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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the quarterly period ended October 31, 2011

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

 

 

LTX-CREDENCE 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)

[None]

(Former name, former address and former fiscal year, if changed since last report)

 

 

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  x    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  x    No  ¨

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

 

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

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

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 1, 2011
Common Stock, $0.05 par value per share		48,834,481 shares

 

 

 

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LTX-CREDENCE CORPORATION

Index

 

				Page Number
Part I.		FINANCIAL INFORMATION
Item 1.		Financial Statements
		Consolidated Balance Sheets as of October 31, 2011 and July 31, 2011			3
		Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three Months Ended October 31, 2011 and October 31, 2010			4
		Consolidated Statements of Cash Flows for the Three Months Ended October 31, 2011 and October 31, 2010			5
		Notes to Consolidated Financial Statements			6-16
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			16
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			23
Item 4.		Controls and Procedures			23
Part II.		OTHER INFORMATION
Item 1.		Legal Proceedings			24
Item 1A.		Risk Factors			24
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			30
Item 6.		Exhibits			30
		SIGNATURE			31
		EXHIBIT INDEX			32

 

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LTX-CREDENCE CORPORATION

CONSOLIDATED BALANCE SHEETS

(In thousands)

 

		October 31, 2011				July 31, 2011
		(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	58,843			$	123,198
Marketable securities			93,989				39,417
Accounts receivable—trade, net of allowances of $40			24,363				42,646
Accounts receivable—other			839				408
Inventories			28,020				21,145
Prepaid expenses and other current assets			3,788				4,368
Total current assets			209,842				231,182
Property and equipment, net			20,120				20,827
Intangible assets, net			5,526				6,317
Goodwill			43,030				43,030
Other assets			709				759
Total assets		$	279,227			$	302,115
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	7,684			$	15,232
Other accrued expenses			20,403				24,677
Deferred revenues			4,348				5,589
Total current liabilities			32,435				45,498
Other long-term liabilities			15,573				15,897
Commitments and contingent liabilities (Note 5)
Stockholders’ equity:
Common stock			2,453				2,480
Additional paid-in capital			751,498				756,046
Accumulated other comprehensive income			24				41
Accumulated deficit			(522,756	)			(517,847	)
Total stockholders’ equity			231,219				240,720
Total liabilities and stockholders’ equity		$	279,227			$	302,115

See accompanying Notes to Consolidated Financial Statements.

 

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LTX-CREDENCE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(In thousands, except per share data)

 

		Three Months  Ended October 31,
		2011				2010
Net product sales		$	23,984			$	65,241
Net service sales			9,768				10,406
Net sales			33,752				75,647
Cost of sales			15,715				28,401
Gross profit			18,037				47,246
Engineering and product development expenses			12,916				12,979
Selling, general and administrative expenses			9,321				13,165
Amortization of purchased intangible assets			791				1,490
Restructuring			46				116
Income (loss) from operations			(5,037	)			19,496
Other income (expense):
Interest expense			(40	)			(81	)
Investment income			138				69
Other income, net			152				204
Income (loss) before provision for income taxes			(4,787	)			19,688
Provision for income taxes			122				13
Net income (loss)		$	(4,909	)		$	19,675
Net income (loss) per share:
Basic		$	(0.10	)		$	0.40
Diluted		$	(0.10	)		$	0.39
Weighted-average common and common equivalent shares used in computing net income (loss) per share:
Basic			49,487				49,161
Diluted			49,487				49,888
Comprehensive income (loss):
Net income (loss)		$	(4,909	)		$	19,675
Unrealized gain (loss) on marketable securities			(17	)			14
Comprehensive income (loss)		$	(4,926	)		$	19,689

See accompanying Notes to Consolidated Financial Statements.

 

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LTX-CREDENCE CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands, except per share data)

 

		Three Months Ended October 31,
		2011				2010
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)		$	(4,909	)		$	19,675
Add non-cash items:
Stock-based compensation			1,337				937
Depreciation and amortization			2,904				4,679
Other			342				213
Changes in operating assets and liabilities:
Accounts receivable			17,853				3,260
Inventories			(7,389	)			2,119
Prepaid expenses			611				(453	)
Other assets			—				(492	)
Accounts payable			(7,548	)			2,058
Accrued expenses			(4,892	)			(2,308	)
Deferred revenues			(1,242	)			(4,684	)
Net cash provided by (used in) operating activities			(2,933	)			25,004
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales and maturities of available-for-sale securities			4,469				1,464
Proceeds from sales and maturities of held-to-maturity securities			3,000				—
Purchases of available-for-sale securities			(56,898	)			(7,333	)
Purchases of held-to-maturity securities			(5,491	)			(7,191	)
Purchases of property and equipment			(468	)			(1,225	)
Net cash used in investing activities			(55,388	)			(14,285	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchases of common stock			(4,839	)			—
Payments of tax withholdings for vested RSUs, net of proceeds from stock option exercises			(687	)			(807	)
Net cash used in financing activities			(5,526	)			(807	)
Effect of exchange rate changes on cash and cash equivalents			(508	)			241
Net increase (decrease) in cash and cash equivalents			(64,355	)			10,153
Cash and cash equivalents at beginning of period			123,198				74,978
Cash and cash equivalents at end of period		$	58,843			$	85,131

See accompanying Notes to Consolidated Financial Statements.

 

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LTX-CREDENCE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. THE COMPANY

LTX-Credence Corporation (“LTX-Credence” or the “Company”) provides market focused cost-optimized, automated test equipment (ATE) solutions. The Company designs, manufactures, markets and services ATE solutions that address the broad, divergent test requirements of the wireless, computing, automotive and digital consumer market segments. Semiconductor designers and manufacturers worldwide use its equipment to test their devices during the manufacturing process. After testing, these devices are then incorporated in a wide range of products, including computers, mobile internet equipment such as wireless access points and interfaces, broadband access products such as cable modems and set top boxes, personal communication products such as mobile phones and personal digital music players, consumer products such as televisions, videogame systems, digital cameras and automobile electronics, and for power management in portable and automotive electronics. The Company also sells hardware and software support and maintenance services for its test systems. The Company is headquartered and has a development facility in Norwood, Massachusetts, development facilities in Milpitas, California and Beaverton, Oregon, and sales and service facilities located across the world to support its customer base.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared pursuant to the Rules of the Securities and Exchange Commission for quarterly reports on Form 10-Q and, accordingly, these footnotes condense or omit information and disclosures which substantially duplicate information provided in our latest audited financial statements. These unaudited financial statements should be read in conjunction with the financial statements and notes included in our Annual Report on Form 10-K for the year ended July 31, 2011. In the opinion of management, these unaudited consolidated financial statements reflect all adjustments, including normal recurring accruals, necessary for a fair presentation of the results for the interim periods presented. The operating results for the three months ended October 31, 2011 are not necessarily indicative of future trends or the Company’s results of operations for the entire fiscal year ending July 31, 2012.

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant inter-company transactions and balances have been eliminated in consolidation.

Foreign Currency Remeasurement

The financial statements of the Company’s foreign subsidiaries are remeasured in accordance with Financial Accounting Standards Board Accounting Standards Codification (FASB ASC) Topic 830, Foreign Currency Matters. The subsidiaries’ functional currency is the U.S. dollar. Accordingly, the Company’s foreign subsidiaries remeasure monetary assets and liabilities at month-end exchange rates while long-term non-monetary items are remeasured at historical rates. Income and expense accounts are remeasured at the average rates in effect during the month. Net gains or losses resulting from foreign currency remeasurement and transaction gains or losses are included in the consolidated results of operations as a component of Other income, net, and were not significant for the three months ended October 31, 2011 or 2010.

Derivatives

The Company conducts business in a number of foreign countries, with certain transactions denominated in local currencies. The purpose of the Company’s foreign currency management is to minimize the effect of exchange rate fluctuations on certain foreign denominated net monetary assets. The Company does not use derivative financial instruments for trading or speculative purposes.

