1
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, 1997
----------------
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 0-10761
LTX CORPORATION
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
MASSACHUSETTS 04-2594045
- --------------------------------------------------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
LTX Park at University Avenue, Westwood, Massachusetts 02090
------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (617) 461-1000
--------------
- --------------------------------------------------------------------------------
Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report
Indicate by check X whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at December 1, 1997
- --------------------------------------- -------------------------------
Common Stock, par value $0.05 per share 36,790,546
2
LTX CORPORATION
INDEX
Page Number
Part I. FINANCIAL INFORMATION
Consolidated Balance Sheet 1
October 31, 1997 and July 31, 1997
Consolidated Statement of Operations
Three months ended October 31, 1997 2
and October 31, 1996
Consolidated Statement of Cash Flows
Three months ended October 31, 1997 3
and October 31, 1996
Notes to Consolidated Financial Statements 4 - 5
Management's Discussion and Analysis of
Financial Condition and Results of Operations 6 - 10
Part II. OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K 11
SIGNATURES 12
3
LTX CORPORATION
CONSOLIDATED BALANCE SHEET
(Unaudited)
(In thousands, except share data)
October 31, July 31,
1997 1997
----------- ---------
ASSETS
Current assets:
Cash and equivalents $ 57,253 $ 67,800
Accounts receivable, less allowances of $1,100 48,440 40,845
Inventories 63,006 54,947
Other current assets 4,375 4,016
--------- ---------
Total current assets 173,074 167,608
Property and equipment, net 42,316 42,958
Other assets 2,984 2,980
--------- ---------
$ 218,374 $ 213,546
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current portion of
long-term liabilities $ 12,005 $ 11,514
Accounts payable 28,103 23,887
Accrued expenses and restructuring charges 12,829 11,933
Unearned service revenues and customer advances 3,579 5,156
--------- ---------
Total current liabilities 56,516 52,490
Long-term liabilities, less current portion 13,006 13,550
Convertible subordinated debentures 7,308 7,308
Stockholders' equity:
Common stock, $0.05 par value 1,885 1,881
Additional paid-in capital 196,032 195,798
Accumulated deficit (52,012) (53,120)
Less - Treasury stock at cost
(947,500 shares) (4,361) (4,361)
--------- ---------
Total stockholders' equity 141,544 140,198
--------- ---------
$ 218,374 $ 213,546
========= =========
See accompanying Notes to Consolidated Financial Statements
- 1 -
4
LTX CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
Three Months
Ended
October 31,
---------------------
1997 1996
-------- --------
Net sales $ 54,206 $ 44,666
Cost of sales 35,200 31,347
Inventory provision for product line restructuring -- 9,250
-------- --------
Gross margin 19,006 4,069
Engineering and product development expenses 6,716 6,109
Selling, general and administrative expenses 10,909 10,135
Product line restructuring costs -- 6,750
-------- --------
Income (loss) from operations 1,381 (18,925)
Interest (income) expense, net (80) (123)
-------- --------
Income (loss) before income taxes 1,461 (18,802)
Provision for income taxes 353 --
-------- --------
Net income (loss) $ 1,108 ($18,802)
======== ========
Fully diluted net income (loss) per share $ 0.03 $ (0.53)
Weighted average shares 38,265 35,715
See accompanying Notes to Consolidated Financial Statements
- 2 -
5
LTX CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(In thousands)
Three Months
Ended
October 31,
---------------------
1997 1996
-------- --------
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net income (loss) $ 1,108 $(18,802)
Add (deduct) non-cash items:
Depreciation and amortization 3,001 2,711
Exchange (gain) loss (33) (19)
(Increase) decrease in:
Accounts receivable (7,671) 3,815
Inventories (8,059) 8,449
Other current assets (359) 728
Other assets (4) 17
Increase (decrease) in:
Accounts payable 4,275 (12,515)
Accrued expenses and restructuring charges 896 3,990
Unearned service revenues and customer advances (1,577) (342)
-------- --------
Net cash used in operating activities (8,423) (11,968)
-------- --------
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Maturities of held-to-maturity securities, net -- 2,998
Expenditures for property and equipment, net (2,359) (3,532)
-------- --------
Net cash used in investing activities (2,359) (534)
-------- --------
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Proceeds from sale of common stock
Proceeds from stock purchase and option plans 238 15
Increase (decrease) in bank debt 333 (52)
Payments of long-term debt (301) (164)
Proceeds from lease financing -- 1,888
Purchase of treasury stock -- (1,146)
-------- --------
Net cash provided by financing activities 270 541
-------- --------
Effect of exchange rate changes on cash (35) (211)
-------- --------
Net decrease in cash and equivalents (10,547) (12,172)
Cash and equivalents at beginning of period 67,800 66,069
-------- --------
Cash and equivalents at end of period $ 57,253 $ 53,897
======== ========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid during the period for:
Interest $ 393 $ 427
Income taxes 649 1,533
See accompanying Notes to Consolidated Financial Statements
- 3 -
6
LTX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The Company
LTX Corporation (the "Company") designs, manufactures, and markets automatic
test equipment for the semiconductor industry that is used to test mixed
signal, digital, linear and discrete semiconductor components. Headquartered
in Westwood, Massachusetts, the Company has development and manufacturing
facilities in Westwood, Massachusetts and 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 Form 10-K.
