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.

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 Topic 605, Revenue Recognition, to the Financial Accounting Standards Board Codification (“FASB ASC”) and Accounting Standards Update 2009-13, Multiple-Deliverable Revenue Arrangements (“ASU 2009-13”). The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the seller’s price is fixed or determinable and collectability is reasonably assured.

Revenue related to equipment sales is recognized when: (a) the Company has a written sales agreement; (b) delivery has occurred or service has been rendered; (c) the price is fixed or determinable; (d) collectability is reasonably assured; (e) the equipment delivered is a standard product with historically demonstrated acceptance; and (f) there is no unique customer acceptance provision or payment tied to acceptance or an undelivered element significant to the functionality of the system. Generally, payment terms are time based after product shipment. From time to time, sales to a customer may involve multiple elements, in which case revenue is recognized on the delivered element provided that (1) the undelivered element is a proven technology, (2) there is a history of acceptance on the equipment with the customer, (3) the undelivered element is not essential to the customer’s application, (4) the delivered item(s) has value to the customer on a stand-alone basis, and (5) if the arrangement includes a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) is considered probable and substantially in the control of the Company. The arrangement consideration, or the amount of revenue to be recognized on each separate unit of accounting, is allocated at the inception of the arrangement to all deliverables on the basis of their relative selling price.

Revenue related to maintenance and service contracts is recognized ratably over the duration of the contracts. Net service sales as presented in the Company’s Consolidated Statement of Operations and Comprehensive Income (Loss) includes revenue associated with 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 or market, determined on the first-in, first-out (“FIFO”) method, and include materials, labor and manufacturing overhead. The components of inventories are as follows:

 

		April 30, 2017				July 31, 2016
		(in thousands)
Material and purchased components		$	28,052			$	27,753
Work-in-process			26,028				20,218
Finished equipment, including inventory consigned to customers			24,886				22,015
Total inventories		$	78,966			$	69,986

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

Purchasing and usage alternatives are also explored to mitigate inventory exposure. When recorded, reserves are intended to reduce the carrying value of inventory to its net realizable value. As of April 30, 2017 and July 31, 2016, inventory was stated net of inventory reserves of $21.3 million and $21.4 million, respectively. If actual demand for products deteriorates or market conditions are less favorable than projected, additional inventory reserves may be required. Such reserves are not reversed until the related inventory is sold or otherwise disposed.

Goodwill and Other Intangibles

In accordance with FASB ASC Topic 350—Intangibles—Goodwill and Other (“Topic 350”), goodwill is not amortized. Rather, the Company’s goodwill is subject to periodic impairment testing. Topic 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, 2016 and determined no adjustment to goodwill was necessary.

The testing of goodwill for impairment is performed at a level referred to as a reporting unit. As of April 30, 2017, the Company’s goodwill is allocated to its Semiconductor Test reporting unit and its Contactors reporting unit. Based on Topic 350-20-35-3A, as of April 30, 2017, there were no triggering events that required the Company to complete impairment testing.

The Company’s goodwill consists of the following:

 

Goodwill		April 30, 2017				July 31, 2016
		(in thousands)
Semiconductor Test Reporting Unit
Merger with Credence Systems Corporation (August 29, 2008)		$	28,662			$	28,662
Acquisition of Step Tech Inc. (June 10, 2003)			14,368				14,368
Contactors Reporting Unit
Acquisition of Titan Semiconductor Tool LLC (February 2, 2015)			820				820
Total goodwill		$	43,850			$	43,850

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 April 30, 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			$	(28,111	)		$	1,771
Customer Relationships – Titan			20				670				(6	)			664
Trade Names – Titan			10				70				(21	)			49
Total amortizable intangible assets						$	30,622			$	(28,138	)		$	2,484
Trademarks							6,427				—				6,427
Total intangible assets						$	37,049			$	(28,138	)		$	8,911

 

