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 October 31, 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
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LTX CORPORATION
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(Exact Name of Registrant as Specified in Its Charter)
Massachusetts 04-2594045
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(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
LTX Park at University Avenue, Westwood, Massachusetts 02090
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (781) 461-1000
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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 December 1, 2000
----- -------------------------------
Common Stock, par value $0.05 per share 47,727,959
LTX CORPORATION
Index
Part I. FINANCIAL INFORMATION Page Number
Item 1. Consolidated Balance Sheet 1
October 31, 2000 and July 31, 2000
Consolidated Statement of Operations 2
Three Months Ended October 31, 2000
and October 31, 1999
Consolidated Statement of Cash Flows 3
Three Months Ended October 31, 2000 and October 31, 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 15
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
LTX CORPORATION
CONSOLIDATED BALANCE SHEET
(In thousands)
October 31, July 31,
2000 2000
---- ----
(Unaudited) (Audited)
ASSETS
Current assets:
Cash and equivalents $209,337 $206,973
Accounts receivable, net of allowances 89,133 74,940
Accounts receivable - other 11,606 6,875
Inventories 89,998 75,671
Deferred tax asset 32,977 38,795
Prepaid expense and other current assets 32,185 10,222
------ ------
Total current assets 465,236 413,476
Property and equipment, net 51,180 38,125
Other assets 6,941 4,903
-------- --------
Total assets $523,357 $456,504
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deferred tax asset 32,977 38,795
Prepaid expense and other current assets 32,185 10,222
-------- --------
Total current assets 465,236
Current liabilities:
Notes payable $ 14,000 $ 9,725
Current portion of long-term debt 5,172 5,144
Accounts payable 63,356 43,042
Deferred revenues and customer advances 49,888 23,096
Accrued restructuring charges 513 2,263
Other accrued expenses 22,349 22,319
-------- --------
Total current liabilities 155,278 105,589
Long-term debt, less current portion 10,947 11,239
Stockholders' equity 357,132 339,676
-------- --------
Total liabilities and stockholders' equity
$523,357 $456,504
======== ========
See accompanying Notes to Consolidated Financial Statements
1
LTX CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
Three Months
Ended
October 31,
-----------
2000 1999
---- ----
Net sales $101,647 $60,005
Cost of sales 52,557 33,069
-------- -------
Gross profit 49,090 26,936
Engineering and product development expenses 16,039 11,008
Selling, general and administrative expenses 10,295 8,698
-------- -------
Income from operations 22,756 7,230
Other income / (expense):
Interest expense (362) (611)
Interest income 2,405 255
-------- -------
Income before income taxes 24,799 6,874
Provision for income taxes 7,439 -
-------- -------
Net income $ 17,360 $ 6,874
======== =======
Net income per share:
Basic $0.36 $0.19
===== =====
Diluted $0.35 $0.17
===== =====
Weighted--average common shares used in
computing net income per share:
Basic 47,598 37,029
====== ======
Diluted 50,257 40,422
====== ======
See accompanying Notes to Consolidated Financial Statements
2
LTX CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited) (In thousands)
Three Months
Ended
October 31,
2000 1999
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 17,360 $ 6,874
Add (deduct) non-cash items:
Depreciation and amortization 3,362 2,773
Exchange (gain) loss 22 (267)
(Increase) decrease in:
Accounts receivable (18,998) (14,973)
Inventories (14,316) (6,511)
Deferred tax asset 5,818 --
Other current assets (21,966) 82
Other assets (33) (343)
Increase (decrease) in:
Accounts payable 20,357 2,672
Accrued expenses and restructuring charges (1,715) (359)
Deferred revenues and customer advances 26,792 (790)
-------- --------
Net cash provided by (used in) operating activities 16,683 (10,842)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property and equipment, net (16,426) (4,005)
Investment - Purchase of minority interest equity (2,000) --
-------- --------
Net cash used in investing activities (18,426) (4,005)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from stock purchase plans and option plans 96 249
Proceeds from stock equity offering -- 79,954
Proceeds from short term borrowing 14,000 27,949
Payments of short term borrowing (9,725) (22,022)
Payments of long-term debt and other liabilities (264) 44
Proceeds from lease financing -- 2,087
-------- --------
Net cash provided by financing activities 4,107 88,261
-------- --------
Effect of exchange rate changes on cash -- 184
-------- --------
Net increase in cash and equivalents 2,364 73,598
Cash and equivalents at beginning of period 206,973 19,936
-------- --------
Cash and equivalents at end of period $209,337 $ 93,534
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 197 $ 910
Income taxes $ 223 $ 42
See accompanying Notes to Consolidated Financial Statements
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 engineering and product 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 loss of $22,000 and a gain of $267,000
for the three months ended October 31, 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.
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.
4
The Securities and Exchange Commission released Staff Accounting Bulletin (SAB)
No. 101, "Revenue Recognition in Financial Statements", on December 3, 1999. On
June 26, 2000 the SEC staff announced that they are delaying the required
implementation date for SAB No. 101 with the issuance of SAB No. 101B. 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 a significant impact on the timing of the Company's revenue
recognition. On October 12, 2000 the SEC provided written guidance on
implementing SAB No. 101. The SEC guidance will be adopted in the fourth quarter
of fiscal year 2001 by recording the effect of any prior revenue transaction
affected as a "cumulative effect of a change in accounting principle."