During the twelve months ended July 31, 2011, the Company entered into a derivative in the form of a foreign currency forward contract to minimize the effect of exchange rate fluctuations associated with the remeasurement of net monetary assets denominated in foreign currencies. This transaction did not qualify for hedge accounting under FASB ASC Topic 815, Derivatives and Hedging. The change in fair value of this derivative is recorded directly in the Company’s statement of operations and offsets the change in fair value of the net monetary assets denominated in foreign currencies. The Company recorded $0.2 million of income in Other income, net for the three months ended October 31, 2011. There was no activity recorded for the same period in 2010. During the three months ended October 31, 2011, the Company’s foreign currency forward contract expired. The notional amount of the foreign currency forward contract was $4.6 million and $4.8 million, respectively, at July 31, 2011. The following table summarizes the fair value of the derivative instrument as of October 31, 2011 and July 31, 2011:

 

Derivatives not designated as hedging instruments:

Balance Sheet Location

October 31, 2011

July 31, 2011

(in thousands)

Foreign exchange contract

Other accrued expenses

$

—

$

187

 

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Revenue Recognition

The Company recognizes revenue based on guidance provided in FASB ASC Topic 605, Revenue Recognition (“ASC 605”). 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; (c) the price is fixed or determinable; (d) collectability is reasonably assured; (e) the product delivered is 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. When sales to a customer involve multiple elements, 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 product 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 included 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 based on the provisions of Accounting Standards Update (“ASU”) 2009-13.

Revenue related to spare parts is recognized on shipment.

Revenue related to maintenance and service contracts is recognized ratably over the duration of the contracts.

Engineering and Product Development Costs

The Company expenses all engineering, research and development costs as incurred. Expenses subject to capitalization in accordance with the FASB ASC Topic 985, Software, relating to certain software development costs, were insignificant for the three months ended October 31, 2011 and 2010, respectively.

Shipping and Handling Costs

Shipping and handling costs are included in cost of sales in the consolidated statements of operations. These costs, when included in the sales price charged for products, are recognized in net sales. Shipping and handling costs were insignificant for the three months ended October 31, 2011 and 2010, respectively.

Income Taxes

Income tax expense relates principally to operating results of foreign entities in jurisdictions primarily in Asia and Europe.

As of October 31, 2011 and July 31, 2011, the total liability for unrecognized income tax benefits was $10.5 million and $9.1 million, respectively, (of which $5.3 million, if recognized, would impact the Company’s income tax rate and therefore are recorded in other long-term liabilities on the Company’s consolidated balance sheet). The Company recognizes interest and penalties related to uncertain tax positions as a component of income tax expense. As of October 31, 2011 and July 31, 2011, 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, France and Germany. With few exceptions, the Company is no longer subject to U.S. federal, state and local or non-U.S. income tax examinations for years before 2000.

As a result of completion of the merger with Credence Systems Corporation (“Credence”) on August 29, 2008, a greater than 50% cumulative ownership change in both entities triggered a significant limitation in net operating loss carryforward utilization. The Company’s ability to use operating and acquired 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 able to be used to approximately $202.0 million. The Company will continue to assess the realizability of these carryforwards in subsequent periods.

 

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Accounting for Stock-Based Compensation

The Company has various stock-based compensation plans, including the Company’s 2010 Stock Plan, as amended on November 26, 2010 (“2010 Plan”), the LTX Corporation 2004 Stock Plan, the Company’s 2001 Stock Plan, the Company’s 1999 Stock Plan, and the Company’s 1993 Stock Plan. In addition, the Company assumed the StepTech, Inc. Stock Option Plan as part of its acquisition of StepTech, Inc. (“StepTech”) and the Credence 2005 Stock Incentive Plan with its acquisition of Credence. The Company can only grant awards from the 2010 Plan.

The Company granted 737,100 and 692,700 restricted stock unit based awards during the three months ended October 31, 2011 and 2010, respectively, all of which are service-based and have four year vesting terms.

The Company recognizes stock-based compensation expense on its equity awards in accordance with the provisions of FASB ASC Topic 718, Compensation – Stock Compensation (“ASC 718”). Under ASC 718, the Company is required to recognize as expense the estimated fair value of all share-based payments to employees. In accordance with this standard, the Company has elected to recognize the compensation cost of all service based awards on a straight-line basis over the vesting period of the award.

Product Warranty Costs

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 all of its products, the standard terms and conditions of which are based on the product sold and the customer. For all testers sold, the Company accrues a liability for the estimated cost of standard warranty at the time of tester shipment and defers the portion of product revenue attributed to the estimated selling price of non-standard warranty. Costs for non-standard warranties are expensed as incurred. Factors that impact the expected product warranty liability include the number of installed testers, historical and anticipated product failure rates, material usage and service labor costs. The Company periodically assesses the adequacy of its recorded product warranty liability and adjusts it as necessary.

The following table shows the change in the product warranty liability, as required by FASB ASC Topic 460, Guarantees, for the three months ended October 31, 2011 and 2010:

 

		Three Months Ended October 31,
Product Warranty Activity		2011				2010
		(in thousands)
Balance at beginning of period		$	2,281			$	4,398
Warranty expenditures for current period			(1,069	)			(2,643	)
Changes in liability related to pre-existing warranties			20				(25	)
Provision for warranty costs in the period			501				2,539
Balance at end of period		$	1,733			$	4,269

Comprehensive income (loss)

Comprehensive income (loss) is composed of two components: net income (loss) and other comprehensive income (loss). Other comprehensive income (loss) consists of unrealized gains and losses on the Company’s marketable securities.

Net income (loss) per share

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

 

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Reconciliation between basic and diluted earnings per share is as follows:

 

		Three Months  Ended October 31,
		2011				2010
		(in thousands, except per share data)
Net income (loss)		$	(4,909	)		$	19,675
Basic EPS
Weighted average shares outstanding			49,487				49,161
Basic EPS		$	(0.10	)		$	0.40
Diluted EPS
Weighted average shares outstanding			49,487				49,161
Plus: impact of stock options and unvested restricted stock units			—				727
Weighted average common and common equivalents shares outstanding			49,487				49,888
Diluted EPS		$	(0.10	)		$	0.39

For the three months ended October 31, 2011 and 2010, options to purchase approximately 1,401,690 shares and 1,953,327 shares, respectively, of common stock were not included in the calculation of diluted net loss per share because their inclusion would have been anti-dilutive. These options could be dilutive in the future. The calculation of diluted net loss per share also excludes 1,869,976 and 1,731,453 RSUs for the period ended October 31, 2011 and, 2010, respectively, in accordance with the contingently issuable shares guidance of FASB ASC Topic 260, Earnings Per Share. The calculation of diluted net income (loss) per share for the three months ended October 31, 2010 also excludes the impact of conversion features of the Company’s Convertible Senior Subordinated Notes due 2011 as to include them would have been anti-dilutive.

Cash and Cash Equivalents and Marketable Securities

The Company considers all highly liquid investments that are readily convertible to cash and that have original maturity dates of three months or less to be cash equivalents. Cash and cash equivalents consist primarily of operating cash and money market accounts. Marketable securities consist primarily of debt securities that are classified as available-for-sale and held-to-maturity, in accordance with FASB ASC Topic 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 these 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.

Gross unrealized gains and losses for the three months ended October 31, 2011 and 2010 were not significant. Realized gains, losses and interest are included in investment income in the Statements of Operations. Unrealized gains and losses are reflected as a separate component of comprehensive income and are included in Stockholders’ Equity. The Company analyzes its securities portfolio for impairment on a quarterly basis or upon occurrence of a significant change in circumstances. There were no other than temporary impairment losses recorded in the three months ended October 31, 2011 or 2010.

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:

 

		October 31, 2011				July 31, 2011
		(in thousands)
Purchased components and parts		$	12,762			$	11,313
Units-in-progress			4,730				2,080
Finished units			10,528				7,752
Total inventories		$	28,020			$	21,145

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 the ability to realize the value of inventory based on a combination of factors including the following: forecasted sales or usage, estimated product end of life dates, estimated current and future market value and new product introductions.