Revenue Recognition
Revenues from product sales and related warranty costs are recognized at the
time of shipment. Service revenues are recognized over the applicable
contractual periods or as services are performed. Revenues from engineering
contracts are recognized over the contract period on a percentage of
completion basis.
Net Income (Loss) Per Share
Fully diluted net income per share is based on the weighted average number
of shares of common stock and common stock equivalents outstanding. Common
stock equivalents include shares issuable under stock option plans and
warrants to purchase shares. None of the Company's Convertible Subordinated
Debentures are common stock equivalents. Fully diluted net loss per share is
based on the weighted average number of shares of common stock outstanding
only, as the inclusion of common stock equivalents would be anti-dilutive.
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,
1997 1997
------- -------
(In thousands)
Raw materials $17,120 $14,482
Work-in-process 26,692 24,409
Finished goods 19,194 16,056
------- -------
$63,006 $54,947
======= =======
- 4 -
7
LTX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
3. Recent Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 "Earnings Per Share" (FAS 128)
which is effective for periods ending after December 15, 1997. FAS 128
requires the presentation of basic earnings per share (EPS) and diluted EPS.
Basic EPS replaces the primary EPS calculation required under APB Opinion
No. 15. Basic EPS excludes dilution and is calculated using the weighted
average of common shares outstanding for the period. Diluted EPS is computed
similarly to fully diluted EPS pursuant to APB Opinion No. 15. The pro-forma
effect of this accounting change on the October 31, 1997 and October 31,
1996 previously reported EPS data is as follows:
Three Months
Ended
October 31,
-----------------
Per share amounts 1997 1996
------ ------
Primary EPS as reported $ 0.03 $(0.53)
Effect of FAS 128 -- --
------ ------
Basic EPS $ 0.03 $(0.53)
====== ======
Fully Diluted EPS as reported $ 0.03 $(0.53)
Effect of FAS 128 -- --
------ ------
Diluted EPS $ 0.03 $(0.53)
====== ======
4. Interest Expense and Income
Interest expense and income were as follows: Three Months
Ended
October 31,
------------------
1997 1996
------ ------
(In thousands)
Expense $ 582 $ 695
Income (662) (818)
------ ------
Interest (income) expense, net $ (80) $ (123)
====== ======
- 5 -
8
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 Sales Percentage
----------------------- Increase/(Decrease)
Three Months -------------------
Ended Three Months
October 31, 1997
---------------------- Over
1997 1996 1996
------ ------ ------
Net sales 100.0 % 100.0 % 21.4 %
Cost of sales 64.9 70.2 12.3
Inventory provision for product line -- 20.7 N/M
restructuring
----- -----
Gross margin 35.1 9.1 367.1
Engineering and product
development expenses 12.4 13.7 9.9
Selling, general and
administrative expenses 20.1 22.7 7.6
Product line restructuring costs -- 15.1 N/A
----- -----
Income (loss) from operations 2.6 (42.4) N/M
Interest (income) expense, net (0.1) (0.3) (35.0)
----- -----
Income (loss) before income
taxes 2.7 (42.1) N/M
Provision for income taxes 0.7 -- N/M
----- -----
Net income (loss) 2.0 % (42.1) % N/M %
===== =====
N/A - Not Applicable
N/M - Not Meaningful
- 6 -
9
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Three Months Ended October 31, 1997 Compared
to the Three Months Ended October 31, 1996
Net sales for the three months ended October 31, 1997 were $54.2 million as
compared to $44.7 million in the same quarter of the prior year, an increase of
21.4%. The increase in net sales reflects the improvement in orders the Company
has experienced, primarily as a result of more favorable semiconductor equipment
industry conditions since the first quarter of the prior fiscal year. The higher
level of sales year-to-year is primarily represented by a substantial increase
in shipments of the Company's Digital products, particularly the Delta/STE mixed
technology test system. Shipments to Japan were 13% of total sales in the three
months ended October 31, 1997 as compared to 8% in the same quarter of the prior
year.
The gross profit margin was 35.1% of net sales in the three months ended October
31, 1997. Excluding the inventory provision for product line restructuring, the
gross profit margin was 29.8% of net sales in the same quarter of the prior
year. The improvement in gross profit margin in the three months ended
October 31, 1997 as compared to the same quarter of the prior year is a result
of the proportionately lower fixed manufacturing costs and costs associated
with the Company's applications assistance and customer support organization
relative to the higher net sales, the benefit of product cost reductions on the
Delta/STE test system and increased service revenues.
