10-Q 1 d438041d10q.htm 10-Q 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the quarterly period ended October 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 number: 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)

(781) 461-1000

(Registrant’s telephone number, including area code)

 

 

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

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer   ☐  (Do not check if a smaller reporting company)    Smaller reporting company  
     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  ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class

 

Outstanding at December 5, 2017

Common Stock, $0.05 par value per share   54,882,598 shares

 

 

 


Table of Contents

XCERRA CORPORATION

Index

 

          Page
Number
 
Part I.    FINANCIAL INFORMATION   
Item 1.    Financial Statements   
   Consolidated Balance Sheets as of October 31, 2017 and July 31, 2017      3  
   Consolidated Statements of Operations and Comprehensive (Loss) Income for the Three months Ended October 31, 2017 and October 31, 2016      4  
   Consolidated Statements of Cash Flows for the Three months Ended October 31, 2017 and October 31, 2016      5  
   Notes to Consolidated Financial Statements      6  
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations      21  
Item 3.    Quantitative and Qualitative Disclosures About Market Risk      31  
Item 4.    Controls and Procedures      31  
Part II.    OTHER INFORMATION      31  
Item 1.    Legal Proceedings      31  
Item 1A.    Risk Factors      33  
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds      43  
Item 6.    Exhibits      44  
   SIGNATURE      45  

 

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XCERRA CORPORATION

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands)

 

     October 31,
2017
    July 31,
2017
 

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 104,388     $ 103,637  

Marketable securities

     56,919       57,087  

Accounts receivable—trade, net of allowances of $358 and $76, respectively

     89,047       92,689  

Accounts receivable—other

     452       274  

Inventories

     86,905       81,509  

Prepaid expenses and other current assets

     20,455       19,087  

Assets held for sale

     850       994  
  

 

 

   

 

 

 

Total current assets

     359,016       355,277  

Property and equipment, net

     28,556       28,509  

Intangible assets, net

     8,596       8,752  

Goodwill

     43,850       43,850  

Other assets

     2,139       2,225  
  

 

 

   

 

 

 

Total assets

   $ 442,157     $ 438,613  
  

 

 

   

 

 

 

LIABILITIES AND EQUITY

    

Current liabilities:

    

Current portion of long-term debt

   $ 4,095     $ 3,779  

Accounts payable

     25,378       36,249  

Deferred revenues

     4,833       8,085  

Other accrued expenses

     49,825       50,262  
  

 

 

   

 

 

 

Total current liabilities

     84,131       98,375  

Other long-term liabilities

     9,087       9,012  

Term loans

     16,550       17,547  

Commitments and contingencies (Note 6)

    

Stockholders’ equity:

    

Common stock

     2,736       2,716  

Additional paid-in capital

     810,087       809,914  

Accumulated other comprehensive loss

     (10,988     (11,896

Accumulated deficit

     (469,524     (487,055
  

 

 

   

 

 

 

Total Xcerra stockholders’ equity

     332,311       313,679  

Non-controlling interest

     78       —    
  

 

 

   

 

 

 

Total equity

     332,389       313,679  
  

 

 

   

 

 

 

Total liabilities and equity

   $ 442,157     $ 438,613  
  

 

 

   

 

 

 

See accompanying Notes to Consolidated Financial Statements.

 

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XCERRA CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(In thousands, except per share data)

 

     Three Months Ended
October 31,
 
     2017     2016  

Net product sales

   $ 114,577     $ 74,702  

Net service sales

     5,709       5,383  
  

 

 

   

 

 

 

Net sales

     120,286       80,085  

Cost of sales

     60,871       45,725  
  

 

 

   

 

 

 

Gross profit

     59,415       34,360  

Engineering and product development expenses

     17,139       15,296  

Selling, general and administrative expenses

     21,285       18,461  

Amortization of purchased intangible assets

     157       190  

Restructuring

     135       107  
  

 

 

   

 

 

 

Income from operations

     20,699       306  

Other income (expense):

    

Interest expense

     (229     (316

Interest income

     256       168  

Other income, net

     (237     468  
  

 

 

   

 

 

 

Income before provision for income taxes

     20,489       626  

Provision for income taxes

     2,788       608  
  

 

 

   

 

 

 

Net income

   $ 17,701     $ 18  
  

 

 

   

 

 

 

Net income attributable to Non-controlling interest

     170       —    
  

 

 

   

 

 

 

Net income attributable to Xcerra

   $ 17,531     $ 18  
  

 

 

   

 

 

 

Basic and diluted net income per share attributable to Xcerra:

    

Basic net income per share

   $ 0.32     $ 0.00  

Diluted net income per share

   $ 0.32     $ 0.00  

Weighted-average common and common equivalent shares used in computing net income per share:

    

Basic

     54,604       53,865  

Diluted

     55,628       54,025  

Comprehensive income (loss):

    

Net income attributable to Xcerra

   $ 17,531     $ 18  

Unrealized loss on marketable securities

     (43     (48

Unrealized gain (loss) on currency translation

     951       (1,013
  

 

 

   

 

 

 

Comprehensive income (loss) attributable to Xcerra

   $ 18,439     $ (1,043
  

 

 

   

 

 

 

See accompanying Notes to Consolidated Financial Statements.

 

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XCERRA CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

     Three months Ended
October 31,
 
     2017     2016  

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net income attributable to Xcerra

   $ 17,531     $ 18  

Net income attributable to Non-controlling interest

     170       —    
  

 

 

   

 

 

 

Net income

     17,701       18  

Add non-cash items:

    

Stock-based compensation

     2,031       1,498  

Depreciation and amortization

     1,620       1,546  

Impairment of asset held for sale

     144       —    

Other non-cash items

     839       840  

Changes in operating assets and liabilities:

    

Accounts receivable

     3,873       1,670  

Inventories

     (5,877     (1,961

Prepaid expenses and other assets

     (876     (2,799

Accounts payable

     (10,989     (4,263

Accrued expenses

     (1,151     (35

Deferred revenue and customer advances

     (3,260     (556
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     4,055       (4,042

CASH FLOWS FROM INVESTING ACTIVITIES:

    

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

     11,262       14,219  

Purchases of available-for-sale securities

     (11,209     (14,336

Investment in variable interest entity

     (86     —    

Purchases of property and equipment, net of proceeds from sale

     (1,027     (1,063
  

 

 

   

 

 

 

Net cash used in investing activities

     (1,060     (1,180

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Principal payments of bank term loan

     (709     (710

Payments of tax withholdings for vested RSUs

     (1,838     (1,030
  

 

 

   

 

 

 

Net cash used in financing activities

     (2,547     (1,740

Effect of exchange rate changes on cash and cash equivalents

     303       (473
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     751       (7,435

Cash and cash equivalents at beginning of period

     103,637       83,065  
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 104,388     $ 75,630  
  

 

 

   

 

 

 

See accompanying Notes to Consolidated Financial Statements.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. THE COMPANY

Xcerra Corporation (“Xcerra” or the “Company,” “we” or “us”), is a global provider of test and handling capital equipment, interface products, test fixtures, and services to the semiconductor, industrial, and electronics manufacturing industries. The Company designs, manufactures, markets and services systems and products that address the broad, divergent requirements of the mobility, industrial, medical, automotive and consumer end markets, offering a comprehensive portfolio of solutions and technologies, and a global network of strategically deployed applications and support resources. Xcerra operates in the semiconductor and electronics manufacturing test markets and is the parent company to the atg-Luther & Maelzer (“atg”), Everett Charles Technologies (“ECT”), LTX-Credence (“LTXC”) and Multitest (“Multitest”) businesses. Semiconductor designers and manufacturers worldwide use the 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 service offerings include the design, manufacture, and marketing of in-circuit and functional-circuit test fixtures for testing assembled PCBs. The Company also sells hardware and software support and maintenance services for its products.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The unaudited consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant inter-company transactions and balances have been eliminated in consolidation. The Company evaluates the need to consolidate affiliates based on standards set forth in ASC 810 Consolidation (“ASC 810”).

The consolidated financial statements include the accounts of the Company and a variable interest entity (“VIE”) in which the Company has been determined to be the primary beneficiary. The Non-controlling interest in ALBS Solutions Sdn Bhd (“ALBS”) represents the 88.89% equity interest held by other members of the entity. All significant consolidated transactions and balances have been eliminated in consolidation.

Variable Interest Entities—Principles of Consolidation

The Company follows ASC 810-10-15 guidance with respect to accounting for VIEs. These entities do not have sufficient equity at risk to finance their activities without additional subordinated financial support from other parties or whose equity investors lack any of the characteristics of a controlling financial interest. A variable interest is an investment or other interest that will absorb portions of a VIE’s expected losses or receive portions of its expected residual returns and are contractual, ownership, or pecuniary in nature and that change with changes in the fair value of the entity’s net assets. A reporting entity is the primary beneficiary of a VIE and must consolidate it when that party has a variable interest, or combination of variable interests, that provides it with a controlling financial interest. A party is deemed to have a controlling financial interest if it meets both of the power and losses/benefits criteria. The power criterion is the ability to direct the activities of the VIE that most significantly impact its economic performance. The losses/benefits criterion is the obligation to absorb losses from, or right to receive benefits from, the VIE that could potentially be significant to the VIE. The VIE model requires an ongoing reconsideration of whether a reporting entity is the primary beneficiary of a VIE due to changes in facts and circumstances.

As of October 31, 2017 and July 31, 2017, the Company consolidated one and zero VIEs, respectively.

Xcerra is the primary beneficiary of ALBS which is qualified as a VIE. The assets and liabilities and revenues and expenses of this VIE are included in the financial statements of ALBS and are further included in the consolidated financial statements. As of October 31, 2017, the VIE had assets of $491,000, liabilities of $177,000, and operating income of $191,000. No assets were pledged or given as collateral against any borrowings.

Preparation of Financial Statements and Use of Estimates

The accompanying financial statements have been prepared by the Company, and reflect all adjustments, which, in the opinion of management, are necessary for fair presentation. The preparation of financial statements in conformity with United States generally accepted accounting principles (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the financial statements and the reported amounts of income and expenses during the reporting periods. Actual results may differ from those estimates and such differences may be material to the consolidated financial statements.

Revenue Recognition

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

 

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after product shipment. From time to time, sales to a customer may involve multiple elements, in which case revenue is recognized on the delivered element provided that (1) the undelivered element is a proven technology, (2) there is a history of acceptance on the equipment with the customer, (3) the undelivered element is not essential to the customer’s application, (4) the delivered item(s) has value to the customer on a stand-alone basis, and (5) if the arrangement includes a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) is considered probable and substantially in the control of the Company. The arrangement consideration, or the amount of revenue to be recognized on each separate unit of accounting, is allocated at the inception of the arrangement to all deliverables on the basis of their relative selling price.

Revenue related to maintenance and service contracts is recognized ratably over the duration of the contracts. Net service sales as presented in the Company’s Consolidated Statement of Operations and Comprehensive Income (Loss) includes revenue associated with LTXC maintenance or service contracts only, and excludes ECT and Multitest. ECT and Multitest generally do not provide maintenance and service contracts, but rather sell spare parts and other components, and as a result these sales are recognized as net product sales in the Company’s Consolidated Statement of Operations and Comprehensive Income (Loss). Revenue related to spare parts and components is recognized when the main criteria listed above are met. Generally customer acceptance is not required for spare parts and component sales.