						As of July 31, 2016
Description		Estimated Useful Life				Gross Carrying Amount				Accumulated Amortization				Net Amount
		(in years)				(in thousands)				(in thousands)				(in thousands)
Developed technology – Credence, ECT, Multitest, atg, and Titan			6-20			$	29,882			$	(27,605	)		$	2,277
Customer Relationships – ECT, Multitest, atg, and Titan			20				1,844				(1,174	)			670
Maintenance agreements – ASL & Diamond			7				1,900				(1,900	)			—
Trade Names – Titan			10				70				(15	)			55
Non-compete Agreements			1				8				(8	)			—
Total amortizable intangible assets						$	33,704			$	(30,702	)		$	3,002
Trademarks							6,427				—				6,427
Total intangible assets						$	40,131			$	(30,702	)		$	9,429

Intangible assets, other than trademarks owned by the Company, are amortized based upon the pattern of estimated economic use over their estimated useful lives. The weighted average estimated remaining useful life over which these intangible assets will be amortized is 3.5 years.

 

The Company expects amortization for these intangible assets to be:

 

Year ending July 31,		Amount (in thousands)
Remainder of 2017		$	159
2018			548
2019			517
2020			403
Thereafter			857
Total		$	2,484

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 Topic 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. As of April 30, 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 Topic 360, Property, Plant and Equipment, to the FASB ASC, the Company reviews whether impairment losses exist on its long-lived assets other than goodwill when indicators of impairment are present. During this review, the Company assesses future cash flows and re-evaluates the significant assumptions used in determining the original cost of long-lived assets other than goodwill. Although the assumptions may vary, they generally include revenue growth, operating results, cash flows and other indicators of value. Management then determines whether there has been a permanent impairment of the value of long-lived assets based upon events or circumstances that have occurred since acquisition. The impairment amount recognized is based upon a determination of the impaired asset’s fair value compared to its carrying value. As of April 30, 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 Topic 830, Foreign Currency Matters, to the FASB ASC. 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 ($0.1) million and $0.7 million, for the three and nine months ended April 30, 2017, respectively, and ($1.5) million and $0.5 million for the three and nine months ended April 30, 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 remeasurement and translation gains or losses are recorded in stockholders’ equity as accumulated other comprehensive income (loss).

Product Warranty Costs

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

 

The following table shows the change in the Company’s product warranty liability, as required by Topic 460, Guarantees, to the FASB ASC for the nine months ended April 30, 2017 and 2016:

 

		Nine months Ended April 30,
Product Warranty Activity		2017				2016
		(in thousands)
Balance at beginning of period		$	2,725			$	2,983
Warranty expenditures for current period			(2,778	)			(1,993	)
Changes in liability related to pre-existing warranties			(14	)			(33	)
Provision for warranty costs in the period			3,243				1,894
Balance at end of period		$	3,176			$	2,851

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 Topic 985, Software, to the FASB ASC, 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 and nine months ended April 30, 2017 and 2016.

Income Taxes

The Company recorded an income tax provision of $1.7 million for the nine months ended April 30, 2017, primarily due to foreign taxes in profitable locations.

The Company’s total liability for unrecognized income tax benefits was $6.1 million and $6.3 million (of which $2.6 million and $2.7 million, if recognized, would impact the Company’s income tax rate) as of April 30, 2017 and July 31, 2016 respectively. The Company recognizes interest and penalties related to uncertain tax positions as a component of provision for income taxes. As of April 30, 2017 and July 31, 2016, the Company had accrued approximately $1.3 million and $1.2 million, respectively, for potential payment of accrued interest and penalties.

The Company conducts business globally and, as a result, the Company and its subsidiaries or branches file income tax returns in the U.S. federal jurisdiction and various 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 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 April 30, 2017, the Company granted 3,500 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 Topic 718, Compensation—Stock Compensation to the FASB ASC (Topic 718). Under Topic 718, the Company is required to recognize as expense the estimated fair value as of the grant date of all share-based awards to employees. In accordance with this standard, the Company recognizes the compensation cost of each service-based award on a straight-line basis over the vesting period of such award. For the three and nine months ended April 30, 2017, the Company recorded stock-based compensation expense of approximately $1.5 million and $4.6 million, respectively, in connection with its share-based awards. For the three and nine months ended April 30, 2016, the Company recorded stock-based compensation expense of approximately $1.4 million and $5.1 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 available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted net income per common share reflects the maximum dilution that would have resulted from the assumed exercise and share repurchase related to dilutive stock options and RSUs, and is computed by dividing net income by the weighted average number of common shares and the dilutive effect of all securities outstanding.

