Xcerra (XCRA) 10-Q 2013 Q2 Quarterly report

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 January 31, 2013

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 March 5, 2013
Common Stock, $0.05 par value per share	47,549,642 shares

LTX-CREDENCE CORPORATION

Index

		Page     Number
Part I.	FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Balance Sheets as of January 31, 2013 and July 31, 2012		3
	Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended January 31, 2013 and January 31, 2012		4
	Consolidated Statements of Cash Flows for the Six Months Ended January 31, 2013 and January 31, 2012		5
	Notes to Consolidated Financial Statements		6-15
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		24
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		24
Item 4.	Mine Safety Disclosures		25
Item 6.	Exhibits		25
	SIGNATURE		26
	EXHIBIT INDEX		27

2

LTX-CREDENCE CORPORATION

CONSOLIDATED BALANCE SHEETS

(In thousands)

	January 31, 2013			July 31, 2012
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	32,358		$	29,446
Marketable securities		95,386			107,728
Accounts receivable—trade, net of allowances of $0 and $39		23,523			31,182
Accounts receivable—other		647			740
Inventories		29,350			28,850
Prepaid expenses and other current assets		3,430			3,440
Total current assets		184,694			201,386
Property and equipment, net		17,744			18,229
Intangible assets, net		2,362			3,153
Goodwill		43,030			43,030
Other assets		1,248			1,270
Total assets	$	249,078		$	267,068
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	9,082		$	12,734
Accrued expenses		17,382			19,736
Deferred revenue		5,030			5,347
Total current liabilities		31,494			37,817
Other long-term liabilities		12,085			13,547
Commitments and contingencies (Note 5)
Stockholders’ equity:
Common stock		2,375			2,430
Additional paid-in capital		743,411			750,760
Accumulated other comprehensive income		156			230
Accumulated deficit		(540,443	)		(537,716	)
Total stockholders’ equity		205,499			215,704
Total liabilities and stockholders’ equity	$	249,078		$	267,068

See accompanying Notes to Consolidated Financial Statements.

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LTX-CREDENCE CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(In thousands, except per share data)

	Three Months Ended January 31,						Six Months Ended January 31,
	2013			2012			2013			2012
Net product sales	$	26,103		$	15,025		$	60,429		$	39,009
Net service sales		8,913			9,057			17,775			18,825
Net sales		35,016			24,082			78,204			57,834
Cost of sales		16,457			13,202			36,141			28,917
Gross profit		18,559			10,880			42,063			28,917
Engineering and product development expenses		13,203			12,364			25,595			25,280
Selling, general and administrative expenses		9,183			8,346			19,189			17,667
Amortization of purchased intangible assets		396			791			792			1,582
Restructuring		69			141			300			187
Loss from operations		(4,292	)		(10,762	)		(3,813	)		(15,799	)
Other income (expense):
Interest expense		(57	)		(42	)		(107	)		(82	)
Interest income		224			246			485			384
Other income, net		115			199			113			352
Loss before benefit from income taxes		(4,010	)		(10,359	)		(3,322	)		(15,145	)
Net benefit from income taxes		(734	)		(671	)		(595	)		(549	)
Net loss	$	(3,276	)	$	(9,688	)	$	(2,727	)	$	(14,596	)
Net loss per share:
Basic and diluted	$	(0.07	)	$	(0.20	)	$	(0.06	)	$	(0.30	)
Weighted-average common and common equivalent shares used in computing net loss per share:
Basic and diluted		47,425			48,961			47,864			49,225
Comprehensive loss:
Net loss	$	(3,276	)	$	(9,688	)	$	(2,727	)	$	(14,596	)
Unrealized gain (loss) on marketable securities		71			110			(74	)		93
Comprehensive loss	$	(3,205	)	$	(9,578	)	$	(2,801	)	$	(14,503	)

See accompanying Notes to Consolidated Financial Statements.

4

LTX-CREDENCE CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

	Six Months Ended January 31,
	2013			2012
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(2,727	)	$	(14,596	)
Add (deduct) non-cash items:
Stock-based compensation		2,378			2,505
Depreciation and amortization		4,262			5,689
Restructuring		300			187
Other		(263	)		(728	)
Changes in operating assets and liabilities:
Accounts receivable		7,814			20,966
Inventories		(2,345	)		(6,791	)
Prepaid expenses		574			831
Accounts payable		(3,652	)		(8,810	)
Accrued expenses		(2,895	)		(8,220	)
Deferred revenue		(318	)		(150	)
Net cash provided by (used in) operating activities		3,128			(9,117	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales and maturities of available-for-sale securities		41,720			18,426
Proceeds from sales and maturities of held-to-maturity securities		2,800			5,750
Purchases of available-for-sale securities		(28,379	)		(80,966	)
Purchases of held-to-maturity securities		(4,842	)		(7,885	)
Purchases of property and equipment		(1,894	)		(1,826	)
Net cash provided by (used in) investing activities		9,405			(66,501	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchases of common stock		(9,208	)		(6,077	)
Payments of tax withholdings for vested restricted stock units, net of proceeds from stock option exercises		(1,010	)		(1,044	)
Proceeds from shares issued from employees’ stock purchase plan		389			397
Net cash used in financing activities		(9,829	)		(6,724	)
Effect of exchange rate changes on cash and cash equivalents		208			(423	)
Net increase (decrease) in cash and cash equivalents		2,912			(82,765	)
Cash and cash equivalents at beginning of period		29,446			123,198
Cash and cash equivalents at end of period	$	32,358		$	40,433

See accompanying Notes to Consolidated Financial Statements.

