Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Overview
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"). For a full
understanding of our financial position and results of operations, this discussion should be read in conjunction with the combined and consolidated financial statements and related notes presented in
this report on Form 10-K.
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 combined and consolidated financial statements are expressed in U.S. dollars.
Prior
to June 1, 2006, we had operated as part of Agilent, and not as a stand-alone company. Therefore, the accompanying combined and consolidated financial statements prior to
June 1, 2006, were derived from the accounting records of Agilent using the historical basis of assets and liabilities of Verigy. The expense and cost allocations prior to June 1, 2006,
have been determined on a basis we consider to be a reasonable reflection of the utilization of services provided by Agilent or the benefit received by us from Agilent.
37
Agilent
historically used a centralized approach to cash management and financing of its operations. Transactions relating to Verigy prior to June 1, 2006 were accounted for
through the Agilent invested equity account for Verigy. Accordingly, none of the cash, cash equivalents or debt at the Agilent corporate level has been assigned to Verigy in the combined and
consolidated financial statements prior to June 1, 2006.
Business Summary
We design, develop, manufacture and sell advanced test systems and solutions for the semiconductor industry. As part of our single scalable platform strategy, we
develop and offer performance and capability enhancements to our platforms as part of our product development roadmap. We offer a single platform for each of the two general categories of devices
being tested: our 93000 Series platform, designed to test SOCs, SIPs and high-speed memory devices, and our Versatest V5000 Series platform, designed to test memory devices, including
flash memory and multi-chip packages. We also provide a range of services that assist our customers in quickly and cost effectively delivering the innovative, feature-rich
products demanded by their end users.
More
than a decade ago, we introduced the concept of scalable platform architecture for semiconductor testing, and we are continuing to capitalize on the benefits of that strategy today.
Our scalable platform architecture provides us with internal operating model efficiencies such as reduced research and development costs, engineering headcount, support requirements and inventory
risk.
We
sell our products and services directly to a wide range of customers, including integrated device manufacturers, or IDMs, test subcontractors, which includes specialty assembly,
package and test companies as well as wafer foundries, and fabless design companies. We have a broad installed customer base, having sold over 1,650 of our 93000 Series systems and over 2,500 of our
Versatest Series systems.
Overview of Results
In fiscal year 2007, two customers, ChipMos Technologies (Bermuda) Ltd. and Spansion Inc., accounted for more than 10% of our net revenue. In fiscal
year 2006, one customer, ChipMos Technologies (Bermuda) Ltd., accounted for more than 10% of our net revenue. In fiscal year 2005, no single customer accounted for more than 10% of our net
revenue.
We
derive a significant percentage of our net revenue from outside North America. Net revenue from customers located outside of North America represented 70.8%, 68.4% and 72.8% of total
net revenue in fiscal years 2007, 2006, and 2005, respectively. Net revenue in North America was lower by 9.8% in fiscal year 2007, compared to fiscal year 2006, due to the continuing outsourcing by
our North American customers to contract manufacturers in Asia. Net revenue in Asia (including Japan) was higher by 4.8% in fiscal year 2007, compared to fiscal year 2006. 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 significant impacts 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. Upturns and downturns 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. Furthermore, we sell to a variety of customers, including
subcontractors. Because we sell to 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
38
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 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.
In
connection with our separation from Agilent in June 2006, we transitioned the manufacturing processes for the 93000 Series products that we previously conducted internally to
Flextronics Telecom Services Ltd. ("Flextronics"). As a result of this transition, we now rely entirely on contract manufacturers. Flextronics commenced production of our Versatest series
products in China in July 2006 and assumed our manufacturing activities for the 93000 Series products in Germany in June 2006. Our volume manufacturing activities related to our 93000
Series platform will ultimately transition to Flextronics in China. However, given the recent increased demand for our SOC products, coupled with our customers' tight delivery schedule requirements,
we have decided to maintain additional manufacturing capacity at Flextronics in Germany. We expect this manufacturing model to improve our ability to manage costs in a cyclical market, drive down
inventory costs and exposure, improve our responsiveness to customer demand and place us closer to emerging markets.
We
believe that relying upon independent contract manufacturers will decrease our fixed costs and better position us to respond to changes in the demand for our products. With our
selection of Flextronics as our primary independent manufacturing supplier, we are leveraging their worldwide processes, tools and infrastructure and are expanding our manufacturing in Asia, where
Flextronics already has a significant capability for manufacturing complex technologies. As a result of this outsourcing arrangement, we expect to lower our fixed costs by reducing our capital
investments and manufacturing equipment and by reducing the size of our manufacturing work force located in high-cost geographies. In addition, although we will continue to retain some key
strategic procurement activities, we expect to reduce our material costs by leveraging Flextronics' tactical supply chain expertise and securing local suppliers. As a result of these actions, we
expect to have improved gross margins and reduced inventory when compared to historical levels.
Our
third and fourth fiscal quarters tend to be our strongest quarters for new orders, while our first fiscal quarter tends to be our weakest quarter for orders. 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, however, by the high degree of cyclicality of the semiconductor industry.
Critical Accounting Policies and Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the U.S. ("U.S. GAAP") requires management to make
estimates and assumptions that affect the amounts reported in our combined and consolidated financial statements and accompanying notes. Management bases its estimates on historical experience and
various other assumptions believed to be reasonable. Although these estimates are based on management's best 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 and accounting for income taxes.
Revenue recognition.
Net revenue is derived from the sale of products and services and is adjusted for returns and
allowances, which historically have been insignificant. Consistent with the SEC's Staff Accounting Bulletin No. 104, or "SAB 104," we recognize revenue on the sale of semiconductor test
equipment when there is persuasive evidence of an arrangement, delivery has occurred or services have
39
been
rendered, the sales price is fixed or determinable and collectibility is reasonably assured. Delivery is considered to have occurred when title and risk of loss have transferred to the customer,
for products, or when service has been performed. We consider the price to be fixed or determinable when the price is not subject to refund or adjustments. At the time we take an order, we evaluate
the creditworthiness of our customers to determine the appropriate timing of revenue recognition. For sales or arrangements that include customer-specified acceptance criteria, including those where
acceptance is required upon achievement of performance milestones or fulfillment of other future obligations, revenue is recognized after the acceptance criteria have been met. If the criteria are not
met, then revenue is deferred until such criteria are met or until the period(s) over which the last undelivered element is delivered. To the extent that a contingent payment exceeds the fair value of
the undelivered element, we defer the contingent payment.
Our
product revenue is generated predominantly from the sales of various types of test equipment. Software is embedded in many of our test equipment products, but the software component
is considered to be incidental. For revenue arrangements that include multiple elements, we recognize revenue in accordance with EITF 00-21. For products that include installation, if we
have previously successfully installed similar equipment, product revenue is recognized upon delivery, and recognition of installation revenue is delayed until the installation is complete. Otherwise,
neither
the product nor the installation revenue is recognized until the installation is complete. Revenue from services includes extended warranty, customer support, consulting, training, and education
services. Service revenue is deferred and recognized over the contractual period or as services are rendered to the customer. For example, customer support contracts are recognized ratably over the
contractual period, while training revenue is recognized as the training is provided to the customer. In addition, all of the revenue recognition criteria described above must be met before service
revenue is recognized. We use objective evidence of fair value to allocate revenue to elements in multiple element arrangements and recognize revenue when the criteria for revenue recognition have
been met for each element. In the absence of objective evidence of fair value of a delivered element, we allocate revenue to the fair value of the undelivered elements and the residual revenue to the
delivered elements. The price charged when an element is sold separately generally determines fair value.
Restructuring charges.
We recognize a liability for restructuring costs at fair value only when the liability is incurred.
The three main components of our restructuring charges are workforce reductions, consolidating facilities and asset impairments. Workforce-related charges are accrued when it is determined that a
liability has been incurred, which is generally when individuals have been notified of their termination dates and expected severance payments. Plans to eliminate excess facilities result in charges
for lease termination fees and future commitments to pay lease charges, net of estimated future sublease income. We recognize charges for elimination of excess facilities when we have vacated the
premises. Asset impairments primarily consist of property, plant and equipment associated with excess facilities being eliminated, and are based on an estimate of the amounts and timing of future cash
flows related to the expected future remaining use and ultimate sale or disposal of the property, plant and equipment. The charges associated with consolidating facilities and asset impairment charges
incurred by Agilent prior to our separation were allocated to Verigy to the extent the underlying benefits related to our business. These estimates were derived using the guidance of Statement of
Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"), Staff Accounting Bulletin 100,
"Restructuring and Impairment Charges" ("SAB 100"), Emerging Issues Task Force 94-3, "Liability Recognition for Costs to Exit an Activity (Including Certain Costs Incurred in a
Restructuring)" ("EITF 94-3") and lastly, SFAS No. 146 "Accounting for Exit or Disposal Activities" ("SFAS No. 146") which was effective for exit and disposal activities
initiated after December 31, 2002. If the amounts and timing of cash flows from restructuring activities are significantly different from what we have estimated, the actual amount of
restructuring and asset impairment charges could be materially different, either higher or lower, than those we have recorded.
40
Inventory valuation.
We assess the valuation of our inventory, including demonstration inventory, on a quarterly basis based
upon estimates about future demand and actual usage. To the extent that we determine that we are holding excess or obsolete inventory, we write down the value of our inventory to its net realizable
value. Such write-downs are reflected in cost of products and can be material in amount. We recorded net inventory charges of $8 million, $7 million and $18 million in fiscal
years 2007, 2006 and 2005, respectively. Our inventory assessment involves difficult estimates of future events and, as a result, additional write-downs may be required. If actual market conditions
are more favorable than anticipated, inventory previously written down may be sold to customers, resulting in lower cost of products and higher income from operations than expected in that period.
Excess and obsolete
inventory resulting from shifts in demand or changes in market conditions for raw materials and components can result in significant volatility in our costs of products.
In
our inventory valuation analysis, we also include inventory that we could be obligated to purchase from our suppliers based on our production forecasts. To the extent that our
committed inventory purchases exceed our forecasted productions needs, we write down the value of those inventories by taking a charge to our cost of products and increasing our supplier liability.
Warranty.
We generally provide a one-year warranty on products commencing upon installation or delivery. We
accrue for warranty costs in accordance with Statement of Financial Standards No. 5, "Accounting for Contingencies" ("SFAS No. 5"), based on historical trends in warranty charges as a
percent of gross product shipments. Estimated warranty charges are recorded within cost of products at the time revenue is recognized and the liability is reported in other current liabilities on the
combined balance sheet. The accrual is reviewed regularly and periodically adjusted to reflect changes in warranty cost estimates. For some products we also offer extended warranties beyond one year.
Costs associated with our extended warranty contracts beyond one year are expensed as incurred.
Separation costs.
Separation costs are one-time internal and external spin-off related costs, such as
information technology set-up costs and consulting and legal and other professional fees. We do not expect any significant separation costs after October 31, 2007.
Share-based compensation.
We account for share-based awards in accordance with Statement of Financial Accounting Standards
No. 123(R), Shared-Based Payment ("SFAS No. 123(R)") which was effective November 1, 2005 for Verigy. Under this standard, share-based compensation expense is primarily based on
estimated grant date fair value using the Black-Scholes option pricing model and is recognized on a straight-line basis for awards granted after November 1, 2005 over the vesting
period of the award. For awards issued prior to November 1, 2005, we recognize share-based compensation expense based on FASB Interpretation 28 "Accounting for Stock Appreciation Rights and
Other Variable Stock Option or Award Plans an interpretation of APB Opinions No. 15 and 25", which provides for accelerated expensing. Our estimate of share-based compensation expense requires
a number of complex and subjective assumptions including our stock price volatility, employee exercise patterns (expected life of the options), future forfeitures and related tax effects. The
assumptions used in calculating the fair value of share-based awards represent our best estimates, but these estimates involve inherent uncertainties and the application of management judgment.
Although we believe the assumptions and estimates we have made are reasonable and appropriate, changes in assumptions could materially impact our reported financial results. We incurred
$14 million and $10 million in share-based compensation expense during fiscal 2007 and 2006. We did not incur any share-based compensation expense in 2005. Also see Note 8
"Share-based compensation" of the combined and consolidated financial statements.
Retirement and post-retirement plan assumptions.
Retirement and post-retirement benefit plan costs
are a significant cost of doing business. They represent obligations that will ultimately be settled sometime in the future and therefore are subject to estimation. Pension accounting is intended to
reflect the recognition of future benefit costs over the employees' average expected future service based
41
on
the terms of the plans and the investment and funding decisions made by us. To estimate the impact of these future payments and our decisions concerning funding of these obligations, we are
required to make assumptions using actuarial concepts within the framework of U.S. GAAP. Two critical assumptions are the discount rate and the expected long-term return on plan assets.
Other important assumptions include the health care cost trend rate, expected future salary increases, expected future increases to benefit payments, expected retirement dates, employee turnover and
retiree mortality rates. We evaluate these assumptions at least annually.
The
discount rate is used to determine the present value of future benefit payments at each measurement date (October 31 for U.S. plans and September 30 for
non-U.S. plans). The discount rate for U.S. plans was determined based on published rates for high quality corporate bonds. The discount rate for non-U.S. plans was generally
determined in a similar manner. Differences between the expected future cash flows of our plans and the maturities of the high quality corporate bonds are not expected to have a material impact on the
selection of discount rates. As discount rates decrease, we would expect our net plan costs to increase and as discount rates increase we would expect our net plan costs to decrease. SFAS
No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plansan amendment of FASB Statements No. 87, 88, 106 and 132(R)" ("SFAS
No. 158"), became effective for us as of October 31, 2007 and requires recognition of an asset or liability in the statement of financial position reflecting the funded status of pension
and postretirement benefit plans such as retiree health and life, with current year changes recognized in shareholders' equity. At October 31, 2007, in order to recognize the funded status of
its pension and post-retirement benefit plans in accordance with SFAS No. 158, the Company recorded additional liabilities by a cumulative amount of $18 million of which
$12 million (net of tax of $6 million) was recorded as an increase to accumulated other comprehensive loss. These losses are being recognized over the expected average future service
lives of plan participants. Also see Note 18 "Retirement plans and Post-Retirement Benefits".
The
expected long-term return on plan assets is estimated using current and expected asset allocations, as well as historical and expected returns. Declining rate of return
assumptions generally result in increased pension expense while increasing rate of return assumptions generally result in lower pension expense. A one percent change in the estimated
long-term return on our pension plan assets would result in a $0.3 million impact on pension expense for our fiscal year 2007. There are no plan assets related to our
post-retirement health care plans.
Workforce-related
events such as restructurings or divestitures can result in curtailment and settlement gains or losses to the extent they have an impact on the average future working
lifetime or total number of participants in our retirement and postretirement plans.
Valuation of goodwill and intangible assets.
We performed our annual goodwill impairment analysis in the fourth quarter of
2007. Based on our estimates of forecasted discounted cash flows, we concluded that we did not have any impairment at that time.
Our
accounting for goodwill and purchased intangible assets complies with SFAS No. 142 "Goodwill and Other Intangible Assets" ("SFAS No. 142"). We test goodwill for
possible impairment on an annual basis and at any other time that impairment indicators arise. Circumstances that could trigger an impairment test include but are not limited to: significant decrease
in market price of an asset, significant adverse changes in the extent or use or physical condition of an asset, significant adverse change in legal or regulatory factors affecting an asset,
unanticipated competition, loss of key personnel, accumulation of costs significantly in excess of expected costs to acquire or construct an asset, operating or cash flow losses (or projections of
losses) that demonstrates continuing losses associated with the use of an asset, or a current expectation that more likely than not, an asset will be sold or disposed of significantly before the end
of its previously estimated useful life. Purchased intangible assets are carried at cost less accumulated amortization. Amortization is computed using the straight-line method over the
economic lives of the respective assets, generally three to five years.
42
The process of evaluating the potential impairment of goodwill and other intangibles is highly subjective and requires significant judgment. We estimate expected future cash flows then
compare the carrying value including goodwill and other intangibles to the discounted future cash flows. If the total of future cash flows is less than the carrying amount of the assets, we recognize
an impairment loss based on the excess of the carrying amount over the fair value of the assets. Estimates of the future cash flows associated with the assets are critical to these assessments.
Changes in these estimates based on changed economic conditions or business strategies could result in material impairment charges in future periods.
Accounting for income taxes.
We record a tax provision for the anticipated tax consequences of the reported results of
operations. In accordance with SFAS No. 109,
Accounting for Income Taxes
, the provision for income taxes is computed using the asset and
liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of
assets and liabilities, and for operating losses and tax credit carryforwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable income in
effect for the years in which those tax assets are expected to be realized or settled. We record a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not
to be realized.
We
are required to assess the realization of our net deferred tax assets and the need for a valuation allowance. This assessment requires that our management make judgments about
benefits that could be realized from future taxable income, as well as other positive and negative factors influencing the realization of deferred tax assets. We had no valuation allowance against any
net deferred tax assets as of October 31, 2007 and 2006. Prior to our separation, we maintained a full valuation allowance for losses we incurred in the U.S. and Japan, prior to fiscal year
2003.
Undistributed
earnings of our Domestic (US) and Foreign Subsidiaries are indefinitely reinvested in the respective operations. No provision has been made for taxes that might be payable
upon remittance of such earnings, nor is it practicable to determine the amount of this liability.
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, restructuring and other one-time charges, as well as discrete events, such as settlements of future audits. We are subject to audits and examinations of our tax returns
by tax authorities in various jurisdictions, including the Internal Revenue Service. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy
of our provision for income taxes.
43
Results of Operations
The following table sets forth certain operating data as a percent of net revenue for the periods presented.
|
|
Year Ended October 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Net revenue:
|
|
|
|
|
|
|
|
|
Products
|
|
80.8
|
%
|
83.0
|
%
|
77.9
|
%
|
|
Services
|
|
19.2
|
|
17.0
|
|
22.1
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
100.0
|
|
100.0
|
|
100.0
|
|
Cost of sales:
|
|
|
|
|
|
|
|
|
Cost of products
|
|
41.8
|
|
42.5
|
|
50.0
|
|
|
Cost of services
|
|
13.5
|
|
12.5
|
|
19.3
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of sales
|
|
55.3
|
|
55.0
|
|
69.3
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
44.7
|
|
45.0
|
|
30.7
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Research and development
|
|
12.0
|
|
12.7
|
|
22.1
|
|
|
Selling, general and administrative
|
|
19.1
|
|
19.2
|
|
29.4
|
|
|
Restructuring charges
|
|
0.1
|
|
2.1
|
|
1.5
|
|
|
Separation costs
|
|
0.5
|
|
8.9
|
|
0.7
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
31.7
|
|
42.9
|
|
53.7
|
|
Income (loss) from operations
|
|
13.0
|
|
2.1
|
|
(23.0
|
)
|
Other income (expense), net
|
|
2.0
|
|
0.6
|
|
(0.2
|
)
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
15.0
|
|
2.7
|
|
(23.2
|
)
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
2.2
|
|
2.7
|
|
2.9
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
12.8
|
%
|
0.0
|
%
|
(26.1
|
)%
|
|
|
|
|
|
|
|
|
Net Revenue
|
|
Year Ended October 31,
|
|
|
|
|
|
|
|
2007 over 2006
Change
|
|
2006 over 2005
Change
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
(in millions)
|
|
|
|
|
|
Net revenue from products:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SOC/SIP/High-Speed Memory
|
|
$
|
333
|
|
$
|
442
|
|
$
|
267
|
|
(24.7
|
)%
|
65.5
|
%
|
|
Memory Test
|
|
|
282
|
|
|
204
|
|
|
88
|
|
38.2
|
%
|
131.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue from products
|
|
$
|
615
|
|
$
|
646
|
|
$
|
355
|
|
(4.8
|
)%
|
82.0
|
%
|
Net revenue from services
|
|
|
146
|
|
|
132
|
|
|
101
|
|
10.6
|
%
|
30.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
$
|
761
|
|
$
|
778
|
|
$
|
456
|
|
(2.2
|
)%
|
70.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
44
Our
revenues by geographic region for fiscal years 2007, 2006 and 2005 are as follows:
|
|
Year Ended October 31,
|
|
|
|
|
|
|
|
2007 over 2006
Change
|
|
2006 over 2005
Change
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
($ in millions)
|
|
|
|
|
|
North America
|
|
$
|
222
|
|
$
|
246
|
|
$
|
124
|
|
(9.8
|
)%
|
98.4
|
%
|
|
As a percent of total net revenue
|
|
|
29.2
|
%
|
|
31.6
|
%
|
|
27.2
|
%
|
|
|
|
|
Europe
|
|
$
|
32
|
|
$
|
48
|
|
$
|
43
|
|
(33.3
|
)%
|
11.6
|
%
|
|
As a percent of total net revenue
|
|
|
4.2
|
%
|
|
6.2
|
%
|
|
9.4
|
%
|
|
|
|
|
Asia-Pacific, excluding Japan
|
|
$
|
455
|
|
$
|
405
|
|
$
|
195
|
|
12.3
|
%
|
107.7
|
%
|
|
As a percent of total net revenue
|
|
|
59.8
|
%
|
|
52.0
|
%
|
|
42.8
|
%
|
|
|
|
|
Japan
|
|
$
|
52
|
|
$
|
79
|
|
$
|
94
|
|
(34.2
|
)%
|
(16.0
|
)%
|
|
As a percent of total net revenue
|
|
|
6.8
|
%
|
|
10.2
|
%
|
|
20.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
$
|
761
|
|
$
|
778
|
|
$
|
456
|
|
(2.2
|
)%
|
70.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
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 for fiscal year 2007 was $761 million, a decrease of $17 million, or 2.2%, from the $778 million achieved in fiscal year 2006. Net product revenue for
fiscal year 2007 was $615 million, a decrease of $31 million, or 4.8%, from $646 million achieved in fiscal year 2006. The decrease in product revenue was primarily due to lower
sales volume of our SOC/SIP test systems, partially offset by higher revenue from sales of our memory test systems, spurred by continued strong demand for hand-held consumer products as
well as the expansion of the markets that we serve into NAND flash and flash final test.
