Table of Contents
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM 10-Q
(MARK
ONE)
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x
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QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
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For
the quarterly period ended July 31, 2008
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OR
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o
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
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For
the transition period from
to
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COMMISSION
FILE NUMBER: 000-52038
Verigy
Ltd.
(Exact Name of Registrant
as Specified in Its Charter)
SINGAPORE
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N/A
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(State or Other
Jurisdiction of
Incorporation or Organization)
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(I.R.S. Employer
Identification No.)
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NO.
1 YISHUN AVE 7
SINGAPORE 768923
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N/A
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(Address of
Principal Executive Offices)
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(Zip Code)
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Registrants Telephone
Number, Including Area Code
(+65) 6755-2033
Indicate by check mark 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
o
Indicate by check mark
whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See definitions of large
accelerated filer, accelerated filer, and smaller reporting company in Rule 12b-2
of the Exchange Act. (Check one):
Large accelerated filer
x
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Accelerated
filer
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Non-accelerated filer
o
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Smaller
reporting company
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(Do not check if a
smaller reporting company)
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Indicate by check mark whether the registrant is a
shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
o
No
x
As of September 3, 2008, there were 58,938,009
outstanding ordinary shares, no par value.
Table of Contents
PART I
FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
VERIGY
LTD.
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(in
millions, except per share amounts)
(Unaudited)
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Three Months Ended
July 31,
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Nine Months Ended
July 31,
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2008
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2007
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2008
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2007
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Net revenue:
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Products
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$
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138
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$
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168
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$
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423
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$
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443
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Services
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41
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36
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118
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109
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Total net revenue
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179
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204
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541
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552
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Costs of sales:
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Cost of products
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67
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85
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202
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233
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Cost of services
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29
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26
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86
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76
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Total costs of sales
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96
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111
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288
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309
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Operating expenses:
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Research and development
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27
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23
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78
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68
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Selling, general and administrative
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40
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38
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116
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107
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Restructuring charges
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1
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1
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Separation costs
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1
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4
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Total operating expenses
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68
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62
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195
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179
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Income from operations
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15
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31
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58
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64
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Other income, net
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6
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3
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15
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10
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Income before taxes
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21
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34
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73
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74
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Provision for income taxes
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3
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4
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9
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9
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Net income
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$
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18
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$
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30
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$
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64
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$
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65
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Net income per share basic:
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$
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0.30
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$
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0.50
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$
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1.06
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$
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1.10
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Net income per share diluted:
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$
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0.29
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$
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0.50
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$
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1.05
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$
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1.09
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Weighted average shares (in thousands) used in computing net income
per share:
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Basic:
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60,003
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59,428
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59,962
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59,068
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Diluted:
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60,853
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60,418
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60,760
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59,708
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The accompanying
notes are an integral part of these condensed consolidated financial
statements.
3
Table of Contents
VERIGY
LTD.
CONDENSED
CONSOLIDATED BALANCE SHEETS
(Unaudited)
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July 31,
2008
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October 31,
2007
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(in millions, except share
amounts)
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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218
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$
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146
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Short-term marketable securities
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167
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229
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Trade accounts receivable, net
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87
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107
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Inventory
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86
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68
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Other current assets
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49
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54
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Total current assets
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607
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604
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Property, plant and equipment, net
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42
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42
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Long-term marketable securities
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82
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48
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Goodwill and other intangibles, net
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18
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18
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Other long-term assets
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82
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59
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Total assets
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$
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831
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$
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771
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LIABILITIES AND SHAREHOLDERS EQUITY
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Current liabilities:
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Accounts payable
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$
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76
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$
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76
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Payables to Agilent
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1
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Employee compensation and benefits
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46
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53
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Deferred revenue, current
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63
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65
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Income taxes and other taxes payable
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5
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12
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Other current liabilities
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22
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19
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Total current liabilities
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212
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226
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Long-term liabilities:
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Income taxes payable
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10
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Other long-term liabilities
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48
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47
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Total liabilities
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270
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273
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Commitments and contingencies (Note 19)
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Shareholders equity
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Ordinary shares, no par value; 59,814,433 and 59,704,629 issued and
outstanding at July 31, 2008 and October 31, 2007, respectively
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Additional paid in capital
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402
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381
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Retained earnings
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179
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131
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Accumulated other comprehensive loss
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(20
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)
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(14
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)
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Total shareholders equity
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561
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498
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Total liabilities and shareholders equity
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$
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831
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$
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771
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The accompanying
notes are an integral part of these condensed consolidated financial
statements.
4
Table of Contents
VERIGY
LTD.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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Nine Months
Ended
July 31,
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2008
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2007
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(in millions)
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Cash flows from operating activities:
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Net income
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$
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64
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$
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65
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Adjustments to reconcile net income to net cash provided by operating
activities:
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Depreciation and amortization
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11
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9
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Excess and obsolete inventory-related charges
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8
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8
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Loss on disposal of property, plant and equipment
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1
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1
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Share-based compensation
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12
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10
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Excess tax benefits from share-based compensation
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(1
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)
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(2
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)
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Impairment of cost-based investments
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2
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Impairment loss on marketable securities
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2
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Changes in assets and liabilities, net of effect of acquisitions:
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Trade accounts receivable, net
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22
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30
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Receivables from Agilent
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8
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Inventory
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(23
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)
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3
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Accounts payable
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2
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Payables to Agilent
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(1
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)
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(26
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)
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Employee compensation and benefits
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(7
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)
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(3
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)
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Deferred revenue, current
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(1
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)
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(3
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)
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Income taxes and other taxes payable
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(8
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)
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(11
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)
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Other current assets and accrued liabilities
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4
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(1
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)
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Other long term assets and long term liabilities
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10
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(6
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)
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Net cash provided by operating activities
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93
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86
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|
|
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Cash flows from investing activities:
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|
|
|
|
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Acquisitions and investment, net of cash acquired
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(28
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)
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Investments in property, plant and equipment
|
|
(8
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)
|
(9
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)
|
Purchases of available for sale marketable securities
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|
(256
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)
|
(458
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)
|
Proceeds from sales and maturities of available for sale marketable
securities
|
|
275
|
|
197
|
|
Net cash used in investing activities
|
|
(17
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)
|
(270
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)
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
Issuance of ordinary shares under employee stock plans
|
|
8
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|
12
|
|
Repurchase of ordinary shares
|
|
(13
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)
|
|
|
Excess tax benefits from share-based compensation
|
|
1
|
|
2
|
|
Net cash (used in) provided by financing activities
|
|
(4
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)
|
14
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
72
|
|
(170
|
)
|
Cash and cash equivalents at beginning of period
|
|
146
|
|
300
|
|
Cash and cash equivalents at end of period
|
|
$
|
218
|
|
$
|
130
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
Cash paid for income taxes
|
|
$
|
10
|
|
$
|
9
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
5
Table of Contents
VERIGY
LTD.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.
OVERVIEW
Overview
Verigy Ltd. (we, us or the Company) designs,
develops and manufactures semiconductor test equipment and provides test system
solutions that are used in the manufacture, validation, characterization, and
production test of System-on-a-Chip (SOC), System-in-a-Package (SIP),
high-speed memory and memory devices. In addition to test equipment, our
solutions include advanced analysis tools as well as consulting, service and
support offerings such as start-up assistance, application services and system
calibration and repair.
Prior to our initial public offering, we were a
wholly-owned subsidiary of Agilent Technologies, Inc (Agilent). We became an independent company on June 1,
2006, when we separated from Agilent. On
June 13, 2006, we completed our initial public offering and became a
separate stand-alone publicly-traded company incorporated in Singapore focused
on technology and innovation in semiconductor testing. Effective October 31, 2006, Agilent
distributed the 50 million Verigy ordinary shares it owned to its
shareholders.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Basis of
presentation.
The accompanying financial data has been prepared by
us pursuant to the rules and regulations of the U.S. Securities and
Exchange Commission (SEC). Our fiscal
year end is October 31, and our fiscal quarters end on January 31, April 30,
and July 31. Unless otherwise
stated, all dates refer to our fiscal years and fiscal periods. Amounts included in the accompanying
condensed consolidated financial statements are expressed in U.S. dollars.
In the opinion of management, the accompanying
condensed consolidated financial statements reflect all adjustments which are
of a normal and recurring nature and necessary to fairly state the statements
of financial position, results of operations and cash flows for the dates and
periods presented.
In the third quarter of fiscal year 2008, we recorded
a $2.6 million adjustment in other income, net, related to foreign currency
remeasurement gains. These gains relate to a failure to remeasure certain
foreign currency assets and liabilities, primarily value added tax receivables,
arising in fiscal years 2006, 2007 and the first two quarters of fiscal year
2008. Management has assessed the impact
of this adjustment and does not believe the amounts are material, either
individually or in the aggregate, to any of the prior years financial
statements, and the impact of correcting these errors in the current year is
not expected to be material to the full fiscal year 2008 financial statements.
Reclassifications.
Certain amounts disclosed in the
notes to the condensed consolidated financial statements for the three and nine
months ended July 31, 2007, were reclassified to conform to the
presentation used for the three and nine months ended July 31, 2008.
Principles of
consolidation
.
The condensed
consolidated financial statements include the accounts of the Company and our
wholly-owned subsidiaries. All
significant inter-company accounts and transactions have been eliminated.
Use of estimates
.
The preparation of financial statements in accordance with accounting
principles generally accepted in the U.S. requires management to make estimates
and assumptions that affect the amounts reported in our condensed consolidated
financial statements and accompanying notes.
Management bases its estimates on historical experience and various
other assumptions it believes to be reasonable.
Although these estimates are based on managements knowledge of current
events and actions that may impact us in the future, actual results may be
different from the estimates. Our
critical accounting policies are those that affect our financial statements
materially and involve difficult, subjective or complex judgments by
management. Those policies are revenue
recognition, restructuring, inventory valuation, warranty, share-based
compensation, retirement and post-retirement plan assumptions, valuation of
goodwill and intangible assets, valuation of marketable securities, and
accounting for income taxes.
6
Table of Contents
Derivative instruments.
We have implemented a hedging strategy that
is intended to mitigate our foreign currency exposure by entering into foreign
currency forward contracts that have maturities in excess of one month. These contracts are used to reduce our risk
associated with exchange rate movement, as gains and losses on these contracts
are intended to mitigate the effect of exchange rate fluctuations on certain
foreign currency denominated revenues, costs and eventual cash flows.
The terms of currency instruments used for hedging
purposes are generally consistent with the timing of the transactions being hedged. These derivative financial instruments are
recorded at fair value based upon quoted market prices for comparable
instruments. For derivative instruments
designated and qualifying as cash flow hedges of anticipated foreign currency
denominated transactions, the effective portion of the gain or loss on these
hedges is reported as a component of accumulated other comprehensive income
(loss) in shareholders equity, and is reclassified into the statement of
operations when the hedged transaction affects earnings. If the transaction being hedged fails to
occur, or if a portion of any derivative is ineffective, the gain or loss on
the associated financial instrument is recorded promptly in earnings. For derivative instruments used to hedge
existing foreign currency denominated assets or liabilities, the gain or loss
on these hedges is recorded promptly in earnings to offset the changes in the
fair value of the assets or liabilities being hedged. Verigy does not use derivative financial
instruments for trading or speculative purposes.
3.
RECENT ACCOUNTING
PRONOUNCEMENTS
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements
(SFAS No. 157). The purpose of SFAS No. 157 is to define
fair value, establish a framework for measuring fair value and enhance
disclosures about fair value measurements.
In February 2008, the FASB issued FASB Staff Position (FSP) 157-1,
Application of FASB Statement No. 157 to FASB Statement No. 13
and Other Accounting Pronouncements That Address Fair Value Measurements for
Purposes of Lease Classification or Measurement under Statement 13
(FSP 157-1) and FSP 157-2,
Effective Date of FASB
Statement No. 157
(FSP 157-2).
FSP 157-1 amends SFAS No. 157 to remove certain leasing transactions from
its scope. FSP 157-2 delays the
effective date of SFAS No. 157 for all non-financial assets and
non-financial liabilities, except for items that are recognized or disclosed at
fair value in the financial statements on a recurring basis (at least
annually), until the beginning of the first quarter of fiscal year 2010. The measurement and disclosure requirements
related to financial assets and financial liabilities are effective for us
beginning in the first quarter of fiscal year 2009. We are currently evaluating whether SFAS No. 157
will result in a change to our fair value measurements.
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and
Financial Liabilities
(SFAS No. 159), which permits entities
to choose to measure many financial instruments and certain other items at fair
value that are not currently required to be measured at fair value. SFAS No.159 will be effective for us
beginning in the first quarter of fiscal year 2009. We are currently evaluating the impact of
adopting SFAS No. 159 on our financial position, cash flows and
results of operations.
In December 2007, the FASB issued SFAS No. 141
(revised 2007),
Business Combinations
(SFAS No. 141(R)). SFAS
No. 141(R) amends SFAS No. 141 and provides revised guidance for
recognizing and measuring identifiable assets and goodwill acquired,
liabilities assumed and any noncontrolling interest in an acquiree. It also provides disclosure requirements to
enable users of the financial statements to evaluate the nature and financial
effects of a business combination. It is
effective for fiscal years beginning on or after December 15, 2008 and
will be applied prospectively. We are
currently assessing the impact that SFAS No. 141(R) may have on our
consolidated financial statements upon adoption in fiscal year 2010.
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statementsan amendment of ARB No. 51
(SFAS No. 160).
SFAS No. 160 requires that ownership interests in subsidiaries held by
parties other than the parent, and the amount of consolidated net income, be
clearly identified, labeled, and presented in the consolidated financial
statements. It also requires, once a
subsidiary is deconsolidated, any retained noncontrolling equity investment in
the former subsidiary be initially measured at fair value. Sufficient disclosures are required to
clearly identify and distinguish between the interests of the parent and the
interests of the noncontrolling owners.
It is effective for fiscal years beginning on or after December 15,
2008 and requires retroactive adoption of the presentation and disclosure
requirements for existing minority interests.
All other requirements shall be applied prospectively. We are currently assessing the impact that
SFAS No. 160 may have on our consolidated financial statements upon
adoption in fiscal year 2010.
In March 2008, the
FASB issued SFAS No. 161,
Disclosures about
Derivative Instruments and Hedging Activities-an amendment of FASB Statement No. 133
(SFAS No. 161). SFAS No. 161
expands the current disclosure requirements of SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities
,
and requires that companies must now provide enhanced disclosures on a quarterly
basis regarding how and why the entity uses derivatives, how derivatives and
related hedged items are accounted for under SFAS No. 133 and how
derivatives and related hedged items affect the companys financial position,
performance and cash flow. SFAS No. 161 is effective prospectively for
periods beginning on or after November 15, 2008. We are currently
assessing the impact that SFAS No. 161 may have on our consolidated
financial statements upon our adoption in fiscal year 2009.
7
Table of
Contents
4.
TRANSACTIONS
WITH AGILENT
During the three and nine months ended July 31,
2008 and 2007, we had no revenue from sale of products to Agilent or any
outstanding receivables. For the three
months ended July 31, 2008 and 2007, we purchased $0.6 million and $3.8
million of materials from Agilent, respectively. For the nine months ended July 31, 2008
and 2007, we purchased $3.7 million and $7.5 million of materials from Agilent,
respectively.
As of July 31, 2008, we had no payables to
Agilent for transition-related services, compared to $1 million of payables to
Agilent at October 31, 2007, which primarily related to transition-related
services provided to us by Agilent during the second half of fiscal year
2007. We have completed all of our
transition service agreements with Agilent.
5.
NET INCOME PER SHARE
The following is a reconciliation of the basic and
diluted net income per share computations for the periods presented below:
|
|
Three Months
Ended
July 31,
|
|
Nine Months
Ended
July 31,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Basic Net Income Per Share:
|
|
|
|
|
|
|
|
|
|
Net income (in millions)
|
|
$
|
18
|
|
$
|
30
|
|
$
|
64
|
|
$
|
65
|
|
Weighted average number of ordinary shares (1)
|
|
60,003
|
|
59,428
|
|
59,962
|
|
59,068
|
|
Basic net income per share
|
|
$
|
0.30
|
|
$
|
0.50
|
|
$
|
1.06
|
|
$
|
1.10
|
|
Diluted Net Income Per Share:
|
|
|
|
|
|
|
|
|
|
Net income (in millions)
|
|
$
|
18
|
|
$
|
30
|
|
$
|
64
|
|
$
|
65
|
|
Weighted average number of ordinary shares (1)
|
|
60,003
|
|
59,428
|
|
59,962
|
|
59,068
|
|
Potentially dilutive ordinary share equivalents stock options,
restricted share units and other employee stock plans (1)
|
|
850
|
|
990
|
|
798
|
|
640
|
|
Total shares for purpose of calculating diluted net income per share
(1)
|
|
60,853
|
|
60,418
|
|
60,760
|
|
59,708
|
|
Diluted net income per share
|
|
$
|
0.29
|
|
$
|
0.50
|
|
$
|
1.05
|
|
$
|
1.09
|
|
(1) Weighted average shares are presented in
thousands.
The dilutive effect of outstanding options and
restricted share units (RSU) is reflected in diluted net income per share by
application of the treasury stock method, which includes consideration of
share-based compensation required by SFAS No. 123(R).
The following table presents those options to purchase
ordinary shares and restricted share units outstanding which were not included
in the computation of diluted net income per share because they were
anti-dilutive:
|
|
Three Months
Ended
July 31,
|
|
Nine Months
Ended
July 31,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Non-qualified Share Options:
|
|
|
|
|
|
|
|
|
|
Number of options to purchase ordinary shares (in thousands)
|
|
667
|
|
208
|
|
812
|
|
1,140
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Share Units:
|
|
|
|
|
|
|
|
|
|
Number of restricted share units (in thousands)
|
|
96
|
|
|
|
12
|
|
|
|
8
Table of Contents
6. PROVISION FOR INCOME TAXES
For the three months ended July 31,
2008 and 2007, we recorded income tax expense of approximately $3 million and
$4 million, respectively. During the
nine months ended July 31, 2008 and 2007, we recorded income tax expense
of approximately $9 million for both periods presented.
Our effective tax rate
varies based on a variety of factors, including overall profitability, the
geographical mix of income before taxes and the related tax rates in the
jurisdictions in which we operate, restructuring and other one-time charges, as
well as discrete events, such as settlements of audits.
On November 1, 2007, we
adopted FASB Interpretation No. 48,
Accounting for
Uncertainty in Income Taxes
(FIN 48). This interpretation clarifies the accounting
for uncertainty in income taxes recognized in an enterprises financial
statements in accordance with FASB Statement No. 109,
Accounting
for Income Taxes.
It prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement
of a tax position, as well as provides guidance on de-recognition,
classification, interest and penalties, accounting in interim periods,
disclosure and transition. The provision of FIN 48 is effective for
fiscal years beginning after December 15, 2006, and applies to all tax
positions upon initial adoption of this standard. Only tax positions that
meet the more-likely-than-not recognition threshold at the effective date may
be recognized or continue to be recognized upon adoption of FIN 48.
As a result of the adoption of FIN 48, we increased our reserves for
unrecognized tax benefits by $0.2 million and increased our reserves for
penalties by $0.2 million, for a total increase of $0.4 million, which was
accounted for as a cumulative adjustment to the beginning balance of retained
earnings. Additionally, we reclassified
$10.4 million from current income taxes and other taxes payable to long-term
taxes payable. At the adoption date of November 1,
2007, we had $9.8 million of unrecognized tax benefits which would reduce our
income tax expense if recognized. As of July 31,
2008, we had $11.6 million of unrecognized tax benefits, of which $10.4 million
is recorded as long- term liabilities, and $1.2 million is recorded as income
taxes payable. As of July 31, 2008,
we had an additional $2.5 million of unrecognizable tax benefits, which is
recorded as a reduction in long term deferred tax assets.
Our
continuing practice is to recognize interest and penalties related to income
tax matters as a component of income tax expense. We had approximately $0.6 million of accrued
interest and penalties at the adoption date of November 1, 2007, and
approximately $1.1 million of accrued interest and penalties as of July 31,
2008.
Although we file Singapore,
U.S. federal, U.S. state and foreign income tax returns, our three major tax
jurisdictions are Singapore, the U.S. and Germany. Our 2006 and 2007 tax years remain subject to
examination by the tax authorities in our major tax jurisdictions. We are not currently under audit for any tax
years.