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. In fiscal year 2000 a tax benefit of $20.2 million
for certain deferred tax assets was recorded. Realization of the net deferred
tax assets is dependent on our ability to generate future taxable income.
Management believes that it is more likely than not that the assets will be
realized, based on forecasted income. However, there can be no assurance that
the Company will meet its expectations of future income. The remaining valuation
allowance in fiscal 2000 relates to certain foreign losses and tax credits for
which realization of future tax benefits is uncertain. The Company's estimated
effective tax rate for the first quarter of fiscal 2001 was 30%. No tax
provision was recorded for the first quarter of fiscal 2000.
Net Income per Share
Basic net income per share is computed by dividing net income available to
common stockholders by the weighted average number of common shares outstanding
for the period. Diluted income per 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 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
October 31,
2000 1999
---- ----
(in thousands, except per share data)
Net income $17,360 $ 6,874
Basic EPS
Basic common shares 47,598 37,029
Basic EPS $ 0.36 $ 0.19
Diluted EPS
Basic common shares 47,598 37,029
Plus: Impact of stock options and warrants 2,659 3,393
------- -------
Diluted common shares 50,257 40,422
Diluted EPS $ 0.35 $ 0.17
Options to purchase 283,500 shares of common stock on October 31, 2000 were
outstanding but not included in the quarter end calculation of diluted net
income per share because either the options' exercise price was greater than the
average market price of the common shares during the period ended, or the effect
of including the options would have been anti-dilutive in effect. There were no
options outstanding that were excluded in the calculation of diluted earnings
per share as of October 31, 1999.
5
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:
October 31, July 31,
2000 2000
---- ----
(In thousands)
Raw materials $34,517 $31,085
Work-in-progress 39,787 30,194
Finished goods 15,694 14,392
------- -------
$89,998 $75,671
======= =======
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. Comprehensive
income does not differ from net income for the three month period ended October
31, 2000 and October 31, 1999.
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 does not use derivative financial instruments for speculative trading
purposes, and does not currently hedge foreign currency exposure to offset the
effects of changes in foreign exchange rates. Therefore, the adoption of this
statement did not have an impact on the financial statements.
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
application of FIN 44 did not have a material impact on the Company's financial
position or results of operations.
6
Segment Reporting
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 net sales for the three months ended October 31, 2000 and 1999,
along with the long-lived assets at October 31, 2000 and July 31, 2000, are
summarized as follows:
Three Months
Ended
October 31,
-----------
2000 1999
---- ----
(In thousands)
Net Sales:
United States $ 43,336 $11,665
Singapore 23,873 16,377
Taiwan 16,516 14,887
Japan 3,413 829
All other countries 14,509 16,247
-------- -------
Total Net Sales $101,647 $60,005
======== =======
October 31, July 31,
2000 2000
---- ----
(in thousands)
Long-lived assets:
United States $ 42,170 $30,847
Singapore 4,509 3,290
Taiwan 1,188 915
Japan 53 53
All other countries 3,260 3,020
-------- -------
Total long-lived assets $ 51,180 $38,125
======== =======
7
Item 2. MANAGEMENT'S 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 Sale Percentage
Three Months Increase/Decrease
Ended Three Months
October 31, 2000
-----------
2000 1999 Over 1999
---- ---- ---- ----
Net Sales 100.0% 100.0% 69.4%
Cost of Sales 51.7 55.1 58.9
----- ----- -----
Gross margin 48.3 44.9 82.2
Engineering and product development expenses 15.8 18.3 45.7
Selling, general and administrative expenses 10.1 14.5 18.4
----- ----- -----
Income from operations 22.4 12.0 214.7
Other income (expense):
Interest expense (0.4) (1.0) (40.8)
Interest income 2.4 0.4 843.1
----- ----- -----
Income before income taxes 24.4 11.5 260.8
Provision for income taxes 7.3 0.0 NM
----- ----- -----
Net income 17.1% 11.5% 152.5%
===== ===== =====
NM--Not Meaningful
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 Ended October 31, 2000 Compared to the Three Months Ended October
31, 1999
Net sales for the three months ended October 31, 2000 increased 69.4% to $101.6
million as compared to $60.0 million in the same quarter of the prior year. The
increase in revenue is primarily a result of the acceptance of the Company's
Fusion product strategy and repeat orders from Fusion customers. Service revenue
accounted for $7.4 million, or 7.3% of net sales, and $7.4 million, or 12.3% of
net sales, for the three months ended October 31, 2000 and 1999, respectively.
Geographically, sales to customers outside of the United States were 57.4% and
80.6% of net sales in the three months ended October 31, 2000 and October 31,
1999, respectively.
The gross profit margin was 48.3% of net sales in the three months ended October
31, 2000, as compared to 44.9% 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,
8
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 assembly outsourcing strategy.
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 engineering and product 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 44.3% and 39.6% for the three months ended October 31,
2000 and October 31, 1999, respectively.