Net
product revenue from sales of our SOC/SIP/High-speed memory test systems decreased by $109 million, or 24.7%, in fiscal year 2007, compared to fiscal year 2006,
primarily due to weakness in demand for our SOC/SIP/High-speed memory test systems during the first
half of fiscal year 2007, particularly from sub-contractors. During the second half of fiscal year 2007, however, we did experience an increase in demand for our
SOC/SIP/High-speed memory test systems, driven by our new product introductions. Net product revenue from sales of our memory test systems increased by $78 million, or 38.2%, in
fiscal year 2007, compared to fiscal year 2006, primarily due to strong sales of flash memory devices as a result of greater demand for hand-held consumer products, as well as expansion of
our addressable markets into NAND flash and flash final test.
Service
revenue in fiscal year 2007 accounted for $146 million, an increase of $14 million, or 10.6%, compared to the $132 million achieved in fiscal year 2006. The
increase in service revenue is primarily attributable to our growing installed base.
Net
revenue in fiscal year 2006 was $778 million, an increase of $322 million, or 70.6%, from the $456 million achieved in fiscal year 2005. Net product revenue in
fiscal year 2006 was $646 million, an increase of $291 million, or 82.0%, from the $355 million achieved in fiscal year 2005. The increase in net product revenue was primarily a
result of a higher volume of sales enabled by increased overall demand for our products. Net product revenue from our SOC/SIP/high-speed memory test systems increased by
$175 million, or 65.5%, with most of the sales being of the enhanced version of our 93000 Series platform. Continued customer demand for our 93000 Series platform increased our penetration in a
breadth of applications, from next generation graphics and wireless gaming, to high-end SOC applications and digital consumer applications as well as SOC solutions with RF capabilities.
During
45
the
fourth quarter of fiscal 2006, we experienced some weakness in demand for our SOC/SIP/high-speed memory test systems, particularly from sub-contractors. As a result, a
higher portion of our net revenue during the latter part of fiscal 2006 has come from our IDM customers. Sales of our memory test systems also contributed to the net product revenue increase, with net
product revenue from our memory test systems increasing by $116 million, or 131.8%. Substantially all of these sales were of the enhanced version of our Versatest V5000 Series platform, which
was introduced in late fiscal year 2004. This demand was primarily a result of strong sales of flash memory devices as a result of greater demand for hand-held consumer products, as well
as expansion of our addressable markets into NAND flash and flash final test. Service revenue for fiscal year 2006 accounted for $132 million, or 17.0% of net revenue, compared to
$101 million, or 22.1% of net revenue for fiscal year 2005. The increase in service revenue is attributed to our growing installed base and increased services associated with a strong demand
for products at the end of fiscal year 2006.
We
derive a significant percentage of our net revenue from outside North America. Net revenue from customers located outside of North America represented 70.8%, 68.4% and 72.8% of total
net revenue in fiscal years 2007, 2006, and 2005, respectively. Net revenue in North America was lower by 9.8% in fiscal year 2007, compared to fiscal year 2006, due to the continuing outsourcing by
our North American customers to contract manufacturers in Asia. Net revenue in Asia (including Japan) was higher by 4.8% in fiscal year 2007, compared to fiscal year 2006. We expect this trend of
increasing
sales in Asia (including Japan) to continue as semiconductor manufacturing activities continue to concentrate in that region.
Cost of Sales
Cost of Products
|
|
Year Ended October 31,
|
|
|
|
|
|
|
|
2007 over 2006
Change
|
|
2006 over 2005
Change
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
($ in millions)
|
|
|
|
|
|
Cost of products
|
|
$
|
318
|
|
$
|
331
|
|
$
|
228
|
|
(3.9
|
)%
|
45.2
|
%
|
|
As a percent of product revenue
|
|
|
51.7
|
%
|
|
51.2
|
%
|
|
64.2
|
%
|
|
|
|
|
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 $13 million, or 3.9%, in fiscal year 2007, compared to fiscal year 2006, was primarily due to a decrease in product shipments,
cost savings realized from the streamlining of our infrastructure costs, $8 million lower restructuring and separation costs and $6 million lower excess and obsolete inventory-related
charges. These decreases were partially offset by $5 million higher freight and duty expenses and $4 million higher warranty costs. Cost of products as a percent of net product revenue
increased by 0.5 percentage points in fiscal year 2007, compared to fiscal year 2006, primarily as a result of a decrease in product shipments and product mix, partially offset by less
inventory write-offs for discontinued products and cost savings realized from the streamlining of our infrastructure costs. Excess and obsolete inventory-related charges in fiscal year
2007 were $12 million, compared to $18 million in fiscal year 2006. In addition, we sold previously written down inventory of $4 million and $11 million in fiscal years
2007 and 2006, respectively. The sales of previously written down inventory reduced cost of products as a percentage of product revenue by approximately 0.3 and 0.9 percentage points for fiscal
years 2007 and 2006, respectively.
Our
cost of products included approximately $4.4 million of restructuring and separation charges in fiscal year 2007, compared to approximately $12 million in fiscal year
2006. Our cost of products also included approximately $1.7 million of SFAS No. 123(R) share-based compensation expense in both
46
fiscal
years 2007 and 2006. As of October 31, 2007, we held inventory that was previously written down by $35 million and is primarily composed of component raw material. We continue to
dispose of the remaining inventory on a recurring basis.
The
increase in cost of products of $103 million, or 45.2%, in fiscal year 2006, compared to fiscal year 2005, was directly related to the increase in products shipped in 2006.
The decrease in cost of products as a percent of net product revenue, compared to fiscal year 2005, was a result of higher revenue, higher margins from both our product lines, less inventory
write-offs for discontinued products as well as our cost savings realized from our move to a new manufacturing model. This decrease was partially offset by higher performance-based
variable compensation costs in fiscal year 2006. Excess and obsolete inventory-related charges in fiscal year 2006 were $18 million, compared to $25 million in fiscal year 2005. In
addition, we sold previously written down inventory of $11 million and $7 million in fiscal years 2006 and 2005, respectively. The sales of previously written down inventory reduced cost
of products as a percentage of product revenue by approximately 0.9 and 1.3 percentage points for fiscal years 2006 and 2005, respectively.
Our
costs of products in absolute amount are expected to increase or decrease with revenue. As a percent of net product revenue, these costs will vary depending on a variety of factors,
including the mix of system configurations in a particular period, competitive and other pressures on pricing and our
ability to manage inventory levels to avoid excess and obsolete inventory charges. In order to mitigate the risk and to manage our costs through the peaks and troughs of the semiconductor industry, we
have streamlined our cost structure by reducing our fixed costs and adding more flexibility to our manufacturing model through the outsourcing of our manufacturing. We believe our efforts will provide
us with the flexibility to respond more rapidly to changes in industry conditions and to better capitalize on market opportunities during market upturns, and will provide us with more consistent cost
of products.
Cost of Services
|
|
Year Ended October 31,
|
|
|
|
|
|
|
|
2007 over 2006
Change
|
|
2006 over 2005
Change
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
($ in millions)
|
|
|
|
|
|
Cost of services
|
|
$
|
103
|
|
$
|
97
|
|
$
|
88
|
|
6.2
|
%
|
10.2
|
%
|
|
As a percent of services revenue
|
|
|
70.5
|
%
|
|
73.5
|
%
|
|
87.1
|
%
|
|
|
|
|
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 increased by $6 million, or 6.2%, in fiscal year 2007, compared to fiscal year 2006, primarily due to the $14 million increase in services revenue and our
increased costs needed to support a higher installed base, partially offset by cost savings realized from the streamlining of our infrastructure costs. Cost of services as a percent of service revenue
decreased by 3 percentage points, from 73.5% in fiscal year 2006 to 70.5%, reflecting our better utilization of our service personnel as our installed base has increased as well as the benefit
of the improved reliability and quality of our current product offering. Our cost of services also included approximately $0.8 million of SFAS No. 123(R) share-based compensation expense
in fiscal year 2007, compared to approximately $0.2 million in fiscal year 2006.
Cost
of services increased by $9 million, or 10.2%, in fiscal year 2006, compared to fiscal year 2005, primarily due to higher service revenue being generated from product
shipments. Cost of services as a percent of service revenue decreased by 13.6 percentage points, from 87.1% in fiscal year 2005 to 73.5% in fiscal year 2006. The improvement in the cost of
services margin is primarily due to the $31 million higher services revenue as well as better utilization of our service personnel as our installed base increased and benefits from the improved
reliability and quality of our products. Our cost of
47
services
also included approximately $0.4 million of restructuring charges in fiscal year 2006, compared to no such charges in fiscal year 2005 and approximately $0.2 million of SFAS
No. 123(R) share-based compensation expense in fiscal year 2006, compared to no such charges for fiscal year 2005.
As
a percent of service revenue, cost of services will vary depending on a variety of factors, including the effect of price erosion, the reliability and quality of our products and our
need to maintain customer service and support centers worldwide.
Operating Expenses
Research and Development Expenses
|
|
Year Ended October 31,
|
|
|
|
|
|
|
|
2007 over 2006
Change
|
|
2006 over 2005
Change
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
($ in millions)
|
|
|
|
|
|
Research and development
|
|
$
|
91
|
|
$
|
99
|
|
$
|
101
|
|
(8.1
|
)%
|
(2.0
|
)%
|
|
As a percent of net revenue
|
|
|
12.0
|
%
|
|
12.7
|
%
|
|
22.1
|
%
|
|
|
|
|
Research and Development.
Research and development ("R&D") expense includes costs related to:
-
-
salaries
and related compensation expenses for research and development and engineering personnel;
-
-
materials
used in R&D activities;
-
-
outside
contractor expenses;
-
-
depreciation
of equipment used in R&D activities;
-
-
facilities
and other overhead and support costs for the above; and
-
-
effective
fiscal year 2006, share-based compensation.
R&D
costs have generally been expensed as incurred.
Research
and development expense declined by $8 million, or 8.1%, in fiscal year 2007, compared to fiscal year 2006, primarily due to lower project materials as well as cost
savings realized from the streamlining of our infrastructure costs, partially offset by $0.4 million higher share-based compensation expenses. R&D expenses included approximately
$1.7 million of SFAS No. 123(R) share-based compensation expenses in fiscal year 2007, compared to approximately $1.3 million for fiscal year 2006.
Research
and development expense declined by $2 million, or 2.0%, in fiscal year 2006, compared to fiscal year 2005, primarily due to lower allocated cost from Agilent prior to
our separation as well as our continued progress in lowering our post-separation cost structure partially offset by higher performance-based variable compensation expenses and share-based
compensation expenses that were recorded in accordance with SFAS No. 123(R). R&D expenses decreased significantly as a percent of net revenue in fiscal year 2006, compared to fiscal year 2005,
primarily due to the increase in revenue despite higher performance-based variable compensation expenses and share-based compensation expenses that were recorded in accordance with SFAS
No. 123(R). R&D expenses included approximately $1.3 million of SFAS No. 123(R) share-based compensation expenses in fiscal year 2006, compared to no such expenses for fiscal year
2005.
We
believe that we need to maintain a significant level of research and development spending in order to remain competitive and, as a result, our research and development expenses have
varied only modestly in dollars but vary more significantly as a percent of revenue. As part of our separation from Agilent, we have consolidated our R&D teams in Boeblingen, Germany, for our
principal SOC
48
developments
and in Cupertino, California, for our memory test products. We believe this will help us concentrate on our technology innovation and decrease our time to market with new products.
Selling, General and Administrative Expenses
|
|
Year Ended October 31,
|
|
|
|
|
|
|
|
2007 over 2006
Change
|
|
2006 over 2005
Change
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
($ in millions)
|
|
|
|
|
|
Selling, general and administrative
|
|
$
|
145
|
|
$
|
149
|
|
$
|
134
|
|
(2.7
|
)%
|
11.2
|
%
|
|
As a percent of net revenue
|
|
|
19.1
|
%
|
|
19.2
|
%
|
|
29.4
|
%
|
|
|
|
|
Selling, General and Administrative.
Selling, general and administrative ("SG&A") 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
-
-
effective
fiscal year 2006, share-based compensation.
Selling,
general and administrative expenses decreased by $4 million, or 2.7%, in fiscal year 2007, compared to fiscal year 2006 primarily as a result of cost savings realized
from the streamlining of our infrastructure costs, partially offset by wage increases, higher performance-based variable compensation expenses and higher share-based compensation expenses. SG&A
expenses included approximately $9.6 million of SFAS No. 123(R) share-based compensation expenses in fiscal year 2007, compared to approximately $7.2 million for fiscal year 2006.
Selling,
general and administrative expenses increased by $15 million, or 11.2%, in fiscal year 2006, compared to fiscal year 2005. This increase was primarily a result of higher
performance-based variable compensation expenses, wage increases, higher commission costs on increased sales, and higher share-based compensation expenses that were recorded in accordance with SFAS
No. 123(R). These increases were partially offset by cost savings from lower IT and infrastructure costs we experienced subsequent to our separation from Agilent. SG&A expenses included
approximately $7.2 million of SFAS No. 123(R) share-based compensation expenses in fiscal year 2006, compared to no such expenses for fiscal year 2005.
In
general, we believe our SG&A expenses will decrease in absolute amount compared to prior periods due to our efforts to streamline our infrastructure and consolidate excess facilities.
The expected savings realized from our cost reduction efforts will be partially offset by incremental costs associated with operating as a stand-alone public company, including professional fees such
as legal, regulatory and accounting compliance costs that we will incur and share-based compensation expenses that are now being recorded in accordance with SFAS No. 123(R). SG&A expenses can
fluctuate due to changes in commission expenses which are tied to changes in sales volume and customer mix.
49
Restructuring Charges
A summary of the statement of operations impact of the charges resulting from all restructuring plans for fiscal years ended October 31, 2007, 2006 and
2005 is shown below:
|
|
Year Ended October 31,
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
(in millions)
|
Restructuring charges (included in cost of sales)
|
|
$
|
3
|
|
$
|
7
|
|
$
|
1
|
Restructuring charges (included in operating expenses)
|
|
|
1
|
|
|
17
|
|
|
7
|
|
|
|
|
|
|
|
Total restructuring charges
|
|
$
|
4
|
|
$
|
24
|
|
$
|
8
|
|
|
|
|
|
|
|
We
incurred restructuring charges of $4 million, $24 million and $8 million for fiscal years 2007, 2006 and 2005, respectively. These charges were a result of
Agilent's 2005 restructuring plan and Verigy's continued efforts aimed at reducing operational costs, primarily through closing, consolidating and relocating some sites and reducing and realigning our
workforce.
As
of October 31, 2007, we had approximately $1.8 million accrued restructuring liabilities, compared to no accrued restructuring liability as of October 31, 2006.
In accordance with the separation agreements with Agilent, Agilent retained and paid for all restructuring liabilities associated with its 2005 restructuring plan, except for those liabilities related
to 85 employees who were transferred to Flextronics for whom we paid approximately $3 million and are recognizing as expense over the transferred employees requisite service period.
See
Note 17 "Restructuring" of the combined and consolidated financial statements for a description of the restructuring and asset impairment activity.
Separation Costs
The following table presents the components of separation costs for fiscal years 2007, 2006 and 2005, respectively.
|
|
Year Ended October 31,
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
(in millions)
|
Separation costs (included in cost of sales)
|
|
$
|
1
|
|
$
|
8
|
|
$
|
|
Separation costs (included in operating expense)
|
|
|
4
|
|
|
75
|
|
|
3
|
|
|
|
|
|
|
|
|
Total of separation costs
|
|
|
5
|
|
|
83
|
|
|
3
|
|
|
|
|
|
|
|
Net curtailment and settlement gains (included in costs of sales)
|
|
|
|
|
|
(4
|
)
|
|
|
Net curtailment and settlement gains (included in operating expenses)
|
|
|
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
Total net curtailment and settlement gains
|
|
|
|
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
Net separation costs
|
|
$
|
5
|
|
$
|
73
|
|
$
|
3
|
|
|
|
|
|
|
|
In
connection with our separation from Agilent, we incurred one-time internal and external separation costs, such as information technology set-up costs and
consulting and legal and other professional fees.
For
fiscal year 2007, we incurred $5 million in separation costs, of which approximately $1 million was recorded in costs of sales. For fiscal year 2006, we incurred
$83 million in separation costs, of which approximately $8 million was recorded in costs of sales. For fiscal year 2005, we incurred
50
$3 million
in separation costs, all of which were recorded in operating expenses. We do not expect any significant separation costs on a go-forward basis.
In
fiscal year 2006, we also had a net curtailment and settlement gain of approximately $10 million which pertained to Agilent's U.S. Retirement Plans and Agilent's Post
Retirement Benefit Plan. These net curtailment and settlement gains which resulted from the separation of our business from Agilent and the significant workforce reductions we incurred during fiscal
year 2006, were recorded by Agilent in accordance with SFAS No. 88 and were pushed down to our business.
Provision for Income Taxes
|
|
Year Ended October 31,
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
(in millions)
|
Provision for income taxes
|
|
$
|
17
|
|
$
|
21
|
|
$
|
13
|
We
recorded income tax provisions of $17 million, $21 million and $13 million for fiscal years ended 2007, 2006 and 2005, respectively. Through June 1, 2006,
Verigy's income tax expense reflected amounts based on Agilent's consolidated tax profile, thus our income tax expense for the first seven months consisted of allocated expense from Agilent. Since our
separation from Agilent on June 1, 2006, our tax expense is based on our new business model and tax status in the countries where we do business.
As
of October 31, 2007 and 2006, we had $46 million and $57 million of deferred tax assets due to temporary differences between the book and tax basis of the net
assets, most of which were acquired upon our separation from Agilent. Upon our separation from Agilent, we did not retain any pre-separation deferred tax assets or liabilities which had
resulted from historical temporary differences, net operating losses and credit carryforwards. We did, however, retain approximately $4 million of prepaid tax assets upon our separation.
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, restructuring and other one-time charges, as well as discrete events, such as settlements of future audits. We are subject to audits and examinations of our tax returns
by tax authorities in various jurisdictions, including the Internal Revenue Service. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy
of our provision for income taxes.
Financial Condition
Liquidity and Capital Resources
As of October 31, 2007, we had $146 million in cash and cash equivalents, compared to $300 million as of October 31, 2006. This
decrease was primarily a result of cash used for the purchase of available-for-sale marketable securities partially offset by cash generated from our operations and financing
activities.
Prior
to June 1, 2006, Agilent used a centralized approach to cash management and financing of its operations. As such, transactions relating to our business prior to
June 1, 2006, were accounted for through the Agilent net invested equity account for our business. Accordingly, none of the cash, cash equivalents or debt at the Agilent corporate level had
been assigned to our business in the historical combined and consolidated financial statements prior to June 1, 2006.
51
Net Cash Provided By (Used in) Operating Activities
Net cash provided by operating activities was $121 million in fiscal year 2007, compared to $164 million of net cash provided by operating
activities in fiscal year 2006. The $121 million cash generated during fiscal year 2007 was primarily due to net income from our operations of $97 million, a $9 million decrease
in our receivables, a $10 million increase in employee compensation and benefits and a $7 million increase in deferred revenue. These were partially offset by a decrease of
$31 million in payables to Agilent, a decrease in income taxes and other taxes payable of $9 million and a decrease in other current and long-term assets and liabilities of
approximately $5 million. Also, in fiscal year 2007, we had non-cash charges of $13 million from depreciation and amortization, $12 million of inventory
write-offs, and $14 million of SFAS No. 123(R) non-cash share-based compensation costs.
Net
cash provided by operating activities was $164 million in fiscal year 2006, compared to $74 million of net cash used for operating activities in fiscal year 2005. The
significant net cash generation in fiscal year 2006, compared to fiscal year 2005, was primarily due to our breakeven position in fiscal year 2006 versus a net loss of $119 million in fiscal
year 2005. In addition, an increase in our accounts payable and payables to Agilent of $85 million and net liabilities retained by Agilent of $82 million, and a $16 million
increase in deferred revenue contributed to the higher cash generation on fiscal year 2006. Also, in fiscal year 2006, we had non-cash charges of $18 million from inventory
write-offs, $10 million of SFAS No. 123(R) non-cash share-based compensation costs, and $9 million in depreciation expense. These impacts were partially
offset by a $41 million increase in our accounts receivable, $9 million decrease in income taxes payable, and
$42 million decrease in the net change of current assets and accrued liabilities. Also, in fiscal year 2006, we had a non-cash net $10 million curtailment and settlement
gain.
