SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM 10-Q
(MARK
ONE)
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x
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QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
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For
the quarterly period ended April 30, 2008
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OR
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o
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
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For
the transition period from
to
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COMMISSION
FILE NUMBER: 000-52038
Verigy
Ltd.
(Exact Name of Registrant
as Specified in Its Charter)
SINGAPORE
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N/A
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(State or Other
Jurisdiction of
Incorporate or Organization)
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(I.R.S. Employer
Identification No.)
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NO.
1 YISHUN AVE 7
SINGAPORE 768923
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N/A
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(Address of
Principal Executive Offices)
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(Zip Code)
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Registrants telephone number, including
Area Code
(+65) 6755-2033
Indicate by check mark whether the registrant: (1) has
filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past
90 days. Yes
x
No
o
Indicate by check mark
whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See definitions of
large accelerated filer, accelerated filer, and smaller reporting company
in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
x
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Accelerated
filer
o
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Non-accelerated filer
o
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Smaller
reporting company
o
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(Do not check if a
smaller reporting company)
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Indicate by check mark whether the registrant is a
shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
o
No
x
As of June 2, 2008, there were 60,158,223 outstanding
ordinary shares, no par value.
VERIGY LTD.
TABLE OF CONTENTS
2
PART I
FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
VERIGY
LTD.
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(in
millions, except per share amounts)
(Unaudited)
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Three Months Ended
April 30,
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Six Months Ended
April 30,
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2008
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2007
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2008
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2007
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Net revenue:
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Products
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$
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122
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$
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147
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$
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285
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$
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275
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Services
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40
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36
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77
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73
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Total net revenue
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162
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183
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362
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348
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Costs of sales:
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Cost of products
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56
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79
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135
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148
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Cost of services
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29
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25
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57
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50
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Total costs of sales
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85
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104
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192
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198
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Operating expenses:
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Research and development
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26
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22
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51
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45
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Selling, general and administrative
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37
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35
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76
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69
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Separation costs
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1
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3
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Total operating expenses
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63
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58
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127
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117
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Income from operations
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14
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21
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43
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33
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Other income, net
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3
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4
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9
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7
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Income before taxes
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17
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25
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52
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40
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Provision for income taxes
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3
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3
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6
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5
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Net income
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$
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14
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$
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22
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$
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46
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$
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35
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Net income per share basic:
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$
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0.24
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$
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0.37
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$
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0.76
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$
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0.59
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Net income per share diluted:
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$
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0.23
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$
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0.36
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$
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0.75
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$
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0.59
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Weighted average shares (in thousands) used in computing net income
per share:
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Basic:
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60,009
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59,004
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59,941
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58,884
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Diluted:
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60,663
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59,945
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60,714
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59,567
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The accompanying
notes are an integral part of these condensed consolidated financial
statements.
3
VERIGY
LTD.
CONDENSED
CONSOLIDATED BALANCE SHEETS
(Unaudited)
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April 30,
2008
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October 31,
2007
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(in millions, except share
amounts)
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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242
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$
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146
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Short-term marketable securities
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129
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229
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Trade accounts receivable, net
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90
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107
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Inventory
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81
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68
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Other current assets
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51
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54
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Total current assets
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593
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604
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Property, plant and equipment, net
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41
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42
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Long-term marketable securities
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83
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48
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Goodwill
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18
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18
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Other long-term assets
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84
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59
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Total assets
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$
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819
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$
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771
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LIABILITIES AND SHAREHOLDERS EQUITY
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Current liabilities:
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Accounts payable
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$
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77
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$
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76
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Payables to Agilent
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1
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Employee compensation and benefits
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52
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53
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Deferred revenue, current
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61
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65
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Income taxes and other taxes payable
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4
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12
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Other current liabilities
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17
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19
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Total current liabilities
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211
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226
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Long-term liabilities:
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Income taxes payable
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10
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Other long-term liabilities
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47
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47
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Total liabilities
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268
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273
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Commitments and contingencies (Note 18)
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Shareholders equity
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Ordinary shares, no par value; 60,021,531 and 59,704,629 issued and
outstanding at April 30, 2008 and October 31, 2007, respectively
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Additional paid in capital
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393
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381
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Retained earnings
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175
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131
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Accumulated other comprehensive loss
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(17
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)
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(14
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)
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Total shareholders equity
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551
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498
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Total liabilities and shareholders equity
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$
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819
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$
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771
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The accompanying
notes are an integral part of these condensed consolidated financial
statements.
4
VERIGY
LTD.
CONDENSED
CONSOLIDATED STATEMENTS OF CASHFLOWS
(Unaudited)
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Six Months
Ended
April 30,
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2008
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2007
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(in millions)
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Cash flows from operating activities:
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Net income
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$
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46
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$
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35
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Adjustments to reconcile net income to net cash provided by operating
activities:
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Depreciation and amortization
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8
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6
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Excess and obsolete inventory-related charges
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5
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5
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Share-based compensation
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8
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7
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Impairment loss on marketable securities
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2
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Changes in assets and liabilities:
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Trade accounts receivable, net
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18
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37
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Receivables from Agilent
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8
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Inventory (Note 10)
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(15
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)
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7
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Accounts payable
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1
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(4
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)
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Payables to Agilent
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(1
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)
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(27
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)
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Employee compensation and benefits
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(1
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)
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Deferred revenue, current
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(4
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)
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(5
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)
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Income taxes and other taxes payable
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(9
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)
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(14
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)
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Other current assets and accrued liabilities
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(1
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)
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(7
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)
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Other long term assets and long term liabilities
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10
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2
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Net cash provided by operating activities
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67
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50
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Cash flows from investing activities:
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Acquisitions and investment, net of cash acquired
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(28
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)
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Investments in property, plant and equipment
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(4
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)
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(7
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)
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Purchases of available for sale marketable securities
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(163
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)
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(297
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)
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Proceeds from sales and maturities of available for sale marketable
securities
|
|
220
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|
117
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|
Net cash provided by (used in) investing activities
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25
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|
(187
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)
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|
|
|
|
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Cash flows from financing activities:
|
|
|
|
|
|
Issuance of ordinary shares under employee stock plans
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4
|
|
5
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|
Net cash provided by financing activities
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|
4
|
|
5
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
96
|
|
(132
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)
|
Cash and cash equivalents at beginning of period
|
|
146
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|
300
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|
Cash and cash equivalents at end of period
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|
$
|
242
|
|
$
|
168
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
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|
|
|
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Cash paid for income taxes
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|
$
|
8
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|
$
|
4
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
5
VERIGY LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.
OVERVIEW
Overview
Verigy (we, us or the Company)
designs, develops and manufactures semiconductor test equipment and provides
test system solutions that are used in the manufacture, validation,
characterization, and production test of System-on-a-Chip (SOC),
System-in-a-Package (SIP), high-speed memory and memory devices. In addition to
test equipment, our solutions include advanced analysis tools as well as consulting,
service and support offerings such as start-up assistance, application services
and system calibration and repair.
Prior to our initial public
offering, we were a wholly-owned subsidiary of Agilent Technologies, Inc (Agilent). We became an independent company on June 1,
2006, when we separated from Agilent. On
June 13, 2006, we completed our initial public offering and became a
separate stand-alone publicly-traded company incorporated in Singapore focused
on technology and innovation in semiconductor testing. Effective October 31, 2006, Agilent
distributed the 50 million Verigy ordinary shares it owned to its
shareholders.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation.
The accompanying financial data has been prepared by us pursuant to the
rules and regulations of the U.S. Securities and Exchange Commission (SEC). Our fiscal year end is October 31, and
our fiscal quarters end on January 31, April 30, and July 31. Unless otherwise stated, all dates refer to
our fiscal years and fiscal periods.
Amounts included in the accompanying condensed consolidated financial
statements are expressed in U.S. dollars.
In the opinion of
management, the accompanying condensed consolidated financial statements
reflect all adjustments which are of a normal and recurring nature and
necessary to fairly state the statements of financial position, results of
operations and cash flows for the dates and periods presented.
Reclassifications.
Certain
amounts disclosed in the notes to the condensed consolidated financial
statements for the three and six months ended April 30, 2007, were
reclassified to conform to the presentation used for the three and six months
ended April 30, 2008.
Principles of consolidation
.
The condensed
consolidated financial statements include the accounts of the Company and our
wholly-owned subsidiaries. All
significant inter-company accounts and transactions have been eliminated.
Use of estimates
.
The preparation of
financial statements in accordance with accounting principles generally
accepted in the U.S. requires management to make estimates and assumptions that
affect the amounts reported in our condensed consolidated financial statements
and accompanying notes. Management bases
its estimates on historical experience and various other assumptions it
believes to be reasonable. Although
these estimates are based on managements knowledge of current events and
actions that may impact us in the future, actual results may be different from
the estimates. Our critical accounting
policies are those that affect our financial statements materially and involve
difficult, subjective or complex judgments by management. Those policies are revenue recognition,
restructuring, inventory valuation, warranty, share-based compensation,
retirement and post-retirement plan assumptions, valuation of goodwill and
intangible assets, valuation of marketable securities, and accounting for
income taxes.
Derivative
instruments.
We have implemented a
hedging strategy that is intended to mitigate our foreign currency exposure by
entering into foreign currency forward contracts that have maturities in excess
of one month. These contracts are used to reduce our risk associated with
exchange rate movement, as gains and losses on these contracts are intended to
mitigate the effect of exchange rate fluctuations on certain foreign currency
denominated revenues, costs and eventual cash flows.
The terms of currency instruments
used for hedging purposes are generally consistent with the timing of the
transactions being hedged. These derivative financial instruments are recorded
at fair value based upon quoted market prices for comparable instruments. For
derivative instruments designated and qualifying as cash flow hedges of
anticipated foreign currency denominated transactions, the effective portion of
the gain or loss on these hedges is reported as a component of accumulated
other comprehensive income (loss) in shareholders equity, and is reclassified
into the statement of operations when the hedged transaction affects earnings.
If the transaction being hedged fails to occur, or if a portion of any
derivative is ineffective, the gain or loss on the associated financial
instrument is recorded promptly in earnings. For derivative instruments used to
hedge existing foreign currency denominated assets or liabilities, the gain or
loss on these hedges is recorded promptly in earnings to offset the changes in
the fair value of the assets or liabilities being hedged. Verigy does not use
derivative financial instruments for trading or speculative purposes.
6
3. RECENT ACCOUNTING PRONOUNCEMENTS
In September 2006, the
FASB issued SFAS No. 157,
Fair Value Measurements
(SFAS No. 157). The purpose of
SFAS No. 157 is to define fair value, establish a framework for measuring
fair value and enhance disclosures about fair value measurements. In February 2008, the FASB issued FASB
Staff Position (FSP) 157-1,
Application of FASB
Statement No. 157 to FASB Statement No. 13 and Other Accounting
Pronouncements That Address Fair Value Measurements for Purposes of Lease
Classification or Measurement under Statement 13
(FSP 157-1) and
FSP 157-2,
Effective Date of FASB Statement No. 157
(FSP 157-2). FSP 157-1 amends SFAS No. 157 to remove
certain leasing transactions from its scope.
FSP 157-2 delays the effective date of SFAS No. 157 for
all non-financial assets and non-financial liabilities, except for items that
are recognized or disclosed at fair value in the financial statements on a
recurring basis (at least annually), until the beginning of the first quarter
of fiscal year 2010. The measurement and
disclosure requirements related to financial assets and financial liabilities
are effective for us beginning in the first quarter of fiscal year 2009. We are currently evaluating whether SFAS No. 157
will result in a change to our fair value measurements.
In February 2007, the FASB
issued SFAS No. 159,
The Fair Value Option for
Financial Assets and Financial Liabilities
(SFAS No. 159), which
permits entities to choose to measure many financial instruments and certain
other items at fair value that are not currently required to be measured at
fair value. SFAS No.159 will be
effective for us beginning in the first quarter of fiscal year 2009. We are currently evaluating the impact of
adopting SFAS No. 159 on our financial position, cash flows and
results of operations.
In December 2007,
the FASB issued SFAS No. 141 (revised 2007),
Business Combinations
(SFAS No. 141(R)). SFAS No. 141(R) amends SFAS No. 141 and
provides revised guidance for recognizing and measuring identifiable assets and
goodwill acquired, liabilities assumed, and any noncontrolling interest in the
acquiree. It also provides disclosure
requirements to enable users of the financial statements to evaluate the nature
and financial effects of the business combination. It is effective for fiscal years beginning on
or after December 15, 2008 and will be applied prospectively. We are currently assessing the impact that
SFAS No. 141(R) may have on our consolidated financial statements
upon adoption in fiscal year 2010.
In December 2007,
the FASB issued SFAS No. 160,
Noncontrolling Interests
in Consolidated Financial Statementsan amendment of ARB No. 51
(SFAS No. 160). SFAS No. 160 requires that ownership
interests in subsidiaries held by parties other than the parent, and the amount
of consolidated net income, be clearly identified, labeled, and presented in
the consolidated financial statements.
It also requires once a subsidiary is deconsolidated, any retained
noncontrolling equity investment in the former subsidiary be initially measured
at fair value. Sufficient disclosures
are required to clearly identify and distinguish between the interests of the
parent and the interests of the noncontrolling owners. It is effective for fiscal years beginning on
or after December 15, 2008 and requires retroactive adoption of the
presentation and disclosure requirements for existing minority interests. All other requirements shall be applied
prospectively. We are currently
assessing the impact that SFAS No. 160 may have on our consolidated
financial statements upon adoption in fiscal year 2010.
In
March 2008, the FASB issued SFAS No. 161,
Disclosures
about Derivative Instruments and Hedging Activities-an amendment of FASB
Statement No. 133
. SFAS No. 161 expands the current
disclosure requirements of SFAS No. 133,
Accounting
for Derivative Instruments and Hedging Activities
, and requires
that companies must now provide enhanced disclosures on a quarterly basis
regarding how and why the entity uses derivatives; how derivatives and related
hedged items are accounted for under SFAS No. 133 and how derivatives and
related hedged items affect the companys financial position, performance and
cash flow. SFAS No. 161 is effective prospectively for periods beginning
on or after November 15, 2008. We are currently assessing the impact that
SFAS No. 161 may have on our consolidated financial statements upon our
adoption in fiscal year 2009.
7
4. TRANSACTIONS WITH AGILENT
During the three and six
months ended April 30, 2008 and 2007, we had no revenue from sale of
products to Agilent or any outstanding receivables. For the three months ended April 30,
2008 and 2007, we purchased $1.2 million and $1.4 million of materials from
Agilent, respectively. For the six
months ended April 30, 2008 and 2007, we purchased $3.1 million and $3.7
million of materials from Agilent, respectively.
As of April 30, 2008,
we had no payables to Agilent, compared to $1 million of payables to Agilent at
October 31, 2007, which primarily related to transition-related services
provided to us by Agilent during the second half of fiscal year 2007. We have completed all of our transition
service agreements with Agilent.
5. NET INCOME PER SHARE
The following is a
reconciliation of the basic and diluted net income per share computations for
the periods presented below:
|
|
Three Months
Ended
April 30,
|
|
Six Months
Ended
April 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Basic Net Income Per Share:
|
|
|
|
|
|
|
|
|
|
Net income (in millions)
|
|
$
|
14
|
|
$
|
22
|
|
$
|
46
|
|
$
|
35
|
|
Weighted average number of ordinary shares
(1)
|
|
60,009
|
|
59,004
|
|
59,941
|
|
58,884
|
|
Basic net income per share
|
|
$
|
0.24
|
|
$
|
0.37
|
|
$
|
0.76
|
|
$
|
0.59
|
|
Diluted Net Income Per Share:
|
|
|
|
|
|
|
|
|
|
Net income (in millions)
|
|
$
|
14
|
|
$
|
22
|
|
$
|
46
|
|
$
|
35
|
|
Weighted average number of ordinary shares
(1)
|
|
60,009
|
|
59,004
|
|
59,941
|
|
58,884
|
|
Potentially dilutive common stock
equivalents stock options, restricted share units and other employee stock
plans (1)
|
|
654
|
|
941
|
|
773
|
|
683
|
|
Total shares for purpose of calculating
diluted net income per share (1)
|
|
60,663
|
|
59,945
|
|
60,714
|
|
59,567
|
|
Diluted net income per share
|
|
$
|
0.23
|
|
$
|
0.36
|
|
$
|
0.75
|
|
$
|
0.59
|
|
(1) Weighted average
shares are presented in thousands.
The dilutive effect of
outstanding options and restricted share units (RSU) is reflected in diluted
net income per share by application of the treasury stock method, which
includes consideration of share-based compensation required by SFAS No. 123(R).
The following table presents
those options to purchase ordinary shares and restricted share units
outstanding which were not included in the computation of diluted net income
per share because they were anti-dilutive:
|
|
Three Months
Ended
April 30,
|
|
Six Months
Ended
April 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Non-qualified Share Options:
|
|
|
|
|
|
|
|
|
|
Number of options to purchase ordinary
shares (in thousands)
|
|
1,169
|
|
326
|
|
761
|
|
2,310
|
|
Weighted-average exercise price
|
|
$
|
19.89
|
|
$
|
15.00
|
|
$
|
22.28
|
|
$
|
15.00
|
|
Average ordinary share price
|
|
$
|
19.59
|
|
$
|
23.05
|
|
$
|
21.57
|
|
$
|
20.33
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Share Units:
|
|
|
|
|
|
|
|
|
|
Number of restricted share units (in
thousands)
|
|
115
|
|
|
|
20
|
|
|
|
Weighted-average grant date price
|
|
$
|
26.67
|
|
$
|
|
|
$
|
27.67
|
|
$
|
|
|
Average ordinary share price
|
|
$
|
19.59
|
|
$
|
23.05
|
|
$
|
21.57
|
|
$
|
20.33
|
|
8
6. PROVISION FOR INCOME TAXES
For each of the three month
periods ended April 30, 2008 and 2007, we recorded income tax expense of
approximately $3. During the six months
ended April 30, 2008 and 2007, we recorded income tax expense of approximately
$6 million and $5 million, respectively.
Our effective tax rate
varies based on a variety of factors, including overall profitability, the
geographical mix of income before taxes and the related tax rates in the
jurisdictions in which we operate, completion of separation, restructuring and
other one-time charges, as well as discrete events, such as settlements of
audits.
On
November 1, 2007, we adopted FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes
(FIN 48). This interpretation clarifies the accounting
for uncertainty in income taxes recognized in an enterprises financial
statements in accordance with FASB Statement No. 109,
Accounting
for Income Taxes.
It prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement
of a tax position, as well as provides guidance on de-recognition,
classification, interest and penalties, accounting in interim periods,
disclosure and transition. The provision of FIN 48 is effective for
fiscal years beginning after December 15, 2006, and applies to all tax
positions upon initial adoption of this standard. Only tax positions that
meet the more-likely-than-not recognition threshold at the effective date may
be recognized or continue to be recognized upon adoption of FIN 48.
As a result of the adoption of FIN 48, we increased our reserves for
unrecognized tax benefits by $0.2 million and increased our reserves for
penalties by $0.2 million, for a total increase of $0.4 million, which was
accounted for as a cumulative adjustment to the beginning balance of retained
earnings. Additionally, we reclassified
$10 million from current income taxes and other taxes payable to long-term
taxes payable. At the adoption date of November 1,
2007, we had $9.8 million of unrecognized tax benefits which would reduce our
income tax expense if recognized. As of April 30,
2008, we had $10.7 million of unrecognized tax benefits which would reduce our
income tax expense if recognized and $2.5 million which would decrease other
intangible assets if recognized.
Our
continuing practice is to recognize interest and penalties related to income
tax matters as a component of income tax expense. We had approximately $0.6 million of accrued
interest and penalties at the adoption date of November 1, 2007, and
approximately $0.9 million of accrued interest and penalties as of April 30,
2008.
Although we file Singapore,
U.S. federal, U.S. state and foreign income tax returns, our three major tax
jurisdictions are Singapore, U.S. and Germany.