Inventories

Inventories are stated at the lower of cost and net realizable value, determined on the first-in, first-out (“FIFO”) method, and include materials, labor and manufacturing overhead. The components of inventories are as follows:

 

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

Material and purchased components

   $ 37,011      $ 30,746  

Work-in-process

     26,377        26,211  

Finished equipment, including inventory consigned to customers

     23,517        24,552  
  

 

 

    

 

 

 

Total inventories

   $ 86,905      $ 81,509  
  

 

 

    

 

 

 

The Company establishes inventory reserves when conditions exist that indicate inventory may be in excess of anticipated demand or is obsolete based upon assumptions about future demand for the Company’s products or market conditions. The Company regularly evaluates its ability to realize the value of inventory based on a combination of factors, including forecasted sales or usage, estimated product end of life dates, estimated current and future market value, and new product introductions.

Purchasing and usage alternatives are also explored to mitigate inventory exposure. When recorded, reserves are intended to reduce the carrying value of inventory to its net realizable value. As of October 31, 2017 and July 31, 2017, inventory was stated net of inventory reserves of $23.0 million and $22.0 million, respectively. If actual demand for products deteriorates or market conditions are less favorable than projected, additional inventory reserves may be required. Such reserves are not reversed until the related inventory is sold or otherwise disposed.

Goodwill and Other Intangibles

In accordance with ASC 350—Intangibles—Goodwill and Other (“ASC 350”), goodwill is not amortized. Rather, the Company’s goodwill is subject to periodic impairment testing. ASC 350 requires that the Company assign its goodwill to reporting units and test each reporting unit’s goodwill for impairment at least on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The Company completed its goodwill impairment testing at July 31, 2017 and determined no adjustment to goodwill was necessary.

The testing of goodwill for impairment is performed at a level referred to as a reporting unit. As of October 31, 2017, the Company’s goodwill is allocated to its Semiconductor Test reporting unit and its Contactors reporting unit. Based on ASC 350-20-35-3A, as of October 31, 2017, there were no triggering events that required the Company to complete impairment testing.

 

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The Company’s goodwill consists of the following:

 

Goodwill

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

Semiconductor Test Reporting Unit

     

Merger with Credence Systems Corporation (August 29, 2008)

   $ 28,662      $ 28,662  

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

     14,368        14,368  

Contactors Reporting Unit

     

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

     820        820  
  

 

 

    

 

 

 

Total goodwill

   $ 43,850      $ 43,850  
  

 

 

    

 

 

 

Amortizable intangible assets which relate to the acquisition of Titan Semiconductor Tool LLC (“Titan”), ECT, Multitest, and atg, and the merger with Credence Systems Corporation (“Credence”), consist of the following, and are included in intangible assets, net on the Company’s Consolidated Balance Sheets:

 

            As of October 31, 2017  

Description

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

Developed technology—Credence, ECT, Multitest, atg, and Titan

     6-20      $ 29,882      $ (28,403    $ 1,479  

Customer Relationships—Titan

     20        670        (27      643  

Trade Names—Titan

     10        70        (24      46  
     

 

 

    

 

 

    

 

 

 

Total amortizable intangible assets

      $ 30,622      $ (28,454    $ 2,168  
     

 

 

    

 

 

    

 

 

 

 

            As of July 31, 2017  

Description

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

Developed technology—Credence, ECT, Multitest, atg, and Titan

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

Customer Relationships—ECT, Multitest, atg, and Titan

     20        670        (8      662  

Trade Names—Titan

     10        70        (23      47  
     

 

 

    

 

 

    

 

 

 

Total amortizable intangible assets

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

 

 

    

 

 

    

 

 

 

Intangible assets, other than trademarks owned by the Company, are amortized based upon the pattern of estimated economic use over their estimated useful lives. The weighted average estimated remaining useful life over which these intangible assets will be amortized is 8.8 years.

 

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The Company expects amortization for these intangible assets to be:

 

Year ending July 31, 2018

   Amount
(in thousands)
 

Remainder of 2018

     394  

2019

     520  

2020

     406  

2021

     287  

2022

     191  

Thereafter

     370  
  

 

 

 

Total

   $ 2,168  
  

 

 

 

The identifiable intangible assets associated with the Dover Acquisition include $6.4 million of trademarks. The Company believes these trademarks will contribute to the Company’s cash flows indefinitely. Therefore, in accordance with ASC 350, the Company has assigned an indefinite useful life to the trademarks, and will not amortize the trademarks until their useful lives are no longer indefinite. These assets are subject to an annual impairment test or more frequently if triggering events occur. For the year ended July 31, 2017, the Company assessed qualitative factors to determine if a two-step quantitative impairment test was necessary. The Company determined, based on qualitative assessment, that it was more likely than not that the trademarks’ fair value was greater than their carrying amount, therefore no quantitative assessment was required, and there was no adjustment to the carrying value of the trademarks. As of October 31, 2017, there were no triggering events that required the Company to complete impairment testing on its trademarks.

Long Lived Assets

On an on-going basis, management reviews the value of and period of amortization or depreciation of the 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 October 31, 2017, there were no indicators that required the Company to conduct a recoverability test.

Foreign Currency Remeasurement and Translation

The financial statements of the 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, and were ($0.4) million and $0.2 million, for the three months October 31, 2017 and 2016, respectively. The functional currency of ECT, Multitest and atg is local currency, predominantly Euro, USD, Malaysian Ringgit and Singapore Dollars, and net gains or losses resulting from foreign currency translation are recorded in stockholders’ equity as accumulated other comprehensive income (loss).

Product Warranty Costs

Certain of the Company’s products are sold with warranty provisions that require it to remedy deficiencies in quality or performance of products over a specified period of time at no cost to its customers. The Company generally offers a warranty for most of its products, the standard terms and conditions of which are based on the product sold and the customer. For all products sold, subject to a warranty, the Company accrues a liability for the estimated cost of the standard warranty at the time of shipment. Factors that impact the warranty liability include the number of installed products, historical and anticipated product failure rates, material usage and service labor costs. The Company periodically assesses the adequacy of its recorded liability and adjusts these amounts as necessary.

 

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The following table shows the change in the Company’s product warranty liability, as required by ASC 460, Guarantees, to the FASB ASC for the three months ended October 31, 2017 and 2016:

 

     Three months Ended
October 31,
 

Product Warranty Activity

   2017      2016  
     (in thousands)  

Balance at beginning of period

   $ 3,610      $ 2,725  

Warranty expenditures for current period

     (929      (1,071

Changes in liability related to pre-existing warranties

     22        (12

Provision for warranty costs in the period

     898        788  
  

 

 

    

 

 

 

Balance at end of period

   $ 3,601      $ 2,430  
  

 

 

    

 

 

 

Trade Accounts Receivable and Allowance for Doubtful Accounts

Trade accounts receivable are recorded at the invoiced amount, do not bear interest, and typically have a contractual maturity of ninety days or less. A majority of the Company’s trade receivables are derived from sales to large multinational semiconductor manufacturers throughout the world. The volatility of the industries that the Company serves can cause certain of its customers to experience shortages of cash, which can impact their ability to make required payments. An allowance for doubtful accounts is maintained for potential credit losses based upon the Company’s assessment of the expected collectability of all accounts receivable. The allowance for doubtful accounts is reviewed periodically to assess the adequacy of the allowances. In any circumstances in which the Company is aware of a customer’s inability to meet its financial obligations, an allowance is provided, which is based on the age of the receivables, the circumstances surrounding the customer’s financial situation, and historical experience. If circumstances change, and the financial condition of customers is adversely affected resulting in their inability to meet their financial obligations to the Company, additional allowances may be recorded.

Engineering and Product Development Expenses

The Company expenses all engineering and product development costs as incurred. Expenses relating to certain software development costs, subject to capitalization in accordance with ASC 985, Software, were insignificant.

Shipping and Handling Costs

Shipping and handling costs are included in cost of sales in the Company’s Consolidated Statements of Operations and Comprehensive Income (Loss). Shipping and handling costs were insignificant for the three months ended October 31, 2017 and 2016.

Income Taxes

The Company recorded an income tax provision of $2.8 million for the three months ended October 31, 2017, primarily due to foreign taxes in profitable locations.

The Company’s total liability for unrecognized income tax benefits was $6.2 million (of which $2.6 million, if recognized, would impact the Company’s income tax rate) as of both October 31, 2017 and July 31, 2017 respectively. The Company recognizes interest and penalties related to uncertain tax positions as a component of provision for income taxes. As of October 31, 2017 and July 31, 2017, the Company had accrued approximately $1.4 million and $1.3 million, respectively, for potential payment of accrued interest and penalties.

The Company conducts business globally and, as a result, the Company and its subsidiaries or branches file income tax returns in the U.S. federal jurisdiction and various U.S. state and foreign jurisdictions. In the normal course of business the Company is subject to examination by taxing authorities throughout the world, including such major jurisdictions as the United States, Singapore, Malaysia, China, France and Germany. With few exceptions, the Company is no longer subject to U.S. federal, state and local or non-U.S. income tax examinations for the years prior to 1998.

As a result of the Company’s merger with Credence on August 29, 2008, a greater than 50% cumulative ownership change in both entities triggered a significant limitation on net operating loss carryforward utilization. The Company’s ability to use acquired U.S. net operating loss and credit carryforwards is subject to annual limitation as defined in sections 382 and 383 of the Internal Revenue Code. The Company currently estimates that the annual limitation on its use of net operating losses generated through August 29, 2008 will be approximately $10.1 million which, based on currently enacted federal carryforward periods, limits the amount of net

 

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operating losses that are available for utilization to approximately $202 million. The Company has recorded a valuation allowance against the full value of U.S. net operating loss and credit carryforwards, and will continue to assess the realizability of these carryforwards in subsequent periods.

Accounting for Stock-Based Compensation

The Company has equity awards outstanding under the 2010 Stock Incentive Plan (“2010 Plan”) and can only grant awards from this 2010 Plan.

During the three months ended October 31, 2017, the Company granted 914,600 Restricted Stock Units (“RSUs”) which are subject to service-based vesting and vest ratably over four years.

The Company recognizes stock-based compensation expense on its equity awards in accordance with the provisions of ASC 718, Compensation—Stock Compensation (“ASC 718”). Under ASC 718, the Company is required to recognize as expense the estimated fair value as of the grant date of all share-based awards to employees. In accordance with this standard, the Company recognizes the compensation cost of each service-based award on a straight-line basis over the vesting period of such award. For the three months ended October 31, 2017 and 2016, the Company recorded stock-based compensation expense of approximately $2.0 million and $1.5 million, respectively, in connection with its share-based awards.

Net income per share

Basic net income per common share is computed by dividing net income attributable to Xcerra available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted net income per common share reflects the maximum dilution that would have resulted from the assumed exercise and share repurchase related to dilutive stock options and RSUs, and is computed by dividing net income by the weighted average number of common shares and the dilutive effect of all securities outstanding.

