest income and realized gains and losses from sales of marketable securities, included in interest income in the Statement of Operations, are as follows:

 

     Fiscal Year Ended July 31,  
      2017       2016       2015   
     (in thousands)  

Interest income on marketable securities

   $ 265     $ 280     $ 1,221  

Realized gain (loss) from sales of securities

     (1     (1     22  
  

 

 

   

 

 

   

 

 

 

Total

   $ 264     $ 279     $ 1,243  
  

 

 

   

 

 

   

 

 

 

Fair Value of Financial Instruments

The Company determines its fair value measurements for assets and liabilities based upon the provisions of ASC 820, Fair Value Measurements and Disclosures.

ASC 825, 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 debt and other accrued liabilities approximate fair value due to their short maturities. Marketable securities classified as available-for-sale are recorded at fair value based upon quoted market prices.

Concentration of Credit and Supplier Risk

 

     Fiscal Year Ended July 31,  
     2017     2016     2015  
     (in millions except %’s)  

Customer over 10% of net sales—Spirox (% of revenue)

     15     19     13

Net sales from top ten customers (% of total revenue)

     59     55     54

Accounts receivable from the same top ten customers

   $ 51.2     $ 42.3     $ 43.1  

Net sales to customers outside the United States

   $ 321.9     $ 266.0     $ 312.5  

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 2017 and fiscal 2016 the Company did not write off any accounts receivable. During fiscal 2015, the Company wrote off $0.2 million of accounts receivable.

 

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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 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 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, 2017 and July 31, 2016 are summarized as follows:

 

     As of July 31,     Estimated  Useful
Lives
 
     2017     2016    
     (in thousands)     (in years)  

Equipment spares

   $ 27,680     $ 30,784       7  

Machinery, equipment and internally manufactured systems

     30,707       31,206       3-7  

Office furniture and equipment

     1,302       2,157       3-7  

Purchased software

     547       725       3  

Land

     2,508       2,508        

Buildings

     7,990       7,944       10 – 40 years  

Leasehold improvements

     9,679       10,312      

Term of lease or

useful life, not to

exceed 10 years

 

 

 

  

 

 

   

 

 

   

Property and equipment, gross

   $ 80,413     $ 85,636    

Accumulated depreciation and amortization

     (51,904     (60,153  
  

 

 

   

 

 

   

Property and equipment, net

   $ 28,509     $ 25,483    
  

 

 

   

 

 

   

Depreciation expense was $5.5 million, $5.7 million, and $6.4 million for the fiscal years ended July 31, 2017, 2016, and 2015, respectively.

Recent Accounting Pronouncements

In May 2014, the FASB issued Accounting Standards Update 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

 

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contracts with customers. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which delays the effective date of ASU 2014-09 by one year. The FASB agreed to allow entities to choose to adopt the standard as of the original effective date. In March 2016, the FASB issued ASU No 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net) which clarifies the implementation guidance on principal versus agent considerations. The core principle of the new standard is that a company should recognize revenue to show the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The new standard will be effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. For Xcerra, the standard will be effective for the fiscal year starting August 1, 2018. The two permitted transition methods under the new standard are the full retrospective method, in which case the standard would be applied to each prior reporting period presented, or the modified retrospective method, in which case the cumulative effect of applying the standard would be recognized at the date of initial application. The Company currently anticipates adopting the standard using the modified retrospective method. We are in the process of completing our analysis on the impact this guidance will have on our Consolidated Financial Statements and related disclosures, as well as identifying the required changes to our policies, processes and controls. The Company is still conducting its assessment and will continue to evaluate the impact of this ASU on our financial position and results of operation.

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 Company adopted this ASU in the first quarter of fiscal 2017. Adoption of this ASU did not 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 Company adopted this ASU in the first quarter of fiscal 2017. Adoption of this ASU did not have a material impact on its financial position or results of operation.

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 No. 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 does not expect the adoption of this ASU to have a material impact on its financial position or results of operation.

 

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In August 2016, the FASB issued ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments (a consensus of the FASB Emerging Issues Task Force), which addresses eight classification issues related to the statement of cash flows: Debt prepayment or debt extinguishment costs; Settlement of zero-coupon bonds; Contingent consideration payments made after a business combination; Proceeds from the settlement of insurance claims; Proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; Distributions received from equity method investees; Beneficial interests in securitization transactions; and Separately identifiable cash flows and application of the predominance principle. ASU 2016-15 is effective for public business entities for annual and interim periods in fiscal years beginning after December 15, 2017. Early adoption is permitted, including adoption in an interim period. Entities should apply this ASU using a retrospective transition method to each period presented. If it is impracticable for an entity to apply the ASU retrospectively for some of the issues, it may apply the amendments for those issues prospectively as of the earliest date practicable. The Company does not expect the adoption of this ASU to have a material impact on its financial position or results of operation.

In January 2017, the FASB issued ASU 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment. The new guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. Goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. All other goodwill impairment guidance will remain largely unchanged. Entities will continue to have the option to perform a qualitative assessment to determine if a quantitative impairment test is necessary. The same one-step impairment test will be applied to goodwill at all reporting units, even those with zero or negative carrying amounts. Entities will be required to disclose the amount of goodwill at reporting units with zero or negative carrying amounts. The revised guidance will be applied prospectively, and is effective in 2020. The Company adopted this ASU in the first quarter of fiscal 2017. Adoption of this ASU did not have a material impact on its financial position or results of operation.

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 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 was payable on the first anniversary of the Closing subject to claims for indemnification by Fastprint, if any, prior to that time. As of the first anniversary date of the Closing, there were no claims for indemnification made by Fastprint, and the holdback was paid to ECT on December 1, 2016.

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.

 

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XCERRA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

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.

Summarized results of the discontinued operation are as follows for the years ended July 31, 2016 and 2015:

 

     2016     2015  

Revenue

   $ 12,378     $ 34,920  
  

 

 

   

 

 

 

Cost of Goods

   $ 12,183     $ 35,392  
  

 

 

   

 

 

 

Depreciation expense

   $ —       $ 771  
  

 

 

   

 

 

 

Income (loss) from discontinued operations

   $ (1,538   $ (3,292

Gain from sale of discontinued operations

     13,578       —    

Provision for income taxes

     3,325       —    
  

 

 

   

 

 

 

Income (loss) from discontinued operations, net of tax

   $ 8,715     $ (3,292
  

 

 

   

 

 

 

Cash provided by (used in) operating activities (discontinued operations)

   $ 7,679     $ (2,419
  

 

 

   

 

 

 

Cash provided by (used in) investing activities (discontinued operations)

   $ (350   $ (376
  

 

 

   

 

 

 

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.

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