SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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 April 30, 2000
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 CORPORATION
---------------
(Exact Name of Registrant as Specified in Its Charter)
Massachusetts 04-2594045
------------------------------------------------------------------
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
LTX Park at University Avenue, Westwood, Massachusetts 02090
-----------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (781) 461-1000
----------------------------------------------------------------------------
Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report.
Indicate by check X 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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at May 22, 2000
----- ---------------------------
Common Stock, par value $0.05 per share 47,499,683
LTX CORPORATION
Index
Part I. FINANCIAL INFORMATION Page Number
Item 1. Consolidated Balance Sheet 1
April 30, 2000 and July 31, 1999
Consolidated Statement of Operations 2
Three Months and Nine Months Ended April 30, 2000
and April 30, 1999
Consolidated Statement of Cash Flows 3
Nine Months Ended April 30, 2000 and April 30, 1999
Notes to Consolidated Financial Statements 4-7
Item 2. Management's Discussion and Analysis of Financial 8-16
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
LTX CORPORATION
CONSOLIDATED BALANCE SHEET
(In thousands, except share data)
April 30, July 31,
2000 1999
------- -------
(Unaudited) (Audited)
ASSETS
Current assets:
Cash and equivalents $205,196 $ 19,936
Accounts receivable, net of allowances of
$1,908 and $2,027 73,714 37,043
Accounts receivable - other 7,520 4,324
Inventories 62,972 48,551
Other current assets 8,715 5,795
-------- -------
Total current assets 358,117 115,649
Property and equipment, net 35,704 31,942
Other assets 4,452 402
-------- -------
Total assets $398,273 $147,993
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 9,951 $ 5,472
Current portion of long-term debt 2,694 674
Accounts payable 42,688 37,439
Deferred revenues and customer advances 29,121 11,391
Accrued restructuring charges 2,263 2,263
Other accrued expenses 12,102 10,495
-------- -------
Total current liabilities 98,819 67,734
-------- -------
Long-term debt, less current portion 11,700 14,023
Other long-term liabilities -- --
Convertible subordinated debentures -- 7,308
Stockholders' equity 287,754 58,928
-------- -------
Total liabilities and stockholders' equity $398,273 $147,993
======== ========
1
LTX CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
Three Months Nine Months
Ended Ended
April 30, April 30,
-------------- ------------
2000 1999 2000 1999
---- ---- ---- ----
Net sales $82,117 $43,210 $212,332 $103,919
Cost of sales 42,719 25,012 112,770 63,303
------- ------- -------- --------
Gross profit 39,398 18,198 99,562 40,616
Engineering and product development expenses 13,237 8,450 36,363 25,027
Selling, general and administrative expenses 9,418 7,781 27,691 22,905
------- ------- -------- --------
Income (loss) from operations 16,743 1,967 35,508 (7,316)
Other income / (expense):
Interest expense (487) (302) (1,516) (1,009)
Interest income 1,290 129 2,494 580
Gain on liquidation/sale of business units - - - 3,786
------- ------- -------- --------
Income (loss) before income taxes 17,546 1,794 36,486 (3,959)
Provision for income taxes 17 - 47
------- ------- --------
Net income (loss) $17,529 $ 1,794 $ 36,439 $ (3,959)
======= ======= ======== ========
Net income (loss) per share:
Basic $0.39 $0.05 $0.88 $(0.11)
===== ===== ===== ======
Diluted $0.37 $0.05 $0.81 $(0.11)
===== ===== ===== ======
Weighted--average common shares used in
computing net income (loss) per share:
Basic 44,526 35,643 41,386 35,532
====== ====== ====== ======
Diluted 47,835 37,195 44,783 35,532
====== ====== ====== ======
2
LTX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Nine Months
Ended
April 30,
-----------
2000 1999
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 36,439 $(3,959)
Add (deduct) non-cash items:
Depreciation and amortization 8,189 8,665
Gain on liquidation/sale of business units - (3,786)
Exchange (gain) loss (242) 467
(Increase) decrease in:
Accounts receivable (36,286) 4,900
Inventories (21,860) (2,074)
Other current assets (2,914) (434)
Other assets (814) (124)
Increase (decrease) in:
Accounts payable 5,146 (809)
Accrued expenses and restructuring charges 1,538 (4,670)
Deferred revenues and customer advances 13,245 (6,738)
-------- -------
Net cash provided by (used in) operating activities 2,441 (8,562)
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property and equipment, net (13,003) (4,795)
-------- -------
Net cash used in investing activities (13,003) (4,795)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from stock purchase plans and option plans 5,634 523
Proceeds from sale of business unit - 2,000
Proceeds from stock equity offering 179,645 -
Proceeds from short term borrowing 40,510 3,480
Payments of short term borrowing (36,367) (1,946)
Payments of long-term debt and other liabilities (167) (1,174)
Proceeds from lease financing 6,415 3,850
-------- -------
Net cash provided by financing activities 195,670 6,733
-------- -------