Reconciliation between basic and diluted net income per common share is as follows:

 

     Three Months Ended
October 31,
 
     2017      2016  
     (in thousands, except
per share data)
 

Net income attributable to Xcerra

   $ 17,531      $ 18  

Basic EPS:

     

Weighted average shares outstanding—basic

     54,604        53,865  

Basic income per share

   $ 0.32      $ 0.00  

Diluted EPS:

     

Weighted average shares outstanding—basic

     54,604        53,865  

Plus: impact unvested RSUs

     1,024        160  
  

 

 

    

 

 

 

Weighted average shares outstanding—diluted

     55,628        54,025  

Diluted income per share

   $ 0.32      $ 0.00  

During the three months ended October 31, 2017 and 2016, there were no outstanding options to purchase stock of the Company.

Cash and Cash Equivalents and Marketable Securities

The Company considers all highly liquid investments that are readily convertible to cash and that have original maturity dates of three months or less to be cash equivalents. Cash and cash equivalents consist primarily of operating cash, money market accounts and reverse repurchase agreements. Marketable securities consist primarily of debt securities that are classified as available-for-sale, in accordance with ASC 320, Investments—Debt and Equity Securities. The Company also holds certain investments in commercial paper that it considers to be held to maturity, based on their maturity dates. Securities available for sale include corporate and governmental obligations with various contractual maturity dates some of which are greater than one year. The Company considers the securities to be liquid and convertible to cash within 30 days. The Company has the ability and intent to liquidate any security that the Company holds to fund operations over the next twelve months if necessary, and as such has classified all of its marketable securities as short-term. Governmental obligations include U.S. Government, State, Municipal and Federal Agency securities. The Company has an overnight sweep investment arrangement with its bank for certain accounts to allow the Company to enter into diversified overnight investments via a money market mutual fund which generally provides a higher investment yield than a regular operating account.

 

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The market value and maturities of the Company’s marketable securities are as follows:

 

     Total Amount  
     (in thousands)  

October 31, 2017

  

Due in less than one year

   $ 28,600  

Due in 1 to 3 years

     28,319  
  

 

 

 

Total marketable securities

   $ 56,919  
  

 

 

 
     Total Amount  
     (in thousands)  

July 31, 2017

  

Due in less than one year

   $ 25,458  

Due in 1 to 3 years

     31,629  
  

 

 

 

Total marketable securities

   $ 57,087  
  

 

 

 

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

 

     Market
Value
     Amortized
Cost
 
     (in thousands)  

October 31, 2017

     

Corporate (a)

   $ 28,191      $ 28,047  

Government

     11,804        11,808  

Mortgage-Backed

     1,858        1,858  

Asset-Backed

     15,066        15,059  
  

 

 

    

 

 

 

Total

   $ 56,919      $ 56,772  
  

 

 

    

 

 

 
     Market
Value
     Amortized
Cost
 
     (in thousands)  

July 31, 2017

     

Corporate (a)

   $ 24,969      $ 24,828  

Government

     12,408        12,410  

Mortgage-Backed

     2,335        2,332  

Asset-Backed

     17,375        17,348  
  

 

 

    

 

 

 

Total

   $ 57,087      $ 56,918  
  

 

 

    

 

 

 

 

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

Unrealized gains and losses on investments held by the Company are reflected as a separate component of comprehensive income (loss) within Stockholders’ Equity. Realized gains, losses and interest on investments held by the Company are included in interest income in the Consolidated Statements of Operations and Comprehensive Income (Loss). The Company analyzes its investments for impairment on a quarterly basis or upon occurrence of indicators of possible impairment. There were no other than temporary impairment losses recorded in the three months ended October 31, 2017 or 2016.

 

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

 

October 31, 2017

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

Securities < 12 months unrealized losses

   $ 24,633      $ (28

Securities > 12 months unrealized losses

     22,674        (57

Securities < 12 months unrealized gains

     3,967        2  

Securities > 12 months unrealized gains

     5,645        6  
  

 

 

    

 

 

 

Total

   $ 56,919      $ (77
  

 

 

    

 

 

 

July 31, 2017

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

Securities < 12 months unrealized losses

   $ 23,378      $ (28

Securities > 12 months unrealized losses

     18,411        (32

Securities < 12 months unrealized gains

     2,080        3  

Securities > 12 months unrealized gains

     13,218        23  
  

 

 

    

 

 

 

Total

   $ 57,087      $ (34
  

 

 

    

 

 

 

Property and Equipment

Property and equipment acquired is recorded at cost. The Company records depreciation using the straight-line method. Charges are made to operating expenses in amounts that are sufficient to amortize the cost of the assets over their estimated useful lives. Equipment spares used for service and internally manufactured test systems used for testing components and engineering projects are recorded at cost and depreciated over seven years. Repair and maintenance costs that do not extend the lives of property and equipment are expensed as incurred. The Company’s property and equipment as of October 31, 2017 and July 31, 2017 are summarized as follows:

 

     October 31,
2017
     July 31,
2017
     Estimated
Useful Lives
 
     (in thousands)      (in years)  

Equipment spares

   $ 27,887      $ 27,680        7  

Machinery, equipment and internally manufactured systems

     31,663        30,707        3-7  

Office furniture and equipment

     1,546        1,302        3-7  

Purchased software

     524        547        3  

Land

     2,508        2,508        —    

Buildings

     7,990        7,990        10-40 years  

Leasehold improvements

     9,677        9,679       

Term of lease or
useful life, not to
exceed 10 years


 
  

 

 

    

 

 

    

Property and equipment, gross

     81,795        80,413     

Accumulated depreciation and amortization

     (53,239      (51,904   
  

 

 

    

 

 

    

Property and equipment, net

   $ 28,556      $ 28,509     
  

 

 

    

 

 

    

 

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3. MERGER AGREEMENT

On April 7, 2017, the Company entered into an Agreement and Plan of Merger (as amended, the “Merger Agreement”) with Unic Capital Management Co., Ltd., a Chinese company (“Unic Capital”) and China Integrated Circuit Industry Investment Fund Co., Ltd., a Chinese company (“Sponsor”) and Unic Acquisition Corporation, a Massachusetts corporation (“Merger Sub”). On August 4, 2017, pursuant to that certain Assignment and Assumption Agreement, by and among Unic Capital, Hubei Xinyan Equity Investment Partnership (Limited Partnership), a Chinese limited partnership (“Parent”) and Xcerra, Unic Capital irrevocably transferred, conveyed, assigned and delivered to Parent all of Unic 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.

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

See Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Agreement and Plan of Merger for additional details related to the pending Merger.

4. SEGMENT REPORTING AND GEOGRAPHIC INFORMATION

Segment Reporting

In accordance with the provisions of ASC 280, Segment Reporting (“ASC 280”), the Company has determined that it has six operating segments (Semiconductor Test, Semiconductor Handlers, Contactors, PCB Test, Probes / Pins, and Fixtures). Based on the aggregation criteria of ASC 280, the Company determined that several of the operating segments can be aggregated due to these segments having similar economic characteristics and meeting all of the other aggregation criteria in ASC 280. Consequently, the Company has two reportable segments: the Semiconductor Test Solutions (“STS”) reportable segment, which is comprised of the Semiconductor Test, Semiconductor Handlers and Contactors operating segments, and the Electronic Manufacturing Solutions (“EMS”) reportable segment, which is comprised of the PCB Test, Probes / Pins and Fixtures operating segments.

The Semiconductor Test operating segment includes operations related to the design, manufacture and sale of automated test equipment for the semiconductor industry that is used to test system-on-a-chip, digital, analog and mixed signal integrated circuits. The Semiconductor Handlers operating segment includes operations related to the design, manufacture and sale of test handlers used in the testing of integrated circuits. The Contactors segment includes operations related to the design, manufacture and sale of test contactors which serve as the interface between the test handler and the semiconductor device under test. The PCB Test operating segment includes operations related to design, manufacture and sale of equipment used in the testing of bare and printed circuit boards. The Probes / Pins operating segment includes operations related to the design, manufacture and sale of the physical devices used to connect electronic test equipment to the device under test. The Fixtures segment includes operations related to the design, manufacture and sale of PCB Test fixtures that enable the transmission of test signals from the loaded PCB to the tester. Each operating segment has a segment manager who is directly accountable to and maintains regular contact with the Company’s chief operating decision maker (chief executive officer and chief operating officer) to discuss operating activities, financial results, forecasts, and plans for the segment.

The Company evaluates performance using several factors, of which the primary financial measures are revenue and operating segment operating income. The accounting policies of the operating segments are the same as those described in Note 2 “Summary of Significant Accounting Policies”.

 

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Segment information for the three ended October 31, 2017 and 2016 is as follows (in thousands):

 

     Semiconductor
Test Solutions
     Electronic
Manufacturing Solutions
     Consolidated  

Three months ended October 31, 2017

        

Net sales

   $ 100,056      $ 20,230      $ 120,286  

Income from operations

   $ 19,270      $ 1,429      $ 20,699  

Depreciation and amortization expense

   $ 1,343      $ 277      $ 1,620  

Three months ended October 31, 2016

        

Net sales

   $ 64,813      $ 15,272      $ 80,085  

(Loss) income from operations

   $ (317    $ 623      $ 306  

Depreciation and amortization expense

   $ 1,350      $ 196      $ 1,546  

The Company is not disclosing total assets for each of its reportable segments, as total assets by reportable segment is not a key metric utilized by the Company’s chief operating decision maker.

Geographic Information

The Company’s net sales by geographic area for the three months ended October 31, 2017 and 2016, along with its long-lived assets by location at October 31, 2017 and July 31, 2017, are summarized as follows:

 

     Three Months Ended
October 31,
 
     2017      2016  
     (in thousands)  

Net sales:

     

United States

   $ 12,328      $ 10,205  

Philippines

     25,094        11,970  

Thailand

     11,653        5,682  

Hong Kong/China

     11,106        7,417  

Austria

     10,951        3,051  

Taiwan

     9,547        16,610  

Germany

     9,435        6,430  

Malaysia

     9,015        4,511  

Singapore

     4,698        4,994  

All other countries

     16,459        9,215  
  

 

 

    

 

 

 

Total Net Sales

   $ 120,286      $ 80,085  
  

 

 

    

 

 

 

 

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

Long-lived assets:

     

United States

   $ 14,266      $ 14,426  

Germany

     8,553        8,579  

Malaysia

     3,114        3,069  

China

     795        285  

Singapore

     364        416  

Japan

     727        791  

Philippines

     63        82  

Taiwan

     331        375  

All other countries

     343        486  
  

 

 

    

 

 

 

Total long-lived assets

   $ 28,556      $ 28,509  
  

 

 

    

 

 

 

 

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Transfer prices on products sold to foreign subsidiaries are intended to produce profit margins that correspond to the subsidiary’s sales and support efforts.

5. RESTRUCTURING

In accordance with the provisions of ASC 420, Exit or Disposal Cost Obligation, the Company recognizes certain costs associated with headcount reductions, office vacancies and other costs to move or relocate operations or employees as restructuring costs in the period in which such actions are initiated and approved by management or the obligations are incurred, as applicable.