7. SHARE-BASED COMPENSATION
2006 Equity Incentive Plan
On June 7, 2006, our
board of directors adopted the Verigy Ltd. 2006 Equity Incentive Plan (the 2006
EIP). A total of 10,300,000 ordinary
shares were authorized for issuance under the plan. The 2006 EIP provides for grants of incentive
stock options, nonqualified stock options, stock appreciation rights and
restricted share units. At July 31,
2008, there were approximately 4.4 million ordinary shares available for
issuance under the 2006 EIP.
Except for replacement
options granted in connection with Verigys separation from Agilent, employee
nonqualified stock options have an exercise price of no less than 100% of the
fair market value of an ordinary share on the date of grant and, generally,
vest at a rate of 25% per year over 4 years.
The maximum allowable term is 10 years.
Restricted share units awarded to employees pay out in an equal number
of ordinary shares and, generally, vest at a rate of 25% per year over 4
years. Options and restricted share
units cease to vest upon termination of employment. If an employee terminates employment due to
death, disability or retirement at or after age 65 with at least 15 years of
service, then the vested portion of the employees option and restricted share
unit award is determined by adding 12 months to the length of his or her actual
service, and the option is exercisable as to the vested shares for one year
after the date of termination, or, if earlier, the expiration of the term of
the option.
9
Table of Contents
Stock options granted to
outside directors have a maximum term of 5 years. Options granted prior to the second quarter
of fiscal year 2008 become vested on the first anniversary of the grant date,
and options granted beginning in the second quarter of fiscal year 2008 become
vested in four equal quarterly installments from the grant date. Restricted share units granted prior to the
second quarter of fiscal year 2008 become vested on the first anniversary of the
grant date, and units granted beginning in the second quarter of fiscal year
2008 become vested in four equal quarterly installments from the grant
date. Restricted share units granted to
outside directors are paid out on the third anniversary of the grant date. All awards granted to an outside director
become fully vested upon the directors termination of services if due to of
death, disability, retirement at or after age 65, or if in connection with a
change in control.
Ordinary shares are issued
for employees restricted share units on the date the restricted share units
vest. The majority of shares issued are
net of the minimum statutory withholding requirements, as shares are withheld
to cover the tax withholding obligation. As a result, the actual number
of shares issued will be less than the number of restricted share units
granted. Prior to vesting, restricted share units do not have dividend
equivalent or voting rights.
2006 Employee Shares Purchase Plan
On June 7, 2006, our
board of directors adopted the 2006 Employee Shares Purchase Plan (the Purchase
Plan). The Purchase Plan is intended to
qualify for favorable tax treatment under section 423 of the U.S. Internal
Revenue Code. The total number of shares
that were authorized for purchase under the plan is 1,700,000.
Under the Purchase Plan,
eligible employees may elect to purchase shares from payroll deductions up to
10% of eligible compensation during 6-month offering periods. The purchase price is (i) 85% of the
fair market value per ordinary share on the trading day before the beginning of
an offering period or (ii) 85% of the fair market value per ordinary
share on the last trading day of an offering period, whichever is lower.
The maximum number of shares that an employee can purchase is 2,500 shares each
offering period and $25,000 in fair market value of ordinary shares each
calendar year.
As of July 31, 2008, a
total of 668,416 ordinary shares had been issued as a result of purchases made
by participants in our Purchase Plan. On
the purchase dates of May 31, 2008, November 30, 2007, May 31,
2007 and November 30, 2006, we issued 171,905, 155,030, 197,000 and
144,481 ordinary shares, respectively, to participants in our Purchase Plan.
Share-Based Compensation for Verigy
Options and Purchase Plan
As of November 1, 2005,
we adopted the provisions of SFAS No. 123(R), which requires the
measurement and recognition of compensation expense for all share-based payment
awards made to our employees and directors, including stock option awards and
employee share purchases made under the Purchase Plan.
We have recognized
compensation expense based on the estimated grant date fair value method
required under SFAS No. 123(R) using a straight-line amortization
method. As SFAS No. 123(R) requires
that share-based compensation expense be based on awards that are ultimately
expected to vest, estimated share-based compensation is reduced for estimated
forfeitures. We expense restricted share
units based on fair market value of the shares at the date of grant over the
period during which the restrictions lapse.
Share-Based Compensation for Agilent Options Held by Verigy Employees
Prior to our separation from
Agilent, some of our employees participated in Agilents stock-based
compensation plans. Until November 1,
2005, we accounted for stock-based awards, based on Agilents stock, using the
intrinsic value method of accounting in accordance with Accounting Principles
Board Opinion No. 25
Accounting for Stock
Issued to Employees
(APB 25) and related interpretations. Under the intrinsic value method, we recorded
compensation expense related to stock options in our condensed consolidated
statements of operations when the exercise price of our employee stock-based
award was less than the market price of the underlying Agilent stock on the
date of the grant. We had no stock
option expenses resulting from an exercise price that was less than the market
price on the date of the grant in any of the periods presented.
10
Table
of Contents
Share-Based Payment Award Activity
The following table summarizes stock option activity during the nine
months ended July 31, 2008:
|
|
Options
|
|
|
|
Shares
|
|
Weighted
Average
Exercise
Price
|
|
|
|
(in thousands)
|
|
|
|
Outstanding as of October 31, 2007
|
|
3,280
|
|
$
|
15.38
|
|
Granted
|
|
361
|
|
$
|
23.55
|
|
Exercised (1)
|
|
(227
|
)
|
$
|
13.54
|
|
Cancelled / Expired
|
|
(68
|
)
|
$
|
15.13
|
|
Outstanding as of July 31, 2008
|
|
3,346
|
|
$
|
16.40
|
|
(1) The total pretax
intrinsic value of stock options exercised during the nine months ended July 31,
2008 was $2.4 million.
The following table
summarizes restricted share unit activity during the nine months ended July 31,
2008:
|
|
Restricted Share Units
|
|
|
|
Shares
|
|
Weighted
Average
Grant
Date
Share
Price
|
|
|
|
(in thousands)
|
|
|
|
Outstanding as of October 31, 2007
|
|
870
|
|
$
|
18.49
|
|
Granted
|
|
730
|
|
$
|
22.05
|
|
Vested and paid out
|
|
(212
|
)
|
$
|
19.15
|
|
Forfeited
|
|
(49
|
)
|
$
|
19.83
|
|
Outstanding as of July 31, 2008
(2) (3) (4)
|
|
1,339
|
|
$
|
20.28
|
|
The following table
summarizes information about all outstanding stock options to purchase ordinary
shares of Verigy at July 31, 2008:
|
|
Options Outstanding
|
|
Range of Exercise Prices
|
|
Number
Outstanding
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
Weighted
Average
Exercise
Price
|
|
Aggregate
Intrinsic Value
|
|
|
|
(in thousands)
|
|
|
|
|
|
(in thousands)
|
|
$7.48 15.00
|
|
1,512
|
|
5.29 years
|
|
$
|
13.10
|
|
$
|
13,812
|
|
$15.01 20.00
|
|
1,314
|
|
6.42 years
|
|
$
|
16.44
|
|
7,600
|
|
$20.01 25.00
|
|
115
|
|
5.82 years
|
|
$
|
23.87
|
|
|
|
$25.01 30.00
|
|
405
|
|
5.62 years
|
|
$
|
26.43
|
|
|
|
|
|
3,346
|
|
5.79 years
|
|
$
|
16.40
|
|
$
|
21,412
|
|
The aggregate intrinsic
value in the table above represents the total pretax intrinsic value, based on
our closing stock price of our ordinary shares of $22.23 at July 31, 2008,
which would have been received by award holders had all award holders exercised
their awards that were in-the-money as of that date. As of July 31,
2008, approximately 1,456,000 outstanding options were vested and exercisable
and the weighted average exercise price was $15.05. Among the 1,456,000 outstanding options that
were vested and exercisable, the total number of exercisable stock options that
were in-the-money was 1,341,000 and the weighted average exercise price was
$14.12.
11
Table
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The following table
summarizes information about all outstanding restricted share unit awards of
Verigy ordinary shares at July 31, 2008:
|
|
Restricted Share Units Outstanding
|
|
Range of Grant Date Share Prices
|
|
Number
Outstanding
|
|
Weighted Average
Grant Date Share Price
|
|
|
|
(in thousands)
|
|
|
|
$14.75 15.00 (2)
|
|
74
|
|
$
|
14.97
|
|
$15.01 20.00 (3)
|
|
570
|
|
$
|
18.32
|
|
$20.01 25.00
|
|
494
|
|
$
|
20.80
|
|
$25.01 30.00 (4)
|
|
201
|
|
$
|
26.52
|
|
|
|
1,339
|
|
$
|
20.28
|
|
(2) The outstanding
restricted share units as of July 31, 2008 include 22,000 fully vested
units held by outside directors.
(3) The outstanding
restricted share units as of July 31, 2008 include 13,000 fully vested
units held by outside directors.
(4) The outstanding
restricted share units as of July 31, 2008 include 11,000 fully vested
units held by outside directors.
As of July 31, 2008,
the total grant date fair value of our outstanding restricted share units was
approximately $27.2 million and the aggregate market value of the ordinary
shares underlying the outstanding restricted share units was $29.8 million.
Share-based Compensation
The impact on our results
for share-based compensation for the three and nine months ended July 31,
2008 and 2007, respectively, was as follows:
|
|
Three Months
Ended
July 31,
|
|
Nine Months
Ended
July 31,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
(in millions)
|
|
Cost of products and services
|
|
$
|
0.8
|
|
$
|
0.6
|
|
$
|
2.3
|
|
$
|
1.8
|
|
Research and development
|
|
0.5
|
|
0.4
|
|
1.5
|
|
1.3
|
|
Selling, general and administrative
|
|
3.0
|
|
2.4
|
|
8.6
|
|
7.2
|
|
Total share-based compensation expense
|
|
$
|
4.3
|
|
$
|
3.4
|
|
$
|
12.4
|
|
$
|
10.3
|
|
For the three and nine
months ended July 31, 2008 and 2007, share-based compensation capitalized
within inventory was insignificant.
The weighted average grant
date fair value of awards related to Verigy options granted during the three
and nine months ended July 31, 2008, was $10.45 and $9.93 per share,
respectively, and was determined using the Black-Scholes option pricing
model. The tax benefit realized from
exercised stock options and similar awards for the three and nine months ended July 31,
2008 was $0.4 million and $0.6 million, respectively, compared to $1.4 million
and $1.8 million for the three and nine months ended July 31, 2007,
respectively.
As of July 31, 2008 and
2007, the total compensation cost related to share-based awards not yet
recognized, net of expected forfeitures, was approximately $34.0 million and
$28.1 million, respectively. We expect
to recognize the cost of these share-based awards over a weighted average of
2.44 years.
12
Table
of Contents
Valuation Assumptions for Verigy Options
The fair value of Verigy
options granted during the three and nine months ended July 31, 2008 and
2007 was estimated at grant date using a Black-Scholes options-pricing model
with the following weighted average assumptions:
|
|
Three Months
Ended
July 31,
|
|
Nine Months
Ended
July 31,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Risk-free interest rate for options
|
|
3.37
|
%
|
4.82
|
%
|
3.14
|
%
|
4.60
|
%
|
Dividend yield
|
|
0.0
|
%
|
0.0
|
%
|
0.0
|
%
|
0.0
|
%
|
Volatility for options
|
|
44.5
|
%
|
39.3
|
%
|
47.0
|
%
|
40.3
|
%
|
Expected option life
|
|
4.50 years
|
|
4.45 years
|
|
4.42 years
|
|
4.36 years
|
|
Valuation
Assumptions for the Purchase Plan
|
|
Three Months
Ended
July 31,
|
|
Nine Months
Ended
July 31,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Risk-free interest rate for Purchase Plan
|
|
2.05
|
%
|
5.25
|
%
|
2.05
|
%
|
5.25
|
%
|
Dividend yield
|
|
0.0
|
%
|
0.0
|
%
|
0.0
|
%
|
0.0
|
%
|
Volatility for Purchase Plan
|
|
44.1
|
%
|
39.1
|
%
|
44.1
|
%
|
39.1
|
%
|
Expected option life for Purchase Plan
|
|
6 months
|
|
6 months
|
|
6 months
|
|
6 months
|
|
The
Black-Scholes model requires the use of highly subjective and complex
assumptions, including the options expected life and the price volatility of
the underlying ordinary shares. The
price volatility of our share price was determined on the date of grant using a
combination of the average daily historical volatility and the average implied
volatility of publicly traded options of our ordinary shares. Management
believes that using a combination of historical and implied volatility is the
most appropriate measure of the expected volatility of our share price.
Because we have limited historical data, we used data from peer companies to
determine our assumptions for the expected option life. For the risk-free interest rate, we used the
rate of return on U.S. Treasury Strips as of the grant dates.
8. SHARE REPURCHASE PROGRAM
On November 27,
2007, our board of directors approved the use of up to $150 million to
repurchase up to 10 percent of Verigys outstanding ordinary shares, or
approximately 6 million ordinary shares.
On April 15, 2008, during our annual general meeting of
shareholders, our shareholders approved the share repurchase program.
The
following repurchases under the above program were completed in the period
presented below:
Three Months Ended
|
|
Number of
Ordinary Shares
Repurchased
|
|
Weighted
Average Price
Per Share
|
|
Amount of
Ordinary Shares
Repurchased
|
|
|
|
(in thousands)
|
|
|
|
(in thousands)
|
|
July 31, 2008
|
|
637
|
|
$
|
22.97
|
|
$
|
14,630
|
|
Program to date as of July 31, 2008
|
|
637
|
|
$
|
22.97
|
|
$
|
14,630
|
|
All such shares repurchased are immediately
retired and will not be available for future resale. The remaining amount that is authorized under
the stock repurchase program is approximately 5.4 million shares and $135
million.
9. INOVYS ACQUISITION
During
the three months ended January 31, 2008, we acquired Inovys, a privately
held company. Inovys provides innovative
solutions for design debug, failure analysis and yield acceleration for complex
semiconductor devices and processes.
From the acquisition date, the results of operations of Inovys business
are included in our condensed consolidated statements of operations and were
not material to revenues or net income for the period following the
acquisition. The purchase price was
allocated to the acquired net assets based on estimates of fair values. Pro forma results of operations for the
acquisition have not been presented as the effect has not been significant for
the periods presented.
13
Table
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10. COMPREHENSIVE INCOME
The components of
comprehensive income, net of tax, are as follows:
|
|
Three Months
Ended
July 31,
|
|
Nine Months
Ended
July 31,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
(in millions)
|
|
Net income
|
|
$
|
18
|
|
$
|
30
|
|
$
|
64
|
|
$
|
65
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments,
net of tax
|
|
|
|
|
|
|
|
|
|
Change in unrealized losses on marketable
securities and investments in other long-term assets, net of tax
|
|
(2
|
)
|
|
|
(7
|
)
|
|
|
Change in unrealized losses on derivative
instruments qualifying as cash flow hedges, net of tax
|
|
(1
|
)
|
|
|
|
|
|
|
Total comprehensive income
|
|
$
|
15
|
|
$
|
30
|
|
$
|
57
|
|
$
|
65
|
|
Verigys
derivative financial instruments consist of currency forward exchange contracts
and are recorded at fair value on the condensed consolidated balance
sheets. Changes in the fair value of
derivatives that do not qualify for hedge accounting treatment, as well as the
ineffective portion of hedges, if any, are recognized in the consolidated
statement of operations. The effective
portion of the foreign exchange gain (loss) is reported as a component of
accumulated other comprehensive income (loss) in shareholders equity and is
reclassified into the statement of operations when the hedged transaction
affects earnings. All amounts included
in accumulated other comprehensive loss as of July 31, 2008 will generally
be reclassified into earnings within 12 months. Changes in the fair value of currency forward
exchange due to changes in time value are excluded from the assessment of
effectiveness and are recognized in earnings.
The change in forward time value was not material for all periods
presented. If the transaction being
hedged fails to occur, or if a portion of any derivative is deemed to be
ineffective, we will recognize the gain (loss) on the associated financial
instrument in other income, net in the statement of operations. We did not have any ineffective hedges during
the periods presented.
11. INVENTORY
Inventory, net of related
reserves, consists of the following:
|
|
July 31,
|
|
October 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
(in millions)
|
|
Raw materials
|
|
$
|
35
|
|
$
|
25
|
|
Work in progress
|
|
9
|
|
6
|
|
Finished goods
|
|
42
|
|
37
|
|
Total inventory
|
|
$
|
86
|
|
$
|
68
|
|
There is approximately $16
million of demonstration products included in finished goods inventory as of July 31,
2008 and $17 million as of October 31, 2007.
14
Table
of Contents
12. PROPERTY, PLANT AND EQUIPMENT, NET
|
|
July 31,
|
|
October 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
(in millions)
|
|
Leasehold improvements
|
|
$
|
16
|
|
$
|
13
|
|
Software
|
|
21
|
|
21
|
|
Machinery and equipment
|
|
46
|
|
40
|
|
Total property, plant and equipment
|
|
83
|
|
74
|
|
Accumulated depreciation and amortization
|
|
(41
|
)
|
(32
|
)
|
Total property, plant and equipment, net
|
|
$
|
42
|
|
$
|
42
|
|
We recorded approximately $4
million and $3 million of depreciation and amortization expense during the
three months ended July 31, 2008 and 2007, respectively. We recorded approximately $11 million and $9
million of depreciation and amortization expense during the nine months ended July 31,
2008 and 2007, respectively.
13. MARKETABLE SECURITIES
We account for our
short-term marketable securities in accordance with SFAS No. 115,
Accounting for Certain Investments in Debt and Equity
Securities
(SFAS No. 115). We classify our marketable securities as
available for sale at the time of purchase and re-evaluate such designation as
of each consolidated balance sheet date.
We amortize premiums and discounts against interest income over the life
of the investment. Our marketable
securities are classified as cash equivalents if the original maturity, from
the date of purchase, is ninety days or less.
Our marketable securities are classified as short-term investments if
the original maturity, from the date of purchase, is in excess of ninety days
since we intend to convert them into cash as necessary to meet our liquidity
requirements.
Our marketable securities
include commercial paper, corporate bonds, government securities and auction
rate securities. Auction rate securities
are securities that are structured with interest rate reset periods of
generally less than ninety days but with contractual maturities that can be
well in excess of ten years. At the end
of each interest rate reset period, which occur every seven to thirty-five
days, investors can buy, sell, or continue to hold the securities at par. Our auction rate securities experienced
failed auctions due to sell orders exceeding buy orders which occurred as a result
of liquidity concerns derived primarily from the mortgage and debt
markets. We continue to see liquidity
issues in the market for auction rate securities. Our auction rate securities primarily consist
of investments that are backed by pools of student loans guaranteed by the U.S.
Department of Education and other asset-backed securities. We evaluate our investments periodically for
possible other-than-temporary impairment by reviewing factors such as the
length of time and extent to which fair value has been below cost basis, the
financial condition of the issuer and insurance guarantor, and our ability and
intent to hold the investment for a period of time sufficient for anticipated
recovery of market value. Based on an
analysis of other-than-temporary impairment factors, at July 31, 2008, we
have recorded a temporary impairment within accumulated other comprehensive
loss for the nine months ended July 31, 2008 of approximately $6 million
(net of tax of $1 million) related to these auction rate securities. We estimate the fair value using market price
or a discounted cash flow model incorporating assumptions that market
participants would use in their estimates of fair value. Some of these assumptions include estimates
for interest rates, timing and amount of cash flows and expected holding
periods of the auction rate securities.
Our marketable securities portfolio as of July 31, 2008 has a
carrying value of $249 million, of which approximately $82 million
represented auction rate securities. The
interest rate reset auctions for our portfolio have all failed as of July 31,
2008. These securities have been in a
loss position for less than 12 months.
The funds associated with failed auctions will not be accessible to us
until a successful auction occurs, a buyer is found outside of the auction
process, or the underlying securities have matured or are called by the
issuer. Given the recent disruptions in
the credit markets and the fact that the liquidity for these types of
securities remains uncertain, we have classified all of our auction rate
securities as long-term assets in our condensed consolidated balance sheet as
our ability to liquidate such securities in the next 12 months is uncertain.