Effect of exchange rate changes on cash 152 563
-------- -------
Net increase (decrease) in cash and equivalents 185,260 (6,061)
Cash and equivalents at beginning of period 19,936 25,109
-------- -------
Cash and equivalents at end of period $205,196 $19,048
======== =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid (received) during the period for:
Interest $ 1,709 $ 973
Income taxes $ 829 $ (784)
3
LTX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. THE COMPANY
LTX Corporation ("LTX" or the "Company") designs, manufactures, and markets
automatic test equipment for the semiconductor industry that is used to test
system-on-a-chip, digital, analog, and mixed signal (a combination of digital
and analog) integrated circuits ("ICs"). The Company's Fusion product is a
single test platform that can be configured to test system-on-a-chip devices,
digital VLSI devices including microprocessors and microcontrollers, and
analog/mixed signal devices. The Company also sells hardware and software
support and maintenance services for its test systems. The semiconductors tested
by the Company's systems are widely used in the communications, computer,
automotive and consumer electronics industries. The Company markets its products
worldwide to manufacturers of system-on-a-chip, digital, analog and mixed signal
ICs. The Company is headquartered, and has development and manufacturing
facilities, in Westwood, Massachusetts, a development facility in San Jose,
California, and worldwide sales and service facilities to support its customer
base.
Summary of Significant Accounting Policies
Basis of Presentation
The accompanying financial statements have been prepared by the Company, without
audit, and reflect all adjustments, which, in the opinion of management, are
necessary for a fair statement of the results of the interim periods presented.
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 and liabilities and disclosures of
contingent assets and liabilities as of the date of the financial statements and
the reported amounts of income and expenses during the reporting periods.
Certain information and footnote disclosures normally included in the annual
financial statements, which are prepared in accordance with generally accepted
accounting principles have been condensed or omitted. Accordingly, although the
Company believes that the disclosures are adequate to make the information
presented not misleading, the financial statements should be read in conjunction
with the footnotes contained in the Company's Annual Report on 10-K.
Reclassification
Effective November 1, 1999, the Company changed its accounting policy to
classify certain applications and engineering development costs previously
reported in cost of sales as research and development expense. The change was
made effective for the quarter ending January 31, 2000. The expenses that were
reclassified relate to development activities by our application engineering
group for future enhancements of existing products and initial application
development of new products. Prior period financial statements have been
reclassified to conform to the 2000 presentation. The reclassification had no
impact on earnings for prior periods.
Foreign Currency Translation
The financial statements of the Company's foreign subsidiaries are translated in
accordance with Statement of Financial Accounting Standards No. 52, "Foreign
Currency Translation". The Company's functional currency is the U.S. dollar.
Accordingly, the Company's foreign subsidiaries translate monetary assets and
liabilities at year-end exchange rates while non-monetary items are translated
at historical rates. Income and expense accounts are translated at the average
rates in effect during the year, except for sales, cost of sales and
depreciation, which are primarily translated at historical rates. Net realized
and unrealized gains and losses resulting from foreign currency remeasurement
and transaction gains and losses were a gain of $242,000 and a loss of $467,000
for the nine months ended April 30, 2000 and 1999 respectively. The amounts
recorded in both periods were principally due to fluctuations in the Japanese
yen that are included in the consolidated results of operations.
4
Revenue Recognition
Revenue from product sales and related warranty costs are recognized at the time
of shipment. Service revenue is recognized over the applicable contractual
periods or as services are performed. Revenue from engineering contracts is
recognized over the contract period on a percentage of completion basis.
The Securities and Exchange Commission released Staff Accounting Bulletin (SAB)
No. 101, Revenue Recognition in Financial Statements, on December 3, 1999. The
SAB provides additional guidance on the accounting for revenue recognition,
including both broad conceptual discussions as well as certain industry-specific
guidance. The new guidance concerning customer acceptance and installation terms
may have an impact on the timing of the Company's revenue recognition. The
guidance is effective for the first quarter of fiscal year 2001 and would be
adopted by recording the effect of any prior revenue transaction affected as a
"cumulative effect of change in accounting principle" as of August 1, 2000.
