Xcerra Corp - FORM 10-Q

Xcerra Corp - FORM 10-Q - June 9, 2010

Attached files

Attached files

Stock widget

Investing forum

Xcerra Corp Reports

Also read

file	filename
EX-32 - SECTION 906 CEO AND CFO CERTIFICATION - Xcerra Corp	dex32.htm
EX-31.1 - SECTION 302 CEO CERTIFICATION - Xcerra Corp	dex311.htm
EX-31.2 - SECTION 302 CFO CERTIFICATION - Xcerra Corp	dex312.htm

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 April 30, 2010

¨	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: 000-10761

LTX-CREDENCE CORPORATION

(Exact name of registrant as specified in its charter)

Massachusetts

04-2594045

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

1355 California Circle,

Milpitas, California

95035

(Address of principal executive offices)

(Zip Code)

(781) 461-1000

(Registrant’s telephone number, including area code)

[None]

(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 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 ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨

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 the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.


Class		Outstanding at June 7, 2010
Common Stock, $0.05 par value per share		146,850,308 shares

LTX-CREDENCE CORPORATION

Index


		Page Number
Part I.	FINANCIAL INFORMATION

Item 1.	Consolidated Balance Sheets as of April 30, 2010 and July 31, 2009	3

	Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three and Nine Months Ended April 30, 2010 and April 30, 2009	4

	Consolidated Statements of Cash Flows for the Nine Months Ended April 30, 2010 and April 30, 2009	5

	Notes to Consolidated Financial Statements	6-24

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	44

Item 4.	Controls and Procedures	44

Part II.	OTHER INFORMATION

Item 6.	Exhibits	44

	SIGNATURE	45

LTX-CREDENCE CORPORATION

CONSOLIDATED BALANCE SHEETS

(In thousands)


	April 30, 2010			July 31, 2009
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	75,520		$	86,488
Marketable securities		461			9,152
Accounts receivable—trade, net of allowances of $110 and $481, respectively		38,246			23,578
Accounts receivable—other		1,683			1,374
Inventories		26,813			35,339
Prepaid expenses and other current assets		4,742			12,163

Total current assets		147,465			168,094
Property and equipment, net		29,973			38,301
Intangible assets, net		14,941			22,933
Goodwill		43,030			43,030
Other assets (includes $369 and $777, respectively, in restricted cash)		934			2,811

Total assets	$	236,343		$	275,169


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt	$	1,520		$	53,120
Accounts payable		15,421			18,551
Deferred revenues and customer advances		10,593			7,373
Other accrued expenses		29,847			41,827

Total current liabilities		57,381			120,871
Long-term debt, less current portion		800			32,610
Other long-term liabilities		16,480			16,284
Stockholders’ equity:
Common stock		7,319			6,351
Additional paid-in capital		745,921			695,009
Accumulated other comprehensive income		6			117
Accumulated deficit		(591,564	)		(596,073	)

Total stockholders’ equity		161,682			105,404

Total liabilities and stockholders’ equity	$	236,343		$	275,169

See accompanying Notes to Consolidated Financial Statements.

LTX-CREDENCE CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(In thousands, except per share data)


	Three Months Ended April 30,						Nine Months Ended April 30,
	2010			2009			2010			2009
Net product sales	$	45,020		$	11,547		$	110,671		$	55,581
Net service sales		11,049			13,120			35,248			46,620

Net sales		56,069			24,667			145,919			102,201
Cost of sales		23,921			17,674			67,603			67,754
Inventory-related provision		—			—			—			19,311

Gross profit		32,148			6,993			78,316			15,136
Engineering and product development expenses		12,339			16,556			36,179			58,729
Selling, general and administrative expenses		11,414			11,120			29,295			40,502
Impairment charges		—			—			—			5,799
Amortization of purchased intangible assets		2,664			4,446			7,992			11,856
Acquired in-process research and development		—			—			—			6,200
Restructuring		788			3,315			2,027			21,845

Income (Loss) from operations		4,943			(28,444	)		2,823			(129,795	)
Other income (expense), net:
Interest expense		(330	)		(1,708	)		(2,657	)		(3,804	)
Investment income		43			319			136			2,012
Other income		12			1,219			1,325			1,498
Gain on extinguishment of debt, net		2,126			992			3,057			3,209

Income (Loss) before (benefit)/provision for income taxes		6,794			(27,622	)		4,684			(126,880	)
(Benefit)/Provision for income taxes		(35	)		197			236			835

Net income (loss)	$	6,829		$	(27,819	)	$	4,448		$	(127,715	)

Net income (loss) per share:
Basic	$	0.05		$	(0.22	)	$	0.03		$	(1.06	)
Diluted	$	0.05		$	(0.22	)	$	0.03		$	(1.06	)
Weighted-average common and common equivalent shares used in computing net income (loss) per share:
Basic		139,609			127,189			131,912			120,322
Diluted		142,487			127,189			134,175			120,322
Comprehensive income (loss):
Net income (loss)	$	6,829		$	(27,819	)	$	4,448		$	(127,715	)
Unrealized gain (loss) on marketable securities		(11	)		610			(111	)		622
Cumulative translation adjustment		—			96			—			(487	)
Pension liability gain		—			43			—			248

Comprehensive income (loss)	$	6,818		$	(27,070	)	$	4,337		$	(127,332	)

See accompanying Notes to Consolidated Financial Statements.