 

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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, 2011 and July 31, 2011, inventory is stated net of inventory reserves of $42.7 million and $43.0 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 of. The Company had sales of $4.2 million of previously reserved inventory for the three months ended October 31, 2011, which represents the gross cash received from the customer. The Company released reserves of $0.9 million for the three months ended October 31, 2011, related to these sales. The Company had sales of $2.5 million of previously reserved inventory for the three months ended October 31, 2010, which represents the gross cash received from the customer. The Company released reserves of $0.3 million for the three months ended October 31, 2010, related to these sales.

Property and Equipment

Property and equipment acquired is recorded at cost. Property and equipment related to the Credence merger was recorded at fair value on the date of acquisition. The Company provides for depreciation and amortization on 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 3 to 7 years. Repair and maintenance costs that do not extend the lives of property and equipment are expensed as incurred. Property and equipment are summarized as follows:

 

		(in thousands)								(in years)
		October 31, 2011				July 31, 2011				Estimated Useful Lives
Equipment spares		$	59,624			$	65,078			5 or 7
Machinery, equipment and internally manufactured systems			42,260				41,476			3-7
Office furniture and equipment			4,617				4,892			3-7
Purchased software			2,862				2,805			3
Land			2,524				2,524			—
Leasehold improvements			6,163				6,134			Term of lease or useful life, not to exceed 10 years
Property and equipment, gross			118,050				122,909
Less: accumulated depreciation and amortization			(97,930	)			(102,082	)
Property and equipment, net		$	20,120			$	20,827

Impairment of Long-Lived Assets Other Than Goodwill

On an on-going basis, management reviews the value and period of amortization or depreciation of long-lived assets. In accordance with FASB ASC Topic 360, Property, Plant and Equipment , the Company reviews whether impairment losses exist on long-lived assets when indicators of impairment are present. During this review, the Company re-evaluates the significant assumptions used in determining the original cost 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 a determination of the impaired asset’s fair value. As of October 31, 2011 and July 31, 2011 there were no indicators that required the Company to conduct a recoverability test at that date.

Goodwill and Other Intangibles

In accordance with FASB ASC Topic 350, Intangibles – Goodwill and Other, (“ASC 350”), the Company is required to review goodwill by reporting unit for impairment at least annually or more often if there are indicators of impairment present. The Company has determined its entire business represents one reporting unit. Historically, the Company has performed its annual impairment analysis during the fourth quarter of each year. The provisions of ASC 350 require that a two-step impairment test be performed for goodwill. In the first step, the Company compares the implied fair value of each reporting unit to which goodwill has been allocated to its carrying value. If the implied fair value of the reporting unit exceeds the carrying value of the net assets assigned to that unit, goodwill is considered not impaired and the Company is not required to perform further testing. If the carrying value of the net assets assigned to the reporting unit exceeds the implied fair value of the reporting unit, then the Company

 

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must perform the second step of the impairment test in order to determine the implied fair value of the reporting unit’s goodwill. If the carrying value of a reporting unit’s goodwill exceeds its implied fair value, then the Company would record an impairment loss equal to the difference. As of October 31, 2011 and July 31, 2011, the implied fair value of the goodwill of the Company’s reporting unit exceeds the Company’s carrying value of its net assets and therefore no impairment exists as of those dates.

Determining the fair value of a reporting unit requires the Company to make judgments and involves the use of significant estimates and assumptions. These estimates and assumptions include revenue growth rates and operating margins used to calculate projected future cash flows, risk-adjusted discount rates, future economic and market conditions and determination of appropriate market comparables. The Company bases its fair value estimates on assumptions it believes to be reasonable but that are unpredictable and inherently uncertain. Actual future results may differ from those estimates.

The Company’s Goodwill consists of the following:

 

Goodwill		October 31, 2011				July 31, 2011
		(in thousands)
Credence (August 29, 2008)		$	28,662			$	28,662
Step Tech (June 10, 2003)			14,368				14,368
Total goodwill		$	43,030			$	43,030

There was no change in the goodwill balance for the three months ended October 31, 2011 or 2010.

Intangible assets, all of which relate to the Credence merger, consist of the following:

 

						As of October 31, 2011
Description		Estimated Useful Life				Gross Carrying Amount				Accumulated Amortization				Net Amount
		(in years)				(in thousands)				(in thousands)				(in thousands)
Trade names			2.0			$	300			$	300			$	—
Distributor relationships			2.0				2,800				2,800				—
Key customer relationships			3.0				8,500				8,500				—
Developed technology—ASL			6.0				16,000				13,450				2,550
Developed technology—Diamond			9.0				9,400				7,713				1,687
Maintenance agreements			7.0				1,900				611				1,289
Total intangible assets						$	38,900			$	33,374			$	5,526

 

						As of July 31, 2011
Description		Estimated Useful Life				Gross Carrying Amount				Accumulated Amortization				Net Amount
		(in years)				(in thousands)				(in thousands)				(in thousands)
Trade names			2.0			$	300			$	300			$	—
Distributor relationships			2.0				2,800				2,800				—
Key customer relationships			3.0				8,500				8,500				—
Developed technology—ASL			6.0				16,000				12,945				3,055
Developed technology—Diamond			9.0				9,400				7,495				1,905
Maintenance agreements			7.0				1,900				543				1,357
Total intangible assets						$	38,900			$	32,583			$	6,317

Intangible assets 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 2.7 years.

 

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The Company expects amortization for these intangible assets to be:

 

For the fiscal year ending July 31,		Amount
		(in thousands)
Remainder of 2012		$	2,372
2013			1,583
2014			769
2015			396
Thereafter			406
Total		$	5,526

3. SEGMENT REPORTING

In accordance with the provisions of FASB ASC Topic 280, Segment Reporting , the Company operates as one reporting segment, that is, the design, manufacture and marketing 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 Company’s net sales by geographic area for the three months ended October 31, 2011 and 2010, along with the long-lived assets at October 31, 2011 and July 31, 2011, are summarized as follows:

 

		Three Months Ended October 31,
		2011				2010
		(in thousands)
Net Sales:
United States		$	9,406			$	11,844
Taiwan			6,454				22,448
Philippines			4,028				15,562
Singapore			2,419				7,323
All other countries			11,445				18,470
Total Net Sales		$	33,752			$	75,647

Long-lived assets consist of property and equipment:

 

		October 31, 2011				July 31, 2011
		(in thousands)
Long-lived assets:
United States		$	18,320			$	18,820
Singapore			516				559
Philippines			322				371
All other countries			962				1,077
Total long-lived assets		$	20,120			$	20,827

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

4. RESTRUCTURING

As a result of the Credence merger in August 2008, the Company assumed restructuring plans previously approved by Credence management designed to reduce headcount, consolidate facilities and to align that company’s capacity and infrastructure to anticipated customer demand and transition of its operations for higher utilization of facility space.

During the three months ended October 31, 2011 and 2010, the Company extended the sublease assumptions for its previously restructured facilities which increased the accrued restructuring liability by $0.1 million in each of these quarters. As of October 31, 2011 the accrual for facility leases includes $3.1 million of long term payments to be made for the remainder of the respective lease terms which is included in other long term liabilities on the Company’s consolidated balance sheet. The remainder of the accrual of $1.4 million is included in other accrued expenses on the Company’s consolidated balance sheet.

 

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The following table sets forth the Company’s restructuring accrual activity for the three months ended October 31, 2011 and October 31, 2010 (in thousands):

 

		Severance Costs				Facility Leases				Total
		(in thousands)
Balance July 31, 2011		$	6			$	4,761			$	4,767
Additions to expense			—				46				46
Accretion and elimination of unfavorable lease liability			—				40				40
Cash paid			(6	)			(373	)			(379	)
Balance October 31, 2011		$	—			$	4,474			$	4,474

 

		Severance Costs				Facility Leases				Total
		(in thousands)
Balance July 31, 2010		$	84			$	5,810			$	5,894
Additions to expense			—				116				116
Accretion and elimination of unfavorable lease liability			—				21				21
Cash paid			(8	)			(406	)			(414	)
Balance October 31, 2010		$	76			$	5,541			$	5,617

5. COMMITMENTS AND CONTINGENCIES

The Company is subject to various legal proceedings, claims and litigation which arise in the ordinary course of operations. In the opinion of management, the amount of liability, if any, with respect to these actions would not materially affect the Company’s financial position, results of operations or cash flows.