5

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 for the semiconductor industry. 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 of the semiconductor industry. Semiconductor designers and manufacturers worldwide use our equipment to test their devices during the manufacturing process. After testing, these devices are incorporated in a wide range of products, including personal and tablet computers, mobile internet equipment such as wireless access points and interfaces, broadband access products such as cable modems and set top boxes, personal communication and entertainment products such as mobile phones and personal digital music players, consumer products such as televisions, videogame systems and digital cameras, automobile electronics and power management devices used in portable and automotive electronics. We also sell hardware and software support and maintenance services for our test systems.

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 consolidated financial statements should be read in conjunction with the financial statements and notes included in our Annual Report on Form 10-K for the fiscal year ended July 31, 2012. 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 and six months ended January 31, 2013 are not necessarily indicative of future trends or the Company’s results of operations for the entire fiscal year ending July 31, 2013.

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

Foreign Currency Remeasurement

The financial statements of the Company’s foreign subsidiaries are remeasured in accordance with Topic 830,Foreign Currency Matters, to the Financial Accounting Standards Board Codification (FASB ASC). The Company’s 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 exchange 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 and six months ended January 31, 2013 or 2012.

Revenue Recognition

The Company recognizes revenue based on guidance provided in Topic 605,Revenue Recognition to the FASB ASC (“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, Multiple Deliverable Revenue Arrangements (“ASU 2009-13”).

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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 Topic 985,Software, to the FASB ASC relating to certain software development costs, were insignificant for the three and six months ended January 31, 2013 and 2012.

Shipping and Handling Costs

Shipping and handling costs are included in cost of sales in the consolidated statements of operations. Shipping and handling costs were insignificant for the three and six months ended January 31, 2013 and 2012.

Income Taxes

The benefit from income taxes relates principally to operating results of foreign entities in jurisdictions primarily in Asia and Europe and the release of reserves due to statute of limitation expirations.

As of January 31, 2013 and July 31, 2012, the total liability for unrecognized income tax benefits was $7.0 million and $8.0 million, respectively (of which $3.5 million and $4.4 million, if recognized, would impact the Company’s income tax rate). The Company recognizes interest and penalties related to uncertain tax positions as a component of income tax expense. As of January 31, 2013 and July 31, 2012, the Company had accrued approximately $0.8 million and $1.0 million 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 prior to 1998.

As a result of completion of the Company’s 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.

Accounting for Stock-Based Compensation

The Company maintains and has made awards that remain outstanding under various stock-based compensation plans, including the Company’s 2010 Stock Plan, as amended on November 26, 2010 (“2010 Plan”), the Company’s 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 and has made awards that remain outstanding under the StepTech, Inc. Stock Option Plan as part of its acquisition of StepTech, Inc. (“StepTech”) in 2003 and the Credence 2005 Stock Incentive Plan in connection with its acquisition of Credence. The Company can only grant new awards under the 2010 Plan.

The Company recognizes stock-based compensation expense for its equity awards in accordance with the provisions of Topic 718,Compensation – Stock Compensationto the FASB ASC (“ASC 718”). Under ASC 718, the Company is required to recognize as expense the estimated fair value as of the grant date of all share-based payments to employees. In accordance with this standard, the Company has elected to recognize the compensation cost of each service based award on a straight-line basis over the vesting period of such award. The Company recorded stock-based compensation expense of approximately $1.2 million and $2.4 million for the three and six months ended January 31, 2013, respectively, and $1.2 million and $2.5 million, respectively, for the three and six months ended January 31, 2012, in connection with its share-based payments.

The Company granted 82,000 restricted stock unit awards during the three months ended January 31, 2013, all of which are service-based and vest in twelve months from the grant date.

The Company granted 793,900 restricted stock unit awards during the three months ended October 31, 2012, all of which are service-based and vest 25% in each of the next four years.

7

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 tester products sold, the Company accrues a liability for the estimated cost of standard warranty at the time of tester shipment. 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 Topic 460,Guarantees, to the FASB ASC for the six months ended January 31, 2013 and 2012:

	Six Months Ended January 31,
Product Warranty Activity	2013			2012
	(in thousands)
Balance at beginning of period	$	1,672		$	2,281
Warranty expenditures for current period		(2,025	)		(1,783	)
Changes in liability related to pre-existing warranties		(33	)		20
Provision for warranty costs in the period		1,644			887
Balance at end of period	$	1,258		$	1,405

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

	Three Months Ended January 31,						Six Months Ended January 31,
	2013			2012			2013			2012
	(in thousands, except per share data)
Net loss	$	(3,276	)	$	(9,688	)	$	(2,727	)	$	(14,596	)
Basic EPS:
Weighted average shares outstanding		47,425			48,961			47,864			49,225
Basic EPS	$	(0.07	)	$	(0.20	)	$	(0.06	)	$	(0.30	)
Diluted EPS:
Weighted average shares outstanding		47,425			48,961			47,864			49,225
Plus: impact of stock options and unvested restricted stock units		—			—			—			—
Weighted average common and common equivalents shares outstanding		47,425			48,961			47,864			49,225
Diluted EPS	$	(0.07	)	$	(0.20	)	$	(0.06	)	$	(0.30	)

For the three and six months ended January 31, 2013 and 2012, options to purchase approximately 1.0 million shares and 1.6 million 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 2.1 million and 1.8 million restricted stock units for the periods ended January 31, 2013 and 2012, respectively, in accordance with the contingently issuable shares guidance of Topic 260,Earnings Per Share, to the FASB ASC.