Net Cash Used in Investing Activities
Net cash used in investing activities for the fiscal year 2007 was $290 million, compared to $37 million in fiscal year 2006. The
$290 million of net investment was primarily related to $568 million invested in available-for-sale securities and $12 million of cash payments for site
set-ups and leasehold improvements, partially offset by $290 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 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. In the fourth quarter of fiscal year 2007, certain auction rate securities failed auction due to sell
orders exceeding buy orders. Based on an analysis of other-than-temporary impairment factors, Verigy recorded a temporary impairment within other comprehensive loss of
approximately $1.4 million (net of tax of $0.3 million) at October 31, 2007 related to these auction rate securities. Verigy's marketable securities portfolio as of
October 31, 2007 was $402 million. The portfolio includes $142 million (at cost) invested in auction rate securities of which, $49 million (at cost) are currently
associated with failed auctions, all of which have been in a loss position for less than 12 months. The funds associated with failed auctions will not be accessible until a successful auction
occurs, a buyer is found outside of the auction process or the underlying securities have matured. As a result, we have classified those securities with failed auctions as long-term assets
in our consolidated balance sheet.
Net
cash used in investing activities for the fiscal year 2006 was $37 million, compared to $14 million in fiscal year 2005. The investing activity in fiscal year 2006 was
comprised of approximately $20 million for the new ERP and IT infrastructure set-up costs, $10 million relating primarily to capital expenditures for test and computer
equipment, office furniture as well as new research and development equipment for use in product and application development and approximately $5 million for new site set-ups as
well as leasehold improvements.
52
Net Cash Provided by (Used in) Financing Activities
Net cash provided by financing activities for fiscal year 2007 was $14 million, compared to $173 million in fiscal year 2006. The $14 million
of net cash proceeds was comprised of approximately $7 million from the exercise of employee stock options, $5 million from contributions by participants of our ESPP Plan,
and approximately $2 million for excess tax benefits associated with the exercise of stock options and the vesting of restricted share units.
Net
cash provided by financing activities for the fiscal year 2006 was $173 million, compared to cash provided by Agilent to us of $88 million for fiscal year 2005. In
fiscal year 2006, the $173 million was primarily comprised of $121 million of initial public offering proceeds, $19 million of capital contributions from Agilent, plus additional
cash infusion from Agilent of $41 million that our business required prior to our separation.
On
June 16, 2006, we used a part of our initial public offering proceeds to repay Agilent $25 million plus accrued interest that we had borrowed from Agilent under a
short-term revolving credit facility that we entered into with Agilent on June 2, 2006. This credit facility has been terminated as of October 31, 2006. On October 1,
2006, we completed the organizational structure of our China legal entity as well as the purchase of the net assets of our China operations from Agilent, which were valued at approximately
$14 million.
Other
Following our separation from Agilent, Agilent had provided us services and access to resources necessary for our operations. These services and resources
included facilities management, site information technology infrastructure, use of various applications and support systems, as well as employee related services for transitional employees remaining
with Agilent. The total transition services we received from Agilent totaled $4.4 million and $38 million for fiscal years 2007 and 2006, respectively. As of October 31, 2007,
these transition services had ended.
As
of October 31, 2006, we released Agilent from all guarantees or other security obligations that they had entered into on our behalf. These guarantees and security arrangements
related to real property lease deposits and guarantees, security for company credit card programs and other credit arrangements and required deposits with governmental trade and tax agencies. As of
October 31, 2006, Verigy replaced all the cash deposits that Agilent had made for us on our behalf and also released Agilent from all guarantees and security obligations that they had made for
us on our behalf.
We
have contractual commitments for non-cancelable operating leases and vendor financing arrangements. We have in the past provided lease residual value guarantees on these
financing arrangements and we have no other material guarantees or commitments.
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 $375 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.
53
Contractual Obligations and Commitments
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.
The
following table summarizes our contractual obligations at October 31, 2007 (in millions):
|
|
Total
|
|
Less than
one year
|
|
One to
three years
|
|
Three to
five years
|
|
More than
five years
|
Operating leases
|
|
$
|
57
|
|
$
|
10
|
|
$
|
17
|
|
$
|
11
|
|
$
|
19
|
Commitments to contract manufacturers and suppliers
|
|
|
117
|
|
|
117
|
|
|
|
|
|
|
|
|
|
Other purchase commitments
|
|
|
24
|
|
|
24
|
|
|
|
|
|
|
|
|
|
Long term liabilities
|
|
|
47
|
|
|
|
|
|
15
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
245
|
|
$
|
151
|
|
$
|
32
|
|
$
|
43
|
|
$
|
19
|
|
|
|
|
|
|
|
|
|
|
|
Operating leases.
Commitments under operating leases relate primarily to leasehold property. Following our separation, we
have entered into long term lease arrangements for our corporate headquarters in Singapore, our U.S. headquarters in Cupertino, California, and our Boeblingen, Germany facility, the site of our 93000
Series platform development. We have also entered into 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 27% 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 $5 million as of October 31, 2007, and $6 million as of October 31, 2006. These amounts are included in other current liabilities in our combined balance sheets at
October 31, 2007 and October 31, 2006.
Other purchase commitments.
These 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 from professional service
providers are typically cancelable with a notice of 90-days or less without significant penalties. Our agreement with our primary IT service provider requires a notification period of
120 days and includes a termination charge of up to approximately $1.6 million in order to cancel our long-term contract.
Long-term liabilities.
Long-term liabilities relate primarily to $32 million of defined
benefit and defined contribution retirement obligations, $12 million of extended warranty and deferred revenue obligations and approximately $3 million of other long-term
liabilities. Upon our separation from Agilent, the defined benefit plans for our employees located in Germany, Korea, Taiwan, France and
54
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 million into our pension trust accounts during fiscal year 2007. 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 that have been
transferred to us.
Off-Balance Sheet Arrangements
We had no material off-balance sheet arrangements as of October 31, 2007 or October 31, 2006.
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
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 three months or
less. These contracts are used to reduce our risk associated with exchange rate movements, as gains and losses on these contracts are intended to offset exchange losses and gains underlying exposures.
Not withstanding our efforts to mitigate some foreign currency exposures, 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. Verigy does 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 October 31, 2007 and October 31, 2006, the analysis indicated that these hypothetical market movements would not have a material effect on our consolidated financial
position, results of operations or cash flows.
Prior
to our separation from Agilent, Agilent hedged net cash flow and balance sheet exposures that were not denominated in the functional currencies of its subsidiaries on a
short-term and anticipated basis and gains or losses associated with Agilent's derivative instrument contracts that had been allocated to us. As such, the historical results of our
business prior to June 1, 2006, reflected the hedging program in place at Agilent.
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 bond and 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 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
55
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 have changed by approximately $0.1 million as of
October 31, 2007 and our interest income would have changed by approximately $2 million for our fiscal year 2007.
Auction
rate securities are securities that are structured with short-term interest rate reset dates of generally less than ninety days but with contractual maturities that
can be well in excess of ten years. At the end of each reset period, which occurs every seven to thirty-five days, investors can sell or continue to hold the securities at par. These
securities are subject to fluctuations in fair value depending on the supply and demand at each auction. In the fourth quarter of fiscal year 2007, certain auction rate securities failed auction due
to sell orders exceeding buy orders. Based on an analysis of other-than-temporary impairment factors, Verigy recorded a temporary impairment within other comprehensive loss of
approximately $1.4 million (net of tax of $0.3 million) at October 31, 2007 related to these auction rate securities. Verigy's marketable securities portfolio as of
October 31, 2007 was $402 million. The portfolio includes $142 million (at cost) invested in auction rate securities of which, $49 million (at cost) are currently
associated with failed auctions, all of which have been in a loss position for less than 12 months. The funds associated with the securities for which auctions have failed will not be
accessible until a successful auction occurs, a buyer is found outside of the auction process or the underlying securities have matured.
56
Item 8.
Financial Statements and Supplementary Data
|
|
Page
|
Index to Combined and Consolidated Financial Statements
|
|
|
Combined and Consolidated Financial Statements:
|
|
|
|
Report of Independent Registered Public Accounting Firm
|
|
58
|
|
Combined and Consolidated Statement of Operations for each of the three years in the period ended October 31, 2007
|
|
59
|
|
Consolidated Balance Sheets at October 31, 2007 and 2006
|
|
60
|
|
Combined and Consolidated Statement of Cash Flows for each of the three years in the period ended October 31, 2007
|
|
61
|
|
Combined and Consolidated Statement of Stockholders' Equity for each of the three years in the period ended October 31, 2007
|
|
62
|
|
Notes to Combined and Consolidated Financial Statements
|
|
63
|
|
Quarterly Summary (unaudited)
|
|
104
|
57
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Shareholders and Board of Directors of Verigy Ltd.:
In
our opinion, the combined and consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Verigy Ltd.
and its subsidiaries at October 31, 2007 and 2006 and the results of their operations and their cash flows for each of the three years in the period ended October 31, 2007 in conformity
with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed under Item 15 (a) 2 presents fairly, in all
material respects, the information set forth therein when read in conjunction with the related combined and consolidated financial statements. Also in our opinion, the Company maintained, in all
material respects, effective internal control over financial reporting as of October 31, 2007, based on criteria established in
Internal ControlIntegrated
Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements and
financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in
Management's Report on
Internal Control over Financial Reporting
appearing under Item 9A. Our responsibility is to express opinions on these financial
statements and on the Company's internal control over financial reporting based on our audits (which was an integrated audit in fiscal 2007). We conducted our audits in accordance with the standards
of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are
free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a
test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the
overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk
that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A
company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures
that (i) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, 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.
As
discussed in Note 2 to the combined and consolidated financial statements, the Company changed the manner in which it accounts for share-based compensation in fiscal 2006 and
the manner in which it accounts for its defined benefit pension and other postretirement plans in fiscal 2007.
/s/
PricewaterhouseCoopers LLP
San
Jose, California
December 20, 2007
58
VERIGY LTD.
COMBINED AND CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
Year Ended October 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
(in millions, except per share amounts)
|
|
Net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
$
|
615
|
|
$
|
646
|
|
$
|
355
|
|
|
Services
|
|
|
146
|
|
|
132
|
|
|
101
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
|
761
|
|
|
778
|
|
|
456
|
|
Cost of sales:
|
|
|
|
|
|
|
|
|
|
|
|
Cost of products
|
|
|
318
|
|
|
331
|
|
|
228
|
|
|
Costs of services
|
|
|
103
|
|
|
97
|
|
|
88
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of sales
|
|
|
421
|
|
|
428
|
|
|
316
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
91
|
|
|
99
|
|
|
101
|
|
|
Selling, general and administrative
|
|
|
145
|
|
|
149
|
|
|
134
|
|
|
Restructuring charges
|
|
|
1
|
|
|
17
|
|
|
7
|
|
|
Separation costs
|
|
|
4
|
|
|
69
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
241
|
|
|
334
|
|
|
245
|
|
Income (loss) from operations
|
|
|
99
|
|
|
16
|
|
|
(105
|
)
|
Other income (expense), net
|
|
|
15
|
|
|
5
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
Income (loss) before taxes
|
|
|
114
|
|
|
21
|
|
|
(106
|
)
|
Provision for taxes
|
|
|
17
|
|
|
21
|
|
|
13
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
97
|
|
$
|
|
|
$
|
(119
|
)
|
|
|
|
|
|
|
|
|
Net income (loss) per sharebasic:
|
|
$
|
1.63
|
|
$
|
|
|
$
|
(2.38
|
)
|
Net income (loss) per sharediluted:
|
|
$
|
1.61
|
|
$
|
|
|
$
|
(2.38
|
)
|
Weighted average shares (in thousands) used in computing basic and diluted net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
59,190
|
|
|
53,356
|
|
|
50,000
|
|
|
|
|
Diluted:
|
|
|
59,883
|
|
|
53,356
|
|
|
50,000
|
|
The
accompanying notes are an integral part of these combined and consolidated financial statements.
59
VERIGY LTD.
CONSOLIDATED BALANCE SHEETS
|
|
October 31,
2007
|
|
October 31,
2006
|
|
|
|
(in millions, except share amounts)
|
|
ASSETS
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
146
|
|
$
|
300
|
|
|
Short-term marketable securities
|
|
|
229
|
|
|
|
|
|
Trade accounts receivable, net
|
|
|
107
|
|
|
108
|
|
|
Receivables from Agilent
|
|
|
|
|
|
8
|
|
|
Inventory
|
|
|
68
|
|
|
87
|
|
|
Other current assets
|
|
|
54
|
|
|
48
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
604
|
|
|
551
|
|
Property, plant and equipment, net
|
|
|
42
|
|
|
44
|
|
Long-term marketable securities
|
|
|
48
|
|
|
|
|
Goodwill
|
|
|
18
|
|
|
18
|
|
Other long term assets
|
|
|
59
|
|
|
61
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
771
|
|
$
|
674
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
76
|
|
$
|
75
|
|
|
Payables to Agilent
|
|
|
1
|
|
|
37
|
|
|
Employee compensation and benefits
|
|
|
53
|
|
|
43
|
|
|
Deferred revenue, current
|
|
|
65
|
|
|
58
|
|
|
Income taxes and other taxes payable
|
|
|
12
|
|
|
23
|
|
|
Other current liabilities
|
|
|
19
|
|
|
15
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
226
|
|
|
251
|
|
Long-term liabilities
|
|
|
47
|
|
|
34
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
273
|
|
|
285
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 21)
|
|
|
|
|
|
|
|
Shareholders' equity
|
|
|
|
|
|
|
|
|
Ordinary shares, no par value; 59,704,629 and 58,651,559 issued and outstanding at October 31, 2007 and October 31, 2006, respectively
|
|
|
|
|
|
|
|
|
Additional paid in capital
|
|
|
381
|
|
|
358
|
|
|
Retained earnings
|
|
|
131
|
|
|
34
|
|
|
Accumulated other comprehensive loss
|
|
|
(14
|
)
|
|
(3
|
)
|
|
|
|
|
|
|
|
Total shareholders' equity
|
|
|
498
|
|
|
389
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders' equity
|
|
$
|
771
|
|
$
|
674
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these combined and consolidated financial statements.
60
VERIGY LTD.
COMBINED AND CONSOLIDATED STATEMENTS OF CASHFLOWS
|
|
Year Ended October 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
(in millions)
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
97
|
|
$
|
|
|
$
|
(119
|
)
|
|
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
13
|
|
|
9
|
|
|
6
|
|
|
|
Excess and obsolete inventory-related charges
|
|
|
12
|
|
|
18
|
|
|
25
|
|
|
|
Loss on disposal of property, plant and equipment
|
|
|
1
|
|
|
3
|
|
|
|
|
|
|
Share-based compensation
|
|
|
14
|
|
|
10
|
|
|
|
|
|
|
Excess tax benefits from share-based compensation
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
Asset impairment and other exit costs
|
|
|
2
|
|
|
3
|
|
|
|
|
|
|
Pension curtailment and settlement net gains
|
|
|
|
|
|
(10
|
)
|
|
|
|
|
|
Restructuring charges pushed down by Agilent
|
|
|
|
|
|
4
|
|
|
|
|
|
|
Assets and liabilities retained by Agilent due to separation
|
|
|
|
|
|
82
|
|
|
|
|
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade accounts receivable, net
|
|
|
1
|
|
|
(33
|
)
|
|
(18
|
)
|
|
|
|
Receivables from Agilent
|
|
|
8
|
|
|
(8
|
)
|
|
|
|
|
|
|
Inventory (Note 10)
|
|
|
2
|
|
|
5
|
|
|
(10
|
)
|
|
|
|
Accounts payable
|
|
|
1
|
|
|
54
|
|
|
2
|
|
|
|
|
Employee compensation and benefits
|
|
|
10
|
|
|
3
|
|
|
2
|
|
|
|
|
Payables to Agilent
|
|
|
(31
|
)
|
|
31
|
|
|
|
|
|
|
|
Deferred revenue, current
|
|
|
7
|
|
|
16
|
|
|
10
|
|
|
|
|
Income taxes and other taxes payable
|
|
|
(9
|
)
|
|
(9
|
)
|
|
7
|
|
|
|
|
Other current assets and accrued liabilities
|
|
|
(2
|
)
|
|
(42
|
)
|
|
9
|
|
|
|
|
Other long term assets and long term liabilities
|
|
|
(3
|
)
|
|
28
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
121
|
|
|
164
|
|
|
(74
|
)
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of investments
|
|
|
|
|
|
(1
|
)
|
|
(3
|
)
|
|
|
Purchases of available-for-sale marketable securities
|
|
|
(568
|
)
|
|
|
|
|
|
|
|
|
Proceeds from sales and maturities of available-for-sale marketable securities
|
|
|
290
|
|
|
|
|
|
|
|
|
|
Investments in property, plant and equipment, net (Note 12)
|
|
|
(12
|
)
|
|
(36
|
)
|
|
(11
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(290
|
)
|
|
(37
|
)
|
|
(14
|
)
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net proceeds from sale of ordinary shares (IPO Proceeds)
|
|
|
|
|
|
121
|
|
|
|
|
|
|
Capital contributions by Agilent
|
|
|
|
|
|
19
|
|
|
|
|
|
|
Borrowings from Agilent
|
|
|
|
|
|
25
|
|
|
|
|
|
|
Repayment of debt to Agilent
|
|
|
|
|
|
(25
|
)
|
|
|
|
|
|
Distribution of share-based compensation (Note 8)
|
|
|
|
|
|
(8
|
)
|
|
|
|
|
|
Issuance of ordinary shares under employee stock plans
|
|
|
12
|
|
|
|
|
|
|
|
|
|
Excess tax benefits from share-based compensation
|
|
|
2
|
|
|
|
|
|
|
|
|
|
Cash receipts from Agilent related to sale of net assets
|
|
|
|
|
|
535
|
|
|
|
|
|
|
Cash payments to Agilent related to sale of net assets
|
|
|
|
|
|
(531
|
)
|
|
|
|
|
|
Net Agilent invested equity
|
|
|
|
|
|
37
|
|
|
88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
14
|
|
|
173
|
|
|
88
|
|
Effect of exchange rate movements
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
(154
|
)
|
|
300
|
|
|
|
|
Cash and cash equivalents at beginning of period
|
|
|
300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
146
|
|
$
|
300
|
|
$
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for income taxes
|
|
$
|
9
|
|
$
|
6
|
|
$
|
|
|
Other non-cash activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets acquired upon separation
|
|
$
|
|
|
$
|
43
|
|
$
|
|
|
|
|
Fixed assets (included in payables to Agilent) purchased from Agilent
|
|
$
|
|
|
$
|
6
|
|
$
|
|
|
The accompanying notes are an integral part of these combined and consolidated financial statements.
61
VERIGY LTD.
COMBINED AND CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
|
|
Ordinary Shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
Other
Comprehensive
Income (loss)
|
|
|
|
|
|
Number
of Shares
|
|
Additional
Paid-In
Capital
|
|
Owner's
Net
Investment
|
|
Retained
Earnings
|
|
Total
|
|
|
|
(in millions, except number of shares in thousands)
|
|
Balance at October 31, 2004
|
|
|
|
$
|
|
|
$
|
117
|
|
$
|
|
|
$
|
2
|
|
$
|
119
|
|
Components of comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
(119
|
)
|
|
|
|
|
|
|
|
(119
|
)
|
|
Foreign currency translation, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(120
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment by Agilent
|
|
|
|
|
|
|
|
88
|
|
|
|
|
|
|
|
|
88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of October 31, 2005
|
|
|
|
|
|
|
|
86
|
|
|
|
|
|
1
|
|
|
87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss (pre-separation)
|
|
|
|
|
|
|
|
(36
|
)
|
|
|
|
|
|
|
|
(36
|
)
|
|
Net income (post separation)
|
|
|
|
|
|
|
|
|
|
|
36
|
|
|
|
|
|
36
|
|
|
Change in minimum pension liability, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
|
(2
|
)
|
|
Change in foreign currency translation, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital contribution from Agilent (Pre-separation)
|
|
50,000
|
|
|
186
|
|
|
(50
|
)
|
|
|
|
|
(1
|
)
|
|
135
|
|
|
Capital contribution from Agilent (post separation)
|
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
19
|
|
|
Net repayments to Agilent (post separation)
|
|
|
|
|
(13
|
)
|
|
|
|
|
|
|
|
|
|
|
(13
|
)
|
|
Issuance of ordinary shares, net (IPO)
|
|
8,652
|
|
|
121
|
|
|
|
|
|
|
|
|
|
|
|
121
|
|
|
Loss on initialization of pension liability position
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
(2
|
)
|
|
Deferred tax assets acquired upon separation
|
|
|
|
|
43
|
|
|
|
|
|
|
|
|
|
|
|
43
|
|
|
Share-based compensation (Verigy options)
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of October 31, 2006
|
|
58,652
|
|
|
358
|
|
|
|
|
|
34
|
|
|
(3
|
)
|
|
389
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
97
|
|
|
|
|
|
97
|
|
|
Change in unrealized gain (loss) on marketable securities, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
(1
|
)
|
|
Change in minimum pension liability, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
1
|
|
|
Change in foreign currency translation, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment to initially apply SFAS No. 158, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12
|
)
|
|
(12
|
)
|
|
Issuance of ordinary shares under employee stock plans
|
|
711
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
7
|
|
|
Issuance of ordinary shares under the employee stock purchase plan
|
|
341
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
5
|
|
|
Excess tax benefits from stock option exercises
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
Share-based compensation
|
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
14
|
|
|
Changes in deferred taxes related to separation from Agilent
|
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of October 31, 2007
|
|
59,704
|
|
$
|
381
|
|
$
|
|
|
$
|
131
|
|
$
|
(14
|
)*
|
$
|
498
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
*
-
Comprised
of adjustment to initially apply SFAS No. 158, net of tax of $(12) million, change in foreign currency translation, net of tax of $1 million, change in
unrealized loss on marketable securities and derivatives, net of tax of $(2) million, and capital contribution from Agilent (pre-separation) of $(1) million.