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, 2011 or July 31, 2011.

Subject to certain limitations, LTX-Credence indemnifies its current and former officers and directors for certain events or occurrences. Although the maximum potential amount of future payments LTX-Credence could be required to make under these agreements is theoretically unlimited, as there were no known or pending claims, the Company has not accrued a liability for these agreements as of October 31, 2011 or July 31, 2011.

The Company had approximately $18.8 million and $9.6 million, respectively, of non-cancelable inventory commitments with outsourced suppliers as of October 31, 2011 and July 31, 2011. The Company expects to consume the inventory through normal operating activity.

The Company has operating lease commitments for certain facilities and equipment. Minimum lease payments under non-cancelable leases at October 31, 2011, are as follows:

Lease Commitments:

 

For the fiscal year ending July 31,		Amount
		(in thousands)
Remainder of 2012		$	4,271
2013			4,844
2014			4,445
2015			3,922
2016			3,671
Thereafter			6,341
Total minimum lease payments		$	27,494

 

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6. ACCRUED EXPENSES

Other accrued expenses consisted of the following at October 31, 2011 and July 31, 2011:

 

		(in thousands)
		October 31, 2011				July 31, 2011
Accrued compensation		$	7,517			$	10,340
Accrued vendor liability			1,715				2,442
Warranty reserve			1,733				2,281
Accrued restructuring			1,309				1,350
Accrued income and local taxes			1,270				1,274
Accrued professional fees			882				964
Other accrued expenses			5,977				6,026
Total accrued expenses		$	20,403			$	24,677

Accrued vendor liability represents inventory physically located at the Company’s outsourced suppliers which the Company is obligated to purchase.

7. FAIR VALUE MEASUREMENTS

The Company determines its fair value measurements for assets and liabilities based upon the provisions of FASB ASC Topic 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 considers factors specific to the asset or liability.

The following table presents financial assets and liabilities measured at fair value and their related valuation inputs as of October 31, 2011 and as of July 31, 2011:

 

						Fair Value Measurements at Reporting Date Using (in thousands)
October 31, 2011		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)		$	58,843			$	58,843			$	—			$	—
Marketable securities (2)			87,495				9,994				77,501				—
Total Assets		$	146,338			$	68,837			$	77,501			$	—

 

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July 31, 2011		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)		$	123,198			$	122,698			$	500			$	—
Marketable securities (2)			35,419				10,031				25,388				—
Total assets		$	158,617			$	132,729			$	25,888			$	—
Other accrued expenses (Foreign exchange contract (3)		$	187			$	—			$	187			$	—
Total Liabilities		$	187			$	—			$	187			$	—

 

(1)	Cash and cash equivalents as of October 31, 2011 and July 31, 2011 includes cash held in operating accounts of approximately $5.2 million and $10.9 million, respectively, that are not subject to fair value measurements. For purposes of this disclosure they are included as having Level 1 inputs.

(2)	Marketable securities as of October 31, 2011 and July 31, 2011 excludes approximately $6.5 million and $4.0 million, respectively, of commercial paper which is held to maturity and not subject to fair value measurements.

(3)	Other accrued expenses as of July 31, 2011 include a derivative not designated as a hedging arrangement related to a foreign exchange contract of approximately $0.2 million.

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

There were no assets or liabilities measured at fair value on a non-recurring basis requiring valuation disclosures as of October 31, 2011 or as of July 31, 2011.

8. STOCKHOLDERS’ EQUITY

Stock Repurchases

On September 15, 2011, the Company announced that its Board of Directors authorized a stock repurchase program for up to $25 million. Under this program, the Company is authorized to repurchase shares of its common stock from time to time in open market transactions. The Company will determine the timing and amount of the transactions based on its evaluation of market conditions and other factors. The repurchase program may be suspended or discontinued at any time and has no expiration date. Through October 31, 2011, the Company had repurchased 894,890 shares for approximately $4.8 million.

2010 Plan

On November 5, 2010, the Company’s Board of Directors adopted, subject to shareholder approval, the Company’s 2010 Stock Plan, and subsequently amended it on November 26, 2010 (“2010 Plan”). Under the terms of the 2010 Plan, the Company may issue up to 4,800,000 shares of the Company’s common stock (subject to adjustment in the event of stock splits and other similar events) pursuant to awards granted under the 2010 Plan. In addition, any unissued shares of the Company’s common stock, and any unused shares of the Company’s common stock as a result of termination, surrender, cancellation or forfeiture of outstanding awards under the Credence 2005 Plan, as amended and restated, and the LTX Corporation 2004 Plan, (together the “Prior Plans”), will be available for grant under the 2010 Plan. The 2010 Plan was approved by the Company’s shareholders at the annual meeting on December 7, 2010. All future grants of equity awards will be made out of the 2010 Plan, and no additional grants will be made under the Prior Plans.

Reverse Stock Split

On September 15, 2010, the Company’s Board of Directors approved a one-for-three reverse stock split of the Company’s common stock, pursuant to a previously obtained stockholders authorization. The Company filed Restated Articles of Organization on September 30, 2010 in order to effect the reverse stock split, and on a post-split basis, to set the number of authorized shares of its common stock at 150,000,000. The Restated Articles of Organization were approved by the Company’s stockholders at the Special Meeting of Stockholders held on July 8, 2010.

Upon the effective time of the Restated Articles of Organization, each outstanding share of the Company’s common stock was automatically converted into one-third of a share of common stock. No fractional shares were issued in connection with the reverse stock split. Holders of common stock who would otherwise have received a fractional share of common stock pursuant to the reverse stock split received cash in lieu of the fractional share. The reverse stock split became effective for trading purposes at the opening of the Nasdaq Global Market on October 1, 2010. The effect of the reverse stock split has been retroactively applied to all periods presented.

 

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9. RECENT ACCOUNTING PRONOUNCEMENTS

In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement. This ASU clarifies the concepts related to highest and best use and valuation premise, blockage factors and other premiums and discounts, the fair value measurement of financial instruments held in a portfolio and of those instruments classified as a component of shareholders’ equity. The guidance includes enhanced disclosure requirements about recurring Level 3 fair value measurements, the use of nonfinancial assets, and the level in the fair value hierarchy of assets and liabilities not recorded at fair value. The provisions of this ASU are effective prospectively for interim and annual periods beginning on or after December 15, 2011. Early application is prohibited. This ASU requires changes in presentation only and the Company is currently assessing if it will have a material impact on its consolidated financial statements.

In September 2011, the FASB issued ASU No. 2011-08, Testing Goodwill for Impairment. This revised standard is intended to reduce the cost and complexity of the annual goodwill impairment test by providing entities an option to perform a “qualitative” assessment to determine whether further impairment testing is necessary. The revised standard is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The Company is currently evaluating the impact of adoption of this revised standard.

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 elsewhere 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, should, would, anticipates, expects, intends, plans, 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 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” in this quarterly report on Form 10-Q 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 reflect management’s analysis only as of the date hereof. We assume no obligations to update these forward-looking statements to reflect actual results or changes in factors or assumptions affecting forward-looking statements.

Overview

We provide market focused cost-optimized, automated test equipment (ATE) solutions. We design, manufacture, market and service ATE solutions that address the broad, divergent test requirements of the wireless, computing, automotive and digital consumer market segments. Semiconductor designers and manufacturers worldwide use our equipment to test their devices during the manufacturing process. After testing, these devices are then incorporated in a wide range of products, including computers, mobile internet equipment such as wireless access points and interfaces, broadband access products such as cable modems and set top boxes, personal communication products such as mobile phones and personal digital music players, consumer products such as televisions, videogame systems, digital cameras and automobile electronics, and for power management in portable and automotive electronics. We also sell hardware and software support and maintenance services for our test systems.

We focus our marketing and sales efforts on integrated device manufacturers, (IDMs), outsource assembly and test providers, (OSATs), which perform manufacturing services for the semiconductor industry; and fabless companies, which design integrated circuits but have no manufacturing capability. We offer our customers with a comprehensive portfolio of test systems and provide a global network of strategically deployed applications and support resources.

