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, 2001
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______
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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 24, 2001
----- ---------------------------
Common Stock, par value $0.05 per share 48,120,838
LTX CORPORATION
Index
Page Number
Part I. FINANCIAL INFORMATION
Item 1. Consolidated Balance Sheet 1
April 30, 2001 and July 31, 2000
Consolidated Statement of Operations 2
Three Months and Nine Months Ended April 30, 2001 and April 30, 2000
Consolidated Statement of Cash Flows 3
Nine Months Ended April 30, 2001 and April 30, 2000
Notes to Consolidated Financial Statements 4-7
Item 2. Management's Discussion and Analysis of Financial 8-14
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 16
LTX CORPORATION
CONSOLIDATED BALANCE SHEET
(In thousands)
April 30, July 31,
2001 2000
-------- --------
(Unaudited)
ASSETS
Current assets:
Cash and equivalents $188,183 $206,973
Accounts receivable, net of allowances 53,020 74,940
Accounts receivable - other 13,911 6,875
Inventories 106,751 75,671
Deferred tax asset 24,927 38,795
Prepaid expense 48,054 10,222
-------- --------
Total current assets 434,846 413,476
Property and equipment, net 66,042 38,125
Other assets 14,035 4,903
-------- --------
Total assets $514,923 $456,504
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 15,000 $ 9,725
Current portion of long-term debt 5,293 5,144
Accounts payable 30,517 43,042
Deferred revenues and customer advances 54,015 23,096
Accrued restructuring charges 513 2,263
Other accrued expenses 19,245 22,319
-------- --------
Total current liabilities 124,583 105,589
-------- --------
Long-term debt, less current portion 8,286 11,239
Other long-term liabilities - -
Stockholders' equity:
Common stock 2,535 2,518
Additional paid in capital 404,730 401,209
Unrealized gain loss on marketable securities 425 -
Accumulated deficit (13,875) (52,290)
Less-Treasury stock, at cost (11,761) (11,761)
-------- --------
Total stockholders' equity 382,054 339,676
-------- --------
Total liabilities and stockholders' equity $514,923 $456,504
======== ========
See accompanying Notes to Consolidated Financial Statements
1
LTX CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Unaudited)
(In thousands, except per share data)
Three Months Nine Months
Ended Ended
April 30, April 30,
--------- ---------
2001 2000 2001 2000
------- ------- -------- --------
Net sales $65,596 $82,117 $271,905 $212,332
Cost of sales 37,524 42,719 144,223 112,770
------- ------- -------- --------
Gross profit 28,072 39,398 127,682 99,562
Engineering and product development expenses 17,295 13,237 49,983 36,363
Selling, general and administrative expenses 8,180 9,418 29,205 27,691
------- ------- -------- --------
Income from operations 2,597 16,743 48,494 35,508
Other income and expense:
Interest expense 297 487 966 1,516
Interest income 2,259 1,290 7,343 2,494
Income before provision for income taxes 4,559 17,546 54,871 36,486
Provision for income taxes 1,368 17 16,459 47
------- ------- -------- --------
Net income $ 3,191 $17,529 $ 38,412 $ 36,439
======= ======= ======== ========
Net income per share:
Basic $ 0.07 $ 0.39 $ 0.81 $ 0.88
======= ======= ======== ========
Diluted $ 0.06 $ 0.37 $ 0.77 $ 0.81
======= ======= ======== ========
Weighted--average common shares used in
computing net income per share:
Basic 47,803 44,526 47,676 41,386
======= ======= ======== ========
Diluted 50,522 47,835 50,145 44,783
======= ======= ======== ========
Comprehensive income:
Net income $ 3,191 $17,529 $ 38,412 $ 36,439
Unrealized gain on
Marketable Securities 22 - 425 -
------- ------- -------- --------
Comprehensive income $ 3,213 $17,529 $ 38,837 $ 36,439
See accompanying Notes to Consolidated Financial Statements
2
LTX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Nine Months
Ended
April 30
--------
2001 2000