15
Table
of Contents
The following table
summarizes our marketable security investments as of July 31, 2008:
|
|
Cost
|
|
Gross Unrealized
Gains (Losses)
|
|
Estimated Fair
Market Value
|
|
|
|
(in millions)
|
|
Short-term marketable securities:
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
186
|
|
$
|
|
|
$
|
186
|
|
U.S. treasury securities and government
agency securities
|
|
71
|
|
|
|
71
|
|
Corporate debt securities
|
|
96
|
|
|
|
96
|
|
Total short-term available for sale
investments
|
|
$
|
353
|
|
$
|
|
|
$
|
353
|
|
|
|
Cost
|
|
Gross Unrealized
Gains (Losses)
|
|
Estimated Fair
Market Value
|
|
|
|
(in millions)
|
|
Long-term marketable securities:
|
|
|
|
|
|
|
|
Auction rate securities
|
|
$
|
89
|
|
$
|
(7
|
)
|
$
|
82
|
|
Total long-term available for sale
investments
|
|
$
|
89
|
|
$
|
(7
|
)
|
$
|
82
|
|
As Reported:
|
|
|
|
Cash equivalents
|
|
$
|
186
|
|
Short-term marketable securities
|
|
167
|
|
Long-term marketable securities
|
|
82
|
|
Total at July 31, 2008
|
|
$
|
435
|
|
The amortized cost and
estimated fair value of cash equivalents and marketable securities classified
as available-for sale at July 31, 2008 are shown in the table below based
on their contractual maturity dates:
|
|
Cost
|
|
Gross Unrealized
Gains (Losses)
|
|
Estimated Fair
Market Value
|
|
|
|
(in millions)
|
|
Less than 1 year
|
|
$
|
326
|
|
$
|
|
|
$
|
326
|
|
Due in 1 to 2 years
|
|
27
|
|
|
|
27
|
|
Due after 2 years
|
|
89
|
|
(7
|
)
|
82
|
|
Total at July 31, 2008
|
|
$
|
442
|
|
$
|
(7
|
)
|
$
|
435
|
|
14. GUARANTEES
Standard Warranty
A summary of our standard
warranty accrual activity during the nine months ended July 31, 2008 and
2007 is shown in the table below: (Also see Note 18 Other Current Liabilities
and Other Long-Term Liabilities)
|
|
Nine Months Ended
July 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
(in millions)
|
|
Beginning balance at November 1,
|
|
$
|
9
|
|
$
|
6
|
|
Accruals for warranties issued during the
period
|
|
8
|
|
9
|
|
Accruals related to pre-existing warranties
(including changes in estimates)
|
|
|
|
5
|
|
Settlements made during the period
|
|
(10
|
)
|
(12
|
)
|
Ending balance at July 31,
|
|
$
|
7
|
|
$
|
8
|
|
In our condensed
consolidated balance sheets, standard warranty accrual is presented in other
current liabilities.
16
Table of Contents
Extended Warranty
A summary of our extended
warranty deferred revenue activity for the nine months ended July 31, 2008
and 2007 is shown in the table below:
|
|
Nine Months Ended
July 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
(in millions)
|
|
Beginning balance at November 1,
|
|
$
|
21
|
|
$
|
20
|
|
Revenue recognized during the period
|
|
(8
|
)
|
(7
|
)
|
Deferral of revenue for new contracts
|
|
5
|
|
8
|
|
Ending balance at July 31,
|
|
$
|
18
|
|
$
|
21
|
|
In our condensed
consolidated balance sheets, current deferred revenue is presented separately
and long-term deferred revenue is included in other long-term liabilities.
Indemnifications
As is customary in our
industry and as is provided for in local law in the U.S. and other
jurisdictions, many of our standard contracts provide remedies to our customers
and others with whom we enter into contracts, such as defense, settlement, or
payment of judgment for intellectual property claims related to the use of our
products. From time to time, we
indemnify customers, as well as our suppliers, contractors, lessors, lessees
and others with whom we enter into contracts, against combinations of loss,
expense or liability arising from various triggering events related to the sale
and the use of our products, the use of their goods and services, the use of
facilities and state of our owned facilities and other matters covered by such
contracts, usually up to a specified maximum amount. In addition, from time to time we also
provide protection to these parties against claims related to undiscovered
liabilities, additional product liability or environmental obligations.
Under agreements we entered
into with Agilent at the time of the separation, we will indemnify Agilent in
connection with our activities conducted prior to and following our separation
from Agilent in connection with our business and the liabilities that we
specifically assumed under the agreements.
These indemnifications cover a variety of aspects of our business,
including, but not limited to, employee, tax, intellectual property and
environmental matters.
15.
RESTRUCTURING
During the three months
ended July 31, 2008, we offered an early retirement plan to a number of
eligible employees. The total charges
incurred during this period for this early retirement plan were
$2.1 million, $1.2 million of which was recorded within cost of sales and
the remainder of which was recorded within operating expenses.
In connection with the
transfer of our manufacturing activities to Flextronics in fiscal year 2006, we
transferred a number of employees to Flextronics. As part of this arrangement, we had a
potential obligation in the future of approximately $2 million associated with
the termination of these transferred employees from the manufacturing
facilities in Flextronics in Germany. We
had deferred these costs and recognized them ratably over the employees period
of service through the employees expected termination from Flextronics. During the second quarter of fiscal year
2008, we determined that we were no longer liable to pay this obligation as we
had decided to maintain a specialized portion of our manufacturing activities
in Germany. As a result, at the end of
the second quarter of fiscal year 2008, we recorded a $1.2 million benefit
relating to restructuring charges.
As of July 31, 2008, we
had approximately $2.4 million in accrued restructuring liability relating to
reductions that will occur during the second half of fiscal year 2008.
16. SEPARATION COSTS
In connection with our
separation from Agilent in June 2006, we incurred one-time internal and
external separation costs, such as information technology set-up costs and
consulting and legal and other professional fees. These expenses totaled $1.0 million and $4.5
million in the three and nine months ended July 31, 2007, respectively,
and were not significant during the three and nine months ended July 31,
2008.
17. RETIREMENT AND POST-RETIREMENT PENSION
PLANS
General.
Substantially all of our employees are covered under various Verigy defined
benefit and/or defined contribution plans.
Additionally, we sponsor retiree medical accounts for certain eligible
U.S. employees. Prior to the separation,
Agilent had sponsored post-retirement health care benefits and a death benefit
under the Retiree Survivors Benefit Plan for our eligible U.S. employees.
17
Table
of Contents
U.S.
Retirement and Post-retirement Health Care Benefits for U.S. Employees
Effective June 1, 2006,
we established a defined contribution benefit plan (Verigy 401(k) plan)
for our U.S. employees. Our
401(k) plan provides matching contribution of up to 4% of eligible
compensation. Eligible compensation
consists of base and variable pay. In
addition, we also offer a profit sharing plan for our U.S. employees, whereby
we will make a maximum 2% contribution to the employees 401(k) plan if
certain annual financial targets are achieved.
A small number of our U.S. employees meeting certain age and service
requirements also receive an additional 2% profit sharing contribution to their
401(k) plan accounts if certain annual financial targets are achieved.
For the three and nine
months ended July 31, 2008, our matching expenses for our U.S. employees
under the Verigy 401(k) and the Verigy profit sharing plans were $0.9
million and $2.5 million, respectively, compared to $0.9 million and $2.6
million in the comparable periods in fiscal year 2007.
Effective June 1, 2006,
Verigy made available certain retiree benefits to U.S. employees meeting
certain age and service requirements upon termination of employment through
Verigys Retiree Medical Account (RMA) Plan.
At the date of separation, the present value of our responsibility for
the retiree medical benefit obligation was approximately $2.3 million. We are ratably recognizing this obligation
over a period of 6.4 years, the shorter of the estimated average working
lifetime or retirement eligibility of these employees. For the three and nine months ended July 31,
2008, the amount of expenses recognized under the RMA plan was approximately
$0.2 million and $0.5 million, respectively.
There are no plan assets related to these obligations, and we currently
do not have any plans to make any contributions.
Non-U.S.
Retirement Benefit Plans.
Eligible
employees outside the U.S. generally receive retirement benefits under various
retirement plans based upon factors such as years of service and employee
compensation levels. Eligibility is
generally determined in accordance with local statutory requirements.
Change in
Plans.
Upon our separation from
Agilent, the defined benefit plans for our employees in Germany, Korea, Taiwan,
France and Italy were transferred to us.
With the exception of Italy and France, which involve relatively insignificant
amounts, Agilent completed the funding of these transferred plans, based on
100% of the accumulated benefit obligation level as of the separation date, by
contributing approximately $3.3 million into our pension trust accounts during
the three months ended January 31, 2007.
18
Table of Contents
Costs for
All U.S. and Non-U.S. Plans.
The following tables summarize the principal components of
total costs associated with the retirement-related benefit plans of Verigy for
the three and nine months ended July 31, 2008 and 2007:
|
|
U.S. Plans
|
|
Non-U.S. Plans
|
|
Total
|
|
|
|
Three Months Ended July 31,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
(in millions)
|
|
Defined benefit pension plan costs
|
|
$
|
|
|
$
|
|
|
$
|
1.8
|
|
$
|
1.5
|
|
$
|
1.8
|
|
$
|
1.5
|
|
Defined contribution pension plan costs
|
|
0.9
|
|
0.9
|
|
0.3
|
|
0.3
|
|
1.2
|
|
1.2
|
|
Non-pension post-retirement benefit costs
|
|
0.2
|
|
0.2
|
|
|
|
|
|
0.2
|
|
0.2
|
|
Total retirement-related plans costs
|
|
$
|
1.1
|
|
$
|
1.1
|
|
$
|
2.1
|
|
$
|
1.8
|
|
$
|
3.2
|
|
$
|
2.9
|
|
|
|
U.S. Plans
|
|
Non-U.S. Plans
|
|
Total
|
|
|
|
Nine Months Ended July 31,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
(in millions)
|
|
Defined benefit pension plan costs
|
|
$
|
|
|
$
|
|
|
$
|
5.3
|
|
$
|
4.4
|
|
$
|
5.3
|
|
$
|
4.4
|
|
Defined contribution pension plan costs
|
|
2.5
|
|
2.6
|
|
0.9
|
|
0.5
|
|
3.4
|
|
3.1
|
|
Non-pension post-retirement benefit costs
|
|
0.5
|
|
0.5
|
|
|
|
|
|
0.5
|
|
0.5
|
|
Total retirement-related plans costs
|
|
$
|
3.0
|
|
$
|
3.1
|
|
$
|
6.2
|
|
$
|
4.9
|
|
$
|
9.2
|
|
$
|
8.0
|
|
Non-U.S.
Defined Benefit.
For the three and nine months ended July 31, 2008 and 2007, the net
pension costs related to our employees participating in our non-U.S. defined
benefit plans were comprised of:
|
|
Three Months
|
|
Nine Months
|
|
|
|
Ended
|
|
Ended
|
|
|
|
July 31,
|
|
July 31,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
(in millions)
|
|
Service cost benefits earned during the
year
|
|
$
|
1.2
|
|
$
|
1.0
|
|
$
|
3.9
|
|
$
|
3.0
|
|
Interest cost on benefit obligation
|
|
1.0
|
|
0.7
|
|
2.9
|
|
2.0
|
|
Expected return on plan assets
|
|
(0.7
|
)
|
(0.5
|
)
|
(2.4
|
)
|
(1.5
|
)
|
Amortization and deferrals of recognized amounts:
|
|
|
|
|
|
|
|
|
|
Actuarial loss
|
|
0.3
|
|
0.3
|
|
0.9
|
|
0.9
|
|
Total net plan costs
|
|
$
|
1.8
|
|
$
|
1.5
|
|
$
|
5.3
|
|
$
|
4.4
|
|
Measurement date.
We use a September 30
measurement date for all of our non-U.S. plans and October 31 for our U.S.
retiree medical account.
18.
OTHER CURRENT LIABILITIES
AND OTHER LONG-TERM LIABILITIES
Other current accrued
liabilities at July 31, 2008 and October 31, 2007, were as follows:
|
|
July 31,
2008
|
|
October 31,
2007
|
|
|
|
(in millions)
|
|
Supplier liabilities
|
|
$
|
7
|
|
$
|
5
|
|
Accrued warranty costs
|
|
7
|
|
9
|
|
Other
|
|
8
|
|
5
|
|
Total other current liabilities
|
|
$
|
22
|
|
$
|
19
|
|
Supplier liabilities reflect
the amount by which our firmly committed inventory purchases from our suppliers
exceed our current forecasted production and service and support needs. (Also see Note 14, Guarantees for
additional information regarding warranty accruals).
19
Table of Contents
Other long-term liabilities
at July 31, 2008 and October 31, 2007, were as follows:
|
|
July 31,
2008
|
|
October 31,
2007
|
|
|
|
(in millions)
|
|
Long-term extended warranty and deferred
revenue
|
|
$
|
8
|
|
$
|
12
|
|
Retirement plan accruals
|
|
39
|
|
32
|
|
Other
|
|
1
|
|
3
|
|
Total other long-term liabilities
|
|
$
|
48
|
|
$
|
47
|
|
(Also see Note 17, Retirement
and Post-Retirement Pension Plans for additional information regarding
retirement plan accruals).
19.
COMMITMENTS
AND
CONTINGENCIES
As of July 31, 2008,
there was no material change in our capital lease obligations, operating lease
obligations, purchase obligations or any other long-term liabilities reflected
on our condensed consolidated balance sheets as compared to such obligations
and liabilities as of October 31, 2007.
As a result of adopting FIN
48, we had $9.8 million of unrecognized tax benefits which were recorded as
long term liabilities upon adoption on November 1, 2007. As of July 31,
2008, we had $11.6 million of unrecognized tax benefits, of which $10.4 million
is recorded as long- term liabilities, $1.2 million is recorded as income taxes
payable within current liabilities, and an additional $2.5 million which is
recorded as a reduction in long term deferred tax assets.
Rent expense was $1.5
million and $4.7 million for the three and nine months ended July 31,
2008, respectively, compared to $1.4 million and $4.2 million in the comparable
periods in fiscal year 2007.
From time to time, we are
involved in lawsuits, claims, investigations and proceedings, including patent,
commercial and environmental matters, which arise in the ordinary course of
business.
20.
SEGMENT &
GEOGRAPHIC INFORMATION
SFAS No. 131,
Disclosures About Segments of an Enterprise and Related Information,
(SFAS No. 131) requires us to identify the segment or segments we
operate in. Based on the standards set
forth in SFAS No. 131, we operate in one reportable segment: we
provide test system solutions that are used in the manufacture of semiconductor
devices. Below is the revenue detail for
the two product platforms within this segment:
|
|
Three Months
|
|
Nine Months
|
|
|
|
Ended
|
|
Ended
|
|
|
|
July 31,
|
|
July 31,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
(in millions)
|
|
Net revenue from products:
|
|
|
|
|
|
|
|
|
|
SOC / SIP / High-Speed Memory
|
|
$
|
129
|
|
$
|
92
|
|
$
|
366
|
|
$
|
210
|
|
Memory
|
|
9
|
|
76
|
|
57
|
|
233
|
|
Net revenue from products
|
|
138
|
|
168
|
|
423
|
|
443
|
|
Net revenue from services
|
|
41
|
|
36
|
|
118
|
|
109
|
|
Total net revenue
|
|
$
|
179
|
|
$
|
204
|
|
$
|
541
|
|
$
|
552
|
|
Major
customers
For the three months ended July 31,
2008, three of our customers accounted for 44% of our total net revenue, with
each one of them accounting for 19.6%, 13.7%, and 10.7%, respectively. For the three months ended July 31,
2007, one of our customers accounted for 30.9% of our total net revenue.
For the nine months ended July 31,
2008, one of our customers accounted for 11.3% of our total net revenue. For the nine months ended July 31, 2007,
two of our customers accounted for 35.7% of our total net revenue, with one
customer accounting for 24.2% and the other customer accounting for 11.5% of
our total net revenue.
20
Table of Contents
Geographic
Net Revenue Information:
|
|
Three Months
|
|
Nine Months
|
|
|
|
Ended
|
|
Ended
|
|
|
|
July 31,
|
|
July 31,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
(in millions)
|
|
United States
|
|
$
|
25
|
|
$
|
29
|
|
$
|
83
|
|
$
|
171
|
|
Singapore
|
|
125
|
|
148
|
|
363
|
|
296
|
|
Japan
|
|
14
|
|
12
|
|
48
|
|
38
|
|
Rest of the World
|
|
15
|
|
15
|
|
47
|
|
47
|
|
Total net revenue
|
|
$
|
179
|
|
$
|
204
|
|
$
|
541
|
|
$
|
552
|
|
Net revenue is attributed to
geographic areas based on the country in which the customer takes title of our
products.
Geographic
Property, Plant and Equipment Information:
|
|
July 31,
|
|
October 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
(in millions)
|
|
United States
|
|
$
|
14
|
|
$
|
13
|
|
Singapore
|
|
14
|
|
17
|
|
Germany
|
|
6
|
|
4
|
|
China
|
|
3
|
|
3
|
|
Rest of the World
|
|
5
|
|
5
|
|
Total geographic property, plant and
equipment
|
|
$
|
42
|
|
$
|
42
|
|
21
Table of Contents
ITEM 2.
|
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
The following discussion
should be read in conjunction with the condensed consolidated financial
statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q. This report contains forward-looking
statements including, without limitation, statements regarding manufacturing
operations, increase in sales and growth of business in Asia, research and
development activities and expenses, variations in quarterly revenues and
operating results, trends, cyclicality, seasonality and growth in the markets
we sell into, our strategic direction, expenditure in research and development,
anticipated benefits from our operating model, our future effective tax rate,
new product introductions, growth in service revenue, our liquidity position,
our ability to generate cash from continuing operations, our expected growth,
the potential impact of adopting new accounting pronouncements, our potential
future financial results, the quality of our marketable securities, our
purchase commitments, our obligation and assumptions about our retirement and
post-retirement benefit plans, the impact of our variable cost structure, and
our lease payment obligations that involve risks and uncertainties. Additional forward-looking statements can be
identified by words such as anticipated, expect, believes, plan, predicts,
and similar terms. Our actual results
could differ materially from the results contemplated by these forward-looking
statements due to various factors, including those discussed under Part II,
Item 1A., Risk Factors and elsewhere in this report.
Overview
Prior to our initial public offering, we were a wholly-owned subsidiary
of Agilent Technologies, Inc (Agilent).
We became an independent company on June 1, 2006, when we separated
from Agilent. On June 13, 2006, we
completed our initial public offering and became a separate stand-alone
publicly-traded company incorporated in Singapore focused on technology and
innovation in semiconductor testing. We
design, develop, manufacture and sell advanced test systems and solutions for
the semiconductor industry. We offer a
single platform for each of the two general categories of devices being tested:
our 93000 Series platform, designed to test System-on-a-Chip (SOC),
System-in-a-Package (SIP) and high-speed memory devices, and our V5000 Series platform,
designed to test memory devices, including flash memory and multi-chip
packages. Our test solutions are both
scalable and flexible. Our test
platforms are scalable across different frequency ranges, different pin counts
and different numbers of devices under simultaneous test. Our test platforms flexibility allows for a
single test system to test a wide range of applications for semiconductor
devices. Our scalable platform
architecture provides us with internal operating model efficiencies such as
relatively lower research and development costs, engineering headcount, support
requirements and inventory risk. The
scalability and flexibility of our test solutions also provides economic
benefits to our customers by allowing them to get their complex, feature-rich
semiconductor devices to market quickly and to reduce their overall costs. In addition to our test equipment, our
solutions include advanced analysis tools as well as consulting, service and
support offerings such as start-up assistance, application services and system
calibration and repair.
We have a broad customer
base, with almost 1,900 93000 Series systems and more than 2,550 V5000 Series systems
installed worldwide as of July 31, 2008.
Our customers include integrated device manufacturers (IDMs), test
subcontractors, also referred to as subcontractors, which includes specialty
assembly, package and test companies as well as wafer foundries, and fabless
design companies.
Basis of Presentation and Separation from Agilent
Our fiscal year end is October 31,
and our fiscal quarters end on January 31, April 30 and July 31. Unless otherwise stated, all dates refer to
our fiscal year and fiscal periods.
Amounts included in the
accompanying condensed consolidated financial statements are expressed in U.S.
dollars. The accompanying condensed
consolidated financial statements have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission (SEC).