 

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Industry Conditions and Outlook

We sell capital equipment and services to companies that design, manufacture, assemble or test semiconductor devices. The semiconductor industry is highly cyclical, causing in turn a cyclical impact on our financial results. 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 business. The level of capital expenditures by these semiconductor companies depends on the current and anticipated market demand for semiconductor devices and the products that incorporate them. Therefore, demand for our semiconductor test equipment is dependent on growth in the semiconductor industry. In particular, three primary characteristics of the semiconductor industry drive the demand for semiconductor test equipment:

 

•

increases in unit production of semiconductor devices;

 

•

increases in the complexity of semiconductor devices used in electronic products; and

 

•

the emergence of next generation device technologies, such as system in package (“SIP”).

The following graph shows the cyclicality in semiconductor test equipment orders and shipments from fiscal 1997 through fiscal 2011 (using the three month moving average), as calculated by SEMI, an industry trade organization:

Consistent with our business strategy, we invest significant amounts in engineering and product development to design and enhance our tester platforms throughout the semiconductor business cycle. During periods of industry weakness, we implement cost reduction measures, such as the strict oversight and reduction in discretionary travel and other variable overhead expenses. We believe that these reductions in operating costs preserve our ability to fund critical product research and development efforts and continue to provide our customers with the levels of responsiveness and service they require. For the three months ended October 31, 2011 engineering and product development expense was $12.9 million or 38.3% of net sales as compared to $13.0 million or 17.2% of net sales for the three months ended October 31, 2010.

We believe that our competitive advantage in the semiconductor test industry is primarily driven by the ability of our combined tester platforms to meet or exceed the cost and technical specifications required for the testing of advanced semiconductor devices. Our current investment in engineering and product development is focused on enhancements and additions to our product offerings with new options and instruments designed for specific market segments. We believe this will continue to differentiate our tester platforms from the product offerings of our competitors.

In addition, we have transitioned the manufacture of certain components and subassemblies to contract manufacturers, thereby reducing our fixed manufacturing costs associated with direct labor and overhead. We believe that transforming product manufacturing costs into variable costs allows us to improve our performance in the highly cyclical semiconductor equipment industry.

We are also exposed to the risks associated with the volatility of the U.S. and global economies. The lack of visibility regarding whether or when there will be sustained growth periods for the sale of electronic goods and information technology equipment, and uncertainty regarding the amount of sales, underscores the need for caution in predicting growth in the semiconductor test equipment industry in general and in our revenues and profits specifically. Slow or negative growth in the U.S. economy may materially and adversely affect our business, financial condition and results of operations for the foreseeable future. Our results of operations would be further adversely affected if we were to experience lower than anticipated order levels,

 

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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.

Critical Accounting Policies and the Use of Estimates

The preparation of financial statements in conformity with 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 decisions or assessments are as follows: revenue recognition, inventory reserves, income taxes, warranty, goodwill and other intangibles, 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 related disclosures elsewhere in this Form 10-Q.

Revenue Recognition

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 report. 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.

Inventory

We sell capital equipment to companies that design, manufacture, assemble, and test semiconductor devices. 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 usage. These factors include, but are not limited to, changes in our customers’ capital expenditures, technological changes in our markets, our ability to meet changing customer requirements, competitive pressures in products and prices, and the availability of key components from our suppliers. Our policy is to establish inventory reserves when conditions exist that suggest our inventory may be in excess of anticipated demand or is obsolete based upon our assumptions about future demand for our products or market conditions. We regularly evaluate the ability to realize the value of our inventory based on a combination of factors including the following: historical usage rates, forecasted sales or usage, estimated product end of life dates, estimated current and future market values and new product introductions. Purchasing and alternative usage options are also explored to mitigate inventory exposure. When recorded, our reserves are intended to reduce the carrying value of our inventory to its net realizable value. Such reserves are not reversed until the related inventory is sold or otherwise disposed.

For the three months ended October 31, 2011 we recorded sales of $4.2 million of previously reserved inventory, which represents gross cash received from the customer. We released reserves of $0.9 million for three months ended October 31, 2011, related to these sales. For the three months ended October 31, 2010 we recorded sales of $2.5 million of previously reserved inventory, which represents gross cash received from the customer. We released reserves of $0.3 million for the three months ended October 31, 2010, related to these sales.

As of October 31, 2011 and July 31, 2011, our inventory of $28.0 million and $21.1 million, respectively, is stated net of inventory reserves of $42.7 million and $43.0 million, respectively, and primarily consists of Fusion, X-Series, ASL, and Diamond products.

Income Taxes

In accordance with FASB ASC Topic 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 will 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 are 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.

 

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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 net deferred tax assets. The valuation allowance totaled $194.5 million and $223.4 million as of July 31, 2011 and July 31, 2010, respectively, a decrease of $28.9 million. The decrease in the Company’s valuation allowance compared to the prior year was primarily due to (i) a decrease in deferred tax assets associated with state net operating loss and credit carryforwards that are subject to annual limitations as defined in sections 382 and 383 of the Internal Revenue Code and (ii) a decrease in deferred tax assets associated with an accounting method change for spares.

We expect to record a full valuation allowance on future tax benefits until we can sustain an appropriate level of profitability. Until such time, we would not expect to recognize any significant tax benefits in our future results of operations. We will continue to monitor the recoverability of our deferred tax assets on a periodic basis. As a result of the merger and Internal Revenue Service Code Section 382 guidance, the future utilization of the combined company’s net operating loss deductions will be significantly limited.

Valuation of Goodwill

In accordance with FASB ASC Topic 350, Intangibles—Goodwill and Other, (“ASC 350”), we are required to review goodwill by reporting unit for impairment at least annually or more often if there are indicators of impairment present. We have determined our entire business represents one reporting unit. Historically, we have performed our annual impairment analysis during the fourth quarter of each year. The provisions of ASC 350 require that a two-step impairment test be performed for goodwill. In the first step, we compare the fair value of each reporting unit to which goodwill has been allocated to its carrying value. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that reporting unit, goodwill is considered not impaired and we are not required to perform further testing. If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, then we must perform the second step of the impairment test in order to determine the implied fair value of the reporting unit’s goodwill. If the carrying value of a reporting unit’s goodwill exceeds its implied fair value, then we would record an impairment loss equal to the difference. As of October 31, 2011 and July 31, 2011 the fair value of our reporting unit exceeded the carrying value of the reporting unit’s net assets and therefore no impairment exists as of those dates.

Determining the fair value of a reporting unit, if applicable, requires us to make judgments and involves the use of significant estimates and assumptions. These estimates and assumptions include revenue growth rates and operating margins used to calculate projected future cash flows, risk-adjusted discount rates, future economic and market conditions and determination of appropriate market comparables. We base our fair value estimates on assumptions we believe to be reasonable but that are unpredictable and inherently uncertain. Actual future results may differ from those estimates.

Valuation of Identifiable Intangible Assets

Our identifiable intangible assets include existing technology, customer relationships and trade names. Our existing technology relates to patents, patent applications and know-how with respect to the technologies embedded in our currently marketed products.

We primarily used the income approach to value our existing technology and other intangibles. This approach calculates fair value by estimating future cash flows attributable to each intangible asset and discounting it to present value at a risk-adjusted discount rate.

In estimating the useful life of acquired 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 included 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 expect to amortize these intangible assets over estimated useful lives using a method that is based on estimated future cash flows as we believe this will approximate the pattern in which the economic benefits of the assets will be derived.

Impairment of Long-Lived Assets Other Than Goodwill

On an on-going basis, management reviews the value and period of amortization or depreciation of long-lived assets. In accordance with FASB ASC Topic 360, Property, Plant and Equipment, (“ASC 360”), we review whether impairment losses exist on long-lived assets when indicators of impairment are present. During this review, we reevaluate the significant assumptions used in determining the original cost of long-lived assets. Although the assumptions may vary, they generally include revenue growth,

 

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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 a determination of the impaired asset’s fair value. As of October 31, 2011 there were no indicators that required us to conduct a recoverability test at that date.

Warranty

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. The estimated warranty cost is based on historical product performance and field expenses. We use actual service hours and parts expense per system and apply the actual labor and overhead rates to estimate the warranty charge. The actual product performance and/or field expense profiles may differ, and in those cases we adjust the warranty accrual accordingly.