Income Taxes
Deferred income taxes are recorded for temporary differences between the
financial reporting and tax basis of assets and liabilities. Research and
development tax credits are recognized for financial reporting purposes to the
extent that they can be used to reduce the tax provision. The Company has not
provided for federal income taxes on the cumulative undistributed earnings of
its foreign subsidiaries, which were not significant, in the past since it
reinvested those earnings. At April 30, 2000, most of the Company's foreign
subsidiaries had accumulated deficits. The Company has net operating loss
carryforwards, research and development tax credits and other book to tax
adjustments that are sufficient to offset taxable income for the nine months
ended April 30, 2000.
Net Income (Loss) per Share
In July 1998, the Company adopted Statement of Financial Accounting Standards,
"Earnings Per Share" (SFAS 128). All previously reported earnings per share
information presented have been restated to reflect the impact of adopting SFAS
128. Under SFAS 128, basic net income (loss) per common 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 income
(loss) per common share reflects the maximum dilution that would have resulted
from the assumed exercise and share repurchase related to dilutive stock options
and is computed by dividing net income (loss) by the weighted average number of
common shares and all dilutive securities outstanding.
A reconciliation between basic and diluted earnings per share is as follows:
Three Months Ended Nine Months Ended
April 30, April 30,
2000 1999 2000 1999
----- ---- ---- ----
(in thousands, except per share amounts)
Net income (loss) $17,529 $ 1,794 $36,439 $(3,959)
Basic EPS
Basic common shares 44,526 35,643 41,386 35,532
Basic EPS $ 0.39 $ 0.05 $ 0.88 $ (0.11)
Diluted EPS
Basic common shares 44,526 35,643 41,386 35,532
Plus: Impact of stock options and warrants 3,309 1,552 3,397 -
------- ------- ------- -------
Diluted common shares 47,835 37,195 44,783 35,532
Diluted EPS $ 0.37 $ 0.05 $ 0.81 $ (0.11)
5
There were no options outstanding that were excluded in the above calculation of
diluted earnings per share as of April 30, 2000. The impact of stock options
and warrants was not used in the calculation of the nine months ended April 30,
1999 diluted EPS as the Company was in a loss position and adding the impact of
stock options would be antidilutive.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market and
include material, labor and manufacturing overhead. Inventories consisted of
the following at:
April 30, July 31,
2000 1999
----- -----
(In thousands)
Raw materials $24,390 $22,380
Work-in-progress 29,741 18,107
Finished goods 8,841 8,064
------- -------
$62,972 $48,551
======= =======
Comprehensive Income
In August 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income".
The statement requires comprehensive income to be reported with the same
prominence as other financial statements. Comprehensive income would include
any unrealized gains or losses on available-for-sale securities, foreign
currency translation adjustments and minimum pension liability adjustments.
Recent Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" amended by SFAS 137 "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of SFAS No. 133 - Amendment of SFAS NO. 133" (combined "SFAS 133"). This
statement establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments embedded in
other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value. The statement requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement, and requires that a company must formally
document, designate, and assess the effectiveness of transactions that receive
hedge accounting. SFAS No. 133 is effective for fiscal years beginning after
June 15, 2000. A company may also implement the statement as of the beginning of
any fiscal quarter after issuance (that is, fiscal quarters beginning June 16,
1998 and thereafter). SFAS No. 133 cannot be applied retroactively. SFAS No. 133
must be applied to (a) derivative instruments and (b) certain derivative
instruments embedded in hybrid contracts that were issued, acquired, or
substantively modified after December 31, 1997 (and, at the company's election,
before January 1, 1998). This statement could increase volatility in earnings
and other comprehensive income for companies with applicable contracts. The
Company is in the process of quantifying the impact of adopting SFAS No. 133 on
its financial statements and has not determined the timing of or method of
adoption.
In March 2000, the Financial Accounting Standard Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation - An interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44
clarifies the application of APB Opinion No. 25 and among other issues clarifies
the following: the definition of an employee for purposes of applying APB
Opinion No. 25; the criteria for determining whether a plan qualifies as a non-
compensatory plan; the accounting consequence of various modifications to the
terms of previously fixed stock options or awards; and the accounting for an
exchange of stock compensation awards in a business combination. FIN 44 is
effective July 1, 2000, but certain conclusions in FIN 44 cover specific events
that occurred after either December 15, 1998 or January 12, 2000. The Company
does not expect the application of FIN 44 to have a material impact on the
Company's financial position or results of operations.