Cash and Cash Equivalents and Marketable Securities

The Company considers all highly liquid investments that are readily convertible to cash and that have original maturity dates of three months or less to be cash equivalents. Cash and cash equivalents consist primarily of operating cash. Marketable securities consist primarily of debt securities that are classified as available-for-sale and held-to-maturity, in accordance with Topic 320,Investments – Debt and Equity Securities, to the FASB ASC. The Company also holds certain investments in commercial paper or certificates of deposit that it considers to be held-to-maturity, based on their maturity dates. Securities available-for-sale includes corporate, asset-backed, mortgage-backed, and governmental obligations with various contractual maturity dates, some of which are

8

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 on investments held by the Company for the three and six months ended January 31, 2013 and 2012 were not significant. Unrealized gains and losses on investments held by the Company are reflected as a separate component of comprehensive income (loss) and are included in Stockholders’ Equity. Realized gains, losses and interest on investments held by the Company are included in investment income in the Consolidated Statements of Comprehensive Income (Loss). The Company analyzes its investments for impairment on a quarterly basis or upon occurrence of a significant change in circumstances. The only impairment losses recorded in the three and six months ended January 31, 2013 or 2012 were temporary impairment losses.

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:

	January 31, 2013		July 31, 2012
	(in thousands)
Purchased components and parts	$	15,015	$	13,811
Units-in-progress		3,302		3,045
Finished units		11,033		11,994
Total inventories	$	29,350	$	28,850

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.

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 January 31, 2013 and July 31, 2012, inventory is stated net of inventory reserves of $42.1 million and $42.4 million, respectively. If actual demand for products deteriorates or market conditions are less favorable than projected, additional inventory reserves may be required. Such reserves are not reversed until the related inventory is sold or otherwise disposed of. The Company had sales of $0.4 million and $0.7 million of previously reserved inventory for the three months and six months ended January 31, 2013, which represents the gross cash received from the customer. The Company released reserves of $0.1 and $0.3 million for the three months and six months ended January 31, 2013, related to these sales. The Company had sales of $1.1 million and $5.3 million of previously reserved inventory for the three months and six months ended January 31, 2012, which represents the gross cash received from the customer. The Company released reserves of $0.2 million and $1.2 million for the three months and six months ended January 31, 2012, related to these sales.

Property and Equipment

Property and equipment acquired is recorded at cost. 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 three to seven 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:

	January 31, 2013			July 31, 2012			Estimated Useful Lives
	(in thousands)						(in years)
Equipment spares	$	51,036		$	57,841		5 or 7
Machinery, equipment and internally manufactured systems		39,078			38,067		3-7
Office furniture and equipment		3,664			3,885		3-7
Purchased software		2,867			2,870		3
Land		2,524			2,524		—
Leasehold improvements		6,235			6,187		Term of lease or useful life, not to exceed 10 years
Property and equipment, gross		105,404			111,374
Less: accumulated depreciation and amortization		(87,660	)		(93,145	)
Property and equipment, net	$	17,744		$	18,229

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Impairment of Long-Lived Assets Other Than Goodwill

On an ongoing basis, management reviews the value of and period of amortization or depreciation of the Company’s long-lived assets. In accordance with Topic 360,Property, Plant and Equipment, to the FASB ASC, the Company reviews whether impairment losses exist on its long-lived assets other than goodwill when indicators of impairment are present. During this review, the Company assesses future cash flows and re-evaluates the significant assumptions used in determining the original cost of long-lived assets other than goodwill. Although the assumptions may vary, they generally include revenue growth, operating results, cash flows and other indicators of value. Management then determines whether there has been a permanent impairment of the value of long-lived assets based upon events or circumstances that have occurred since acquisition. The extent of the impairment amount recognized is based upon a determination of the impaired asset’s fair value compared to its carrying value. As of January 31, 2013 and July 31, 2012 there were no indicators that required the Company to conduct a recoverability test as of those dates.

Goodwill and Other Intangibles

In accordance with Topic 350,Intangibles – Goodwill and Other, to the FASB ASC (“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 Company evaluated the implied fair value based on the Company’s market capitalization of its one reporting unit as compared to the carrying value of the net assets assigned to its reporting unit as of January 31, 2013 and July 31, 2012. As of those dates, the implied fair value of the goodwill of the Company’s reporting unit exceeded the Company’s carrying value of its net assets and therefore no impairment existed.

The Company’s goodwill consists of the following:

Goodwill	January 31, 2013		July 31, 2012
	(in thousands)
Merger with Credence Systems Corporation (August 29, 2008)	$	28,662	$	28,662
Acquisition with Step Tech Inc. (June 10, 2003)		14,368		14,368
Total goodwill	$	43,030	$	43,030

There was no change in the goodwill balance for the three or six months ended January 31, 2013 or 2012.

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

			As of January 31, 2013
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		15,352		648
Developed technology—Diamond		9.0		9,400		8,636		764
Maintenance agreements		7.0		1,900		950		950
Total intangible assets			$	38,900	$	36,538	$	2,362

			As of July 31, 2012
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		14,965		1,035
Developed technology—Diamond		9.0		9,400		8,367		1,033
Maintenance agreements		7.0		1,900		815		1,085
Total intangible assets			$	38,900	$	35,747	$	3,153

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 1.8 years.

The Company expects amortization for these intangible assets to be:

For the fiscal year ending July 31,	Amount
	(in thousands)
Remainder of 2013	$	791
2014		769
2015		396
2016		321
2017		85
Total	$	2,362

3. SEGMENT REPORTING

In accordance with the provisions of Topic 280,Segment Reporting to the FASB ASC, 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.