Trade Accounts Receivable and Allowance for Doubtful Accounts

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

Recent Accounting Pronouncements

See Note 9 to the consolidated financial statements included in this Quarterly Report on Form 10-Q, regarding the impact of certain recent accounting pronouncements on our consolidated financial statements.

Results of Operations

The following tables set forth for the periods indicated the principal items included in the Consolidated Statement of Operations in dollars and as percentages of net sales.

 

		Three Months Ended October 31,
		2011				2010
		(in thousands)
Net sales		$	33,752			$	75,647
Cost of sales			15,715				28,401
Gross profit			18,037				47,246
Engineering and product development expenses			12,916				12,979
Selling, general and administrative expenses			9,321				13,165
Amortization of purchased intangible assets			791				1,490
Restructuring			46				116
Income (loss) from operations			(5,037	)			19,496
Other income (expense):
Interest expense			(40	)			(81	)
Investment income			138				69
Other income, net			152				204
Income (loss) before provision for income taxes			(4,787	)			19,688
Provision for income taxes			122				13
Net income (loss)		$	(4,909	)		$	19,675

 

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		Percentage of Net Sales
		Three Months Ended October 31,
		2011				2010
Net sales			100.0	%			100.0	%
Cost of sales			46.6				37.5
Gross profit			53.4				62.5
Engineering and product development expenses			38.3				17.2
Selling, general and administrative expenses			27.6				17.4
Amortization of purchased intangible assets			2.3				2.0
Restructuring			0.1				0.2
Income (loss) from operations			(14.9	)			25.7
Other income (expense):
Interest expense			(0.1	)			(0.1	)
Investment income			0.4				0.1
Other income, net			0.4				0.3
Income (loss) before provision for income taxes			(14.2	)			26.0
Provision for income taxes			0.3				—
Net income (loss)			(14.5	)%			26.0	%

Three Months Ended October 31, 2011 Compared to the Three Months Ended October 31, 2010

Net sales. Net sales consist of revenue from sales of semiconductor test equipment, system support and maintenance services. Net sales for the three months ended October 31, 2011 decreased 55% to $33.8 million as compared to $75.6 million in the same quarter of the prior year. The decrease in net sales in the three months ended October 31, 2011 as compared to the same period in the prior year is primarily due to industry-wide weakness across all market segments. There is also decreased demand from certain customers whose current utilization rates on existing test equipment are below capacity which has slowed their capital spending requirements.

Service revenue, included in net sales, accounted for $9.8 million, or 28.9% of net sales, and $10.4 million, or 13.8% of net sales, for the three months ended October 31, 2011 and 2010, respectively. The decrease in service revenue is primarily a result of an increased reliability of our products and a lower cost product sale which reduces the demand for service because customers are more apt to replace than contract for service.

Geographically, sales to customers outside of the United States were 72.1% and 84.0% of net sales for the three months ended October 31, 2011 and 2010, respectively. The decrease in sales to customers outside the United States was primarily a result of lower demand primarily in Taiwan and Philippines.

Gross profit. Gross profit was $18.0 million or 53.4% of net sales in the three months ended October 31, 2011, as compared to $47.2 million or 62.5% of net sales in the same quarter of the prior year. The decrease in gross profit for the three months ended October 31, 2011 as compared to October 31, 2010 was primarily driven by the decrease in total revenue of approximately 55%, and partially offset by lower warranty costs due to product mix.

Engineering and product development expenses. Engineering and product development expenses were $12.9 million, or 38.3% of net sales, in the three months ended October 31, 2011, which is consistent with $13.0 million, or 17.2% of net sales, in the same quarter of the prior year.

Selling, general and administrative expenses. Selling, general and administrative expenses were $9.3 million, or 27.6% of net sales, in the three months ended October 31, 2011, as compared to $13.2 million, or 17.4% of net sales, in the same quarter of the prior year. The decrease in selling, general and administrative expenses, on a dollar basis, for the three months ended October 31, 2011 as compared to October 31, 2010 was primarily driven by a decrease in variable expenses that are tied to revenue or profits such as profit sharing and commissions.

Amortization of purchased intangible assets. Amortization associated with intangible assets acquired from Credence was $0.8 million or 2.3% of net sales for the three months ended October 31, 2011 as compared to $1.5 million or 2.0% of net sales for the same quarter of the prior year. The underlying intangible assets relate to acquired technology, and customer and distributor relationships. These intangible assets acquired in the Credence merger are being amortized over their estimated useful lives of between one and nine years based on their expected pattern of use.

 

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Restructuring. Restructuring expense was less than $0.1 million or 0.1% of net sales for the three months ended October 31, 2011 as compared to $0.1 million or 0.2% of net sales for the same period in the prior year. The restructuring expenses recorded in the three months ended October 31, 2011 and 2010, respectively, were related to a change in sublease assumptions on previously restructured facilities in California.

Interest expense. Interest expense was less than $0.1 million for the three months ended October 31, 2011 as compared to $0.1 million for the three months ended October 31, 2010. Interest expense for the quarter ending October 31, 2011 includes accretion for the difference between the net present value and the estimated future value of the Company’s facility restructuring liability. The three months ended October 31, 2010 includes interest on convertible notes that were repaid in May 2011.

Investment income. Investment income was $0.1 million for the three months ended October 31, 2011 as compared to less than $0.1 million for the three months ended October 31, 2010. Investment income increased slightly during the quarter ending October 31, 2011, primarily as a result of increased investment in marketable securities. Investment income remains low due to the overall investment market and the generally low interest rates available.

Other income, net. Other income was less than $0.2 million for the three months ended October 31, 2011 as compared to other income of $0.2 million for the three months ended October 31, 2010. Other income for the three months ended October 31, 2011 includes approximately $0.1 million for proceeds received in a bankruptcy settlement from a former customer of Credence Systems Corporation.

Provision for income taxes. We recorded an income tax provision of $0.1 million for the three months ended October 31, 2011, as compared to a provision of less than $0.1 million recorded for the three months ended October 31, 2010 which was primarily due to foreign tax on earnings generated in foreign jurisdictions.

As of October 31, 2011 and July 31, 2011, our total liability for unrecognized income tax benefits was $10.5 million and $9.1 million, respectively (of which $5.3 million, if recognized, would favorably affect our income tax rate).

We expect to maintain a full valuation allowance on United States deferred tax assets until we can sustain an appropriate level of profitability to ensure utilization of existing assets. Until such time, we would not expect to recognize any significant tax benefits in our results of operations.

Net income (loss). Net loss was $4.9 million, or $(0.10) per basic and diluted share, in the three months ended October 31, 2011, as compared to net income of $19.7 million, or $0.40 per basic and $0.39 per diluted share, in the same quarter of the prior year.

Liquidity and Capital Resources

The following is a summary of significant items impacting our liquidity and capital resources for the three months ending October 31, 2011 (in millions):

 

		Three Months Ended October 31, 2011
		(in millions)
Cash, cash equivalents and marketable securities at July 31, 2011		$	162.6
Repurchases of common stock			(4.8	)
Capital expenditures			(0.5	)
Other uses of cash, primarily cash used for operations			(4.5	)
Cash and cash equivalents and marketable securities at October 31, 2011		$	152.8

As of October 31, 2011, we had $152.8 million in cash, cash equivalents and marketable securities and net working capital of $177.4 million, as compared to $162.6 million of cash, cash equivalents and marketable securities and $185.7 million of net working capital at July 31, 2011. The decrease in the cash, cash equivalents and marketable securities was primarily due to the stock repurchases of $4.8 million for the three months ended October 31, 2011 and other uses of cash in operations.

Accounts receivable from trade customers, net of allowances, was $24.4 million at October 31, 2011, as compared to $42.6 million at July 31, 2011. Accounts receivable decreased during the quarter due to a sequential revenue decrease of $28.9 million or 46.1%.The allowance for doubtful accounts was less than $0.1 million, or 0.2 % of gross accounts receivable, at October 31, 2011and July 31, 2011.