Certain amounts
in the condensed consolidated financial statements for the three and nine
months ended July 31, 2007 were reclassified to conform to the
presentation used for the three and nine months ended July 31, 2008. In
the third quarter of fiscal year 2008, we recorded a $2.6 million adjustment in
other income, net, related to foreign currency remeasurement gains. These gains
relate to a failure to remeasure certain foreign currency assets and
liabilities, primarily value added tax receivables, arising in fiscal years
2006, 2007 and the first two quarters of fiscal year 2008. Management has assessed the impact of this
adjustment and does not believe the amounts are material, either individually
or in the aggregate, to any of the prior years financial statements, and the
impact of correcting these errors in the current year is not expected to be
material to the full fiscal year 2008 financial statements. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles (GAAP) in the United States have been
condensed or omitted pursuant to such rules and regulations. The following discussion should be read in
conjunction with our 2007 Annual Report on Form 10-K.
22
Table of Contents
Overview of Results
Our
total net revenue for the three months ended July 31, 2008, was
$179 million, down $25 million, or 12.3%, from the comparable period in fiscal
year 2007, but up 10.5% sequentially.
This decrease was due to lower revenue from sales of our memory test
systems in the third quarter of fiscal year 2008. The decline in our memory test revenues
resulted from substantial declines in the capital spending patterns of our
memory device manufacturer customers and of their subcontractor test partners
to which we also sell systems. The
overall decline in the memory market capital spending reflects continued excess
supply and price erosion for memory products, which has resulted in lower
manufacturing output and excess test capacity.
These factors have caused our customers to delay test system orders and
delay delivery of systems ordered.
Notwithstanding
the cyclical weakness in the memory test industry, our SOC business showed
continued strength. We experienced
increased demand for our 93000 platform for SOC applications, in particular our
Port Scale RF products, driven primarily by strong demand for our customers
devices targeted at wireless, PC and consumer mixed-signal device markets. For the three months ended July 31,
2008, three of our SOC customers each accounted for more than 10% of our total
net revenue. In contrast, for the three
months ended July 31, 2007, one of our memory customers accounted for more
than 10% of our total net revenue.
Our gross margin for the
three months ended July 31, 2008, was 46.4%, an increase of 0.8 percentage
points from the comparable period in fiscal year 2007. Gross margin improvement was primarily
attributable to the stronger mix of SOC systems, which generally have a higher
gross margin than our memory systems, sold during the quarter. Excluding the impact of $1.2 million of
restructuring charges in cost of sales relating to an early retirement program
recently initiated, gross margin would have been essentially flat compared to
the second quarter of fiscal year 2008.
Our total operating
expenses, including separation and restructuring charges, were $68 million
in the three months ended July 31, 2008, up $6 million, or 9.7%, from the
comparable period in fiscal year 2007, and up by $5 million sequentially. This increase in operating expenses from the
comparable quarter of fiscal year 2007 was primarily due to increased spending
on research and development initiatives for memory products that are planned
for introduction by the end of the calendar year and SOC products planned for
release during the next 9 to 12 months, higher share-based compensation and
increases in field selling and governance costs.
Net income for the three and
nine months ended July 31, 2008 was $18 million and $64 million, a
decrease of 40.0% and 1.5% from the $30 and $65 million achieved in the
comparable periods in fiscal year 2007.
This decrease was primarily due to the overall decline in the memory
market capital spending, partially offset by our revenue growth in SOC testers
and increased revenue generated from our Port Scale RF product. For the nine months ended July 31, 2008,
we generated operating cash flows of $93 million and our cash and cash
equivalents balance as of July 31, 2008 was $218 million.
We derive a significant
percentage of our net revenue from outside of North America. Net revenue from customers located outside of
North America represented 86.0% and 85.8% of total net revenue in the three
months ended July 31, 2008 and 2007, respectively. Net revenue in North America was lower by
13.8% during the three months ended July 31, 2008, compared to the same
period of fiscal year 2007, due to the continuing outsourcing by our North
American customers to contract manufacturers in Asia. Net revenue in Asia (including Japan) was
higher by 11.4% in the three months ended July 31, 2008, compared to the
same period of fiscal year 2007. We
expect this trend of increasing sales in Asia (including Japan) to continue as
semiconductor manufacturing activities continue to concentrate in that region.
The sales of our products
and services are dependent, to a large degree, on customers who are subject to
cyclical trends in the demand for their products. These cyclical periods have had and will have
a significant effect on our business since our customers often delay or
accelerate purchases in reaction to changes in their businesses and to demand
fluctuations in the semiconductor industry.
Historically, these demand fluctuations have resulted in significant
variations in our results of operations.
This was particularly relevant during the second and third quarters of
fiscal year 2008 where we saw a significant decrease in revenue from our memory
platform and experienced some order postponements. Due to our product diversification, however,
we were able to partially offset the effect of this downturn in demand for flash
memory systems with increased demand for our SOC products fueled by the
wireless, PC and consumer mixed-signal device markets. The sharp swings in the semiconductor
industry in recent years have generally affected the semiconductor test
equipment and services industry more significantly than the overall capital
equipment sector.
23
Table of Contents
Furthermore, we sell to a
variety of customers, including subcontractors.
Because we sell to subcontractors, which during market troughs tend to decrease
or postpone orders for new test systems and test services more quickly and
dramatically than other customers, any downturn may cause a quicker and more
significant adverse effect on our business than on the broader semiconductor
industry. In addition, although a
decline in orders for semiconductor capital equipment may accompany or precede
the timing of a decline in the semiconductor market as a whole, recovery in
semiconductor capital equipment spending may lag the recovery by the
semiconductor industry.
Although our visibility into
the memory market remains poor, we continue to invest in our memory products in
anticipation of a cyclical recovery in the market and are working on
initiatives to expand our memory customer base. In addition, we will place
stronger emphasis on our SOC business focusing our attention and resources on
high growth segments of the markets we address such as highly-integrated RF,
consumer mixed-signal, high-speed memory and yield improvement.
Critical
Accounting Policies and Estimates
The preparation of financial
statements in accordance with U.S. GAAP requires management to make estimates
and assumptions that affect the amounts reported in our condensed consolidated
financial statements and accompanying notes.
Management bases its estimates on historical experience and various
other assumptions management believes to be reasonable. Although these estimates are based on
managements knowledge of current events and of actions that may impact the
Company in the future, actual results may be different from the estimates. Our critical accounting policies are those
that affect our financial statements materially and involve difficult, subjective
or complex judgments by management.
Those policies include revenue recognition, restructuring charges,
inventory valuation, warranty, share-based compensation, retirement and
post-retirement plan assumptions, valuation of goodwill and intangible assets,
valuation of marketable securities, and accounting for income taxes.
An accounting policy is
deemed to be critical if it requires an accounting estimate to be made based on
assumptions about matters that are highly uncertain at the time the estimate is
made, and if different estimates that reasonably could have been used or
changes in the accounting estimate that are reasonably likely to occur could
materially change the financial statements.
There have been no significant changes during the three and nine months
ended July 31, 2008 to the items that we disclosed as our critical
accounting policies and estimates in Managements Discussion and Analysis of
Financial Condition and Results of Operations included in our Annual Report on Form 10-K
for the year ended October 31, 2007, filed with the Securities and
Exchange Commission on December 21, 2007.
Recent
Accounting Pronouncements
In September 2006, the
FASB issued SFAS No. 157,
Fair Value Measurements
(SFAS No. 157). The purpose of
SFAS No. 157 is to define fair value, establish a framework for measuring
fair value and enhance disclosures about fair value measurements. In February 2008, the FASB issued FASB
Staff Position (FSP) 157-1,
Application of FASB
Statement No. 157 to FASB Statement No. 13 and Other Accounting
Pronouncements That Address Fair Value Measurements for Purposes of Lease
Classification or Measurement under Statement 13
(FSP 157-1) and
FSP 157-2,
Effective Date of FASB Statement No. 157
(FSP
157-2). FSP 157-1 amends SFAS No. 157
to remove certain leasing transactions from its scope. FSP 157-2 delays the effective date of SFAS No. 157
for all non-financial assets and non-financial liabilities, except for items
that are recognized or disclosed at fair value in the financial statements on a
recurring basis (at least annually), until the beginning of the first quarter
of fiscal year 2010. The measurement and
disclosure requirements related to financial assets and financial liabilities
are effective for us beginning in the first quarter of fiscal year 2009. We are currently evaluating whether SFAS No. 157
will result in a change to our fair value measurements.
In February 2007, the
FASB issued SFAS No. 159,
The Fair Value Option for
Financial Assets and Financial Liabilities
(SFAS No. 159),
which permits entities to choose to measure many financial instruments and
certain other items at fair value that are not currently required to be
measured at fair value. SFAS No.159 will
be effective for us beginning in the first quarter of fiscal year 2009. We are currently evaluating the impact of
adopting SFAS No. 159 on our financial position, cash flows and results of
operations.
In December 2007, the FASB issued
SFAS No. 141 (revised 2007),
Business Combinations
(SFAS
No. 141(R)). SFAS No. 141(R) amends SFAS
No. 141 and provides revised guidance for recognizing and measuring identifiable
assets and goodwill acquired, liabilities assumed and any noncontrolling interest
in an acquiree. It also provides disclosure
requirements to enable users of the financial statements to evaluate the nature
and financial effects of a business combination. It is effective for fiscal years beginning on
or after December 15, 2008 and will be applied prospectively. We are currently assessing the impact that SFAS
No. 141(R) may have on our consolidated financial statements upon adoption in fiscal
year 2010.
24
Table of Contents
In December 2007,
the FASB issued SFAS No. 160,
Noncontrolling Interests
in Consolidated Financial Statementsan amendment of ARB No. 51
(SFAS No. 160). SFAS No. 160 requires that ownership
interests in subsidiaries held by parties other than the parent, and the amount
of consolidated net income, be clearly identified, labeled, and presented in
the consolidated financial statements.
It also requires, once a subsidiary is deconsolidated, any retained
noncontrolling equity investment in the former subsidiary be initially measured
at fair value. Sufficient disclosures
are required to clearly identify and distinguish between the interests of the
parent and the interests of the noncontrolling owners. It is effective for fiscal years beginning on
or after December 15, 2008, and requires retroactive adoption of the
presentation and disclosure requirements for existing minority interests. All other requirements shall be applied
prospectively. We are currently
assessing the impact that SFAS No. 160 may have on our consolidated
financial statements upon adoption in fiscal year 2010.
In
March 2008, the FASB issued SFAS No. 161,
Disclosures
about Derivative Instruments and Hedging Activities-an amendment of FASB
Statement No. 133
(SFAS No. 161). SFAS No. 161 expands the current disclosure
requirements of SFAS No. 133,
Accounting for Derivative
Instruments and Hedging Activities
, and requires that companies
must now provide enhanced disclosures on a quarterly basis regarding how and
why the entity uses derivatives, how derivatives and related hedged items are
accounted for under SFAS No. 133 and how derivatives and related hedged
items affect the companys financial position, performance and cash flow. SFAS No. 161
is effective prospectively for periods beginning on or after November 15,
2008. We are currently assessing the impact that SFAS No. 161 may have on
our consolidated financial statements upon our adoption in fiscal year 2009.
Quarterly
Results of Operations
Our quarterly results of operations have varied in the past and are likely
to continue to vary in the future primarily due to the cyclical nature of the
semiconductor industry. The
semiconductor industry has been highly cyclical with recurring periods of
diminished product demand. During these
periods, semiconductor designers and manufacturers, facing reduced demand for
their products, have significantly reduced their capital and other
expenditures, including expenditures for semiconductor test equipment and
services such as those we offer. We have
experienced just such a cyclical downturn in our memory business during fiscal
year 2008. Historically, our third and
fourth fiscal quarters have tended to be our strongest quarters for new orders,
while our first fiscal quarter tends to be our weakest quarter for orders. During
the third quarter of 2008 we continued to see weakness in the memory market
which negatively impacted our orders during the period.
We believe that the most significant factor
driving these seasonal patterns is the holiday buying season for consumer electronics
products. The seasonality of our
business is often masked to a significant extent by the high degree of
cyclicality of the semiconductor industry.
As such, we believe that period-to-period comparisons of our results of
operations should not be relied upon as an indication of future
performance. In future periods, the
market price of our ordinary shares could decline if our revenues and results
of operations are below the expectations of analysts and investors. Factors that may cause our revenue and
results of operations to vary include those discussed in the Risk Factors in
Item 1A of Part II of, and else where in, this report.
25
Table of Contents
The following table sets
forth certain operating data as a percent of net revenue for the periods
presented:
|
|
Three Months
July 31,
|
|
Nine Months Ended
July 31,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Net revenue:
|
|
|
|
|
|
|
|
|
|
Products
|
|
77.1
|
%
|
82.4
|
%
|
78.2
|
%
|
80.3
|
%
|
Services
|
|
22.9
|
|
17.6
|
|
21.8
|
|
19.7
|
|
Total net revenue
|
|
100.0
|
|
100.0
|
|
100.0
|
|
100.0
|
|
Cost of sales:
|
|
|
|
|
|
|
|
|
|
Cost of products
|
|
37.4
|
|
41.7
|
|
37.3
|
|
42.2
|
|
Cost of services
|
|
16.2
|
|
12.7
|
|
15.9
|
|
13.8
|
|
Total cost of sales
|
|
53.6
|
|
54.4
|
|
53.2
|
|
56.0
|
|
Gross margin (1)
|
|
46.4
|
|
45.6
|
|
46.8
|
|
44.0
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
15.1
|
|
11.3
|
|
14.4
|
|
12.3
|
|
Selling, general and administrative
|
|
22.3
|
|
18.6
|
|
21.4
|
|
19.4
|
|
Restructuring charges
|
|
0.6
|
|
|
|
0.2
|
|
|
|
Separation costs
|
|
|
|
0.5
|
|
|
|
0.7
|
|
Total operating expenses
|
|
38.0
|
|
30.4
|
|
36.0
|
|
32.4
|
|
Income from operations
|
|
8.4
|
|
15.2
|
|
10.8
|
|
11.6
|
|
Other income, net
|
|
3.4
|
|
1.5
|
|
2.7
|
|
1.8
|
|
Income before income taxes
|
|
11.8
|
|
16.7
|
|
13.5
|
|
13.4
|
|
Provision for income taxes
|
|
1.7
|
|
2.0
|
|
1.7
|
|
1.6
|
|
Net income
|
|
10.1
|
%
|
14.7
|
%
|
11.8
|
%
|
11.8
|
%
|
(1) Gross
margin represents the ratio of gross profit to total net revenue
Net Revenue
|
|
Three Months
Ended July 31,
|
|
2008
over
2007
|
|
Nine Months
Ended July 31,
|
|
2008
over
2007
|
|
|
|
2008
|
|
2007
|
|
Change
|
|
2008
|
|
2007
|
|
Change
|
|
|
|
($ in millions)
|
|
|
|
($ in millions)
|
|
|
|
Net revenue from products:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SOC/SIP/High-Speed Memory
|
|
$
|
129
|
|
$
|
92
|
|
40.2
|
%
|
$
|
366
|
|
$
|
210
|
|
74.3
|
%
|
Memory
|
|
9
|
|
76
|
|
(88.2
|
)%
|
57
|
|
233
|
|
(75.5
|
)%
|
Net revenue from products
|
|
138
|
|
168
|
|
(17.9
|
)%
|
423
|
|
443
|
|
(4.5
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue from services
|
|
41
|
|
36
|
|
13.9
|
%
|
118
|
|
109
|
|
8.3
|
%
|
Total net revenue
|
|
$
|
179
|
|
$
|
204
|
|
(12.3
|
)%
|
$
|
541
|
|
$
|
552
|
|
(2.0
|
)%
|
26
Table of Contents
Our revenue by geographic
region for the three and nine months ended July 31, 2008 and 2007 is as
follows:
|
|
Three Months
Ended July 31,
|
|
2008
over
2007
|
|
Nine Months
Ended July 31,
|
|
2008
over
2007
|
|
|
|
2008
|
|
2007
|
|
Change
|
|
2008
|
|
2007
|
|
Change
|
|
|
|
($ in millions)
|
|
|
|
($ in millions)
|
|
|
|
North America
|
|
$
|
25
|
|
$
|
29
|
|
(13.8
|
)%
|
$
|
83
|
|
$
|
173
|
|
(52.0
|
)%
|
As a percent of total net revenue
|
|
14.0
|
%
|
14.2
|
%
|
|
|
15.3
|
%
|
31.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe
|
|
$
|
7
|
|
$
|
9
|
|
(22.2
|
)%
|
$
|
26
|
|
$
|
24
|
|
8.3
|
%
|
As a percent of total net revenue
|
|
3.9
|
%
|
4.4
|
%
|
|
|
4.8
|
%
|
4.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asia-Pacific, excluding Japan
|
|
$
|
133
|
|
$
|
154
|
|
(13.6
|
)%
|
$
|
384
|
|
$
|
317
|
|
21.1
|
%
|
As a percent of total net revenue
|
|
74.3
|
%
|
75.5
|
%
|
|
|
71.0
|
%
|
57.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Japan
|
|
$
|
14
|
|
$
|
12
|
|
16.7
|
%
|
$
|
48
|
|
$
|
38
|
|
26.3
|
%
|
As a percent of total net revenue
|
|
7.8
|
%
|
5.9
|
%
|
|
|
8.9
|
%
|
6.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
$
|
179
|
|
$
|
204
|
|
(12.3
|
)%
|
$
|
541
|
|
$
|
552
|
|
(2.0
|
)%
|
Net
Revenue.
Net revenue is derived from the sale of products and
services and is adjusted for returns and allowances, which historically have
been insignificant. Our product revenue
is generated predominantly from the sales of our test equipment products. Revenue from services includes extended
warranty, customer support, consulting, training and education activities. Service revenue is recognized over the
contractual period or as services are rendered to the customer.
Net revenue in the three
months ended July 31, 2008 was $179 million, a decrease of $25
million, or 12.3%, from the $204 million in the three months ended July 31,
2007. Net product revenue in the three
months ended July 31, 2008 was $138 million, a decrease of
$30 million, or 17.9%, from the $168 million in the three months
ended July 31, 2007. These
decreases were due to lower revenue from sales of our memory test systems,
partially offset by increases in SOC and services revenue. As noted in the Overview above, our memory
customers continue to delay memory tester purchases and have significantly cut
their capital budgets due to excess supply and lower capacity utilization. Despite the cyclical weakness in the memory
test industry, our SOC business showed continued strength in the third fiscal
quarter of fiscal year 2008. During this
period, we experienced increased demand for our 93000 platform in SOC testers,
in particular our Port Scale RF products driven by wireless, PC and consumer
mixed-signal device markets.
Net revenue in the nine
months ended July 31, 2008 was $541 million, a decrease of
$11 million, or 2.0%, from the $552 million in the corresponding prior
year period. Net product revenue in the
nine months ended July 31, 2008 was $423 million, a decrease of $20
million, or 4.5%, from the $443 million in the prior year period. These decreases were primarily due to lower
revenue from sales of our memory test systems, partially offset by higher revenue
from sales of our SOC and high-speed memory test systems and our Port Scale RF
products.
Net revenue in North America
was lower by 13.8% in the three months ended July 31, 2008, compared to
the three months ended July 31, 2007, primarily due to decreased sales to
customers for memory test systems in the U.S.
Net revenue from customers located in Asia represented 82.1% of total
net revenue for the three months ended July 31, 2008, compared to 81.4% in
the three months ended July 31, 2007. We expect the trend of
increasing sales in the Asia region to continue as semiconductor manufacturing
activities continue to concentrate in that region.
Service revenue for the
three months ended July 31, 2008 accounted for $41 million, or 22.9% of
net revenue, compared to $36 million, or 17.6% of net revenue for the
three months ended July 31, 2007.
Our service revenue is expected to grow in absolute amount as we provide
services to a growing installed base of systems. Unlike product revenue, service revenue tends
not to experience significant cyclical fluctuations due to the fact that
service contracts generally extend for one to two years and revenue is
recognized over the contractual period or as services are rendered.
Service revenue for the nine
months ended July 31, 2008 accounted for $118 million, or 21.8% of
net revenue, compared to $109 million, or 19.7% of net revenue for the nine
months ended July 31, 2007.
27
Table of Contents
Cost of
Sales
Cost of Products
|
|
Three Months
Ended July 31,
|
|
2008
over
2007
|
|
Nine Months
Ended July 31,
|
|
2008
over
2007
|
|
|
|
2008
|
|
2007
|
|
Change
|
|
2008
|
|
2007
|
|
Change
|
|
|
|
($ in millions)
|
|
|
|
($ in millions)
|
|
|
|
Cost of products
|
|
$
|
67
|
|
$
|
85
|
|
(21.2
|
)%
|
$
|
202
|
|
$
|
233
|
|
(13.3
|
)%
|
As a percent of product revenue
|
|
48.6
|
%
|
50.6
|
%
|
|
|
47.8
|
%
|
52.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of
Products.
