Filed by Credence Systems Corporation
Pursuant to Rule 425 under the Securities Act of 1933, as amended
and deemed filed pursuant to Rule 14a-12 of the
Securities Exchange Act of 1934, as amended
Subject Company: Integrated Measurement Systems, Inc.
Commission File No.: 000-026274
CREDENCE SYSTEMS
Moderator: Graham Siddall
Page 1
CREDENCE SYSTEMS
Moderator: Graham Siddall
May 16, 2001
4:00 p.m. MT
Operator: Ladies and gentlemen, thank you for standing by. Welcome to the
Credence second quarter earnings release conference call. At
this time all participants are in a listen only mode. Later we
will conduct a question and answer session. At that time, if
you have a question, you will need to press the one, followed
by the four on your push button phone. As a reminder this
conference is being recorded Wednesday, May 16, 2001. I would
now like to turn the conference over to John Detwiler, Senior
Vice President and Chief Financial Officer of Credence. Please
go ahead sir.
John Detwiler: Thank you, I am here with Graham Siddall, our Chief Executive
Office and President, Dave Ranhoff, our Executive Vice
President and Chief Operating Officer, and a special guest, Mr.
Keith Barnes, the Chairman and Chief Executive Officer of
Integrated Measurement Systems, Inc. or IMS.
Welcome to the second fiscal quarter 2001 earnings release
conference call for Credence Systems. Graham will discuss with
you the highlights of the second fiscal quarter as well as the
state of the business. I will discuss business and operational
results as well as an analysis of the financials and share with
you the business outlook for Credence Systems in 2001. We will
not at this time discuss the business outlook for IMS, as
completion of
CREDENCE SYSTEMS
Moderator: Graham Siddall
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the transaction is still pending IMS shareholder approval as
well as regulatory approval. We would refer you to IMS' SEC
filings and public disclosures for information about the
company. At the conclusion of my comments we will open the call
for questions. We intend to limit today's conference call to
one hour and therefore, our opening comments will be relatively
brief.
Before we begin, however, I would like to make some cautionary
statements. By now you have probably reviewed our press
release, which was e-mailed to you this afternoon. If you have
not received the release please call Patricia Ling at
(510) 623-4703 and she can provide it for you. During the
course of this conference call we will make forward-looking
statements regarding future events or the future performance of
our company. Any such projections are based on limited
information available to the company, which is subject to
change. Although projections and the factors influencing them
will likely change, we will not necessarily update the
information since the company is only providing guidance at
certain points during the year. Actual events or results could
differ materially and no reader of this release should assume
later in the quarter that the information we provide today is
still valid. Such information speaks only as of today. Specific
factors could change, causing our projections not to be
achieved. We refer you to the documents the company files from
time to time with the Securities and Exchange Commission.
I now turn the call over to Graham.
Graham Siddall: Thank you John. Overcapacity in the test sector, particularly
at our foundry and subcontract customers in Asia, continued in
the second fiscal quarter of 2001. During the quarter we booked
only $28 million of new orders, resulting in a book to bill
ratio of approximately 0.65. In addition, during this quarter
we experienced some order cancellations and in response to the
weak conditions in the industry decided to work pro-actively
with customers to clear out backlog that could not be scheduled
with
CREDENCE SYSTEMS
Moderator: Graham Siddall
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reasonable certainty. This activity led to a reduction in the
previous backlog of $78 million. Net de-bookings therefore were
$50 million for the fiscal quarter. It is clear that in the
current economic environment our customers will not be adding
significant additional testing capacity until utilization rates
improve.
With revenue at $43.3 million our sequential decline from Q1
2001 was 65 percent. As we have continually communicated, we
are in a cyclical downturn in the test and assembly section of
the industry that probably began in October 2000 and could last
several more quarters before the excess test capacity is fully
absorbed and growth in our business resumes. We stated at the
beginning of the year our belief that a recovery may not occur
until late calendar 2001 or early in 2002. We still adhere to
that view. Some of our customers and others in the industry are
forecasting a return to growth as early as the third quarter of
this calendar year. We would of course welcome that opportunity
and are managing our business to be prepared for this
possibility but we are skeptical and have adopted a more
cautious approach. For the purposes of managing our business we
are assuming that bookings growth will not resume until fiscal
Q4 at the earliest.
With revenues continuing to fall, we reduced our head count by
a further 8 percent last Thursday. In the last three months, we
have reduced our headcount by about 300 employees. From a peak
of 1,450 in the first fiscal quarter, our headcount has now
fallen to approximately 1,140 today. In addition, we have
implemented a salary reduction for all domestic employees and
continue to operate on a reduced work schedule. Our goal is to
reduce our recurring quarterly operating expenses to
approximately $42 to $43 million per quarter in the next few
months. This figure includes the amortization of purchased
intangibles of $6.1 million per quarter. Reaching these goals
brings our break-even revenue level to approximately $65
million per quarter, excluding the amortization, or about $75
million per quarter with the amortization charges.