Prepaid expenses and other current assets decreased by $0.6 million to $3.8 million at October 31, 2011 as compared to $4.4 million at July 31, 2011 primarily due to the timing of prepaid insurance premiums, maintenance contract renewals and other expenses, as well as a decrease in value added tax receivables.

 

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Capital expenditures totaled approximately $0.5 million for the three months ended October 31, 2011, as compared to $1.2 million for the three months ended October 31, 2010. Capital expenditures for the three months ended October 31, 2011 and October 31, 2010 were composed primarily of capital related to certain engineering projects and tester spare parts to support a larger installed base of test equipment.

We had $2.9 million in net cash used in operating activities for the three months ended October 31, 2011, as compared to net cash provided by operating activities of $25.0 million for the same quarter of the prior year. The net cash used in operating activities for the three months ended October 31, 2011 was primarily related to our net loss of $4.9 million, adjusted for non-cash items including depreciation and amortization and stock based compensation, of approximately $4.6 million, and an increase in working capital of $2.6 million. The net cash provided by operating activities for the three months ended October 31, 2010 was primarily related to our net income of $19.7 million, and non-cash items, principally depreciation and amortization, of approximately $5.8 million offset in part by a net increase in working capital of $0.5 million.

We had $55.4 million in net cash used in investing activities for the three months ended October 31, 2011 as compared to net cash used in investing activities of $14.3 million for the three months ended October 31, 2010. The net cash used in investing activities for the three months ended October 31, 2011 was primarily related to $56.9 million of purchases of available-for-sale securities and $5.5 million in purchases of held-to-maturity securities, $0.5 million of purchases of property and equipment, offset by $4.5 million of proceeds from sales and maturities of available-for-sale securities and $3.0 million in proceeds from sales of held-to-maturity securities. The net cash used in investing activities for the three months ended October 31, 2010 was primarily related to $7.3 million of purchases of available-for-sale securities, $7.2 million of purchases of held-to-maturity securities, and $1.2 million in purchases of property and equipment offset by $1.5 million of proceeds from sales and maturities of available-for-sale securities.

We had $5.5 million in net cash used in financing activities for the three months ended October 31, 2011 as compared to net cash used in financing activities of $0.8 million for the three months ended October 31, 2010. The net cash used in financing activities for the three months ended October 31, 2011 was primarily related to stock repurchases of $4.8 million and the remainder was related to payments of tax withholdings for vested restricted stock units. The net cash used in financing activities for the three months ended October 31, 2010 was primarily related to payments of tax withholdings for vested restricted stock units.

Commitments and Contingencies

Our major outstanding contractual obligations are related to our rental properties and other operating leases and inventory purchase commitments.

The aggregate outstanding amount of our contractual obligations was $46.3 million as of October 31, 2011. 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 the date of this filing and the effect such obligations are expected to have on our liquidity and cash flow in future periods:

 

		Total				2012				2013-2014				2015-2016				Thereafter
		(in thousands)
Contractual Obligations:
Operating leases		$	27,494			$	4,271			$	9,289			$	7,593			$	6,341
Inventory commitments			18,792				18,792				—				—				—
Total Contractual Obligations		$	46,286			$	23,063			$	9,289			$	7,593			$	6,341

Off-Balance Sheet Arrangements

As of October 31, 2011 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 Market Risk exposure since the filing of the 2011 Annual Report on Form 10-K.

 

Item 4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures. Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of October 31, 2011. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time period specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to

 

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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 our 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 our disclosure controls and procedures as of October 31, 2011, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our 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 fiscal quarter ended October 31, 2011 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 the Company’s disclosure controls and procedures or our internal controls 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

From time to time we are party to legal proceedings in the course of our business in addition to those described below. We do not, however, expect such other legal proceedings to have a material adverse effect on our business, financial condition or results of operations.

As previously reported, on April 19, 2011, we received a demand letter pursuant to Massachusetts General Laws ch. 156D, § 7.42 sent on behalf of Joel Krieger, a purported LTX-Credence shareholder, whose putative class action complaint, Krieger v. LTX-Credence Corp., et. al., No. 10-04713, filed on December 3, 2010 in the Superior Court for the Commonwealth of Massachusetts, was dismissed. The letter demands that we commence legal proceedings against the Company’s directors and senior officers for breaches of their fiduciary duties, gross negligence and mismanagement, waste of corporate assets, and abuse of control, all arising out of our pursuit of a merger transaction with Verigy. On October 12, 2011 the independent members of our Board of Directors determined that pursuing the claims asserted in the demand letter was not in our best interest.

 

Item 1A.

Risk Factors

This report includes or incorporates forward-looking statements that involve substantial risks and uncertainties and fall within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. You can identify these forward-looking statements by our use of the words “believes,” “anticipates,” “plans,” “expects,” “may,” “will,” “would,” “should,” “intends,” “estimates,” “seeks” and 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. We do not assume any obligation to update any forward-looking statement we make.

Our sole market is the highly cyclical semiconductor industry, which causes a cyclical impact on our financial results.

We sell capital equipment to companies that design, manufacture, assemble, and test semiconductor devices. The semiconductor industry is highly cyclical, causing a cyclical impact on our financial results. Industry order rates increased in fiscal year 2010 and portions of fiscal year 2011. However industry conditions weakened as we entered fiscal year 2012. The timing and level of sustained industry recovery is uncertain at this time. The ability to forecast the business outlook for our industry is typically limited to a maximum of three months. As a result, our expectations for our business for the full fiscal 2012 remain uncertain. 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 cycles in the industry could have an adverse effect on our business.

 

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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 industry 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 devices, including SIP, will also experience similar characteristics. Our market is also characterized by rapid technological change and changes in customer demand. In the past, we have experienced delays in commitments, delays in collecting accounts receivable and significant declines in demand for our products during these downturns, and we may not be able to maintain or exceed our current level of sales.

Additionally, as a capital equipment provider, our revenue is driven by the capital expenditure budgets and spending patterns of our customers who often delay or accelerate purchases in reaction to variations in their businesses. Because a high portion of our costs are fixed, we are limited in our ability to reduce expenses and inventory purchases quickly in response to decreases in orders and revenues. In a contraction, we may not be able to reduce our significant fixed costs, such as continued investment in research and development and capital equipment requirements and materials purchases from our suppliers.

The market for semiconductor test equipment is highly concentrated, and we have limited opportunities to sell our products.

The semiconductor industry is highly concentrated, and a small number of semiconductor device manufacturers and contract assemblers account for a substantial portion of the purchases of semiconductor test equipment generally, including our test equipment. Our top customers in fiscal year 2011 were Texas Instruments, Spirox, and Atmel, which accounted for 23%, 14%, and 13% of our net sales, respectively. In fiscal year 2010, the top customers were Spirox, Atmel, and Texas Instruments which accounted for 24%, 13%, and 12% of our net sales, respectively. Sales to the top ten customers were 80%, 77%, and 69%, of net sales in fiscal 2011, 2010, and 2009, 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 will be negatively affected.

Our ability to increase our sales will depend, in part, on our ability to obtain orders from new customers. Semiconductor manufacturers select a particular vendor’s test system for testing 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 system vendor for a new generation of a device, that manufacturer is more likely to purchase test systems from that vendor for that generation of the device, and, possibly, subsequent generations of that device as well. Therefore, the opportunities to obtain orders from new customers may be limited, which may impair our ability to grow our sales and revenue.

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 could 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,

 

•

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.

 

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A substantial amount of the shipments of our test 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 integration, test and acceptance prior to shipment. If we were to experience problems of this type late in our quarter, shipments could be delayed and our operating results could fall below expectations.

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

We rely on one subcontractor to manufacture our test systems and multiple other subcontractors for the manufacture of the components and subassemblies for our products. Additionally we rely on sole source suppliers for certain components and subassemblies. We have no long term supply agreement with our contract manufacturers, and purchase products through individual purchase orders. 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 a lengthy process. 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 or at an acceptable price, we would have to identify and qualify acceptable replacements 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 production and testing services 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 test systems, 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 require specific technical know-how and expertise. These factors could make it more difficult for us to find a new manufacturer of our test 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 components 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.

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 printed circuit boards. One such directive is Directive 2002/95/EC of the European Parliament and of the Council of 27 January 2003 on the restriction of 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 EU 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 27 Member States). Any interruption in supply due to the unavailability of lead 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. 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.