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 38,412 $ 36,439
Add (deduct) non-cash items:
Depreciation and amortization 10,016 8,189
Unrealized gain or loss on investment 425 -
Exchange loss / (gain) 673 (242)
(Increase) decrease in:
Accounts receivable 14,203 (36,286)
Inventories (31,085) (21,860)
Deferred tax asset 15,338 -
Prepaid expense (37,880) (2,914)
Other assets 191 (814)
Increase (decrease) in:
Accounts payable (12,066) 5,146
Accrued expenses and restructuring charges (4,656) 1,538
Deferred revenues and customer advances 30,923 13,245
-------- --------
Net cash provided by operating activities 24,495 2,441
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property and equipment, net (37,942) (13,003)
Minority investment (9,334) -
-------- --------
Net cash used in investing activities (47,276) (13,003)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from stock purchase plans and option plans 2,070 5,634
Proceeds from stock equity offering - 179,645
Proceeds from short term borrowings 39,000 40,510
Payments of short term borrowings (33,725) (36,367)
Payments of long-term debt and other liabilities (2,804) (167)
Proceeds from lease financing - 6,415
-------- --------
Net cash provided by financing activities 4,541 195,670
-------- --------
Effect of exchange rate changes on cash 550 152
-------- --------
Net increase (decrease) in cash and equivalents (18,790) 185,260
Cash and equivalents at beginning of period 206,973 19,936
-------- --------
Cash and equivalents at end of period $188,183 $205,196
======== ========
Interest $ 801 $ 1,709
Income taxes $ 3,267 $ 829
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.
2. 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.
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 $673,000 and a gain of $242,000
for the nine months ended April 30, 2001 and 2000 respectively. The amounts
recorded in both periods were principally due to fluctuations in the Japanese
yen that are included in selling, general and administrative expenses 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. 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. 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,
4
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 nine months ended April 30, 2001
was 30%.
Net Income per Share
Basic net income per common share is computed by dividing net income available
to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted income per common share reflects the maximum
dilution that would have resulted from the assumed exercise and share repurchase
related to dilutive stock options and 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 Nine Months Ended
April 30, April 30,
2001 2000 2001 2000
---- ---- ---- ----
(in thousands, except per share amounts)
Net income $ 3,191 $17,529 $38,412 $36,439
Basic EPS
Basic common shares 47,803 44,526 47,676 41,386
Basic EPS $ 0.07 $ 0.39 $ 0.81 $ 0.88
Diluted EPS
Basic common shares 47,803 44,526 47,676 41,386
Plus: Impact of stock options and warrants 2,719 3,309 2,469 3,397
Diluted common shares 50,522 47,835 50,145 44,783
Diluted EPS $ 0.06 $ 0.37 $ 0.77 $ 0.81
Options to purchase 398,500 shares of common stock as of April 30, 2001 were
outstanding but not included in the quarter ended 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 calculation of diluted earnings per
share as of April 30, 2000.
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:
April 30, July 31,
2001 2000
---- ----
(In thousands)
Raw materials $ 47,627 $31,085
Work-in-progress 54,210 30,194
Finished goods 4,914 14,392
-------- -------
$106,751 $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. This
information has been outlined in the Consolidated Statement of Operations and
Comprehensive Income.
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, this statement did not
have a material 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.
3. 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.