During the three months ended October 31, 2017, the Company incurred costs associated with the closing of its engineering development site in Yerevan, Armenia.

The following table sets forth the Company’s restructuring accrual activity for the three months ended October 31, 2017 and October 31, 2016. The balance at the end of each period is included in the Company’s Consolidated Balance Sheet in Accrued Expenses:

 

     Severance
Costs
     Facility
Leases
     Total  
     (in thousands)  

Balance July 31, 2017

   $ 21      $ 65      $ 86  

Additions to expense

     15        120        135  

Cash paid

     (15      (185      (200
  

 

 

    

 

 

    

 

 

 

Balance October 31, 2017

   $ 21        —        $ 21  
  

 

 

    

 

 

    

 

 

 
     Severance
Costs
     Facility
Leases
     Total  
     (in thousands)  

Balance July 31, 2016

   $ 142      $ 734      $ 876  

Additions to expense

     80        27        107  

Accretion

     —          108        108  

Cash paid

     (111      (386      (497
  

 

 

    

 

 

    

 

 

 

Balance October 31, 2016

   $ 111      $ 483      $ 594  
  

 

 

    

 

 

    

 

 

 

6. COMMITMENTS AND CONTINGENCIES

From time to time, the Company is subject to certain legal proceedings and other contingencies, the outcomes of which are subject to significant uncertainty. The Company accrues for estimated losses if it is probable that an asset has been impaired or a liability has been incurred and the amount of the loss can be reasonably estimated. The Company uses judgment and evaluates, with the assistance of legal counsel, whether a loss contingency arising from litigation should be disclosed or recorded. The outcome of legal proceedings and other contingencies is inherently uncertain and often difficult to estimate. Accordingly, if the outcome of legal proceedings and other contingencies is different than is anticipated by the Company, the Company would record the difference between any previously recorded amount and the full amount at which the matter was resolved, in earnings in the period resolved, which could negatively impact the Company’s results of operations and financial position for the period.

On August 22, 2017, a putative shareholder class action complaint was filed in the United States District Court for the District of Massachusetts against the Company and each member of the Board, captioned Chris Stallings v. Xcerra Corporation, et al., C.A. No. 1:17-cv-11579. The complaint alleged, among other things, that the Company and each member of the Board violated federal securities laws and regulations by soliciting stockholder votes in connection with the Merger through a proxy statement that omitted material facts. The parties agreed on certain additional disclosures to the Company’s definitive proxy statement, which were filed on October 3, 2017. The plaintiffs dismissed the complaint on November 1, 2017.

On August 23, 2017, a putative shareholder class action complaint was filed in the United States District Court for the District of Massachusetts against the Company, each member of the Board, Parent, Unic Capital, Sponsor and Merger Sub, captioned Robert Berg v. Xcerra Corporation et. al., Case No. 1:17-cv-11583. The complaint alleged, among other things, that the Company and each member of the Board violated federal securities laws and regulations by soliciting stockholder votes in connection with the Merger through a proxy statement that omitted material facts. The parties agreed on certain additional disclosures to the Company’s definitive proxy statement, which were filed on October 3, 2017. The plaintiff dismissed the complaint on November 1, 2017.

On November 10, 2017, a putative shareholder class action complaint was filed in the United States District Court for the District of Massachusetts against the Company and each member of the Board, captioned Waseem Khan v. Xcerra Corporation et. al., Case No. 1:17-cv-12226. The complaint alleges, among other things, that the Company and the Board violated federal securities laws and regulations by soliciting stockholder votes in connection with the Merger through a proxy statement that includes false and misleading material information with respect to the proposed Merger, which renders the proxy statement false and misleading. The complaint seeks damages. The Company is reviewing the complaint and has not yet formally responded to it, but believes that the plaintiffs’ allegations are without merit and intends to defend against them vigorously. However, litigation is inherently uncertain and there can be no assurance regarding the likelihood that the Company’s defense of the actions will be successful. Additional complaints containing substantially similar allegations may be filed in the future.

 

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In the ordinary course of business, the Company agrees from time to time to indemnify certain customers against certain third party claims for property damage, bodily injury, personal injury or intellectual property infringement arising from the operation or use of the Company’s products. Also, from time to time in agreements with suppliers, licensors, and other business partners, the Company agrees to indemnify these partners against certain liabilities arising out of the sale or use of the Company’s products. The maximum potential amount of future payments the Company could be required to make under these indemnification obligations is theoretically unlimited; however, the Company has general and umbrella insurance policies that enable it to recover a portion of any amounts paid, and many of its agreements contain a limit on the maximum amount, as well as limits on the types of damages recoverable. Based on the Company’s experience with such indemnification claims, it believes the estimated fair value of these obligations is minimal. Accordingly, the Company has no liabilities recorded for these agreements as of October 31, 2017 or July 31, 2017.

Subject to certain limitations, the Company indemnifies its current and former officers and directors for liabilities or costs that they may incur in certain circumstances in connection with their services as directors and officers of the Company. Although the maximum potential amount of future payments the Company could be required to make under these agreements is theoretically unlimited, as there were no known or pending claims, the Company had not accrued a liability for these agreements as of October 31, 2017 or July 31, 2017.

As of October 31, 2017 the Company had approximately $55.1 million of non-cancelable inventory commitments with its suppliers. The Company expects to consume this inventory through normal operating activity.

The Company has operating lease commitments for certain facilities and equipment lease obligations that expire at various dates through 2024. The Company has an option to extend the term for its Norwood, Massachusetts facility lease for a single extension term of five years provided that the Company notifies its landlord at least 425 days prior to expiration of the current extension term. Minimum lease payment obligations under non-cancelable leases as of October 31, 2017 are as follows:

 

Fiscal year ending July 31, 2018

   Facilities      Equipment      Total
Operating
Leases
 
     (in thousands)  

Remainder of 2018

   $ 3,157      $ 441      $ 3,598  

2019

     3,594        414        4,008  

2020

     3,002        232        3,234  

2021

     2,460        63        2,523  

2022

     1,788        40        1,828  

Thereafter

     4,657        —          4,657  
  

 

 

    

 

 

    

 

 

 

Total minimum lease payments

   $ 18,658      $ 1,190      $ 19,848  
  

 

 

    

 

 

    

 

 

 

7. OTHER ACCRUED EXPENSES

Other accrued expenses consisted of the following at October 31, 2017 and July 31, 2017:

 

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

Accrued income and other taxes

   $ 20,177      $ 13,163  

Accrued compensation

     15,454        18,864  

Warranty reserve

     3,601        3,610  

Accrued commissions

     2,393        2,931  

Accrued vendor liability

     2,152        2,229  

Accrued professional fees

     1,308        3,218  

Other accrued expenses

     4,740        6,247  
  

 

 

    

 

 

 

Total accrued expenses

   $ 49,825      $ 50,262  
  

 

 

    

 

 

 

 

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8. LONG-TERM DEBT

Long-term debt consists of the following:

 

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

Bank Term Loan under Credit Agreement

   $ 18,750      $ 19,375  

Bank Term Loan—Commerzbank

     2,707        2,791  
  

 

 

    

 

 

 

Total debt

     21,457        22,166  

Less: financing fees

     (812      (840

Less: current portion

     (4,095      (3,779
  

 

 

    

 

 

 

Total long-term debt

   $ 16,550      $ 17,547  
  

 

 

    

 

 

 

The debt principal payments for the next five years and thereafter are as follows:

 

Payments due by fiscal year

   Debt Principal
Payments
 
     (in thousands)  

Remainder of 2018

   $ 3,125  

2019

     16,354  

2020

     416  

2021

     416  

2022

     416  

Thereafter

     730  
  

 

 

 

Total

   $ 21,457  
  

 

 

 

Credit Agreement

On December 15, 2014, the Company entered into a credit agreement (the “Credit Agreement”) with ECT, a wholly owned subsidiary of the Company ( together with the Company, the “Borrowers”), Silicon Valley Bank, as lender, administrative agent and issuing lender (“SVB”), and the several lenders from time to time party thereto (collectively, the “Lenders”). The Credit Agreement provides for a senior secured credit facility, consisting of a term loan facility (the “Term Loan”), in favor of the Borrowers in the aggregate principal amount of $25.0 million which was advanced to the Company on December 15, 2014 (the “Facility”).

The proceeds of the Term Loan were used to pay off $25.0 million of the outstanding indebtedness under the previous credit facility that was advanced to the Company pursuant to that certain credit agreement entered into on November 27, 2013 with ECT, SVB as lender, administrative agent and issuing lender, and the lenders from time to time party thereto (the “Original Credit Agreement”). As of December 15, 2014, no amounts remained outstanding under the credit facility issued under the Original Credit Agreement.

All obligations under the Facility are secured by a first priority security interest in substantially all of the Borrowers’ existing and future assets, including a pledge of the stock or other equity interests of the Borrowers’ domestic subsidiaries and of any first tier foreign subsidiaries, provided that not more than 66% of the voting stock of any such foreign subsidiaries shall be required to be pledged.

The Credit Agreement requires that the Term Loan be repaid in quarterly installments, with 5% of the principal due the first year, 10% of principal due in each of the second and third years, 15% of principal due the fourth year, and a final payment of $15 million due on December 14, 2018 (the “Maturity Date”). The outstanding balance of the Term Loan may, at the Borrowers’ option, be prepaid at any time in whole or in part without premium or penalty, other than customary breakage costs, if any, subject to the terms and conditions of the Credit Agreement.

As the terms of the Credit Agreement were not substantially different from the terms of the Original Credit Agreement, the Company accounted for this transaction as a modification of debt, and accordingly continues to recognize deferred financing fees over the term of the Credit Agreement.

Borrowings made under the Facility bear interest, at a base rate plus a margin (such margin not to exceed a per annum rate of 1.75%) based on a ratio of the Company’s consolidated senior debt to consolidated earnings before interest, taxes, depreciation and amortization (“EBITDA”) (the “Leverage Ratio”), or at a London Interbank Offered Rate (“LIBOR”) rate plus a margin (such margin not to exceed a per annum rate of 2.75%) based on the Leverage Ratio. The interest rate otherwise payable under the Facility will be subject to increase by 2.0% per annum during the continuance of a payment default and may be subject to increase by 2.0% per annum during the continuance of any other event of default. As of October 31, 2017, the interest rate in effect on the Facility was 3.76%.

 

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Covenants

The Credit Agreement contains customary affirmative and negative covenants, subject in certain cases to baskets and exceptions, including negative covenants with respect to indebtedness, liens, fundamental changes, dispositions, restricted payments, investments, ERISA matters, matters relating to subordinated debt, affiliate transactions, sale and leaseback transactions, swap agreements, accounting changes, negative pledge clauses, clauses restricting subsidiary distributions, lines of business, amendments to certain documents and use of proceeds. The Credit Agreement also contains customary reporting and other affirmative covenants. The Credit Agreement contains a consolidated fixed charge coverage ratio and consolidated leverage ratio.

The Company’s obligations under the Facility may be accelerated upon the occurrence of an event of default under the Credit Agreement, which includes customary events of default, including payment defaults, the inaccuracy of representations or warranties, the failure to comply with covenants, ERISA defaults, judgment defaults, bankruptcy and insolvency defaults and cross defaults to material indebtedness.