Our 2006 and 2007 tax years remain subject to examination by the tax
authorities in our major tax jurisdictions. We are not currently under audit
for any tax years.
7. SHARE-BASED COMPENSATION
2006 Equity Incentive Plan
On June 7, 2006, our
board of directors adopted the Verigy Ltd. 2006 Equity Incentive Plan (the 2006
EIP). A total of 10,300,000 ordinary
shares were authorized for issuance under the plan. The 2006 EIP provides for grants of incentive
stock options, nonqualified stock options, stock appreciation rights and
restricted share units. At April 30,
2008, there were approximately 4.5 million ordinary shares available for
issuance under the 2006 EIP.
On November 27,
2007, our board of directors approved the use of up to $150 million to
repurchase up to 10 percent of Verigys outstanding ordinary shares. On April 15, 2008, during our annual
general meeting of shareholders, our shareholders approved the share repurchase
program which provides our directors authority to acquire up to 10 percent, or
approximately 6 million shares, of Verigys outstanding ordinary shares.
Except for replacement
options granted in connection with Verigys 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 ordinary shares,
and generally vest at a rate of 25% per year over 4 years. Options and restricted share units cease to
vest upon termination of employment. If
an employee terminates employment due to death, disability or retirement at or
after age 65 with at least 15 years of service, then the vested portion of the
employees option and restricted share unit award is determined by adding 12
months to the length of his or her actual service, and the option is
exercisable as to the vested shares for one year after the date of termination,
or, if earlier, the expiration of the term of the option.
9
Stock options granted to
outside directors have a maximum term of 5 years. Options granted prior to the second quarter
of fiscal year 2008 become vested on the first anniversary of the grant date,
and options granted beginning in the second quarter of fiscal year 2008 become
vested in four equal quarterly installments from the grant date. Restricted share units granted prior to the
second quarter of fiscal year 2008 become vested on the first anniversary of
the grant date, and units granted beginning in the second quarter of fiscal
year 2008 become vested in four equal quarterly installments from the grant date. Restricted share units granted to outside
directors are paid out on the third anniversary of the grant date. All awards granted to an outside director
become fully vested upon the directors termination of services if due to of
death, disability, retirement at or after age 65, or if in connection with a
change in control.
Ordinary shares are issued
for employees restricted share units on the date the restricted share units
vest. The majority of shares issued are
net of the minimum statutory withholding requirements, as shares are withheld
to cover the tax withholding obligation. As a result, the actual number
of shares issued will be less than the number of restricted share units
granted. Prior to vesting, restricted share units do not have dividend
equivalent or voting rights.
2006 Employee Shares Purchase Plan
On June 7, 2006, our
board of directors adopted the 2006 Employee Shares Purchase Plan (the Purchase
Plan). The Purchase Plan is intended to
qualify for favorable tax treatment under section 423 of the U.S. Internal
Revenue Code. The total number of shares
that were authorized for purchase under the plan is 1,700,000.
Under the Purchase Plan,
eligible employees may elect to purchase shares from payroll deductions up to
10% of eligible compensation during 6-month offering periods. The purchase price is (i) 85% of the
fair market value per ordinary share on the trading day before the beginning of
an offering period or (ii) 85% of the fair market value per ordinary
share on the last trading day of an offering period, whichever is lower.
The maximum number of shares that an employee can purchase is 2,500 shares each
offering period and $25,000 in fair market value of ordinary shares each
calendar year.
As of April 30, 2008, a
total of 496,511 ordinary shares had been issued as a result of purchases made
by participants in our Purchase Plan. On
the purchase dates of November 30, 2007, May 31, 2007 and November 30,
2006, we issued 155,030, 197,000 and 144,481 ordinary shares, respectively, to
participants in our Purchase Plan.
Share-Based Compensation for Verigy
Options and Purchase Plan
As of November 1, 2005,
we adopted the provisions of SFAS No. 123(R), which requires the
measurement and recognition of compensation expense for all share-based payment
awards made to our employees and directors, including stock option awards and
employee stock purchases made under the Purchase Plan.
We have recognized
compensation expense based on the estimated grant date fair value method
required under SFAS No. 123(R) using a straight-line amortization
method. As SFAS No. 123(R) requires
that share-based compensation expense be based on awards that are ultimately
expected to vest, estimated share-based compensation is reduced for estimated
forfeitures. We expense restricted share
units based on fair market value of the shares at the date of grant over the
period during which the restrictions lapse.
Share-Based Compensation for Agilent Options Held by Verigy Employees
Prior to our separation from
Agilent, some of our employees participated in Agilents stock-based
compensation plans. Until November 1,
2005, we accounted for stock-based awards, based on Agilents stock, using the
intrinsic value method of accounting in accordance with Accounting Principles
Board Opinion No. 25
Accounting for Stock
Issued to Employees
(APB 25) and related interpretations. Under the intrinsic value method, we recorded
compensation expense related to stock options in our condensed consolidated
statements of operations when the exercise price of our employee stock-based
award was less than the market price of the underlying Agilent stock on the
date of the grant. We had no stock
option expenses resulting from an exercise price that was less than the market
price on the date of the grant in any of the periods presented.
10
Share-Based Payment Award Activity
The following table
summarizes stock option activity during the six months ended April 30,
2008:
|
|
Options
|
|
|
|
Shares
|
|
Weighted
Average
Exercise
Price
|
|
|
|
(in thousands)
|
|
|
|
Outstanding as of October 31, 2007
|
|
3,280
|
|
$
|
15.38
|
|
Granted
|
|
243
|
|
$
|
22.64
|
|
Exercised (1)
|
|
(95
|
)
|
$
|
13.13
|
|
Cancelled / Expired
|
|
(40
|
)
|
$
|
15.19
|
|
Outstanding as of April 30, 2008
|
|
3,388
|
|
$
|
15.97
|
|
(1) The total pretax
intrinsic value of stock options exercised during the six months ended April 30,
2008 was $1.0 million.
The following table
summarizes restricted share unit activity during the six months ended April 30,
2008:
|
|
Restricted Share Units
|
|
|
|
Shares
|
|
Weighted
Average
Grant
Date
Share
Price
|
|
|
|
(in thousands)
|
|
|
|
Outstanding as of October 31, 2007
|
|
870
|
|
$
|
18.49
|
|
Granted
|
|
656
|
|
$
|
21.72
|
|
Vested and paid out
|
|
(104
|
)
|
$
|
19.15
|
|
Forfeited
|
|
(28
|
)
|
$
|
20.12
|
|
Outstanding as of April 30, 2008
(2) (3) (4)
|
|
1,394
|
|
$
|
19.93
|
|
The following table
summarizes information about all outstanding stock options to purchase ordinary
shares of Verigy at April 30, 2008:
|
|
Options Outstanding
|
|
Range of Exercise Prices
|
|
Number
Outstanding
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
Weighted
Average
Exercise
Price
|
|
Aggregate
Intrinsic Value
|
|
|
|
(in thousands)
|
|
|
|
|
|
(in thousands)
|
|
$7.48 15.00
|
|
1,580
|
|
5.60 years
|
|
$
|
13.03
|
|
$
|
13,176
|
|
$15.01 20.00
|
|
1,406
|
|
6.73 years
|
|
$
|
16.41
|
|
6,975
|
|
$20.01 25.00
|
|
78
|
|
5.64 years
|
|
$
|
23.42
|
|
|
|
$25.01 30.00
|
|
324
|
|
5.69 years
|
|
$
|
26.62
|
|
|
|
|
|
3,388
|
|
6.08 years
|
|
$
|
15.97
|
|
$
|
20,151
|
|
The aggregate intrinsic
value in the table above represents the total pretax intrinsic value, based on
our closing stock price of our ordinary shares of $21.37 at April 30,
2008, which would have been received by award holders had all award holders
exercised their awards that were in-the-money as of that date. As of April 30,
2008, approximately 1,258,000 outstanding options were vested and exercisable
and the weighted average exercise price was $14.61. Among the 1,258,000 outstanding options that
were vested and exercisable, the total number of exercisable stock options that
were in-the-money was 1,177,000 and the weighted average exercise price was
$13.84.
11
The following table
summarizes information about all outstanding restricted share unit awards of
Verigy ordinary shares at April 30, 2008:
|
|
Restricted Share Units Outstanding
|
|
Range of Grant Date Share Prices
|
|
Number
Outstanding
|
|
Weighted Average
Grant Date Share Price
|
|
|
|
(in thousands)
|
|
|
|
$14.75 15.00 (2)
|
|
101
|
|
$
|
14.97
|
|
$15.01 20.00 (3)
|
|
624
|
|
$
|
18.34
|
|
$20.01 25.00
|
|
476
|
|
$
|
20.32
|
|
$25.01 30.00 (4)
|
|
193
|
|
$
|
26.71
|
|
|
|
1,394
|
|
$
|
19.93
|
|
(2) The outstanding
restricted share units as of April 30, 2008 include 22,000 fully vested
units held by outside directors.
(3) The outstanding
restricted share units as of April 30, 2008 include 13,000 fully vested
units held by outside directors.
(4) The outstanding
restricted share units as of April 30, 2008 include 11,000 fully vested
units held by outside directors.
As of April 30, 2008,
the total grant date fair value of our outstanding restricted share units was
approximately $27.8 million and the aggregate market value of the ordinary
shares underlying the outstanding restricted share units was $29.8 million.
Share-based Compensation
The impact on our results
for share-based compensation for the three and six months ended April 30,
2008 and 2007, respectively, was as follows:
|
|
Three Months
|
|
Six Months
|
|
|
|
Ended
|
|
Ended
|
|
|
|
April 30,
|
|
April 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
(in millions)
|
|
Cost of products and services
|
|
$
|
0.8
|
|
$
|
0.6
|
|
$
|
1.5
|
|
$
|
1.2
|
|
Research and development
|
|
0.5
|
|
0.4
|
|
1.0
|
|
0.9
|
|
Selling, general and administrative
|
|
2.9
|
|
2.2
|
|
5.6
|
|
4.8
|
|
Total share-based compensation expense
|
|
$
|
4.2
|
|
$
|
3.2
|
|
$
|
8.1
|
|
$
|
6.9
|
|
For the three and six months
ended April 30, 2008 and 2007, share-based compensation capitalized within
inventory was insignificant.
The weighted average grant
date fair value of awards related to Verigy options granted during the three
and six months ended April 30, 2008, was $8.34 and $9.68 per share,
respectively, and was determined using the Black-Scholes option pricing
model. The tax benefit realized from
exercised stock options and similar awards for the three and six months ended April 30,
2008 and 2007 was insignificant.
As of April 30, 2008
and 2007, the total compensation cost related to share-based awards not yet
recognized, net of expected forfeitures, was approximately $34.4 million and
$28.4 million, respectively. We expect
to recognize the cost of these share-based awards over a weighted average of
2.55 years.
Valuation Assumptions for Verigy Options
The fair value of Verigy
options granted during the three and six months ended April 30, 2008 and
2007 was estimated at grant date using a Black-Scholes options-pricing model
with the following weighted average assumptions:
|
|
Three Months
|
|
Six Months
|
|
|
|
Ended
|
|
Ended
|
|
|
|
April 30,
|
|
April 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Risk-free interest rate for options
|
|
2.82
|
%
|
4.50
|
%
|
3.03
|
%
|
4.53
|
%
|
Dividend yield
|
|
0.0
|
%
|
0.0
|
%
|
0.0
|
%
|
0.0
|
%
|
Volatility for options
|
|
48.8
|
%
|
39.8
|
%
|
48.3
|
%
|
40.6
|
%
|
Expected option life
|
|
4.33 years
|
|
4.38 years
|
|
4.38 years
|
|
4.34 years
|
|
12
Valuation
Assumptions for the Purchase Plan
|
|
Three Months
|
|
Six Months
|
|
|
|
Ended
|
|
Ended
|
|
|
|
April 30,
|
|
April 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Risk-free interest rate for Purchase Plan
|
|
3.35
|
%
|
4.90
|
%
|
3.35
|
%
|
4.90
|
%
|
Dividend yield
|
|
0.0
|
%
|
0.0
|
%
|
0.0
|
%
|
0.0
|
%
|
Volatility for Purchase Plan
|
|
47.3
|
%
|
40.2
|
%
|
47.3
|
%
|
40.2
|
%
|
Expected option life for Purchase Plan
|
|
6 months
|
|
6 months
|
|
6 months
|
|
6 months
|
|
The
Black-Scholes model requires the use of highly subjective and complex
assumptions, including the options expected life and the price volatility of
the Companys 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 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 U.S. Treasury Strips as of the grant dates.
8. INOVYS ACQUISITION
During
the three months ended January 31, 2008, we acquired Inovys, a privately
held company. Inovys provides innovative
solutions for design debug, failure analysis and yield acceleration for complex
semiconductor devices and processes.
From the acquisition date, the results of operations of Inovys business
are included in our condensed consolidated statements of operations and were
not material to revenues or net income for the period following the
acquisition. The purchase price was
allocated to the acquired net assets based on estimates of fair values. Pro forma results of operations for the
acquisition have not been presented as the effect has not been significant for
the periods presented.
9. COMPREHENSIVE INCOME
The components of
comprehensive income, net of tax, are as follows:
|
|
Three Months
|
|
Six Months
|
|
|
|
Ended
|
|
Ended
|
|
|
|
April 30,
|
|
April 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
(in millions)
|
|
Net income
|
|
$
|
14
|
|
$
|
22
|
|
$
|
46
|
|
$
|
35
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments,
net of tax
|
|
|
|
|
|
|
|
|
|
Change in unrealized losses on marketable
securities, net of tax
|
|
(2
|
)
|
|
|
(5
|
)
|
|
|
Change
in unrealized gains
on derivative instruments qualifying as cash flow hedges, net
of tax
|
|
1
|
|
|
|
1
|
|
|
|
Total comprehensive income
|
|
$
|
13
|
|
$
|
22
|
|
$
|
42
|
|
$
|
35
|
|
Verigys
derivative financial instruments consist of currency forward exchange contracts
and are recorded at fair value on the condensed consolidated balance
sheets. Changes in the fair value of
derivatives that do not qualify for hedge accounting treatment, as well as the
ineffective portion of hedges, if any,
are recognized in the consolidated statement of operations. The effective
portion of the foreign exchange gain (loss) is reported as a component of
accumulated other comprehensive income (loss) in shareholders equity and is
reclassified into the statement of operations when the hedged transaction
affects earnings. All amounts included in accumulated other comprehensive loss
as of April 30, 2008 will generally be reclassified into earnings within
12 months. Changes in the fair value of currency forward exchange due to
changes in time value are excluded from the assessment of effectiveness and are
recognized in earnings. The change in forward time value was not material for
all periods presented. If the transaction being hedged fails to occur, or if a
portion of any derivative is deemed to be ineffective, we will recognize the
gain (loss) on the associated financial instrument in other income, net in the
statement of operations. We did not have any ineffective hedges during the
periods presented.
13
10. INVENTORY
Inventory, net of related
reserves, consists of the following:
|
|
April 30,
|
|
October 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
(in millions)
|
|
Raw materials
|
|
$
|
35
|
|
$
|
25
|
|
Work in progress
|
|
6
|
|
6
|
|
Finished goods
|
|
40
|
|
37
|
|
Total inventory
|
|
$
|
81
|
|
$
|
68
|
|
There is approximately $17
million of demonstration products included in finished goods inventory for both
periods as of April 30, 2008 and October 31, 2007.
11. PROPERTY, PLANT AND EQUIPMENT, NET
|
|
April 30,
|
|
October 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
(in millions)
|
|
Leasehold improvements
|
|
$
|
14
|
|
$
|
13
|
|
Software
|
|
21
|
|
21
|
|
Machinery and equipment
|
|
45
|
|
40
|
|
Total property, plant and equipment
|
|
80
|
|
74
|
|
Accumulated depreciation and amortization
|
|
(39
|
)
|
(32
|
)
|
Total property, plant and equipment, net
|
|
$
|
41
|
|
$
|
42
|
|
We recorded approximately $4
million and $3 million of depreciation and amortization expense during the
three months ended April 30, 2008 and 2007, respectively. We recorded approximately $8 million and $6
million of depreciation and amortization expense during the six months ended April 30,
2008 and 2007, respectively.
12. MARKETABLE SECURITIES
We account for our
short-term marketable securities in accordance with SFAS No. 115,
Accounting for Certain Investments in Debt and Equity
Securities
(SFAS No. 115). We classify our marketable securities as
available for sale at the time of purchase and re-evaluate such designation as
of each consolidated balance sheet date.
We amortize premiums and discounts against interest income over the life
of the investment. Our marketable
securities are classified as cash equivalents if the original maturity, from
the date of purchase, is ninety days or less.
Our marketable securities are classified as short-term investments if
the original maturity, from the date of purchase, is in excess of ninety days
since we intend to convert them into cash as necessary to meet our liquidity
requirements.
Our marketable securities
include commercial paper, corporate bonds, government securities and auction
rate securities. Auction rate securities
are securities that are structured with interest rate reset periods of
generally less than ninety days but with contractual maturities that can be
well in excess of ten years. At the end
of each interest rate reset period, which occur every seven to thirty-five
days, investors can buy, sell, or continue to hold the securities at par. In the fourth quarter of fiscal year 2007,
certain of our auction rate securities experienced failed auctions due to sell
orders exceeding buy orders which occurred as a result of liquidity concerns
derived primarily from the mortgage and debt markets. In the first half of fiscal year 2008, we
continued to see liquidity issues in the market for auction rate
securities. Our auction rate securities
primarily consist of investments that are backed by pools of student loans
guaranteed by the U.S. Department of Education and other asset-backed
securities. We evaluate our investments
periodically for possible other-than-temporary impairment by reviewing factors
such as the length of time and extent to which fair value has been below cost
basis, the financial condition of the issuer and insurance guarantor, and our
ability and intent to hold the investment for a period of time which may be
sufficient for anticipated recovery of market value. Based on an analysis of other-than-temporary
14
impairment factors, at April 30,
2008 we recorded a temporary impairment within accumulated other comprehensive
loss of approximately $5 million (net of tax of $1 million) and an
other-than-temporary impairment within the statement of operations of $1.5
million related to these auction rate securities. Our marketable securities portfolio as of April 30,
2008 was $212 million. The
portfolio includes approximately $93 million invested in auction rate
securities of which approximately $9.7 million have been classified as
short-term as they were redeemed by the issuer in May 2008. The interest rate reset auctions for the
majority of our portfolio have failed as of April 30, 2008. These securities have been in a loss position
for less than 12 months. The funds
associated with failed auctions will not be accessible to us until a successful
auction occurs, a buyer is found outside of the auction process, or the
underlying securities have matured or are called by the issuer. Given the recent disruptions in the credit
markets and the fact that the liquidity for these types of securities remains
uncertain, we have classified substantially all of our auction rate securities
that were not liquidated subsequent to April 30, 2008, as long-term assets
in our condensed consolidated balance sheet as our ability to liquidate such
securities in the next 12 months is uncertain.