6
The Company's sales to unaffiliated customers for the nine months ended April
30, 2001 and 2000, along with the long-lived assets for April 30, 2001 and July
31, 2000, are summarized as follows:
Three Months Nine Months
Ended Ended
April 30, April 30,
--------- ---------
2001 2000 2001 2000
---- ---- ---- ----
(In thousands) (In thousands)
Sales to unaffiliated customers:
United States $46,239 $37,318 $127,349 $ 77,000
Singapore 5,061 9,208 60,454 49,144
Taiwan 4,637 12,395 32,365 35,122
Japan 1,264 4,259 12,428 6,065
All other countries 8,395 18,937 39,309 45,001
------- ------- -------- --------
Total sales to unaffiliated customers
$65,596 $82,117 $271,905 $212,332
======= ======= ======== ========
April 30, July 31,
2001 2000
---- ----
(In thousands)
Long-lived assets:
United States $51,489 $ 30,847
Singapore 6,441 3,290
Taiwan 2,788 915
Japan 53 53
All other countries 5,271 3,020
------- --------
Total long-lived assets $66,042 $ 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
Increase/((Decrease)
Percentage of Net Sales
Three Months Nine months Three Months Nine Months
Ended ended 2001 2001
April 30, April 30, Over Over
--------- ---------
2001 2000 2001 2000 2000 2000
---- ---- ---- ---- ---- ----
Net Sales 100.0% 100.0% 100.0% 100.0% (20.1)% 28.1%
Cost of Sales 57.2 52.0 53.0 53.1 (12.2) 27.9
----- ----- ----- ----- ------ -----
Gross margin 42.8 48.0 47.0 46.9 (28.8) 28.2
Engineering and product development expenses 26.3 16.1 18.4 17.1 30.7 37.5
Selling, general and administrative expenses 12.5 11.5 10.8 13.1 (13.2) 5.5
----- ----- ----- ----- ------ -----
Income from operations 4.0 20.4 17.8 16.7 (84.5) 36.6
Other income and expense:
Interest expense 0.4 0.6 0.4 0.7 (39.0) (36.3)
Interest income 3.4 1.5 2.7 1.2 75.1 194.4
----- ----- ----- ----- ------ -----
Income before income taxes 7.0 21.3 20.1 17.2 (74.0) 50.4
Provision for income taxes 2.1 0.0 6.0 0.0 NM NM
----- ----- ----- ----- ------ -----
Net income 4.9% 21.3% 14.1% 17.2% (81.8)% 5.4%
===== ===== ===== ===== ====== =====
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 and Nine Months Ended April 30, 2001 Compared to the Three Months
and Nine Months Ended April 30, 2000
Net sales for the three months ended April 30, 2001 decreased 20.1% to $65.6
million as compared to $82.1 million in the same quarter of the prior year. For
the nine months ended April 30, 2001, net sales were $271.9 million as compared
to $212.3 million for the same period of the prior year, an increase of 28.1%.
The current quarter decrease in revenue is primarily a result of an industry
wide slowdown in the semiconductor industry which began to impact the Company in
the latter half of the second quarter of fiscal year 2001. Service revenue
accounted for $10.9 million, or 16.6% of net sales, and $9.0 million, or 11.0%
of net sales, for the three months ended April 30, 2001 and 2000, respectively,
and $27.4 million and $24.2 million for the nine months ended April 30, 2001 and
April 30, 2000, respectively. Geographically, sales to customers outside of the
United States were 29.5% and 54.6% of net sales in the three months ended April
8
30, 2001 and April 30, 2000, respectively.
The gross profit margin was 42.8% of net sales in the three months ended April
30, 2001, as compared to 48.0% of net sales in the same quarter of the prior
year. The decrease results from a lower level of sales relative to fixed
manufacturing costs. For the nine months ended April 30, 2001, the gross profit
margin was 47.0% compared to 46.9% for the nine months ended April 30, 2000.
Engineering and product development expenses were $17.3 million, or 26.3% of net
sales, in the three months ended April 30, 2001, as compared to $13.2 million,
or 16.1% of net sales, in the same quarter of the prior year. For the nine
months ended April 30, 2001, engineering and product development expenses were
$50.0 million, or 18.4% of net sales, as compared to $36.4 million, or 17.2% of
net sales, in the nine months ended April 30, 2000. 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.