The accompanying notes are an integral part of these combined and consolidated financial statements.
62
1. OVERVIEW
Overview
Verigy ("we," "us" or the "Company") designs, develops, manufactures and supports semiconductor test equipment and provides test system solutions that are used in
the manufacture 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 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. On June 16, 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 ("the distribution date"), Agilent distributed the
50 million Verigy ordinary shares it owned to its shareholders. See Note 4, "IPO, Separation from Agilent and Distribution" for further information regarding our initial public offering,
our separation from Agilent and Agilent's distribution of our ordinary shares 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 combined and consolidated financial statements are expressed in U.S. dollars.
Prior
to June 1, 2006, we had operated as part of Agilent, and not as a stand-alone company. Therefore, the accompanying combined and consolidated financial statements prior to
June 1, 2006, were derived from the accounting records of Agilent using the historical basis of assets and liabilities of Verigy. The expense and cost allocations prior to June 1, 2006,
have been determined on a basis we consider to be a reasonable reflection of the utilization of services provided by Agilent or the benefit received by us from Agilent.
Agilent
historically used a centralized approach to cash management and financing of its operations. Transactions relating to Verigy prior to June 1, 2006 were accounted for
through the Agilent invested equity account for Verigy. Accordingly, none of the cash, cash equivalents or debt at the Agilent corporate level has been assigned to Verigy in the combined and
consolidated financial statements prior to June 1, 2006.
See
Note 5, "Transactions with Agilent" for further information regarding the relationships we have with Agilent.
Reclassifications.
Certain amounts in the combined and consolidated financial statements as of and
for the years ended October 31, 2005 and October 31, 2006, were reclassified to conform with the presentation used in 2007.
Principles of combination.
Our combined and consolidated financial statements include the global
historical assets, liabilities and operations of Verigy. All significant intra-company transactions within Verigy have been eliminated. All significant transactions between us and other Agilent
businesses are included in these combined and consolidated financial statements. All transactions with Agilent, prior to our separation from Agilent, were considered to be effectively settled for cash
in the combined and consolidated statements of cash flows at the time the transaction is recorded.
63
Principles of consolidation.
The combined and consolidated financial statements include the accounts
of the company and our wholly owned subsidiaries. All significant intercompany 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 combined financial statements and accompanying notes. Management bases its
estimates on historical experience and various other assumptions believed to be reasonable. Although
these estimates are based on management's best 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 and asset
impairment charges, inventory valuation, warranty, share-based compensation, retirement and post-retirement plan assumptions, valuation of goodwill and intangible assets and accounting for
income taxes.
Revenue recognition.
Net revenue is derived from the sale of products and services and is adjusted
for returns and allowances, which historically have been insignificant. Consistent with the SEC's Staff Accounting Bulletin No. 104, or "SAB 104," we recognize revenue on the sale of
semiconductor test equipment when there is persuasive evidence of an arrangement, delivery has occurred or services have been rendered, the sales price is fixed or determinable and collectibility is
reasonably assured. Delivery is considered to have occurred when title and risk of loss have transferred to the customer, for products, or when service has been performed. We consider the price to be
fixed or determinable when the price is not subject to refund or adjustments. At the time we take an order, we evaluate the creditworthiness of our customers to determine the appropriate timing of
revenue recognition. For sales or arrangements that include customer-specified acceptance criteria, including those where acceptance is required upon achievement of performance milestones or
fulfillment of other future obligations, revenue is recognized after the acceptance criteria have been met. If the criteria are not met, then revenue is deferred until such criteria are met or until
the period(s) over which the last undelivered element is delivered. To the extent that a contingent payment exceeds the fair value of the undelivered element, we defer the contingent payment.
Product revenue.
Our product revenue is generated predominantly from the sales of various types of
test equipment. Software is embedded in many of our test equipment products, but the software component is considered to be incidental. For sales or arrangements that include customer-specified
acceptance criteria, including those where acceptance is required upon achievement of performance milestones or fulfillment of other future obligations, revenue is recognized after the acceptance
criteria have been met. For products that include installation, if we have previously successfully installed similar equipment, product revenue is recognized upon delivery, and recognition of
installation revenue is delayed until the installation is complete. Otherwise, neither the product nor the installation revenue is recognized until the installation is complete.
Service revenue.
Revenue from services includes extended warranty, customer support, consulting,
training and education. Service revenue is deferred and recognized over the contractual period or as services are rendered to the customer. For example, customer support contracts are recognized
ratably over the contractual period, while training revenue is recognized as the training is provided to the customer. In addition the four revenue recognition criteria described above must be met
before service revenue is recognized.
64
Multiple element arrangements.
We use objective evidence of fair value to allocate revenue to
elements in multiple element arrangements and recognize revenue when the criteria for revenue recognition have been met for each element. If the criteria are not met, then revenue is deferred until
such criteria are met or until the period(s) over which the last undelivered element is delivered. In the absence of objective evidence of fair value of a delivered element, we allocate revenue to the
fair value of the undelivered elements and the residual revenue to the delivered elements. The price charged when an element is sold separately determines fair value. To the extent that a contingent
payment exceeds the fair value of the undelivered element, we defer the contingent payment.
Warranty revenue and cost.
We generally provide a one-year warranty on products
commencing upon installation or delivery. We accrue for warranty costs in accordance with Statement of Financial Standards No. 5, "Accounting for Contingencies" ("SFAS No. 5"), based on
historical trends in warranty charges as a percentage of gross product shipments. Estimated warranty charges are recorded within cost of products at the time revenue is recognized and the liability is
reported in other current liabilities on the combined and consolidated balance sheet. The accrual is reviewed regularly and periodically adjusted to reflect changes in warranty cost estimates. For
some products we also sell extended warranties beyond one year. Revenue related to our extended warranty contracts beyond one year is recorded as long-term deferred revenue in the combined
and consolidated balance sheet and recognized on a straight-line basis over the contract period. Related costs are expensed as incurred.
Deferred revenue.
Deferred revenue is primarily comprised of extended warranty, revenue deferred for
installations yet to be completed, and advanced billing and customer deposits for service, support and maintenance agreements.
Trade accounts receivable, net.
Trade accounts receivable are recorded at the invoiced amount and do
not bear interest. Our accounts receivable have been reduced by an allowance for doubtful accounts, which is our best estimate of the amount of probable credit losses in our existing accounts
receivable. We determine the allowance based on customer specific experience and the aging of our receivables, among other factors. We do not have any off-balance-sheet credit exposure
related to our customers. Our allowance for doubtful accounts was $0.1 million, $0.1 million and $0.2 million as of October 31, 2007, 2006, and 2005, respectively.
Restructuring.
We recognize a liability for restructuring costs at fair value only when the liability
is incurred. The three main components of our restructuring charges are workforce reductions, consolidating facilities and asset impairments. Workforce-related charges are accrued when it is
determined that a liability has been incurred, which is generally after individuals have been notified of their termination dates and expected severance payments. Plans to eliminate excess facilities
result in charges for lease termination fees and future commitments to pay lease charges, net of estimated future sublease income. We recognize charges for elimination of excess facilities when we
have vacated the premises. Asset impairments primarily consist of property, plant and equipment associated with excess facilities being eliminated, and are based on an estimate of the amounts and
timing of future cash flows related to the expected future remaining use and ultimate sale or disposal of the property, plant and equipment. Prior to our separation from Agilent, the charges
associated with consolidating facilities and asset impairment charges incurred by Agilent were allocated to Verigy to the extent the underlying benefits related to our business. These estimates were
derived using the guidance of Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"),
Staff Accounting Bulletin 100, "Restructuring and Impairment Charges" ("SAB 100"), Emerging Issues Task Force 94-3, "Liability Recognition for Costs to Exit an Activity (Including Certain
Costs Incurred in a Restructuring)" ("EITF 94-3") and lastly, SFAS No. 146 "Accounting for Exit or Disposal Activities" ("SFAS No. 146"). If the amounts and
65
timing
of cash flows from restructuring activities are significantly different from what we have estimated, the actual amount of restructuring and asset impairment charges could be materially
different, either higher or lower, than those we have recorded.
Share-based compensation.
We account for share-based awards in accordance with Statement of Financial
Accounting Standards No. 123(R), Shared-Based Payment ("SFAS No. 123(R)") which was effective November 1, 2005 for Verigy. Under this standard, share-based compensation expense is
primarily based on estimated grant date fair value using the Black-Scholes option pricing model and is recognized on a straight-line basis for awards granted after November 1, 2005
over the vesting period of the award. For awards issued prior to November 1, 2005, we recognize share-based compensation expense based on FASB Interpretation 28 "Accounting for Stock
Appreciation Rights and Other Variable Stock Option or Award Plans an interpretation of APB Opinions No. 15 and 25", which provides for accelerated expensing. Our estimate of share-based
compensation expense requires a number of complex and subjective assumptions including our stock price volatility, employee exercise patterns (expected life of the options), future forfeitures and
related tax effects. The assumptions used in calculating the fair value of share-based awards represent our best estimates, but these estimates involve inherent uncertainties and the application of
management judgment. Although we believe the assumptions and estimates we have made are reasonable and appropriate, changes in assumptions could materially impact our reported financial results. We
incurred $14 million and $10 million in share-based compensation expense during fiscal 2007 and 2006. We did not incur any share-based compensation expense in 2005. Also see
Note 8 "Share-based compensation" of the combined and consolidated financial statements.
Retirement and post-retirement plan assumptions.
Retirement and
post-retirement benefit plan costs are a significant cost of doing business. They represent obligations that will ultimately be settled sometime in the future and therefore are subject to
estimation. Retirement and post-retirement accounting is intended to reflect the recognition of future benefit costs over the employees' average expected future service based on the terms
of the plans and the investment and funding decisions made by us. To estimate the impact of these future payments and our decisions concerning funding of these obligations, we are required to make
assumptions using actuarial concepts within the framework of U.S. GAAP. Two critical assumptions are the discount rate and the expected long-term return on plan assets. Other important
assumptions include the health care cost trend rate, expected future salary increases, expected future increases to benefit payments, expected retirement dates, employee turnover and retiree mortality
rates. We evaluate these assumptions at least annually.
The
discount rate is used to determine the present value of future benefit payments at each measurement date (October 31 for U.S. plans and September 30 for
non-U.S. plans). The discount rate for U.S. plans was determined based on published rates for high quality corporate bonds. The discount rate for non-U.S. plans was generally
determined in a similar manner. Differences between the expected future cash flows of our plans and the maturities of the high quality corporate bonds are not expected to have a material impact on the
selection of discount rates. As discount rates decrease we would expect our net plan costs to increase and as discount rates increase we would expect our net plan costs to decrease. SFAS
No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plansan amendment of FASB Statements No. 87, 88, 106 and 132(R)" ("SFAS
No. 158"), became effective for us as of October 31, 2007 and requires recognition of an asset or liability in the statement of financial position reflecting the funded status of pension
and postretirement benefit plans such as retiree health and life, with current year changes recognized in shareholders' equity. At October 31, 2007, in order to recognize the funded status of
its pension and post-retirement benefit plans in accordance with SFAS No. 158, the Company recorded additional liabilities by a cumulative amount of $18 million of which
$12 million (net of tax of $6 million) was recorded as a
66
increase
to accumulated other comprehensive loss. These losses are being recognized over the expected average future service lives of plan participants. Also see Note 18 "Retirement plans and
Post-Retirement Benefits".
The
expected long-term return on plan assets is estimated using current and expected asset allocations, as well as historical and expected returns. Declining rate of return
assumptions generally result in increased pension expense while increasing rate of return assumptions generally result in lower pension expense. A one percent change in the estimated
long-term return on pension plan assets would result in a $0.3 million impact on pension expense for our fiscal year 2007. There are no plan assets related to our
post-retirement health care plans.
Workforce-related
events such as restructurings or divestitures can result in curtailment and settlement gains or losses to the extent they have an impact on the average future working
lifetime or total number of participants in our retirement and postretirement plans.
Goodwill and purchased intangible assets.
We adopted SFAS No. 142 "Goodwill and Other
Intangible Assets" ("SFAS No. 142") on November 1, 2002 and recorded an allocation of goodwill from Agilent. Goodwill is not amortized but is reviewed annually (or more frequently if
impairment indicators arise) for impairment. Impairment indicators include the significant decrease in market price of an asset, significant adverse changes in the extent or use or physical condition
of an asset, significant adverse change in legal or regulatory factors affecting an asset, accumulation of costs significantly in excess of expected costs to acquire or construct an asset, operating
or cash flow losses (or projections of losses) that demonstrates continuing losses associated with the use of an asset, or a current expectation that is more likely than not, that an asset will be
sold or disposed of significantly before the end of its previously estimated useful life. Purchased intangible assets are carried at cost less accumulated amortization. Amortization is computed using
the straight-line method over the economic lives of the respective assets, generally three to five years.
The
process of evaluating the potential impairment of goodwill and other intangibles is highly subjective and requires significant judgment. We estimate expected future cash flows then
compare the carrying value including goodwill and other intangibles to the discounted future cash flows. If the total of future cash flows is less than the carrying amount of the assets, we recognize
an impairment loss based on the excess of the carrying amount over the fair value of the assets. Estimates of the future cash flows associated with the assets are critical to these assessments.
Changes in these estimates based on changed economic conditions or business strategies could result in material impairment charges in future periods.
Separation costs.
Separation costs are one-time internal and external
spin-off related costs, such as information technology set-up costs and consulting and legal and other professional fees.
Shipping and handling costs.
Our shipping and handling costs charged to customers are included in net
revenue and the associated expense is recorded in cost of products in the combined statements of operations for all years presented.
Advertising.
Business specific advertising costs are expensed as incurred. Advertising costs were
insignificant for all three years presented. Prior to our separation from Agilent, some corporate advertising expenses were allocated to us by Agilent as part of corporate allocations described in
Note 5 "Transactions with Agilent" but are not separately identifiable.
Research and development.
Costs related to research, design and development of our products are
charged to research and development expense as they are incurred.
67
Net income (loss) per share.
Basic net loss per share is computed by dividing net
lossthe numeratorby the weighted average number of common shares outstandingthe denominatorduring the period excluding the dilutive effect of stock
options and other employee stock plans. Diluted net loss per share gives effect to all potentially dilutive common stock equivalents outstanding during the period. In computing diluted net loss per
share, the average stock price for the period is used in determining the number of shares assumed to be purchased from the proceeds of stock option exercises and unamortized share based compensation.
The calculation of dilutive net loss per share excludes shares of potential ordinary shares if the effect is anti-dilutive.
Cash and cash equivalent.
We classify highly liquid investments as cash equivalents if their original
or remaining maturity is three months or less at the date of purchase. Cash and cash equivalents consist of cash deposited in checking and money market accounts.
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. Our marketable securities
include commercial paper, corporate bond and government securities and auction rate securities. Auction rate securities are securities that are structured with short-term interest rate
reset dates of generally less than ninety days but with contractual maturities that can be well in excess of ten years.
Our
marketable securities 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. Realized gains or losses on the sale of marketable securities are determined using the specific-identification method and were not material for fiscal year 2007. 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 our ability and intent to hold the investment for a period of time which may be sufficient for anticipated recovery of market value. 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.
Accounting for income taxes.
We record a tax provision for the anticipated tax consequences of the
reported results of operations. In accordance with SFAS No. 109, "
Accounting for Income Taxes"
("SFAS No. 109"), the provision for income
taxes is computed using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the
financial reporting and tax bases of assets and liabilities, and for operating losses and tax credit carryforwards. Deferred tax assets and liabilities are measured using the currently enacted tax
rates that apply to taxable income in effect for the years in which those tax assets are expected to be realized or settled.
We
are required to assess the realization of our net deferred tax assets and the need for a valuation allowance. This assessment requires that our management make judgments about
benefits that could be realized from future taxable income, as well as other positive and negative factors influencing the realization of deferred tax assets. We had no valuation allowance against any
net deferred tax assets as of October 31, 2007 and 2006. Prior to our separation from Agilent, we maintained a full valuation allowance for losses we incurred in the U.S. and Japan, prior to
fiscal year 2003.
68
Undistributed
earnings of our Domestic (US) and Foreign Subsidiaries are indefinitely reinvested in the respective operations. No provision has been made for taxes that might be payable
upon remittance of such earnings, nor is it practicable to determine the amount of this liability.
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, restructuring and other one-time charges, as well as discrete events, such as settlements of future audits. We are subject to audits and examinations of our tax returns
by tax authorities in various jurisdictions, including the Internal Revenue Service. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy
of our provision for income taxes.
Fair value of financial instruments.
The carrying values of accounts receivable, accounts payables,
accrued employee compensation and benefits and other accrued liabilities approximate fair value because of their short maturities. The fair values of marketable securities are reported in
Note 9 "Marketable Securities".
Concentration of credit risk.
We sell our products through our direct sales force. In fiscal year
2007, two customers accounted for 10% or more of our net revenue. In fiscal year 2006, one customer accounted for 10% or more of our net revenue. In fiscal year 2005, no single customer accounted for
10% or more of our net revenue. As of October 31, 2007, two customers accounted for 27.8% of our accounts receivable balance with one accounting for 15.4% and another accounting for 12.4%. As
of October 31, 2006, one customer accounted for 20.2% of our accounts receivable balance. We perform ongoing credit evaluations of our customers' financial conditions, and require collateral,
such as letters of credit and bank guarantees, in certain circumstances.
Concentration of suppliers and contract manufacturers.
Certain components and parts used in our
products are procured from a single or a limited group of suppliers, some of whom are relatively small in size. The failure of these 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. 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.
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 of three months or less. These contracts are used to reduce our risk associated with exchange rate
movement, as gains and losses on these contracts are intended to offset exchange losses and gains underlying exposures. In addition, Agilent had historically used such instruments and prior to our
separation, part of its gain or loss has been allocated to us. Prior to our separation, Agilent had entered into foreign exchange contracts, primarily forward contracts and purchased options, to hedge
exposures to changes in foreign currency exchange rates. These contracts were designated at inception as hedges of the related foreign currency exposures, which include committed and anticipated
revenue and expense transactions and assets and liabilities that are denominated in currencies other than the functional currency of the entity that has the exposure. To achieve hedge accounting,
contracts must reduce the foreign currency exchange rate risk otherwise inherent in the amount and duration of the hedged exposures and comply with established risk management policies. Verigy does
not use derivative financial instruments for speculative or trading purposes.
Inventory.
We assess the valuation of our inventory, including demonstration inventory, on a
quarterly basis based upon estimates about future demand and actual usage. To the extent that we
69
determine
that we are holding excess or obsolete inventory, we write down the value of our inventory to its net realizable value. Such write-downs are reflected in cost of products and can be material
in amount. Our inventory assessment involves difficult estimates of future events and, as a result, additional write-downs may be required. If actual market conditions are more favorable than
anticipated, inventory previously written down may be sold to customers, resulting in lower cost of products and higher income from operations than expected in that period. Excess and obsolete
inventory resulting from shifts in demand or changes in market conditions for raw materials and components can result in significant volatility in our costs of products.
In
our inventory valuation analysis, we also include inventory that we could be obligated to purchase from our suppliers based on our production forecasts. To the extent that our
committed inventory purchases exceed our forecasted productions needs, we write down the value of those inventories by taking a charge to our cost of products and increasing our supplier liability.
Property, plant and equipment.