The following table
summarizes our marketable security investments as of April 30, 2008:
|
|
Cost
|
|
Gross Unrealized
Gains (Losses)
|
|
Impairment
|
|
Estimated Fair
Market Value
|
|
|
|
(in millions)
|
|
Short-term marketable securities:
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
210
|
|
$
|
|
|
$
|
|
|
$
|
210
|
|
U.S. treasury securities and government
agency securities
|
|
25
|
|
|
|
|
|
25
|
|
Corporate debt securities
|
|
94
|
|
|
|
|
|
94
|
|
Auction rate securities
|
|
10
|
|
|
|
|
|
10
|
|
Total short-term available for sale
investments
|
|
$
|
339
|
|
$
|
|
|
$
|
|
|
$
|
339
|
|
|
|
Cost
|
|
Gross Unrealized
Gains (Losses)
|
|
Impairment
|
|
Estimated Fair
Market Value
|
|
|
|
(in millions)
|
Long-term marketable securities:
|
|
|
|
|
|
|
|
|
|
Auction rate securities
|
|
$
|
90
|
|
$
|
(5
|
)
|
$
|
(2
|
)
|
$
|
83
|
|
Total long-term available for sale
investments
|
|
$
|
90
|
|
$
|
(5
|
)
|
$
|
(2
|
)
|
$
|
83
|
|
As Reported:
|
|
|
|
Cash equivalents
|
|
$
|
210
|
|
Short-term marketable securities
|
|
129
|
|
Long-term marketable securities
|
|
83
|
|
Total at April 30, 2008
|
|
$
|
422
|
|
The amortized cost and
estimated fair value of cash equivalents and marketable securities classified
as available-for sale at April 30, 2008 are shown in the table below based
on their contractual maturity dates:
|
|
Cost
|
|
Gross Unrealized
Gains (Losses)
|
|
Impairment
|
|
Estimated Fair
Market Value
|
|
|
|
(in millions)
|
Less than 1 year
|
|
$
|
284
|
|
$
|
|
|
$
|
|
|
$
|
284
|
|
Due in 1 to 2 years
|
|
44
|
|
|
|
|
|
44
|
|
Due after 2 years
|
|
101
|
|
(5
|
)
|
(2
|
)
|
94
|
|
Total at April 30, 2008
|
|
$
|
429
|
|
$
|
(5
|
)
|
$
|
(2
|
)
|
$
|
422
|
|
15
13. GUARANTEES
Standard Warranty
A summary of our standard warranty accrual activity
during the six months ended April 30, 2008 and 2007 is shown in the table
below: (Also see Note 17 Other Current Liabilities and Other Long-Term
Liabilities)
|
|
Six Months Ended
April 30,
|
|
|
|
2008
|
|
2007
|
|
|
|
(in millions)
|
|
Beginning balance at November 1,
|
|
$
|
9
|
|
$
|
6
|
|
Accruals for warranties issued during the period
|
|
6
|
|
5
|
|
Accruals related to pre-existing warranties (including changes in
estimates)
|
|
|
|
4
|
|
Settlements made during the period
|
|
(8
|
)
|
(8
|
)
|
Ending balance at April 30,
|
|
$
|
7
|
|
$
|
7
|
|
In our condensed consolidated balance
sheets, standard warranty accrual is presented in other current liabilities.
Extended Warranty
A summary of our extended warranty deferred revenue
activity for the six months ended April 30, 2008 and 2007 is shown in the
table below:
|
|
Six Months Ended
April 30,
|
|
|
|
2008
|
|
2007
|
|
|
|
(in millions)
|
|
Beginning balance at November 1,
|
|
$
|
21
|
|
$
|
20
|
|
Revenue recognized during the period
|
|
(5
|
)
|
(4
|
)
|
Deferral of revenue for new contracts
|
|
4
|
|
7
|
|
Ending balance at April 30,
|
|
$
|
20
|
|
$
|
23
|
|
In our condensed consolidated balance sheets, current
deferred revenue is presented separately and long-term deferred revenue is
included in other long-term liabilities.
Indemnifications
As is customary in our industry and as provided for in
local law in the U.S. and other jurisdictions, many of our standard contracts
provide remedies to our customers and others with whom we enter into contracts,
such as defense, settlement, or payment of judgment for intellectual property
claims related to the use of our products. From time to time, we indemnify
customers, as well as our suppliers, contractors, lessors, lessees and others
with whom we enter into contracts, against combinations of loss, expense, or
liability arising from various triggering events related to the sale and the
use of our products, the use of their goods and services, the use of facilities
and state of our owned facilities and other matters covered by such contracts,
usually up to a specified maximum amount. In addition, from time to time we
also provide protection to these parties against claims related to undiscovered
liabilities, additional product liability or environmental obligations.
Under the agreements with Agilent, we will indemnify
Agilent in connection with our activities conducted prior to and following our
separation from Agilent in connection with our business and the liabilities
that we specifically assumed under the agreements. These indemnifications cover
a variety of aspects of our business, including, but not limited to, employee,
tax, intellectual property and environmental matters.
16
14.
RESTRUCTURING
In connection with the transfer of our manufacturing
activities to Flextronics in fiscal year 2006, we transferred a number of
employees to Flextronics. As part of
this arrangement, we had a potential obligation in the future of approximately
$2 million associated with the termination of these transferred employees from
the manufacturing facilities in Flextronics in Germany. We had deferred these costs and recognized
them ratably over the employees period of service through the employees
expected termination from Flextronics.
During the three months ended April 30, 2008, we determined that we
will no longer be liable to pay this obligation as we have decided to maintain
a specialized portion of our manufacturing activities in Germany. We recorded a $1.2 million benefit relating
to the reversal of these charges.
As of April 30, 2008, we had approximately $0.5
million in accrued restructuring liability relating to reductions that will
occur during the second half of fiscal year 2008.
15. SEPARATION
COSTS
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. These expenses totaled $1.3
million and $3.5 million in the three and six months ended April 30, 2007,
respectively, and were immaterial during the three and six months ended April 30,
2008.
16.
RETIREMENT AND POST-RETIREMENT
PENSION PLANS
General.
Substantially all of our employees are covered under various Verigy defined
benefit and/or defined contribution plans.
Additionally, we sponsor retiree medical accounts for certain eligible
U.S. employees. Prior to the separation,
Agilent had sponsored post-retirement health care benefits and a death benefit
under the Retiree Survivors Benefit Plan for our eligible U.S. employees.
U.S. Retirement and Post-retirement
Health Care Benefits for U.S. Employees
Effective June 1, 2006, we established a new
defined contribution benefit plan (Verigy 401(k) plan) for our U.S
employees. Our 401(k) plan provides
matching contribution of up to 4% of eligible compensation. Eligible compensation consists of base and
variable pay. In addition, we also offer
a profit sharing plan for our U.S. employees, whereby we will make a maximum 2%
contribution to the employees 401(k) plan if certain annual financial
targets are achieved. A small number of
our U.S. employees meeting certain age and service requirements also receive an
additional 2% profit sharing contribution to their 401(k) plan accounts if
certain annual financial targets are achieved.
For the three and six months ended April 30,
2008, our matching expenses for our U.S. employees under the Verigy 401(k) and
the Verigy profit sharing plans were $0.7 million and $1.6 million,
respectively, compared to $0.9 million and $1.7 million in the comparable
periods in fiscal year 2007.
Effective June 1, 2006, Verigy made available
certain retiree benefits to U.S. employees meeting certain age and service
requirements upon termination of employment through Verigys Retiree Medical
Account (RMA) Plan. At the date of
separation, the present value of our responsibility for the retiree medical
benefit obligation was approximately $2.3 million. We are ratably recognizing this obligation
over a period of 6.4 years, the shorter of the estimated average working
lifetime or retirement eligibility of these employees. For the three and six months ended April 30,
2008 and 2007, the amount of expenses recognized under the RMA plan for both
periods presented was approximately $0.2 million and $0.4 million,
respectively. There are no plan assets
related to these obligations, and we currently do not have any plans to make
any contributions.
Non-U.S. Retirement Benefit Plans.
Eligible employees outside the U.S. generally receive retirement benefits under
various retirement plans based upon factors such as years of service and
employee compensation levels.
Eligibility is generally determined in accordance with local statutory
requirements.
Change in Plans.
Upon our separation from Agilent, the defined benefit plans for our employees
in Germany, Korea, Taiwan, France and Italy were transferred to us. With the exception of Italy and France, which
involve relatively insignificant amounts, Agilent completed the funding of
these transferred plans, based on 100% of the accumulated benefit obligation
level as of the separation date, by contributing approximately $3.3 million
into our pension trust accounts during the three months ended January 31,
2007.
17
Costs for All U.S. and Non-U.S.
Plans.
The
following tables summarize the principal components of total costs associated
with the retirement-related benefit plans of Verigy for the three and six
months ended April 30, 2008 and 2007:
|
|
U.S. Plans
|
|
Non-U.S. Plans
|
|
Total
|
|
|
|
Three Months Ended April 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
(in millions)
|
|
Defined benefit pension plan costs
|
|
$
|
|
|
$
|
|
|
$
|
1.8
|
|
$
|
1.5
|
|
$
|
1.8
|
|
$
|
1.5
|
|
Defined contribution pension plan costs
|
|
0.7
|
|
0.9
|
|
0.3
|
|
|
|
1.0
|
|
0.9
|
|
Non-pension post-retirement benefit costs
|
|
0.2
|
|
0.2
|
|
|
|
|
|
0.2
|
|
0.2
|
|
Total retirement-related plans costs
|
|
$
|
0.9
|
|
$
|
1.1
|
|
$
|
2.1
|
|
$
|
1.5
|
|
$
|
3.0
|
|
$
|
2.6
|
|
|
|
U.S. Plans
|
|
Non-U.S. Plans
|
|
Total
|
|
|
|
Six Months Ended April 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
(in millions)
|
|
Defined benefit pension plan costs
|
|
$
|
|
|
$
|
|
|
$
|
3.5
|
|
$
|
2.9
|
|
$
|
3.5
|
|
$
|
2.9
|
|
Defined contribution pension plan costs
|
|
1.6
|
|
1.7
|
|
0.6
|
|
0.2
|
|
2.2
|
|
1.9
|
|
Non-pension post-retirement benefit costs
|
|
0.4
|
|
0.4
|
|
|
|
|
|
0.4
|
|
0.4
|
|
Total retirement-related plans costs
|
|
$
|
2.0
|
|
$
|
2.1
|
|
$
|
4.1
|
|
$
|
3.1
|
|
$
|
6.1
|
|
$
|
5.2
|
|
Non-U.S. Defined Benefit.
For the three and six months
ended April 30, 2008 and 2007, the net pension costs related to our
employees participating in our non-U.S. defined benefit plans were comprised
of:
|
|
Three Months
|
|
Six Months
|
|
|
|
Ended
|
|
Ended
|
|
|
|
April 30,
|
|
April 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
(in millions)
|
|
Service cost benefits earned during the year
|
|
$
|
1.6
|
|
$
|
1.0
|
|
$
|
2.7
|
|
$
|
2.0
|
|
Interest cost on benefit obligation
|
|
1.0
|
|
0.7
|
|
1.9
|
|
1.3
|
|
Expected return on plan assets
|
|
(1.1
|
)
|
(0.5
|
)
|
(1.7
|
)
|
(1.0
|
)
|
Amortization and deferrals of recognized
amounts:
|
|
|
|
|
|
|
|
|
|
Actuarial loss
|
|
0.3
|
|
0.3
|
|
0.6
|
|
0.6
|
|
Total net plan costs
|
|
$
|
1.8
|
|
$
|
1.5
|
|
$
|
3.5
|
|
$
|
2.9
|
|
Measurement
date.
We use a September 30
measurement date for all of our non-U.S. plans and October 31 for our U.S.
retiree medical account.
17.
OTHER CURRENT
LIABILITIES AND OTHER LONG-TERM LIABILITIES
Other current accrued liabilities at April 30,
2008 and October 31, 2007, were as follows:
|
|
April 30,
2008
|
|
October 31,
2007
|
|
|
|
(in millions)
|
|
Supplier liabilities
|
|
$
|
6
|
|
$
|
5
|
|
Accrued warranty costs
|
|
7
|
|
9
|
|
Other
|
|
4
|
|
5
|
|
Total other current liabilities
|
|
$
|
17
|
|
$
|
19
|
|
18
Supplier liabilities reflect the amount by which our
firmly committed inventory purchases from our suppliers exceed our forecasted
production and service and support needs.
(Also see Note 13, Guarantees for additional information
regarding warranty accruals).
Other long-term liabilities at April 30, 2008 and
October 31, 2007, were as follows:
|
|
April 30,
2008
|
|
October 31,
2007
|
|
|
|
(in millions)
|
|
Long-term extended warranty and deferred revenue
|
|
$
|
10
|
|
$
|
12
|
|
Retirement plan accruals
|
|
36
|
|
32
|
|
Other
|
|
1
|
|
3
|
|
Total other long-term liabilities
|
|
$
|
47
|
|
$
|
47
|
|
(Also see Note 16, Retirement and Post-Retirement
Pension Plans for additional information regarding retirement plan accruals).
18. COMMITMENTS
AND
CONTINGENCIES
As of April 30, 2008, there was no material
change in our capital lease obligations, operating lease obligations, purchase
obligations or any other long-term liabilities reflected on our condensed
consolidated balance sheets as compared to such obligations and liabilities as
of October 31, 2007.
As a result of adopting FIN 48, we had $9.8 million of
unrecognized tax benefits which were recorded as long term liabilities upon
adoption on November 1, 2007. As of April 30, 2008, we had
$10.7 million of unrecognized tax benefits which are recorded as long- term
liabilities and an additional $2.5 million which are recorded as a reduction in
long term deferred tax assets.
Rent expense was $1.6 million and $3.2 million for the
three and six months ended April 30, 2008, respectively, compared to $1.5
million and $2.8 million in the comparable periods in fiscal year 2007.
From time to time, we are involved in lawsuits,
claims, investigations and proceedings, including patent, commercial and
environmental matters, which arise in the ordinary course of business.
19. SEGMENT &
GEOGRAPHIC INFORMATION
SFAS No. 131,
Disclosures About
Segments of an Enterprise and Related Information,
(SFAS No. 131)
requires us to identify the segment or segments we operate in. Based on the standards set forth in
SFAS No. 131, we operate in one reportable segment: we provide test
system solutions that are used in the manufacture of semiconductor
devices. Below is the revenue detail for
the two product platforms within this segment:
|
|
Three Months
|
|
Six Months
|
|
|
|
Ended
|
|
Ended
|
|
|
|
April 30,
|
|
April 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
(in millions)
|
|
Net revenue from products:
|
|
|
|
|
|
|
|
|
|
SOC / SIP / High-Speed Memory
|
|
$
|
116
|
|
$
|
69
|
|
$
|
237
|
|
$
|
118
|
|
Memory
|
|
6
|
|
78
|
|
48
|
|
157
|
|
Net revenue from products
|
|
122
|
|
147
|
|
285
|
|
275
|
|
Net revenue from services
|
|
40
|
|
36
|
|
77
|
|
73
|
|
Total net revenue
|
|
$
|
162
|
|
$
|
183
|
|
$
|
362
|
|
$
|
348
|
|
Major customers
For the three months ended April 30, 2008, one of
our customers accounted for 12.9% of our total net revenue. For the three months ended April 30,
2007, two of our customers accounted for 41.8% of our total net revenue, with
one customer accounting for 24.8% and the other customer accounting for 17.0%
of our total net revenue.
19
For the six months ended April 30, 2008, one of
our customers accounted for 10.2% of our total net revenue. For the six months ended April 30, 2007,
two of our customers accounted for 36.1% of our total net revenue, with one
customer accounting for 20.3% and the other customer accounting for 15.8% of
our total net revenue.
Geographic Net Revenue Information:
|
|
Three Months
|
|
Six Months
|
|
|
|
Ended
|
|
Ended
|
|
|
|
April 30,
|
|
April 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
(in millions)
|
|
United States
|
|
$
|
28
|
|
$
|
63
|
|
$
|
58
|
|
$
|
142
|
|
Singapore
|
|
107
|
|
91
|
|
238
|
|
148
|
|
Japan
|
|
10
|
|
11
|
|
34
|
|
26
|
|
Rest of the World
|
|
17
|
|
18
|
|
32
|
|
32
|
|
Total net revenue
|
|
$
|
162
|
|
$
|
183
|
|
$
|
362
|
|
$
|
348
|
|
Net revenue is attributed to geographic areas based on
the country in which the customer takes title of our products.
Geographic Property, Plant and
Equipment Information:
|
|
April 30,
|
|
October 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
(in millions)
|
|
United States
|
|
$
|
13
|
|
$
|
13
|
|
Singapore
|
|
15
|
|
17
|
|
Germany
|
|
5
|
|
4
|
|
China
|
|
3
|
|
3
|
|
Rest of the World
|
|
5
|
|
5
|
|
Total geographic property, plant and equipment
|
|
$
|
41
|
|
$
|
42
|
|
20
ITEM 2.
MANAGEMENTS DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
S
The following discussion should be read in conjunction
with the condensed consolidated financial statements and notes thereto included
elsewhere in this Quarterly Report on Form 10-Q. This report contains forward-looking
statements including, without limitation, statements regarding manufacturing
operations, increase in sales and growth of business in Asia, research and
development activities and expenses, variations in quarterly revenues and
operating results, trends, cyclicality, seasonality and growth in the markets
we sell into, our strategic direction, expenditure in research and development,
anticipated benefits from our operating model, our future effective tax rate,
new product introductions, growth in service revenue, our liquidity position,
our ability to generate cash from continuing operations, our expected growth,
the potential impact of adopting new accounting pronouncements, our potential
future financial results, the quality of our marketable securities, our
purchase commitments, our obligation and assumptions about our retirement and
post-retirement benefit plans, the impact of our variable cost structure, and
our lease payment obligations that involve risks and uncertainties. Additional forward-looking statements can be
identified by words such as anticipated, expect, believes, plan, predicts,
and similar terms. Our actual results
could differ materially from the results contemplated by these forward-looking
statements due to various factors, including those discussed under Part II,
Item 1A., Risk Factors and elsewhere in this report.
Overview
Prior to our
initial public offering, we were a wholly-owned subsidiary of Agilent Technologies,
Inc (Agilent). We became an
independent company on June 1, 2006, when we separated from Agilent. On June 13, 2006, we completed our
initial public offering and became a separate stand-alone publicly-traded
company incorporated in Singapore focused on technology and innovation in
semiconductor testing. We design,
develop, manufacture and sell advanced test systems and solutions for the
semiconductor industry. We offer a
single platform for each of the two general categories of devices being tested:
our 93000 Series platform, designed to test System-on-a-Chip (SOC),
System-in-a-Package (SIP) and high-speed memory devices, and our V5000 Series platform,
designed to test memory devices, including flash memory and multi-chip
packages. Our test solutions are both
scalable and flexible. Our test
platforms are scalable across different frequency ranges, different pin counts
and different numbers of devices under simultaneous test. Our test platforms flexibility allows for a
single test system to test a wide range of applications for semiconductor
devices. Our scalable platform
architecture provides us with internal operating model efficiencies such as
relatively lower research and development costs, engineering headcount, support
requirements and inventory risk. The
scalability and flexibility of our test solutions also provides economic
benefits to our customers by allowing them to get their complex, feature-rich
semiconductor devices to market quickly and to reduce their overall costs. In addition to our test equipment, our
solutions include advanced analysis tools as well as consulting, service and
support offerings such as start-up assistance, application services and system
calibration and repair.
We have a broad customer base, with more than 1,800
93000 Series systems and more than 2,500 V5000 Series systems
installed worldwide as of April 30, 2008.
Our customers include integrated device manufacturers (IDMs), test
subcontractors, also referred to as subcontractors, which includes specialty
assembly, package and test companies as well as wafer foundries, and fabless
design companies.
Basis of
Presentation and Separation from Agilent
Our fiscal year end is October 31, and our fiscal
quarters end on January 31, April 30 and July 31. Unless otherwise stated, all dates refer to
our fiscal year and fiscal periods.
Amounts included in the accompanying condensed
consolidated financial statements are expressed in U.S. dollars. The accompanying condensed consolidated
financial statements have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission (SEC).
Certain
amounts in the condensed consolidated financial statements for the three and
six months ended April 30, 2007 were reclassified to conform to the
presentation used for the three and six months ended April 30, 2008.
Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles (GAAP) in the United States have been condensed or
omitted pursuant to such rules and regulations. The following discussion should be read in
conjunction with our 2007 Annual Report on Form 10-K.
21
Overview of Results
Our total net revenue for
the three months ended April 30, 2008, was $162 million, down $21
million, or 11.5%, from the comparable period in fiscal year 2007, and down
19.0% sequentially. This decrease was
due to lower revenue from sales of our memory test systems. We experienced a sharp decrease in our sales
of memory products resulting in our lowest revenue quarter since our spin off
from Agilent. The decline in our memory
test revenues resulted from substantial declines in the capital spending
patterns of our memory device manufacturer customers and of their subcontractor
test partners to which we also sell systems.