Selling, general and administrative expenses were $8.2 million, or 12.5% of net
sales, in the three months ended April 30, 2001, as compared to $9.4 million, or
11.5% of net sales, in the same quarter of the prior year. For the nine months
ended April 30, 2001, selling, general and administrative expenses were $29.2
million, or 10.8% of net sales, as compared to $27.7 million, or 13.0% of net
sales, in the nine months ended April 30, 2000. The decrease in the selling,
general and administrative expenses of $1.2 million during the three months
ended April 30, 2001 is related to the lower level of sales, which reduced
certain variable costs.
Interest expense was $297,000 and $487,000 for the three months ended April 30,
2001 and April 30, 2000, respectively. Interest expense for the nine months
ended April 30, 2001 was $1.0 million as compared to $1.5 million for the nine
months ended April 30, 2000. The decrease in expense is a result of a decrease
in the borrowing rate along with a decrease in overall debt.
Interest income was $2.3 million for the three months ended April 30, 2001 and
$7.3 million for the nine months ended April 30, 2001 as compared to $1.3
million for the three months ended April 30, 2000 and $2.5 million for the nine
months ended April 30, 2000. The increase in interest income occurred because of
the increase in the Company's cash balance.
The Company had a tax provision of $1.4 million for the three months ended April
30, 2001 and $16.5 million for the nine months ended April 30, 2001 as compared
to $17,000 for the three months ended April 30, 2000 and $47,000 for the nine
months ended April 30, 2000. In fiscal year 2000, we recorded a tax benefit of
$20.2 million and recorded deferred tax assets. 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 we
will meet our expectations of future income. The remaining valuation allowance
in fiscal 2000 relates to certain foreign losses and tax credits for which the
reliability of future tax benefits is uncertain.
Net income was $3.2 million, or $0.06 per share, in the three months ended April
30, 2001, as compared with $17.5 million, or $0.37 per share, in the same
quarter in the prior year. The Company had net income of $38.4 million, or $0.77
per share, in the nine months ended April 30, 2001, as compared to a net income
of $36.4 million, or $0.81 per share, for the same period last year.
Industry conditions further weakened during the three months ended April 30,
2001. Management believes that slow semiconductor equipment industry conditions
will continue for the near term. Until there is a substantial improvement in
industry conditions, the sluggish industry conditions will continue to adversely
affect the Company's results of operations. The Company's results of operations
would be further adversely affected if it were to experience lower than
anticipated order levels, cancellations of orders in backlog, extended customer
delivery requirements or lower than anticipated margins due to unfavorable
product mix. The Company has taken steps to reduce discretionary spending and
capital expenditures.
Liquidity and Capital Resources
At April 30, 2001, the Company had $188.2 million in cash and equivalents and
working capital of $310.3 million, as compared to $207.0 million of cash and
equivalents and $307.9 million of working capital at July 31, 2000. The decrease
in cash balance is primarily a result of cash expenditures for capital assets
and the Company's minority interest investment in a semiconductor test equipment
company.
Accounts receivable from trade customers were $53.0 million at April 30, 2001,
as compared to $74.9 million at July 31, 2000. The decrease in account
receivables was the result of cash collecting activities along with the lower
sales for the quarter. The reserve for sales return allowances and doubtful
accounts was $3.7 million, or 6.4% of gross accounts receivable, on April 30,
2001 and $3.6 million, or 4.6% of gross accounts receivable, on July 31, 2000.
Inventories increased by $31.1 million to $106.8 million at April 30, 2001 as
compared to $75.7 million at July 31, 2000. The increase is directly
attributable to the production ramp in the Fusion product.
Deferred tax asset decreased by $13.9 million to $24.9 million at April 30, 2001
9
as compared to $38.8 million at July 31, 2000. The decrease is attributed to the
realization of certain deferred tax assets. Prepaid expense increased by $37.8
million to $48.1 million at April 30, 2001 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 $16.3 million for the three months ended April 30,
2001 as compared to $4.6 million for the three months ended April 30, 2000.