6
Segment Reporting
In fiscal 1999, the Company adopted SFAS No. 131, "Disclosure about Segments of
an Enterprise and Related Information," which establishes standards for
reporting operating segments of a business enterprise and descriptive
information about the operating segments in financial statement.
The Company operates predominantly in one industry segment: 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
(a combination of digital and analog) integrated circuits.
The Company's sales to unaffiliated customers for the nine months ended April
30, 2000 and 1999, along with the long-lived assets for April 30, 2000 and July
31, 1999, are summarized as follows:
Three Months Nine Months
Ended Ended
April 30, April 30,
-------------- --------------
2000 1999 2000 1999
---- ---- ---- ----
(In thousands) (In thousands)
Sales to unaffiliated customers:
United States $37,318 $17,743 $ 77,000 $ 42,348
Singapore 9,208 7,121 49,144 12,275
Taiwan 12,395 2,291 35,122 10,851
Japan 4,259 4,940 6,065 6,753
All other countries 18,937 11,115 45,001 31,692
------- ------- -------- --------
Total sales to unaffiliated customers
$82,117 $43,210 $212,332 $103,919
======= ======= ======== ========
April 30, July 31,
2000 1999
---- ----
Long-lived assets:
United States $29,049 $ 24,965
Singapore 3,206 3,695
Taiwan 949 1,175
Japan 55 59
All other countries 2,445 2,048
------- --------
Total long-lived assets $35,704 $ 31,942
======= ========
7
Item 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following table sets forth for the periods indicated the principal items
included in the Consolidated Statement of Operations as percentages of net
sales.
Percentage of Net Sales Percentage
Inrease/Decrease
Three Months Nine Months Three Months Nine Months
Ended Ended 2000 2000
April 30, April 30, Over Over
-------- -------- ----------- ------------
2000 1999 2000 1999 1999 1999
---- ---- ---- ---- ---- ----
Net Sales 100.0% 100.0% 100.0% 100.0% 90.0% 104.3%
Cost of Sales 52.0 57.9 53.1 60.9 70.8 78.1
----- ----- ----- ----- ----- -----
Gross margin 48.0 42.1 46.9 39.1 116.5 145.1
Engineering and product development expenses 16.1 19.5 17.2 24.1 56.7 45.3
Selling, general and administrative expenses 11.5 18.0 13.0 22.0 21.0 20.9
----- ----- ----- ----- ----- -----
Income (loss) from operations 20.4 4.6 16.7 (7.0) 751.2 NM
Other income (expense):
Interest expense 0.6 0.7 0.7 1.0 61.3 50.2
Interest income 1.5 0.3 1.2 0.6 900.0 330.0
Gain on liquidation/sale of business units 0.0 0.0 0.0 3.6 NM NM
----- ----- ----- ----- ----- -----
Income (loss) before income taxes 21.3 4.2 17.2 (3.8) 878.0 NM
Provision for income taxes 0.0 0.0 0.0 0.0 NM NM
----- ----- ----- ----- ----- -----
Net income (loss) 21.3% 4.2% 17.2% (3.8)% 877.1% NM
===== ===== ===== ===== ===== =====
NM--Not Meaningful
8
The discussion below contains certain forward-looking statements relating to,
among other things, estimates of economic and industry conditions, sales trends,
expense levels and capital expenditures. Actual results may vary from those
contained in such forward-looking statements. See "Business Risks" below.
Results of Operations
Three Months and Nine Months Ended April 30, 2000 Compared to the Three Months
and Nine Months Ended April 30, 1999
Net sales for the three months ended April 30, 2000 increased 90.0% to $82.1
million as compared to $43.2 million in the same quarter of the prior year. For
the nine months ended April 30, 2000, net sales were $212.3 million as compared
to $103.9 million for the same period of the prior year, an increase of 104.3%.
The increase in revenue is primarily a result of the semiconductor test
equipment ("STE") and semiconductor industries experiencing an increase in
demand, as well as increasing acceptance of the Company's Fusion product
strategy and repeat orders from Fusion customers. Service revenue accounted for
$9.0 million, or 11.0% of net sales, and $9.4 million, or 21.9% of net sales,
for the three months ended April 30, 2000 and 1999, respectively and $24.2
million, or 11.4% of net sales, and $22.9 million, or 22% of net sales, for the
nine months ended April 30, 2000 and April 30, 1999, respectively.
Geographically, sales to customers outside of the United States were 54.6% and
58.9% of net sales in the three months ended April 30, 2000 and April 30, 1999,
respectively.