The overall decline in the memory market capital spending reflects
continued excess supply and price erosion for memory products, which has resulted
in lower manufacturing output and excess test capacity. These factors have caused our customers to
delay test system orders and, in one case, to delay delivery of systems ordered
in our first quarter of fiscal year 2008.
Despite the cyclical
weakness in the memory test industry, our SOC business showed considerable
strength. We experienced increased
demand for our 93000 platform for both SOC and high-speed memory applications,
driven primarily by strong demand for our customers devices targeted at the
computer and cell phone markets. We also
saw solid market response to our Port Scale RF products among our customer
base. For the three months ended April 30,
2008, one of our SOC customers accounted for more than 10% of our total net
revenue. In contrast, for the three
months ended April 30, 2007, two of our memory customers accounted for
more than 10% of our total net revenue.
Our gross margin for the three months ended April 30,
2008, was 47.5%, an increase of 4.3 percentage points from the comparable
period in fiscal year 2007 and an increase of one percentage point from the
first quarter of fiscal year 2008. Gross margin improvement was primarily
attributable to the stronger mix of SOC systems, which generally have a higher
gross margin than our memory systems, sold during the quarter. In addition, in the three months ended April 30,
2008, we benefited from a $1.2 million reduction in cost of sales associated
with severance obligations that we are no longer liable to pay due to our
decision to maintain a specialized portion of our manufacturing activities in
Germany. This compares to a $1.1 million
restructuring charge to cost of sales during the comparable period in fiscal
year 2007.
Our total operating expenses, including separation and
restructuring charges, were $63 million in the three months ended April 30,
2008, up $5 million, or 8.6%, from the comparable period in fiscal year 2007,
but down by $1 million sequentially.
This increase in operating expenses from the comparable quarter of fiscal
year 2007 was primarily due to increased spending on research and development
initiatives for product programs that are planned for introduction during the
next 6 to 12 months, as well as higher share-based compensation, partially
offset by lower sales and variable compensation expenses.
Net income for the three and six months ended April 30,
2008 was $14 million and $46 million, a decrease of 36.4 percent from $22 million in the three
months ended April 30, 2007, but an increase of 31.4 percent from $35
million in the six months ended April 30, 2007. This year to date increase
was due to our revenue growth in SOC and high-speed memory testers for the
quarter as well as favorable product mix.
For the six months ended April 30, 2008, we generated operating
cash of $67 million and the cash and cash equivalents balance as of April 30,
2008 was $242 million.
We derive a significant percentage of our net revenue
from outside of North America. Net
revenue from customers located outside of North America represented 82.7% and
65.0% of total net revenue in the three months ended April 30, 2008 and
2007, respectively. Net revenue in North
America was lower by 56.3% during the three months ended April 30, 2008,
compared to the same period of fiscal year 2007, due to the continuing
outsourcing by our North American customers to contract manufacturers in
Asia. Net revenue in Asia (including
Japan) was higher by 10.7% in the three months ended April 30, 2008,
compared to the same period of fiscal year 2007. We expect this trend of increasing sales in
Asia (including Japan) to continue as semiconductor manufacturing activities
continue to concentrate in that region.
The sales of our products and services are dependent,
to a large degree, on customers who are subject to cyclical trends in the
demand for their products. These cyclical periods have had and will have a
significant effect on our business since our customers often delay or
accelerate purchases in reaction to changes in their businesses and to demand fluctuations
in the semiconductor industry.
Historically, these demand fluctuations have resulted in significant
variations in our results of operations. This was particularly relevant during
this second quarter of fiscal year 2008 where we saw a significant decrease in
revenue from our memory platform and experienced a postponement of a
significant customer order. Due to our
product diversification, however, we were able to partially offset the effect
of this downturn in demand for memory systems with increased demand for our SOC
platform fueled by the computing and cell phone device markets. These 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.
22
Furthermore, we sell to a variety of customers,
including subcontractors. Because we sell to subcontractors, which during
market downturns tend to reduce or delay orders for new test systems and test
services more quickly and dramatically than other customers, any downturn may
cause a quicker and more significant adverse effect on our business than on the
broader semiconductor industry. In
addition, although a decline in orders for semiconductor capital equipment may
accompany or precede the timing of a decline in the semiconductor market as a
whole, recovery in semiconductor capital equipment spending may lag the
recovery by the semiconductor industry.
Although our visibility into the memory market remains
poor, we are prepared for continued weakness in our memory test business
through the end of calendar year 2008.
While we continue to invest in our memory products in anticipation of a
cyclical recovery in the memory test market, in the near term we are primarily
focusing our attention and resources on high growth segments of the markets we
address such as high-integrated RF, consumer mixed-signal, high-speed memory
and yield improvement.
Critical Accounting Policies and
Estimates
The preparation of financial statements in accordance
with U.S. GAAP requires management to make estimates and assumptions that
affect the amounts reported in our condensed consolidated financial statements
and accompanying notes. Management bases
its estimates on historical experience and various other assumptions management
believes to be reasonable. Although
these estimates are based on managements knowledge of current events and of
actions that may impact the Company in the future, actual results may be
different from the estimates. Our
critical accounting policies are those that affect our financial statements
materially and involve difficult, subjective or complex judgments by management. Those policies include revenue recognition,
restructuring charges, inventory valuation, warranty, share-based compensation,
retirement and post-retirement plan assumptions, valuation of goodwill and
intangible assets, valuation of marketable securities, and accounting for
income taxes.
An accounting policy is deemed to be critical if it
requires an accounting estimate to be made based on assumptions about matters
that are highly uncertain at the time the estimate is made, and if different
estimates that reasonably could have been used or changes in the accounting
estimate that are reasonably likely to occur could materially change the
financial statements. There have been no
significant changes during the three and six months ended April 30, 2008
to the items that we disclosed as our critical accounting policies and
estimates in Managements Discussion and Analysis of Financial Condition and
Results of Operations included in our Annual Report on Form 10-K for the
year ended October 31, 2007, filed with the Securities and Exchange Commission
on December 21, 2007.
Recent Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements
(SFAS No. 157). The purpose of SFAS No. 157 is to define fair
value, establish a framework for measuring fair value and enhance disclosures
about fair value measurements. In February
2008, the FASB issued FASB Staff Position (FSP) 157-1,
Application
of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting
Pronouncements That Address Fair Value Measurements for Purposes of Lease
Classification or Measurement under Statement 13
(FSP 157-1) and
FSP 157-2,
Effective Date of FASB Statement No. 157
(FSP
157-2). FSP 157-1 amends SFAS No. 157
to remove certain leasing transactions from its scope. FSP 157-2 delays the effective date of SFAS No.
157 for all non-financial assets and non-financial liabilities, except for
items that are recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually), until the beginning of the
first quarter of fiscal year 2010. The
measurement and disclosure requirements related to financial assets and
financial liabilities are effective for us beginning in the first quarter of
fiscal year 2009. We are currently
evaluating whether SFAS No. 157 will result in a change to our fair value
measurements.
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and Financial Liabilities
(SFAS No. 159), which permits entities to choose to measure many financial
instruments and certain other items at fair value that are not currently
required to be measured at fair value.
SFAS No.159 will be effective for us beginning in the first quarter of
fiscal year 2009. We are currently
evaluating the impact of adopting SFAS No. 159 on our financial position, cash
flows and results of operations.
In December 2007, the FASB issued SFAS No. 141
(revised 2007),
Business Combinations
(SFAS No.
141(R)). SFAS No. 141(R) amends SFAS No.
141 and provides revised guidance for recognizing and measuring identifiable
assets and goodwill acquired, liabilities assumed, and any noncontrolling
interest in the acquiree. It also
provides disclosure requirements to enable users of the financial statements to
evaluate the nature and financial effects of the business combination. It is effective for fiscal years beginning on
or after December 15, 2008 and will be applied prospectively. We are currently assessing the impact that
SFAS No. 141(R) may have on our consolidated financial statements upon adoption
in fiscal year 2010.
23
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statementsan amendment of ARB No. 51
(SFAS No. 160).
SFAS No. 160 requires that ownership interests in subsidiaries held by
parties other than the parent, and the amount of consolidated net income, be
clearly identified, labeled, and presented in the consolidated financial
statements. It also requires once a
subsidiary is deconsolidated, any retained noncontrolling equity investment in
the former subsidiary be initially measured at fair value. Sufficient disclosures are required to
clearly identify and distinguish between the interests of the parent and the
interests of the noncontrolling owners.
It is effective for fiscal years beginning on or after December 15,
2008 and requires retroactive adoption of the presentation and disclosure
requirements for existing minority interests.
All other requirements shall be applied prospectively. We are currently assessing the impact that
SFAS No. 160 may have on our consolidated financial statements upon
adoption in fiscal year 2010.
In March 2008, the
FASB issued SFAS No. 161,
Disclosures about
Derivative Instruments and Hedging Activities-an amendment of FASB Statement No. 133
.
SFAS No. 161 expands the current disclosure requirements of SFAS No. 133,
Accounting for Derivative Instruments and Hedging
Activities
, and requires that companies must now provide enhanced
disclosures on a quarterly basis regarding how and why the entity uses
derivatives; how derivatives and related hedged items are accounted for under
SFAS No. 133 and how derivatives and related hedged items affect the
companys financial position, performance and cash flow. SFAS No. 161 is
effective prospectively for periods beginning on or after November 15,
2008. We are currently assessing the impact that SFAS No. 161 may have on
our consolidated financial statements upon our adoption in fiscal year 2009.
Quarterly Results of Operations
Our quarterly results of operations have varied in the
past and are likely to continue to vary in the future primarily due to the
cyclical nature of the semiconductor industry. 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 by the high degree of
cyclicality of the semiconductor industry.
As such, we believe that period-to-period comparisons of our results of
operations should not be relied upon as an indication of future
performance. In future periods, the
market price of our ordinary shares could decline if our revenues and results
of operations are below the expectations of analysts and investors. Factors that may cause our revenue and
results of operations to vary include those discussed in the Risk Factors in
Item 1A of Part II of, and else where in, this report.
The following table sets forth certain operating data
as a percent of net revenue for the periods presented:
|
|
Three Months
April 30,
|
|
Six Months Ended
April 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Net revenue:
|
|
|
|
|
|
|
|
|
|
Products
|
|
75.3
|
%
|
80.3
|
%
|
78.7
|
%
|
79.0
|
%
|
Services
|
|
24.7
|
|
19.7
|
|
21.3
|
|
21.0
|
|
Total net revenue
|
|
100.0
|
|
100.0
|
|
100.0
|
|
100.0
|
|
Cost of sales:
|
|
|
|
|
|
|
|
|
|
Cost of products
|
|
34.6
|
|
43.2
|
|
37.3
|
|
42.5
|
|
Cost of services
|
|
17.9
|
|
13.7
|
|
15.7
|
|
14.4
|
|
Total cost of sales
|
|
52.5
|
|
56.9
|
|
53.0
|
|
56.9
|
|
Gross margin (1)
|
|
47.5
|
|
43.1
|
|
47.0
|
|
43.1
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
16.0
|
|
12.0
|
|
14.1
|
|
12.9
|
|
Selling, general and administrative
|
|
22.9
|
|
19.1
|
|
21.0
|
|
19.8
|
|
Separation costs
|
|
|
|
0.5
|
|
|
|
0.9
|
|
Total operating expenses
|
|
38.9
|
|
31.6
|
|
35.1
|
|
33.6
|
|
Income from operations
|
|
8.6
|
|
11.5
|
|
11.9
|
|
9.5
|
|
Other income, net
|
|
1.9
|
|
2.2
|
|
2.5
|
|
2.0
|
|
Income before income taxes
|
|
10.5
|
|
13.7
|
|
14.4
|
|
11.5
|
|
Provision for income taxes
|
|
1.9
|
|
1.7
|
|
1.7
|
|
1.4
|
|
Net income
|
|
8.6
|
%
|
12.0
|
%
|
12.7
|
%
|
10.1
|
%
|
(1) Gross margin
represents the ratio of gross profit to total net revenue
24
Net Revenue
|
|
Three Months
Ended April 30,
|
|
2008
over
2007
|
|
Six Months
Ended April 30,
|
|
2008
over
2007
|
|
|
|
2008
|
|
2007
|
|
Change
|
|
2008
|
|
2007
|
|
Change
|
|
|
|
($ in millions)
|
|
|
|
($ in millions)
|
|
|
|
Net revenue from products:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SOC/SIP/High-Speed Memory
|
|
$
|
116
|
|
$
|
69
|
|
68.1
|
%
|
$
|
237
|
|
$
|
118
|
|
100.8
|
%
|
Memory
|
|
6
|
|
78
|
|
(92.3
|
)%
|
48
|
|
157
|
|
(69.4
|
)%
|
Net revenue from products
|
|
122
|
|
147
|
|
(17.0
|
)%
|
285
|
|
275
|
|
3.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue from services
|
|
40
|
|
36
|
|
11.1
|
%
|
77
|
|
73
|
|
5.5
|
%
|
Total net revenue
|
|
$
|
162
|
|
$
|
183
|
|
(11.5
|
)%
|
$
|
362
|
|
$
|
348
|
|
4.0
|
%
|
Our revenue by geographic region for the three and six
months ended April 30, 2008 and 2007 is as follows:
|
|
Three Months
Ended April 30,
|
|
2008
over
2007
|
|
Six Months
Ended April 30,
|
|
2008
over
2007
|
|
|
|
2008
|
|
2007
|
|
Change
|
|
2008
|
|
2007
|
|
Change
|
|
|
|
($ in millions)
|
|
|
|
($ in millions)
|
|
|
|
North America
|
|
$
|
28
|
|
$
|
64
|
|
(56.3
|
)%
|
$
|
58
|
|
$
|
144
|
|
(59.7
|
)%
|
As a percent of total net revenue
|
|
17.3
|
%
|
35.0
|
%
|
|
|
16.1
|
%
|
41.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe
|
|
$
|
10
|
|
$
|
7
|
|
42.9
|
%
|
$
|
19
|
|
$
|
15
|
|
26.7
|
%
|
As a percent of total net revenue
|
|
6.2
|
%
|
3.8
|
%
|
|
|
5.2
|
%
|
4.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asia-Pacific, excluding Japan
|
|
$
|
114
|
|
$
|
101
|
|
12.9
|
%
|
$
|
251
|
|
$
|
163
|
|
54.0
|
%
|
As a percent of total net revenue
|
|
70.3
|
%
|
55.2
|
%
|
|
|
69.3
|
%
|
46.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Japan
|
|
$
|
10
|
|
$
|
11
|
|
(9.1
|
)%
|
$
|
34
|
|
$
|
26
|
|
30.8
|
%
|
As a percent of total net revenue
|
|
6.2
|
%
|
6.0
|
%
|
|
|
9.4
|
%
|
7.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
$
|
162
|
|
$
|
183
|
|
(11.5
|
)%
|
$
|
362
|
|
$
|
348
|
|
4.0
|
%
|
Net Revenue.
Net revenue is
derived from the sale of products and services and is adjusted for returns and
allowances, which historically have been insignificant. Our product revenue is generated predominantly
from the sales of our test equipment products.
Revenue from services includes extended warranty, customer support,
consulting, training and education activities.
Service revenue is recognized over the contractual period or as services
are rendered to the customer.
Net revenue in the three months ended April 30,
2008 was $162 million, a decrease of $21 million, or 11.5%, from the
$183 million achieved in the three months ended April 30, 2007. Net product revenue in the three months ended
April 30, 2008 was $122 million, a decrease of $25 million, or 17.0%,
from the $147 million achieved in the three months ended April 30,
2007. These decreases were due to lower
revenue from sales of our memory test systems, partially offset by increases in
SOC and services revenue. As noted in
the Overview above, our memory customers continue to delay memory tester
purchases and have significantly cut their capital budgets due to excess supply
and lower capacity utilization. Despite
the cyclical weakness in the memory test industry, our SOC business showed
considerable strength in the second fiscal quarter of fiscal year 2008. During this period, we experienced increased
demand for our 93000 platform in both SOC and high-speed memory driven by
computing and cell phone device markets.
Services revenue for the three months ended April 30,
2008 accounted for $40 million, or 24.7% of net revenue, compared to
$36 million, or 19.7% of net revenue for the three months ended April 30,
2007. Our service revenue is expected to
grow in absolute amount as we provide services to a growing installed base of
systems. Unlike product revenue, service
revenue tends not to experience significant cyclical fluctuations due to the
fact that service contracts generally extend for one to two years and revenue
is recognized over the contractual period or as services are rendered.
25
Net revenue in the six months ended April 30,
2008, was $362 million, an increase of $14 million, or 4.0%, from the $348
million achieved in the corresponding prior year period. Net product revenue in the six months ended April 30,
2008 was $285 million, an increase of $10 million, or 3.6%, from the
$275 million achieved in the prior year period. These increases were due to higher revenue
from our SOC and high-speed memory test systems, partially offset by lower
revenue from sales of our memory test systems.
Service revenue for the six months ended April 30,
2008 accounted for $77 million, or 21.3% of net revenue, compared to $73 million,
or 21.0% of net revenue for the six months ended April 30, 2007.
Net revenue in North America was lower by 56.3% in the
three months ended April 30, 2008, compared to the three months ended April 30,
2007, primarily due to decreased sales to key customers for memory test systems
in the U.S. Net revenue from customers
located in Asia represented 76.5% of total net revenue for the three months
ended April 30, 2008, compared to 61.2% in the three months ended April 30,
2007. We expect the trend of increasing sales in the Asia region to
continue as semiconductor manufacturing activities continue to concentrate in
that region.
Cost of Sales
Cost of Products
|
|
Three Months
Ended April 30,
|
|
2008
over
2007
|
|
Six Months
Ended April 30,
|
|
2008
over
2007
|
|
|
|
2008
|
|
2007
|
|
Change
|
|
2008
|
|
2007
|
|
Change
|
|
|
|
($ in millions)
|
|
|
|
($ in millions)
|
|
|
|
Cost of products
|
|
$
|
56
|
|
$
|
79
|
|
(29.1
|
)%
|
$
|
135
|
|
$
|
148
|
|
(8.8
|
)%
|
As a percent of product revenue
|
|
45.9
|
%
|
53.7
|
%
|
|
|
47.4
|
%
|
53.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 $23
million in the three months ended April 30, 2008, compared to the three
months ended April 30, 2007, was primarily due to the decrease in memory product
shipments as well as a decrease of $2.7 million of restructuring and separation
costs, compared to the three months ended April 30, 2007. This reduction
includes a $1.2 million benefit
associated with severance obligations that we are no longer liable to
pay due to our decision to maintain a specialized portion of our manufacturing
activities in Germany. Also, our cost of
products included $0.5 million of SFAS No. 123(R) share-based
compensation expense in the three months ended April 30, 2008, compared to
$0.4 million of such charges in the three months ended April 30, 2007.
Cost of products as a percent of net product revenue
decreased by 7.8 percentage points in the three months ended April 30,
2008, compared to the three months ended April 30, 2007, primarily due to
the shift in product mix toward higher gross margin SOC products as well as the
by lower restructuring and separation costs and performance based compensation
costs in the current year period.
Excess and obsolete inventory-related charges in both
the three months ended April 30, 2008 and 2007 were $3 million. We also sold previously written down
inventory for $0.8 million and $1 million in the three months ended April 30,
2008 and 2007, respectively. The sales
of previously written down inventory improved our cost of products gross
margins by approximately 0.3 percentage points for the three months ended April 30,
2008 and 0.4 percentage points in three months ended April 30, 2007.
The decrease in cost of products of approximately $13
million in the six months ended April 30, 2008, compared to the six months
ended April 30, 2007, was primarily due to a decrease in product shipments
primarily of our memory products coupled with a favorable shift in product mix
and $3.7 million in lower restructuring and separation costs compared to the
comparable period in fiscal year 2007.