CREDENCE SYSTEMS
Moderator: Graham Siddall
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Visibility is still very murky but without improvements in
business conditions we now expect the next fiscal quarter's
revenue to be down sequentially from Q2 2001. We will review
the outlook with you in more detail in a few moments.
I would now like to discuss where I believe we are in the
semiconductor equipment cycle, and in particular, how this
environment has impacted Credence's business. As we discussed
on our last conference call, test equipment bookings began
declining in the November-December time frame. Test capacity
utilization declined from over 90% last October to the 80%
range in January and has fallen steadily and dramatically to
about 50% in April. The decline in test capacity utilization in
the Asia Pacific region where Credence has most of its business
is much greater than the declines experienced by IDM companies
in the rest of the world. As a pure play test company with
approximately 60% of our business with the foundry and
subcontract test companies in Asia it is clear that our
business will be impacted negatively until the back end
overcapacity is worked off and this could take several more
quarters. This booking weakness has now spread to the front end
wafer fab area, particularly for 200 millimeter equipment, but
the situation is clearly worse in the capacity -driven test and
assembly sector.
In the end, resumption of growth for the whole industry will be
based on greater spending in the end user markets. We believe
that this will not reassert itself until very late calendar
2001 or 2002. Clearly the length and depth of this cycle will
also be driven by the general health of the economy and this is
where the current federal initiatives on interest rate and
income tax cuts could prove beneficial.
Our business in Europe during Q2 represented 9 percent of gross
bookings and 17 percent of revenue. Our North America business
represented 40 percent of our revenue and 14 percent of our
gross booking during Q1. Asia was 37 percent of revenue
CREDENCE SYSTEMS
Moderator: Graham Siddall
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and 77 percent of gross bookings. 40 percent of the canceled
orders during the quarter were from Taiwan, 24% were in North
America and 33% were in Southeast Asia outside of Taiwan.
The top 10 Credence customers represented 51 percent of our
business in Q2 and 58 percent for all of fiscal 2001. Our mixed
signal business represented 69 percent of our year-to-date
revenue. Logic represented 5 percent and non-DRAM memory,
primarily flash, represented 15 percent. The remaining 11
percent of our business was made up of service and software.
Successful companies in the semiconductor equipment business
have demonstrated time and again that it is during the
downturns in the industry that the seeds are sown for success
in the upturn. The expense reductions we effected in the last
three months were necessary since the company was gearing up to
an $800 million revenue level which is clearly not going to
happen in the current market environment. However, despite the
reduction in head count of 300 people we are minimizing the
impact of the cuts in customer support and engineering and are
preparing the company to catch the next wave in business which
we believe could surface in earnest in calendar 2002. We are
focused on four major new product initiatives in the areas of
mixed signal test, flash memory test, wireless test solutions,
and design for test initiatives that have the potential to
break the increasing cost of test trend. We are also using the
downturn to restructure the company for greater efficiency by
fully integrating the numerous acquisitions that we have made
over the past year.
We are determined to position the company strategically for
growth in new markets and with new customers as we come out of
this painful downturn. It is in this last regard that today we
announced a definitive agreement to acquire Integrated
Measurement Systems, Inc. in a pooling of interests
transaction. We also signed a shareholder's agreement with
Cadence, IMS' largest shareholder. The agreement still awaits
shareholder and
CREDENCE SYSTEMS
Moderator: Graham Siddall
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regulatory approval. IMS specializes in providing high
performance integrated circuit validation systems, typically
for the design engineer in the design prototype stage for
validating and characterizing complex IC's. IMS is based in
Beaverton, Oregon with about 300 employees.
We believe IMS is an ideal strategic fit for Credence. Not only
are both companies' product lines fully complementary, but
together we will address the complex challenges of IC testing
from engineering through production. By pooling our resources
and strengths we can aggressively pursue opportunities in key
IDMs, increase our presence in North America, Asia and Europe,
and broaden our customer and relationship base. While IMS
supports the IC design engineer at the prototype stage for
validating and characterizing complex digital, mixed-signal,
and memory ICs, Credence focuses predominately on the high-
volume production-oriented customer. IMS provides stable,
technology-driven revenue in the down cycles of the industry
and hence will make the revenue stream of the combined company
less volatile. We believe that the combined company will be the
first test equipment manufacturer in the industry to provide
solutions from silicon characterization and validation to high
volume production test.