In the first quarter of the prior fiscal year, the Company redirected its
product strategy to focus primarily on functionally complex devices known as
"systems-on-a-chip." At that time, the Company restructured it Digital Products
Division management team and began emphasizing sales of its Delta/STE mixed
technology test system. As a result, the Company recorded an inventory provision
of $9.3 million related to non-strategic products and took a charge of $6.7
million for canceled non-strategic development projects and other costs
associated with the change in product strategy.
Engineering and product development expenses were $6.7 million, or 12.4% of net
sales, in the three months ended October 31, 1997, as compared to $6.1 million,
or 13.7% of net sales, in the same quarter of the prior year. The increase in
engineering expenses reflects the Company's investment in the development of its
single platform test system, Fusion[TM], for testing "system-on-a-chip" devices.
Selling, general and administrative expenses were $10.9 million, or 20.1% of net
sales, in the three months ended October 31, 1997, as compared to $10.1 million,
or 22.7% of net sales, in the same quarter of the prior year. The increase in
selling, general and administrative expenses largely relates to advertising and
promotion costs associated with the product introduction of Fusion, as well as
the expansion of the Company's sales organization.
Net interest income was $0.1 million in the three months ended October 31, 1997,
approximately the same level as the same quarter in the prior year.
-7-
10
The provision for income taxes of $0.4 million in the three months ended October
31, 1997 reflects a 24% effective tax rate. There was no provision for income
taxes in the same quarter of the prior year due to the net loss for the period.
Net income was $1.1 million, or $0.03 net income per share, in the three months
ended October 31, 1997. The Company had a net loss of $18.8 million, or $0.53
net loss per share, in the same quarter of the prior year. The prior year's net
loss included an inventory provision and restructuring charges totaling $16.0
million, or $0.45 per share.
Until backlog increases substantially, the Company's ability to maintain
profitable operations in the near term will continue to depend on obtaining the
required level of shippable orders to meet its quarterly sales objectives. The
Company's results of operations would be adversely affected if it were to
experience lower than anticipated order levels, extended customer delivery
requirements or lower than anticipated margins due to changes in product mix.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash balance at October 31, 1997 was $57.3 million, as compared to
$67.8 million at July 31, 1997. The decrease in cash balances of $10.5 million
was a result of net cash used in operating activities of $8.4 million, net cash
used in additions to property and equipment of $2.4 million and net cash
provided by financing activities of $0.3 million.
The negative net cash flow from operations was a result of the combination of
higher accounts receivable levels and the increase in inventories, net of
accounts payable, in the period. The increase in accounts receivable primarily
relates to proportionately higher shipments in the period to Japanese customers
with longer payment cycles. The increase in inventories relates to materials
purchased for the future initial deliveries of Fusion, systems built for
demonstration purposes at industry trade shows and additional inventories needed
to meet book/ship order requirements. The increase in accounts payable in the
period is a result of the higher level of inventory purchases. At October 31,
1997, the Company had $2.2 million remaining in its restructuring provision to
cover the future costs resulting from its change in product strategy.
Property and equipment additions of $2.4 million were mostly for Fusion product
development activities and customer support requirements, and were less than
non-cash depreciation charges of $3.0 million.
The Company's Japanese subsidiary had bank borrowings of $6.7 million at October
31, 1997 as compared to $6.5 million at July 31, 1997. There were no borrowings
outstanding at October 31, 1997 or July 31, 1997 under the Company's working
capital line of credit with its domestic banks.
Management believes that the Company has sufficient cash resources to meet its
remaining fiscal 1998 cash requirements. These resources include cash balances
of $57.3 million at October 31, 1997, together with the borrowing availability
under its domestic working capital and equipment lease line and future cash
flows from operations.
-8-
11
BUSINESS RISKS
The Company in this report makes, and may from time to time elsewhere make,
disclosures which contain forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Such disclosures in this
report include, without limitation, statements regarding the development,
introduction, acceptance and market for Fusion and the Company's belief, under
"Liquidity and Capital Resources", as to the adequacy of its cash resources.
Such forward-looking statements involve risks and uncertainties including, but
not limited to, the following important factors that could cause actual results
to differ materially from those in the forward-looking statement:
Fluctuations in Sales and Operating Results
Given the relatively large selling prices of the Company's test systems, sales
of a limited number of test systems account for a substantial portion of sales
in any particular fiscal quarter and a small number of transactions could
therefore have a significant impact on sales and gross margins for that fiscal
quarter. The Company's sales and operating results have fluctuated and could in
the future fluctuate significantly from period to period, including from one
quarterly period to another, due to a combination of factors, including the
cyclical demand of the semiconductor industry, order cancellations or
rescheduling by customers, the large selling prices of the Company's test
systems (which typically result in a long selling process), competitive pricing
pressures and the mix between and configuration of test systems sold in a
particular period. The impact of these and other factors on the Company's sales
and operating results in any future period cannot be forecast with accuracy. In
addition, the need for continued investment in research and development, for
capital equipment requirements and for extensive worldwide customer support
capability results in significant fixed costs which would be difficult to reduce
in the event that the Company does not meet its sales objectives.