Also, our cost of products included $1 million of SFAS No. 123(R) share-based
compensation expense in the six months ended April 30, 2008, compared to
$0.8 million of such charges in the six months ended April 30, 2007.
26
Cost of products as a percent of net product revenue
decreased by 6.4 percentage points in the six months ended April 30, 2008,
compared to the six months ended April 30, 2007, primarily due to the
favorable product mix as well as lower restructuring and separation costs and
lower performance-based compensation expenses in the current year period.
Excess and obsolete inventory-related charges in both
the six months ended April 30, 2008 and 2007 were $5 million. We sold previously written down inventory for
$1.8 million and $2 million in the six months ended April 30,
2008 and 2007, respectively. The sales
of previously written down inventory increased gross margin by approximately
0.3 percentage points and 0.4 percentage points for the six months ended April 30,
2008 and 2007, respectively.
As of April 30, 2008, we held $81 million of
inventory, net of $38 million of reserves, composed of $70 million of raw
materials, $8 million of work in progress and $41 million of finished
goods. Raw materials include
approximately $34 million of support inventory.
We continue to dispose of previously written down inventory on a
recurring basis.
Cost of Services
|
|
Three Months
Ended April 30,
|
|
2008
over
2007
|
|
Six Months
Ended April 30,
|
|
2008
over
2007
|
|
|
|
2008
|
|
2007
|
|
Change
|
|
2008
|
|
2007
|
|
Change
|
|
|
|
($ in millions)
|
|
|
|
($ in millions)
|
|
|
|
Cost of services
|
|
$
|
29
|
|
$
|
25
|
|
16
|
%
|
$
|
57
|
|
$
|
50
|
|
14
|
%
|
As a percent of service revenue
|
|
72.5
|
%
|
69.4
|
%
|
|
|
74.0
|
%
|
68.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Services.
Cost of services includes cost of field service and support personnel, spare
parts consumed in service activities and administrative overhead allocations.
Cost of services in the three months ended April 30,
2008, were higher compared to the three months ended April 30, 2007. Cost of services as a percent of service
revenue increased by 3.1 percentage points, from 69.4% in the three months
ended April 30, 2007 to 72.5% in the three months ended April 30,
2008. This margin deterioration is
primarily due to higher material consumption and people related costs needed to
support our installed base. Our cost of
services included $0.3 million and $0.2 million of SFAS No. 123(R) share-based
compensation expense in the three months ended April 30, 2008 and 2007,
respectively.
Cost of services in the six months ended April 30,
2008, was higher in both absolute amount and as a percent of the related
revenue than the six months ended April 30, 2007. The increase in cost services in absolute
amount reflected increased costs associated with supporting a larger installed
base. Cost of services as a percent of
service revenue increased by 5.5 percentage points, from 68.5% in the six
months ended April 30, 2007 to 74.0% in the six months ended April 30,
2008. This margin deterioration is
primarily due to the fact that we are putting more service capability in place
for our upcoming product introductions.
In addition, we had higher material, freight and duty costs needed to
support our installed base, we experienced higher material consumption, and had
an unfavorable currency impact during the period. Our cost of services also included $0.5
million and $0.4 million of SFAS No. 123(R) share-based compensation
expense in the six months ended April 30, 2008 and 2007, respectively.
As a percent of net services revenue, cost of services
will vary depending on a variety of factors, including our ability to weather
price erosion, the reliability and quality of our products and our need to
maintain customer service and support centers worldwide.
Operating Expenses
Research and
Development Expenses
|
|
Three Months
Ended
April 30,
|
|
2008
over
2007
|
|
Six Months
Ended
April 30,
|
|
2008
over
2007
|
|
|
|
2008
|
|
2007
|
|
Change
|
|
2008
|
|
2007
|
|
Change
|
|
|
|
($ in millions)
|
|
Research and development
|
|
$
|
26
|
|
$
|
22
|
|
18.2
|
%
|
$
|
51
|
|
$
|
45
|
|
13.3
|
%
|
As a percent of net revenue
|
|
16.0
|
%
|
12.0
|
%
|
|
|
14.1
|
%
|
12.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27
Research and Development.
Research and development expense includes costs related to salaries and related
compensation expenses for research and development and engineering personnel;
materials used in research and development activities; outside contractor
expenses; depreciation of equipment used in research and development
activities; facilities and other overhead and support costs for the above; and
share-based compensation.
Research and development costs have generally been
expensed as incurred.
Research and development expense increased by $4
million in absolute dollars in the three months ended April 30, 2008
compared to the prior year period. This
increase was primarily due to higher expenses to support product development
activities for products planned for release during the next 6 to 12
months. Research and development expense
also included $0.5 million and $0.4 million of SFAS No. 123(R) share-based
compensation expense for the three months ended April 30, 2008 and 2007,
respectively. Research and development
costs as a percentage of revenue increased by 4.0 percentage points from 12.0%
in the three months ended April 30, 2007 to 16.0% in the three months
ended April 30, 2008. The increase in research and development expense as
a percent of revenue reflected the higher level of absolute spending combined
with the lower revenues in the current year period.
Research and development expense in the six months
ended April 30, 2008 increased in absolute dollars by $6 million compared
to the same time last year, primarily due to higher expenses to support new
product introductions planned for release during the next 6 to 12 months
partially offset by lower performance based compensation. Research and development as a percentage of
revenue increased by 1.2 percentage points from 12.9% in the six months ended April 30,
2007 to 14.1% in the six months ended April 30, 2008. This increase was primarily due to decreased
product shipments in the three months ended April 30, 2008. Research and development expense also
included $1 million and $0.9 million of SFAS No. 123(R) share-based
compensation expense for the six months ended April 30, 2008 and 2007,
respectively.
We believe that we need to maintain a significant
level of research and development spending in order to remain competitive and,
as a result, we expect our research and development expenses to only vary
modestly in dollar amount from period to period, and to fluctuate as a
percentage of revenue based on revenue levels.
Selling, General
and Administrative Expenses
|
|
Three Months
Ended
April 30,
|
|
2008
over
2007
|
|
Six Months
Ended
April 30,
|
|
2008
over
2007
|
|
|
|
2008
|
|
2007
|
|
Change
|
|
2008
|
|
2007
|
|
Change
|
|
|
|
($ in millions)
|
|
Selling, general and administrative
|
|
$
|
37
|
|
$
|
35
|
|
5.7
|
%
|
$
|
76
|
|
$
|
69
|
|
10.1
|
%
|
As a percent of net revenue
|
|
22.8
|
%
|
19.1
|
%
|
|
|
21.0
|
%
|
19.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, General and Administrative.
Selling, general and administrative expense includes costs related to salaries
and related expenses for sales, marketing and applications engineering
personnel; sales commissions paid to sales representatives and distributors;
outside contractor expenses; other sales and marketing program expenses; travel
and professional service expenses; salaries and related expenses for
administrative, finance, human resources, legal and executive personnel;
facility and other overhead and support costs for the above; and share-based
compensation.
Selling, general and administrative expense increased
by $2 million in absolute dollars in the three months ended April 30, 2008
compared to the prior year period primarily due to higher field selling costs
and higher share-based compensation expenses partially offset by savings
realized from decreased governance costs and lower sales and performance based
compensation. Selling, general and administrative
expense included approximately $2.9 million of share-based compensation
expenses in the three months ended April 30, 2008, compared to $2.2
million of such expenses for the three months ended April 30, 2007.
Selling, general and administrative expenses increased
10.1% to $76 million for the six months ended April 30, 2008, compared to
the six months ended April 30, 2007.
This increase was primarily due to higher field selling costs and higher
share-based compensation expenses offset slightly by lower sales and
performance based compensation. Selling,
general and administrative expenses included approximately $5.6 million of
share-based compensation expenses in the six months ended April 30, 2008,
compared to $4.8 million of such charges in the six months ended April 30,
2007.
28
Restructuring
Charges
In connection with the transfer of our manufacturing
activities to Flextronics in fiscal year 2006, we transferred a number of
employees to Flextronics. As part of
this arrangement, we had a potential obligation in the future of approximately
$2 million associated with the termination of these transferred employees from
the manufacturing facilities in Flextronics in Germany. We had deferred these costs and recognized
them ratably over the employees period of service through the employees
expected termination from Flextronics.
During the three months ended April 30, 2008, we determined that we
will no longer be liable to pay this obligation as we have decided to maintain
a specialized portion of our manufacturing activities in Germany. We recorded a $1.2 million benefit relating
to the reversal of these charges.
As of April 30, 2008, we had approximately $0.5
million in accrued restructuring liability relating to reductions that will
occur during the second half of 2008.
Separation Costs
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. These expenses totaled $1.3
million and $3.5 million in the three and six months ended April 30, 2007,
respectively, and were immaterial during the three and six months ended April 30,
2008.
Other Income, net
Interest and other income consists primarily of
interest earned on cash, cash equivalents and investments, gains and losses
from foreign exchange transactions, offset, as applicable by realized losses
and other-than-temporary impairments recorded with respect to our marketable
securities, if any. Interest and other
income was $3 million for the three months ended April 30, 2008, compared
to $4 million in the prior year period.
For the six months ended April 30, 2008, interest and other income
was $9 million, compared to $7 million in the comparable period in fiscal year
2007. The decrease in other income
during the three months ended April 30, 2008, was a result of a $1.5
million other-than-temporary impairment charge taken on our auction rate securities,
partially offset by income due to our higher cash, cash equivalents and
investment balances in the current year period.
Provision for
Income Taxes
For each of the three month periods ended April 30,
2008 and 2007, we recorded income tax expense of approximately $3 million. During the six months ended April 30,
2008 and 2007, we recorded income tax expense of approximately $6 million and
$5 million, respectively. The higher tax
expense in the six months ended April 30, 2008 is primarily due to a
higher pre-tax income.
Our effective tax rate varies based on a variety of
factors, including overall profitability, the geographical mix of income before
taxes and the related tax rates in the jurisdictions in which we operate,
completion of separation, restructuring and other one-time charges, as well as
discrete events, such as settlements of audits.
We may be subject to audits and examinations of our tax returns by tax
authorities in various jurisdictions, including the Internal Revenue
Service. We intend to regularly assess
the likelihood of adverse outcomes resulting from these examinations to
determine the adequacy of our provision for income taxes.
On November 1, 2007, we adopted FASB
Interpretation No. 48,
Accounting for
Uncertainty in Income Taxes
(FIN 48). This interpretation
clarifies the accounting for uncertainty in income taxes recognized in an
enterprises financial statements in accordance with FASB Statement No. 109,
Accounting for Income Taxes.
It
prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position as well as provides
guidance on de-recognition, classification, interest and penalties, accounting
in interim periods, disclosure and transition. The provision of FIN 48 is
effective for fiscal years beginning after December 15, 2006 and applies
to all tax positions upon initial adoption of this standard. Only tax
positions that meet the more-likely-than-not recognition threshold at the
effective date may be recognized or continue to be recognized upon adoption of
FIN 48. As a result of the adoption of FIN 48, we increased our
reserves for unrecognized tax benefits by $0.2 million and increased our
reserves for penalties by $0.2 million, for a total increase of $0.4 million,
which was accounted for as a cumulative adjustment to the beginning balance of
retained earnings. Additionally, we
reclassified $10 million from current income taxes and other taxes payable to
long-term taxes payable. At the adoption
date of November 1, 2007, we had $9.8 million of unrecognized tax benefits
which would reduce our income tax expense if recognized. As of April 30, 2008, we had $10.7
million of unrecognized tax benefits which would reduce our income tax expense
if recognized and $2.5 million which would decrease other intangible assets if
recognized. We estimate that there will
be no material changes in our unrecognized tax benefits in the next 12 months.
29
Our continuing practice is to recognize interest and
penalties related to income tax matters as a component of income tax
expense. We had approximately $0.6
million of accrued interest and penalties at the adoption date of November 1,
2007 and approximately $0.9 million of accrued interest and penalties as of April 30,
2008.
Although we file Singapore, U.S. federal, U.S. state
and foreign income tax returns, our three major tax jurisdictions are
Singapore, U.S. and Germany. Our 2006
and 2007 tax years remain subject to examination by the tax authorities in our
major tax jurisdictions. We are not currently under audit for any tax years.
Financial Condition
Liquidity and
Capital Resources
As of April 30, 2008, we had $242 million in cash
and cash equivalents, compared to $146 million as of October 31,
2007. This increase was primarily due to
cash proceeds from the sale of available for sale securities and cash generated
from our operations, partially offset by investments in other private companies
made during the six months ended April 30, 2008 including the acquisition
of Inovys.
Net Cash Provided by Operating
Activities
In the six months ended April 30, 2008, we
generated $67 million in cash from operating activities, compared to cash
provided by operating activities of $50 million in the six months ended April 30,
2007. The $67 million cash generation
during the six months ended April 30, 2008 was a result of $46 million of
net income, an $18 million reduction in receivables and $9 million increase in
other current and long-term assets and liabilities. Also, during the six months ended April 30,
2008, we had non-cash charges of $8 million from depreciation and amortization
expense, $5 million from gross inventory write-offs, $8 million of share-based
compensation costs, and $1.5 million from an other-than-temporary impairment on
marketable securities. The effect of
these charges was partially offset by an increase of $15 million in inventory
and decreases of $9 million in income and other taxes payable, $4 million in
deferred revenue, and $1 million in employee compensation and benefits.
In the six months ended April 30, 2007, we
generated $50 million in cash from operating activities. The $50 million cash generation during the
six months ended April 30, 2007 was a result of $35 million of net income,
$45 million reduction in receivables and a $7 million decrease in
inventory. Also, in the six months ended
April 30, 2007, we had non-cash charges of $5 million from inventory
write-offs, $7 million of share-based compensation costs, and $6 million in
depreciation and amortization expense.
These impacts were partially offset by decreases of $31 million in
payables, $14 million in income and other taxes payable, $5 million in deferred
revenue and $5 million in other current and long-term assets and liabilities.
Net
Cash Provided by
(Used in) Investing Activities
Net cash provided by investing activities in the six
months ended April 30, 2008 was $25 million, compared to $187 million
used in the six months ended April 30, 2007. The net cash generated was primarily related
to the net proceeds from the purchase and sales of available for sale
marketable securities of $57 million.
Our marketable securities include commercial paper, corporate bonds,
government securities and auction rate securities. Auction rate securities are securities that
are structured with interest rate reset periods of generally less than ninety
days but with contractual maturities that can be well in excess of ten
years. At the end of each interest rate
reset period, which occur every seven to thirty-five days, investors can buy,
sell, or continue to hold the securities at par. In the fourth quarter of fiscal year 2007,
certain of our auction rate securities experienced failed auctions due to sell
orders exceeding buy orders which occurred as a result of liquidity concerns
derived primarily from the mortgage and debt markets. In the first half of fiscal year 2008, we
continued to see liquidity issues in the market for auction rate
securities. Our auction rate securities
primarily consist of investments that are backed by pools of student loans
guaranteed by the U.S. Department of Education and other asset-backed
securities. We believe that the credit
quality of these securities remains high based on both the ratings of the
underlying securities and on the government and insurance provider
guarantees. We evaluate our investments
periodically for possible other-than-temporary impairment by reviewing factors
such as the length of time and extent to which fair value has been below cost
basis, the financial condition of the issuer and insurance guarantor, and our
ability and intent to hold the investment for a period of time which may be
sufficient for anticipated recovery of market value. Based on an analysis of other-than-temporary
impairment factors, at April 30, 2008 we recorded a temporary impairment
within accumulated other comprehensive loss of approximately $5 million (net of
tax of $1 million) and an other-than-temporary impairment within the
statement of operations of $1.5 million related to these auction rate
securities. Our marketable securities
portfolio as of April 30, 2008 was $212 million. The portfolio includes approximately
$93 million invested in auction rate
30
securities of which approximately $9.7 million have
been classified as short-term as they were redeemed by the issuer in May 2008. The interest rate reset auctions for the
majority of our portfolio have failed as of April 30, 2008. These securities have been in a loss position
for less than 12 months. The funds
associated with failed auctions will not be accessible to us until a successful
auction occurs, a buyer is found outside of the auction process, or the
underlying securities have matured or are called by the issuer. Given the recent disruptions in the credit
markets and the fact that the liquidity for these types of securities remains
uncertain, we have classified substantially all of our auction rate securities
that were not liquidated subsequent to April 30, 2008, as long-term assets
in our condensed consolidated balance sheet as our ability to liquidate such
securities in the next 12 months is uncertain.
Cash generated from our available for sale securities was partially
offset by cash paid for the acquisition of Inovys and other investments of $28
million, net of cash acquired.
Net cash used in investing activities in the six
months ended April 30, 2007 was $187 million. The $187 million net investment in the
six months ended April 30, 2007 primarily related to $297 million invested
in available for sale marketable securities and $7 million cash payments for
site-set-ups and leasehold improvements, partially offset by $117 million
proceeds from sales and maturities of available for sale marketable securities.
Net Cash Provided by Financing
Activities
Net cash provided by financing activities in the six
months ended April 30, 2008 was $4 million, compared to $5 million in the
six months ended April 30, 2007.
The $4 million net cash proceeds in the six months ended April 30,
2008 was comprised of approximately $1 million from the exercise of employee
stock options and approximately $3 million from contributions by participants
of our Purchase Plan, for which 155,030 shares were issued in the first quarter
of fiscal year 2008.
Net cash provided by financing activities in the six
months ended April 30, 2007 was $5 million. The $5 million net cash proceeds in the six
months ended April 30, 2007 was comprised of approximately $3 million from
the exercise of employee stock options and approximately $2 million from
contributions by participants of our Purchase Plan, for which 144,481 shares
were issued in the first quarter of fiscal year 2007.
Other
On November 27, 2007, our
board of directors approved the use of up to $150 million to repurchase up
to 10 percent of Verigys outstanding ordinary shares. On April 15, 2008, during our annual
general meeting of shareholders, our shareholders approved the share repurchase
program which provides our directors authority to acquire up to 10 percent, or
approximately 6 million shares, of Verigys outstanding ordinary shares.
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 $371 million, together with
cash generated from operations, will be sufficient to satisfy our working
capital, capital expenditure and other liquidity needs at least through the
next twelve months. We may require or
choose to obtain debt or equity financing in the future. We cannot assure you that additional
financing, if needed, will be available on favorable terms or at all.
Contractual
Obligations and Commitments
Contractual Obligations
Our cash flows from operations are dependent on a
number of factors, including fluctuations in our operating results, accounts
receivable collections, inventory management and the timing of tax and other
payments. As a result, the impact of
contractual obligations on our liquidity and capital resources in future
periods should be analyzed in conjunction with such factors.
31
The following table summarizes our contractual
obligations at April 30, 2008:
|
|
|
|
Less than
|
|
One to three
|
|
Three to five
|
|
More than
|
|
(in millions)
|
|
Total
|
|
one year
|
|
years
|
|
years
|
|
five years
|
|
Operating leases
|
|
$
|
58
|
|
$
|
13
|
|
$
|
17
|
|
$
|
11
|
|
$
|
17
|
|
Commitments to contract manufacturers and suppliers
|
|
100
|
|
100
|
|
|
|
|
|
|
|
Other purchase commitments
|
|
30
|
|
30
|
|
|
|
|
|
|
|
Long-term liabilities
|
|
47
|
|
|
|
11
|
|
36
|
|
|
|
Total
|
|
$
|
235
|
|
$
|
143
|
|
$
|
28
|
|
$
|
47
|
|
$
|
17
|
|
The table above excludes
approximately $10 million of unrecognized tax benefits as we are unable to make
reasonably reliable estimates of the period of cash settlement with the
respective taxing authority.
Operating leases.