IMS will continue to operate in its current facility as a
wholly-owned subsidiary of Credence Systems Corporation. Our
Fluence subsidiary, which is only a few blocks away in
Beaverton, will be combined with IMS. Keith Barnes, IMS'
chairman and chief executive officer, will manage the new
subsidiary as executive vice president of Credence Systems and
president of Integrated Measurement Systems, Inc., a Credence
Company. Both Fluence and IMS have contracts with other tester
companies and we will continue to honor these contracts. I am
delighted to have Keith Barnes with us today and he will be
commenting on the acquisition later in this conference call.
CREDENCE SYSTEMS
Moderator: Graham Siddall
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Overall we are naturally very disappointed with the Q2 business
level and realize that we are probably in for at least another
two quarters before business improves. However, we believe that
we are well positioned as a company and look forward to the
eventual upturn and opportunities of the future. I will now
turn the call over to John, who will review the financial and
operational details as well as the fiscal 2001 outlook.
J. Detwiler: Thank you, Graham. The highlights of the second fiscal
quarter's financials are as follows:
Bookings for the quarter were $28 million, representing a 0.65
book to bill before the canceled orders. After the canceled
orders, the book to bill is negative. Our revenue for the
quarter stood at $43.3 million, down $79.9 million from the
previous quarter, or 65 percent. The gross profit margins for
Q2 stood at 48.2 percent, as compared to 57.3 percent last
quarter. We also took a charge in the quarter for the provision
of excess inventory of $45 million. We made this decision as we
gained greater visibility on the length and depth of this
industry downcycle. This provision was largely earmarked for
our logic and mixed signal product lines. Our inventory levels
decreased by about $29 million from the Q1 levels after this
provision. We continue to work to slow the inventory pipeline
in light of the changing industry environment. We currently
believe the inventory levels will peak in the third quarter,
but this is dependent on the future revenue results. Our total
operating expenses for Q2 were $48.8 million, down from $51.4
million in Q1. Excluding the special charges for our recent
headcount reductions, the operating expenses stood at $46.8
million, or down $4.6 million from the last quarter.
As we articulated in our last conference call, our short term
operating goal was to reduce recurring operating expense levels
to approximately $46 million per quarter, which includes the
purchased amortization. We almost reached that goal this
quarter. For next quarter, our goal will be to reduce these
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Moderator: Graham Siddall
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operating expenses to $42 to $43 million per quarter. The
ongoing intangible amortization charges for the DCI and Rabkin
acquisitions added approximately $900,000 per quarter to the
run rate.
Our head count, ending Q2, was 1,140. As we mentioned, we
reduced our head count a further 100 people last Friday. We
plan to hold our head count relatively constant at this level
as we move toward our goal of lowering our recurring operating
expenses to the $42 million goal per quarter.
Research and development expenses for the second fiscal quarter
were $19 million, as compared to $20.5 million in the first
quarter. For the year, we expect to have R&D expenses at
approximately the $76 million level.
Selling, general and administrative expenses were $21.7 million
for the first quarter, as compared to $25.8 million in the
prior quarter.
The amortization of purchased intangibles is expected to remain
at $6.1 million per quarter.
Our total cash plus marketable securities stood at $343 million
and our days sales outstanding rose to 130 days as the
collection and payment term environment continued to
deteriorate in the quarter. Net interest and other income for
our first fiscal quarter stood at $4.7 million. Taking account
of the disbursement of $6 million for the purchase of Rabkin
during the quarter, our net cash change for the quarter was
almost neutral.
Total outstanding average diluted shares for the second fiscal
quarter stood at 54.04 million, down about 300,000 shares. For
purposes of the EPS, options were ignored this quarter because
they are anti-dilutive in periods when we have a loss.
If you exclude the special charges in the quarter, our pro-
forma
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Moderator: Graham Siddall
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net loss stood at $13.6 million, or $0.26 per share. We used a
tax benefit rate of 35 percent for the year-to-date and for the
time being, we recommend that you use this rate for the
remainder of the year.
I now turn to the financial outlook for the rest of fiscal
2001. We believe Q3 revenue will be down in the $30 to $40
million range and that we will be at or near the bottom in Q3,
but we do not expect a significant rebound in Q4. We would
expect to have our recurring operating expenses down to the $42
to $43 million level, including the amortization charges. We
expect the loss for the third quarter to be in the $0.25 to
$0.35 range, including the amortization charges.
We believe our book to bill will remain below 1.0 in Q3. At
this point it is difficult to provide fair guidance on
bookings. This guidance is dependent on the current weak
business environment not getting any worse. As we have reviewed
with you, the business outlook for the next six months is very
uncertain. Despite the current market conditions, we are
excited about Credence's prospects and our future earning
opportunities. We completed a year of gaining significant
market share and diversifying our business and believe that
this provides the foundation for future growth.
We will now turn to Keith Barnes for a few words before we open
up the call for questions.
