CREDENCE SYSTEMS CORP - 10-Q Quarterly Report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the quarterly period ended January 31, 2005

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 0-22366

CREDENCE SYSTEMS CORPORATION

(Exact name of registrant as specified in its charter)


Delaware		94-2878499
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

1421 California Circle, Milpitas, California

95035

(Address of principal executive offices)

(Zip Code)

(408) 635-4300

(Registrant’s telephone number, including area code)

Former name, former address and former fiscal year, if changed since last report.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No ¨

At February 28, 2005, there were 91,420,931 shares of the Registrant’s common stock, $0.001 par value per share, outstanding.

CREDENCE SYSTEMS CORPORATION

INDEX


		PAGE NO.
PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements	3

	Condensed Consolidated Balance Sheets	3

	Condensed Consolidated Statements of Operations	4

	Condensed Consolidated Statements of Cash Flows	5

	Notes to Condensed Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	44

Item 4.	Controls and Procedures	45

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	46

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	46

Item 3.	Defaults Upon Senior Securities	46

Item 4.	Submission of Matters to a Vote of Security Holders	46

Item 5.	Other Information	46

Item 6.	Exhibits	46

Signature		47

PART I - FINANCIAL INFORMATION

Item 1. - FINANCIAL STATEMENTS

CREDENCE SYSTEMS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

(unaudited)


	January 31, 2005		October 31, 2004^a
ASSETS
Current assets:
Cash and cash equivalents	$	91,712	$	94,052
Short-term investments		72,042		69,954
Accounts receivable, net		99,266		124,393
Inventories		140,892		146,741
Income tax receivable		275		26
Deferred income taxes		20,855		20,544
Prepaid expenses and other current assets		17,403		20,962

Total current assets		442,445		476,672
Property and equipment, net		101,649		108,707
Goodwill		425,228		422,960
Other intangible assets, net		111,024		116,882
Other assets		42,713		47,885

Total assets	$	1,123,059	$	1,173,106

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Bank loans and notes payable – leased products	$	5,000	$	6,058
Accounts payable		40,954		51,742
Accrued payroll and related liabilities		22,479		17,755
Deferred revenue		15,528		14,654
Income taxes payable		16,226		13,103
Accrued warranty		13,966		15,314
Deferred profit		8,994		9,718
Accrued expenses and other liabilities		41,285		51,651

Total current liabilities		164,432		179,995
Convertible subordinated notes		180,000		180,000
Long-term deferred income taxes		20,274		20,544
Other liabilities		4,893		4,359
Stockholders’ equity		753,460		788,208

Total liabilities and stockholders’ equity	$	1,123,059	$	1,173,106

a)	Derived from the audited consolidated balance sheet included in our Annual Report on Form 10-K for the year ended October 31, 2004.

See accompanying notes.

CREDENCE SYSTEMS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(unaudited)


	Three Months Ended January 31,
	2005			2004
Net sales:
Systems, upgrades and software	$	68,410		$	57,331
Service and spare parts		25,473			10,794

Total net sales		93,883			68,125
Cost of goods sold
Systems, upgrades and software		40,608			29,842
Service and spare parts		18,680			6,380
Special charges		5,481			—

Gross margin		29,114			31,903
Operating expenses:
Research and development		22,328			15,239
Selling, general and administrative		31,378			23,716
Amortization of purchased intangibles and deferred stock compensation (1)		6,674			2,622
Restructuring charges		1,351			653

Total operating expenses		61,731			42,230

Operating loss		(32,617	)		(10,327	)
Interest income		619			1,229
Interest expense		(737	)		(864	)
Other income and expenses, net		(115	)		(71	)

Loss before income tax provision		(32,850	)		(10,033	)
Income taxes		3,452			1,359

Loss before minority interest		(36,302	)		(11,392	)
Minority interest		—			77

Net loss	$	(36,302	)	$	(11,469	)

Net loss per share
Basic	$	(0.41	)	$	(0.18	)

Diluted	$	(0.41	)	$	(0.18	)

Number of shares used in computing per share amount
Basic		87,977			63,936

Diluted		87,977			63,936

(1) Amortization of deferred stock compensation related to the following expense categories by period:
Cost of goods sold	$	107		$	12
Research and development		173			—
Selling, general and administrative		559			206

Total amortization of deferred stock compensation	$	839		$	218

See accompanying notes.