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The Company’s net sales by geographic area for the three and six months ended January 31, 2013 and 2012, along with its long-lived assets at January 31, 2013 and July 31, 2012, are summarized as follows:

	Three Months Ended January 31,				Six Months Ended January 31,
	2013		2012		2013		2012
	(in thousands)
Net sales:
United States	$	8,638	$	7,113	$	15,703	$	16,519
Taiwan		8,128		1,312		20,335		7,766
Philippines		4,232		4,628		11,846		8,656
Malaysia		3,873		1,069		8,255		2,806
Hong Kong/China		2,639		2,267		6,287		3,011
Germany		2,418		2,024		3,979		4,920
Singapore		1,128		1,130		3,855		3,549
All other countries		3,960		4,539		7,944		10,607
Total Net Sales	$	35,016	$	24,082	$	78,204	$	57,834

Long-lived assets consist of property and equipment:

	January 31, 2013		July 31, 2012
	(in thousands)
Long-lived assets:
United States	$	15,859	$	16,386
Japan		719		564
Singapore		253		312
Philippines		111		166
All other countries		802		801
Total long-lived assets	$	17,744	$	18,229

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

In accordance with the provisions of Topic 420,Exit or Disposal Cost Obligation, to the FASB ASC, the Company recognizes certain costs associated with headcount reductions, office vacancies and other costs to move or relocate operations or employees as restructuring costs in the period in which such actions are initiated and approved by management or the obligations are incurred, as applicable. The following table sets forth the Company’s restructuring accrual activity for the six months ended January 31, 2013 and January 31, 2012 (in thousands):

	Severance Costs			Facility Leases			Total
Balance July 31, 2012	$	364		$	3,697		$	4,061
Additions to expense		231			69			300
Accretion		—			107			107
Stock based compensation		(48	)		—			(48	)
Cash paid		(302	)		(759	)		(1,061	)
Balance January 31, 2013	$	245		$	3,114		$	3,359
Included in the Company’s Consolidated Balance Sheet:
Accrued expenses	$	245		$	938		$	1,183
Other long-term liabilities	$	—		$	2,176		$	2,176
	Severance Costs			Facility Leases			Total
Balance July 31, 2011	$	6		$	4,761		$	4,767
Additions to expense		107			80			187
Accretion		—			82			82
Cash paid		(6	)		(749	)		(755	)
Balance January 31, 2012	$	107		$	4,174		$	4,281
Included in the Company’s Consolidated Balance Sheet:
Accrued expenses	$	107		$	1,229		$	1,336
Other long-term liabilities	$	—		$	2,945		$	2,945

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During the three months ending January 31, 2013, the Company recognized $0.1 million of restructuring expense related to certain costs associated with relocating some of the Company’s repair function from North American locations to subsidiary offices in Singapore and the Philippines. Within the Philippines, the Company relocated a portion of its employees from its current offices to a new location where the repair center will reside. Severance and post-employment obligation liabilities of $0.2 million related to headcount reductions resulting from this change in the service organization were recorded during the quarter ending October 31, 2012.

The cash paid for the six months ending January 31, 2013 represents lease payments for the Company’s previously restructured facilities and severance paid.

During the three months ending January 31, 2012, the Company exercised an early termination clause in one of its North American facility leases and vacated the facility. Consequently, the Company recorded a liability for severance costs for headcount reductions, as well as for its remaining obligation under the lease, including a termination fee for triggering the early termination clause. The total restructuring expense recorded related to this action was $0.1 million.

5. COMMITMENTS AND CONTINGENCIES

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

We are a defendant in a litigation matter incidental to the business that is related to customer expectations of test system performance for product that was shipped in 2006 by Credence. We do not believe the plaintiff’s claims have merit and we are vigorously defending our position. An estimate of any potential loss cannot be made; we do not believe a loss is probable, and accordingly we have not accrued any amounts related to this matter.

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 in the aggregate 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 January 31, 2013 or July 31, 2012.

Subject to certain limitations, the Company indemnifies its current and former officers and directors in certain circumstances in connection with their services as directors and officers of the Company. Although the maximum potential amount of future payments the Company could be required to make under these agreements is theoretically unlimited, as there were no known or pending claims, the Company has not accrued a liability for these agreements as of January 31, 2013 or July 31, 2012.

The Company had approximately $15.3 million and $15.1 million of non-cancelable inventory commitments with an outsourced supplier as of January 31, 2013 and July 31, 2012, respectively. The Company expects to consume the inventory through normal operating activity.

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The Company has operating lease commitments for certain facilities and equipment that expire at various dates through 2021. Minimum lease payment obligations under non-cancelable leases are as follows:

Lease Commitments:

For the fiscal year ending July 31,	Amount
	(in thousands)
Remainder of 2013	$	2,688
2014		5,499
2015		4,719
2016		4,285
2017		2,528
Thereafter		4,674
Total minimum lease payments	$	24,393

6. ACCRUED EXPENSES

Other accrued expenses consisted of the following at January 31, 2013 and July 31, 2012:

	(in thousands)
	January 31, 2013		July 31, 2012
Accrued compensation	$	6,885	$	7,059
Accrued vendor liability		2,234		2,373
Warranty reserve		1,258		1,672
Accrued restructuring		1,183		1,502
Accrued taxes		1,079		931
Accrued commissions		580		1,301
Other accrued expenses		4,163		4,898
Total accrued expenses	$	17,382	$	19,736

7. FAIR VALUE MEASUREMENTS

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

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

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

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

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The following table presents financial assets and liabilities measured at fair value and their related valuation inputs as of January 31, 2013 and as of July 31, 2012:

			Fair Value Measurements at Reporting Date Using (in thousands)
January 31, 2013	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)	$	32,358	$	32,358	$	—	$	—
Marketable securities (2)		89,528		9,335		80,193		—
Total assets	$	121,886	$	41,693	$	80,193	$	—

July 31, 2012	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)	$	29,446	$	29,081	$	365	$	—
Marketable securities (2)		104,932		7,226		97,706		—
Total assets	$	134,378	$	36,307	$	98,071	$	—

(1) Cash and cash equivalents as of January 31, 2013 and July 31, 2012 includes cash held in operating accounts of approximately $29.4 million and $28.6 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 January 31, 2013 and July 31, 2012 exclude approximately $5.9 million and $2.8 million, respectively, of commercial paper which is held to maturity and not subject to fair value measurements.

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 recorded at fair value on a non-recurring basis requiring valuation disclosures as of January 31, 2013 or as of July 31, 2012.

8. STOCKHOLDERS’ EQUITY

Stock Repurchases

On September 15, 2011, the Company announced that its Board of Directors had authorized a stock repurchase program for up to $25 million of shares of the Company’s common stock. 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.

During the three and six months ending January 31, 2013, the Company repurchased 124,229 and 1,642,272 shares of common stock, respectively, for a total purchase price of $0.7 million and $9.2 million, respectively. During the three and six months ended January 31, 2012, the Company repurchased 226,710 and 1,121,600 shares of common stock, respectively, for a total purchase price of $1.2 million and $6.1 million, respectively. Cumulatively, as of January 31, 2013, the Company has repurchased 3,294,666 shares of common stock for a total purchase price of $18.7 million since the inception of the program.

2010 Plan

On December 7, 2010, the Company’s stockholders approved the Company’s 2010 Stock Plan (“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 that were available for issuance but not subject to grants under the Credence 2005 Plan, as amended and restated, and the LTX Corporation 2004 Plan, which are referred to collectively as the Prior Plans, and any shares of the Company’s common stock that were subject to grants made under the Prior Plans but were not issued as a result of termination, surrender, cancellation or forfeiture of outstanding awards will be available for grant under the 2010 Plan. 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.

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read together with the Consolidated Financial Statements and Notes thereto appearing in Part I, Item 1 in this quarterly report on Form 10-Q. Certain statements in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” are forward-looking statements that involve risks and uncertainties. Words such as may, will, could, should, would, anticipates, expects, intends, plans, predicts, projects, believes, seeks, estimates and similar expressions identify such forward-looking statements. The forward-looking statements contained herein are based on current expectations and entail various risks and uncertainties that could cause actual results to differ materially and adversely from those expressed in such forward-looking statements. Factors that might cause such a difference include, among other things, those set forth under “Risk Factors” in the Company’s Annual Report for the fiscal year ended ending July 31, 2012 filed on Form 10-K with the SEC on October 15, 2012 and those appearing elsewhere in this quarterly report on Form 10-Q. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof and reflect management’s estimates and analysis only as of the date hereof. We assume no obligations to update 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 for the semiconductor industry. We design, manufacture, market and service ATE solutions that address the broad, divergent test requirements of the wireless, computing, automotive and digital consumer markets of the semiconductor industry. Semiconductor designers and manufacturers worldwide use our equipment to test their devices during the manufacturing process. After testing, these devices are incorporated in a wide range of products, including personal and tablet computers, mobile internet equipment such as wireless access points and interfaces, broadband access products such as cable modems and set top boxes, personal communication and entertainment products such as mobile phones and personal digital music players, consumer products such as televisions, videogame systems and digital cameras, automobile electronics and power management devices used in portable and automotive electronics. 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), outsourced semiconductor assembly and test providers, (OSATs), which perform assembly and testing services for the semiconductor industry, and fabless semiconductor companies, which design integrated circuits but have no manufacturing capability. We offer our customers a comprehensive portfolio of semiconductor test systems and provide a global network of strategically deployed applications and support resources.

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 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.

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The following graph shows the cyclicality in semiconductor test equipment orders and shipments from fiscal 1998 through fiscal 2012 (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 engineering and product development efforts and continue to provide our customers with the levels of responsiveness and service they require. 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.

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 from fixed to variable costs allows us to improve our performance in the highly cyclical semiconductor equipment industry.

We are 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. and global economies may materially and adversely affect our business, financial condition and results of operations. Our results of operations would also be 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.

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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 Notes and related disclosures in Part I, Item 1 in this quarterly report on 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 Part 1, Item 1 in this quarterly report on Form 10-Q. 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 Reserves

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 and six months ended January 31, 2013 we recorded sales of $0.4 million and $0.7 million of previously reserved inventory, which represents gross cash received from the customer. We released reserves of $0.1 million and $0.3 million for three months and six months ended January 31, 2013, related to these sales. For the three months and six months ended January 31, 2012 we recorded sales of $1.1 million and $5.3 million of previously reserved inventory, which represents gross cash received from the customer. We released reserves of $0.2 million and $1.2 million for the three months and six months ended January 31, 2012, related to these sales.

As of January 31, 2013 and July 31, 2012, our inventory of $29.4 million and $28.9 million, respectively, is stated net of inventory reserves of $42.1 million and $42.4 million, respectively, and primarily consists of 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. 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 for deferred tax assets increased from $194.5 million at July 31, 2011, to $200.1 million at July 31, 2012. The increase in our valuation allowance compared to the prior year was primarily due to an increase in deferred tax assets associated with the taxable losses generated in various jurisdictions.