Cost of products consists
primarily of manufacturing materials, outsourced manufacturing costs, direct
labor, manufacturing and administrative overhead, warranty costs and provisions
for excess and obsolete inventory, partially offset, when applicable, by
benefits from sales of previously written down inventory.
The decrease in cost of
products of approximately $18 million in the three months ended July 31,
2008, compared to the three months ended July 31, 2007, was primarily due
to the decrease in memory product shipments as well as a decrease of separation
costs, partially offset by an increase of restructuring charges compared to the
three months ended July 31, 2007.
Also, our cost of products included $0.6 million of SFAS No. 123(R) share-based
compensation expense in the three months ended July 31, 2008, compared to
$0.4 million of such charges in the three months ended July 31, 2007.
Cost of products as a
percent of net product revenue decreased by 2.0 percentage points in the three
months ended July 31, 2008, compared to the three months ended July 31,
2007, primarily due to the shift in product mix toward higher gross margin SOC
products as well as decreases of separation costs in the current year period.
Excess and obsolete
inventory-related charges in the three months ended July 31, 2008 and 2007
were $3 million and $3 million, respectively. We also sold previously written down inventory
for $0.4 million and $1 million in the three months ended July 31,
2008 and 2007, respectively. The sales
of previously written down inventory improved our cost of products gross
margins by approximately 0.3 percentage points for the three months ended July 31,
2008 and 0.3 percentage points in three months ended July 31, 2007.
The decrease in cost of
products of approximately $31 million in the nine months ended July 31,
2008, compared to the nine months ended July 31, 2007, was primarily due
to a decrease in product shipments primarily of our memory products, coupled
with a favorable shift in product mix and lower restructuring and separation
costs compared to the comparable period in fiscal year 2007. Our cost of products also included
$1.6 million of SFAS No. 123(R) share-based compensation
expense in the nine months ended July 31, 2008, compared to $1.2 million
of such charges in the nine months ended July 31, 2007.
Cost of products as a
percent of net product revenue decreased by 4.8 percentage points in the nine
months ended July 31, 2008, compared to the nine months ended July 31,
2007, primarily due to the favorable product mix as well as lower restructuring
and separation costs and lower performance-based compensation expenses in the
current year period.
Excess and obsolete
inventory-related charges in the nine months ended July 31, 2008 and 2007
were $8 million and $8 million, respectively. We sold previously written down inventory for
$2.2 million and $3 million in the nine months ended July 31,
2008 and 2007, respectively. The sales
of previously written down inventory increased gross margin by approximately
0.5 percentage points and 0.4 percentage points for the nine months ended July 31,
2008 and 2007, respectively.
28
Table of Contents
Cost of Services
|
|
Three Months
Ended July 31,
|
|
2008
over
2007
|
|
Nine Months
Ended July 31,
|
|
2008
over
2007
|
|
|
|
2008
|
|
2007
|
|
Change
|
|
2008
|
|
2007
|
|
Change
|
|
|
|
($ in millions)
|
|
|
|
($ in millions)
|
|
|
|
Cost of services
|
|
$
|
29
|
|
$
|
26
|
|
11.5
|
%
|
$
|
86
|
|
$
|
76
|
|
13.2
|
%
|
As a percent of service revenue
|
|
70.7
|
%
|
72.2
|
%
|
|
|
72.9
|
%
|
69.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of
Services.
Cost of services includes
cost of field service and support personnel, spare parts consumed in service
activities and administrative overhead allocations.
Cost of services in the
three months ended July 31, 2008 was higher compared to the three months
ended July 31, 2007. Cost of
services as a percent of service revenue decreased by 1.5 percentage points,
from 72.2% in the three months ended July 31, 2007 to 70.7% in the three
months ended July 31, 2008. This
margin improvement is primarily due to lower material consumption and people
related costs needed to support our installed base. Our cost of services included $0.2 million of
SFAS No. 123(R) share-based compensation expense in both the three
months ended July 31, 2008 and 2007.
Cost of services in the nine
months ended July 31, 2008 was higher in both absolute amount and as a
percent of the related revenue than the nine months ended July 31,
2007. The increase in cost of services
in absolute amount reflected increased costs associated with supporting a
larger installed base. Cost of services
as a percent of service revenue increased by 3.2 percentage points, from 69.7%
in the nine months ended July 31, 2007 to 72.9% in the nine months ended July 31,
2008. This margin deterioration is
primarily due to the fact that we are putting more service capability in place
for our upcoming product introductions.
In addition, we had higher material, freight and duty costs needed to
support our installed base, we experienced higher material consumption, and had
an unfavorable currency impact during the period. Our cost of services also included $0.7
million and $0.6 million of SFAS No. 123(R) share-based
compensation expense in the nine months ended July 31, 2008 and 2007,
respectively.
As a percent of net services
revenue, cost of services will vary depending on a variety of factors,
including the effects of price erosion, the reliability and quality of our
products and our need to maintain customer service and support centers
worldwide.
Operating
Expenses
Research and Development Expenses
|
|
Three Months
Ended
July 31,
|
|
2008
over
2007
|
|
Nine Months
Ended
July 31,
|
|
2008
over
2007
|
|
|
|
2008
|
|
2007
|
|
Change
|
|
2008
|
|
2007
|
|
Change
|
|
|
|
($ in millions)
|
|
Research and development
|
|
$
|
27
|
|
$
|
23
|
|
17.4
|
%
|
$
|
78
|
|
$
|
68
|
|
14.7
|
%
|
As a percent of net revenue
|
|
15.1
|
%
|
11.3
|
%
|
|
|
14.4
|
%
|
12.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and Development.
Research and development
expense includes costs related to salaries and related compensation expenses
for research and development and engineering personnel; materials used in
research and development activities; outside contractor expenses; depreciation
of equipment used in research and development activities; facilities and other
overhead and support costs for the above; and share-based compensation. Research and development costs have generally
been expensed as incurred.
Research and development
expense increased by $4 million in absolute dollars in the three months ended July 31,
2008, compared to the prior year period.
This increase was primarily due to higher expenses to support product
development activities for memory products planned for release by the end of
the calendar year and SOC products planned for release during the next 9 to 12
months. Research and development expense
also included $0.5 million and $0.4 million of SFAS No. 123(R) share-based
compensation expense for the three months ended July 31, 2008 and 2007,
respectively. Research and development
costs as a percentage of revenue increased by 3.8 percentage points from 11.3%
in the three months ended July 31, 2007, to 15.1% in the three months
ended July 31, 2008. The increase
in research and development expense as a percent of revenue reflected the
higher level of absolute spending combined with the lower revenue in the
current year period.
29
Table
of Contents
Research and development
expense in the nine months ended July 31, 2008 increased in absolute
dollars by $10 million compared to the same time last year, primarily due to
higher expenses to support new memory product introductions planned for release
by the end of the calendar year and new SOC products planned for release during
the next 9 to 12 months, partially offset by lower performance based
compensation. Research and development
as a percentage of revenue increased by 2.1 percentage points from 12.3% in the
nine months ended July 31, 2007 to 14.4% in the nine months ended July 31,
2008. This increase was primarily due to
decreased product shipments in the three months ended July 31, 2008. Research and development expense also
included $1.5 million and $1.3 million of SFAS No. 123(R) share-based
compensation expense for the nine months ended July 31, 2008 and 2007,
respectively.
We believe that we need to
maintain a significant level of research and development spending in order to
remain competitive and, as a result, we expect our research and development
expenses to only vary modestly in dollar amount from period to period, and to
fluctuate as a percentage of revenue based on revenue levels.
Selling, General and Administrative Expenses
|
|
Three Months
Ended
July 31,
|
|
2008
over
2007
|
|
Nine Months
Ended
July 31,
|
|
2008
over
2007
|
|
|
|
2008
|
|
2007
|
|
Change
|
|
2008
|
|
2007
|
|
Change
|
|
|
|
($ in millions)
|
|
Selling, general and administrative
|
|
$
|
40
|
|
$
|
38
|
|
5.3
|
%
|
$
|
116
|
|
$
|
107
|
|
8.4
|
%
|
As a percent of net revenue
|
|
22.3
|
%
|
18.6
|
%
|
|
|
21.4
|
%
|
19.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
General and Administrative.
Selling,
general and administrative expense includes costs related to salaries and
related expenses for sales, marketing and applications engineering personnel;
sales commissions paid to sales representatives and distributors; outside
contractor expenses; other sales and marketing program expenses; travel and
professional service expenses; salaries and related expenses for
administrative, finance, human resources, legal and executive personnel;
facility and other overhead and support costs for the above; and share-based
compensation.
Selling, general and
administrative expense increased by $2 million in absolute dollars in the three
months ended July 31, 2008 compared to the prior year period primarily due
to higher field selling costs and higher share-based compensation expenses and
increased governance costs. Selling,
general and administrative expense included approximately $3.0 million of
share-based compensation expenses in the three months ended July 31, 2008,
compared to $2.4 million of such expenses for the three months ended July 31,
2007.
Selling, general and
administrative expenses increased 8.4% to $116 million for the nine months
ended July 31, 2008, compared to the nine months ended July 31,
2007. This increase was primarily due to
higher field selling costs and higher share-based compensation expenses offset
slightly by lower performance based compensation. Selling, general and administrative expenses
included approximately $8.6 million of share-based compensation expenses in the
nine months ended July 31, 2008, compared to $7.2 million of such charges
in the nine months ended July 31, 2007.
Restructuring Charges
During the three months
ended July 31, 2008, we offered an early retirement plan to a number of
eligible employees. The total charges
incurred during this period for this early retirement plan were
$2.1 million, $1.2 million of which was recorded within cost of sales and
the remainder of which was recorded within operating expenses.
In connection with the
transfer of our manufacturing activities to Flextronics in fiscal year 2006, we
transferred a number of employees to Flextronics. As part of this arrangement, we had a
potential obligation in the future of approximately $2 million associated with
the termination of these transferred employees from the manufacturing
facilities in Flextronics in Germany. We
had deferred these costs and recognized them ratably over the employees period
of service through the employees expected termination from Flextronics. During the second quarter of fiscal year
2008, we determined that we were no longer liable to pay this obligation as we
had decided to maintain a specialized portion of our manufacturing activities
in Germany. As a result, at the end of
the second quarter of fiscal year 2008, we recorded a $1.2 million benefit
relating to restructuring charges.
30
Table
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As of July 31, 2008, we
had approximately $2.4 million in accrued restructuring liability. We anticipate that this program will be
substantially complete by the end of fiscal year 2008.
Separation Costs
In connection with our
separation from Agilent in June 2006, we incurred one-time internal and
external separation costs, such as information technology set-up costs and
consulting and legal and other professional fees. These expenses totaled $1.0 million and $4.5
million in the three and nine months ended July 31, 2007, respectively,
and were not significant during the three and nine months ended July 31,
2008.
Other Income, net
Interest and other income
consists primarily of interest earned on cash, cash equivalents and
investments, gains and losses from foreign exchange transactions, offset, as
applicable, by realized losses and other-than-temporary impairments recorded
with respect to our marketable securities, if any.
In the third quarter of
fiscal year 2008, we recorded a $2.6 million adjustment in other income, net,
related to foreign currency remeasurement gains. These gains relate to a
failure to remeasure certain foreign currency assets and liabilities, primarily
value added tax receivables, arising in fiscal years 2006, 2007 and the first
two quarters of fiscal year 2008.
Interest and other income was $6 million for the three months ended July 31,
2008, compared to $3 million in the prior year period. For the nine months ended July 31, 2008,
interest and other income was $15 million, compared to $10 million in the
comparable period in fiscal year 2007.
Other income for the nine months ended July 31, 2008 was favorably
impacted by the foreign currency remeasurement gains discussed above, as well
as higher income generated due to our higher cash, cash equivalents and
investment balances in the current year, partially offset by
a $1.5 million
other-than-temporary impairment charge taken on our auction rate securities.
(Also see Note 2, Summary of Significant Accounting Policies for
additional information regarding the $2.6 million adjustment).
Provision for Income Taxes
For the three months ended July 31,
2008 and 2007, we recorded income tax expense of approximately $3 and $4
million, respectively. During the nine
months ended July 31, 2008 and 2007, we recorded income tax expense of
approximately $9 million for both periods presented.
Our effective tax rate
varies based on a variety of factors, including overall profitability, the
geographical mix of income before taxes and the related tax rates in the
jurisdictions in which we operate, restructuring and other one-time charges, as
well as discrete events, such as settlements of audits. We may be subject to audits and examinations
of our tax returns by tax authorities in various jurisdictions, including the
Internal Revenue Service. We intend to
regularly assess the likelihood of adverse outcomes resulting from these
examinations to determine the adequacy of our provision for income taxes.
On November 1, 2007, we
adopted FASB Interpretation No. 48,
Accounting for
Uncertainty in Income Taxes
(FIN 48). This interpretation
clarifies the accounting for uncertainty in income taxes recognized in an
enterprises financial statements in accordance with FASB Statement No. 109,
Accounting for Income Taxes.
It
prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position as well as provides
guidance on de-recognition, classification, interest and penalties, accounting
in interim periods, disclosure and transition. The provision of FIN 48 is
effective for fiscal years beginning after December 15, 2006, and applies
to all tax positions upon initial adoption of this standard. Only tax
positions that meet the more-likely-than-not recognition threshold at the
effective date may be recognized or continue to be recognized upon adoption of
FIN 48. As a result of the adoption of FIN 48, we increased our
reserves for unrecognized tax benefits by $0.2 million and increased our
reserves for penalties by $0.2 million, for a total increase of $0.4 million,
which was accounted for as a cumulative adjustment to the beginning balance of
retained earnings. Additionally, we
reclassified $10.4 million from current income taxes and other taxes payable to
long-term taxes payable. At the adoption
date of November 1, 2007, we had $9.8 million of unrecognized tax benefits
which would reduce our income tax expense if recognized. As of July 31, 2008, we had $11.6
million of unrecognized tax benefits, of which $10.4 million is recorded as
long-term liabilities, and $1.2 million is recorded as income taxes
payable. As of July 31, 2008, we
had an additional $2.5 million of unrecognizable tax benefits, which is
recorded as a reduction in long term deferred tax assets.
We
estimate that there will be no material changes in our unrecognized tax
benefits in the next 12 months.
31
Table
of Contents
Our continuing practice is
to recognize interest and penalties related to income tax matters as a
component of income tax expense. We had
approximately $0.6 million of accrued interest and penalties at the adoption
date of November 1, 2007, and approximately $1.1 million of accrued
interest and penalties as of July 31, 2008.
Although we file Singapore,
U.S. federal, U.S. state and foreign income tax returns, our three major tax
jurisdictions are Singapore, the U.S. and Germany. Our 2006 and 2007 tax years remain subject to
examination by the tax authorities in our major tax jurisdictions. We are not
currently under audit for any tax years.
Financial
Condition
Liquidity and Capital Resources
As of July 31, 2008, we
had $218 million in cash and cash equivalents, compared to $146 million as of October 31,
2007. This increase was primarily due to
cash generated from our operations and cash proceeds from the sale of available
for sale securities, partially offset by investments in other private companies
made during the nine months ended July 31, 2008 including the acquisition
of Inovys.
Net Cash
Provided by Operating Activities
In the nine months ended July 31,
2008, we generated $93 million in cash from operating activities, compared to
cash provided by operating activities of $86 million in the nine months
ended July 31, 2007. The $93
million cash generation during the nine months ended July 31, 2008 was a
result of $64 million of net income, $22 million reduction in receivables, and
a $14 million net increase in net assets.
Also, during the nine months ended July 31, 2008, we had non-cash
charges of $11 million from depreciation and amortization expense, $8 million
from inventory write-offs, $11 million of net share-based compensation costs, a
$2 million impairment loss on marketable securities and a $1 million loss on
disposal of property, plant and equipment.
These impacts were partially offset by an increase of $23 million in
inventory, and decreases of $8 million in income and other taxes payable, $7
million in employee compensation and benefits, $1 million in payables, and $1
million in deferred revenue.
In the nine months ended July 31,
2007, we generated $86 million in cash from operating activities. The $86
million cash generation during the nine months ended July 31, 2007, was
the result of $65 million of net income, $38 million reduction in receivables
and a $3 million decrease in inventory. These impacts were partially
offset by decreases of $24 million in trade payables, $11 million in income and
other taxes payable and $13 million net increase in net assets. Also, in
the nine months ended July 31, 2007, we had non-cash charges of $9 million
in depreciation and amortization expense, $8 million from inventory write-offs,
$8 million of net SFAS No. 123(R) share-based compensation
costs, $2 million in impairment of cost-based investments as well as $1 million
in loss on disposal of fixed assets.
Net
Cash Used
in Investing Activities
Net cash used in investing
activities in the nine months ended July 31, 2008 was $17 million,
compared to $270 million used in the nine months ended July 31,
2007. The net cash used was primarily
related to the cash paid for the acquisition of Inovys and other investments of
$28 million, net of cash acquired as well as the investments made in our
property, plant and equipment of $8 million.
This was partially offset by the net proceeds from the purchase and
sales of available for sale marketable securities of $19 million. Our marketable securities include commercial
paper, corporate bonds, government securities and auction rate securities. Auction rate securities are securities that
are structured with interest rate reset periods of generally less than ninety
days but with contractual maturities that can be well in excess of ten
years. At the end of each interest rate
reset period, which occur every seven to thirty-five days, investors can buy,
sell, or continue to hold the securities at par. Our auction rate securities experienced
failed auctions due to sell orders exceeding buy orders which occurred as a
result of liquidity concerns derived primarily from the mortgage and debt
markets. We continue to see liquidity
issues in the market for auction rate securities. Our auction rate securities primarily consist
of investments that are backed by pools of student loans guaranteed by the U.S.
Department of Education and other asset-backed securities. We believe that the credit quality of these
securities remains high based on both the ratings of the underlying securities
and on the government and insurance provider guarantees. We evaluate our investments periodically for
possible other-than-temporary impairment by reviewing factors such as the
length of time and extent to which fair value has been below cost basis, the
financial condition of the issuer and insurance guarantor, and our ability and
intent to hold the investment for a period of time which may be sufficient for
anticipated recovery of market value.
Based on an analysis of other-than-temporary impairment factors, at July 31,
2008, we have recorded a temporary impairment within accumulated other
comprehensive loss for the nine months ended July 31, 2008 of
approximately $6 million (net of tax of $1 million) related to these
auction rate securities. We
32
Table
of Contents
estimate the fair value
using market price or a discounted cash flow model incorporating assumptions
that market participants would use in their estimates of fair value. Some of these assumptions include estimates
for interest rates, timing and amount of cash flows and expected holding
periods of the auction rate securities.
Our marketable securities portfolio as of July 31, 2008 has a
carrying value of $249 million, of which approximately $82 million
represented auction rate securities. The
interest rate reset auctions for our portfolio have all failed as of July 31,
2008. These securities have been in a
loss position for less than 12 months.
The funds associated with failed auctions will not be accessible to us
until a successful auction occurs, a buyer is found outside of the auction
process, or the underlying securities have matured or are called by the
issuer. Given the recent disruptions in
the credit markets and the fact that the liquidity for these types of
securities remains uncertain, we have classified all of our auction rate
securities as long-term assets in our condensed consolidated balance sheet as
our ability to liquidate such securities in the next 12 months is
uncertain. Based on our expected cash
flows and other sources of cash, we do not believe that any reduction in
liquidity of our auction rate securities will have a material impact on our
overall ability to meet our liquidity needs.
Net cash used in investing
activities in the nine months ended July 31, 2007, was $270 million.
The $270 million of net investment in the nine months ended July 31, 2007,
was primarily related to $458 million invested in available-for-sale marketable
securities and $9 million cash payments for site set-ups and leasehold
improvements, partially offset by $197 million of proceeds from sales and
maturities of available-for-sale marketable securities. Our marketable
securities include commercial paper, corporate bonds, government securities and
auction rate securities, and are reported at fair value with the related
unrealized gains and losses included in accumulated other comprehensive income
(loss), a component of shareholders equity, net of tax.