CREDENCE SYSTEMS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)


	Three Months Ended January 31,
	2005			2004
Cash flows from operating activities:
Net loss	$	(36,302	)	$	(11,469	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		17,172			9,725
Non-cash charges		5,036			—
Restructuring charges		1,089			—
Provision for inventory write downs		382			2,176
Provision for allowance for doubtful accounts		699			52
Gain on disposal of property and equipment		(183	)		(275	)
Realized net loss from sale of available-for-sale securities		—			2
Minority interest		—			77
Changes in operating assets and liabilities:
Accounts receivable, net		23,513			(3,047	)
Inventories		571			(2,290	)
Income tax receivable and payable		2,508			1,835
Prepaid expenses and other current assets		3,348			1,460
Other assets		2,677			1,772
Accounts payable		(10,579	)		3,821
Accrued expenses and other current liabilities		(7,242	)		5,191
Deferred profit		(724	)		159

Net cash provided by operating activities		1,965			9,189
Cash flows from investing activities:
Purchases of available-for-sale securities		(40,225	)		(55,777	)
Sales and maturities of available-for-sale securities		38,025			58,211
Acquisition of property and equipment		(2,807	)		(5,358	)
Acquisition of other assets		—			(919	)
Proceeds from sale of property and equipment and leased equipment		100			971

Net cash used in investing activities		(4,907	)		(2,872	)
Cash flows from financing activities:
Issuance of common and treasury stock		548			2,597
Payments of bank loans and notes payable related to leased products		(1,058	)		(2,815	)
Other		—			(21	)

Net cash used in financing activities		(510	)		(239	)

Effects of exchange rate on cash and cash equivalents		1,112			—

Net (decrease) increase in cash and cash equivalents		(2,340	)		6,078
Cash and cash equivalents at beginning of period		94,052			27,318

Cash and cash equivalents at end of period	$	91,712		$	33,396

Supplemental disclosures of cash flow information:
Interest paid	$	1,350		$	1,412
Income taxes paid	$	244		$	82
Noncash investing and financing activities:
Net transfers of inventory to property and equipment	$	55		$	395
Conversion of preferred stock to common stock	$	6		$	—
Unrealized loss on available-for-sale securities	$	77		$	82

See accompanying notes.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.	Quarterly Financial Statements

The condensed consolidated financial statements and related notes for the three month periods ended January 31, 2005 and 2004 are unaudited but include all adjustments (consisting solely of normal recurring adjustments except for acquisition, special charges related to cost of goods sold and restructuring charges adjustments) which are, in the opinion of management, necessary for a fair presentation of the financial position and results of operations of Credence Systems Corporation (Credence or the Company) for the interim periods, in accordance with U.S. generally accepted accounting principles. The results of operations for the three month periods ended January 31, 2005 and 2004 are not necessarily indicative of the operating results to be expected for the full fiscal year. The information included in this report should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto for the fiscal year ended October 31, 2004 included in the Company’s most recent Annual Report on Form 10-K and the additional risk factors contained herein and therein, including, without limitation, risks relating to the importance of timely product introduction, successful integration of acquisitions, fluctuations in our quarterly net sales and operating results, limited systems sales, backlog, cyclicality of the semiconductor industry, management of fluctuations in our operating results, expansion of our product lines, limited sources of supply, reliance on our subcontractors, our highly competitive industry, customization of products, rapid technological change, customer concentration, lengthy sales cycles, changes in financial accounting standards and accounting estimates, dependence on key personnel, international sales, proprietary rights, legal proceedings, volatility of our stock price, terrorist attacks and other geopolitical instability, effects of the Sarbanes-Oxley Act of 2002, and effects of certain anti-takeover provisions, as set forth in this Report. Any party interested in receiving a free copy of the Form 10-K or the Company’s other publicly available documents should write to the Chief Financial Officer of the Company.

Description of Business - Credence was incorporated in California in March 1982 to succeed a sole proprietorship and was reincorporated in Delaware in October 1993. The principal business activity of the Company is the design, development, manufacture, sale and service of engineering validation test equipment, diagnostic and failure analysis products, and automatic test equipment (ATE) used for testing semiconductor integrated circuits, or ICs. The Company also develops, licenses and distributes software products that provide automation solutions in the IC design and test flow fields. The Company serves a broad spectrum of the semiconductor industry’s testing needs through a wide range of products that test digital logic, mixed-signal, system-on-a-chip, radio frequency, volatile and static and non-volatile memory semiconductors.

Basis of Presentation – The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany transactions and balances have been eliminated. Certain prior year amounts in the condensed consolidated financial statements and related notes have been reclassified to conform to the current year’s presentation. These reclassifications had no effect on the financial position, results of operations, or cash flows for any of the periods presented.

Use of Estimates – The preparation of the accompanying unaudited condensed consolidated financial statements requires management to make estimates and assumptions that affect the amounts reported in the financial statements. Actual results could differ from those estimates.

2.	Revenue Recognition

Under Securities and Exchange

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