Capital expenditures were $37.9 million and $13.0 million for the nine months
ending April 30, 2001 and April 30, 2000, respectively. The principal reason for
the increases relate to the addition of board test equipment, increased system
test cell capacity, the addition of spare parts and investments in new
application development equipment supporting the growth of the Fusion product
line.
Other assets increased by $9.1 million to $14.0 million at April 30, 2001 as
compared to $4.9 million at July 31, 2000. The increase is attributed to a
minority investment in a semiconductor test equipment company, which is
accounted for using the cost method.
During the quarter ended April 30, 2001, the Company renegotiated its domestic
credit facility with its existing lender. The facility of $15.0 million is
secured by all assets of the Company and bears interest at the bank's prime
rate. Borrowing availability under this facility is based on a formula of
eligible domestic and foreign accounts receivable. Outstanding borrowings at
April 30, 2001 were $15.0 million under this credit facility. A second credit
facility with another lender was established on April 30, 2001 as a revolving
credit line for $30.0 million. This facility is secured by cash and bears
interest (at the Company's option) at either: (i) the greater of the federal
funds rate plus 0.5% or the bank's prime rate, in each case, minus 1.0% or
(ii) LIBOR plus 0.4%. 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. Our revenue and operating results
are currently being negatively impacted by a sudden and severe downturn that the
semiconductor industry is currently experiencing. 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.
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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.
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.
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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 53% of our revenues for the nine months ended April 30, 2001
and 64% of our revenues for the nine months ended April 30, 2000. 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
. 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
87.7% of revenues for the nines months ended April 30, 2001, 74.0% of revenues
in fiscal year 2000 and 59.7% of revenues in fiscal year 1999. 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.
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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 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 38.7% and 48.3% of our sales for the nine months
ended April 30, 2001 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
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. 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, 2001, our stock price has ranged
from a low of $9.56 to a high of $48.63. 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.
14
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 $28.6 million as of April 30,
2001 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.
One of our short-term credit facilities bears interest at the bank's prime rate.
The other short-term credit facility bears interest (at the Company's option) at
either: (i) the greater of the federal funds rate plus 0.5% or the bank's prime
rate, in each case, minus 1% or (ii) LIBOR plus 0.4%. 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,
2001, our revenues derived from shipments outside the United States constituted
53% of our total revenues. Revenues invoiced and collected in currencies other
than U.S. dollars comprises 7.8% 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 April 30, 2001, $15.0 million was outstanding under our domestic bank
facility bearing interest at a rate of 7.5%. Based on this balance, an immediate
change of 1% in the interest rate would cause a change in interest expense of
approximately $150,000 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".
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PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
On May 18, 2001, LTX served Ando Electric Co., Ltd. ("Ando") with a Demand for
Arbitration pursuant to the Fusion Agreement, dated April 24, 1998, between LTX
and Ando. The arbitration will be conducted by the American Arbitration
Association in San Jose, California. LTX's demand asserts claims for breach of
contract, breach of fiduciary duty, unfair competition and other claims arising
out of Ando's conduct. LTX seeks damages and equitable relief. LTX does not
believe that this legal proceeding will have any material adverse impact on our
business and results of operations.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a)
(i) Exhibit 10(DD) - Third Modification Agreement dated as of April
21, 2001 between LTX Corporation and Silicon Valley Bank
(ii) Exhibit 10(EE) - Credit Agreement dated as of April 30, 2001
between LTX Corporation and Citizens Bank of Massachusetts
(b) There were no reports of Form 8-K filed during the three months ended
April 30, 2001.
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 1, 2001 By: /s/ Roger W. Blethen
------------------------
Roger W. Blethen
Chief Executive Officer and President
Date: June 1, 2001 By: /s/ Mark J. Gallenberger
----------------------------
Mark J. Gallenberger
Vice President, Chief Financial
Officer and Treasurer
(Principal Financial Officer)
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