The gross profit margin was 48.0% of net sales in the three months ended April
30, 2000, as compared to 42.1% of net sales in the same quarter of the prior
year. The increase is a result of a higher level of sales relative to fixed
manufacturing costs, improved product margins due to increased shipments of the
Company's Fusion test systems, which carry a higher gross margin than the prior
generation systems and gaining the full benefits from the Company's
consolidation of its manufacturing operations. For the nine months ended April
30, 2000, the gross profit margin was 46.9% compared to 39.1% for the nine
months ended April 30, 1999. Effective November 1, 1999, the Company changed its
accounting policy to classify certain applications and engineering development
costs previously reported in cost of goods sold as research and development
expenses in the Company's quarter ending January 31, 2000 and thereafter.
Financial results for all prior periods have been reclassified to conform to the
January 31, 2000 presentation. Under the prior method of classification, gross
profit margins would have been 43.8% and 37.2% for the three months ended April
30, 2000 and April 30, 1999, respectively, and 42.0% and 32.4% for the nine
months ended April 30, 2000 and April 30, 1999, respectively.
Engineering and product development expenses were $13.2 million, or 16.1% of net
sales, in the three months ended April 30, 2000, as compared to $8.5 million, or
19.5% of net sales, in the same quarter of the prior year. For the nine months
ended April 30, 2000, engineering and product development expenses were $36.4
million, or 17.2% of net sales, as compared to $25.0 million, or 24.1% of net
sales, in the nine months ended April 30, 1999. The increase in expenditure is
principally a result of a higher level of development expenses and key account
support costs for the Company's Fusion product line. Engineering and product
development expenses include the reclassified applications and engineering
development costs described in the previous paragraph. Under the prior method of
classification, engineering and product development expenses would have been
$9.8 million, or 11.9% of net sales, and $6.3 million, or 14.6% of net sales,
for the three months ended April 30, 2000 and April 30, 1999, respectively, and
$25.9 million, or 12.2% of net sales, and $18.1 million, or 17.4% of net sales,
for the nine months period ended April 30, 2000 and April 30, 1999,
respectively.
Selling, general and administrative expenses were $9.4 million, or 11.5% of net
sales, in the three months ended April 30, 2000, as compared to $7.8 million, or
18.0% of net sales, in the same quarter of the prior year. For the nine months
ended April 30, 2000, selling, general and administrative expenses were $27.7
million, or 13.0% of net sales, as compared to $22.9 million, or 22.0% of net
sales, in the nine months ended April 30, 1999. The increase in the selling,
general and administrative expenses of $1.6 million during the three months
ended April 30, 2000 is related to the development and selling expenses of the
Fusion product line and support of key accounts.
Interest expense was $487,000 and $302,000 for the three months ended April 30,
2000 and April 30, 1999, respectively. Interest expense for the nine months
ended April 30, 2000 was $1.5 million as compared to $1.0 million for the nine
months ended April 30, 1999. The increase in expense is a result of an increase
in outstanding bank loan balances with the Company's domestic bank. The
increased borrowings were used to support growth in working capital.
Interest income was $1.3 million for the three months ended April 30, 2000 and
$2.5 million for the nine months ended April 30, 2000 as compared to $129,000
for the three months ended April 30, 1999 and $580,000 for the nine months ended
April 30, 1999. The increase in interest income occurred because of the increase
in the Company's cash balance.
9
The Company recorded gains of $3.8 million during the second quarter of fiscal
1999. These transactions consisted of the liquidation of its majority-owned
Japanese subsidiary, a joint venture with Sumitomo Metal Industries, Ltd., which
resulted in a gain of $1.7 million and the sale of a portion of its legacy board
repair business in Singapore which resulted in a gain of $2.1 million. Both
transactions are consistent with the Company's strategic commitment to the
Fusion strategy and its focus on reducing costs.
The Company had a tax provision of $17,000 for the three months ended April 30,
2000 and no tax provision for the three months ended April 30, 1999. The
Company's net operating loss carry forward is sufficient to offset taxable
income for the quarter ended April 30, 2000.
Net income was $17.5 million, or $0.37 per share, in the three months ended
April 30, 2000, as compared with $1.8 million, or $0.05 per share, in the same
quarter in the prior year. The Company had net income of $36.4 million, or
$0.81 per share, in the nine months ended April 30, 2000, as compared to a net
loss of $(4.0) million, or $(0.11) per share, for the same period last year.
Liquidity and Capital Resources
At April 30, 2000, the Company had $205.2 million in cash and equivalents and
working capital of $259.3 million, as compared to $19.9 million of cash and
equivalents and $47.9 million of working capital at July 31, 1999. The increase
in cash balance is primarily a result of cash proceeds received from a follow-on
public offering of common stock totaling approximately $80.0 million, which was
completed in October 1999 and a second follow-on public offering of common stock
totaling approximately $100 million, which was completed in April 2000.