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

 

		Three Months Ended April 30,								Nine months Ended April 30,
		2017				2016				2017				2016
		(in thousands, except per share data)
Net income		$	7,548			$	3,157			$	10,138			$	4,040
Basic EPS:
Weighted average shares outstanding- basic			54,259				53,506				54,080				53,837
Basic income per share		$	0.14			$	0.06			$	0.19			$	0.08
Diluted EPS:
Weighted average shares outstanding- basic			54,259				53,506				54,080				53,837
Plus: impact unvested RSUs			784				—				581				60
Weighted average shares outstanding- diluted			55,043				53,506				54,661				53,897
Diluted income per share		$	0.14			$	0.06			$	0.19			$	0.07

During the nine months ended April 30, 2017 and April 30, 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 Topic 320, Investments—Debt and Equity Securities, to the FASB ASC. The Company also holds certain investments in commercial paper that it considers to be held to maturity, based on their maturity dates. Securities available for sale include corporate and governmental obligations with various contractual maturity dates some of which are greater than one year. The Company considers the securities to be liquid and convertible to cash within 30 days. The Company has the ability and intent to liquidate any security that the Company holds to fund operations over the next twelve months if necessary, and as such has classified all of its marketable securities as short-term. Governmental obligations include U.S. Government, State, Municipal and Federal Agency securities. The Company has an overnight sweep investment arrangement with its bank for certain accounts to allow the Company to enter into diversified overnight investments via a money market mutual fund which generally provides a higher investment yield than a regular operating account.

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

 

		Total Amount
		(in thousands)
April 30, 2017
Due in less than one year		$	33,979
Due in 1 to 3 years			22,048
Total marketable securities		$	56,027

 

		Total Amount
		(in thousands)
July 31, 2016
Due in less than one year		$	25,257
Due in 1 to 3 years			31,099
Total marketable securities		$	56,356

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

 

		Market Value				Amortized Cost
		(in thousands)
April 30, 2017
Corporate		$	24,722			$	24,586
Government			13,657				13,677
Mortgage-Backed			2,327				2,326
Asset-Backed			15,321				15,306
Total		$	56,027			$	55,895

 

		Market Value				Amortized Cost
		(in thousands)
July 31, 2016
Corporate		$	22,574			$	22,405
Government			18,321				18,249
Mortgage-Backed			1,665				1,672
Asset-Backed			13,796				13,739
Total		$	56,356			$	56,065

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 and nine months ended April 30, 2017 or 2016.

 

The following table summarizes marketable securities and related unrealized gains and losses as of April 30, 2017 and July 31, 2016:

 

April 30, 2017		Market Value				Unrealized Gain/(Loss)
		(in thousands)
Securities < 12 months unrealized losses		$	27,791			$	(37	)
Securities > 12 months unrealized losses			12,993				(38	)
Securities < 12 months unrealized gains			6,188				5
Securities > 12 months unrealized gains			9,055				17
Total		$	56,027			$	(53	)

 

July 31, 2016		Market Value				Unrealized Gain/(Loss)
		(in thousands)
Securities < 12 months unrealized losses		$	3,363			$	(4	)
Securities > 12 months unrealized losses			6,925				(17	)
Securities < 12 months unrealized gains			21,894				19
Securities > 12 months unrealized gains			24,174				74
Total		$	56,356			$	72

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 five to seven years. Repair and maintenance costs that do not extend the lives of property and equipment are expensed as incurred. The Company’s property and equipment as of April 30, 2017 and July 31, 2016 are summarized as follows:

 

		April 30, 2017				July 31, 2016				Estimated Useful Lives
		(in thousands)								(in years)
Equipment spares		$	27,538			$	30,784				7
Machinery, equipment and internally manufactured systems			28,555				31,206				3-7
Office furniture and equipment			2,332				2,157				3-7
Purchased software			799				725				3
Land			2,508				2,508				—
Buildings			7,990				7,944				10-40 years
Leasehold improvements			11,995				10,312				Term of lease or useful life, not to exceed 10 years
Property and equipment, gross			81,717				85,636
Accumulated depreciation and amortization			(54,752	)			(60,153	)
Property and equipment, net		$	26,965			$	25,483