On September 16, 2015 the Borrowers entered into the First Amendment to the Credit Agreement and Waiver with SVB and the Lenders, pursuant to which SVB and the Lenders waived the delivery of monthly financial statements for the month ending June 30, 2015, and the parties agreed to amend the Credit Agreement to provide that the delivery of financial statements would occur on a quarterly basis as opposed to monthly, and that the Company may repurchase up to $30 million of its capital stock provided that it comply with certain financial covenants.

As of October 31, 2017, the Company was in compliance with all covenants under the Credit Agreement.

Bank Term Loan—Commerzbank

In May 2014, the Company entered into a loan agreement with Commerzbank to finance the purchase of the Company’s leased facility in Rosenheim, Germany. The principal amount of the term loan is 2.9 million euro ($3.9 million, using a July 31, 2014 exchange rate), payable over 10 years at an annual interest rate of 2.35%. Principal plus accrued interest is due quarterly over the duration of the term loan.

9. FAIR VALUE MEASUREMENTS

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

The Company holds short-term money market investments and certain other financial instruments which are carried at fair value. The Company determines fair value based upon quoted prices, when available or through the use of alternative approaches when market quotes are not readily accessible or available.

Valuation techniques for fair value are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s best estimate, considering all relevant information. These valuation techniques involve some level of management estimation and judgment. The valuation process to determine fair value also includes making appropriate adjustments to the valuation model outputs to consider risk factors.

The fair value hierarchy of the Company’s inputs used in the determination of fair value for assets and liabilities during the current period consists of three levels. Level 1 inputs are composed of unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date. Level 2 inputs include quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, inputs other than quoted prices that are observable for the asset or liability, and inputs that are derived principally from or corroborated by observable market data by correlation or other means. Level 3 inputs incorporate the Company’s own best estimate of what market participants would use in pricing the asset or liability at the measurement date where consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model. If inputs used to measure an asset or liability fall within different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the fair value measurement of the asset or liability. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and consideration of factors specific to the asset or liability.

 

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The following table presents financial assets and liabilities measured at fair value and their related valuation inputs as of October 31, 2017 and July 31, 2017:

 

            Fair Value Measurements at Reporting Date Using
(in thousands)
 

October 31, 2017

   Total Fair Value
of Asset
or Liability
     Quoted Prices in Active
Markets for Identical
Assets (Level 1)
     Significant Other
Observable Inputs
(Level 2)
     Significant
Unobservable Inputs
(Level 3)
 

Cash and cash equivalents (1)

   $ 104,388      $ 104,388      $ —        $ —    

Marketable securities

     56,919        10,405        46,514        —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 161,307      $ 114,793      $ 46,514      $ —    
  

 

 

    

 

 

    

 

 

    

 

 

 

July 31, 2017

   Total Fair Value
of Asset
or Liability
     Quoted Prices in Active
Markets for Identical
Assets (Level 1)
     Significant Other
Observable Inputs
(Level 2)
     Significant
Unobservable Inputs
(Level 3)
 

Cash and cash equivalents (1)

   $ 103,637      $ 103,637      $ —        $ —    

Marketable securities

     57,087        12,109        44,978        —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 160,724      $ 115,746      $ 44,978      $ —    
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Cash and cash equivalents as of October 31, 2017 and July 31, 2017 includes cash held in operating accounts of approximately $104.0 million and $103.5 million, respectively, that are not subject to fair value measurements. For purposes of this disclosure, they are included as having Level 1 inputs.

The carrying value of accounts receivable, prepaid expenses, accounts payable, and accrued expenses approximate fair value due to their short-term nature.

There were no assets or liabilities not measured at fair value but for which fair value is required to be disclosed. The carrying value of the Company’s debt, which includes term loans, approximates fair value due to market interest. Debt at October 31, 2017 and July 31, 2017 was $21.5 million and $22.2 million, respectively. Within the hierarchy of fair value measurement, these are Level 2 inputs.

10. STOCKHOLDERS’ EQUITY

Stock Repurchases

On September 3, 2015, the Company announced that its Board of Directors authorized a stock repurchase program, pursuant to which the Company is authorized to repurchase up to $30 million of its common stock from time to time in open market transactions or in privately negotiated transactions (the “2015 Plan”). This repurchase program supersedes the repurchase program that was announced on September 15, 2011 (the “2011 Plan”) and as a result there are no shares available for repurchase under the 2011 Plan. The Company may suspend or discontinue the 2015 Plan at any time and the 2015 plan has no expiration date. As of December 8, 2017, the Company had repurchased 1,956,733 shares for approximately $12 million under the 2015 Plan.

11. RECENT ACCOUNTING PRONOUNCEMENTS

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

 

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In February 2016, the FASB issued ASU No. 2016-02, Leases (ASC 842), which requires companies that are lessees to recognize a right-of-use asset and lease liability for most leases that do not meet the definition of a short-term lease. For income statement purposes, leases will continue to be classified as either operating or financing. Classification will be based on criteria that are largely similar to those applied in current lease accounting. This standard will result in extensive qualitative and quantitative disclosure changes. This standard will be effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period. For Xcerra, the standard will be effective for the fiscal year starting August 1, 2019, with early adoption permitted. The Company is currently evaluating the impact of this ASU on its financial position and results of operations.

In March 2016, the FASB issued ASU No. 2016-09, Compensation-Stock Compensation (ASC 718): Improvements to Employee Share-Based Payment Accounting. This ASU changes how companies account for certain aspects of share-based payment awards to employees, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. This pronouncement is effective for annual periods beginning after December 15, 2016. Early adoption is permitted. The Company adopted this ASU in the first quarter of fiscal 2018. Adoption of this ASU did not have a material impact on its financial position or results of operation.

12. SUBSEQUENT EVENTS

On November 28, 2017, the Company’s Board of Directors approved management to repay in full the outstanding obligation under the Term Loan with SVB. On December 1, 2017, the Company repaid $18.8 million of principal, accrued interest and fees to SVB, releasing the Company from its obligation under the Credit Agreement.

On November 30, 2017, the Company announced further restructuring in its Fixtures Services Group that impacted one of its facilities and employees in China. The Company has decided to cease manufacturing related operations located at its ECT Shenzhen site and move the production operations to its third-party outsource partner in Asia. As a result, the Company expects to incur costs for severance and relocation of the production operations during the quarter ending January 31, 2018. The estimated cost of this restructuring is not expected to have a material impact on the Company’s operating income or liquidity.

 

Item 2. 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 in this Quarterly Report on Form 10-Q. 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, could, should, 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 Quarterly Report on Form 10-Q. 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 (atg), Everett Charles Technologies (ECT), LTX-Credence (LTXC) 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.

 

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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 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) or Taiwan, (iv) review and clearance by the Committee on Foreign Investment in the United States (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 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 Annex A to the final proxy statement on Schedule 14A filed with the SEC on September 5, 2017. In addition, see Part I, Item 1A. Risk Factors of this Form 10-Q, 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.

 

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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 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 Quarterly Report on Form 10-Q.

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 Quarterly Report on Form 10-Q and is incorporated herein by reference.

Inventory Reserves

We are exposed to a number of economic and industry factors that could result in portions of our inventory becoming either obsolete or in excess of anticipated customer demand. These factors include changes in our customers’ capital expenditures, technological changes in our markets, our ability to meet changing customer requirements, competitive pressures in products and prices, and the availability of key components from our suppliers. Our policy is to establish inventory reserves when conditions exist that suggest our inventory may be in excess of anticipated demand or is obsolete based upon our assumptions about future demand for our products or market conditions. We regularly evaluate the ability to realize the value of our inventory based on a combination of factors including the following: historical usage rates, forecasted sales or usage, estimated product end of life dates, estimated current and future market values, and new product introductions. Purchasing and alternative usage options are also explored to mitigate inventory exposure. When recorded, our reserves are intended to reduce the carrying value of our inventory to its net realizable value. These 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 the Consolidated Financial Statements included in this Quarterly Report on Form 10-Q 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 Matter. The functional currency of our tester group is USD. 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 are included in our Consolidated Statements of Operations and Comprehensive Income (Loss) as a component of other income (expense), net. The functional currency of our ECT, atg and Multitest businesses is local currency, predominantly Euro, USD, Malaysian Ringgit and Singapore dollars, and net gains or losses resulting from foreign currency translation are recorded in stockholders’ equity as accumulated other comprehensive (loss) income.

 

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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 fiscal 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 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 Systems Corporation (Credence) in 2008 and Internal Revenue Code Section 382 guidance, the future utilization of our net operating losses will be subject to annual limitation.

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 on August 29, 2008 and from our purchase of Titan Semiconductor LLC (Titan) on February 2, 2015.

As of October 31, 2017, our goodwill is allocated to our Semiconductor Test reporting unit and our Contactors reporting unit. As of October 31, 2017, there were no triggering events that required us to perform interim 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, 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 engage third-party valuation consultants to assist in evaluating the Company’s estimated fair value calculations.

 

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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. As of July 31, 2016, we completed a Step 1 analysis using a Discounted Cash Flow 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 acquisition of the Multitest, atg and ECT businesses from Dover Printing & Identification, Inc. (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 (fiscal 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 considered paragraph 11 of ASC 350, which lists the pertinent factors to be considered when estimating the useful life of an intangible asset. These factors include a review of the expected use by the combined company of the assets acquired, the expected useful life of another asset (or group of assets) related to the acquired assets, legal, regulatory or other contractual provisions that may limit the useful life of an acquired asset or may enable the extension of the useful life of an acquired asset without substantial cost, the effects of obsolescence, demand, competition and other economic factors, and the level of maintenance expenditures required to obtain the expected future cash flows from the asset. 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 October 31, 2017 and July 31, 2017, there were no indicators that required us to conduct a recoverability test as of these dates.

Product Warranty Costs

We provide standard warranty coverage on our 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 Quarterly Report on Form 10-Q 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. An allowance for doubtful accounts is maintained for potential credit losses based upon our assessment of the expected

 

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collectability of all accounts receivable. Our allowance for doubtful accounts policy is described in Note 2, Summary of Significant Accounting Policies, contained in the Notes to Consolidated Financial Statements included in this Quarterly Report on Form 10-Q and is incorporated herein by reference.

Recent Accounting Pronouncements

Our recent accounting pronouncements are described in Note 11, Recent Accounting Pronouncements, contained in the Notes to the Consolidated Financial Statements included in the Quarterly Report on Form 10-Q and is incorporated herein by reference.