Property, plant and equipment are stated at cost less accumulated
depreciation and amortization. Additions, improvements and major renewals are capitalized; maintenance, repairs and minor renewals are expensed as incurred. When assets are retired or disposed of, the
assets and related accumulated depreciation and amortization are removed from our general ledger and the resulting gain or loss is reflected in the combined statement of operations. Buildings and
improvements are depreciated over ten to forty years, or the lease term if lower, and machinery and equipment over three to ten years. We are currently using the straight-line method to
depreciate assets. However, prior to November 1, 2001, assets were being depreciated principally using accelerated methods and will continue to be depreciated under those methods until they are
fully depreciated or retired.
Capitalized software.
We capitalize certain internal and external costs incurred to acquire or create
internal use software in accordance with AICPA Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." Capitalized software is
included in property, plant and equipment and is depreciated over three to six years when development is complete.
Impairment of long-lived assets.
We continually monitor events and changes in
circumstances that could indicate carrying amounts of long-lived assets, including intangible assets, may not be recoverable. When such events or changes in circumstances occur, we assess
the recoverability of long-lived assets by determining whether the carrying value of such assets will be recovered through undiscounted expected future cash flows. If the total of the
undiscounted future cash flows is less than the carrying amount of those assets, we recognize an impairment loss based on the excess of the carrying amount over the fair value of the assets.
Foreign currency translation.
We follow SFAS No. 52 "Foreign Currency Translation" for both
the translation and remeasurement of balance sheet and income statement items into U.S. Dollars. For those business units that operate in a local currency functional environment, all assets and
liabilities are translated into U.S. Dollars using the exchange rates in effect at the end of the period; revenue and expenses are translated using average exchange rates in effect during each period.
Resulting translation adjustments are reported as a separate component of accumulated comprehensive income (loss) in shareholders' equity.
For
those business units that operate in a U.S. Dollar functional environment, foreign currency assets and liabilities are remeasured into U.S. Dollars using the exchange rates in effect
at the end of the period except for nonmonetary assets and capital accounts, which are remeasured at historical exchange rates. Revenue and expenses are generally remeasured at monthly exchange rates
which
70
approximate
average exchange rates in effect during each year, except for those expenses related to balance sheet amounts that are remeasured at historical exchange rates. An allocation from Agilent
of the applicable gains or losses from foreign currency remeasurement for periods prior to June 1, 2006 is included in other income (expense), net in the combined and consolidated statements of
operations.
3. RECENT ACCOUNTING PRONOUNCEMENTS
In June 2006, the FASB issued FASB Interpretation No. 48, "Accounting for Uncertainty in Income TaxesAn Interpretation of FASB
Statement No. 109" ("FIN 48"). This interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise's 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 provisions of FIN 48 are effective for fiscal
years beginning after December 15, 2006 and are to be applied 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. The cumulative effect of
applying the provisions of FIN 48 should be reported as an adjustment to the opening balance of retained earnings (or other appropriate components of equity) for that fiscal year. We expect to adopt
this pronouncement beginning in our fiscal year 2008 and we have not yet determined the potential financial impact of adopting FIN 48.
In
September 2006, the Staff of the SEC issued Staff Accounting Bulletin No. 108, "Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements" (SAB 108). SAB 108 provides guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of
determining whether the current year's financial statements are materially misstated. Verigy applied the provisions of SAB 108 beginning in the first quarter of fiscal 2007 and there was no impact to
the combined and consolidated financial statements.
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. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years. We are currently assessing the impact that SFAS No. 157 may have on our combined and consolidated financial statements
upon adoption in fiscal 2009.
In
September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for Defined Benefit Pension and other Postretirement Plans, an amendment of FASB statements
No. 87, 88, 106, and 132(R)" ("SFAS No. 158"), which requires companies to recognize a net liability or asset to report the funded status of their defined benefit pension and other
postretirement benefit plans on their balance sheets as well as recognize changes in the funded status of a defined benefit post-retirement plan in the year in which the changes occur
through comprehensive income. The pronouncement also specifies that a plan's assets and obligations that determine its funded status be measured as of the end of Company's fiscal year, with limited
exceptions. Under SFAS No. 158, certain previously unrecognized actuarial gains and losses and previously unrecognized prior service costs for both the pension and other
post-retirement benefit plans as well as a previously unrecognized transition obligation for the other post-retirement benefit plan are required to be recognized. These amounts
were not required to be recorded on the Company's Consolidated Balance Sheet before the adoption of SFAS No. 158, but were instead amortized over a period of time. In accordance with SFAS
No. 158, the Company has
71
recognized
the funded status of its benefit plans and implemented the disclosure requirements of SFAS No. 158 at October 31, 2007. The requirement to measure the plan assets and benefit
obligations as of the Company's fiscal year-end date will not be effective until fiscal years ending after December 15, 2008 and will be adopted by the Company by the end of fiscal
2009. At October 31, 2007, in order to recognize the funded status of its pension and post-retirement benefit plans in accordance with SFAS No. 158, the Company recorded
additional liabilities by a cumulative amount of $18 million of which $12 million (net of tax of $6 million) was recorded as a increase to accumulated other comprehensive loss.
These losses are being recognized over the expected average future service lives of plan participants. Also see Note 18 "Retirement plans and Post-Retirement Benefits".
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 is effective for financial
statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. We are currently assessing the impact that SFAS No. 157 may have on
our combined and consolidated financial statements upon adoption in fiscal 2009.
4. IPO, SEPARATION FROM AGILENT, AND DISTRIBUTION
On June 16, 2006, we completed our initial public offering ("IPO") of 8.5 million ordinary shares at a price of $15 per share, which less
underwriting discount and commission, resulted in aggregate net proceeds of approximately $118.6 million. On July 6, 2006, the underwriters of the IPO exercised a portion of their
over-allotment option which resulted in the issuance of additional 151,559 shares and generated approximately $2.1 million in net proceeds. The remaining portion of the
underwriters' over-allotment option has lapsed. As part of the offering, Agilent made a
one-time payment to us of $19.3 million, the amount by which our net proceeds from the IPO were approximately $140 million.
Following
the offering, Agilent owned 50 million ordinary shares or approximately 85 percent of Verigy's ordinary shares. Effective October 31, 2006, Agilent
distributed the 50 million Verigy ordinary shares it owned to its shareholders. Agilent shareholders of record as of October 16, 2006 received 0.122435 ordinary shares of Verigy for each
Agilent share owned.
Verigy
and Agilent, and, in some cases, their respective subsidiaries, entered into agreements in connection with the June 1, 2006 separation of our business from Agilent,
including a master separation and distribution agreement. These agreements cover a variety of matters, including the transfer, ownership and licensing of intellectual property and other assets and
liabilities relating to our business, the use of shared facilities, employee and tax-related matters and the transitional services. In addition, a loan agreement between Agilent and
Verigy, provided for a $25 million revolving credit facility from Agilent to Verigy on the separation date with interest at one-month LIBOR plus 50 basis points. As of
October 31, 2006, all amounts were paid back and the agreement was terminated. The agreements relating to the separation from Agilent were negotiated and entered into in the context of a
parent-subsidiary relationship.
As
of October 31, 2006, Verigy has replaced all the cash deposits that Agilent had made for us on our behalf and also released Agilent from all guarantees and security obligations
that they had made for us on our behalf. These guarantees and security arrangements related to real property lease deposits and guarantees, security for company credit card programs and other credit
arrangements and required deposits with governmental trade and tax agencies.
72
Following
our separation from Agilent, Agilent had provided us services and access to resources necessary for our operations. These services and resources included facilities management,
site information technology infrastructure, use of various applications and support systems, as well as employee related services for transitional employees remaining with Agilent. The total
transition services we received from Agilent totaled $4.4 million and $38 million for fiscal years 2007 and 2006, respectively. As of October 31, 2007, these transition services
had ended.
See
Note 5, "Transactions with Agilent" for further information regarding the relationships we have with Agilent.
Indemnifications to Verigy
In connection with our spin-off, Agilent has agreed to indemnify us for certain liabilities that were excluded from the separation and were not
transferred to us, for specified IPO-related liabilities and other specified items.
5. TRANSACTIONS WITH AGILENT
Prior to our separation, we were a wholly owned subsidiary of Agilent, and thus, our transactions with Agilent were considered inter-company. After our separation
date and prior to November 1, 2006, our transactions with Agilent were considered related party transactions since Agilent still owned approximately 85% of our outstanding ordinary shares until
October 31, 2006.
Inter-company and Related Party Transactions
During fiscal year 2007, we did not generate any revenue from the sale of products to Agilent. For fiscal years 2006 and 2005, revenue from the sale of products
to Agilent was $1.1 million and $2.0 million, respectively. Net revenue from Agilent, prior to June 1, 2006, was recorded using a cost plus methodology and may not necessarily
represent a price an unrelated third party would pay.
We
purchased materials from Agilent during fiscal years 2007, 2006 and 2005 of $11 million, $5 million and $9 million, respectively. Purchases from Agilent prior to
June 1, 2006, were recorded in cost of sales based on cost plus methodology.
Allocated Costs
The combined and consolidated statements of operations include our direct expenses as well as allocations of expenses arising from shared services and
infrastructure provided to us by Agilent during fiscal year 2006 and 2005. These allocated expenses include costs of centralized research and development, legal and accounting services, employee
benefits, real estate and facilities, corporate advertising, insurance services, information technology, treasury and other corporate and infrastructure services. These expenses were allocated to us
using estimates that we consider to be a reasonable reflection of the utilization of services provided to or benefits received by us. The allocation methods
include headcount, square footage, actual consumption and usage of services, adjusted invested capital and others.
Since
our separation from Agilent became effective on June 1, 2006, fiscal year 2006 includes only seven months of allocated costs. During fiscal year 2007, there were no
allocated costs from Agilent to us.
73
Allocated costs during fiscal year 2006 and 2005 that were included in the accompanying combined statements of operations are as follows:
|
|
Year Ended October 31,
|
|
|
2006
|
|
2005
|
|
|
(in millions)
|
Cost of products
|
|
$
|
16
|
|
$
|
26
|
Research and development
|
|
|
10
|
|
|
21
|
Selling, general and administrative
|
|
|
39
|
|
|
55
|
Other (income) expense, net
|
|
|
1
|
|
|
|
|
|
|
|
|
Total allocated costs
|
|
$
|
66
|
|
$
|
102
|
|
|
|
|
|
Receivables from and Payables to Agilent
|
|
Year Ended October 31,
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
(in millions)
|
Receivables from Agilent
|
|
$
|
|
|
$
|
8
|
|
$
|
|
Payables to Agilent
|
|
$
|
1
|
|
$
|
37
|
|
$
|
|
As
of October 31, 2007, we had no receivables from Agilent. During fiscal year 2007, we received approximately $3 million from Agilent for cash collected by Agilent from
our customers from sales of our products that occurred prior to November 1, 2006. In addition, during fiscal year 2007, Agilent contributed approximately $3 million into our pension
trust accounts, completing its obligation to fund our Germany, Taiwan and Korea defined benefit plans at 100% of the accumulated benefit obligation level as the separation date in accordance with the
employee matters agreement between Agilent and us. Also in fiscal year 2007, Agilent completed its obligation to fund the transferred Germany flexible time-off plan by contributing
approximately $2 million into our Germany flexible time-off trust account.
As
of October 31, 2007, we had $1 million of payables to Agilent primarily related to transition-related services provided to us by Agilent during the second half of fiscal
year 2007. As of October 31, 2006, payables to Agilent consisted of approximately $26 million accrued liabilities for transition-related services provided to us by Agilent, approximately
$8 million for capitalized costs relating to new site set ups as well as leasehold improvement for our new U.S. headquarters facilities and approximately $3 million accrued liabilities
for the purchase of assets related to our China operations. The total transition services we received from Agilent totaled $4.4 million and $38 million for fiscal years 2007 and 2006,
respectively.
See
Note 17, Separation Costs, for separation cost details and net gains associated with curtailment and settlement.
Agreements with Agilent
We shared and operated under numerous agreements executed by Agilent with third parties, including but not limited to purchasing, manufacturing, supply, and
distribution agreements; use of facilities owned, leased, and managed by Agilent; and software, technology and other intellectual property agreements.
74
6. NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share is calculated by dividing net income (loss) by the weighted-average number of ordinary shares outstanding. The weighted-average
number of ordinary shares outstanding does not include the dilutive effect of ordinary equivalent shares, such as share options and restricted share units. Diluted net income (loss) per share is
calculated by dividing net income (loss) by the weighted-average ordinary shares outstanding plus the dilutive effect of ordinary equivalent shares, such as share options and other employee stock
plans. The calculation of diluted net income (loss) per share excludes shares of potential ordinary shares if the effect is anti-dilutive.
The
following is a reconciliation of the basic and diluted net income (loss) per share computations for the periods presented below:
|
|
Year Ended October 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Basic Net income (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) (in millions)
|
|
$
|
97
|
|
$
|
|
|
$
|
(119
|
)
|
|
Weighted average number of ordinary shares(1)
|
|
|
59,190
|
|
|
53,356
|
|
|
50,000
|
|
|
Basic net income (loss) per share
|
|
$
|
1.63
|
|
$
|
|
|
$
|
(2.38
|
)
|
Diluted net income (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) (in millions)
|
|
$
|
97
|
|
$
|
|
|
$
|
(119
|
)
|
|
Weighted average number of ordinary shares(1)
|
|
|
59,190
|
|
|
53,356
|
|
|
50,000
|
|
|
Potentially dilutive common stock equivalentsstock options and other employee stock plans(1)
|
|
|
693
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shares for purpose of calculating diluted net income (loss) per share(1)
|
|
|
59,883
|
|
|
53,356
|
|
|
50,000
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share
|
|
$
|
1.61
|
|
$
|
|
|
$
|
(2.38
|
)
|
-
(1)
-
Weighted
average shares are presented in thousands.
The
dilutive effect of outstanding options and restricted share units 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 (loss) per
share because they were anti-dilutive.
|
|
Year Ended October 31,
|
|
|
2007
|
|
2006
|
|
2005
|
Non-qualified share options
|
|
|
|
|
|
|
|
|
|
|
Number of options to purchase ordinary shares (in thousands)
|
|
|
2,849
|
|
|
3,504
|
|
|
|
|
Weighted-average exercise price
|
|
$
|
15.87
|
|
$
|
14.06
|
|
$
|
|
Average common stock price
|
|
$
|
23.29
|
|
$
|
16.14
|
|
|
Not Applicable
|
Restricted share units
|
|
|
|
|
|
|
|
|
|
|
Number of restricted share units (in thousands)
|
|
|
292
|
|
|
197
|
|
|
|
|
Weighted-average exercise price
|
|
$
|
18.27
|
|
$
|
15.47
|
|
$
|
|
|
Average common stock price
|
|
$
|
23.29
|
|
$
|
16.14
|
|
|
Not Applicable
|
Pursuant
to the Master Separation and Distribution Agreement and the Employee Matters Agreement entered into between Verigy Ltd. and Agilent Technologies, Inc. in
connection with Verigy's
75
separation
from Agilent (collectively the "
Separation Agreements
"), on October 31, 2006, Agilent cancelled the unvested Agilent equity awards
held by Verigy employees as of October 31, 2006 (the "
Original Agilent Awards
"). In accordance with the Separation Agreements, and in connection
with the cancellation of the Original Agilent Awards, the compensation committee of the board of directors of Verigy Ltd. approved and issued under the Verigy Ltd. 2006 Equity Incentive
Plan replacement Verigy equity awards to Verigy employees whose Original Agilent Awards were cancelled (the "
Replacement Awards
").
Those
awards that were provided to employees outside of the United States, where options are impractical and/or infeasible due to local requirement or where other awards may obtain more
favorable treatment under Applicable Local Law, were cancelled and immediately replaced with Verigy restricted share units. The number of replaced restricted share units was based on the intrinsic
value of the closing price of Agilent stock option on distribution date divided by the closing price of a Verigy ordinary share on the distribution date.
On
October 31, 2006, the board of directors of Verigy approved and issued approximately 2.2 million and 0.05 million replacement options and restricted shares units,
respectively. The replacement of the Agilent options with Verigy options was accounted for as a stock option modification in accordance with SFAS No. 123(R).
7. PROVISION FOR TAXES
We recorded income tax provisions of approximately $17 million, $21 million and $13 million for fiscal years ended October 31, 2007,
2006 and 2005, respectively.
Through
June 1, 2006, Verigy's income tax expense reflected amounts based on Agilent's consolidated tax profile so our income tax expense for the first seven months consisted of
allocated expense from Agilent. Since our separation from Agilent on June 1, 2006, our tax expense is based on our new operating structure and tax status in the countries where we do business.
Prior
to June 1, 2006, we considered the U.S. entities as our domestic entities as did Agilent. Following our separation from Agilent, we consider our Singapore entities as our
domestic entities since that is where we are incorporated.
We
have negotiated tax incentives with the Singapore Economic Development Board, an agency of the Government of Singapore, which have been approved by Singapore's 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. The incentive tax rates will expire in various fiscal years beginning in fiscal 2011. 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
76
percentage
points higher than would have been the case had we maintained the benefit of the incentives.
Our
provision for income taxes for fiscal years 2007, 2006, and 2005 are as follows:
|
|
|
|
Five Months Ended
October 31,
|
|
Seven Months
Ended May 31,
|
|
|
|
|
|
|
|
Twelve Months Ended
October 31,
2007
|
|
2006
|
|
Twelve Months Ended
October 31,
2006
|
|
Twelve Months Ended
October 31,
2005
|
|
|
|
(in millions)
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic (U.S.)
|
|
$
|
4
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
|
Domestic (Singapore)
|
|
|
4
|
|
|
1
|
|
|
|
|
|
1
|
|
|
|
|
|
Foreign
|
|
|
8
|
|
|
22
|
|
|
10
|
|
|
32
|
|
|
15
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic (U.S.)
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic (Singapore)
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
2
|
|
|
(13
|
)
|
|
1
|
|
|
(12
|
)
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total tax provision
|
|
$
|
17
|
|
$
|
10
|
|
$
|
11
|
|
$
|
21
|
|
$
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
table below shows the geographical mix of our pre-tax profit and loss positions for fiscal year 2007, our pre and post separation income and losses for fiscal year 2006,
and fiscal year 2005.
|
|
|
|
Five Months Ended
October 31,
|
|
Seven Months
Ended May 31,
|
|
|
|
|
|
|
|
Twelve Months Ended
October 31,
2007
|
|
2006
|
|
Twelve Months Ended
October 31,
2006
|
|
Twelve Months Ended
October 31,
2005
|
|
|
|
(in millions)
|
|
|
Domestic (U.S.)
|
|
$
|
(7
|
)
|
$
|
|
|
$
|
(6
|
)
|
$
|
(6
|
)
|
$
|
(81
|
)
|
|
Domestic (Singapore)
|
|
|
107
|
|
|
24
|
|
|
|
|
|
24
|
|
|
|
|
|
Foreign
|
|
|
14
|
|
|
22
|
|
|
(19
|
)
|
|
3
|
|
|
(25
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net income (loss) before taxes
|
|
$
|
114
|
|
$
|
46
|
|
$
|
(25
|
)
|
$
|
21
|
|
$
|
(106
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
77
The
table below reconciles the differences between our domestic statutory income tax rates and our effective tax rate:
|
|
|
|
Five Months Ended
October 31,
|
|
Seven Months
Ended May 31,
|
|
|
|
|
|
|
|
Twelve Months Ended
October 31,
2007
|
|
2006
|
|
Twelve Months Ended
October 31,
2006
|
|
Twelve Months Ended
October 31,
2005
|
|
|
|
(in millions)
|
|
Notional U.S. federal tax rate
|
|
35.0
|
%
|
35.0
|
%
|
35.0
|
%
|
35.0
|
%
|
35.0
|
%
|
State income taxes, net of federal benefit
|
|
(0.8
|
)
|
1.0
|
|
|
|
2.1
|
|
|
|
Foreign income taxed at different rates
|
|
(14.6
|
)
|
(6.7
|
)
|
(70.8
|
)
|
68.9
|
|
(21.6
|
)
|
Nontaxable gain from reversal of prior years' retirement expenses
|
|
|
|
(7.6
|
)
|
|
|
(16.6
|
)
|
|
|
R&D credits
|
|
(1.2
|
)
|
|
|
|
|
|
|
1.3
|
|
Other, net
|
|
(3.5
|
)
|
|
|
|
|
0.5
|
|
0.7
|
|
Valuation allowanceothers
|
|
|
|
|
|
(8.6
|
)
|
10.1
|
|
(27.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14.9
|
%
|
21.7
|
%
|
(44.4
|
)%
|
100.0
|
%
|
(12.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
Our
income taxes payable were approximately $11 million, $15 million and $31 million, at October 31, 2007, 2006 and 2005 respectively. These amounts are
included within income taxes and other taxes payable. The payables as of fiscal year end October 31, 2006 and 2005 represent amounts that had not been settled through the Agilent invested
equity account at the respective fiscal years.