Keith Barnes
Good afternoon. For several years, we at IMS have known
Credence Systems. Both companies have roots that go back to
Tektronix and we have supported certain Credence ATE products
with our VT SW products. We have produced tester fixtures,
which make certain of our systems compatible with some of
theirs. This has assisted mutual customers to rapidly move from
the design environment using IMS systems to the production test
phase where they use Credence systems. We have had discussions
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Moderator: Graham Siddall
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in the past about combining their Fluence division with our VT
SW division, as well.
We make complementary systems and software products. While IMS
supports the design engineer in the design prototype stage for
validating and characterizing of complex digital, mixed-signal,
and memory ICs, Credence predominantly supports the backend
production oriented customer.
The flow from design validation to production test is a natural
flow and this combination is one, we believe, which will
provide great value to our customers and to our shareholders,
alike.
The unique marriage of IMS prototype validation test technology
with EDA technology has always been a key differentiator. We
have been strongly influenced by the needs of the IC designer.
Many of the world's leading semiconductor manufacturers and
systems manufacturers are our customers. These customers need
to move rapidly from design validation to production test with
confidence. The combination of IMS and Credence will assist
them with this flow.
We tie directly into the Cadence, Synopsys, and Mentor Graphics
design simulation environment to extract the design intent and
assist our customers during the prototype validation phase to
determine design, fabrication, and performance anomalies.
Our systems products are used to validate complex prototype IC
s which include Digital Processors including, but not limited
to, DSPs, fixed and floating point, leading microprocessors and
microcontrollers, embedded processors, etc... We also validate
leading edge Mixed Signal devices used in Graphics, Network
Processing, Wireless Communications, etc... And we validate
designs in the high speed memory area including DRAM, SRAM, DDR
RAM, and RAMBUS memories. Further, as these elements are
combined into complex SOC devices, we have systems which also
validate these integrated SOC devices.
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Moderator: Graham Siddall
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As I mentioned before, we also have a Virtual Test Software
division that provides tools for designers and test engineers
to move data from the design phase to the production phase.
These tools enable test IP development and simulation using
standard Verilog and VHDL simulation tools. Credence is one of
the ATE vendors we support with our VT products.
IMS and Credence have complementary offerings in each of these
categories. When combined we will be able to provide our
customers with a smooth flow from design to production test,
providing greater value to our customers from a single
supplier.
IMS's main customers include the leading IDM's as well as
fabless semiconductor companies, and systems manufacturers
located throughout the world. Credence's customers are mainly
test houses and contract manufacturers, and primarily located
in Asia. Together, we can expand our focus to a broader
customer base and more diversified geographical mix. More
customers in more companies with a broader mix of technologies
should add up to more value for the customer and for Credence
investors.
Other synergies exist on the technology development and
integration side. IMS deals in the newest high-speed, high-
complexity designs. The Credence production test products will
need to meet similar speed and pin count requirements within a
year or so after IMS build its products for the designers.
Sharing the technology development will lower the overall R&D
for both companies and allow us to get to market faster. We
should be able to achieve lower product costs because of higher
volumes of commonly used components and subsystems. And, by
having more of a prototyping phase on the IMS products before
ramping the production on Credence products, we should be able
to achieve better overall quality.
Like Credence, IMS is proud of its quality record. For seven
years in a row, IMS has been ranked by its customers as number
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Moderator: Graham Siddall
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one in the world for quality and customer service.
In summary, we believe this deal makes good business and
financial sense. It provides a great product flow for our
mutual customers, it allows us to leverage more technology to a
broader customer base worldwide, and this should translate to
better shareholder value for IMS and Credence shareholders as
we execute.
John Detwiler: We will now turn the conference call over to the operator for
your questions. Thank you.
Operator: Ladies and gentlemen, we will now begin the question and answer
session. If you have a question, you will need to press the
one, followed by the four, on you push button phone. You will
hear a three tone prompt acknowledging your request, and your
questions will be polled in the order they are received. If
your question has been answered, and you would like to withdraw
your polling request, you may do so by pressing the one,
followed three, on your push button phone. If you are using a
speaker phone, please pick up your hand set before pressing the
numbers.
One moment please, for the first question.
Keith Endres, Transcription Coordinator at 303-633-3879
Additional Information and Where to Find It
Investors and security holders are advised to read the proxy
statement/prospectus regarding the transaction described in these materials,
when it becomes available, because it will contain important information. The
proxy statement/prospectus will be filed with the SEC by Credence and IMS.
Security holders may obtain a free copy of the proxy statement/prospectus, when
it becomes available, and other related documents filed by Credence and IMS at
the SEC's website at www.sec.gov or at the SEC's public reference room located
at 450 Fifth Street, NW, Washington D.C. 20549 or at one of the SEC's other
public reference rooms in New York, New York and Chicago, Illinois. Please call
the SEC at 1-800-SEC-0330 for further information on the public reference rooms.
When available, the proxy statement/prospectus and the other documents may also
be obtained by contacting by either company.