Accounts receivable from trade customers were $73.7 million at April 30, 2000,
as compared to $37.0 million at July 31, 1999. The principal reason for the
increase is a result of increasing sales revenue for Fusion products to new and
existing accounts, along with increased sales as result of higher demand
generally in the STE and semiconductor industries. Inventories increased by
$14.4 million to $63.0 million at April 30, 2000 as compared to $48.6 million at
July 31, 1999. The increase is directly attributable to the production ramp in
the Fusion product as sales in that product line have increased sequentially
each quarter since the quarter ended October 31, 1998. This increase was
partially offset by a transfer of $6.5 million of legacy component material to a
third party repair facility. The $6.5 million is included in Accounts
Receivable - Other and Other Assets in the accompanying Consolidated Balance
Sheet as of April 30, 2000.
Capital expenditures totaled $4.6 million for the three months ended April 30,
2000 as compared to $2.1 million for the three months ended April 30, 1999.
Capital expenditures were $13.0 million and $4.8 million for the nine months
ending April 30, 2000 and April 30, 1999, respectively. The principal reason for
the increases relate to the addition of board test equipment and system test
cell capacity supporting the growth of the Fusion product line.
The Company called the remaining $7,183,000 of its 7 1/4% Convertible
Subordinated Debentures due 2011 for redemption on March 24, 2000. These
debentures had a conversion price of $18.00 and all of these outstanding
debentures were converted into 399,055 shares of common stock of the Company as
of March 24, 2000.
On October 1, 1999, the Company renegotiated its $10.0 million domestic credit
facility with its current lender. The facility is secured by all assets of the
Company and bears interest at the bank's prime rate plus 0.5%. Borrowing
availability under the facility is based on a formula of eligible domestic
accounts receivable. In addition, the Company entered into an agreement with the
same bank that provides the Company with a $5.0 million line of credit that
bears interest at prime plus 0.5%. Borrowing availability under this facility is
based on a formula of eligible foreign accounts receivable and inventories and
is guaranteed by the Export-Import Bank of the United States. Outstanding
borrowings at April 30, 2000 were $5.2 million under the domestic credit
facility and $4.7 million under the foreign accounts receivable line facility.
10
The Company anticipates that cash flow from operations combined with available
cash balances and credit facility enhancements will be adequate to fund the
Company's currently proposed operating activities for the next twelve months.
Year 2000
We did not experience any material adverse problems resulting from Year 2000. We
established a program to address Year 2000 software failure issues, which is
overseen by a senior manager who updated our officers and directors regularly
prior to January 1, 2000. We have incurred costs of approximately $400,000 to
make our products Year 2000 compliant, most of which was represented by current
engineering staff who were assigned to the project, and approximately $400,000
in ensuring compliance of our internal business systems and those of our
suppliers, most of which was represented by current administrative personnel
assigned to the project.
BUSINESS RISKS
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, "intends,"
"estimates," 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 important factors in the cautionary statements, particularly
under the heading "Business Risks," which 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 in turn a cyclical impact on our financial results. 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 the Company's business and results of business.
Any significant downturn in the markets for our customers' semiconductor devices
or in general economic conditions would likely result in a reduction in demand
for our products and would hurt our business. Most recently, our revenue and
operating results declined in fiscal 1998 as a result of a sudden and severe
downturn in the semiconductor industry precipitated by the recession in several
Asian countries. Downturns in the semiconductor test equipment industry have
been characterized by diminished product demand, excess production capacity and
accelerated erosion of selling prices. We believe the markets for newer
generations of devices, including system-on-a-chip ("SOC"), will also experience
similar characteristics. 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 cannot be certain that we will 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
proportion of our costs are fixed, we are limited in our ability to reduce
expenses quickly in response to revenue shortfalls. 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.
We May Not Be Able to Deliver Custom Hardware Options and Software Applications
to Satisfy Specific Customer Needs in a Timely Manner.
We must develop and deliver customized hardware and software 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 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.
11
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 adversely affect sales or profitability or lead to
significant variability in our operating results or our stock price. This may be
caused by a combination of factors, including the following:
. sales of a limited number of test systems account for a substantial portion
of our net sales in any particular fiscal quarter, and a small number of
transactions could therefore have a significant impact;
. order cancellations by customers;
. lower gross margins in any particular period due to changes in:
-- our product mix,
-- the configurations of test systems sold, or
-- the customers to whom we sell these systems;
12
. the high selling prices of our test systems (which typically result in a long
selling 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,
or
-- uncertain market acceptance of products developed by our customers.