Deferred
income taxes reflect the net effect of temporary differences between the carrying amounts of assets and liabilities used for financial reporting and tax purposes. We had no net
deferred tax liabilities as of fiscal years ended October 31, 2007 and 2006. The significant components of deferred tax assets included in the combined and consolidated balance sheets as of
October 31, 2007 and 2006 are:
|
|
Year Ended October 31,
|
|
|
2007
|
|
2006
|
|
|
Deferred
Tax Assets
|
|
Deferred
Tax Assets
|
|
|
(in millions)
|
Inventory
|
|
$
|
7
|
|
$
|
7
|
Property, plant and equipment
|
|
|
3
|
|
|
6
|
Intangible
|
|
|
15
|
|
|
25
|
Pension liabilities
|
|
|
6
|
|
|
1
|
Employee benefits, other than retirement
|
|
|
3
|
|
|
5
|
Other retirement benefits
|
|
|
4
|
|
|
9
|
Net operating losses and credit carryforwards
|
|
|
1
|
|
|
|
Other
|
|
|
7
|
|
|
4
|
|
|
|
|
|
Total deferred tax asset
|
|
$
|
46
|
|
$
|
57
|
|
|
|
|
|
The
provisions for income taxes in the combined and consolidated financial statements have been determined on a separate return basis. We are required to assess the realization of our
net deferred tax assets and the need for a valuation allowance. This assessment requires that our management make judgments about benefits that could be realized from future taxable income, as well as
other positive and negative factors influencing the realization of deferred tax assets.
78
We
had $46 million and $57 million of deferred tax assets as of October 31, 2007 and 2006, respectively, due primarily to temporary differences between the book and
tax basis of the net assets which were acquired upon our separation from Agilent. Upon our separation from Agilent, we did not retain any pre-separation deferred tax assets or liabilities
which had resulted from historical temporary differences, net operating losses and credit carryforwards. We did, however, retain approximately $4 million of prepaid tax assets upon our
separation.
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, completion of separation, restructuring and other one-time charges, as well as discrete events, such as settlements of future audits. We are subject to audits and
examinations of our tax returns by tax authorities in various jurisdictions, including the Internal Revenue Service. We regularly assess the likelihood of adverse outcomes resulting from these
examinations to determine the adequacy of our provision for income taxes.
Undistributed
earnings of our domestic (US) and foreign subsidiaries are indefinitely reinvested in the respective operations. No provision has been made for taxes that might be payable
upon remittance of such earnings, nor is it practicable to determine the amount of this liability.
8. 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
October 31, 2007, there were approximately 5.4 million ordinary shares available for issuance under the 2006 EIP.
Except
for replacement options granted in connection with Verigy's separation from Agilent, employee nonqualified stock options have an exercise price no less than 100% of the fair
market value of a 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 shares of stock, 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 due to age, then the vested portion of the employee's 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.
Outside
director options vest on the first anniversary of the date of grant and have a maximum term of 5 years. Outside director restricted share units vest on the first
anniversary of the date of grant and are payable on the third anniversary of the date of grant. All awards granted to an outside director become
fully vested upon the director's termination of services because of death, disability, retirement at or after age 65, or the termination is in connection with a change in control.
Ordinary
shares are issued for 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.
79
2006 Employee Shares Purchase Plan
On June 7, 2006, our board of directors adopted the 2006 Employee Shares Purchase Plan (the "ESPP Plan"). The ESPP 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 ESPP 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, in the case of the first offering period under the Purchase Plan,
85% of the IPO price; 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 October 31, 2007, a total of 341,481 ordinary shares had been issued as a result of purchases made by participants in our ESPP Plan. On the purchase date, May 31,
2007, we issued 197,000 ordinary shares to participants in our ESPP Plan. On the purchase date, November 30, 2006, we issued 144,481 ordinary shares to participants in our ESPP Plan.
Share-Based Compensation for Verigy Options and ESPP 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 employee stock option awards and employee stock purchases made under the ESPP Plan.
Subsequent
to June 12, 2006, the effective date of our registration statement on from S-1, certain of our employees and directors were granted
non-qualified share options and restricted share units ("RSU"). For the newly issued Verigy options, 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 for the period from June 1, 2006 to October 31, 2007 has been reduced for estimated forfeitures. Verigy expenses
restricted share units based on fair market value of the shares at the date of grant over the period during which the restrictions lapse.
In
addition, pursuant to the Master Separation and Distribution Agreement and the Employee Matters Agreement entered into between Verigy Ltd. and Agilent Technologies, Inc.
in connection with Verigy's separation from Agilent (collectively the "
Separation Agreements
"), on October 31, 2006, Agilent cancelled the
unvested Agilent equity awards held by Verigy employees as of October 31, 2006 (the "
Original Agilent Awards
"). In accordance with the Separation
Agreements, and in connection with the cancellation of the Original Agilent Awards, the compensation committee of the board of directors of Verigy Ltd. approved and issued under the
Verigy Ltd. 2006 Equity Incentive Plan replacement Verigy equity awards to Verigy employees whose Original Agilent Awards were cancelled (the "Replacement Awards"). The ratio that was used for
the replacement options is the average price of Agilent common stock on October 30, 2006 (the date prior to the distribution date), divided by the average price of Verigy ordinary shares on
October 31, 2006 (the day of the distribution).
Those
awards that were provided to employees outside of the United States where options are impractical and/or infeasible due to local requirement or where other awards may obtain more
favorable treatment under Applicable Local Law, were cancelled and immediately replaced with Verigy
80
restricted
share units. The number of replaced restricted share units was based on the intrinsic value of the closing price of Agilent stock option on distribution date divided by the closing price of
Verigy ordinary share on distribution date.
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 Payment Award Activity Related to Verigy Options
The following table summarizes activities related to stock options for fiscal years 2007 and 2006:
|
|
Options
|
|
|
Shares
|
|
Weighted
Average
Exercise Price
|
|
|
(in thousands)
|
|
|
Outstanding as of October 31, 2005
|
|
|
|
$
|
|
Granted
|
|
1,240
|
|
$
|
15.03
|
Exercised
|
|
|
|
$
|
|
Replacement awards
|
|
2,267
|
|
$
|
13.53
|
Cancelled/Forfeited/Expired
|
|
(3
|
)
|
$
|
14.71
|
|
|
|
|
|
|
Outstanding as of October 31, 2006
|
|
3,504
|
|
$
|
14.06
|
Granted
|
|
465
|
|
$
|
22.75
|
Exercised(1)
|
|
(626
|
)
|
$
|
13.60
|
Cancelled/Forfeited/Expired
|
|
(63
|
)
|
$
|
13.91
|
|
|
|
|
|
|
Outstanding as of October 31, 2007
|
|
3,280
|
|
$
|
15.38
|
|
|
|
|
|
|
-
(1)
-
The
total pretax intrinsic value of stock options exercised during fiscal year 2007 was $7.9 million.
81
The
following table summarizes activities related to restricted share units for fiscal years 2007 and 2006:
|
|
Restricted Share Units (RSU)
|
|
|
Shares
|
|
Weighted
Average Grant
Date Share
Price
|
|
|
(in thousands)
|
|
|
Outstanding as of October 31, 2005
|
|
|
|
$
|
|
Granted
|
|
143
|
|
$
|
14.97
|
Vested and paid out
|
|
|
|
$
|
|
Replacement awards
|
|
54
|
|
$
|
16.80
|
Forfeited
|
|
|
|
$
|
|
|
|
|
|
|
|
Outstanding as of October 31, 2006
|
|
197
|
|
$
|
15.47
|
Granted
|
|
817
|
|
$
|
19.06
|
Vested and paid out
|
|
(134
|
)
|
$
|
17.54
|
Forfeited
|
|
(10
|
)
|
$
|
18.59
|
|
|
|
|
|
|
Outstanding as of October 31, 2007(2)
|
|
870
|
|
$
|
18.49
|
|
|
|
|
|
|
On
October 31, 2006, the board of directors of Verigy approved and issued approximately 2.2 million and 0.05 million of replacement options and restricted share
units, respectively.
The
following table summarizes information about all outstanding options to purchase shares of Verigy ordinary shares at October 31, 2007:
|
|
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
|
|
1,630
|
|
6.12 years
|
|
$
|
12.93
|
|
$
|
16,392
|
$15.01 - 20.00
|
|
1,356
|
|
7.38 years
|
|
$
|
16.06
|
|
|
9,392
|
$20.01 - 25.00
|
|
78
|
|
6.14 years
|
|
$
|
23.42
|
|
|
|
$25.01 - 30.00
|
|
216
|
|
5.85 years
|
|
$
|
26.71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,280
|
|
6.62 years
|
|
$
|
15.38
|
|
$
|
25,784
|
|
|
|
|
|
|
|
|
|
|
The
aggregate intrinsic value in the table above represents the total pretax intrinsic value, based on Verigy's closing stock price of $22.99 at October 31, 2007, 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 October 31, 2007, approximately 638,000
outstanding options were vested and exercisable and the weighted average exercise price was $13.30. As of October 31, 2007, the total number of in-the-money stock
options exercisable was 637,602, and the weighted average exercise price was $13.30.
82
The
following table summarizes information about all outstanding restricted share unit awards of Verigy ordinary shares at October 31, 2007:
|
|
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)
|
|
103
|
|
$
|
14.97
|
$15.01 - 20.00
|
|
714
|
|
$
|
18.35
|
$20.01 - 25.00
|
|
7
|
|
$
|
24.71
|
$25.01 - 30.00
|
|
46
|
|
$
|
27.53
|
|
|
|
|
|
|
|
|
870
|
|
$
|
18.49
|
|
|
|
|
|
|
-
(2)
-
The
outstanding restricted share units as of October 31, 2007 include 22 thousand units held by outside directors that are fully vested.
As
of October 31, 2007, the total grant date fair value of our outstanding restricted share units was approximately $16.1 million and the aggregate market value of the
unvested outstanding restricted share units was $19.5 million, and the aggregate market value of vested units outstanding was $0.5 million.
Share-Based Compensation for Agilent Options Held by Verigy Employees
Prior to our separation from Agilent, some of our employees participated in Agilent's stock-based compensation plans. Until November 1, 2005, we accounted
for stock-based awards, based on Agilent's 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 combined and 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.
83
Share-Based Payment Award Activity Related to Agilent Options Held by Verigy Employees
The following table summarizes equity share-based payment award for the fiscal years 2006 and 2005:
|
|
Shares
|
|
Weighted Average
Exercise Price
|
|
|
(in thousands)
|
|
|
Outstanding as of October 31, 2004
|
|
4,109
|
|
$
|
28.69
|
Granted
|
|
682
|
|
$
|
18.56
|
Exercised
|
|
(282
|
)
|
$
|
22.13
|
Cancellations
|
|
(11
|
)
|
$
|
19.31
|
|
|
|
|
|
|
Outstanding as of October 31, 2005
|
|
4,498
|
|
$
|
28.12
|
Granted
|
|
584
|
|
$
|
33.77
|
Exercised
|
|
(1,358
|
)
|
$
|
25.10
|
Cancellations
|
|
(241
|
)
|
$
|
28.52
|
Net Transfer-OutsAgilent employees
|
|
(1,034
|
)
|
$
|
29.08
|
Vested options remaining with Agilent
|
|
(1,135
|
)
|
$
|
29.94
|
Unvested options replaced with Verigy options and restricted share units
|
|
(1,314
|
)
|
$
|
31.08
|
|
|
|
|
|
|
Outstanding as of October 31, 2006
|
|
|
|
$
|
|
|
|
|
|
|
|
Impact of the Adoption of SFAS No. 123(R) Related to Agilent Options Held by Verigy Employees
Agilent adopted SFAS No. 123(R) using the modified prospective transition method beginning November 1, 2005. Accordingly, for the periods prior to
our separation, we recorded share-based compensation expense for awards granted prior to, but not yet vested, as of November 1, 2005 as if the fair value method required for pro forma
disclosure under SFAS No. 123(R) was in effect for expense recognition purposes, adjusted for estimated forfeitures. For these awards, we have continued to recognize compensation expense using
the accelerated amortization method under FIN 28. For share-based awards granted after November 1, 2005, we have recognized compensation expense based on the estimated grant date fair value
method required under SFAS No. 123(R). For these awards, we have recognized compensation expense 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 for all periods presented has been reduced for estimated forfeitures.
We
recorded the allocation of share-based compensation expenses for Agilent options as an increase in Agilent's invested equity Verigy.
84
Impact of the Adoption of SFAS No. 123(R) Related to Verigy Options
The impact on our results for share-based compensation for Verigy options during fiscal years 2007 and 2006, respectively, were as follows:
|
|
Year Ended October 31,
|
|
|
|
2007
|
|
2006(3)
|
|
|
|
(in millions, except per share data)
|
|
Cost of products and services
|
|
$
|
2.5
|
|
$
|
1.8
|
|
Research and development
|
|
|
1.7
|
|
|
1.3
|
|
Selling, general and administrative
|
|
|
9.6
|
|
|
7.3
|
|
|
|
|
|
|
|
|
|
$
|
13.8
|
|
$
|
10.4
|
|
|
|
|
|
|
|
Impact of share-based compensation expense related to Verigy options on our net income (loss) per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.23
|
)
|
$
|
(0.19
|
)
|
|
Diluted
|
|
$
|
(0.23
|
)
|
$
|
(0.19
|
)
|
-
(3)
-
Amount
included share-based compensation for Agilent options of $1.7 million, $1.2 million, and $5.9 million in cost of products and services, research and
development, and selling, general and administrative, respectively.
For
fiscal years 2007 and 2006, share-based compensation capitalized within inventory was insignificant.
The
weighted average grant date fair value of awards related to Verigy options granted during fiscal year 2007 was $9.16 per share, respectively, and was determined using the Black
Scholes option pricing model. For fiscal year 2006, the weighted average grant date fair value of awards related to Verigy options and Agilent options were $7.28 and $10.38 per share, respectively.
For fiscal year 2007, the tax benefit realized from exercised stock options and similar awards was $2.1 million, whereas the tax benefit realized for fiscal years 2006 and 2005 was
insignificant.
As
of October 31, 2007 and 2006, the total compensation cost related to share-based awards not yet recognized, net of expected forfeitures, was approximately $26.0 million
and $19.0 million, respectively. We expect to recognize these share-based awards over 2.36 years on a weighted average basis.
Valuation Assumptions for Verigy Options
The fair value of options granted was estimated at grant date using a Black-Scholes options-pricing model with the following weighted-average assumptions:
|
|
Year Ended October 31,
|
|
|
|
2007
|
|
2006
|
|
Risk-free interest rate for options
|
|
4.54
|
%
|
4.99
|
%
|
Dividend yield
|
|
0.0
|
%
|
0.0
|
%
|
Volatility for options
|
|
41.5
|
%
|
55.9
|
%
|
Expected option life
|
|
4.39 years
|
|
4.09 years
|
|
85
Valuation Assumptions for the ESPP Plan
|
|
Year Ended October 31,
|
|
|
|
2007
|
|
2006
|
|
Risk-free interest rate for ESPP
|
|
5.25
|
%
|
5.00
|
%
|
Dividend yield
|
|
0.0
|
%
|
0.0
|
%
|
Volatility for options
|
|
39.1
|
%
|
38.7
|
%
|
Expected option life
|
|
6 months
|
|
6 months
|
|
The
Black-Scholes model requires the use of highly subjective and complex assumptions, including the option's expected life and the price volatility of the Company's underlying stock.
The price volatility of our stock 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 more reflective of market conditions and the most appropriate measure of the expected
volatility of our stock 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 US Treasury Strips as of the grant dates.
Valuation Assumptions for Verigy "Replacement Award" Options
The table below summarizes sets of weighted average assumptions used to estimate the fair values, using a Black-Scholes option-pricing model, of those replacement
options which were issued to employees at distribution date.
|
|
Year Ended October 31, 2006
|
|
|
|
Original Agilent
Award
|
|
Original Agilent
Award Immediately
Before
Modification
|
|
Verigy Modified
Replacement Award
|
|
Risk-free interest rate for options
|
|
4.40
|
%
|
4.69
|
%
|
4.70
|
%
|
Dividend yield
|
|
0
|
%
|
0
|
%
|
0
|
%
|
Volatility for options
|
|
29.0
|
%
|
30.4
|
%
|
55.9
|
%
|
Expected option life
|
|
4.25 years
|
|
3.00 years
|
|
2.86 years
|
|
The
Black-Scholes model requires the use of highly subjective and complex assumptions, including the option's expected life and the price volatility of the Company's underlying stock.
For the risk-free interest rate, we used the rate of return on US Treasury Strips as of October 31, 2006 with maturities commensurate with expected option life assumptions. The
calculation of fair value of those original Agilent options was based the assumptions chosen by Agilent at grant date. The calculation of fair value immediately before modification was based on
Agilent's assumptions at grant date and updated to reflect Agilent's specific experience. The estimated fair value calculations for the replacement options were based on the assumptions chosen by
Agilent at the granted date for each option grant and were updated to reflect anticipated Verigy-specific experience.
86
Valuation Assumptions for Agilent Options Held by Verigy Employees
The fair value of options granted was estimated at grant date using a Black-Scholes options-pricing model with the following weighted-average assumptions:
|
|
Years Ended October 31,
|
|
|
|
2006
|
|
2005
|
|
Risk-free interest rate for options
|
|
4.4
|
%
|
3.55
|
%
|
Risk-free interest rate for the ESPP
|
|
4.5
|
%
|
2.42
|
%
|
Dividend yield
|
|
0
|
%
|
0
|
%
|
Volatility for options
|
|
29
|
%
|
39
|
%
|
Volatility for the ESPP
|
|
29
|
%
|
37
|
%
|
Expected option life
|
|
4.25 years
|
|
4 years
|
|
Expected life for the ESPP
|
|
6 months 1.5 years
|
|
6 months 2 years
|
|
The
Black-Scholes model requires the use of highly subjective and complex assumptions, including the option's expected life and the price volatility of the underlying stock. Beginning
November 1, 2005, the expected stock price volatility assumption was determined using the implied volatility for Agilent's stock. Prior to the adoption of SFAS No. 123(R), a combination
of historical and implied volatility was used in deriving our expected volatility assumption. We have determined that implied volatility is more reflective of market conditions and a better indicator
of expected volatility than a combined method of determining volatility.
Pro forma information.
Pro forma net income (loss) information, as required by Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation," ("SFAS No. 123") has been determined as if we had accounted for the employee stock options we granted, including shares issuable to
our employees under the Agilent Employee Stock Purchase Plan, and the Option Exchange Program, under SFAS No. 123's fair value method.
The
pro forma information for fiscal 2005 was as follows:
|
|
Years Ended October 31,
|
|
|
|
2005
|
|
|
|
(in millions, except per share data)
|
|
Net loss as reported
|
|
$
|
(119
|
)
|
SFAS No. 123(R) based compensation
|
|
|
(17
|
)
|
Tax benefit
|
|
|
1
|
|
|
|
|
|
Net losspro forma
|
|
$
|
(135
|
)
|
|
|
|
|
Net loss per share, basic and diluted:
|
|
|
|
|
|
As reported
|
|
$
|
(2.38
|
)
|
|
Pro forma
|
|
$
|
(2.70
|
)
|
9. 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
87
original
maturity, from the date of purchase, is ninety days or less, and 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 bond and government securities and auction rate securities. Auction rate securities are securities that are structured with
short-term interest rate reset dates of generally less than ninety days but with contractual maturities that can be well in excess of ten years. At the end of each reset period, which
occurs every seven to thirty-five days, investors can sell or continue to hold the securities at par. In the fourth quarter of fiscal year 2007, certain auction rate securities failed
auction due to sell orders exceeding buy orders. Based on an analysis of other-than-temporary impairment factors, Verigy recorded a temporary impairment within other
comprehensive loss of approximately $1.4 million (net of tax of $0.3 million) at October 31, 2007 related to these auction rate securities. Verigy's marketable securities
portfolio as of October 31, 2007 was $402 million. The portfolio includes $142 million (at cost) invested in auction rate securities of which, $49 million (at cost) are
currently associated with failed auctions, all of which have been in a loss position for less than 12 months. The funds associated with failed auctions will not be accessible until a successful
auction occurs, a buyer is found outside of the auction process or the underlying securities have matured. As a result, we have classified those securities with failed auctions as
long-term assets in our consolidated balance sheet.
Our
marketable securities 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. Realized gains or losses on the sale of marketable securities are determined using the specific-identification method and were not material for fiscal year 2007. 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 our ability and intent to hold the investment for a period of time which may be sufficient for anticipated recovery of market value. 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.