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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 with Credence in 2008 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 Topic 350,Intangibles – Goodwill and Other, to the FASB ASC (“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. We evaluated the implied fair value based on our market capitalization of our one reporting unit as compared to the carrying value of the net assets assigned to our reporting unit as of January 31, 2013 and July 31, 2012. As of those dates, the implied fair value of the goodwill of our reporting unit exceeded our carrying value of our net assets and therefore no impairment existed.

Valuation of Identifiable Intangible Assets

Our identifiable intangible assets include existing technology, customer and distributor 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.

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 ongoing basis, management reviews the value and period of amortization or depreciation of long-lived assets. In accordance with Topic 360,Property, Plant and Equipment to the FASB ASC (“ASC 360”), we review whether impairment losses exist on long-lived assets other than goodwill when indicators of impairment are present. During this review, we assess future cash flows and reevaluate the significant assumptions used in determining the original cost of long-lived assets other than goodwill. Although the assumptions may vary, they generally include revenue growth, operating results, cash flows and other indicators of value. Management then determines whether there has been a permanent impairment of the value of long-lived assets based upon events or circumstances that have occurred since acquisition. The extent of the impairment amount recognized is based upon a determination of the impaired asset’s fair value compared to its carrying value. As of January 31, 2013 and July 31, 2012, there were no indicators that required us to conduct a recoverability test as of these dates.

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, 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. We maintain an allowance for doubtful accounts for potential credit losses based upon our assessment of the expected collectability of all accounts receivable. We review the allowance for doubtful accounts periodically to assess the adequacy of the allowances. In any circumstances in which we are aware of a customer’s inability to meet its financial obligations, we provide an allowance, which is based on the age of the receivables, the circumstances surrounding the customer’s financial situation and our historical experience. If circumstances change, and the financial condition of our customers were adversely affected resulting in their inability to meet their financial obligations to us, we may need to record additional allowances. Account balances are charged off against the allowance when it is determined the receivable will not be recovered.

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Recent Accounting Pronouncements

There were no recent accounting pronouncements impacting our consolidated financial statements as of the three and six months ending January 31, 2013.

Results of Operations

The following table sets forth for the periods indicated the principal items included in the Consolidated Statement of Operations in thousands, except for percent changes and per share data:

	Statement of Operations
	Three Months Ended January 31,									Six Months Ended January 31,
	2013			2012			% Change			2013			2012			% Change
Net product sales	$	26,103		$	15,025			73.7	%	$	60,429		$	39,009			54.9	%
Net service sales		8,913			9,057			(1.6	)		17,775			18,825			(5.6	)
Net sales		35,016			24,082			45.4			78,204			57,834			35.2
Cost of sales		16,457			13,202			24.7			36,141			28,917			25.0
Gross profit		18,559			10,880			70.6			42,063			28,917			45.5
Engineering and product development expenses		13,203			12,364			6.8			25,595			25,280			1.2
Selling, general and administrative expenses		9,183			8,346			10.0			19,189			17,667			8.6
Amortization of purchased intangible assets		396			791			(50.0	)		792			1,582			(49.9	)
Restructuring		69			141			(51.1	)		300			187			60.4
Loss from operations		(4,292	)		(10,762	)		60.1			(3,813	)		(15,799	)		75.9
Other income (expense):
Interest expense		(57	)		(42	)		36.7			(107	)		(82	)		30.4
Interest income		224			246			(8.9	)		485			384			26.3
Other income, net		115			199			(42.2	)		113			352			(67.9	)
Loss before benefit from income taxes		(4,010	)		(10,359	)		61.3			(3,322	)		(15,145	)		(78.1	)
Net benefit from income taxes		(734	)		(671	)		9.4			(595	)		(549	)		8.4
Net loss	$	(3,276	)	$	(9,688	)		66.2	%	$	(2,727	)	$	(14,596	)		81.3	%
Net loss per share:
Basic and diluted	$	(0.07	)	$	(0.20	)				$	(0.06	)	$	(0.30	)

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The following table sets forth for the periods indicated the principal items included in the Consolidated Statement of Operations expressed in each case as a percentages of net sales:

	Percentage of Net Sales
	Three Months Ended January 31,						Six Months Ended January 31,
	2013			2012			2013			2012
Net sales		100.0	%		100.0	%		100.0	%		100.0	%
Cost of sales		47.0			54.8			46.2			50.0
Gross profit		53.0			45.2			53.8			50.0
Engineering and product development expenses		37.7			51.3			32.7			43.7
Selling, general and administrative expenses		26.2			34.6			24.5			30.6
Amortization of purchased intangible assets		1.1			3.3			1.0			2.7
Restructuring		0.2			0.6			0.4			0.3
Loss from operations		(12.2	)		(44.6	)		(4.8	)		(27.3	)
Other income (expense):
Interest expense		(0.2	)		(0.2	)		(0.1	)		(0.1	)
Interest income		0.6			1.0			0.6			0.6
Other income, net		0.3			0.8			0.1			0.6
Loss before benefit from income taxes		(11.5	)		(43.0	)		(4.2	)		(26.2	)
Net benefit from income taxes		(2.1	)		(2.8	)		(0.8	)		(1.0	)
Net loss		(9.4	)%		(40.2	)%		(3.4	)%		(25.2	)%

Three and Six Months Ended January 31, 2013 Compared to the Three and Six Months Ended January 31, 2012

Net sales. The increase in product sales in the three and six months ended January 31, 2013 as compared to the same periods in 2012, is driven primarily by higher demand for certain product platforms within our portfolio, primarily Diamond, Diamond_x, Pa_x, ASL_x, and other X Series products.