Future mergers and acquisitions may be difficult to integrate, disrupt our business, dilute stockholder value or divert management attention.

We have in the past, and may in the future, seek to acquire or invest in additional businesses, products, technologies or engineers. For example, in August 2008 we completed our merger with Credence Systems Corporation and in June 2003, we completed our acquisition of StepTech, Inc. We may have to issue debt or equity securities to pay for future mergers or acquisitions, which could be dilutive to then current stockholders or subject us to the risk described above in “We may need financing, which could be difficult to obtain.” 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.

 

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Mergers and acquisitions of high-technology companies are inherently risky, and no assurance can be given that future mergers or acquisitions will be successful and will not materially adversely affect our business, operating results or financial condition. Our past and future mergers and acquisitions may involve many risks, including:

 

•

difficulties in managing our growth following mergers and acquisitions;

 

•

difficulties in the integration of the acquired personnel, operations, technologies, products and systems of the acquired companies;

 

•

uncertainties concerning the intellectual property rights we purport to acquire;

 

•

unanticipated costs or liabilities associated with the mergers and acquisitions;

 

•

diversion of managements’ attention from other business concerns;

 

•

adverse effects on our existing business relationships with our or our acquired companies’ customers;

 

•

potential difficulties in completing projects associated with purchased in-process research and development; and

 

•

inability to retain employees of acquired companies.

Any of the events described in the foregoing paragraphs could have an adverse effect on our business, financial condition and results of operations and could cause the price of our common stock to decline.

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 test requirements. Our test 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 in, “The market for semiconductor test equipment is highly concentrated, and we have limited opportunities to sell our products” may make it substantially more difficult for us to sell test 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 this composition will continue. International sales accounted for 85% of our revenues for fiscal 2011 and 76% of our revenues for fiscal 2010. 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 outsource manufacturing supplier in Malaysia increases our exposure to these types of international risks. International sales and our relationships with suppliers may be hurt by many factors, including:

 

•

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

 

•

political and economic instability in our target international markets;

 

•

longer payment cycles common in foreign markets;

 

•

difficulties of staffing and managing our international operations;

 

•

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

 

•

difficulties collecting our accounts receivable because of the distance and different laws;

 

•

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

 

•

adverse weather and climate events.

In the past, we have incurred expenses to meet new regulatory requirements in Europe, experienced periodic difficulties in obtaining timely payment from non-U.S. customers, and been affected by economic conditions in several Asian countries. Our foreign sales are typically invoiced and collected in U.S. dollars. A strengthening in the dollar relative to the currencies of those countries where we do business would increase the prices of our products as stated in those currencies and could hurt our sales in those countries. Significant fluctuations in the exchange rates between the U.S. dollar and foreign currencies could cause us to lower our prices and thus reduce our profitability. These fluctuations could also cause prospective customers to push out or delay orders because of the increased relative cost of our products. In the past, there have been significant fluctuations in the exchange rates between the dollar and the currencies of countries in which we do business. From time to time we may enter into foreign currency hedging arrangements.

 

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Our market is highly competitive, and we have limited resources to compete.

The test equipment industry is 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, and the industry is highly competitive. Our competitors in the market for semiconductor test equipment include Advantest Corporation and Teradyne Inc. These major competitors have substantially greater financial resources and more extensive engineering, manufacturing, marketing, and customer support capabilities.

We expect our competitors to enhance their current products and to introduce new products with 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 manufacturers themselves, may offer new testing technologies, which may in turn reduce the value of our product lines. 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.

The lack of visibility regarding whether there will be sustained growth periods for the sale of electronic goods and information technology equipment, and uncertainty regarding the amount of sales, underscores the need for caution in predicting growth in the semiconductor test equipment industry in general and in our revenues and profits specifically. Slow or negative growth in the domestic economy may continue to materially and adversely affect our business, financial condition and results of operations for the foreseeable future. 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 we may fail to correctly anticipate the technical needs of our customers.

Our test systems are used by our customers to develop, test and manufacture their new devices. We therefore must anticipate industry trends and develop products in advance of the commercialization of our customers’ devices, requiring us to make significant capital investments to develop new test 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 through volume sales. In addition, even if we are able to successfully develop enhancements or new generations of our products, these enhancements or new generations of products may not generate revenue in excess of the costs of development, and they may be quickly rendered obsolete by changing customer preferences or the introduction of products embodying new technologies or features by our competitors. Furthermore, if we were to make announcements of product delays, or if our competitors were to make announcements of new test systems, these announcements could cause our customers to defer or forego purchases of our test systems, which would also hurt our business.

Our success depends on attracting and retaining key personnel.

Our success will depend 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 will depend 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. Layoffs in any industry downturn could make it more difficult for us to hire or retain qualified personnel. 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;

 

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•

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 people.

Third parties may claim we are infringing their intellectual property, and we could suffer 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.

We are responsible for any patent litigation costs. 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.

We may need financing, which could be difficult to obtain.

We expect that our existing cash, cash equivalents and marketable securities will be sufficient to meet our cash requirements to fund operations and expected capital expenditures for the foreseeable future. In the event we need to raise additional funds, we cannot be certain that we will be able to obtain such financing on favorable terms, if at all. Further, if we issue additional equity securities to obtain financing, stockholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of common stock and place restrictions on how we operate our business. If we incur substantial indebtedness in the future we may be required to dedicate a substantial portion of any cash flow from operations to our debt service obligations, thereby reducing the amount of cash flow available for other purposes, including capital expenditures, limit our flexibility in planning for, or reacting to changes in, our business and the industry in which we compete, make it more difficult for us to obtain any other necessary future financing and make us more vulnerable in the event of a further downturn in our business. If we cannot raise funds on acceptable terms, if and when needed, we may not be able to develop or enhance our products and services, take advantage of future opportunities, grow our business or respond to competitive pressures, which could seriously harm our business.

Our stock price is volatile.

In the twelve-month period ending on October 31, 2011, our stock price ranged from a low of $4.81 to a high of $9.83. The price of our common stock has been and likely will continue to be subject to wide fluctuations in response to a number of events and factors, such as:

 

•

quarterly variations in operating results;

 

•

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

 

•

changes in financial estimates and recommendations by securities analysts;

 

•

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

 

•

news reports relating to trends in our markets.

In addition, the stock market in general, and the market prices for semiconductor-related 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, intangible assets and long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amounts of these assets may not be recoverable, and we also review goodwill annually in accordance with Financial Accounting Standards Board (“FASB”), Accounting Standards Codification (“ASC”), Topic 350, Intangibles—Goodwill and Other.

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.

 

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In the event that we determine in a future period that impairment exists for any reason, we would record an impairment charge 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, the 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 controls 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.

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

The following table provides information regarding repurchases of common stock made by us during the quarter ended October 31, 2011:

 

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)				Maximum Number (or Approximately Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs
8/1/2011 – 8/31/2011			—			$	—				—				—
9/1/2011 – 9/30/2011			220,865			$	5.46				220,865			$	23,110,779
10/1/2011 – 10/31/2011			674,025			$	5.48				674,025			$	20,160,517
Total			894,890			$	5.47				894,890			$	20,160,517

 

(1)

On September 15, 2011, the board of directors authorized a stock repurchase program, pursuant to which we are authorized to repurchase up to $25 million of our common stock from time to time in open market transactions. The repurchase program may be suspended or discontinued at any time and has no expiration date.

 

Item 6.

Exhibits

The exhibits filed as part of this Quarterly Report on Form 10-Q are set forth on the Exhibit Index immediately preceding such exhibits, and are incorporated herein by reference.

 

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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.

 

		LTX-Credence Corporation
Date: December 9, 2011		By:		/S/    MARK J. GALLENBERGER
				Mark J. Gallenberger
				Chief Financial Officer and Treasurer
				(Principal Financial Officer)

 

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EXHIBIT INDEX

 

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.LAB**		XBRL Taxonomy Extension Label Linkbase Document
101.PRE**		XBRL Taxonomy Extension Presentation Linkbase Document

 

*	Filed herewith.

**

Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

 

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