88
The
following table summarizes our marketable security investments as of October 31, 2007:
|
|
Cost
|
|
Gross Unrealized
Gains (Losses)
|
|
Estimated Fair
Market Value
|
|
|
(in millions)
|
Short-term marketable securities:
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
125
|
|
$
|
|
|
$
|
125
|
U.S. treasury securities and government agency securities
|
|
|
81
|
|
|
|
|
|
81
|
Corporate debt securities
|
|
|
55
|
|
|
|
|
|
55
|
Auction rate securities
|
|
|
93
|
|
|
|
|
|
93
|
|
|
|
|
|
|
|
|
Total short-term available-for-sale investments
|
|
$
|
354
|
|
$
|
|
|
$
|
354
|
|
|
|
|
|
|
|
|
|
Cost
|
|
Gross Unrealized
Gains (Losses)
|
|
Estimated Fair
Market Value
|
|
|
(in millions)
|
Long-term marketable securities:
|
|
|
|
|
|
|
|
|
|
Auction rate securities
|
|
$
|
49
|
|
$
|
(1
|
)
|
$
|
48
|
|
|
|
|
|
|
|
|
Total long-term available-for-sale investments
|
|
$
|
49
|
|
$
|
(1
|
)
|
$
|
48
|
|
|
|
|
|
|
|
As Reported:
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
|
|
|
|
|
|
|
$
|
125
|
Short-term marketable securities
|
|
|
|
|
|
|
|
|
229
|
Long-term marketable securities
|
|
|
|
|
|
|
|
|
48
|
|
|
|
|
|
|
|
|
|
|
Total at October 31, 2007
|
|
|
|
|
|
|
|
$
|
402
|
|
|
|
|
|
|
|
|
|
The
amortized cost and estimated fair value of cash equivalents and marketable securities classified as available-for-sale at October 31, 2007 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
|
|
$
|
211
|
|
$
|
|
|
$
|
211
|
Due in 1 to 2 years
|
|
|
50
|
|
|
|
|
|
50
|
Due after 2 years
|
|
|
142
|
|
|
(1
|
)
|
|
141
|
|
|
|
|
|
|
|
|
Total at October 31, 2007
|
|
$
|
403
|
|
$
|
(1
|
)
|
$
|
402
|
|
|
|
|
|
|
|
89
10. INVENTORY
Inventory, net of related reserves, consists of the following:
|
|
October 31,
2007
|
|
October 31,
2006
|
|
|
(in millions)
|
Raw materials
|
|
$
|
25
|
|
$
|
37
|
Work in progress
|
|
|
6
|
|
|
8
|
Finished goods
|
|
|
37
|
|
|
42
|
|
|
|
|
|
Total inventory
|
|
$
|
68
|
|
$
|
87
|
|
|
|
|
|
Finished
goods inventory includes demonstration products of $17 million for 2007 and $18 million for 2006. Effective June 1, 2006, we sold approximately
$19 million of raw material inventory to Flextronics for approximately net book value. See Note 20 "Flextronics" for further details.
The
total cost of products in the combined and consolidated statements of operations for 2007, 2006 and 2005 included inventory-related gross charges of $12 million,
$18 million and $25 million, respectively, for excess and obsolete inventory on our site as well inventory at our contract manufacturers and suppliers where we have
non-cancelable purchase commitments. In addition, we sold previously written down inventory of $4 million, $11 million, and $7 million, respectively, for the same
periods.
11. OTHER CURRENT ASSETS
|
|
October 31,
2007
|
|
October 31,
2006
|
|
|
(in millions)
|
Current deferred tax assets
|
|
$
|
16
|
|
$
|
16
|
Transaction tax receivable
|
|
|
19
|
|
|
17
|
Prepaid taxes
|
|
|
6
|
|
|
2
|
Other prepayments
|
|
|
7
|
|
|
9
|
Sundry receivables
|
|
|
3
|
|
|
3
|
Other
|
|
|
3
|
|
|
1
|
|
|
|
|
|
Total other current assets
|
|
$
|
54
|
|
$
|
48
|
|
|
|
|
|
12. PROPERTY, PLANT AND EQUIPMENT, NET
|
|
October 31,
2007
|
|
October 31,
2006
|
|
|
|
(in millions)
|
|
Leasehold improvements
|
|
$
|
13
|
|
$
|
12
|
|
Software
|
|
|
21
|
|
|
22
|
|
Machinery and equipment
|
|
|
40
|
|
|
46
|
|
|
|
|
|
|
|
Total property, plant and equipment
|
|
|
74
|
|
|
80
|
|
Accumulated depreciation and amortization
|
|
|
(32
|
)
|
|
(36
|
)
|
|
|
|
|
|
|
Total property, plant and equipment, net
|
|
$
|
42
|
|
$
|
44
|
|
|
|
|
|
|
|
We
recorded approximately $13 million, $9 million and $6 million of depreciation and amortization expenses for fiscal years 2007, 2006, and 2005, respectively.
90
13. OTHER LONG TERM ASSETS
|
|
October 31,
2007
|
|
October 31,
2006
|
|
|
(in millions)
|
Deferred tax assets, non-current
|
|
$
|
30
|
|
$
|
41
|
Flexible time off assets
|
|
|
15
|
|
|
11
|
Investments
|
|
|
3
|
|
|
4
|
Defined benefit contribution assets
|
|
|
2
|
|
|
1
|
Lease deposits
|
|
|
5
|
|
|
|
Other
|
|
|
4
|
|
|
4
|
|
|
|
|
|
Total other long term assets
|
|
$
|
59
|
|
$
|
61
|
|
|
|
|
|
Our
investments consist of investments in private companies accounted for using the cost method as we have no significant influence over the investee. All of our investments are subject
to periodic impairment review, which requires significant judgment to identify events or circumstances that would likely have a significant adverse effect on the future use of the investment. In
fiscal year 2007, we had a $2 million charge related to the write-off of a cost-based equity investment that was determined to be impaired on other than a temporary
basis. This impairment charge was included in other income (expense), net in the combined and consolidated statements of operations. No impairment charges were recorded in the other periods presented.
The
flexible time off assets relate to amounts set aside to fund vacation, holiday and flexible time-off benefits for our employees in Germany.
Information
about our pension plans and associated assets are presented in Note 18, "Retirement and Post-Retirement Pension Plans".
14. GOODWILL
A summary of our goodwill activity for fiscal years 2007 and 2006 is shown in the table below:
|
|
October 31,
2007
|
|
October 31,
2006
|
|
|
(in millions)
|
Beginning balance at November 1
|
|
$
|
18
|
|
$
|
17
|
Currency translation adjustment
|
|
|
|
|
|
1
|
|
|
|
|
|
Ending balance at October 31
|
|
$
|
18
|
|
$
|
18
|
|
|
|
|
|
91
15. GUARANTEES
Standard Warranty
A summary of our standard warranty accrual activity for fiscal years ended October 31, 2007 and 2006 is shown in the table below; also see Note 19,
"Other Current Liabilities and Long-Term Liabilities":
|
|
Year Ended October 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
(in millions)
|
|
Beginning balance at November 1
|
|
$
|
6
|
|
$
|
6
|
|
Accruals for warranties issued during the period
|
|
|
13
|
|
|
10
|
|
Accruals related to pre-existing warranties (including changes in estimates)
|
|
|
6
|
|
|
|
|
Settlements made during the period
|
|
|
(16
|
)
|
|
(10
|
)
|
|
|
|
|
|
|
Ending balance at October 31
|
|
$
|
9
|
|
$
|
6
|
|
|
|
|
|
|
|
In
our consolidated balance sheets, standard warranty accrual is presented in other current liabilities.
Extended Warranty
A summary of our extended warranty deferred revenue activity for October 31, 2007 and 2006 is shown in the table below:
|
|
Year Ended October 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
(in millions)
|
|
Beginning balance at November 1
|
|
$
|
20
|
|
$
|
13
|
|
Recognition of revenue
|
|
|
(10
|
)
|
|
(6
|
)
|
Deferral of revenue for new contracts
|
|
|
11
|
|
|
13
|
|
|
|
|
|
|
|
Ending balance at October 31
|
|
$
|
21
|
|
$
|
20
|
|
|
|
|
|
|
|
In
our consolidated balance sheets, current deferred revenue is reported separately and long-term deferred revenue is included in long-term liabilities. See
Note 19 "Other Current Liabilities and Long-Term Liabilities".
Indemnifications
As is customary in our industry and as 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, companies that purchase our businesses or assets 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, the state of the assets and businesses that we sell 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. In our experience, claims made under such indemnifications
are rare and the associated estimated fair value of the liability is not material.
92
Under
the agreements with Agilent, Verigy will indemnify Agilent in connection with Verigy activities conducted prior to and following its separation from Agilent in connection with the
businesses that constitute Verigy and the liabilities that Verigy will be specifically assuming under the agreements. These indemnifications will cover a variety of aspects of Verigy's business,
including, but not limited to, employee, tax, intellectual property and environmental matters.
On
December 20, 2006, our Board of Directors and the Board of Directors of our primary U.S. subsidiary approved a form of Indemnity Agreement to be entered into between the U.S.
subsidiary and each officer and director of the company and each of it's direct and indirect subsidiaries. This Indemnity Agreement is substantially similar to the indemnity agreements previously
approved and entered into between the company and each officer and director of the company and its direct and indirect subsidiaries. The U.S. indemnity agreement is intended to supplement the existing
indemnity agreements. The laws of the State of Delaware, where the company's primary U.S. subsidiary is incorporated, permit indemnification of directors and officers under a broader range of
circumstances than is permitted under the laws of Singapore, where the company is incorporated. As a result of these differences in law, directors and officers of the company and its subsidiaries may
be entitled to indemnification under the U.S. Indemnity Agreements in circumstances where the company itself would not be permitted to provide indemnification. The form of U.S. Indemnity Agreement is
attached hereto as Exhibit 10.11, and is incorporated by reference in this description.
16. RESTRUCTURING
Agilent initiated several restructuring plans that have affected Verigy. These plans were designed to reduce costs and expenses in order to return Agilent to
profitability. The two main components of these plans are workforce reduction and consolidation of excess facilities.
We
directly incurred and recorded charges relating to these plans. In addition, we recorded charges allocated to us by Agilent for our share of the expenses they incurred to reduce costs
for support services such as finance, information technology, and workplace services. Our allocated portion of these costs is included in our combined and consolidated financial statements and the
schedules below. All accrued liabilities associated with the allocated costs were recorded by Agilent.
Summary information for Agilent's 2005 Plan
In fiscal year 2005, Agilent launched a new restructuring program to align its workforce with its smaller organization size after the announced sale of its
semiconductor products business and intention to spin us off. As part of this plan, we further reduced our operational costs, primarily through closing, consolidating, and relocating some sites and
reducing and realigning our workforce ("2005 Plan"). Under this plan, we took an $22 million charge in fiscal year 2006, $15 million of which related to a reduction in headcount,
$4 million of which related to headcount reduction by Agilent for corporate and administrative personnel that had supported our business and $3 million of which related to consolidation
of facilities. In accordance with the separation agreements with Agilent, Agilent retained and paid for all restructuring liabilities associated with the 2005 Plan and as such, as of
October 31, 2006, we did not record any accrued liabilities relating to this restructuring plan.
93
Summary of Verigy restructuring charges
In connection with the transfer of our manufacturing activities to Flextronics in fiscal year 2006, we have transferred approximately 85 employees to Flextronics,
and Flextronics has assumed certain pension and other employee liabilities associated with these employees. We are responsible for any liabilities associated with known future severance payments for
the transferred employees and will benefit from the future services of these employees as they will be working exclusively on our products. On June 1, 2006, Agilent paid into a trust account
approximately $3 million, on our behalf, for the severance payments associated with the transferred employees. On July 14, 2006, we reimbursed Agilent for all these payments, in
accordance with the master separation and distribution agreement. Also, we have potential obligation in the future of approximately $2 million associated with these transferred employees. We
have deferred these costs and are recognizing them ratably over the employees' period of service until the respective dates of the employees' termination from Flextronics. For fiscal year 2007 and
2006, we recorded $3 and $2 million respectively of these charges in fiscal 2007 in our cost of products and recorded approximately $1 million in charges in our operating expenses
relating to headcount reductions as we move our operations to lower cost regions. As of October 31, 2007, we had approximately $2 million in accrued restructuring liability.
A
summary of the statement of operations impact of the charges resulting from all restructuring plans for fiscal years ended October 31, 2007, 2006 and 2005 is shown below:
|
|
Year Ended October 31,
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
(in millions)
|
Restructuring charges (included in cost of sales)
|
|
$
|
3
|
|
$
|
7
|
|
$
|
1
|
Restructuring charges (included in operating expenses)
|
|
|
1
|
|
|
17
|
|
|
7
|
|
|
|
|
|
|
|
Total restructuring charges
|
|
$
|
4
|
|
$
|
24
|
|
$
|
8
|
|
|
|
|
|
|
|
The
restructuring costs allocated to us by Agilent during fiscal 2006 and 2005 included in the table above are shown separately below:
|
|
Year Ended October 31,
|
|
|
2006
|
|
2005
|
|
|
(in millions)
|
Restructuring charges (included in cost of sales)
|
|
$
|
2
|
|
$
|
|
Restructuring charges (included in operating expenses)
|
|
|
9
|
|
|
3
|
|
|
|
|
|
Total restructuring charges
|
|
$
|
11
|
|
$
|
3
|
|
|
|
|
|
94
17. SEPARATION COSTS
The following table presents the components of separation costs for fiscal years 2007, 2006, and 2005, respectively.
|
|
Year Ended October 31,
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
(in millions)
|
Separation costs (included in cost of sales)
|
|
$
|
1
|
|
$
|
8
|
|
$
|
|
Separation costs (included in operating expense)
|
|
|
4
|
|
|
75
|
|
|
3
|
|
|
|
|
|
|
|
|
Total of separation costs
|
|
|
5
|
|
|
83
|
|
|
3
|
|
|
|
|
|
|
|
Net curtailment and settlement gains (included in cost of sales)
|
|
|
|
|
|
(4
|
)
|
|
|
Net curtailment and settlement gains (included in operating expenses)
|
|
|
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
Total net curtailment and settlement gains
|
|
|
|
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
|
Net separation costs
|
|
$
|
5
|
|
$
|
73
|
|
$
|
3
|
|
|
|
|
|
|
|
In
connection with our separation from Agilent, we incurred one-time internal and external separation costs, such as information technology set-up costs and
consulting and legal and other professional fees.
For
fiscal year 2007, we incurred $5 million in separation costs, of which approximately $1 million was recorded in cost of sales. For fiscal year 2006, we incurred
$83 million in separation costs, of which approximately $8 million was recorded in cost of sales. For fiscal year 2005, we incurred $3 million in separation costs, all of which
were recorded in our operating expenses.
In
fiscal year 2006, we also had a net curtailment and settlement gain of approximately $10 million which pertained to Agilent's U.S. Retirement Plans and Agilent's Post
Retirement Benefit Plan. These net curtailment and settlement gains which resulted from the separation of our business from Agilent and the significant workforce reductions we incurred during fiscal
year 2006, were recorded by Agilent in accordance with SFAS No. 88 and were pushed down to our business.
18. RETIREMENT PLANS AND POST-RETIREMENT BENEFITS
Verigy adopted the provisions of SFAS No. 158,
"Employers' Accounting for Defined Benefit Pension and other Postretirement Plans an
amendment of FASB Statements No. 87, 88, 106 and 132(R)"
as of October 31, 2007. Upon adoption, SFAS No. 158 requires that the funded status of defined
benefit postretirement plans be recognized on the company's consolidated balance sheets, and changes in the funded status be reflected in comprehensive income. SFAS No. 158 also requires the
measurement date of the Plan's funded status to be the same as the company's fiscal year-end. The requirement to measure the plan assets and benefit obligations as of the Company's fiscal
year-end date will not be effective until fiscal years ending after December 15, 2008 and will be adopted by the Company by the
95
end
of fiscal 2009. The incremental effect of applying SFAS No. 158 on individual line items on the consolidated balance sheet as of October 31, 2007 was as follows:
|
|
Before
Application of
SFAS No. 158
|
|
Adjustments
|
|
After
Application of
SFAS No. 158
|
|
|
(In millions)
|
Other long-term assets
|
|
$
|
53
|
|
$
|
6
|
|
$
|
59
|
Other long-term liabilities
|
|
$
|
29
|
|
$
|
18
|
|
$
|
47
|
Accumulated other comprehensive loss
|
|
$
|
2
|
|
$
|
12
|
|
$
|
14
|
Amounts
recognized in accumulated other comprehensive loss of $12 million (net of tax of $6 million) consists of unrealized net actuarial losses, of which we expect to
recognize approximately $1.2 million as components of net periodic benefit costs over fiscal year ended 2008. Other long-term assets include deferred tax assets relating to pension
liabilities.
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 Survivor's Benefit Plan for our eligible U.S. employees.
Effective June 1, 2006, Verigy established a new defined contribution benefit plan ("Verigy 401(k) plan") for its U.S employees. Verigy's 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
adopted the profit sharing plan for our U.S. employees, whereby the Company will make a maximum 2% contribution to the employee's 401(k) plan if certain annual financial targets are achieved. A small
number of our U.S. employees meeting certain age and service requirements will also receive an additional 2% profit sharing contribution to their 401(k) accounts if certain annual financial targets
are achieved.
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
Verigy's Retiree Medical Account (RMA) Plan. At the date of separation, the present value of Verigy's 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. There are no plan
assets related to these obligations and we do not expect to make any contributions in the next fiscal year. For fiscal year 2007 and 2006, the expenses amount recognized under the RMA plan was
approximately $0.6 million and $0.2 million, respectively.
Prior
to the separation date, June 1, 2006, the former U.S. Agilent employees newly employed by Verigy benefited from Agilent 401(k) matching contributions. These amounts were
reflected in the respective costs of sales, research and development, and selling, general and administrative in the accompanying combined and consolidated statement of operations. Agilent allocated
the 401(k) matching amounts to Verigy on a headcount basis.
For
fiscal year 2007 and 2006, we incurred expenses of $2.2 million, $0.7 million, respectively, for the Company's matching expenses for our U.S. employees under the Verigy
401(k) and $1.2 million and $0.5 million, respectively, for the same respective periods for the additional 2% profit sharing contribution provided to a small number of U.S. employees
that have met certain requirements.
96
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 fiscal year 2007.
Costs for All U.S. and Non-U.S. Plans.
The following tables provide the principal components of total retirement
related benefit plans impact on income (loss) of Verigy:
|
|
U.S. Plans
|
|
Non-U.S. Plans
|
|
Total
|
|
|
Year Ended October 31,
|
|
|
2007
|
|
2006
|
|
2005
|
|
2007
|
|
2006
|
|
2005
|
|
2007
|
|
2006
|
|
2005
|
|
|
(in millions)
|
Defined benefit pension plan costs
|
|
$
|
|
|
$
|
2
|
|
$
|
5
|
|
$
|
6
|
|
$
|
5
|
|
$
|
6
|
|
$
|
6
|
|
$
|
7
|
|
$
|
11
|
Defined contribution pension plan costs
|
|
|
3
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
Non-pension post-retirement benefit costs
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total retirement-related plans costs
|
|
$
|
4
|
|
$
|
2
|
|
$
|
5
|
|
$
|
7
|
|
$
|
5
|
|
|
6
|
|
$
|
11
|
|
$
|
7
|
|
$
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-U.S. Defined Benefit.
For fiscal years ended October 31, 2007, 2006 and 2005, the net pension costs
related to our employees participating in our non-U.S. defined benefit plans were comprised of:
|
|
Year Ended October 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
(in millions)
|
|
Service costbenefits earned during the year
|
|
$
|
4.1
|
|
$
|
3.8
|
|
$
|
2.9
|
|
Interest cost on benefit obligation
|
|
|
2.6
|
|
|
2.0
|
|
|
2.2
|
|
Expected return on plan assets
|
|
|
(2.0
|
)
|
|
(1.7
|
)
|
|
(2.3
|
)
|
Amortization and deferrals:
|
|
|
|
|
|
|
|
|
|
|
|
Actuarial loss
|
|
|
1.2
|
|
|
0.9
|
|
|
0.8
|
|
|
|
|
|
|
|
|
|
|
|
Total net plan costs
|
|
$
|
5.9
|
|
$
|
5.0
|
|
$
|
3.6
|
|
|
|
|
|
|
|
|
|
Measurement date.
We use September 30 measurement date for all of our non-U.S. plans and October 31
for our U.S. retiree medical account.