The decrease in service revenue for the periods presented is primarily a result of increased reliability of our products.

Geographically, sales to customers outside of the United States were 75.3% and 70.5% of net sales for the three months ended January 31, 2013 and 2012, respectively and 79.9% and 71.4% of net sales for the six months ended January 31, 2013 and 2012, respectively. The overall increase in sales to customers outside the United States is primarily a result of higher demand in Taiwan and Malaysia.

Cost of Sales. The increase in cost of sales, for the periods shown, including warranty expense on product sales, is in line with the increase in revenue for the comparable periods.

Engineering and product development expenses. The increase in engineering and product development expenses in the three months ended January 31, 2013 as compared to the same period of the prior year is primarily due to an increase in consulting expenses related to next-generation instrumentation.

Selling, general and administrative expenses. The increase in selling, general, and administrative expenses for the three and six months ended January 31, 2013 as compared to January 31, 2012 is primarily due to commission expense associated with the increase in revenue for the same periods.

Amortization of purchased intangible assets. The overall decrease in amortization is due to certain intangible assets becoming fully amortized due to the cash flow models used to determine the amortization schedule had a heavier weighting in the first few years after the merger with Credence in 2008. The underlying intangible assets relate to developed technology, and customer and distributor relationships.

Restructuring.The restructuring expense recorded in the six months ended January 31, 2013 related to changes in our service organization, to move certain board repair functions and other roles from North American locations to subsidiary offices in Singapore and the Philippines. As a result of this decision, certain headcount reductions were made, and we recorded the estimated severance and post-employment obligations related to those headcount reductions, and recognized a restructuring charge of less than $0.1 million. The expense recorded during the three months ended January 31, 2012, related to severance for headcount reductions, lease termination costs and remaining lease payments resulting from the closing of a North American facility.

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Interest expense.Interest expense is composed of accretion for the difference between the net present value and the estimated future value of our facility-related restructuring liability. The underlying lease associated with this liability ends in 2017.

Interest income.Interest income is higher in the six months ended January 31, 2013 as compared to the six months ended January 31, 2012, due to an increase in investments in marketable securities during the comparative periods.

Other income, net.Other income, net primarily includes the net impact of changes in realized foreign exchange gains and losses. Other income, net for the six months ended January 31, 2013 also includes approximately $0.2 million for a refund related to previous excess medical claims which were recovered that did occur in the same periods in 2012.

Net benefit from income taxes.The income tax benefit recorded during the periods presented was primarily due to the release of reserves due to statute of limitation expirations and foreign tax on earnings generated in foreign jurisdictions.

As of January 31, 2013 and July 31, 2012, the total liability for unrecognized income tax benefits was $7.0 million and $8.0 million, respectively (of which $3.5 million and $4.4 million, if recognized, would impact the Company’s 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.

Liquidity and Capital Resources

The following is a summary of significant items impacting our liquidity and capital resources for the six months ending January 31, 2013 (in millions):

Cash, cash equivalents and marketable securities at July 31, 2012	$	137.2
Repurchases of common stock		(9.2	)
Capital expenditures		(1.9	)
Other cash sources, net		1.6
Cash and cash equivalents and marketable securities at January 31, 2013	$	127.7

As of January 31, 2013, we had $127.7 million in cash and cash equivalents and marketable securities and net working capital of $153.2 million, as compared to $137.2 million of cash and cash equivalents and marketable securities and $163.6 million of net working capital at July 31, 2012. The decrease in cash and cash equivalents and marketable securities was primarily due to stock repurchases of $9.2 million.

Accounts receivable trade, net of allowances, was $23.5 million at January 31, 2013, a decrease of 25.0% as compared to $31.2 million at July 31, 2012. This decrease is largely driven by the decrease in net sales for the same period. Net sales for the quarter ending January 31, 2013 was $35.0 million, a decrease of 19.0%, as compared to net sales of $43.5 million for the quarter ending July 31, 2012. The allowance for doubtful accounts was zero at January 31, 2013 and less than $0.1 million at July 31, 2012.

Inventories increased $0.5 million to $29.4 million at January 31, 2013 from $28.9 million at July 31, 2012, as a result of changes in product sales mix during the periods presented and an increase in consignment inventory placed at customers.

Capital expenditures totaled approximately $1.9 million for the six months ended January 31, 2013, as compared to $1.8 million for the six months ended January 31, 2012. Capital expenditures for the six months ended January 31, 2013 and January 31, 2012 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 $3.1 million in net cash provided by operating activities for the six months ended January 31, 2013, as compared to net cash used in operating activities of $9.1 million for the same period of the prior year. The net cash provided by operating activities for the six months ended January 31, 2013 was primarily related to our net loss of $2.7 million, adjusted for non-cash items including depreciation and amortization and stock based compensation of approximately $6.7 million, offset by an increase in working capital of $0.9 million. The net cash used in operating activities for the six months ended January 31, 2012 was primarily related to our net loss of $14.6 million, offset by non-cash items including depreciation and amortization and stock based compensation, of approximately $7.6 million and an increase in working capital of $2.1 million.