Results of Operations

For the three months ended October 31, 2017 compared to the three months ended October 31, 2016

The following table sets forth for the periods indicated the principal items included in the Consolidated Statements of Operations and Comprehensive Income (Loss) as a percent of revenue and the period-over-period percent changes for those line items (in thousands, except for percentage changes and per share data):

 

     Three months ended October 31,        
     2017     % of sales     2016     % of sales     Change
period to
period
 

Net product sales

   $ 114,577       95   $ 74,702       93     53

Net service sales

     5,709       5     5,383       7     6
  

 

 

     

 

 

     

Net sales

     120,286       100     80,085       100     50

Cost of sales

     60,871       51     45,725       57     33
  

 

 

     

 

 

     

Gross profit

     59,415       49     34,360       43     73

Engineering and product development expenses

     17,139       14     15,296       19     12

Selling, general and administrative expenses

     21,285       18     18,461       23     15

Amortization of purchased intangible assets

     157       <1     190       <1     (17 %) 

Restructuring

     135       <1     107       <1     27
  

 

 

     

 

 

     

Income from operations

     20,699       17     306       <1     *  

Other income (expense):

          

Interest expense

     (229     <1     (316     <1     (28 %) 

Interest income

     256       <1     168       <1     (52 %) 

Other income, net

     (237     <1     468       (1 %)      (151 %) 
  

 

 

     

 

 

     

Income before provision for income taxes

     20,489       17     626       1     *  

Provision for income taxes

     2,788       2     608       1     *  
  

 

 

     

 

 

     

Net income

   $ 17,701       15   $ 18       <1     *  
  

 

 

     

 

 

     

Net income attributable to Non-controlling interests

     170       <1     —         *       *  
  

 

 

     

 

 

     

Net income attributable to Xcerra

   $ 17,531       15   $ 18       <1  
  

 

 

     

 

 

     

 

* Not meaningful

 

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Net sales. The increase in net sales for the three months ending October 31, 2017, compared to the three months ending October 31, 2016, was driven by positive business trends in our Semiconductor Test Solutions (STS) reportable segment as well as increases in most of the business units in our Electronic Manufacturing Solutions (EMS) reportable segment.

Our STS reportable segment net sales for the three months ended October 31, 2017 increased as compared to the same periods in 2016 by $35.2 million or 54%, as the semiconductor market is experiencing a return to growth during this period, largely driven by the Semiconductor Test segment. Our EMS reportable segment net sales for the three months ended October 31, 2017 as compared to the same period in 2016 increased by $5.0 million or 33% due to continued strengthening in our PCB Test segment.

Service revenue from our STS reportable segment increased by 6% in the three months ended October 31, 2017, as compared to the three months ended October 31, 2016, primarily due to increases in service contracts for testers no longer covered under warranty.

Gross profit. The increase in gross profit for the three months ended October 31, 2017 compared to the three months ended October 31, 2016 was primarily due to the increase in net sales in both reporting segments and favorable product mix in the Semiconductor Test segment.

Engineering and product development expenses. The increase in engineering and product development expenses for the three months ended October 31, 2017 compared to the three months ended October 31, 2016 was due primarily to increased salary and headcount related expenses, as well as higher product development costs as we continue to focus on product enhancements and new offerings for our customers.

Selling, general and administrative expenses. The increase in selling, general and administrative expenses for the three months ended October 31, 2017 compared to the three months ended October 31, 2016 was due to higher variable compensation and commissions on higher revenue, higher profit sharing bonus accruals in line with business development, and an increase in legal expenses associated with the Merger Agreement.

Amortization of purchased intangible assets. The decrease in amortization for the three months ended October 31, 2017 compared to the three months ended October 31, 2016 follows accelerated amortization using the cash flows of certain intangible assets. Amortization expense is primarily related to the intangible assets acquired from our acquisition of ECT, Multitest and atg in 2014 and Titan in fiscal 2015.

Restructuring. The restructuring expense recorded in the three months ended October 31, 2017 related primarily to move costs associated with the closing of our engineering development center in Armenia.

Income from operations. We reported income from operations of $20.7 million for the three months ended October 31, 2017, as compared to income from operations of $0.3 million for the three months ended October 31, 2016. This increase year over year was primarily driven by higher net sales in the comparative periods.

Our STS reportable segment had income from operations of $19.3 million for the three months ended October 31, 2017, as compared to a loss of $0.3 million for the three months ended October 31, 2016. This increase was largely driven by the improvement in all of our segments within the STS reportable segment which experienced improved industry conditions.

Our EMS reportable segment reported income from operations of $1.4 million for the three months ended October 31, 2017 as compared to income from operations of $0.6 million for the three months ended October 31, 2016, primarily due to improvement in our PCB Test segment.

Interest expense. Interest expense related to our debt obligations decreased in the comparative periods in line with the reduction of principal balances on those obligations.

Interest income. Interest income increased slightly in the three months ended October 31, 2017 compared to the three months ended October 31, 2016 due to limited changes in the core composition of marketable securities invested within our portfolio.

Other income, net. Includes the impact of fluctuations in foreign exchange rates. For the three months ended October 31, 2017 we recognized ($0.4) million of foreign exchange losses, as compared to $0.2 million of foreign exchange gains for the three months ended October 31, 2016. This fluctuation is largely driven by the relationship of the USD to the Euro and Malaysian Ringgit.

 

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Provision for income taxes. We recorded an income tax provision of $2.8 million and $0.6 million in the three months ended October 31, 2017 and October 31, 2016, respectively, primarily due to foreign taxes in profitable locations.

As of both October 31, 2017 and July 31, 2017 our liability for unrecognized income tax benefits was $6.2 million (of which $2.6 million, if recognized, would impact our income tax rate).

We expect to maintain a full valuation allowance on U.S. deferred tax benefits and in certain foreign jurisdictions until we can sustain an appropriate level of profitability. We will continue to monitor the recovery of our deferred tax assets on a periodic basis.

Net income from Non-controlling interest. During the three months ended October 31, 2017, ALBS recorded income related to reimbursement for non-recurring engineering costs that they had incurred. We have a variable interest in ALBS and as of October 31, 2017 that represents an 11.11% equity ownership in the entity.

Comprehensive income (loss). During the three months ended October 31, 2017, we recognized $0.9 million of unrealized gains from currency translation, as compared to ($1.0) million of unrealized losses from currency translation for the three months ended October 31, 2016, largely driven by the fluctuation of the Malaysian Ringgit and Euro to USD.

Liquidity and Capital Resources

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

 

(in thousands)

   October 31, 2017      July 31, 2017      $ Change      % Change  

Cash, cash equivalents and marketable securities

   $ 161,307      $ 160,724      $ 583        0.4

Working capital

   $ 274,885      $ 256,902      $ 17,983        7.0

The following is a summary of significant items impacting our liquidity and capital resources for the three months ended October 31, 2017 (in millions):

 

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

   $ 160.7  

Payments on tax withholdings for vested RSUs

     (1.8

Capital expenditures

     (1.0

Payment of bank term loan

     (0.7

Effect of exchange rate changes in cash

     0.3  

Other cash provided, primarily by operating activities, net

     3.8  
  

 

 

 

Cash and cash equivalents and marketable securities at October 31, 2017

   $ 161.3  
  

 

 

 

Operating Activities: Operating cash flows for the three months ended October 31, 2017 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. Our net cash generated in operating activities was $4.1 million for the three months ended October 31, 2017. Net cash generated by operating activities were impacted by changes in current assets and liabilities and included increases in inventories of $5.9 million, and prepaid expenses and other assets of $0.9 million, which were offset by a decrease in accounts receivable of $3.9 million, lower accounts payable $11.0 million, accrued expenses of $1.2 million and deferred revenue and customer advances of $3.3 million.

Net cash used in operating activities for the three months ended October 31, 2016 was $4.0 million. Net cash used by operating activities was impacted by changes in current assets and liabilities and included a decrease in accounts receivable of $1.7 million, increases in inventories of $2.0 million, prepaid expenses and other assets of $2.8 million, and lower accounts payable $4.3 million, lower accrued expenses of $0.1 million and lower deferred revenue and customer advances of $0.6 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 three months ended October 31, 2017 totaled $1.1 million and included $1.0 million of capital expenditures primarily related to purchase of spares for our field service group and certain engineering projects.

Net cash used in investing activities for the three months ended October 31, 2016 was $1.2 million, driven by $1.1 million of capital expenditures primarily related certain engineering projects.

 

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Financing Activities: Cash flows used in financing activities consisted primarily of repayment of bank term loans and settlement of the minimum statutory tax withholding requirements paid by us on behalf of our employees upon vesting of restricted stock units. For the three months ended October 31, 2017 the net cash used of $2.5 million consisted of payment of tax withholdings from employee’s vested restricted stock units of $1.8 million and the repayment of term loans of $0.7 million.

For the three months ended October 31, 2016 the net cash used in financing activities of $1.7 million consisted of the payment of tax withholdings from employee’s vested restricted stock units of $1.0 million and the repayment of term loans of $0.7 million.

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 the 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 October 31, 2017, the interest rate in effect on the Facility was 3.76%.

The proceeds of the Term Loan were used to pay off $25.0 million of the outstanding indebtedness under our previous credit facility (the Original 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 balance of outstanding indebtedness of approximately $2.5 million was funded through our cash flow from operations. As of December 15, 2014, the previous facility had been terminated.

The Credit Agreement contains customary affirmative and negative covenants, subject in certain cases to baskets and exceptions, including negative covenants with respect to indebtedness, liens, fundamental changes, dispositions, restricted payments, investments, ERISA matters, matters relating to subordinated debt, affiliate transactions, sale and leaseback transactions, swap agreements, accounting changes, negative pledge clauses, clauses restricting subsidiary distributions, lines of business, amendments to certain documents and use of proceeds. The Credit Agreement also contains customary reporting and other affirmative covenants.

Our obligations under the Facility may be accelerated upon the occurrence of an event of default under the Credit Agreement, which includes customary events of default, including payment defaults, the inaccuracy of representations or warranties, the failure to comply with covenants, ERISA defaults, judgment defaults, bankruptcy and insolvency defaults and cross defaults to material indebtedness.

On September 16, 2015 we and 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 may repurchase up to $30 million of our capital stock provided that we comply with certain financial covenants.

As of October 31, 2017, we were in compliance with all covenants under the Credit Agreement (and the First Amendment). On November 28, 2017, the Company’s Board of Directors approved the repayment in full of the outstanding obligation under the Term Loan with SVB. On December 1, 2017, the Company repaid $18.8 million of principal, accrued interest and fees to SVB, releasing the Company from its obligation under the Credit Agreement.

 

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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.

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 or in privately negotiated transactions (the 2015 Plan). This repurchase program supersedes the 2011 repurchase program Plan (the 2011 Plan) which was announced on September 15, 2011 and under which we purchased 3,294,666 shares for $18.7 million. As a result there were no shares available for repurchase under the 2011 Plan following approval of the 2015 Plan. We may suspend or discontinue 2015 Plan at any time and the program has no expiration date. As of December 8, 2017, we have repurchased 1,956,733 shares for approximately $12.0 million.

Commitments and Contingencies

As of October 31, 2017, our major outstanding contractual obligations are related to our bank term loans, rental properties, other operating leases, and inventory purchase commitments.

In the ordinary course of business, we agree from time to time to indemnify certain customers against certain third party claims for property damage, bodily injury, personal injury or intellectual property infringement arising from the operation or use of 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 have no liabilities recorded for these agreements as of October 31, 2017.

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 to us. 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 have not accrued a liability for these agreements as of October 31, 2017.