We cannot predict the impact of these and other factors on our sales and
operating results in any future period. Results of operations in any period,
therefore, should not be considered indicative of the results to be expected
for any future period. Because of this difficulty in predicting future
performance, our operating results may fall below expectations of securities
analysts or investors in some future quarter or quarters. Our failure to meet
these expectations would likely adversely affect the market price of our
common stock.
A substantial amount of the shipments of our test systems for a particular
quarter occur late in the quarter. Our shipment pattern exposes us to
significant risks 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 subcontractors to manufacture many of the components and
subassemblies for our products, and we rely on sole source suppliers for
certain components. 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 internally. The process of qualifying
subcontractors and suppliers is a lengthy process. We are dependent on two
semiconductor device manufacturers, Vitesse Semiconductor and Maxtech
Components. Each is a sole source supplier of components manufactured in
accordance with our proprietary design and specifications. We have no written
supply agreements with these sole source suppliers and purchase our custom
components through individual purchase orders. Vitesse is also a Fusion
customer.
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 64% of our revenues for the nine months
ended April 30, 2000 and 59% of our revenues for the nine months ended
April 30, 1999. 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. A reduction in revenues or a
disruption or increase in the cost of our manufacturing materials could hurt
our operating results. These international relationships make us particularly
sensitive to changes in the countries from which we derive sales and obtain
supplies. 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; and
13
. difficulties collecting our accounts receivable because of the distance
and different legal rules.
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 the recession 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.
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. Sales to our ten largest customers
accounted for 70.3% of revenues for the nine months ended April 30, 2000,
59.7% of revenues in fiscal year 1999, 55.2% of revenues in fiscal year 1998,
and 43.5% of revenues in fiscal year 1997. 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 hurt. In
addition, our ability to increase our sales will depend in part upon our
ability to obtain orders from new customers. Semiconductor manufacturers
select a particular vendor's test system for testing the manufacturer's new
generations of devices and make substantial investments to develop related
test program software and interfaces. Once a manufacturer has selected one
test system vendor for a generation of devices, that manufacturer is more
likely to purchase test systems from that vendor for that generation of
devices, and, possibly, subsequent generations of devices as well.
Our Future Rate of Growth is Highly Dependent on the Growth of the SOC
Market.
In 1996, we refocused our business strategy on the development of our Fusion
HF product, which is primarily targeted towards addressing the needs of the
SOC market. If the SOC market fails to grow as we expect, our ability to sell
our Fusion HF product will be hampered.
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.
Many other domestic and foreign companies participate in the markets for each
of our products, and the industry is highly competitive. Our principal
competitors in the market for semiconductor test equipment are Agilent
Technologies (formerly a division of Hewlett-Packard), Credence Systems,
Schlumberger Limited, and Teradyne. Most of 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.
14
Development of Our Products Requires Significant Lead-Time, and We May Fail to
Correctly Anticipate the Technical Needs of Our Customers.
Our customers make decisions regarding purchases of our test equipment while
their devices are still in development. 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 sales in significant volume. 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 existing test systems, which would also hurt
our business.
Our Success Depends on Attracting and Retaining Key Personnel.
Our success will depend on our ability to attract and retain highly qualified
managers and technical 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. Our layoffs in the last
industry downturn could make it more difficult for us to hire or retain
qualified personnel.
Economic Conditions in Asia May Hurt Our Sales.
Asia is an important region for our customers in the semiconductor industry, and
many of them have operations there. In recent years, Asian economies have been
highly volatile and recessionary, resulting in significant fluctuations in local
currencies and other instabilities. These instabilities may continue or worsen,
which could have a material adverse impact on our financial position and results
of operations, as approximately 43.7% and 45% of our sales for the nine months
ended April 30, 2000 and the twelve months ended July 31, 1999 respectively were
derived from this region. In light of the historical economic downturns in Asia,
we may not be able to obtain additional orders and may experience cancellations
of orders.
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 patents and may continue to seek patents on our inventions when
appropriate. We have also obtained
15
certain trademark registrations. To date, we have not sought patent protection
in any countries other than the United States, which may impair our ability to
protect our intellectual property in foreign jurisdictions. The process of
seeking intellectual property protection can be time consuming and expensive. We
cannot ensure that:
. patents will issue from currently pending or future applications;
. our existing patents or any new patents will be sufficient in scope or
strength to provide meaningful protection or any commercial advantage to us;
. foreign intellectual property laws will protect our intellectual property
rights; or
. others will not independently develop similar products, duplicate our
products or design around our technology.