97
Funded status
As of our 2007 and 2006 fiscal year ends, the funded status of our non-U.S. defined benefit plans
were:
|
|
Non-U.S. Defined
Benefit Plans
|
|
|
|
Year Ended October 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
(in millions)
|
|
Change in fair value of plan assets:
|
|
|
|
|
|
|
|
|
Fair valuebeginning of period
|
|
$
|
30.9
|
|
$
|
37.1
|
|
|
Actual return on plan assets
|
|
|
0.6
|
|
|
1.6
|
|
|
Employer contributions
|
|
|
5.6
|
|
|
|
|
|
Participants' contributions
|
|
|
1.7
|
|
|
|
|
|
Change in plan assets due to separation from Agilent
|
|
|
|
|
|
(7.3
|
)
|
|
Currency impact
|
|
|
4.2
|
|
|
(0.5
|
)
|
|
|
|
|
|
|
Fair valueend of period
|
|
$
|
43.0
|
|
$
|
30.9
|
|
|
|
|
|
|
|
Change in benefit obligation:
|
|
|
|
|
|
|
|
|
Benefit obligationbeginning of period
|
|
$
|
55.9
|
|
$
|
53.5
|
|
|
Service cost
|
|
|
4.1
|
|
|
3.8
|
|
|
Interest cost
|
|
|
2.6
|
|
|
2.0
|
|
|
Participants' contributions
|
|
|
1.7
|
|
|
|
|
|
Actuarial (gain)/loss
|
|
|
(1.0
|
)
|
|
(4.7
|
)
|
|
Benefits paid
|
|
|
|
|
|
(0.2
|
)
|
|
Currency impact
|
|
|
6.7
|
|
|
1.5
|
|
|
|
|
|
|
|
|
Benefit obligationend of period
|
|
$
|
70.0
|
|
$
|
55.9
|
|
|
|
|
|
|
|
Funded status of the plans
|
|
$
|
(27.0
|
)
|
$
|
(25.0
|
)
|
Unrecognized prior service cost
|
|
|
|
|
|
16.0
|
|
|
|
|
|
|
|
(Accrued) prepaid benefit cost -end of year
|
|
$
|
(27.0
|
)
|
$
|
(9.0
|
)
|
|
|
|
|
|
|
Assets (liabilities) recorded in the balance sheet:
|
|
|
|
|
|
|
|
Liabilities
|
|
$
|
(27.0
|
)
|
$
|
(9.0
|
)
|
|
|
|
|
|
|
As
of October 31, 2007 and 2006, the amounts of the obligations for our non U.S. Defined benefit plans were as follows:
|
|
Year Ended October 31,
|
|
|
2007
|
|
2006
|
|
|
(in millions)
|
Aggregate projected benefit obligation ("PBO")
|
|
$
|
70
|
|
$
|
56
|
Aggregate accumulated benefit obligation ("ABO")
|
|
$
|
46
|
|
$
|
40
|
Assumptions.
The assumptions used to determine the benefit obligations and expense for all of Verigy's defined benefit and
post-retirement benefit plans are presented in the tables below. The impacts of the assumptions listed for the fiscal years 2007, 2006 and 2005 have already been recognized in our combined
and consolidated statement of operations. The expected long-term return on assets
98
below
is based on the historical rate of return for our chosen asset mix of equities and fixed income investments adjusted for anticipated future movements.
Assumptions
used to calculate the net periodic cost in each year were as follows:
|
|
Year Ended October 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
U.S. defined benefit plans:
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
|
5.75
|
%
|
5.75
|
%
|
|
Average increase in compensation levels
|
|
|
|
4.0
|
%
|
4.0
|
%
|
|
Expected long-term return on assets
|
|
|
|
8.50
|
%
|
8.50
|
%
|
Non-U.S. defined benefit plans:
|
|
|
|
|
|
|
|
|
Discount rate
|
|
2.25 - 5.25
|
%
|
2.25 - 6.0
|
%
|
2.25 - 6.0
|
%
|
|
Average increase in compensation levels
|
|
3.0 - 4.5
|
%
|
2.5 - 5.0
|
%
|
2.5 - 5.0
|
%
|
|
Expected long-term return on assets
|
|
2.75 - 6.0
|
%
|
2.75 - 7.5
|
%
|
4.5 - 7.5
|
%
|
U.S. post-retirement benefits plans:
|
|
|
|
|
|
|
|
|
Discount rate
|
|
6.25
|
%
|
5.75
|
%
|
5.75
|
%
|
|
Expected long-term return on assets
|
|
|
%
|
0.0 - 8.5
|
%
|
8.5
|
%
|
|
Current medical cost trend rate
|
|
8.0
|
%
|
8.0 - 10.0
|
%
|
10.0
|
%
|
|
Ultimate medical cost trend rate
|
|
5.0
|
%
|
5.0
|
%
|
5.0
|
%
|
|
Medical cost trend rate decreases to ultimate rate in year
|
|
2010
|
|
2010
|
|
2010
|
|
Assumptions
used to calculate the benefit obligations and the resulting additional minimum pension liability were as follows:
|
|
Year Ended
October 31,
2007
|
|
Year Ended
October 31,
2006
|
|
Year Ended
October 31,
2005
|
|
Non-U.S. defined benefit plans:
|
|
|
|
|
|
|
|
Discount rate
|
|
2.25 - 5.25
|
%
|
2.25 - 6.0
|
%
|
3.5 - 6.0
|
%
|
Average increase in compensation levels
|
|
3.75 - 4.5
|
%
|
2.5 - 5.0
|
%
|
3.0 - 5.0
|
%
|
Expected long-term return on assets
|
|
2.75 - 6.0
|
%
|
2.75 - 7.5
|
%
|
6.75
|
%
|
19. OTHER CURRENT LIABILITIES AND LONG-TERM LIABILITIES
Other current liabilities at October 31, 2007 and 2006 were as follows:
|
|
October 31,
2007
|
|
October 31,
2006
|
|
|
(in millions)
|
Supplier liabilities
|
|
$
|
5
|
|
$
|
6
|
Accrued warranty costs
|
|
|
9
|
|
|
6
|
Other
|
|
|
5
|
|
|
3
|
|
|
|
|
|
Total other current liabilities
|
|
$
|
19
|
|
$
|
15
|
|
|
|
|
|
Supplier
liabilities reflect the amount by which our firmly committed inventory purchases from our suppliers exceed our forecasted production needs. See Note 15, "Guarantees" for
additional information regarding warranty accruals.
99
Long-term
liabilities at October 31, 2007 and 2006 were as follows:
|
|
October 31,
2007
|
|
October 31,
2006
|
|
|
(in millions)
|
Long-term extended warranty and deferred revenue
|
|
$
|
12
|
|
$
|
15
|
Retirement plan accruals
|
|
|
32
|
|
|
15
|
Other
|
|
|
3
|
|
|
4
|
|
|
|
|
|
Total long-term liabilities
|
|
$
|
47
|
|
$
|
34
|
|
|
|
|
|
See
Note 18, "Retirement and Post Retirement Pension Plans" for additional information regarding retirement plan accruals.
20. FLEXTRONICS
In March 2006, we selected Flextronics Telecom Services Ltd. ("Flextronics") as our primary contract manufacturer and signed several asset purchase
agreements with them in connection with the transfer of our manufacturing activities to Flextronics, as well as a global manufacturing services agreement. All of these agreements were entered into by
Agilent, but upon the separation date, Verigy assumed all of Agilent's rights and obligations under these agreements. Our agreements with Flextronics will expire in March 2010 although it may
be automatically extended for subsequent terms of one year, absent nine-month notice of an intention to terminate the agreement from us or Flextronics. The agreements may also be
terminated by us or Flextronics for other customary reasons, including if the other party becomes subject to bankruptcy proceedings or materially breaches the agreement. In addition, generally, we may
terminate the agreements if Flextronics fails to make a timely delivery on more than 15% of our placed orders in any three-month period. We are not obligated to use Flextronics exclusively to
manufacture our products, nor is Flextronics obligated to manufacture test equipment exclusively for us. However, the agreement does require our consent for Flextronics to sell any of our products to
unaffiliated third parties.
Effective
June 1, 2006, we sold to Flextronics approximately $19 million of inventory and approximately $2 million of machinery and equipment for approximately net
book value. In addition, on October 16, 2006, we paid Flextronics $1.5 million for transition-related services, which we are recognizing as an expense ratably over the manufacturing
contract period of approximately 4 years. Also, in connection with these agreements, Flextronics paid us $1.5 million on October 19, 2006 and another $1.5 million on
January 16, 2007 that we have deferred and are recognizing ratably over the manufacturing period.
See
Note 16 "Restructuring" for information pertaining to the transfer of approximately 85 employees to Flextronics in fiscal year 2006.
100
21. COMMITMENTS AND CONTINGENCIES
Operating Lease Commitments:
Following our separation from Agilent, we entered into various operating lease arrangements with
unrelated third parties. The following table reflects our non-cancelable operating lease commitments as of October 31, 2007:
Fiscal Year
|
|
Amount
|
|
|
(in millions)
|
2008
|
|
$
|
9.3
|
2009
|
|
|
10.0
|
2010
|
|
|
6.8
|
2011
|
|
|
6.1
|
2012
|
|
|
4.9
|
Thereafter
|
|
|
19.4
|
|
|
|
Total
|
|
$
|
56.5
|
|
|
|
Rent
expense was approximately $5.7 million, $4.6 million, and $2.0 million for fiscal years 2007, 2006, and 2005, respectively. Prior to our separation from
Agilent, Agilent had allocated to us our pro rata portion of expenses for rent, property tax, insurance, and routine maintenance.
As
of October 31, 2006, Verigy has replaced all the cash deposits that Agilent had made for us on our behalf and also released Agilent from all guarantees and security obligations
that they had made for us on our behalf. These guarantees and security arrangements related to real property lease deposits and guarantees, security for company credit card programs and other credit
arrangements and required deposits with governmental trade and tax agencies.
From
time to time, we are involved in lawsuits, claims, investigations and proceedings, including patent, commercial and environmental matters that arise in the ordinary course of
business. There are no such matters pending that we expect to be material in relation to our business, combined and consolidated financial condition, and results of operations or cash flows.
22. OTHER INCOME AND EXPENSE
The following table presents the components of other income (expense), net for fiscal years ended October 31, 2007, 2006, and 2005:
|
|
Year Ended October 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
(in millions)
|
|
Interest and other income
|
|
$
|
17
|
|
$
|
4
|
|
$
|
|
|
Impairment of cost-based investments
|
|
|
(2
|
)
|
|
|
|
|
|
|
Other expense
|
|
|
|
|
|
1
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
Other income (expense), net
|
|
$
|
15
|
|
$
|
5
|
|
$
|
(1
|
)
|
|
|
|
|
|
|
|
|
Interest
and other income consists primarily of interest on cash, cash equivalents and investments as well as gains and losses from foreign exchange transactions. The increase in
interest and other income during fiscal year 2007, compared to fiscal year 2006, is primarily a result of increased interest income from higher cash, cash equivalents and investment balances.
Also
during fiscal year 2007, we incurred a $2 million charge related to the write-off of a cost-based equity investment that was determined to be impaired
on an other-than-temporary basis.
101
23. SEGMENT & GEOGRAPHIC INFORMATION
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information," requires us to identify the segment or segments we operate in. Based
on the standards set forth in SFAS No. 131, we operate as one reportable segment; that is, 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:
|
|
Year Ended October 31,
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
(in millions)
|
Net revenue from products
|
|
|
|
|
|
|
|
|
|
|
SOC/SIP/High-Speed Memory
|
|
$
|
333
|
|
$
|
442
|
|
$
|
267
|
|
Memory
|
|
|
282
|
|
|
204
|
|
|
88
|
|
|
|
|
|
|
|
|
|
Net revenue from products
|
|
|
615
|
|
|
646
|
|
|
355
|
Net revenue from services
|
|
|
146
|
|
|
132
|
|
|
101
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
$
|
761
|
|
$
|
778
|
|
$
|
456
|
|
|
|
|
|
|
|
Major customers
In fiscal year 2007, two customers accounted for 31.8% of our net revenue, with one customer accounting for 21.7% and the other accounting for 10.1% of our net
revenue. In fiscal year 2006, one customer accounted for 10.1% of our net revenue. In fiscal year 2005, no single customer accounted for 10% or more of our net revenue.
Geographic Net Revenue Information:
|
|
Year Ended October 31,
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
(in millions)
|
United States
|
|
$
|
215
|
|
$
|
245
|
|
$
|
118
|
Singapore
|
|
|
428
|
|
|
376
|
|
|
180
|
Japan
|
|
|
52
|
|
|
79
|
|
|
94
|
Rest of the World
|
|
|
66
|
|
|
78
|
|
|
64
|
|
|
|
|
|
|
|
Total net revenue
|
|
$
|
761
|
|
$
|
778
|
|
$
|
456
|
|
|
|
|
|
|
|
Net
revenue is attributed to geographic areas based on the country in which the customer takes title to our products.
Geographic Property, Plant and Equipment Information:
|
|
October 31,
2007
|
|
October 31,
2006
|
|
|
(in millions)
|
United States
|
|
$
|
13
|
|
$
|
13
|
Singapore
|
|
|
17
|
|
|
20
|
Germany
|
|
|
4
|
|
|
4
|
China
|
|
|
3
|
|
|
4
|
Rest of the World
|
|
|
5
|
|
|
3
|
|
|
|
|
|
Total geographic property, plant and equipment
|
|
$
|
42
|
|
$
|
44
|
|
|
|
|
|
102
24. SUBSEQUENT EVENTS
Employee Shares Purchase Plan
Effective November 30, 2007, we issued 155,030 shares as part of the semi-annual Employee Shares Purchase Plan ("ESPP").
Pending Business Combination
On December 5, 2007, we entered into a definitive agreement to acquire Inovys. Inovys, a privately held company, provides innovative solutions for design
debug, failure analysis and yield acceleration for complex semiconductor devices and processes. The acquisition is expected to close in the first quarter of fiscal 2008 and will be accounted for under
the purchase method of accounting.
Share Repurchase Program
On November 27, 2007, the Board of Directors of the Company approved the use of up to $150 million to repurchase up to 10 percent of Verigy's
outstanding ordinary shares. The Company will seek to obtain shareholder approval for this repurchase program at its 2008 Annual General Meeting of Shareholders expected to be held in
April 2008.
103
QUARTERLY SUMMARY
(Unaudited)
The following table presents our unaudited quarterly results of operations, in millions, for each of our last eight quarters through the quarter ended
October 31, 2007. This table should be read in conjunction with the combined and consolidated audited annual financial statements and related notes contained elsewhere in this
Form 10-K. We have prepared the unaudited information on the same basis as our audited combined and consolidated financial statements. Results of operations for any quarter are not
necessarily indicative of results for any future quarters or years.
|
|
Quarter Ended
|
|
|
|
Oct. 31,
2007
|
|
Jul. 31,
2007
|
|
Apr. 30,
2007
|
|
Jan. 31,
2007
|
|
Oct. 31,
2006
|
|
Jul. 31,
2006
|
|
Apr. 30,
2006
|
|
Jan. 31,
2006
|
|
|
|
(in millions except for per share amounts)
|
|
Net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
$
|
172
|
|
$
|
168
|
|
$
|
147
|
|
$
|
128
|
|
$
|
164
|
|
$
|
181
|
|
$
|
158
|
|
$
|
143
|
|
|
Services
|
|
|
37
|
|
|
36
|
|
|
36
|
|
|
37
|
|
|
38
|
|
|
33
|
|
|
34
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
|
209
|
|
|
204
|
|
|
183
|
|
|
165
|
|
|
202
|
|
|
214
|
|
|
192
|
|
|
170
|
|
Cost of sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of products
|
|
|
85
|
|
|
85
|
|
|
79
|
|
|
69
|
|
|
88
|
|
|
88
|
|
|
81
|
|
|
74
|
|
|
Cost of services
|
|
|
27
|
|
|
26
|
|
|
25
|
|
|
25
|
|
|
25
|
|
|
23
|
|
|
25
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of sales
|
|
|
112
|
|
|
111
|
|
|
104
|
|
|
94
|
|
|
113
|
|
|
111
|
|
|
106
|
|
|
98
|
|
Gross profit
|
|
|
97
|
|
|
93
|
|
|
79
|
|
|
71
|
|
|
89
|
|
|
103
|
|
|
86
|
|
|
72
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
23
|
|
|
23
|
|
|
22
|
|
|
23
|
|
|
24
|
|
|
25
|
|
|
25
|
|
|
25
|
|
|
Selling, general and administrative
|
|
|
38
|
|
|
38
|
|
|
35
|
|
|
34
|
|
|
35
|
|
|
37
|
|
|
40
|
|
|
37
|
|
|
Restructuring charges
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
2
|
|
|
8
|
|
|
6
|
|
|
Separation costs
|
|
|
|
|
|
1
|
|
|
1
|
|
|
2
|
|
|
13
|
|
|
21
|
|
|
20
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
62
|
|
|
62
|
|
|
58
|
|
|
59
|
|
|
73
|
|
|
85
|
|
|
93
|
|
|
83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
35
|
|
|
31
|
|
|
21
|
|
|
12
|
|
|
16
|
|
|
18
|
|
|
(7
|
)
|
|
(11
|
)
|
Other income (expense), net
|
|
|
5
|
|
|
3
|
|
|
4
|
|
|
3
|
|
|
3
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before taxes
|
|
|
40
|
|
|
34
|
|
|
25
|
|
|
15
|
|
|
19
|
|
|
20
|
|
|
(7
|
)
|
|
(11
|
)
|
Provision for taxes
|
|
|
8
|
|
|
4
|
|
|
3
|
|
|
2
|
|
|
5
|
|
|
7
|
|
|
4
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
32
|
|
$
|
30
|
|
$
|
22
|
|
$
|
13
|
|
$
|
14
|
|
$
|
13
|
|
$
|
(11
|
)
|
$
|
(16
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
$
|
0.53
|
|
$
|
0.50
|
|
$
|
0.37
|
|
$
|
0.22
|
|
$
|
0.25
|
|
$
|
0.23
|
|
$
|
(0.22
|
)
|
$
|
(0.32
|
)
|
Diluted:
|
|
$
|
0.52
|
|
$
|
0.50
|
|
$
|
0.36
|
|
$
|
0.22
|
|
$
|
0.25
|
|
$
|
0.23
|
|
$
|
(0.22
|
)
|
$
|
(0.32
|
)
|
Weighted average shares (in thousands) used in computing net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
59,696
|
|
|
59,428
|
|
|
59,004
|
|
|
58,768
|
|
|
58,652
|
|
|
54,662
|
|
|
50,000
|
|
|
50,000
|
|
Diluted:
|
|
|
60,483
|
|
|
60,418
|
|
|
59,945
|
|
|
59,099
|
|
|
58,666
|
|
|
54,681
|
|
|
50,000
|
|
|
50,000
|
|
104
The
following table presents our historical results for the periods indicated as a percent of net revenue:
|
|
Quarter Ended
|
|
|
|
Oct. 31,
2007
|
|
Jul. 31,
2007
|
|
Apr. 30,
2007
|
|
Jan. 31,
2007
|
|
Oct. 31,
2006
|
|
Jul. 31,
2006
|
|
Apr. 30,
2006
|
|
Jan. 31,
2006
|
|
Net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
82.3
|
%
|
82.4
|
%
|
80.3
|
%
|
77.6
|
%
|
81.2
|
%
|
84.6
|
%
|
82.3
|
%
|
84.1
|
%
|
|
Services
|
|
17.7
|
|
17.6
|
|
19.7
|
|
22.4
|
|
18.8
|
|
15.4
|
|
17.7
|
|
15.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
100.0
|
|
100.0
|
|
100.0
|
|
100.0
|
|
100.0
|
|
100.0
|
|
100.0
|
|
100.0
|
|
Cost of sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of products
|
|
40.7
|
|
41.7
|
|
43.2
|
|
41.8
|
|
43.6
|
|
41.1
|
|
42.2
|
|
43.5
|
|
|
Cost of services
|
|
12.9
|
|
12.7
|
|
13.7
|
|
15.2
|
|
12.3
|
|
10.8
|
|
13.0
|
|
14.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of sales
|
|
53.6
|
|
54.4
|
|
56.9
|
|
57.0
|
|
55.9
|
|
51.9
|
|
55.2
|
|
57.7
|
|
|
|
Gross margin
|
|
46.4
|
|
45.6
|
|
43.1
|
|
43.0
|
|
44.1
|
|
48.1
|
|
44.8
|
|
42.3
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
11.0
|
|
11.3
|
|
12.0
|
|
13.9
|
|
11.9
|
|
11.7
|
|
13.0
|
|
14.7
|
|
|
Selling, general and administrative
|
|
18.2
|
|
18.6
|
|
19.1
|
|
20.6
|
|
17.3
|
|
17.2
|
|
20.8
|
|
21.8
|
|
|
Restructuring charges
|
|
0.5
|
|
|
|
|
|
|
|
0.5
|
|
0.9
|
|
4.2
|
|
3.5
|
|
|
Separation costs
|
|
|
|
0.5
|
|
0.5
|
|
1.2
|
|
6.4
|
|
9.8
|
|
10.4
|
|
8.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
29.7
|
|
30.4
|
|
31.6
|
|
35.7
|
|
36.1
|
|
39.6
|
|
48.4
|
|
48.8
|
|
Income (loss) from operations
|
|
16.7
|
|
15.2
|
|
11.5
|
|
7.3
|
|
8.0
|
|
8.5
|
|
(3.6
|
)
|
(6.5
|
)
|
Other income (expense), net
|
|
2.4
|
|
1.5
|
|
2.2
|
|
1.8
|
|
1.4
|
|
0.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before taxes
|
|
19.1
|
|
16.7
|
|
13.7
|
|
9.1
|
|
9.4
|
|
9.4
|
|
(3.6
|
)
|
(6.5
|
)
|
Provision for taxes
|
|
3.8
|
|
2.0
|
|
1.7
|
|
1.2
|
|
2.5
|
|
3.3
|
|
2.1
|
|
2.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
15.3
|
%
|
14.7
|
%
|
12.0
|
%
|
7.9
|
%
|
6.9
|
%
|
6.1
|
%
|
(5.7
|
)%
|
(9.4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|