Commitments under operating leases relate primarily to leasehold property. We have long-term lease arrangements for our
corporate headquarters in Singapore, our U.S. headquarters in Cupertino,
California, and our Boeblingen, Germany facility, currently the site of our
93000 Series platform development.
We also have long-term lease arrangements for our ASIC development
office in Colorado, as well as other sales and support facilities around the
world.
Commitments to contract
manufacturers and suppliers.
We purchase components from a variety of suppliers and historically we have
used several contract manufacturers to provide manufacturing services for our
products. During the normal course of
business, we issue purchase orders with estimates of our requirements several
months ahead of the delivery dates.
However, our agreements with these suppliers usually allow us the option
to cancel, reschedule, or adjust our requirements based on our business needs
prior to firm orders being placed.
Typically, purchase orders outstanding with delivery dates within
30 days are non-cancelable.
Therefore, only approximately 23% 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 $6 million as of April 30, 2008, and $5 million as of October 31, 2007.
These amounts are included in other
current liabilities in our condensed consolidated balance sheets at April 30,
2008 and October 31, 2007.
Other purchase commitments.
Other purchase commitments relate primarily to contracts with professional
services suppliers, which include third-party consultants for legal, finance,
engineering and other administrative services.
With the exception of our IT service providers, our purchase commitments
with professional service providers are typically cancelable with a notice of
90 days or less without significant penalties.
The agreement with our primary IT service provider requires a
notification period of 120 days and includes a termination charge of up to
approximately $1 million in order to cancel our long-term contract.
Long-term liabilities.
Long-term liabilities relate primarily
to $36 million of defined benefit and defined contribution retirement
obligations, $10 million of extended warranty and deferred revenue obligations,
$10 in income taxes payable and approximately $1 million of other long-term
liabilities. Upon our separation from
Agilent, the defined benefit plans for our employees in Germany, Korea, Taiwan,
France and Italy were transferred to us.
With the exception of Italy and France, which involve relatively
insignificant amounts, Agilent completed the funding of these transferred plans
based on 100% of the accumulated benefit obligation level as of the separation
date. Verigy made approximately $2
million of contributions to the retirement plans during fiscal year 2007. We expect
expenses of approximately $7 million in fiscal year
2008 for the retirement plans and we plan on making additional contributions
during the second half of fiscal year 2008.
Off-Balance Sheet Arrangements
We had no material off-balance sheet arrangements as
of April 30, 2008.
ITEM 3. QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Foreign Currency Risk
With the exception of Japan, where products are sold
primarily in Yen, our products are generally sold in U.S. Dollars. Services and support sales are sold primarily
in local currency when sold after the initial product sale. As such, our revenue, costs and expenses,
32
and monetary assets and liabilities are somewhat
exposed to changes in foreign currency exchange rates as a result of our global
operating and financing activities.
We have implemented a
hedging strategy that is intended to mitigate our currency exposures by
entering into foreign currency forward contracts that have maturities of in
excess of one month. These contracts are
used to reduce our risk associated with exchange rate movements, as gains and
losses on these contracts are intended to mitigate the effect of exchange rate
fluctuations on certain foreign currency denominated revenues, costs and
eventual cash flows. The effective
portion of the foreign exchange gain (loss) is reported as a component of
accumulated other comprehensive income (loss) in shareholders equity and is
reclassified into the statement of operations when the hedged transaction
affects earnings. If the transaction being hedged fails to occur, or if a
portion of any derivative is deemed to be ineffective, we will recognize the
gain (loss) on the associated financial instrument in other income, net in the
statement of operations. During the three months ended April 30, 2008, we
recorded approximately $1 million in unrealized gains in accumulated other
comprehensive loss relating to cash flow hedges.
We do not hedge all of our
foreign currency exposures and there can be no assurances that our efforts will
adequately protect us against the risks associated with foreign currency
fluctuations. 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 April 30, 2008 and October 31,
2007, the analysis indicated that these hypothetical market movements would not
have a material effect on our condensed consolidated financial position,
results of operations or cash flows.
Investment and Interest Rate Risk
We account for our investment instruments in
accordance with SFAS No. 115,
Accounting
for Investments in Debt and Equity Securities
. All of our cash and cash equivalents and
marketable securities are treated as available for sale under SFAS
No.115. Our marketable securities
include commercial paper, corporate bonds, government securities and auction
rate securities.
Our cash equivalents and our portfolio of marketable
securities are subject to market risk due to changes in interest rates. Fixed rate interest securities may have their
market value adversely impacted due to a rise in interest rates, while floating
rate securities may produce less income than expected if interest rates
fall. Due in part to these factors, our
future investment income may fall short of expectation due to changes in
interest rates or we may suffer losses in principal if we are forced to sell
securities that decline in the market value due to changes in interest
rates. However, because we classify our
debt securities as available for sale, no gains or losses are recognized due
to changes in interest rates unless such securities are sold prior to maturity
or declines in fair value are determined to be other-than-temporary. Should interest rates fluctuate by
10 percent, the value of our marketable securities would not have a
significant impact as of April 30, 2008 and our interest income would have
changed by approximately $0.9 million for the six months ended April 30,
2008.
Auction rate securities are securities that are
structured with interest rate reset periods of generally less than ninety days
but with contractual maturities that can be well in excess of ten years. At the end of each interest rate reset
period, which occur every seven to thirty-five days, investors can buy, sell,
or continue to hold the securities at par.
In the fourth quarter of fiscal year 2007, certain of our auction rate
securities experienced failed auctions due to sell orders exceeding buy orders
which occurred as a result of liquidity concerns derived primarily from the
mortgage and debt markets. In the first
half of fiscal year 2008, we continued to see liquidity issues in the market
for auction rate securities. Our auction
rate securities primarily consist of investments that are backed by pools of
student loans guaranteed by the U.S. Department of Education and other
asset-backed securities. We believe that
the credit quality of these securities remains high based on both the ratings
of the underlying securities and on the government and insurance provider
guarantees. We evaluate our investments
periodically for possible other-than-temporary impairment by reviewing factors
such as the length of time and extent to which fair value has been below cost
basis, the financial condition of the issuer and insurance guarantor, and our
ability and intent to hold the investment for a period of time which may be
sufficient for anticipated recovery of market value. Based on an analysis of other-than-temporary
impairment factors, at April 30, 2008 we recorded a temporary impairment
within accumulated other comprehensive loss of approximately $5 million (net of
tax of $1 million) and an other-than-temporary impairment within the
statement of operations of $1.5 million related to these auction rate
securities. Our marketable securities
portfolio as of April 30, 2008 was $212 million. The portfolio includes approximately
$93 million invested in auction rate securities of which approximately
$9.7 million have been classified as short-term as they were redeemed by the
issuer in May 2008. The interest
rate reset auctions for the majority of our portfolio have failed as of April 30,
2008. These securities have been in a
loss position for less than 12 months.
The funds associated with failed auctions will not be accessible to us
until a successful auction occurs, a buyer is found outside of the auction
process, or the underlying securities have matured or are called by the
issuer. Given the recent disruptions in
the credit markets and the fact that the
33
liquidity for these types of securities remains
uncertain, we have classified substantially all of our auction rate securities
that were not liquidated subsequent to April 30, 2008, as long-term assets
in our condensed consolidated balance sheet as our ability to liquidate such
securities in the next 12 months is uncertain.
Our marketable securities are reported at fair value
with the related unrealized gains and losses (net of tax) included in
accumulated other comprehensive income (loss), a component of shareholders
equity. Realized gains or losses on the
sale of marketable securities are determined using the specific-identification
method and were immaterial for the three and six months ended April 30,
2008. We record an impairment charge to
the extent that the carrying value of our available for sale securities exceeds
the estimated fair market value of the securities and the decline in value is
determined to be other-than-temporary.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation
of Disclosure Controls and Procedures
Our management has
evaluated, under the supervision and with the participation of our Chief
Executive Officer and Chief Financial Officer, the effectiveness of our
disclosure controls and procedures as of April 30, 2008, pursuant to and
as required by Rule 13a-15(b) under the Securities Exchange Act of
1934 (the Exchange Act). Based on that
evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that, as of April 30, 2008, the companys disclosure controls
and procedures, as defined by Rule 13a-15(b) under the Exchange Act,
were effective and designed to ensure that (i) information required to be
disclosed in the companys reports filed under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the SECs
rules and forms, and (ii) information is accumulated and communicated
to management, including the Chief Executive Officer and Chief Financial
Officer, as appropriate to allow timely decisions regarding required
disclosures. Based on their evaluation,
Verigys Chief Executive Officer and Chief Financial Officer have concluded
that our disclosure controls and procedures are effective as of the end April 30,
2008.
Inherent
Limitations on Effectiveness of Controls
Because of its inherent
limitations, disclosure controls and procedures and internal control over
financial reporting may not prevent or detect misstatements. In addition, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions or that the degree of
compliance with the policies or procedures may deteriorate. Management necessarily applied its judgment
in assessing the benefits of controls relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within the company have been
detected. The design of any system of
controls is based in part upon certain assumptions about the likelihood of
future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions, regardless of
how remote.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over
financial reporting during the quarter ended April 30, 2008, that have
materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
PART II OTHER INFORMATION
ITEM
1. LEGAL PROCEEDINGS
From time to time we are subject to legal proceedings,
claims, and litigation arising in the ordinary course of business.
ITEM 1A. RISK FACTORS
Set forth below and elsewhere in this Quarterly Report on
Form 10-Q and in other documents we file with the SEC, are risks and uncertainties
that could cause actual results to differ materially from the results expressed
or implied by the forward-looking statements contained in this Quarterly
Report. You should carefully consider the risks described below and the
other information in this report before investing in our ordinary shares. Our
business could be seriously harmed by any of these risks. The trading price of
our ordinary shares could decline due to any of these risks, and you may lose
all or part of your investment. The following risk factors, Our
dependence on contract manufacturers may prevent us from delivering our
products on a timely basis, Our business and operating results could be
harmed by the highly cyclical nature of the semiconductor industry, The loss
of, or significant reduction in the number of sales to, our significant
customers could materially harm our business,
We face
substantial
34
competition which, among other things, may lead to
price pressure and adversely affect our sales and revenue,
Our
effective tax rate may vary significantly from period to period, and we could
owe significant taxes even during periods when we experience low operating
profit or operating losses, We sell our products and services worldwide, and
our business is subject to risks inherent in conducting business activities in
geographies outside of the United States and Funds associated with certain of
our auction rate securities may not be accessible for in excess of 12 months
and our auction rate securities may experience an other-than-temporary decline
in value, which would adversely affect our income have been updated from the
version of these risk factors set forth in our Annual Report on Form 10-K
for the year ended October 31, 2007.
A description of the risk
factors associated with our business is set forth below. You should carefully
consider the risks described below and the other information in this report
before investing in our ordinary shares. Our business could be seriously harmed
by any of these risks. The trading price of our ordinary shares could decline
due to any of these risks, and you may lose all or part of your investment.
Risks
Relating to Our Business
Our dependence on sole source suppliers may prevent us from
delivering our products on a timely basis.
We rely on sole source
suppliers, some of whom are relatively small in size, for many of the
components we use in our products, including custom integrated circuits, relays
and other electronic components. In the past, we experienced, and in the future
may experience, delays in shipping our products due to our dependence on sole
source suppliers. Another sole source supplier substantially extended the order
lead times for the components we rely upon, and those components were difficult
to source in the market. While neither of these situations had a material
impact on our results, any future failure of other sole source suppliers to
meet our requirements in a timely manner could impair our ability to ship
products and to realize the related revenues when anticipated, which could
adversely affect our business and operating results.
Our dependence on contract manufacturers may prevent us from
delivering our products on a timely basis.
We rely entirely on
contract manufacturers, which gives us less control over the manufacturing
process and exposes us to significant risks, especially inadequate capacity,
late delivery, substandard quality and high costs. Moreover, because our
products are very complex to manufacture, transitioning manufacturing
activities from one location to another, or from one manufacturing partner to
another, is complicated. Flextronics commenced production of our V5000 series
products in China in July 2006 and assumed our manufacturing activities
for the 93000 Series products in Germany in June 2006. We expect to
complete the transition of our volume manufacturing activities related to our
93000 Series platform to Flextronics in China by the end of fiscal year
2008. We cannot be certain that existing
or future contract manufacturers will be able to manufacture our products on a
timely and cost-effective basis, or to our quality and performance
specifications. If our contract manufacturers are unable to meet our manufacturing
requirements in a timely manner, whether as a result of transitional issues or
otherwise, our ability to ship products and to realize the related revenues
when anticipated could be materially affected.
Our
quarterly operating results may fluctuate significantly from period to period,
and this may cause our share price to decline.
In the past, we have
experienced, and in the future we expect to continue to experience,
fluctuations in revenue and operating results from quarter to quarter for a
variety of reasons, including the risk factors described in this report. As a
result of these and other risks, we believe that quarter-to-quarter comparisons
of our revenue and operating results may not be meaningful and that these
comparisons may not be an accurate indicator of our future performance. In
addition, sales of a relatively limited number of our test systems account for
a substantial portion of our net revenue in any particular quarter. In
contrast, our costs are relatively fixed in the short-term. Thus, changes in
the timing or terms of a small number of transactions could disproportionately
affect our operating results in any particular quarter. Moreover, our operating
results in one or more future quarters may fail to meet the expectations of
securities analysts or investors. If this occurs, we would expect to experience
an immediate and significant decline in the trading price of our ordinary
shares.
Our business and operating results could be harmed by the
highly cyclical nature of the semiconductor industry.
Our business and
operating results depend in significant part upon capital expenditures of
semiconductor designers and manufacturers, which in turn depend upon the
current and anticipated market demand for products incorporating semiconductors
from these designers and manufacturers. Historically, the semiconductor
industry has been highly cyclical with recurring periods of diminished product
demand. During these periods, semiconductor designers and manufacturers, facing
reduced demand for their products, have significantly reduced their capital and
other expenditures, including expenditures for semiconductor test equipment and
services such as those we offer. These periods of reduced product and services
demand have been characterized by excessive inventory levels,
35
cancellation of customer
orders and erosion of selling prices, as well as excessive semiconductor test
capacity. As a consequence, during these periods, we have experienced
significant reductions in customer orders for new test equipment, fewer
upgrades to existing test equipment and less demand for our test services. We
have also experienced order cancellations, delays in commitments and delays in
collecting accounts receivable. Furthermore, because we have a high proportion
of customers that are subcontractors, which during market downturns tend to
reduce or cancel orders for new test systems and test services more quickly and
dramatically than other customers, any downturn may cause a quicker and more
significant adverse impact on our business than on the broader semiconductor
industry. In addition, although a decline in orders for semiconductor capital
equipment, including test equipment, may accompany or precede the timing of a
decline in the semiconductor market as a whole, any recovery in spending for
semiconductor capital equipment, including test equipment, may lag any recovery
by the semiconductor industry. We have
experienced just such a cyclical downturn in our memory business during fiscal year
2008, with revenue for our memory test products declining to $6 million in the
three months ended April 30, 2008, a 92.3% decrease from the $78 million
recorded in the prior year period. These
factors have caused our customers to delay test system orders and, in one case,
to delay delivery of systems ordered in our first quarter of fiscal year
2008. While this steep decline was
partially offset by strength in our SOC business, we nonetheless remain subject
to substantial cyclical fluctuations in revenues and orders.
We have
a limited ability to quickly or significantly reduce our costs, which makes us
particularly vulnerable to the highly cyclical nature of the semiconductor
industry.
Historically, downturns
in the semiconductor industry have affected the test equipment and services
market more significantly than the overall semiconductor industry. A
significant portion of our overall costs are fixed. Because a high proportion
of our costs are fixed, we have a limited ability to reduce expenses and
manufacturing inventory purchases quickly in response to decreases in orders
and revenues. Moreover, to remain competitive, even during downturns in the
semiconductor industry or generally, we are required to maintain significant
fixed costs for research and development. As a consequence, in a downturn, we
may not be able to reduce our costs quickly, or by a sufficient amount, and our
financial performance may suffer.
The
market for semiconductor test equipment and services is highly concentrated,
and we have limited opportunities to sell our test equipment and services.
The semiconductor
industry is highly concentrated in that a small number of semiconductor
designers and manufacturers and subcontractors account for a substantial
portion of the purchases of semiconductor test equipment and services
generally, including our test equipment and services. Consolidation in the
semiconductor industry may increase this concentration. Accordingly, we expect
that sales of our products will be concentrated with a limited number of large
customers for the foreseeable future. We believe that our financial results
will depend in significant part on our success in establishing and maintaining
relationships with, and effecting substantial sales to, these potential
customers. Even if we establish these relationships, our financial results will
depend in large part on these customers sales and business results.
The loss of, or a significant reduction in the number of
sales to, our significant customers could materially harm our business.
For the three months
ended April 30, 2008, revenue from our top ten customers accounted for
approximately 59.5% of our total net revenue, with one customer accounting for
more than 10% of our total net revenue.
In comparison, for the three months ended April 30, 2007, revenue
from our top ten customers accounted for approximately 70.1% of our total net
revenue, with two of our customers each accounting for more than 10% of our
total net revenue. For the six months
ended April 30, 2008, revenue from our top ten customers accounted for
approximately 58.9% of our total net revenue, with one customer accounting for
more than 10% of our total net revenue.
In comparison, for the six months ended April 30, 2007, revenue
from our top ten customers accounted for approximately 67.5% of our total net
revenue, with two customers accounting for more than 10% of our total net
revenue.
Our relationships with
our significant customers, who frequently evaluate competitive products prior
to placing new orders, could be adversely affected by a number of factors,
including:
·
a decision by our customers to purchase
test equipment and services from our competitors;
·
a decision by our customers to pursue the
development and implementation of self-testing integrated circuits or other
strategies that reduce their need for our new or enhanced test equipment;
·
the loss of market share by our customers
in the markets in which they operate;
36
·
the shift by our IDM customers to fabless
semiconductor models;
·
our ability to keep pace with changes in
semiconductor technology;
·
our ability to maintain quality levels of
our equipment and services that meet customer expectations;
·
our ability to produce and deliver
sufficient quantities of our test equipment in a timely manner; and
·
our ability to provide quality customer
service and support.
Generally, our
customers may cancel orders with little or no penalty. Our business and
operating results could be materially adversely affected by the loss of, or any
reduction in orders by, any of our significant customers, particularly if we
are unable to replace that lost revenue with additional orders from new or
existing customers.
If we do
not maintain and expand existing customer relationships and establish new
customer relationships, our ability to generate revenue growth will be
adversely affected.
Our ability to increase
our sales will depend in large part upon our ability to obtain orders for new
test systems, enhancements for existing test systems and services from our
existing and new customers. Maintaining and expanding our existing
relationships and establishing new ones can require substantial investment
without any assurance from customers that they will place significant orders.
Moreover, if we are unable to provide new test systems, enhancements for
existing test systems and services to our customers in a timely fashion or in
sufficient quantities, our business will be harmed. In the past we have
experienced, and in our industry it is not unusual to experience, difficulty in
delivering new test equipment, as well as product enhancements and upgrades.
When we encountered difficulties in the past, our customer relationships and
our ability to generate additional revenue from customers were harmed. Our
inability to meet the demands of customers would severely damage our
reputation, which would make it more difficult for us to sell test equipment,
enhancements and services to existing, as well as new, customers and would
adversely affect our ability to generate revenue.
In addition, we face
significant obstacles in establishing new customer relationships. It is
difficult for us to establish relationships with new customers because such
companies may have existing relationships with our competitors, may be
unfamiliar with our product and service offerings, may have an installed base
of test equipment sufficient for their current needs or may not have the
resources necessary to transition to, and train their employees on, our test
equipment. Even if we do succeed in establishing new relationships, these new
customers may nonetheless continue to favor our competitors, as our competitors
may have had longer relationships with these customers or may maintain a larger
installed base of their competing test equipment in the facilities of new
customers and only purchase limited quantities from us. In addition, we could
face difficulties in our efforts to develop new customer relationships abroad
as a result of buying practices that may favor local competitors or non-local
competitors with a larger presence in local economies than we have. As a
result, we may be forced to partner with local companies in order to compete
for business and such arrangements, if available, may not be achieved on
economically favorable terms, which could negatively affect our financial
performance.