Net Cash
Used in (Provided by) Financing Activities
Net cash used in financing
activities in the nine months ended July 31, 2008 was $4 million, compared
to $14 million provided in the nine months ended July 31, 2007. In the second quarter of fiscal year 2008,
our shareholders approved the share repurchase program, which provides our
directors authority to acquire up to 10 percent, or approximately 6 million
shares, of Verigys outstanding ordinary shares. The $4 million net cash used in the nine
months ended July 31, 2008 was comprised of approximately $13 million of
repurchase of ordinary shares, $1 million of excess tax benefits from
share-based compensation, $1 million from the exercise of employee stock
options, and approximately $7 million from contributions by participants of our
Purchase Plan, for which 155,030 shares and 171,905 shares were issued in the
first and third quarter of fiscal year 2008, respectively.
Net cash provided by
financing activities in the nine months ended July 31, 2007, was $14
million. The $14 million net cash proceeds in the nine months ended July 31,
2007 was comprised of approximately $7 million from the exercise of employee
stock options, $5 million from contributions by participants of our Purchase
Plan, and approximately $2 million for excess tax benefits associated with the
exercise of stock options and the vesting of restricted share units.
Other
Our liquidity is affected by
many factors, some of which are based on normal ongoing operations of our
business and some of which arise from fluctuations related to global economics
and markets. Our cash balances are
generated and held in many locations throughout the world. Local government regulations may restrict our
ability to move cash balances to meet cash needs under certain circumstances. We do not currently expect such regulations
and restrictions to impact our ability to pay vendors and conduct operations
throughout our global organization.
We believe that existing
cash, cash equivalents and short-term marketable securities of approximately
$385 million, together with cash generated from operations, will be sufficient
to satisfy our working capital, capital expenditure and other liquidity needs
at least through the next twelve months.
We may require or choose to obtain debt or equity financing in the
future. We cannot assure you that
additional financing, if needed, will be available on favorable terms or at
all.
Contractual Obligations and Commitments
Contractual
Obligations
Our cash flows from
operations are dependent on a number of factors, including fluctuations in our
operating results, accounts receivable collections, inventory management and
the timing of tax and other payments. As
a result, the impact of contractual obligations on our liquidity and capital
resources in future periods should be analyzed in conjunction with such
factors.
33
Table
of Contents
The following table
summarizes our contractual obligations at July 31, 2008:
|
|
|
|
Less than
|
|
One to three
|
|
Three to five
|
|
More than
|
|
(in millions)
|
|
Total
|
|
one year
|
|
years
|
|
years
|
|
five years
|
|
Operating leases
|
|
$
|
57
|
|
$
|
11
|
|
$
|
16
|
|
$
|
12
|
|
$
|
18
|
|
Commitments to contract manufacturers and
suppliers
|
|
101
|
|
101
|
|
|
|
|
|
|
|
Other purchase commitments
|
|
51
|
|
51
|
|
|
|
|
|
|
|
Long-term liabilities
|
|
47
|
|
|
|
8
|
|
39
|
|
|
|
Total
|
|
$
|
256
|
|
$
|
163
|
|
$
|
24
|
|
$
|
51
|
|
$
|
18
|
|
The
table above excludes approximately $10 million of unrecognized tax benefits as
we are unable to make reasonably reliable estimates of the period of cash settlement
with the respective taxing authority.
Operating
leases.
Commitments under operating
leases relate primarily to leasehold property.
We have long-term lease arrangements for our corporate headquarters in
Singapore, our U.S. headquarters in Cupertino, California, and our Boeblingen,
Germany facility, currently the research and development site for our V93000 Series. We also have long-term lease arrangements for
our ASIC development office in Colorado, as well as other sales and support
facilities around the world.
Commitments
to contract manufacturers and suppliers.
We purchase components from a variety of suppliers and historically we have
used several contract manufacturers to provide manufacturing services for our
products. During the normal course of
business, we issue purchase orders with estimates of our requirements several
months ahead of the delivery dates.
However, our agreements with these suppliers usually allow us the option
to cancel, reschedule, or adjust our requirements based on our business needs
prior to firm orders being placed.
Typically, purchase orders outstanding with delivery dates within
30 days are non-cancelable.
Therefore, only approximately 29% of our purchase commitments arising
from these agreements are firm, non-cancelable and unconditional
commitments. We expect to fulfill the
purchase commitments for inventory within one year.
In addition, we record a
liability for firm, non-cancelable and unconditional purchase commitments for
quantities in excess of our future demand forecasts. Such liabilities were $7 million as of July 31,
2008, and $5 million as of October 31, 2007. These amounts are included in other current
liabilities in our condensed consolidated balance sheets at July 31, 2008
and October 31, 2007.
Other
purchase commitments.
Other purchase
commitments relate primarily to contracts with professional services suppliers,
which include third-party consultants for legal, finance, engineering and other
administrative services. With the exception
of our IT service providers, our purchase commitments with professional service
providers are typically cancelable with a notice of 90 days or less without
significant penalties. The agreement
with our primary IT service provider requires a notification period of 120 days
and includes a termination charge of up to approximately $1 million in order to
cancel our long-term contract.
Long-term
liabilities.
Long-term liabilities relate primarily to $39 million of defined benefit and
defined contribution retirement obligations, $8 million of extended warranty
and deferred revenue obligations, $10 in income taxes payable and approximately
$1 million of other long-term liabilities.
Upon our separation from Agilent, the defined benefit plans for our
employees in Germany, Korea, Taiwan, France and Italy were transferred to
us. With the exception of Italy and
France, which involve relatively insignificant amounts, Agilent completed the
funding of these transferred plans based on 100% of the accumulated benefit obligation
level as of the separation date. Verigy
made approximately $2 million of contributions to the retirement plans during
fiscal year 2007. We expect expenses of
approximately $7 million in fiscal year 2008 for the retirement plans and we
plan on making a contribution of approximately $2 million in fiscal year 2008.
Off-Balance
Sheet Arrangements
We had no material
off-balance sheet arrangements as of July 31, 2008.
34
Table
of Contents
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Foreign Currency Risk
With the exception of Japan,
where products are sold primarily in Yen, our products are generally sold in
U.S. Dollars. Services and support sales
are sold primarily in local currency when sold after the initial product
sale. As such, our revenue, costs and
expenses, and monetary assets and liabilities are somewhat exposed to changes
in foreign currency exchange rates as a result of our global operating and
financing activities.
We have
implemented a hedging strategy that is intended to mitigate our currency
exposures by entering into foreign currency forward contracts that have
maturities of in excess of one month.
These contracts are used to reduce our risk associated with exchange
rate movements, as gains and losses on these contracts are intended to mitigate
the effect of exchange rate fluctuations on certain foreign currency
denominated revenues, costs and eventual cash flows. The effective portion of the foreign exchange
gain (loss) is reported as a component of accumulated other comprehensive
income (loss) in shareholders equity and is reclassified into the statement of
operations when the hedged transaction affects earnings. If the transaction being hedged fails to
occur, or if a portion of any derivative is deemed to be ineffective, we will
recognize the gain (loss) on the associated financial instrument in other
income, net in the statement of operations.
During the three months ended July 31, 2008, we recorded
approximately $0.5 million in unrealized gains in accumulated other
comprehensive loss relating to cash flow hedges.
We do not
hedge all of our foreign currency exposures, and there can be no assurances
that our efforts will adequately protect us against the risks associated with
foreign currency fluctuations. We do not
use derivative financial instruments for speculative or trading purposes.
We performed a sensitivity
analysis assuming a hypothetical 10 percent adverse movement in foreign
exchange rates to the hedging contracts and the underlying exposures described
above. As of July 31, 2008 and October 31,
2007, the analysis indicated that these hypothetical market movements would not
have a material effect on our condensed consolidated financial position,
results of operations or cash flows.
Investment and Interest Rate Risk
We account for our
investment instruments in accordance with SFAS No. 115,
Accounting for Investments in Debt and Equity
Securities
. All of our cash
and cash equivalents and marketable securities are treated as available for
sale under SFAS No. 115. Our
marketable securities include commercial paper, corporate bonds, government
securities and auction rate securities.
Our cash equivalents and our
portfolio of marketable securities are subject to market risk due to changes in
interest rates. Fixed rate interest
securities may have their market value adversely impacted due to a rise in
interest rates, while floating rate securities may produce less income than
expected if interest rates fall. Due in
part to these factors, our future investment income may fall short of
expectation due to changes in interest rates or we may suffer losses in
principal if we are forced to sell securities that decline in the market value
due to changes in interest rates.
However, because we classify our debt securities as available for sale,
no gains or losses are recognized due to changes in interest rates unless such
securities are sold prior to maturity or declines in fair value are determined
to be other-than-temporary. Should
interest rates fluctuate by 10 percent, the value of our marketable
securities would not have a significant impact as of July 31, 2008, and our
interest income would have changed by approximately $1.3 million for the
nine months ended July 31, 2008.
Auction rate securities are
securities that are structured with interest rate reset periods of generally
less than ninety days but with contractual maturities that can be well in
excess of ten years. At the end of each
interest rate reset period, which occur every seven to thirty-five days,
investors can buy, sell, or continue to hold the securities at par. Our auction rate securities experienced failed
auctions due to sell orders exceeding buy orders which occurred as a result of
liquidity concerns derived primarily from the mortgage and debt markets. We continue to see liquidity issues in the
market for auction rate securities. Our
auction rate securities primarily consist of investments that are backed by
pools of student loans guaranteed by the U.S. Department of Education and other
asset-backed securities. We believe that
the credit quality of these securities remains high based on both the ratings
of the underlying securities and on the government and insurance provider
guarantees. We evaluate our investments
periodically for possible other-than-temporary impairment by reviewing factors
such as the length of time and extent to which fair value has been below cost
basis, the financial condition of the issuer and insurance guarantor, and our
ability and intent to hold the investment for a period of time which may be
sufficient for anticipated recovery of market
35
Table
of Contents
value. Based on an analysis of other-than-temporary
impairment factors, at July 31, 2008, we have recorded a temporary
impairment within accumulated other comprehensive loss for the nine months
ended July 31, 2008 of approximately $6 million (net of tax of
$1 million) related to these auction rate securities. We estimate the fair value using market price
or a discounted cash flow model incorporating assumptions that market
participants would use in their estimates of fair value. Some of these assumptions include estimates
for interest rates, timing and amount of cash flows and expected holding
periods of the auction rate securities.
Our marketable securities portfolio as of July 31, 2008 has a
carrying value of $249 million, of which approximately $82 million
represented auction rate securities. The
interest rate reset auctions for our portfolio have all failed as of July 31,
2008. These securities have been in a
loss position for less than 12 months.
The funds associated with failed auctions will not be accessible to us
until a successful auction occurs, a buyer is found outside of the auction process,
or the underlying securities have matured or are called by the issuer. Given the recent disruptions in the credit
markets and the fact that the liquidity for these types of securities remains
uncertain, we have classified all of our auction rate securities as long-term
assets in our condensed consolidated balance sheet as our ability to liquidate
such securities in the next 12 months is uncertain. Based on our expected cash flows and other
sources of cash, we do not believe that any reduction in liquidity of our
auction rate securities will have a material impact on our overall ability to
meet our liquidity needs.
Our marketable securities
are reported at fair value with the related unrealized gains and losses (net of
tax) included in accumulated other comprehensive income (loss), a component of
shareholders equity. Realized gains or
losses on the sale of marketable securities are determined using the
specific-identification method and were immaterial for the three and nine
months ended July 31, 2008. We
record an impairment charge to the extent that the carrying value of our
available for sale securities exceeds the estimated fair market value of the
securities and the decline in value is determined to be
other-than-temporary. We recorded an
other-than-temporary impairment within the statement of operations of $1.5
million during the nine months ended July 31, 2008.
We
record our equity investments within other long-term assets and account for
these investment on a cost basis. We are
required under generally accepted accounting principles to review our equity
interests for impairment when events or changes in circumstances indicate the
carrying value may not be recoverable.
We may be required to record a charge, which may be significant, to
earnings in our consolidated financial statements during the period in which
impairment of our investments in equity interests is determined. This could adversely impact our results of
operations.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our
management
has
evaluated,
under
the
supervision
and
with
the
participation
of
our
Chief
Executive
Officer
and
Chief
Financial
Officer,
the
effectiveness
of
our
disclosure
controls
and
procedures
as
of
July
31,
2008,
pursuant
to
and
as
required
by
Rule
13a-15(b)
under
the
Securities
Exchange
Act
of
1934
(the
Exchange
Act).
Based
on
that
evaluation,
our
Chief
Executive
Officer
and
Chief
Financial
Officer
have
concluded
that,
as
of
July
31,
2008,
the
companys
disclosure
controls
and
procedures,
as
defined
by
Rule
13a-15(b)
under
the
Exchange
Act,
were
effective
and
designed
to
ensure
that
(i)
information
required
to
be
disclosed
in
the
companys
reports
filed
under
the
Exchange
Act
is
recorded,
processed,
summarized
and
reported
within
the
time
periods
specified
in
the
SECs
rules
and
forms,
and
(ii)
information
is
accumulated
and
communicated
to
management,
including
the
Chief
Executive
Officer
and
Chief
Financial
Officer,
as
appropriate
to
allow
timely
decisions
regarding
required
disclosures.
Based
on
their
evaluation,
Verigys
Chief
Executive
Officer
and
Chief
Financial
Officer
have
concluded
that
our
disclosure
controls
and
procedures
are
effective
as
of
the
end
July
31,
2008.
Inherent Limitations on Effectiveness of Controls
Because
of its inherent limitations, disclosure controls and procedures and internal
control over financial reporting may not prevent or detect misstatements. In addition, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions or that the degree of
compliance with the policies or procedures may deteriorate. Management necessarily applied its judgment
in assessing the benefits of controls relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within the company have been
detected. The design of any system of
controls is based in part upon certain assumptions about the likelihood of
future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions, regardless of
how remote.
Changes in Internal Control over
Financial Reporting
There
were no changes in our internal control over financial reporting during the
quarter ended July 31, 2008, that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
36
Table
of Contents
PART II OTHER
INFORMATION
ITEM 1. LEGAL
PROCEEDINGS
From time to time we are
subject to legal proceedings, claims and litigation arising in the ordinary
course of business.
ITEM 1A. RISK
FACTORS
Set forth below and elsewhere
in this report on Form 10-Q and in other documents we file with the SEC,
are risks and uncertainties that could cause actual results to differ materially
from the results expressed or implied by the forward-looking statements
contained in this Quarterly Report. You should carefully consider the
risks described below and the other information in this report before investing
in our ordinary shares. Our business could be seriously harmed by any of these
risks. The trading price of our ordinary shares could decline due to any of
these risks, and you may lose all or part of your investment. The
following risk factors, Our dependence on contract manufacturers may prevent
us from delivering our products on a timely basis, Our business and operating
results could be harmed by the highly cyclical nature of the semiconductor
industry, The loss of, or significant reduction in the number of sales to,
our significant customers could materially harm our business,
We face substantial
competition which, among other things, may lead to price pressure and adversely
affect our sales and revenue, Our effective tax rate may vary significantly from
period to period, and we could owe significant taxes even during periods when
we experience low operating profit or operating losses, We sell our products
and services worldwide, and our business is subject to risks inherent in
conducting business activities in geographies outside of the United States and
Funds associated with certain of our auction rate securities may not be
accessible for in excess of 12 months and our auction rate securities may
experience an other-than-temporary decline in value, which would adversely
affect our income have been updated from the version of these risk factors set
forth in our Annual Report on Form 10-K for the year ended October 31,
2007. We have also included an
additional risk factor We may be required to
record a significant charge to earnings if our investments in equity interests
become impaired in this report.
A
description of the risk factors associated with our business is set forth
below. You should carefully consider the
risks described below and the other information in this report before investing
in our ordinary shares. Our business
could be seriously harmed by any of these risks. The trading price of our ordinary shares
could decline due to any of these risks, and you may lose all or part of your
investment.
Risks Relating to Our Business
Our dependence on sole source
suppliers may prevent us from delivering our products on a timely basis.
We
rely on sole source suppliers, some of whom are relatively small in size, for
many of the components we use in our products, including custom integrated
circuits, relays and other electronic components. In the past, we experienced, and in the
future may experience, delays in shipping our products due to our dependence on
sole source suppliers. Another sole
source supplier substantially extended the order lead times for the components
we rely upon, and those components were difficult to source in the market. While neither of these situations had a
material impact on our results, any future failure of other sole source
suppliers to meet our requirements in a timely manner could impair our ability
to ship products and to realize the related revenues when anticipated, which
could adversely affect our business and operating results.
Our dependence on contract
manufacturers may prevent us from delivering our products on a timely basis.
We
rely entirely on contract manufacturers, which gives us less control over the
manufacturing process and exposes us to significant risks, especially
inadequate capacity, late delivery, substandard quality and high costs. Moreover, because our products are very
complex to manufacture, transitioning manufacturing activities from one
location to another, or from one manufacturing partner to another, is complicated. Flextronics commenced production of our V5000
series products in China in July 2006 and assumed our manufacturing
activities for the 93000 Series products in Germany in June 2006. We expect to complete the transition of our
volume manufacturing activities related to our 93000 Series platform to
Flextronics in China by the end of fiscal year 2008. We cannot be certain that existing or future
contract manufacturers will be able to manufacture our products on a timely and
cost-effective basis, or to our quality and performance specifications. If our contract manufacturers are unable to
meet our manufacturing requirements in a timely manner, whether as a result of transitional
issues or otherwise, our ability to ship products and to realize the related
revenues when anticipated could be materially affected.
37
Table
of Contents
Our quarterly operating results may fluctuate significantly
from period to period, and this may cause our share price to decline.
In
the past, we have experienced, and in the future we expect to continue to
experience, fluctuations in revenue and operating results from quarter to
quarter for a variety of reasons, including the risk factors described in this
report. As a result of these and other
risks, we believe that quarter-to-quarter comparisons of our revenue and
operating results may not be meaningful and that these comparisons may not be
an accurate indicator of our future performance. In addition, sales of a relatively limited
number of our test systems account for a substantial portion of our net revenue
in any particular quarter. In contrast,
our costs are relatively fixed in the short-term. Thus, changes in the timing or terms of a
small number of transactions could disproportionately affect our operating
results in any particular quarter.
Moreover, our operating results in one or more future quarters may fail
to meet the expectations of securities analysts or investors. If this occurs, we would expect to experience
an immediate and significant decline in the trading price of our ordinary
shares.
Our business and operating results
could be harmed by the highly cyclical nature of the semiconductor industry.
Our
business and operating results depend in significant part upon capital
expenditures of semiconductor designers and manufacturers, which in turn depend
upon the current and anticipated market demand for products incorporating
semiconductors from these designers and manufacturers. Historically, the semiconductor industry has
been highly cyclical with recurring periods of diminished product demand. During these periods, semiconductor designers
and manufacturers, facing reduced demand for their products, have significantly
reduced their capital and other expenditures, including expenditures for
semiconductor test equipment and services such as those we offer. These periods of reduced product and services
demand have been characterized by excessive inventory levels, cancellation of customer
orders and erosion of selling prices, as well as excessive semiconductor test
capacity. As a consequence, during these
periods, we have experienced significant reductions in customer orders for new
test equipment, fewer upgrades to existing test equipment and less demand for
our test services. We have also
experienced order cancellations, delays in commitments and delays in collecting
accounts receivable. Furthermore, because
we have a high proportion of customers that are subcontractors, which during
market downturns tend to reduce or cancel orders for new test systems and test
services more quickly and dramatically than other customers, any downturn may
cause a quicker and more significant adverse impact on our business than on the
broader semiconductor industry. In
addition, although a decline in orders for semiconductor capital equipment,
including test equipment, may accompany or precede the timing of a decline in
the semiconductor market as a whole, any recovery in spending for semiconductor
capital equipment, including test equipment, may lag any recovery by the
semiconductor industry. We have
experienced just such a cyclical downturn in our memory business during fiscal
year 2008, with revenue for our memory test products declining to $9 million in
the three months ended July 31, 2008, a 88% decrease from the $76 million
recorded in the prior year period. These
factors have caused our customers to delay test system orders and to delay
delivery of systems ordered. While this
steep decline was partially offset by strength in our SOC business, we
nonetheless remain subject to substantial cyclical fluctuations in revenues and
orders.
We have a limited ability to quickly or significantly reduce
our costs, which makes us particularly vulnerable to the highly cyclical nature
of the semiconductor industry.