If we do not successfully enforce our intellectual property rights, our
competitive position could suffer, which could harm our operating results.
We also rely on trade secrets, proprietary know-how and confidentiality
provisions in agreements with employees and consultants to protect our
intellectual property. Other parties may not comply with the terms of their
agreements with us, and we may not be able to adequately enforce our rights
against these people.
Third Parties May Claim We Are Infringing Their Intellectual Property, and We
Could Suffer Significant Litigation Costs, 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
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.
Our Stock Price Is Volatile.
In the twelve month period ending on April 30, 2000, our stock price has ranged
from a low of $6.00 to a high of $52.25. 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 analyst
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.
16
Quantitative and Qualitative Disclosures About Market Risk
Financial instruments that potentially subject us to concentrations of credit-
risk consist principally of investments in cash equivalents, short-term
investments and trade receivables. We place our investments with high-quality
financial institutions, limit the amount of credit exposure to any one
institution and have established investment guidelines relative to
diversification and maturities designed to maintain safety and liquidity.
Our primary exposures to market risks include fluctuations in interest rates on
our short-term and long-term debt of approximately $24.3 million as of April 30,
2000 and $27.5 million as of July 31, 1999, and in foreign currency exchange
rates. Generally, we do not use derivative financial instruments. We are subject
to interest rate risk on our short-term borrowings under our credit facilities.
Our short-term bank debt bears interest at a variable rate of prime plus 0.5%.
Long term debt interest rates are fixed for the term of the notes.
Foreign Exchange Risk
Operating in international markets involves exposure to movements in currency
exchange rates. Currency exchange rate movements typically also reflect economic
growth, inflation, interest rates, government actions and other factors. We
transact business in various foreign currencies and, accordingly, we are subject
to exposure from adverse movements in foreign currency exchange rates. As
currency exchange rates fluctuate, translation of the statements of operations
of our international businesses into U.S. dollars may affect year-over-year
comparability and could cause us to adjust our financing and operating
strategies. To date, the effect of changes in foreign currency exchange rates on
revenues and operating expenses have not been material. Substantially all of our
revenues are invoiced and collected in U.S. dollars. Our trade receivables
result primarily from sales to semiconductor manufacturers located in North
America, Japan, the Pacific Rim and Europe. In the nine months ended April 30,
2000, our revenues derived from shipments outside the United States constituted
63.7% of our total revenues. Revenues invoiced and collected in currencies other
than U.S. dollars comprises 5% of our last quarter fiscal revenues. Receivables
are from major corporations or are supported by letters of credit. We maintain
reserves for potential credit losses and such losses have been immaterial.
Based on a hypothetical ten percent adverse movement in interest rates and
foreign currency exchange rates, the potential losses in future earnings, fair
value of risk-sensitive financial instruments, and cash flows are immaterial,
although the actual effects may differ materially from the hypothetical
analysis.
We do not use derivative financial instruments for speculative trading purposes,
nor do we currently hedge our foreign currency exposure to offset the effects of
changes in foreign exchange rates. We intend to assess the need to utilize
financial instruments to hedge currency exposures on an ongoing basis.
Interest Rate Risk
Historically, we have had no material interest rate risk associated with debt
used to finance our operations due to limited borrowings. We intend to manage
our interest rate exposure using a mix of fixed and floating interest rate debt
and, if appropriate, financial derivative instruments.
On April 30, 2000, $9.9 million was outstanding under our domestic bank facility
bearing interest at a rate of 9.5%. Based on this balance, an immediate change
of 1% in the interest rate would cause a change in interest expense of
approximately $99,000 on an annual basis. Our objective in maintaining these
variable rate borrowings is the flexibility obtained regarding early repayment
without penalties and lower overall cost as compared with fixed-rate borrowings.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
A discussion of the Company's exposure to and management of market risk appears
under the heading "Business Risks".
17
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27 - Financial Data Schedule
There were no reports on Form 8-K filed during the three months ended
April 30, 2000.
18
SIGNATURES
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 Corporation
Date: June 13, 2000 By: /s/ Roger W. Blethen
- ------------------- ------------------------
Roger W. Blethen
Chief Executive Officer and President
Date: June 13, 2000 By: /s/ David G. Tacelli
- ------------------- ------------------------
David G. Tacelli
Executive Vice President,
Chief Financial Officer and
Treasurer
(Principal Financial Officer)
19