We had $9.4 million in net cash provided by investing activities for the six months ended January 31, 2013 as compared to net cash used in investing activities of $66.5 million for the six months ended January 31, 2012. The net cash provided by investing activities for the six months ended January 31, 2013 was primarily related to $41.7 million of proceeds from sales and maturities of

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available-for-sale securities, $2.8 million in proceeds from sales of held-to-maturity securities, offset by $28.4 million of purchases of available-for-sale securities, $4.8 million in purchases of held-to-maturity securities, and $1.9 million of purchases of property and equipment. The net cash used in investing activities for the six months ended January 31, 2012 was primarily related to $81.0 million of purchases of available-for-sale securities, $7.9 million in purchases of held-to-maturity securities, and $1.8 million of purchases of property and equipment offset by $18.4 million of proceeds from sales and maturities of available-for-sale securities and $5.8 million of proceeds from sales and maturities of held-to-maturity securities. Approximately $53.0 million of the $88.9 million of security purchases related to a transfer of money market funds into longer duration marketable securities to take advantage of more favorable investments yields.

We had $9.8 million in net cash used in financing activities for the six months ended January 31, 2013 as compared to net cash used in financing activities of $6.7 million for the six months ended January 31, 2012. The net cash used in financing activities for the six months ended January 31, 2013 was primarily related to stock repurchases of $9.2 million and the remainder was related to $1.0 million of payments of tax withholdings for vested restricted stock units, net of proceeds from stock option exercises offset by $0.4 million in proceeds from shares issued from the employee stock purchase plan. The net cash used in financing activities for the six months ended January 31, 2012 was primarily related to stock repurchases of $6.1 million and the remainder was related to $1.0 million of payments of tax withholdings for vested restricted stock units, net of proceeds from stock option exercises offset by $0.4 million in proceeds from shares issued from the employee stock purchase plan.

Commitments and Contingencies

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

In the ordinary course of business, we agree from time to time to indemnify certain customers against certain third party claims for property damage, bodily injury, personal injury or intellectual property infringement arising from the operation or use of our products. Also, from time to time in agreements with suppliers, licensors and other business partners, we agree to indemnify these partners against certain liabilities arising out of the sale or use of our products. The maximum potential amount of future payments we could be required to make under these indemnification obligations is theoretically unlimited; however, we have general and umbrella insurance policies that enable 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 our experience with such indemnification claims, we believe the estimated fair value of these obligations is minimal. Accordingly, we have no liabilities recorded for these agreements as of January 31, 2013 or July 31, 2012.

Subject to certain limitations, we indemnify our current and former officers and directors for liability or costs they may incur upon certain events or occurrences encountered in the course of performing their duties to us. Although the maximum potential amount of future payments we could be required to make under these agreements is theoretically unlimited, as there were no known or pending claims, we have not accrued a liability for these agreements as of January 31, 2013 or July 31, 2012.

The aggregate outstanding amount of our contractual obligations was $39.9 million as of January 31, 2013. 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 January 31, 2013 and the effect such obligations are expected to have on our liquidity and cash flow in future periods:

	Total		2013		2014-2015		2016-2017		Thereafter
	(in thousands)
Contractual Obligations:
Operating leases	$	24,393	$	2,688	$	10,218	$	6,813	$	4,674
Inventory commitments		15,282		15,282		—		—		—
Severance		245		245		—		—		—
Total Contractual Obligations	$	39,920	$	18,215	$	10,218	$	6,813	$	4,674

Off-Balance Sheet Arrangements

As of January 31, 2013 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 2012 Annual Report on Form 10-K.

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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 January 31, 2013. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e)) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time period specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to 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 January 31, 2013, 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 January 31, 2013 that has materially affected, or is reasonably likely to materially affect our internal control over financial reporting.

Limitations on the Effectiveness of Controls

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls 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. We do not, however, expect such legal proceedings to have a material adverse effect on our business, financial condition or results of operations.

Item 1A. Risk Factors

There have been no material changes to the risk factors previously disclosed in our Annual Report that was filed on Form 10-K for the year ended July 31, 2012. For a discussion of such risks refer to Item 1A, Risk Factors, contained in our 2012 Annual Report on Form 10-K as filed with the SEC on October 15, 2012.

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

The following table provides information regarding repurchases of common stock made by us since inception of our board-authorized stock repurchase program.

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)		Remaining Dollar Value that May Yet Be Purchased Under the Plans or Programs (excluding commissions)
Inception of program		—	$	—		—	$	25,000,000
Fiscal year ended 7/31/2012		1,652,394	$	5.84		1,652,394	$	15,474,033
Quarter ended 10/31/2012		1,518,043	$	5.62		1,518,043	$	6,924,667
11/1/2012 – 11/30/2012		124,229	$	5.37		124,229	$	6,265,866
12/1/2012 – 12/31/2012		—	$	—		—	$	6,265,866
1/1/2013 – 1/31/2013		—	$	—		—	$	6,265,866
Total		3,294,666	$	5.61		3,294,666

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(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.

During the quarter ending January 31, 2013, we repurchased 124,229 shares for a total purchase price of approximately $0.7 million.

Item 4. Mine Safety Disclosures

Not applicable.

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: March 12, 2013	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
10.1	Second Amended and Restated 2004 Employee Stock Purchase Plan (Incorporated by reference as Exhibit 99.1 to the Registrant’s Form S-8 Registration Statement filed on January 17, 2013)
31.1 *	Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act
31.2 *	Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act
32 *	Certification of the Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(b) of the Exchange Act and 18 U.S.C. Section 1350
101.INS**	XBRL Instance Document
101.SCH**	XBRL Taxonomy Extension Schema Document
101.CAL**	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF**	XBRL Taxonomy Extension Definition Linkbase
101.LAB**	XBRL Taxonomy Extension Label Linkbase Document
101.PRE**	XBRL Taxonomy Extension Presentation Linkbase Document

* Filed herewith

** 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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