Importance of New Product Introductions
The semiconductor test equipment ("STE") market is subject to rapid
technological change and new product introductions, as well as advancing
industry standards. The development of increasingly complex semiconductors and
the utilization of semiconductors in a broader spectrum of products has driven
the need for more advanced test systems to test such devices at an acceptable
cost. The Company's ability to remain competitive in the mixed signal and
system-on-a-chip integrated circuit ("IC") and discrete component markets will
depend upon its ability to successfully enhance existing test systems, develop
new generations of test systems, such as its new Fusion platform and to
introduce these new products on a timely and cost-effective basis. The Company
also has to manufacture its products in volume at a competitive price and on a
timely basis to enable customers to integrate them into their operations as they
begin to produce their next generation of semiconductors. The Company's failure
to have a competitive test system available when required by a semiconductor
manufacturer would make it substantially more difficult for the Company to sell
test systems to that manufacturer for a number of years. The Company has in the
past experienced delays in introducing certain of its products and enhancements,
and there can be no assurance that it will not encounter technical or other
difficulties that could in the future delay the introduction of new products or
enhancements. If new products have reliability or functionality problems, then
reduced, canceled or rescheduled orders, higher manufacturing costs, delays in
collecting accounts receivable and additional warranty expense may result, which
could reduce gross margins on new product sales and otherwise materially affect
the Company's business and results of operations. The Company's Fusion product
is subject to the risks associated with new product introductions, including the
risk that delays in development, reliability or functionality problems could
increase expenses and reduce gross margins on new product sales.
-9-
12
Furthermore, announcements by the Company or its competitors of new products
could cause customers to defer or forego purchases of the Company's existing
products, which would also adversely affect the Company's business and results
of operations. There can be no assurance that the Company will be successful in
the introduction and volume manufacture of its new products, that such
introduction will coincide with the development by semiconductor manufacturers
of their next generation semiconductors or that such products will satisfy
customer needs or achieve market acceptance. The failure to do so could
materially adversely affect the Company's business and results of operations.
Cyclicality of Semiconductor Industry
The Company's business is largely dependent upon the capital expenditures of
semiconductor manufacturers. The semiconductor industry is highly cyclical and
has historically experienced recurring periods of oversupply, which often have
had a severely detrimental effect on such industry's demand for test equipment
and could cause cancellations, rescheduling or reductions of customer orders. No
assurance can be given that the Company's business and results of operations
will not be materially adversely affected if the current downturn continues for
a prolonged period or if downturns or changes in any particular market segments
of the semiconductor industry occur in the future, especially if all of the
market segments in which the Company participates experience downturns at the
same time.
Acquisitions
The Company from time to time may acquire technologies, product lines or
businesses that are complementary to those of the Company. Although the Company
believes that integration of acquired technologies, product lines and businesses
will result in long-term growth and profitability, there can be no assurance
that the Company will be able to successfully negotiate finance or integrate
such acquired technologies, product lines or businesses. Furthermore, the
integration of an acquired company or business may cause a diversion of
management time and resources. There can be no assurance that a given
acquisition, if consummated, would not materially adversely affect the Company.
Proprietary Rights
The Company's future success depends in part upon its proprietary technology.
Although the Company attempts to protect its proprietary technology through a
combination of contract provisions, trade secrets, copyrights and patents, it
believes that its future success depends more upon its engineering,
manufacturing, marketing and service skills. There can be no assurance that the
steps taken by the Company to protect its proprietary rights will be adequate to
prevent misappropriation of its technology or the independent development by
others of similar technology. Although there are no pending actions against the
Company regarding any patents, no assurance can be given that infringement
claims by third parties will not have a material adverse effect on the Company's
business and results of operations.
-10-
13
PART II -- OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) (i) Exhibit 27 - Financial Data Schedule
(ii) Exhibit 3(B) - By-laws, as amended.
(b) There were no reports on Form 8-K filed during
the three months ended October 31, 1997.
- 11 -
14
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 11, 1997 By: /s/ Roger W. Blethen
----------------- ----------------------------------
Roger W. Blethen
Chief Executive Officer and President
Date: December 11, 1997 By: /s/ Glenn W. Meloni
----------------- ----------------------------------
Glenn W. Meloni
Controller (Principal Accounting Officer)
- 12 -