Failure
to accurately estimate our customers demand and plan the production of our new
and existing products could adversely affect our inventory levels and our
income.
Given the cyclical nature
of the semiconductor industry, we cannot reliably forecast the timing and size
of our customers orders. In order to meet anticipated demand, we must order
components and build some inventory before we actually receive purchase orders.
Our results could be harmed if we do not accurately estimate our customers
product demands and are unable to adjust our purchases with market
fluctuations, including those caused by the cyclical nature of the
semiconductor industry. During a market upturn, our results could be materially
and adversely affected if we cannot increase our purchases of components, parts
and services quickly enough to meet increasing demand for our products, and
during a market downturn, we could have excess inventory that we would not be
able to sell, likely resulting in inventory write-offs. Either of these results
could have a material adverse effect on our business, financial condition and
results of operations.
Further, if we do not
successfully manage the introduction of our new products and estimate customer
demand for such products, our ability to sell existing inventory may be
adversely affected. If demand for our new products exceeds our projections, we
might have insufficient quantities of products for sale to our customers, which
could cause us to miss opportunities to increase revenues during market
upturns. If our projections exceed demand for our new products or if some of
our customers cancel their current orders for our
37
old products in
anticipation of our new products, we may have excess inventories of our new
products and excess obsolete inventories, which could result in inventory
write-offs that would adversely affect our financial performance.
Failure
to accurately predict our customers varying ordering patterns could adversely
affect our inventory levels and our income.
Our customers tend to
make large purchases of our products on an inconsistent basis, rather than
smaller purchases on a consistent basis, which makes it difficult to predict
the timing of customer orders. Failure to accurately predict our customers
varying ordering patterns may cause us to experience insufficient or excess
product inventories. If our competitors are more successful than us at timing
new product introductions and inventory levels to customers ordering patterns,
we may lose important sales opportunities and our business and results of
operations may be harmed.
Existing customers may be unwilling to bear expenses
associated with transitioning to new and enhanced products.
In order to grow our
business, we need to sell enhancements and upgrades for our existing test
equipment, in addition to selling new test equipment. Certain customers may be
unwilling, or unable, to bear the costs of implementing enhancements and upgrades
to our test equipment platforms, particularly during semiconductor industry
downturns. As a result, it may be difficult to market and sell enhancements and
upgrades to customers. In addition, as we introduce new enhancements and
upgrades, we cannot predict with certainty if and when our customers will
transition to those enhancements or upgrades. Any delay in or failure of our
customers to transition to new enhancements or upgrades could result in excess
inventories or our new or enhanced products, which could result in inventory
write-offs that would adversely affect our financial performance.
If we do
not introduce new test equipment platforms and upgrade existing test equipment
platforms in a timely manner, and if we do not offer comprehensive and
competitive services for our test equipment platforms, our test equipment and
services will become obsolete, we will lose existing customers and our
operating results will suffer.
The semiconductor design
and manufacturing industry into which we sell our test equipment is
characterized by rapid technological changes, frequent new product
introductions, including upgrades to existing test equipment, and evolving
industry standards. The success of our new or upgraded test equipment offerings
will depend on several factors, including our ability to:
·
properly identify customer needs and
anticipate technological advances and industry trends, such as the
disaggregation of the traditional IDM semiconductor supply chain into fabless
design companies, foundries and packaging, assembly and test providers;
·
develop and commercialize new and
enhanced technologies and applications that meet our customers evolving
performance requirements in a timely manner;
·
develop and deliver enhancements and
related services for our current test equipment that are capable of satisfying
our customers specific test requirements; and
·
introduce and promote market acceptance
of new test equipment platforms, such as our V5500 Series system for
memory testing.
In many cases, our test
equipment and services are used by our customers to develop, test and
manufacture their new products. We therefore must anticipate industry trends
and develop new test equipment platforms or upgrade existing test equipment
platforms in advance of the commercialization of our customers products. In
addition, new methods of testing integrated circuits, such as self-testing
integrated circuits, may be developed which would render our test equipment
uncompetitive or obsolete if we failed to adopt and incorporate these new
methods into our new or existing test equipment platforms. Developing new test
equipment platforms and upgrading existing test equipment platforms requires a
substantial investment before we can determine the commercial viability of the
new or upgraded platform.
As our customers product
requirements are diverse and subject to frequent change, we will also need to
ensure that we have an adequate mix of products that meet our customers
varying requirements. If we fail to adequately predict our customers needs and
technological advances, we may invest heavily in research and development of
test equipment that does not lead to significant revenue, or we may fail to
invest in technology necessary to meet changing customer demands. Without the
timely introduction of
38
new or upgraded test
equipment that reflects technological advances, our test equipment and services
will likely become obsolete, we may have difficulty retaining customers and our
revenue and operating results would suffer.
Our long
and variable sales cycle depends upon factors outside of our control, could
cause us to expend significant time and resources prior to our ever earning
associated revenues and may therefore cause fluctuations in our operating
results.
Sales of our
semiconductor test equipment and services depend in significant part upon
semiconductor designers and manufacturers upgrading existing manufacturing
equipment to accommodate the requirements of new semiconductor devices and
expanding existing, and adding new, manufacturing facilities. As a result, our
sales are subject to a variety of factors we cannot control, including:
·
the complexity of our customers
fabrication processes, which impacts the number of our test systems and amount
of our product enhancements and upgrades our customers require;
·
the willingness of our customers to adopt
new or upgraded test equipment platforms;
·
the internal technical capabilities and
sophistication of our customers, which impacts their need for our test
services; and
·
the capital expenditures of our
customers.
The decision to purchase
our equipment and services generally involves a significant commitment of
capital. As a result, our test equipment has lengthy and variable sales cycles
during which we may expend substantial funds and management effort to secure a
sale prior to receiving any commitment from a customer to purchase our test
equipment or services. Prior to completing sales to our customers, we are often
subject to a number of significant risks, including the risk that our
competitors may compete for the sale or that the customer may change its
technological requirements. Our business, financial condition and results of
operations may be materially adversely affected by our long and variable sales
cycle and the uncertainty associated with expending substantial funds and
effort with no guarantee that sales will be made.
Test
systems that contain defects that harm our customers could damage our
reputation and cause us to lose customers and revenue.
Our test equipment is
highly complex and employs advanced technologies. The use of complex technology
in our test equipment increases the likelihood that we could experience design,
performance or manufacturing problems. If any of our products have defects or
reliability or quality problems, we may, in some circumstances, be exposed to
liability, our reputation could be damaged significantly and customers might be
reluctant to buy our products, which could result in a decline in revenues, an
increase in product returns and the loss of existing customers and the failure
to attract new customers.
We face
substantial competition which, among other things, may lead to price pressure
and adversely affect our sales and revenue.
We face substantial
competition throughout the world in each of our product areas. Our most
significant competitors historically have included Advantest Corporation,
Credence Systems Corporation, LTX Corporation, Teradyne, Inc. and Yokogawa
Electric Corporation. Some of our competitors have substantially greater
financial resources, broader product offerings, more extensive engineering,
manufacturing, marketing and customer support capabilities or a greater
presence in certain countries than we do. We may have less leverage with
component vendors than some of our competitors. Also, some of our competitors
have greater resources and may be more willing or able than we are to put
capital at risk to win business. Price reductions by our competitors may force
us to lower our prices. We also expect our current competitors to continue to
improve the performance of their current products and to introduce new
products, technologies or services that could adversely affect sales of our
current and future test equipment and services. Additionally, current and
future competitors may introduce testing technologies, equipment and services,
which may in turn reduce the value of our own test equipment and services. Any
of these circumstances may limit our opportunities for growth and negatively
impact our financial performance.
We may face competition from Agilent in the future.
Pursuant to the
intellectual property matters agreement between us and Agilent in connection
with our separation from Agilent, except as described below, until October 31,
2009, three years after the date on which Agilent distributed to its
stockholders all of our ordinary shares that it held, Agilent agreed not to
develop, manufacture, distribute, support or service automated semiconductor
test
39
systems for providing
high-volume functional test of integrated circuits (ICs) (including memory
and high-speed memory devices and SOCs) or SIPs, or components for such
products. However, during this three-year period, Agilent may compete with us
with respect to:
·
products (other than automated
semiconductor test systems for high-volume functional test) for providing
functional test of ICs or SIPs, whether or not including parametric test (the
testing of selected parameters of a device or group of devices to identify
errors or flaws), design verification or engineering characterization
capabilities;
·
automated semiconductor test development
systems (including hardware and software) that are intended to enable
development of test programs and protocols for use in high-volume functional
test of ICs or SIPs, whether or not such development test systems themselves
are capable of performing such high-volume functional test; and
·
products (other than automated
semiconductor test systems for high-volume functional test) for providing
parametric test, design verification, engineering characterization or
functional test of: (i) wireless communications devices, such as cellular
telephones or wireless networking products, whether in packaged device or
module form, and whether or not implemented as an IC or SIP; (ii) modules
(such as RF front-end modules) containing one or more ICs connected with other
active or passive devices; and (iii) RF and higher frequency (e.g.,
microwave and optical) devices and components such as oscillators, mixers,
amplifiers and 3-port devices, to the extent that such devices or components
are in the form of an IC or SIP.
While none of the product
types for which Agilent reserved the right to compete with us has provided
material revenue to us in the past, we can provide no assurance that the
limitations contained in the intellectual property matters agreement, which was
entered into in the context of a parent-subsidiary relationship and may be less
favorable to us than if it had been negotiated between unaffiliated third
parties, will be effective at protecting us from competition from Agilent.
In addition, the
intellectual property matters agreement permits Agilent to fulfill its
obligations under contracts in existence as of March 1, 2006, even though
fulfilling such obligations would otherwise have been precluded during the
non-competition period and even if fulfilling such obligations would result in
Agilent competing with us. This exception allows Agilent to fulfill its
obligations to a semiconductor manufacturer pursuant to which Agilent develops
and sells components to the manufacturer for use in the manufacturers
semiconductor test systems purchased from a competitor of Verigy. While we do
not believe that Agilents fulfillment of these obligations will have a
material effect on our business or prospects, we may in the future be less
successful at selling test systems to this semiconductor manufacturer than
would have been the case were the manufacturer not able to combine products
from Agilent with the test systems of our competitor.
Although, under the
intellectual property matters agreement, Agilent transferred all of the
intellectual property rights Agilent held that relate exclusively to our
products to us, Agilent retained and only licensed to us the intellectual
property rights to underlying technologies used in both our products and the
products of Agilent. Under the agreement, Agilent remains free to use the
retained underlying technologies without restriction (other than as described
above with respect to the three-year non-compete period).
After October 31,
2009, Agilent will be free to compete with any portion or all of our business
without restriction, and in doing so will be free to use the retained
underlying technologies. Agilent will not be permitted to use the intellectual
property rights transferred to us, and licensed from us back to Agilent, to
compete with us with respect to our core business of developing, manufacturing,
selling and supporting automated semiconductor test systems for high-volume
functional test of ICs or SIPs. Agilent will, however, be able to use such
intellectual property rights to develop and sell components for such systems,
including systems developed and sold by us as well as those developed and sold
by our competitors. While selling components has not represented a material
portion of our business in the past and is not expected to be an area of focus
for the near future, our business could be adversely affected if systems
offered by our competitors become more competitive as a result of Agilent
supplying components for our competitors systems or if, by buying components
from Agilent, our customers are able to delay or bypass altogether purchasing
newer systems from us.
Competition from Agilent
during or after the three-year non-compete period described above or other
actions taken by Agilent that create real or perceived competition with us,
could harm our business and operating results.
Third
parties may compete with us by using intellectual property that Agilent
licensed to us under the intellectual property matters agreement.
Under the intellectual
property matters agreement, Agilent retained and only licensed to us the
intellectual property rights to underlying technologies used in both our
products and the products of Agilent. Under the agreement, Agilent remains free
to license
40
the intellectual property rights to the underlying
technologies to any party, including our competitors. Any unaffiliated third
party that is licensed to use such retained intellectual property would not be
subject to the non-competition provisions of the intellectual property matters
agreement and could compete with us at any time using the underlying
technologies. The intellectual property that Agilent retained and that can be
licensed in this manner does not relate solely or primarily to one or more of our
products, or groups of products, rather, the intellectual property that Agilent
licensed to us is generally used broadly across our entire product portfolio.
Competition by third parties using the underlying technologies retained by
Agilent could harm our business and operating results.
Third parties may claim we are
infringing their intellectual property, and we could suffer significant
litigation or licensing expenses or be prevented from selling our products or
services.
Our industry has been and continues to be
characterized by uncertain and conflicting intellectual property claims and
vigorous protection and pursuit of these rights. As a result, third parties may
claim that we are infringing their intellectual property rights, and we may be
unaware of intellectual property rights of others that may cover some of our
technology, products and services. Any litigation regarding patents or other
intellectual property could be costly and time-consuming, and divert our
management and key personnel from our business operations. The complexity of
the technology involved and the uncertainty of intellectual property litigation
increase these risks. Claims of intellectual property infringement might also
require us to enter into costly royalty or license agreements. However, we may
not be able to obtain royalty or license agreements on terms acceptable to us,
or at all. We also may be subject to significant damages or injunctions against
development and sale of certain of our products and services.
In addition, there may be third parties who have
refrained from asserting intellectual property infringement claims against our
products while we were a wholly owned subsidiary of Agilent that elect to
pursue such claims against us now that our separation from Agilent is complete
because we no longer have the benefit of being able to counterclaim based on
Agilents patent portfolio, and we are no longer able to provide licenses of
Agilents patent portfolio in order to resolve such claims.
Third parties may infringe our
intellectual property, and we may expend significant resources enforcing our
rights or suffer competitive injury.
Our success depends in large part on our proprietary
technology. We rely on a combination of patents, copyrights, trademarks, trade
secrets, confidentiality provisions and licensing arrangements to establish and
protect our proprietary rights. If we fail to protect our intellectual property
rights, our competitive position could suffer, which could harm our operating
results. Our pending patent and trademark registration applications may not be
allowed or competitors may challenge the validity or scope of these patent
applications or trademark registrations. In addition, our patents may not
provide us with a significant competitive advantage.
We may be required to spend significant resources to
monitor and protect our intellectual property rights. We may not be able to
detect infringement and may lose competitive position in the market before we
do so. In addition, competitors may design around our technology or develop
competing technologies. Furthermore, the laws of some foreign countries do not
offer the same level of protection of our proprietary rights as the laws of the
United States, and we may be subject to unauthorized use of our products or
technologies in those countries, particularly in Asia, where we expect our
business to continue to expand in the foreseeable future.
In addition, our agreements with Agilent, and in
particular the intellectual property matters agreement, set forth the terms and
provisions under which we received the intellectual property rights necessary
to operate our business. Under our agreements with Agilent, we do not have the
right to enforce against third parties intellectual property rights we license
from Agilent, and Agilent is under no obligation to enforce such rights on our
behalf.
Intellectual property rights are
difficult to enforce in the certain countries, which may inhibit our ability to
protect our intellectual property rights or those of our suppliers and
customers in those countries.
Commercial law in certain countries is relatively
undeveloped compared to the commercial law in the U.S. Limited protection of
intellectual property is available under local law. Consequently, operating in
certain countries may subject us to an increased risk that unauthorized parties
may attempt to copy or otherwise obtain or use our intellectual property or the
intellectual property of our suppliers, customers or business partners. We
cannot assure you that we will be able to protect our intellectual property
rights or those of our suppliers and customers or have adequate legal recourse
in the event that we encounter difficulties with infringements of intellectual
property under local law.
41
We may incur a variety of costs to
engage in future acquisitions of companies, products or technologies, and the
anticipated benefits of any acquisitions we may make may never be realized.
We may acquire, or make significant or minority
investments in, complementary businesses, products or technologies. Any future
acquisitions or investments could be accompanied by risks such as:
·
difficulties in assimilating the operations
and personnel of acquired companies;
·
diversion of our managements attention from
ongoing business concerns;
·
our potential inability to maximize our
financial and strategic position through the successful incorporation of
acquired technology and rights into our products and services;
·
additional expense associated with
amortization of acquired assets;
·
difficulty in maintaining uniform standards,
controls, procedures and policies;
·
impairment of existing relationships with
employees, suppliers and customers as a result of the integration of new
management personnel;
·
dilution to our shareholders in the event we
issue shares as consideration to finance an acquisition;
·
difficulty integrating and implementing the
accounting controls necessary to comply with regulatory requirements such as Section 404
of the Sarbanes-Oxley Act; and
·
increased leverage, if we incur debt to
finance an acquisition.
We cannot guarantee that we will realize any benefit
from the integration of any business, products or technologies that we might
acquire in the future, and our failure to do so could harm our business.
Our executive officers and certain key
personnel are critical to our business.
Our future operating results will depend
substantially upon the performance of our executive officers and key personnel.
Our future operating results also depend in significant part upon our ability
to attract and retain qualified management, manufacturing, technical,
application engineering, marketing, sales and support personnel. Competition
for qualified personnel is intense, and we cannot ensure success in attracting
or retaining qualified personnel. Our business is particularly dependent on
expertise which only a very limited number of engineers possess and it may be
increasingly difficult for us to hire personnel over time. We operate in
several geographic locations, including parts of Asia and Silicon Valley, where
the labor markets, especially for application engineers, are particularly
competitive. Our business, financial condition and results of operations could be
materially adversely affected by the loss of any of our key employees, by the
failure of any key employee to perform in his or her current position, or by
our inability to attract and retain skilled employees, particularly engineers.
Our effective tax rate may vary
significantly from period to period, and we could owe significant taxes even
during periods when we experience low operating profit or operating losses.
We have negotiated tax incentives with the Singapore
Economic Development Board, an agency of the Government of Singapore, which
have been approved by Singapores Ministry of Finance and Ministry of Trade and
Industry. Under the incentives, a portion of the income we earn in Singapore
during these ten to fifteen year incentive periods is subject to reduced rates
of Singapore income tax. Some incentive tax rates could begin to expire
beginning in fiscal year 2011 if certain requirements are not met. The
Singapore corporate income tax rate that would apply, absent the incentives, is
18% and 20% for fiscal years 2007 and 2006, respectively. As a result of these
incentives, income taxes decreased by $18 million or $0.30 per share
(diluted) and $8 million or $0.15 per share (diluted) in fiscal years 2007
and 2006, respectively. In order to receive the benefit of the incentives, we
must develop and maintain in Singapore certain functions such as procurement,
financial services, order management, credit and collections, spare parts depot
and distribution center, a refurbishment center and regional activities like an
application development center. In addition to these qualifying activities, we
must hire specified numbers of employees and maintain minimum levels of
investment in Singapore. We have from two to nine years to phase-in the
qualifying activities and to hire the specified numbers of employees. If we do
not fulfill these conditions for any reason, our incentive could lapse, our
income in Singapore would be subject to taxation at higher rates, and our
overall effective tax rate could be between fifteen to twenty percentage points
higher than would have been the case had we maintained the benefit of the
incentives.
42
In addition, our effective tax rate may vary
significantly from period to period because, for example, we may owe
significant taxes in jurisdictions other than Singapore during periods when we
are profitable in those jurisdictions even though we may be experiencing low
operating profit or operating losses on a consolidated basis. Our effective tax
rate varies based on a variety of factors, including overall profitability, the
geographical mix of income before taxes and the related tax rates in the
jurisdictions where we operate, as well as discrete events, such as settlements
of future audits. Certain combinations of these factors could cause us to owe
significant taxes even during periods when we experience low income before
taxes or loss before taxes.
We sell our products and services
worldwide, and our business is subject to risks inherent in conducting business
activities in geographies outside of the United States.