The aggregate outstanding amount of our contractual obligations was $97.2 million as of October 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 October 31, 2017 and the effect such obligations are expected to have on our liquidity and cash flows in future periods:

 

     Total      2018      2019-2020      2021-2022      Thereafter  
     (in thousands)  

Contractual Obligations:

              

Operating leases

   $ 19,848      $ 3,598      $ 7,242      $ 4,351      $ 4,657  

Inventory commitments

     55,057        42,148        12,493        416        —    

Severance

     21        21        —          —          —    

Bank term loan—principal and interest

     22,247        3,647        16,983        875        742  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Contractual Obligations

   $ 97,173      $ 49,414      $ 36,718      $ 5,642      $ 5,399  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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We also expect to invest approximately $6.6 million in capital expenditures and other investments for the remainder of the fiscal year ending July 31, 2018.

Off-Balance Sheet Arrangements

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

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

There has been no material change in our quantitative and qualitative disclosures about market risk exposure since the filing of our Annual Report on Form 10-K for the fiscal year ended July 31, 2017.

 

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures as of October 31, 2017. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e)) under the Securities Exchange Act of 1934 (the Exchange Act), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time period specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of the Company’s disclosure controls and procedures as of October 31, 2017, the Company’s Chief Executive Officer and Chief Financial Officer concluded that, as of such date, the Company’s disclosure controls and procedures were effective at the reasonable assurance levels.

Changes in Internal Controls

There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f)) under the Exchange Act) during the three months ended October 31, 2017 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Limitations on the Effectiveness of Controls

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls over financial reporting can prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. The inherent limitations in all control systems include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons or by collusion of two or more people. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

PART II—OTHER INFORMATION

 

Item 1. 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 alleged, among other things, that the Company and each member of the Board violated federal

 

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securities laws and regulations by soliciting stockholder votes in connection with the Merger through a proxy statement that omitted material facts. The parties agreed on certain additional disclosures to the Company’s definitive proxy statement, which were filed on October 3, 2017. The plaintiffs dismissed the complaint on November 1, 2017.

On August 23, 2017, a putative shareholder class action complaint was filed in the United States District Court for the District of Massachusetts against the Company, each member of the Board, Parent, Unic Capital, Sponsor and Merger Sub, captioned Robert Berg v. Xcerra Corporation et. al., Case No. 1:17-cv-11583. The complaint alleged, among other things, that the Company and each member of the Board violated federal securities laws and regulations by soliciting stockholder votes in connection with the Merger through a proxy statement that omitted material facts. The parties agreed on certain additional disclosures to the Company’s definitive proxy statement, which were filed on October 3, 2017. The plaintiff dismissed the complaint on November 1, 2017.

On November 10, 2017, a putative shareholder class action complaint was filed in the United States District Court for the District of Massachusetts against the Company and each member of the Board, captioned Waseem Khan v. Xcerra Corporation et. al., Case No. 1:17-cv-12226. The complaint alleges, among other things, that the Company and the Board violated federal securities laws and regulations by soliciting stockholder votes in connection with the Merger through a proxy statement that includes false and misleading material information with respect to the proposed Merger, which renders the proxy statement false and misleading. The complaint seeks damages. The Company is reviewing the complaint and has not yet formally responded to it, but believes that the plaintiffs’ allegations are without merit and intends to defend against them vigorously. However, litigation is inherently uncertain and there can be no assurance regarding the likelihood that the Company’s defense of the actions will be successful. Additional complaints containing substantially similar allegations may be filed in the future.

 

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Item 1A. Risk Factors

This Quarterly Report includes or incorporates forward-looking statements that involve substantial risks and uncertainties and fall within the meaning of Section 27A of the Securities Exchange Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended. You can identify these forward-looking statements by our use of the words “believes,” “anticipates,” “plans,” “expects,” “may,” “will,” “would,” “should,” “intends,” “estimates,” “seeks” or similar expressions, whether in the negative or affirmative. We cannot guarantee that we actually will achieve these plans, intentions or expectations. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have included below important factors that we believe could cause our actual results to differ materially from the forward-looking statements that we make. If any of these risks were to occur, our business, financial condition, results of operations or prospects, could be materially and adversely affected. These risks and uncertainties may be interrelated or co-related, and as a result, the occurrence of one risk might directly affect other risks described below, make them more likely to occur or magnify their impact. Moreover, the risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also affect our business. We do not assume any obligation to update any forward-looking statement we make.

The risk factors set forth below with an asterisk (*) next to the title are new risk factors or risk factors containing changes from the risk factors previously disclosed in our Annual Report on Form 10-K.

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 that remain unsatisfied as of the date of this filing, including, among others, (i) the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”), (ii) filings and approvals with or by certain governmental authorities, including governmental authorities in the People’s Republic of China (“PRC”) and Taiwan and (iii) 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;

 

    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

 

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    potential litigation, if any, 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.

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.

 

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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.

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 October 31, 2017, our outstanding indebtedness was approximately $21.5 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 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 $161.3 million as of October 31, 2017 will be sufficient to fund our ongoing operations and inorganic business growth opportunities, 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.

 

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Further, if we issue additional equity or equity-linked securities to obtain financing, stockholders may experience dilution. If we incur substantial additional indebtedness in the future, the risks described above under “Our substantial debt and financial obligations could adversely affect our financial condition and ability to operate our business, we may not be able to pay our debt and other obligations, and we may incur additional debt” would intensify.

Our sales and operating results have fluctuated significantly from period to period, including from one quarter to another, and they may continue to do so.

Our quarterly and annual operating results are affected by a wide variety of factors that have had and could continue to have material and adverse effects on our financial condition and stock price or lead to significant variability in our operating results or our stock price, including the following:

 

    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 Spirox Corporation as a distributor in China and Taiwan*

We rely on Spirox Corporation (“Spirox”) as our primary distribution channel for sales and service in China and Taiwan for our Semiconductor Test Solutions products, which is a region that represents a material portion of our revenues. Spirox has direct contact with our customers, and during the term of our distributor relationship Spirox is obligated to satisfy all installation and service obligations for the Semiconductor Test Solutions products. Our reliance on Spirox give us less control over our sales and distribution channel in China and Taiwan. Our business and financial performance arising from the China and Taiwan region can be negatively impacted by many factors relating to Spirox, including if:

 

    Spirox is ineffective in its sales or service efforts;

 

    Spirox incurs difficulties in staffing and / or training;

 

    Spirox, for any reason, does not satisfy its obligations to customers in China and Taiwan or to us; or

 

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    The distributor relationship between the Company and Spirox deteriorates.

Our dependence on subcontractors and sole source suppliers may prevent us from delivering an acceptable product on a timely basis.

We rely on one subcontractor to manufacture our test systems and multiple other subcontractors for the manufacture of the components and subassemblies used to produce our test systems. Certain of the suppliers for certain components and subassemblies are sole source suppliers. We have no long term supply agreements with our test system contract manufacturers and purchase products through individual purchase orders. For all of our products, we may be required to qualify new or additional subcontractors and suppliers due to capacity constraints, competitive or quality concerns or other risks that may arise, including as a result of a change in control of, or deterioration in the financial condition of, a supplier or subcontractor. The process of qualifying subcontractors and suppliers is lengthy. Our reliance on subcontractors gives us less control over the manufacturing process and exposes us to significant risks, especially inadequate capacity, late delivery, substandard quality, and high costs. In addition, the manufacture of certain of these components and subassemblies is an extremely complex process. If a supplier became unable to provide parts in the volumes needed, at the required standards of quality or at an acceptable price, we would have to identify and qualify acceptable replacement parts from alternative sources of supply or manufacture such components or subassemblies internally. The failure to qualify acceptable replacement subcontractors or suppliers quickly would delay the manufacturing and delivery of our products, which could cause us to lose revenues and customers.

We also may be unable to engage alternative sources for the production of our products on a timely basis or upon terms favorable to us, if at all. If we are required for any reason to seek a new manufacturer of our products, an alternate manufacturer may not be available and, in any event, transitioning to a new manufacturer would require a significant lead time of nine months or more and would involve substantial expense and disruption of our business. Our test systems are highly sophisticated and complex capital equipment, with many custom components, and final assembly requires specific technical know-how and expertise. These factors could make it more difficult for us to find a new manufacturer of our systems if our relationship with our outsource suppliers is terminated for any reason, which would cause us to lose revenues and customers.

We are dependent on certain semiconductor device manufacturers as sole source suppliers of certain sub-assemblies and components used in our test systems which are manufactured in accordance with our proprietary design and specifications. We have no written supply agreement with these sole source suppliers and purchase our custom components through individual purchase orders. If one of our sole source suppliers were to fail to produce or provide the parts they agreed to build for us at the specifications, price or volume required, we would face a significant delay in the final production of our products because we do not have redundant capacity available, and our revenue and results of operations would be materially and adversely affected.

Compliance with current and future environmental regulations may be costly and disruptive to our operations.

We may be subject to environmental and other regulations due to our production and marketing of products in certain states and countries that limit or restrict the amount of hazardous material in certain electronic components such as PCBs. One such regulation is Directive 2002/95/EC of the European Parliament and of the Council of 27 January 2003 that restricts the use of certain hazardous substances in electrical and electronic equipment. “RoHS” is short for restriction of hazardous substances. The RoHS Directive banned the placing on the European Union market of new electrical and electronic equipment containing more than agreed levels of lead, cadmium, mercury, hexavalent chromium, polybrominated biphenyl (PBB) and polybrominated diphenyl ether (PBDE), except where exemptions apply, from July 1, 2006. Manufacturers are required to ensure that their products, including their constituent materials and components, do not contain more than the minimum levels of the nine restricted materials in order to be allowed to export goods into the Single Market (i.e. of the European Community’s 28 Member States). Any interruption in supply due to the unavailability of restriction free products could have a significant impact on the manufacturing and delivery of our products. If a supplier became unable to provide parts in the volumes needed or at an acceptable price, we would have to identify and qualify acceptable replacements from alternative sources of supply or manufacture such components internally. As previously discussed, the failure to qualify acceptable replacements quickly would delay the manufacturing and delivery of our products, which could cause us to lose revenues and customers.

Regulations related to conflict minerals may adversely affect us.

The U.S. Securities and Exchange Commission has adopted disclosure rules for companies that use conflict minerals in their products, with substantial supply chain verification requirements in the event that the materials come from, or could have come from, the Democratic Republic of the Congo or adjoining countries. These rules and verification requirements, which have applied to our activities since 2013 and will apply to our activities going forward, impose additional costs on us and on our suppliers, and may limit the sources or increase the prices of materials used in our products. Further, if we are unable to certify that our products are conflict free, we may face challenges with our customers, which could place us at a competitive disadvantage, and our reputation may be harmed.

 

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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, 82% of our revenues for 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 general economic, industry and market conditions and trends in economies outside the United States, , uncertainty arising from the June 2016 referendum vote in the United Kingdom in favor of exiting the European Union and heightened economic and political uncertainty within and among other European Union member states;

 

    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.