Historically,
downturns in the semiconductor industry have affected the test equipment and
services market more significantly than the overall semiconductor
industry. A significant portion of our
overall costs are fixed. Because a high
proportion of our costs are fixed, we have a limited ability to reduce expenses
and manufacturing inventory purchases quickly in response to decreases in
orders and revenues. Moreover, to remain
competitive, even during downturns in the semiconductor industry or generally,
we are required to maintain significant fixed costs for research and
development. As a consequence, in a
downturn, we may not be able to reduce our costs quickly, or by a sufficient
amount, and our financial performance may suffer.
The market for semiconductor test equipment and services is
highly concentrated, and we have limited opportunities to sell our test
equipment and services.
The
semiconductor industry is highly concentrated in that a small number of
semiconductor designers and manufacturers and subcontractors account for a
substantial portion of the purchases of semiconductor test equipment and
services generally, including our test equipment and services. Consolidation in the semiconductor industry
may increase this concentration.
Accordingly, we expect that sales of our products will be concentrated
with a limited number of large customers for the foreseeable future. We believe that our financial results will
depend in significant part on our success in establishing and maintaining
relationships with, and effecting substantial sales to, these potential
customers. Even if we establish these
relationships, our financial results will depend in large part on these
customers sales and business results.
38
Table
of Contents
The loss of, or a significant
reduction in the number of sales to, our significant customers could materially
harm our business.
For
the three months ended July 31, 2008, revenue from our top ten customers
accounted for approximately 71.5% of our total net revenue, with three
customers accounting for more than 10% of our total net revenue. In comparison, for the three months ended July 31,
2007, revenue from our top ten customers accounted for approximately 71.6% of
our total net revenue, with one of our customers accounting for more than 10%
of our total net revenue. For the nine
months ended July 31, 2008, revenue from our top ten customers accounted
for approximately 61.3% of our total net revenue, with one customer accounting
for more than 10% of our total net revenue.
In comparison, for the nine months ended July 31, 2007, revenue
from our top ten customers accounted for approximately 65.2% of our total net
revenue, with two customers accounting for more than 10% of our total net
revenue.
Our
relationships with our significant customers, who frequently evaluate
competitive products prior to placing new orders, could be adversely affected
by a number of factors, including:
·
|
|
a
decision by our customers to purchase test equipment and services from our
competitors;
|
|
|
|
·
|
|
a
decision by our customers to pursue the development and implementation of
self-testing integrated circuits or other strategies that reduce their need
for our new or enhanced test equipment;
|
|
|
|
·
|
|
the
loss of market share by our customers in the markets in which they operate;
|
|
|
|
·
|
|
the
shift by our IDM customers to fab-lite or fabless semiconductor models;
|
|
|
|
·
|
|
our
ability to keep pace with changes in semiconductor technology;
|
|
|
|
·
|
|
our
ability to maintain quality levels of our equipment and services that meet
customer expectations;
|
|
|
|
·
|
|
our
ability to produce and deliver sufficient quantities of our test equipment in
a timely manner; and
|
|
|
|
·
|
|
our
ability to provide quality customer service and support.
|
Generally, our customers may cancel orders with little or no
penalty. Our business and operating
results could be materially adversely affected by the loss of, or any reduction
in orders by, any of our significant customers, particularly if we are unable
to replace that lost revenue with additional orders from new or existing
customers.
If we do not maintain and expand existing customer
relationships and establish new customer relationships, our ability to generate
revenue growth will be adversely affected.
Our
ability to increase our sales will depend in large part upon our ability to
obtain orders for new test systems, enhancements for existing test systems and
services from our existing and new customers.
Maintaining and expanding our existing relationships and establishing
new ones can require substantial investment without any assurance from customers
that they will place significant orders.
Moreover, if we are unable to provide new test systems, enhancements for
existing test systems and services to our customers in a timely fashion or in
sufficient quantities, our business will be harmed. In the past we have
experienced, and in our industry it is not unusual to experience, difficulty in
delivering new test equipment, as well as product enhancements and
upgrades. When we encountered
difficulties in the past, our customer relationships and our ability to
generate additional revenue from customers were harmed. Our inability to meet the demands of
customers would severely damage our reputation, which would make it more
difficult for us to sell test equipment, enhancements and services to existing,
as well as new, customers and would adversely affect our ability to generate
revenue.
39
Table
of Contents
In
addition, we face significant obstacles in establishing new customer
relationships. It is difficult for us to
establish relationships with new customers because such companies may have
existing relationships with our competitors, may be unfamiliar with our product
and service offerings, may have an installed base of test equipment sufficient
for their current needs or may not have the resources necessary to transition
to, and train their employees on, our test equipment. Even if we do succeed in establishing new
relationships, these new customers may nonetheless continue to favor our
competitors, as our competitors may have had longer relationships with these
customers or may maintain a larger installed base of their competing test
equipment in the facilities of new customers and only purchase limited
quantities from us. In addition, we
could face difficulties in our efforts to develop new customer relationships
abroad as a result of buying practices that may favor local competitors or
non-local competitors with a larger presence in local economies than we
have. As a result, we may be forced to
partner with local companies in order to compete for business and such
arrangements, if available, may not be achieved on economically favorable terms,
which could negatively affect our financial performance.
Failure to accurately estimate our customers demand and plan
the production of our new and existing products could adversely affect our
inventory levels and our income.
Given
the cyclical nature of the semiconductor industry, we cannot reliably forecast
the timing and size of our customers orders.
In order to meet anticipated demand, we must order components and build
some inventory before we actually receive purchase orders. Our results could be harmed if we do not
accurately estimate our customers product demands and are unable to adjust our
purchases with market fluctuations, including those caused by the cyclical
nature of the semiconductor industry.
During a market upturn, our results could be materially and adversely
affected if we cannot increase our purchases of components, parts and services
quickly enough to meet increasing demand for our products, and during a market
downturn, we could have excess inventory that we would not be able to sell,
likely resulting in inventory write-offs.
Either of these results could have a material adverse effect on our
business, financial condition and results of operations.
Further,
if we do not successfully manage the introduction of our new products and
estimate customer demand for such products, our ability to sell existing
inventory may be adversely affected. If
demand for our new products exceeds our projections, we might have insufficient
quantities of products for sale to our customers, which could cause us to miss
opportunities to increase revenues during market upturns. If our projections exceed demand for our new
products or if some of our customers cancel their current orders for our old
products in anticipation of our new products, we may have excess inventories of
our new products and excess obsolete inventories, which could result in
inventory write-offs that would adversely affect our financial performance.
Failure to accurately predict our customers varying ordering
patterns could adversely affect our inventory levels and our income.
Our
customers tend to make large purchases of our products on an inconsistent
basis, rather than smaller purchases on a consistent basis, which makes it
difficult to predict the timing of customer orders. Failure to accurately predict our customers
varying ordering patterns may cause us to experience insufficient or excess
product inventories. If our competitors
are more successful than us at timing new product introductions and inventory
levels to customers ordering patterns, we may lose important sales
opportunities and our business and results of operations may be harmed.
Existing customers may be unwilling
to bear expenses associated with transitioning to new and enhanced products.
In
order to grow our business, we need to sell enhancements and upgrades for our
existing test equipment, in addition to selling new test equipment. Certain customers may be unwilling, or
unable, to bear the costs of implementing enhancements and upgrades to our test
equipment platforms, particularly during semiconductor industry downturns. As a result, it may be difficult to market
and sell enhancements and upgrades to customers. In addition, as we introduce new enhancements
and upgrades, we cannot predict with certainty if and when our customers will
transition to those enhancements or upgrades.
Any delay in or failure of our customers to transition to new
enhancements or upgrades could result in excess inventories or our new or
enhanced products, which could result in inventory write-offs that would
adversely affect our financial performance.
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If we do
not introduce new test equipment platforms and upgrade existing test equipment
platforms in a timely manner, and if we do not offer comprehensive and competitive
services for our test equipment platforms, our test equipment and services will
become obsolete, we will lose existing customers and our operating results will
suffer.
The semiconductor design
and manufacturing industry into which we sell our test equipment is
characterized by rapid technological changes, frequent new product
introductions, including upgrades to existing test equipment, and evolving
industry standards. The success of our
new or upgraded test equipment offerings will depend on several factors,
including our ability to:
·
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properly identify
customer needs and anticipate technological advances and industry trends,
such as the disaggregation of the traditional IDM semiconductor supply chain
into fabless design companies, foundries and packaging, assembly and test
providers;
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·
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develop and
commercialize new and enhanced technologies and applications that meet our
customers evolving performance requirements in a timely manner;
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·
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develop and deliver
enhancements and related services for our current test equipment that are
capable of satisfying our customers specific test requirements; and
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·
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introduce and promote
market acceptance of new test equipment platforms, such as our V5500
Series system for memory testing.
|
In many cases, our test
equipment and services are used by our customers to develop, test and
manufacture their new products. We
therefore must anticipate industry trends and develop new test equipment
platforms or upgrade existing test equipment platforms in advance of the
commercialization of our customers products.
In addition, new methods of testing integrated circuits, such as
self-testing integrated circuits, may be developed which would render our test
equipment uncompetitive or obsolete if we failed to adopt and incorporate these
new methods into our new or existing test equipment platforms. Developing new test equipment platforms and
upgrading existing test equipment platforms requires a substantial investment
before we can determine the commercial viability of the new or upgraded
platform.
As our customers product
requirements are diverse and subject to frequent change, we will also need to
ensure that we have an adequate mix of products that meet our customers
varying requirements. If we fail to
adequately predict our customers needs and technological advances, we may
invest heavily in research and development of test equipment that does not lead
to significant revenue, or we may fail to invest in technology necessary to
meet changing customer demands. Without
the timely introduction of new or upgraded test equipment that reflects
technological advances, our test equipment and services will likely become
obsolete, we may have difficulty retaining customers and our revenue and
operating results would suffer.
Our long
and variable sales cycle depends upon factors outside of our control, could
cause us to expend significant time and resources prior to our ever earning
associated revenues and may therefore cause fluctuations in our operating
results.
Sales of our
semiconductor test equipment and services depend in significant part upon
semiconductor designers and manufacturers upgrading existing manufacturing
equipment to accommodate the requirements of new semiconductor devices and
expanding existing, and adding new, manufacturing facilities. As a result, our sales are subject to a
variety of factors we cannot control, including:
·
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the complexity of our
customers fabrication processes, which impacts the number of our test
systems and amount of our product enhancements and upgrades our customers
require;
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the willingness of our
customers to adopt new or upgraded test equipment platforms;
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the internal technical
capabilities and sophistication of our customers, which impacts their need
for our test services; and
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the capital expenditures
of our customers.
|
The decision to purchase
our equipment and services generally involves a significant commitment of
capital. As a result, our test equipment
has lengthy and variable sales cycles during which we may expend substantial
funds and management effort to secure a sale prior to receiving any commitment
from a customer to purchase our test equipment or services. Prior to completing sales to our customers,
we are often subject to a number of significant risks, including the risk that
our competitors may compete for the sale or that the customer may change its
technological requirements. Our
business, financial condition and results of operations may be materially
adversely affected by our long and variable sales cycle and the uncertainty
associated with expending substantial funds and effort with no guarantee that
sales will be made.
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Test systems that contain defects that harm our customers
could damage our reputation and cause us to lose customers and revenue.
Our
test equipment is highly complex and employs advanced technologies. The use of complex technology in our test
equipment increases the likelihood that we could experience design, performance
or manufacturing problems. If any of our
products have defects or reliability or quality problems, we may, in some
circumstances, be exposed to liability, our reputation could be damaged significantly
and customers might be reluctant to buy our products, which could result in a
decline in revenues, an increase in product returns and the loss of existing
customers and the failure to attract new customers.
We face
substantial competition which, among other things, may lead to price pressure
and adversely affect our sales and revenue.
We face substantial
competition throughout the world in each of our product areas. Our most significant competitors historically
have included Advantest Corporation, Credence Systems Corporation, LTX
Corporation, Teradyne, Inc. and Yokogawa Electric Corporation. Some of our competitors have substantially
greater financial resources, broader product offerings, more extensive
engineering, manufacturing, marketing and customer support capabilities or a
greater presence in certain countries than we do. We may have less leverage with component
vendors than some of our competitors.
Also, some of our competitors have greater resources and may be more
willing or able than we are to put capital at risk to win business. Price reductions by our competitors may force
us to lower our prices. We also expect
our current competitors to continue to improve the performance of their current
products and to introduce new products, technologies or services that could
adversely affect sales of our current and future test equipment and
services. Additionally, current and
future competitors may introduce testing technologies, equipment and services,
which may in turn reduce the value of our own test equipment and services. Any of these circumstances may limit our
opportunities for growth and negatively impact our financial performance.
We may face competition from Agilent in the future.
Pursuant to the
intellectual property matters agreement between us and Agilent in connection
with our separation from Agilent, except as described below, until October 31,
2009, three years after the date on which Agilent distributed to its
stockholders all of our ordinary shares that it held, Agilent agreed not to
develop, manufacture, distribute, support or service automated semiconductor
test systems for providing high-volume functional test of integrated circuits (ICs)
(including memory and high-speed memory devices and SOCs) or SIPs, or
components for such products. However,
during this three-year period, Agilent may compete with us with respect to:
·
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products (other than
automated semiconductor test systems for high-volume functional test) for
providing functional test of ICs or SIPs, whether or not including parametric
test (the testing of selected parameters of a device or group of devices to
identify errors or flaws), design verification or engineering
characterization capabilities;
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·
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automated semiconductor
test development systems (including hardware and software) that are intended
to enable development of test programs and protocols for use in high-volume
functional test of ICs or SIPs, whether or not such development test systems
themselves are capable of performing such high-volume functional test; and
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products (other than
automated semiconductor test systems for high-volume functional test) for
providing parametric test, design verification, engineering characterization
or functional test of: (i) wireless communications devices, such as
cellular telephones or wireless networking products, whether in packaged
device or module form, and whether or not implemented as an IC or SIP;
(ii) modules (such as RF front-end modules) containing one or more ICs
connected with other active or passive devices; and (iii) RF and higher
frequency (e.g., microwave and optical) devices and components such as
oscillators, mixers, amplifiers and 3-port devices, to the extent that such
devices or components are in the form of an IC or SIP.
|
While none of the product
types for which Agilent reserved the right to compete with us has provided
material revenue to us in the past, we can provide no assurance that the
limitations contained in the intellectual property matters agreement, which was
entered into in the context of a parent-subsidiary relationship and may be less
favorable to us than if it had been negotiated between unaffiliated third
parties, will be effective at protecting us from competition from Agilent.
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In addition, the
intellectual property matters agreement permits Agilent to fulfill its
obligations under contracts in existence as of March 1, 2006, even though
fulfilling such obligations would otherwise have been precluded during the
non-competition period and even if fulfilling such obligations would result in
Agilent competing with us. This
exception allows Agilent to fulfill its obligations to a semiconductor
manufacturer pursuant to which Agilent develops and sells components to the
manufacturer for use in the manufacturers semiconductor test systems purchased
from a competitor of Verigy. While we do
not believe that Agilents fulfillment of these obligations will have a
material effect on our business or prospects, we may in the future be less
successful at selling test systems to this semiconductor manufacturer than
would have been the case were the manufacturer not able to combine products
from Agilent with the test systems of our competitor.
Although, under the
intellectual property matters agreement, Agilent transferred all of the
intellectual property rights Agilent held that relate exclusively to our
products to us, Agilent retained and only licensed to us the intellectual
property rights to underlying technologies used in both our products and the
products of Agilent. Under the
agreement, Agilent remains free to use the retained underlying technologies
without restriction (other than as described above with respect to the
three-year non-compete period).
After October 31,
2009, Agilent will be free to compete with any portion or all of our business
without restriction, and in doing so will be free to use the retained
underlying technologies. Agilent will
not be permitted to use the intellectual property rights transferred to us, and
licensed from us back to Agilent, to compete with us with respect to our core
business of developing, manufacturing, selling and supporting automated
semiconductor test systems for high-volume functional test of ICs or SIPs. Agilent will, however, be able to use such
intellectual property rights to develop and sell components for such systems,
including systems developed and sold by us as well as those developed and sold
by our competitors. While selling
components has not represented a material portion of our business in the past
and is not expected to be an area of focus for the near future, our business
could be adversely affected if systems offered by our competitors become more
competitive as a result of Agilent supplying components for our competitors
systems or if, by buying components from Agilent, our customers are able to
delay or bypass altogether purchasing newer systems from us.
Competition from Agilent
during or after the three-year non-compete period described above or other
actions taken by Agilent that create real or perceived competition with us,
could harm our business and operating results.
Third
parties may compete with us by using intellectual property that Agilent
licensed to us under the intellectual property matters agreement.
Under the intellectual
property matters agreement, Agilent retained and only licensed to us the
intellectual property rights to underlying technologies used in both our
products and the products of Agilent.
Under the agreement, Agilent remains free to license the intellectual
property rights to the underlying technologies to any party, including our
competitors. Any unaffiliated third
party that is licensed to use such retained intellectual property would not be
subject to the non-competition provisions of the intellectual property matters
agreement and could compete with us at any time using the underlying
technologies. The intellectual property
that Agilent retained and that can be licensed in this manner does not relate
solely or primarily to one or more of our products, or groups of products,
rather, the intellectual property that Agilent licensed to us is generally used
broadly across our entire product portfolio.
Competition by third parties using the underlying technologies retained
by Agilent could harm our business and operating results.
Third parties may claim we are infringing their intellectual
property, and we could suffer significant litigation or licensing expenses or
be prevented from selling our products or services.
Our
industry has been and continues to be characterized by uncertain and
conflicting intellectual property claims and vigorous protection and pursuit of
these rights. As a result, third parties
may claim that we are infringing their intellectual property rights, and we may
be unaware of intellectual property rights of others that may cover some of our
technology, products and services. Any
litigation regarding patents or other intellectual property could be costly and
time-consuming, and divert our management and key personnel from our business
operations. The complexity of the
technology involved and the uncertainty of intellectual property litigation
increase these risks. Claims of
intellectual property infringement might also require us to enter into costly
royalty or license agreements. However,
we may not be able to obtain royalty or license agreements on terms acceptable
to us, or at all. We also may be subject
to significant damages or injunctions against development and sale of certain
of our products and services.
In
addition, there may be third parties who have refrained from asserting
intellectual property infringement claims against our products while we were a
wholly owned subsidiary of Agilent that elect to pursue such claims against us
now that our separation from Agilent is complete because we no longer have the
benefit of being able to counterclaim based on Agilents patent portfolio, and
we are no longer able to provide licenses of Agilents patent portfolio in
order to resolve such claims.
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Third parties may infringe our intellectual property, and we
may expend significant resources enforcing our rights or suffer competitive injury.
Our
success depends in large part on our proprietary technology. We rely on a combination of patents,
copyrights, trademarks, trade secrets, confidentiality provisions and licensing
arrangements to establish and protect our proprietary rights. If we fail to protect our intellectual
property rights, our competitive position could suffer, which could harm our
operating results. Our pending patent
and trademark registration applications may not be allowed or competitors may
challenge the validity or scope of these patent applications or trademark
registrations. In addition, our patents
may not provide us with a significant competitive advantage.
We
may be required to spend significant resources to monitor and protect our
intellectual property rights. We may not
be able to detect infringement and may lose competitive position in the market
before we do so. In addition,
competitors may design around our technology or develop competing
technologies. Furthermore, the laws of
some foreign countries do not offer the same level of protection of our
proprietary rights as the laws of the United States, and we may be subject to
unauthorized use of our products or technologies in those countries,
particularly in Asia, where we expect our business to continue to expand in the
foreseeable future.
In
addition, our agreements with Agilent, and in particular the intellectual
property matters agreement, set forth the terms and provisions under which we
received the intellectual property rights necessary to operate our
business. Under our agreements with
Agilent, we do not have the right to enforce against third parties intellectual
property rights we license from Agilent, and Agilent is under no obligation to
enforce such rights on our behalf.
Intellectual property rights are difficult to enforce in the
certain countries, which may inhibit our ability to protect our intellectual
property rights or those of our suppliers and customers in those countries.
Commercial
law in certain countries is relatively undeveloped compared to the commercial
law in the U.S. Limited protection of intellectual property is available under
local law. Consequently, operating in
certain countries may subject us to an increased risk that unauthorized parties
may attempt to copy or otherwise obtain or use our intellectual property or the
intellectual property of our suppliers, customers or business partners. We cannot assure you that we will be able to
protect our intellectual property rights or those of our suppliers and
customers or have adequate legal recourse in the event that we encounter
difficulties with infringements of intellectual property under local law.