Engineering and product development expenses were $16.0 million, or 15.8% of net
sales, in the three months ended October 31, 2000, as compared to $11.0 million,
or 18.3% of net sales, in the same quarter of the prior year. The increase in
expenditure is principally a result of a higher level of development expenses
and key account support costs related to growth of 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 $12.0 million, or 11.8% of net sales, and
$7.8 million, or 13.0% of net sales, for the three months ended October 31, 2000
and October 31, 1999, respectively.
Selling, general and administrative expenses were $10.3 million, or 10.1% of net
sales, in the three months ended October 31, 2000, as compared to $8.7 million,
or 14.5% of net sales, in the same quarter of the prior year. The increase in
the selling, general and administrative expenses of $1.6 million is related to
the increased selling expenses of the Fusion product line and support of key
accounts.
Interest expense was $0.4 million and $0.6 million for the three months ended
October 31, 2000 and October 31, 1999, respectively. The decrease in expense is
a result of a decrease in outstanding bank loan balances with the Company's
domestic bank.
Interest income was $2.4 million for the three months ended October 31, 2000 as
compared to $0.3 million for the three months ended October 31, 1999. The
increase in interest income occurred because of the increase in the Company's
cash balance.
The Company had a tax provision of $7.4 million for the three months ended
October 31, 2000. For the quarter ended October 31, 2000, the Company
anticipates a 30% effective tax rate. This tax provision assumes a benefit from
the utilization of current period research and development credits and export
sales activity. No tax provision was recorded for the three months ended October
31, 1999, since the Company's net operating loss carry forward was sufficient to
offset taxable income.
Net income was $17.4 million, or $0.35 per diluted share, in the three months
ended October 31, 2000, as compared with $6.9 million, or $0.17 per diluted
share, in the same quarter in the prior year.
Liquidity and Capital Resources
At October 31, 2000, the Company had $209.3 million in cash and equivalents and
working capital of $310.0 million, as compared to $207.0 million of cash and
equivalents and $307.9 million of working capital at July 31, 2000. The increase
in the cash balance is primarily a result of cash flow from operations.
Accounts receivable from trade customers was $89.1 million at October 31, 2000,
as compared to $74.9 million at July 31, 2000. The principal reason for the
increase is a result of increasing sales revenue for Fusion products to new and
existing accounts. The reserve for sales returns allowances and doubtful
accounts was $3.6 million, or 3.9% of gross trade account receivable on October
31, 2000 and $3.6 million, or 4.6% of gross trade accounts receivable on July
31, 2000.
Inventories increased by $14.3 million to $90.0 million at October 31, 2000 as
compared to $75.7 million at July 31, 2000. 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.
Deferred tax asset decreased by $5.8 million to $33.0 million at October 31,
2000 as compared to $38.8 million at July 31, 2000. The decrease is attributed
to the realization of certain deferred tax assets. Prepaid expense and other
current assets increased by $22.0 million to $32.2 million at October 31, 2000
as compared to $10.2 million at July 31, 2000. The increase is attributable to
inventory related prepayments to secure production capacity with vendors.
Capital expenditures totaled $16.4 million for the three months ended October
31, 2000 as compared to $4.0 million for the three months ended October 31,
1999. The principal reason for the increase relates to the addition of board
test equipment, increased system test cell capacity and investments in new
application development equipment supporting the growth of the Fusion product
line.
9
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 October 31, 2000 were $9.5 million under the domestic credit
facility and $4.5 million under the foreign accounts receivable line facility.
This credit facility terminates on December 31, 2000, unless extended by mutual
agreement. 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.
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.
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.
10
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;
. 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 57.4% of our revenues for the three months
ended October 31, 2000 and 80.6% of our revenues for the three months ended
October 31, 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
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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
. 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 90.7% of revenues for the three months ended October 31,
2000, 74.0% of revenues in fiscal year 2000, 59.7% of revenues in fiscal
year 1999, and 55.2% of revenues in fiscal year 1998. 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, 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
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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.
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 41.6% and 48.3% of our sales for the three months ended
October 31, 2000 and the twelve months ended July 31, 2000, 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 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
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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 October 31, 2000, our stock price has
ranged from a low of $11.50 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.
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 $30.1 million
as of October 31, 2000 and $26.1 million as of July 31, 2000, 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
14
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 three months ended October
31, 2000, our revenues derived from shipments outside the United States
constituted 57.4% of our total revenues. Revenues invoiced and collected in
currencies other than U.S. dollars comprises 8.2% of this 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 October 31, 2000, $14.0 million was outstanding under our domestic bank
facility bearing interest at a rate of 10.0%. Based on this balance, an
immediate change of 1% in the interest rate would cause a change in interest
expense of approximately $140,000 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".
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
October 31, 2000.
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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: December 14, 2000 By: /s/ Roger W. Blethen
- ----------------------- ------------------------
Roger W. Blethen
Chief Executive Officer and President
Date: December 14, 2000 By: /s/ Mark J. Gallenberger
- ----------------------- ----------------------------
Mark J. Gallenberger
Chief Financial Officer and
Treasurer
(Principal Financial Officer)
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