Our headquarters are in Singapore, our manufacturing
is outsourced largely to Flextronics, and we sell our products and services
worldwide. As a result, our business is
subject to risks associated with doing business internationally. Revenue from customers in Japan accounted for
approximately 6.2% and 6.0% of total net revenue for the three months ended April 30,
2008 and 2007, respectively. Revenue
from customers in Asia-Pacific, excluding Japan, accounted for approximately
70.3% and 55.2% for the three months ended April 30, 2008 and 2007,
respectively. Revenue from customers in
Japan accounted for approximately 9.4% and 7.5% of total net revenue for the
six months ended April 30, 2008 and 2007, respectively. Revenue from
customers in Asia-Pacific, excluding Japan, accounted for approximately 69.3%
and 46.8% for the six months ended April 30, 2008 and 2007,
respectively. The economies of Asia have
been highly volatile and recessionary in the past, resulting in significant
fluctuations in local currencies. Our exposure to the business risks presented
by the economies of Asia will increase to the extent that we continue to expand
our operations in that region, including continuing to transition our volume
contract manufacturing processes to Flextronics in China.
Our international activities subjects us to a number
of risks associated with conducting operations internationally, including:
·
difficulties in managing geographically
disparate operations;
·
potential greater difficulty and longer time
in collecting accounts receivable from customers located abroad;
·
difficulties in enforcing agreements through
non-U.S. legal systems;
·
unexpected changes in regulatory requirements
that may limit our ability to export our software or sell into particular
jurisdictions or impose multiple conflicting tax laws and regulations;
·
political and economic instability, civil
unrest or war;
·
terrorist activities and health risks such as
bird flu and SARS that impact international commerce and travel;
·
difficulties in protecting our intellectual
property rights, particularly in countries where the laws and practices do not
protect proprietary rights to as great an extent as do the laws and practices
of the United States;
·
changing laws and policies affecting economic
liberalization, foreign investment, currency convertibility or exchange rates,
taxation or employment; and
·
nationalization of foreign owned assets,
including intellectual property.
In addition, we are exposed to foreign currency
exchange movements versus the U.S. dollar, particularly the Japanese Yen and
the Euro. With respect to revenue, our primary exposure exists during the period
between execution of a purchase order denominated in a foreign currency and
collection of the related receivable. During this period, changes in the
exchange rates of the foreign currency to the U.S. Dollar will affect our
revenue, cost of sales and operating margins and could result in exchange gains
or losses. While a significant portion of our purchase orders to date have been
denominated in U.S. Dollars, competitive conditions may require us to enter
into an increasing number of purchase orders denominated in foreign currencies.
We incur a variety of costs in foreign currencies, including some of our
manufacturing costs, component costs and sales costs. Therefore, as we expand
our operations in Asia, we may become more exposed to a strengthening of currencies
in the region against the U.S. dollar. We cannot assure you that any hedging
transactions we may enter into will be effective or will not result in foreign
exchange hedging gains or losses. As a result, we are exposed to greater risks
in currency fluctuations.
43
Funds associated with certain of
our auction rate securities may not be accessible for in excess of
12 months and our auction rate securities may experience an
other-than-temporary decline in value, which would adversely affect our income.
In the fourth quarter of
fiscal year 2007, certain of our auction rate securities experienced failed
auctions due to sell orders exceeding buy orders which occurred as a result of
liquidity concerns derived primarily from the mortgage and debt markets. In the first half of fiscal year 2008, we
continued to see liquidity issues in the market for auction rate
securities. Our auction rate securities
primarily consist of investments that are backed by pools of student loans
guaranteed by the U.S. Department of Education and other asset-backed
securities. We believe that the credit
quality of these securities remains high based on both the ratings of the
underlying securities and on the government and insurance provider
guarantees. We evaluate our investments
periodically for possible other-than-temporary impairment by reviewing factors
such as the length of time and extent to which fair value has been below cost
basis, the financial condition of the issuer and insurance guarantor, and our
ability and intent to hold the investment for a period of time which may be
sufficient for anticipated recovery of market value. Based on an analysis of other-than-temporary
impairment factors, at April 30, 2008 we recorded a temporary impairment
within accumulated other comprehensive loss of approximately $5 million (net of
tax of $1 million) and an other-than-temporary impairment within the
statement of operations of $1.5 million related to these auction rate
securities. Our marketable securities
portfolio as of April 30, 2008 was $212 million. The portfolio includes approximately
$93 million invested in auction rate securities of which approximately
$9.7 million have been classified as short-term as they were redeemed by the
issuer in May 2008. The interest
rate reset auctions for the majority of our portfolio have failed as of April 30, 2008. These securities have been in a loss position
for less than 12 months. The funds
associated with failed auctions will not be accessible to us until a successful
auction occurs, a buyer is found outside of the auction process, or the
underlying securities have matured or are called by the issuer. Given the recent disruptions in the credit
markets and the fact that the liquidity for these types of securities remains
uncertain, we have classified substantially all of our auction rate securities
that were not liquidated subsequent to April 30, 2008, as long-term assets
in our condensed consolidated balance sheet as our ability to liquidate such
securities in the next 12 months is uncertain.
If our
facilities or the facilities of our contract manufacturers were to experience
catastrophic loss due to natural disasters, our operations would be seriously
harmed.
Our facilities and the facilities of our contract
manufacturers could be subject to a catastrophic loss caused by natural
disasters, including fires and earthquakes. We and our contract manufacturers
have significant facilities in areas with above average seismic activity, such
as California, Japan and Taiwan. If any of these facilities were to experience
a catastrophic loss, it could disrupt our operations, delay production and
shipments, reduce revenue and result in large expenses to repair or replace the
facility. We do not carry catastrophic insurance policies that cover potential
losses caused by earthquakes.
Risks
Related to the Securities Markets and Ownership of Our Ordinary Shares
Our
securities have a limited trading history, and the price of our ordinary shares
may fluctuate significantly.
There has been a public market for our ordinary
shares for a short period of time. An active public market for our ordinary
shares may not be sustained, which would adversely impact the liquidity and
market price of our ordinary shares. The market price of our ordinary shares
may fluctuate significantly. Among the factors that could affect the market
price of our ordinary shares are the risk factors described in this section and
other factors including:
·
changes in expectations as to our future
financial performance, including financial estimates or publication of research
reports by securities analysts;
·
strategic moves by us or our competitors,
such as acquisitions or restructurings;
·
announcements of new products or technical
innovations by us or our competitors;
·
actions by institutional shareholders; and
·
speculation in the press or investment
community.
44
We may
become involved in securities litigation that could divert managements
attention and harm our business.
The stock market in general, and The NASDAQ Global
Select Market and the securities of semiconductor capital equipment companies
in particular, have experienced extreme price and volume fluctuations that have
often been unrelated or disproportionate to the operating performance of the
affected companies. Further, the market prices of securities of semiconductor
test system companies have been particularly volatile. These market and
industry factors may materially harm the market price of our ordinary shares,
regardless of our operating performance. In the past, following periods of
volatility in the market price of a particular companys securities, securities
class action litigation has often been brought against that company. We may
become involved in this type of litigation in the future. Such litigation,
whether or not meritorious, could result in the expenditure of substantial
funds, divert managements attention and resources, and harm our reputation in
the industry and the securities markets, which would reduce our profitability
and harm our business.
It may be difficult for investors
to affect service of process within the United States on us or to enforce civil
liabilities under the federal securities laws of the United States against us.
We are incorporated in Singapore under the Companies
Act, Chapter 50 of Singapore, or Singapore Companies Act. Some of our officers
and directors reside outside the United States. A substantial portion of our
assets is located outside the United States. As a result, it may not be
possible for investors to effect service of process within the United States
upon us. Similarly, investors may be unable to enforce judgments obtained in
U.S. courts predicated upon the civil liability provisions of the federal
securities laws of the United States against us in U.S. courts. Judgments of
U.S. courts based upon the civil liability provisions of the federal securities
laws of the United States are not directly enforceable in Singapore courts and
are not given the same effect in Singapore as judgments of a Singapore court.
Accordingly, there can be no assurance as to whether Singapore courts will
enter judgments in actions brought in Singapore courts based upon the civil
liability provisions of the federal securities laws of the United States.
Singapore corporate law may impede
a takeover of our company by a third party, which could adversely affect the
value of our ordinary shares.
Under the Singapore Code on Take-overs and Mergers,
generally when a person (or a group of persons acting together) acquires shares
having 30% or more of the voting rights of a company or holds at least 30% but
not more than 50% of the voting rights of a company and thereafter acquires in
any period of six months additional shares carrying more than 1% of the voting
rights, then such person is required by law to make an offer to acquire the
remaining voting shares of the company. Consequently, the Code of Take-overs
and Mergers may discourage potential acquirers from purchasing substantial but
non-majority ownership positions of our ordinary shares, which could, in turn,
impede takeovers of our company by a third party.
For a limited period of time, our
directors have general authority to issue new shares on terms and conditions
and with any preferences, rights or restrictions as may be determined by our
board of directors in its sole discretion.
Under Singapore law, new shares may be issued only
with the prior approval of our shareholders in a general meeting. At our 2007
annual general meeting of shareholders, our shareholders provided our directors
general authority to issue new shares until the earlier to occur of the
conclusion of our 2008 annual general meeting or the expiration of the period
within which the next annual general meeting is required to be held. Subject to
the shareholders approval, the provisions of the Singapore Companies Act and
our amended and restated memorandum and articles of association, our board of
directors may allot and issue new shares on terms and conditions and with the
rights and restrictions as they may think fit to impose. Any additional
issuances of new shares by our directors may adversely impact the market price
of our ordinary shares.
Our
shareholders may have more difficulty protecting their interests than they
would as shareholders of a U.S. corporation.
Our corporate affairs are
governed by our amended and restated memorandum and articles of association and
by the laws governing corporations incorporated in Singapore. The rights of our
shareholders and the responsibilities of the members of our board of directors
under Singapore law are different from those applicable to a corporation
incorporated in the United States. Therefore, our public shareholders may have
more difficulty in protecting their interests in connection with actions taken
by our management, members of our board of directors or our controlling
shareholder than they would as shareholders of a corporation incorporated in
the United States. For example, controlling shareholders in U.S. corporations
are subject to fiduciary duties while controlling shareholders in Singapore
corporations are not subject to such duties.
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Not applicable.
45
ITEM 3.
DEFAULT UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following matters were
submitted to a vote of security holders during Verigys annual general meeting
of shareholders held on April 15, 2008.
|
|
For
|
|
Against
|
|
Abstentions
|
|
1.Election of Directors:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
C. Scott Gibson, as a Class I director
|
|
49,764,057
|
|
455,150
|
|
2,398,570
|
|
|
|
|
|
|
|
|
|
Eric Meurice, as a Class I director
|
|
50,054,938
|
|
162,422
|
|
2,400,417
|
|
|
|
|
|
|
|
|
|
Claudine Simson, as a Class I director
|
|
49,812,085
|
|
407,129
|
|
2,398,563
|
|
|
|
|
|
|
|
|
|
Edward Grady, as a Class II director
|
|
49,756,192
|
|
459,500
|
|
2,402,085
|
|
|
|
|
|
|
|
|
|
Steven Berglund, as a Class III
director
|
|
50,034,187
|
|
177,467
|
|
2,406,123
|
|
The other three directors whose term of office as
director continued after the meeting were: Keith Barnes, Paul Chan Kwai Wah,
and Ernest Godshalk.
|
|
|
|
For
|
|
Against
|
|
Abstentions
|
|
Non-Vote
|
|
2.
|
|
Proposal to approve the re-appointment of
PricewaterhouseCoopers to serve as the independent Singapore auditor for the
fiscal year ending October 31, 2008, and to authorize the Board of
Directors to fix PricewaterhouseCoopers remuneration.
|
|
52,409,304
|
|
132,911
|
|
75,562
|
|
-0
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.
|
|
Proposal to approve the pro rata payment for
services rendered by Edward Grady and Steven Berglund as non-employee
directors of Verigy Ltd. From their dates of appointment through the 2008 Annual
General Meeting of Shareholders.
|
|
50,981,503
|
|
493,562
|
|
1,142,712
|
|
-0-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.
|
|
Proposal to approve and authorize: (i) cash
compensation to current non-employee directors for services rendered through
the 2009 Annual General Meeting of Shareholders; (ii) pro rated cash
compensation to any new non-employee directors who may be appointed after our
2008 Annual General Meeting of Shareholders and before our 2009 Annual
General Meeting of Shareholders and; (iii) additional cash compensation for
the Lead Independent Director and to any director who acts as chairman of our
Audit, Compensation, and Nominating and Governance Committees for services
rendered through the 2009 Annual General Meeting of Shareholders.
|
|
50,868,529
|
|
593,948
|
|
1,155,300
|
|
-0-
|
|
46
5.
|
|
Proposal to approve and authorize cash
compensation to Mr. C. Scott Gibson for his services as the Lead
Independent Director for the period of approximately nine months, from
July 10, 2007, the date of his appointment as the Lead Independent
Director, through the 2008 Annual General Meeting of Shareholders on
April 15, 2008.
|
|
50,863,893
|
|
597,869
|
|
1,156,015
|
|
-0-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6.
|
|
Proposal to approve the amendments to our 2006
Equity Incentive Plan.
|
|
27,485,167
|
|
14,291,332
|
|
1,082,607
|
|
9,758,671
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7.
|
|
Proposal to approve the authorization for the
Board of Directors to allot and issue ordinary shares.
|
|
35,747,436
|
|
5,959,764
|
|
1,151,906
|
|
9,758,671
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8.
|
|
Proposal to approve the Share Purchase Mandate
authorizing our purchase or acquisition of our own issued ordinary shares.
|
|
42,696,037
|
|
115,201
|
|
47,868
|
|
9,758,671
|
|
ITEM 5. OTHER INFORMATION
(a)
Departure
of Directors or Certain Officers; Election of Directors; Appointment of Certain
Officers; Compensatory Arrangements of Certain Officers.
First Half Fiscal 2008
Performance Payments
On June 4, 2008,
Verigys Compensation Committee determined the actual performance results for
the performance measures under Verigys incentive compensation bonus program
and approved the amount of the bonus to which each plan participant is entitled
under the terms of the program for the six-month period ended April 30,
2008.
Actual bonuses paid to the
participants in the program for the first half of the fiscal year under the
incentive compensation bonus program were earned based on the achievement of
operating profit goals and shareholder return relative to an established peer
group. Individual target bonuses for the Companys named executive officers
ranged from 55% to 100% of base salary. The actual percent achieved
by these participants for the six-month program period ended April 30,
2008, ranged from 68% to 88% of individual target bonuses.
The following table sets
forth the semi-annual bonus amounts earned in the first half of fiscal year
2008 for the Companys named executive officers.
Name and Current Position
|
|
Fiscal Year 2008
Semi-Annual
Bonus Amount
|
|
Keith Barnes, Chairman, President and Chief
Executive Officer
|
|
$
|
242,981
|
|
Robert Nikl, Chief Financial Officer
|
|
$
|
100,925
|
|
Gayn Erickson, Vice President Memory Test
|
|
$
|
54,460
|
|
Pascal Rondé, Vice President Sales, Service
and Support
|
|
$
|
98,950
|
|
Kenneth Siegel, Vice President and General
Counsel
|
|
$
|
67,611
|
|
CEO
Compensation Arrangements
Pursuant to the terms of the employment offer
letter dated April 4, 2006, as modified May 29, 2006 (the Offer
Letter Agreement), by and between Verigy and Keith Barnes, Verigy pays Mr. Barnes
$12,000 per month for his temporary living expenses (including lodging, car
rental, meals,
and travel
to and from his home in Oregon).
Pursuant to the terms of the Offer Letter Agreement, Verigy agreed to
reimburse Mr. Barnes for his temporary living expenses until April 30,
2009.
On June 4, 2008, Verigy and Mr. Barnes
entered into a letter agreement pursuant to which the Company agreed to extend
the term of the payment of Mr. Barnes temporary living expenses to April 30,
2011. The two-year extension of this benefit, whether or not actually paid, is
in lieu of any relocation benefits to which Mr. Barnes might otherwise
have been entitled. In the event
that Mr. Barnes employment with Verigy ceases for any reason, other than
for Cause (as defined in the Amended & Restated Severance Agreement
between Mr. Barnes and Verigy dated on March 7, 2008), the remaining
unpaid portion of temporary living expenses shall become due and payable. If Mr. Barnes employment terminates for
Cause before April 30, 2011, any unpaid portion of the temporary living
allowance shall be forfeited.
47
The letter agreement between the Company and Mr. Barnes,
dated June 4, 2008, is filed with this Quarterly Report on Form 10-Q
and is incorporated by reference in this Item 5.
ITEM 6.
EXHIBITS
(a) Exhibits:
Exhibit
|
|
|
|
Incorporated By Reference
|
|
Number
|
|
Exhibit Description
|
|
Form
|
|
File Number
|
|
Exhibit
|
|
Date
|
|
Filed Herewith
|
|
3.1
|
|
Amended and Restated
Memorandum and Articles of Association of Verigy Ltd.
|
|
S-1/A
|
|
333-132291
|
|
3.2
|
|
6/5/2006
|
|
|
|
4.1
|
|
Form of Specimen
Share Certificate for Verigy Ltd.s Ordinary Shares
|
|
S-1/A
|
|
333-132291
|
|
4.1
|
|
6/1/2006
|
|
|
|
10.5.3**
|
|
Second Letter of Amendment
to Employment Offer Letter, by and between Verigy and Keith Barnes, dated
June 4, 2008
|
|
|
|
|
|
|
|
|
|
X
|
|
31.1
|
|
Certification of Principal
Executive Officer Pursuant to Rule 13a-14 of the Securities Exchange Act
of 1934, As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|
|
|
|
|
|
|
|
|
|
X
|
|
31.2
|
|
Certification of Principal
Financial Officer Pursuant to Rule 13a-14 of the Securities Exchange Act
of 1934, As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|
|
|
|
|
|
|
|
|
|
X
|
|
32.1
|
|
Certification of Principal
Executive Officer Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
|
|
|
|
X
|
|
32.2
|
|
Certification of Principal
Financial Officer Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
|
|
|
|
X
|
|
** Management contracts or
compensation plans or arrangements in which directors or executive officers are
eligable to participate.
48
SIGNATURE
Pursuant to the requirements
of the Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned thereunto duly authorized.
Dated: June 6, 2008
|
By:
|
/s/ Robert
J. Nikl
|
|
|
ROBERT J. NIKL
|
|
|
Vice President and Chief
Financial Officer
|
49
VERIGY LTD.
EXHIBIT INDEX
Exhibit
|
|
|
|
Incorporated By Reference
|
|
Number
|
|
Exhibit Description
|
|
Form
|
|
File Number
|
|
Exhibit
|
|
Date
|
|
Filed Herewith
|
|
3.1
|
|
Amended and Restated
Memorandum and Articles of Association of Verigy Ltd.
|
|
S-1/A
|
|
333-132291
|
|
3.2
|
|
6/5/2006
|
|
|
|
4.1
|
|
Form of Specimen
Share Certificate for Verigy Ltd.s Ordinary Shares
|
|
S-1/A
|
|
333-132291
|
|
4.1
|
|
6/1/2006
|
|
|
|
10.5.3**
|
|
Second Letter of Amendment
to Employment Offer Letter, by and between Verigy and Keith Barnes, dated
June 4, 2008
|
|
|
|
|
|
|
|
|
|
X
|
|
31.1
|
|
Certification of Principal
Executive Officer Pursuant to Rule 13a-14 of the Securities Exchange Act
of 1934, As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|
|
|
|
|
|
|
|
|
|
X
|
|
31.2
|
|
Certification of Principal
Financial Officer Pursuant to Rule 13a-14 of the Securities Exchange Act
of 1934, As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|
|
|
|
|
|
|
|
|
|
X
|
|
32.1
|
|
Certification of Principal
Executive Officer Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
|
|
|
|
X
|
|
32.2
|
|
Certification of Principal
Financial Officer Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
|
|
|
|
X
|
|
** Management contracts or
compensation plans or arrangements in which directors or executive officers are
eligable to participate.
50
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