We may incur a variety of costs to engage in future
acquisitions of companies, products or technologies, and the anticipated
benefits of any acquisitions we may make may never be realized.
We
may acquire, or make significant or minority investments in, complementary
businesses, products or technologies. Any future acquisitions or investments
could be accompanied by risks such as:
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difficulties in
assimilating the operations and personnel of acquired companies;
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diversion of our
managements attention from ongoing business concerns;
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our potential
inability to maximize our financial and strategic position through the successful
incorporation of acquired technology and rights into our products and
services;
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additional
expense associated with amortization of acquired assets;
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difficulty in
maintaining uniform standards, controls, procedures and policies;
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impairment of
existing relationships with employees, suppliers and customers as a result of
the integration of new management personnel;
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dilution to our
shareholders in the event we issue shares as consideration to finance an
acquisition;
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difficulty
integrating and implementing the accounting controls necessary to comply with
regulatory requirements such as Section 404 of the Sarbanes-Oxley Act;
and
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increased
leverage, if we incur debt to finance an acquisition.
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We
cannot guarantee that we will realize any benefit from the integration of any
business, products or technologies that we might acquire in the future, and our
failure to do so could harm our business.
Our executive officers and certain key personnel are critical to our
business.
Our
future operating results will depend substantially upon the performance of our
executive officers and key personnel.
Our future operating results also depend in significant part upon our
ability to attract and retain qualified management, manufacturing, technical,
application engineering, marketing, sales and support personnel. Competition for qualified personnel is
intense, and we cannot ensure success in attracting or retaining qualified
personnel. Our business is particularly
dependent on expertise which only a very limited number of engineers possess
and it may be increasingly difficult for us to hire personnel over time. We operate in several geographic locations,
including parts of Asia and Silicon Valley, where the labor markets, especially
for application engineers, are particularly competitive. Our business, financial condition and results
of operations could be materially adversely affected by the loss of any of our
key employees, by the failure of any key employee to perform in his or her
current position, or by our inability to attract and retain skilled employees,
particularly engineers.
Our effective tax rate may vary significantly from period to
period, and we could owe significant taxes even during periods when we
experience low operating profit or operating losses.
We
have negotiated tax incentives with the Singapore Economic Development Board,
an agency of the Government of Singapore, which have been approved by Singapores
Ministry of Finance and Ministry of Trade and Industry. Under the incentives, a portion of the income
we earn in Singapore during these ten to fifteen year incentive periods is
subject to reduced rates of Singapore income tax. Some incentive tax rates could begin to
expire beginning in fiscal year 2011 if certain requirements are not met. The Singapore corporate income tax rate that
would apply, absent the incentives, is 18% and 20% for fiscal years 2007 and
2006, respectively. As a result of these
incentives, income taxes decreased by $18 million or $0.30 per share
(diluted) and $8 million or $0.15 per share (diluted) in fiscal years 2007
and 2006, respectively. In order to
receive the benefit of the incentives, we must develop and maintain in
Singapore certain functions such as procurement, financial services, order
management, credit and collections, spare parts depot and distribution center,
a refurbishment center and regional activities like an application development
center. In addition to these qualifying
activities, we must hire specified numbers of employees and maintain minimum
levels of investment in Singapore. We
have from two to nine years to phase-in the qualifying activities and to hire
the specified numbers of employees. If
we do not fulfill these conditions for any reason, our incentive could lapse,
our income in Singapore would be subject to taxation at higher rates, and our
overall effective tax rate could be between fifteen to twenty percentage points
higher than would have been the case had we maintained the benefit of the
incentives.
In
addition, our effective tax rate may vary significantly from period to period
because, for example, we may owe significant taxes in jurisdictions other than
Singapore during periods when we are profitable in those jurisdictions even
though we may be experiencing low operating profit or operating losses on a
consolidated basis. Our effective tax
rate varies based on a variety of factors, including overall profitability, the
geographical mix of income before taxes and the related tax rates in the
jurisdictions where we operate, as well as discrete events, such as settlements
of future audits. Certain combinations
of these factors could cause us to owe significant taxes even during periods
when we experience low income before taxes or loss before taxes.
We sell our products and services worldwide, and our business
is subject to risks inherent in conducting business activities in geographies
outside of the United States.
Our
headquarters are in Singapore, our manufacturing is outsourced largely to
Flextronics, and we sell our products and services worldwide. As a result, our business is subject to risks
associated with doing business internationally.
Revenue from customers in Japan accounted for approximately 7.8% and
5.9% of total net revenue for the three months ended July 31, 2008 and
2007, respectively. Revenue from
customers in Asia-Pacific, excluding Japan, accounted for approximately 74.3%
and 75.5% for the three months ended July 31, 2008 and 2007,
respectively. Revenue from customers in
Japan accounted for approximately 8.9% and 6.9% of total net revenue for the
nine months ended July 31, 2008 and 2007, respectively. Revenue from customers in Asia-Pacific,
excluding Japan, accounted for approximately 71.0% and 57.4% for the nine
months ended July 31, 2008 and 2007, respectively. The economies of Asia have been highly
volatile and recessionary in the past, resulting in significant fluctuations in
local currencies. Our exposure to the
business risks presented by the economies of Asia will increase to the extent
that we continue to expand our operations in that region, including continuing
to transition our volume contract manufacturing processes to Flextronics in
China.
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Our
international activities subjects us to a number of risks associated with
conducting operations internationally, including:
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difficulties in
managing geographically disparate operations;
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potential
greater difficulty and longer time in collecting accounts receivable from
customers located abroad;
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difficulties in
enforcing agreements through non-U.S. legal systems;
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unexpected
changes in regulatory requirements that may limit our ability to export our
software or sell into particular jurisdictions or impose multiple conflicting
tax laws and regulations;
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political and
economic instability, civil unrest or war;
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terrorist
activities and health risks such as bird flu and SARS that impact
international commerce and travel;
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difficulties in
protecting our intellectual property rights, particularly in countries where
the laws and practices do not protect proprietary rights to as great an
extent as do the laws and practices of the United States;
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changing laws
and policies affecting economic liberalization, foreign investment, currency
convertibility or exchange rates, taxation or employment; and
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nationalization
of foreign owned assets, including intellectual property.
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In
addition, we are exposed to foreign currency exchange movements versus the U.S.
dollar, particularly the Japanese Yen and the Euro. With respect to revenue, our primary exposure
exists during the period between execution of a purchase order denominated in a
foreign currency and collection of the related receivable. During this period, changes in the exchange
rates of the foreign currency to the U.S. Dollar will affect our revenue, cost
of sales and operating margins and could result in exchange gains or
losses. While a significant portion of
our purchase orders to date have been denominated in U.S. Dollars, competitive
conditions may require us to enter into an increasing number of purchase orders
denominated in foreign currencies. We
incur a variety of costs in foreign currencies, including some of our
manufacturing costs, component costs and sales costs. Therefore, as we expand our operations in
Asia, we may become more exposed to a strengthening of currencies in the region
against the U.S. dollar. We cannot
assure you that any hedging transactions we may enter into will be effective or
will not result in foreign exchange hedging gains or losses. As a result, we are exposed to greater risks
in currency fluctuations.
Funds associated with certain of our auction rate securities
may not be accessible for in excess of 12 months and our auction rate
securities may experience an other-than-temporary decline in value, which would
adversely affect our income.
Our auction rate securities experienced failed
auctions due to sell orders exceeding buy orders which occurred as a result of
liquidity concerns derived primarily from the mortgage and debt markets. We continue to see liquidity issues in the
market for auction rate securities. Our
auction rate securities primarily consist of investments that are backed by
pools of student loans guaranteed by the U.S. Department of Education and other
asset-backed securities. We believe that
the credit quality of these securities remains high based on both the ratings
of the underlying securities and on the government and insurance provider
guarantees. We evaluate our investments
periodically for possible other-than-temporary impairment by reviewing factors
such as the length of time and extent to which fair value has been below cost
basis, the financial condition of the issuer and insurance guarantor, and our
ability and intent to hold the investment for a period of time which may be sufficient
for anticipated recovery of market value.
Based on an analysis of other-than-temporary impairment factors, at July 31,
2008, we have recorded a temporary impairment within accumulated other
comprehensive loss for the nine months ended July 31, 2008 of
approximately $6 million (net of tax of $1 million) related to these
auction rate securities. We estimate the
fair value using market price or a discounted cash flow model incorporating
assumptions that market participants would use in their estimates of fair
value. Some of these assumptions include
estimates for interest rates, timing and amount of cash flows and expected
holding periods of the auction rate securities.
Our marketable securities portfolio as of July 31, 2008 has a
carrying value of $249 million, of which approximately $82 million
represented auction rate securities. The
interest rate reset auctions for our portfolio have all failed as of July 31,
2008. These securities have been in a
loss position for less than 12 months.
The funds associated with failed auctions will not be accessible to us
until a successful auction occurs, a buyer is found outside of the auction
process, or the underlying securities have matured or are called by the
issuer. Given the recent disruptions in
the credit markets and the fact that the liquidity for these types of
securities remains uncertain, we have classified all of our auction rate
securities as long-term assets in our condensed consolidated balance sheet as
our ability to liquidate such securities in the next 12 months is
uncertain. Based on our expected cash
flows and other sources of cash, we do not believe that any reduction in
liquidity of our auction rate securities will have a material impact on our overall
ability to meet our liquidity needs.
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We may be required to record a significant charge to
earnings if our investments in equity interests become impaired.
We are required under
generally accepted accounting principles to review our equity interests for
impairment when events or changes in circumstances indicate the carrying value
may not be recoverable. Factors that may be considered a change in
circumstances indicating that the carrying value of an investment in equity
interest may not be recoverable include a decline in the operating performance
of an equity investee if a private company. In the past we have made, and
in the future may make, significant or minority equity investments in
complementary businesses, products or technologies. If the
operating performance of the companies in which we make equity investments
declines, we may be required to record a charge, which may be significant, to
earnings in our consolidated financial statements during the period in which
impairment of our investments in equity interests is determined. This could
adversely impact our results of operations.
If our facilities or the facilities
of our contract manufacturers were to experience catastrophic loss due to
natural disasters, our operations would be seriously harmed.
Our
facilities and the facilities of our contract manufacturers could be subject to
a catastrophic loss caused by natural disasters, including fires and
earthquakes. We and our contract
manufacturers have significant facilities in areas with above average seismic
activity, such as California, Japan and Taiwan.
If any of these facilities were to experience a catastrophic loss, it
could disrupt our operations, delay production and shipments, reduce revenue
and result in large expenses to repair or replace the facility. We do not carry catastrophic insurance
policies that cover potential losses caused by earthquakes.
Risks Related to the Securities
Markets and Ownership of Our Ordinary Shares
Our securities have a limited trading
history, and the price of our ordinary shares may fluctuate significantly.
There
has been a public market for our ordinary shares for a short period of
time. An active public market for our
ordinary shares may not be sustained, which would adversely impact the
liquidity and market price of our ordinary shares. The market price of our ordinary shares may
fluctuate significantly. Among the
factors that could affect the market price of our ordinary shares are the risk
factors described in this section and other factors including:
·
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changes in
expectations as to our future financial performance, including financial
estimates or publication of research reports by securities analysts;
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strategic moves
by us or our competitors, such as acquisitions or restructurings;
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announcements of
new products or technical innovations by us or our competitors;
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|
|
·
|
actions by
institutional shareholders; and
|
|
|
·
|
speculation in
the press or investment community.
|
We may become involved in securities
litigation that could divert managements attention and harm our business.
The
stock market in general, and The NASDAQ Global Select Market and the securities
of semiconductor capital equipment companies in particular, have experienced
extreme price and volume fluctuations that have often been unrelated or
disproportionate to the operating performance of the affected companies. Further, the market prices of securities of
semiconductor test system companies have been particularly volatile. These market and industry factors may
materially harm the market price of our ordinary shares, regardless of our
operating performance. In the past,
following periods of volatility in the market price of a particular companys
securities, securities class action litigation has often been brought against
that company. We may become involved in
this type of litigation in the future.
Such litigation, whether or not meritorious, could result in the
expenditure of substantial funds, divert managements attention and resources,
and harm our reputation in the industry and the securities markets, which would
reduce our profitability and harm our business.
47
Table of Contents
It may be difficult for investors to affect service of
process within the United States on us or to enforce civil liabilities under
the federal securities laws of the United States against us.
We
are incorporated in Singapore under the Companies Act, Chapter 50 of Singapore,
or Singapore Companies Act. Some of our
officers and directors reside outside the United States. A substantial portion of our assets is
located outside the United States. As a
result, it may not be possible for investors to effect service of process
within the United States upon us.
Similarly, investors may be unable to enforce judgments obtained in U.S.
courts predicated upon the civil liability provisions of the federal securities
laws of the United States against us in U.S. courts. Judgments of U.S. courts based upon the civil
liability provisions of the federal securities laws of the United States are
not directly enforceable in Singapore courts and are not given the same effect
in Singapore as judgments of a Singapore court.
Accordingly, there can be no assurance as to whether Singapore courts
will enter judgments in actions brought in Singapore courts based upon the
civil liability provisions of the federal securities laws of the United States.
Singapore corporate law may impede a takeover of our company
by a third party, which could adversely affect the value of our ordinary
shares.
Under
the Singapore Code on Take-overs and Mergers, generally when a person (or a
group of persons acting together) acquires shares having 30% or more of the
voting rights of a company or holds at least 30% but not more than 50% of the
voting rights of a company and thereafter acquires in any period of six months
additional shares carrying more than 1% of the voting rights, then such person
is required by law to make an offer to acquire the remaining voting shares of
the company. Consequently, the Code of
Take-overs and Mergers may discourage potential acquirers from purchasing
substantial but non-majority ownership positions of our ordinary shares, which
could, in turn, impede takeovers of our company by a third party.
For a limited period of time, our directors have general
authority to issue new shares on terms and conditions and with any preferences,
rights or restrictions as may be determined by our board of directors in its
sole discretion.
Under
Singapore law, new shares may be issued only with the prior approval of our
shareholders in a general meeting. At
our 2008 annual general meeting of shareholders, our shareholders provided our
directors general authority to issue new shares until the earlier to occur of
the conclusion of our 2009 annual general meeting or the expiration of the
period within which the next annual general meeting is required to be
held. Subject to the shareholders
approval, the provisions of the Singapore Companies Act and our amended and
restated memorandum and articles of association, our board of directors may
allot and issue new shares on terms and conditions and with the rights and
restrictions as they may think fit to impose.
Any additional issuances of new shares by our directors may adversely
impact the market price of our ordinary shares.
Our shareholders may have more
difficulty protecting their interests than they would as shareholders of a U.S.
corporation.
Our corporate affairs are governed by our amended and
restated memorandum and articles of association and by the laws governing
corporations incorporated in Singapore.
The rights of our shareholders and the responsibilities of the members
of our board of directors under Singapore law are different from those
applicable to a corporation incorporated in the United States. Therefore, our public shareholders may have
more difficulty in protecting their interests in connection with actions taken
by our management, members of our board of directors or our controlling
shareholder than they would as shareholders of a corporation incorporated in
the United States. For example,
controlling shareholders in U.S. corporations are subject to fiduciary duties
while controlling shareholders in Singapore corporations are not subject to
such duties.
48
Table of
Contents
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
On November 27, 2007, we
announced that our Board authorized a share purchase program. The program authorizes our directors the use
of up to $150 million to repurchase up to 10 percent of Verigys
outstanding ordinary shares, or approximately 6 million shares. This share purchase program, unless varied or
revoked by our shareholders at a general meeting, will continue in effect until
the earlier of the date of our 2009 annual general meeting of shareholders or
the date by which our 2009 annual general meeting of shareholders is required
to be held. All of these shares were
repurchased on the open market and were funded with existing cash. All ordinary shares that were repurchased as
of July 31, 2008 have been cancelled.
The following table summarizes repurchases of our ordinary stock during
the three months ended July 31, 2008 (
in thousands, except the per share amounts)
:
Period
|
|
(a) Total
Number of
Shares
Purchased
|
|
(b) Average Price
Paid per Share
|
|
(c) Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs
|
|
(d) Approximate
Dollar Value of
Shares That May
Yet Be Purchased
Under the Plans
or Programs
|
|
May 1, 2008 May 31, 2008 (1)
|
|
|
|
|
|
|
|
$
|
150,000
|
|
June 1, 2008 June 30, 2008
|
|
390
|
|
$
|
23.76
|
|
390
|
|
$
|
140,742
|
|
July 1, 2008 July 31, 2008
|
|
247
|
|
$
|
21.73
|
|
247
|
|
$
|
135,370
|
|
Total
|
|
637
|
|
$
|
22.97
|
|
637
|
|
|
|
(1) Share
repurchases did not begin until June of 2008.
ITEM 3. DEFAULT UPON SENIOR
SECURITIES
Not
applicable.
ITEM 4. SUBMISSION OF
MATTERS TO A VOTE OF SECURITY HOLDERS
Not
applicable.
ITEM
5. OTHER INFORMATION
Not
applicable.
49
Table of
Contents
ITEM 6. EXHIBITS
(a) Exhibits:
Exhibit
|
|
|
|
Incorporated By Reference
|
|
Number
|
|
Exhibit Description
|
|
Form
|
|
File Number
|
|
Exhibit
|
|
Date
|
|
Filed Herewith
|
|
3.1
|
|
Amended and Restated
Memorandum and Articles of Association of Verigy Ltd.
|
|
S-1/A
|
|
333-132291
|
|
3.2
|
|
6/5/2006
|
|
|
|
4.1
|
|
Form of Specimen
Share Certificate for Verigy Ltd.s Ordinary Shares
|
|
S-1/A
|
|
333-132291
|
|
4.1
|
|
6/1/2006
|
|
|
|
10.12**
|
|
Employment Offer Letter,
by and between Verigy and Jorge Titinger, effective June 9, 2008
|
|
8-K
|
|
000-52038
|
|
99.2
|
|
6/5/2008
|
|
|
|
31.1
|
|
Certification of Principal
Executive Officer Pursuant to Rule 13a-14 of the Securities Exchange Act
of 1934, As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|
|
|
|
|
|
|
|
|
|
X
|
|
31.2
|
|
Certification of Principal
Financial Officer Pursuant to Rule 13a-14 of the Securities Exchange Act
of 1934, As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|
|
|
|
|
|
|
|
|
|
X
|
|
32.1
|
|
Certification of Principal
Executive Officer Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
|
|
|
|
X
|
|
32.2
|
|
Certification of Principal
Financial Officer Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
|
|
|
|
X
|
|
**
Management contracts or compensation plans or arrangements in which directors
or executive officers are eligible to participate.
50
Table of
Contents
SIGNATURE
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.
Dated: September 5, 2008
|
By:
|
/s/
Robert J. Nikl
|
|
|
ROBERT J. NIKL
|
|
|
Vice President and Chief Financial Officer
|
51
Table of
Contents
VERIGY LTD.
EXHIBIT INDEX
Exhibit
|
|
|
|
Incorporated
By Reference
|
|
Number
|
|
Exhibit Description
|
|
Form
|
|
File
Number
|
|
Exhibit
|
|
Date
|
|
Filed
Herewith
|
|
3.1
|
|
Amended and Restated
Memorandum and Articles of Association of Verigy Ltd.
|
|
S-1/A
|
|
333-132291
|
|
3.2
|
|
6/5/2006
|
|
|
|
4.1
|
|
Form of Specimen
Share Certificate for Verigy Ltd.s Ordinary Shares
|
|
S-1/A
|
|
333-132291
|
|
4.1
|
|
6/1/2006
|
|
|
|
10.12**
|
|
Employment Offer Letter,
by and between Verigy and Jorge Titinger, effective June 9, 2008
|
|
8-K
|
|
000-52038
|
|
99.2
|
|
6/5/2008
|
|
|
|
31.1
|
|
Certification of Principal
Executive Officer Pursuant to Rule 13a-14 of the Securities Exchange Act
of 1934, As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|
|
|
|
|
|
|
|
|
|
X
|
|
31.2
|
|
Certification of Principal
Financial Officer Pursuant to Rule 13a-14 of the Securities Exchange Act
of 1934, As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|
|
|
|
|
|
|
|
|
|
X
|
|
32.1
|
|
Certification of Principal
Executive Officer Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
|
|
|
|
X
|
|
32.2
|
|
Certification of Principal
Financial Officer Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
|
|
|
|
X
|
|
** Management contracts or
compensation plans or arrangements in which directors or executive officers are
eligible to participate.
52
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