 

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The current U.S. President and his Administration, and some members of the current U.S. Congress, have signaled a willingness to revise, renegotiate, or terminate various multilateral trade agreements under which U.S. companies currently exchange products and services around the world, and to impose new taxes on certain goods imported into the U.S. Since we rely upon non-U.S. suppliers for several components of the equipment we sell, such steps, if adopted, could make our products more expensive and potentially less competitive in certain markets. Such steps, if adopted, could also lead to retaliatory actions by other countries, which could make it more difficult to sell our products in those countries, or make our products more expensive and less competitive in those foreign markets. It is not known what specific measures might be proposed or how they would be implemented or enforced. There can be no assurance that pending or future legislation or executive action in the United States that could significantly increase our cost of manufacturing and, consequently, adversely affect our business, financial condition or results of operations, will not be enacted.

In addition, 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 USD. A strengthening in the USD 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 USD and foreign currencies could cause us to lower our prices and thus reduce our profitability. These fluctuations could also cause prospective customers to push out or delay orders because of the increased relative cost of our products. In the past, there have been significant fluctuations in the exchange rates between the USD 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, Teradyne Inc., Johnstech, MicroCraft, Cohu, Inc., SPEA, Shenzhen Mason Electronics Co., Ltd., Bojay, OXO, Sanmina, Interconnect Devices, Inc., QA Technology, and Ingun. Some of these competitors have substantially greater financial resources and more extensive engineering, manufacturing, marketing, and customer support capabilities than we have.

We expect our competitors to enhance their current products and to introduce new products that may have comparable or better price and performance. The introduction of competing products could hurt sales of our current and future products. In addition, new competitors, including semiconductor and electronics manufacturers themselves, may offer new technologies, which may in turn reduce the value of our products. Increased competition could lead to intensified price-based competition, which would hurt our business and results of operations. Unless we are able to invest significant financial resources in developing products and maintaining customer support centers worldwide, we may not be able to compete effectively.

We are exposed to the risks associated with the volatility of the U.S. and global economies.

Slow or negative growth in the domestic or global economies may continue to materially and adversely affect our business, financial condition and results of operations for the foreseeable future. The strength of the domestic and global economies impact business capital spending and the sale of electronic goods and information technology equipment, which impacts our sales, revenues, and profits. The lack of visibility regarding whether there will be sustained growth in domestic and global economies creates uncertainty regarding the amount of our sales, and underscores the need for caution in predicting growth in the semiconductor test equipment industry in general and in our revenues and profits specifically. Our results of operations would be further adversely affected if we were to experience lower than anticipated order levels, cancellations of orders in backlog, extended customer delivery requirements or pricing pressure as a result of a slowdown. At lower levels of revenue, there is a higher likelihood that these types of changes in our customers’ requirements would adversely affect our results of operations because in any particular quarter a limited number of transactions accounts for an even greater portion of sales for the quarter.

Development of our products requires significant lead-time and expenditures, and we may fail to correctly anticipate the technical needs of our customers.

Our systems are used by our customers to develop, test and manufacture their new semiconductor and electronics devices. We therefore must anticipate industry trends and develop products in advance of the commercialization of our customers’ semiconductor and electronics devices, requiring us to make significant capital investments to develop new equipment for our customers well before their devices are introduced. If our customers fail to introduce their devices in a timely manner or the market does not accept their devices, we may not recover our capital investment, in whole or in part. In addition, even if we are able to successfully develop enhancements or new generations of our products, these enhancements or new generations of products may not generate revenue in excess of the costs of development, and they may be quickly rendered obsolete by changing customer preferences or the introduction

 

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of products embodying new technologies or features by our competitors. Furthermore, if we were to make announcements of product delays, or if our competitors were to make announcements of new systems, these announcements could cause our customers to defer or forego purchases of our systems, which would also hurt our business.

We may not be able to recover capital expenditures.

We continue to make capital expenditures in the ordinary course of our business. We may not be able to recover the expenditures for capital projects within the assumed timeframe, or at all, which may have an adverse impact on our profitability.

We have significant guarantees, indemnification and customer confidentiality obligations.

From time to time, we make guarantees to customers regarding the delivery and performance of our products and guarantee certain indebtedness, performance obligations or lease commitments of our subsidiary and affiliate companies. We also have agreed to provide indemnification to our officers, directors, employees and agents, to the extent permitted by law, arising from certain events or occurrences while the officer, director, employee or agent, is or was serving at our request in such capacity. Additionally, we have confidentiality obligations to certain customers. If we become liable under any of these obligations, it could materially and adversely affect our business, financial condition or operating results.

Our success depends on attracting and retaining key personnel.

Our success depends substantially upon the continued service of our executive officers and key personnel, none of whom is bound by an employment or non-competition agreement. Our success also depends on our ability to attract and retain highly qualified managers and technical, engineering, marketing, sales and support personnel. Competition for such specialized personnel is intense, and it may become more difficult for us to hire or retain them. Our volatile business cycles only aggravate this problem. If we implement layoffs during an industry downturn, our ability to hire or retain qualified personnel may be diminished. Our business, financial condition and results of operations could be materially adversely affected by the loss of any of our key employees, by the failure of any key employee to perform in his or her current position, or by our inability to attract additional skilled employees.

We may not be able to protect our intellectual property rights.

Our success depends in part on our ability to obtain intellectual property rights and licenses and to preserve other intellectual property rights covering our products and development and testing tools. To that end, we have obtained certain domestic and international patents and may continue to seek patents on our inventions when appropriate. We have also obtained certain trademark registrations. The process of seeking intellectual property protection can be time consuming and expensive. We cannot ensure that:

 

    patents will issue from currently pending or future applications;

 

    our existing patents or any new patents will be sufficient in scope or strength to provide meaningful protection or any commercial advantage to us;

 

    foreign intellectual property laws will protect our intellectual property rights; or

 

    others will not independently develop similar products, duplicate our products or design around our technology.

If we do not successfully enforce our intellectual property rights, our competitive position could suffer, which could harm our operating results. We also rely on trade secrets, proprietary know-how and confidentiality provisions in agreements with employees and consultants to protect our intellectual property. Other parties may not comply with the terms of their agreements with us, and we may not be able to adequately enforce our rights against these parties.

Third parties may claim we are infringing their intellectual property, and we could incur significant litigation costs and licensing expenses or be prevented from selling our products.

Intellectual property rights are uncertain and involve complex legal and factual questions. We may be unknowingly infringing on the intellectual property rights of others and may be liable for that infringement, which could result in a significant liability for us. If we do infringe the intellectual property rights of others, we could be forced to either seek a license to intellectual property rights of others or alter our products so that they no longer infringe the intellectual property rights of others. A license could be very expensive to obtain or may not be available at all. Similarly, changing our products or processes to avoid infringing the rights of others may be costly or impractical.

If we were to become involved in a dispute regarding intellectual property, whether ours or that of another company, we may have to participate in legal proceedings. These types of proceedings may be costly and time consuming for us, even if we eventually prevail. If we do not prevail, we might be forced to pay significant damages, obtain licenses, modify our products or processes, stop making products or stop using processes.

 

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In the future we may be subject to litigation that could have an adverse effect on our business.

From time to time, we may be subject to litigation or other administrative and governmental proceedings that could require significant management time and resources and cause us to incur expenses and, in the event of an adverse decision, pay damages in an amount that could have a material adverse effect on our financial position or results of operations.

Product defects and any damages stemming from product liability could harm our reputation among existing and potential customers and could have a material adverse effect upon our business results and financial condition

We cannot guarantee that there are no defects in the products we manufacture or that our product liability insurance will sufficiently cover the ultimate amount of any damages caused by such defects. Large scale accidents due to product defects or any discovery of defects in our products could harm our reputation, result in claims for damages, and have a material adverse effect upon our business results and financial condition.

Our operations and the operations of our customers and suppliers are subject to risks of natural catastrophic events, widespread health epidemics, acts of war, and the threat of domestic and international terrorist attacks, any one of which could result in cancellation of orders, delays in deliveries or other business activities, or loss of customers and could negatively affect our business and results of operations.

Our operations and those of our customers and suppliers are subject to disruption for a variety of reasons, including work stoppages, acts of war, terrorism, health epidemics, fires, earthquakes, hurricanes, volcanic eruptions, energy shortages, telecommunication failures, tsunamis, flooding or other natural disasters. Such disruption could materially increase our costs and expenses as well as cause delays in, among other things, shipments of products to our customers, our ability to perform services requested by our customers, or the installation and acceptance of our products at customer sites. Any of these conditions could have a material adverse effect on our business, financial conditions or results of operations.

Damage, interference or interruption to our information technology networks and systems could hinder business continuity and lead to substantial costs or harm to our reputation.

We rely on various information technology networks and systems, some of which are managed by third parties, to process, transmit and store electronic information, including confidential data, and to carry out and support a variety of business activities, including manufacturing, research and development, supply chain management, sales and accounting. Attacks by hackers or computer viruses, wrongful use of the information security system, careless use, accidents or disasters could undermine the defenses we have established for these systems and disrupt business continuity, which could not only risk leakage or tampering of information but could also result in a legal claim, litigation, damages liability or an obligation to pay fines. If this were to occur, our reputation could be harmed, we could incur substantial costs, and it may have a material adverse effect upon our financial condition and results of operation.

Our stock price can be volatile.*

In the three months ended October 31, 2017, our stock price ranged from a low of $9.20 to a high of $9.99. This relative stability is due to the market assumptions regarding the closing of the Merger. If the Merger is not completed, the price of our common stock likely will 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.

 

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In addition, the stock market in general, and the market prices for semiconductor-related and electronics manufacturing companies in particular, have experienced significant price and volume fluctuations that often have been unrelated to the operating performance of the companies affected by these fluctuations. These broad market fluctuations may adversely affect the market price of our common stock, regardless of our operating performance.

We may record impairment charges, which would adversely impact our results of operations.

We review our goodwill and indefinite-lived intangible assets for impairment at least annually, or whenever events or changes in circumstances indicate that the carrying amounts of these assets may not be recoverable, in accordance with FASB ASC 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 USD, increase our costs and expenses and otherwise harm our business. Although our financial statements are denominated in USD, 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 USD significantly fluctuates in relation to unhedged non-U.S. currencies in which we transact business.

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 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.

 

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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.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

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 3, 2015 through October 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 7/31/2017

     —        $ —          —        $ 18,046,697  

Three months ended 10/31/17

     —        $ —          —        $ 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 Plan”). This repurchase program supersedes the 2011 repurchase program that was announced on September 15, 2011 (the “2011 Plan”), and as a result there are no shares available for repurchase under the 2011 Plan. As of October 31, 2017 we have repurchased 1,956,733 shares for approximately $12.0 million under the 2015 Plan.

 

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Item 6. Exhibits

 

Exhibit

Number

  

Description

31.1*    Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act
31.2*    Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act
32*    Certification of the Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(b) of the Exchange Act and 18 U.S.C. Section 1350
101.INS    XBRL Instance Document
101.SCH    XBRL Taxonomy Extension Schema Document
101.CAL    XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF    XBRL Taxonomy Extension Definition Linkbase
101.LAB    XBRL Taxonomy Extension Label Linkbase Document
101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document

 

* Filed herewith

 

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

    Xcerra Corporation
Date: December 8, 2017     By:       /S/ MARK J. GALLENBERGER
      Mark J. Gallenberger
     

Senior Vice President, Chief Operating Officer,

Chief Financial Officer and Treasurer

(Principal Financial Officer)

 

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