LTX-CREDENCE CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands, except per share data)


	Nine Months Ended April 30,
	2010			2009
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	4,448		$	(127,715	)
Add (deduct) non-cash items:
Inventory-related provision		—			19,311
Stock-based compensation		3,089			3,335
Depreciation and amortization		18,820			28,252
Acquired in-process research and development		—			6,200
Non-cash restructuring charge		2,027			1,161
Gain on extinguishment of debt, net		(3,057	)		(3,209	)
Impairment charges		—			5,799
Other		1,544			(403	)
Changes in operating assets and liabilities, net of effect of acquisition:
Accounts receivable		(14,877	)		46,775
Inventories		9,569			(11,309	)
Prepaid expenses		5,854			6,851
Other assets		462			15,867
Accounts payable		(3,131	)		(6,477	)
Accrued expenses		(9,633	)		(21,108	)
Deferred revenues and customer advances		3,220			(7,433	)

Net cash provided by (used in) operating activities		18,335			(44,103	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash received from merger with Credence Systems Corporation, net of fees paid		—			131,667
Proceeds from sales and maturities of available-for-sale securities		9,820			10,142
Purchases of available-for-sale securities		(326	)		—
Purchases of property and equipment		(2,579	)		(5,465	)

Net cash provided by investing activities		6,915			136,344
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings from revolving credit facility		59,988			39,400
Proceeds from equity offering, net of commissions and fees		47,878			—
Proceeds from shares issued from employees’ stock purchase plan		224			—
Repayments of borrowings from revolving credit facility		(99,361	)		—
Payments of tax withholdings for vested RSUs, net of proceeds from stock option exercises		(1,066	)		(376	)
Payments of term loan		(12,200	)		(3,900	)
Payments of convertible senior subordinated notes		(31,589	)		(71,165	)

Net cash used in financing activities		(36,126	)		(36,041	)
Effect of exchange rate changes on cash		(92	)		(577	)

Net increase (decrease) in cash and cash equivalents		(10,968	)		55,623
Cash and cash equivalents at beginning of period		86,488			51,052

Cash and cash equivalents at end of period	$	75,520		$	106,675

BUSINESS ACQUISITION, NET OF CASH ACQUIRED:
Fair value of tangible assets acquired	$	—		$	(141,353	)
Fair value of liabilities assumed		—			233,537
Fair value of stock issued		—			117,723
Fair value of stock options and RSUs exchanged		—			2,863
Cost in excess of fair value (goodwill)		—			(29,974	)
Fair value of acquired identifiable intangible assets		—			(38,700	)
In-process research and development		—			(6,200	)
Less acquisition costs paid		—			(6,229	)

Net cash received from merger with Credence Systems Corporation		—		$	131,667

See accompanying Notes to Consolidated Financial Statements.

LTX-CREDENCE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. THE COMPANY

LTX-Credence Corporation (“LTX-Credence” or the “Company”) provides focused, cost-optimized automated test equipment (ATE) solutions. We design, manufacture, market and service ATE solutions that address the broad, divergent test requirements of the wireless, computing, automotive and digital consumer market segments. Semiconductor designers and manufacturers worldwide use our equipment to test their devices during the manufacturing process. After testing, these devices are then incorporated in a wide range of products, including computers, mobile internet equipment such as wireless access points and interfaces, broadband access products such as cable modems and set top boxes, personal communication products such as mobile phones and personal digital music players, consumer products such as televisions, videogame systems, digital cameras and automobile electronics, and for power management in portable and automotive electronics. The Company also sells hardware and software support and maintenance services for its test systems. The Company is headquartered and has a development facility in Milpitas, California, development facilities in Norwood, Massachusetts and Beaverton, Oregon, and worldwide sales and service facilities to support its customer base.

On August 29, 2008, LTX Corporation (“LTX”) and Credence Systems Corporation (“Credence”) completed a merger (“the Merger”). In connection with the merger, LTX Corporation changed its name to “LTX-Credence Corporation” and changed the symbol under which its common stock trades on the Nasdaq Global Market to “LTXC” and Credence Systems Corporation became a wholly-owned subsidiary of LTX-Credence. On January 30, 2009, the Company completed a statutory merger of Credence in which Credence was legally dissolved and merged into the Company with the Company being the surviving corporation. The Company’s consolidated statement of operations for the nine months ended April 30, 2009 include Credence’s operating results from August 29, 2008 through April 30, 2009.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared pursuant to the Rules of the Securities and Exchange Commission for quarterly reports on Form 10-Q and, accordingly, these footnotes condense or omit information and disclosures which substantially duplicate information provided in our latest audited financial statements. These unaudited financial statements should be read in conjunction with the financial statements and notes included in our Annual Report on Form 10-K for the year ended July 31, 2009. In the opinion of management, these unaudited consolidated financial statements reflect all adjustments, including normal recurring accruals, necessary for a fair presentation of the results for the interim periods presented. The operating results for the three and nine months ended April 30, 2010 are not necessarily indicative of future trends or the Company’s results of operations for the entire fiscal year ending July 31, 2010.

Effective August 1, 2009, the Company adopted FSP APB 14-1, Accounting for Convertible Debt Instruments That May be Settled in Cash upon Conversion (Including Partial Cash Settlement), codified into FASB ASC Subtopic 470-20, Debt with Conversion and Other Options, which requires the issuer of certain convertible debt instruments that may be settled in cash (or other assets) on conversion to separately account for the liability (debt) and equity (conversion option) components of the instrument in a manner that reflects the issuers nonconvertible borrowing rate. The standard also requires retrospective adoption to previously disclosed consolidated financial statements. Since there was no material effect to previously disclosed consolidated financial statements, no amounts have been revised in the unaudited consolidated financial statements to reflect the adoption of this guidance for the three and nine months ended April 30, 2009 or at July 31, 2009. See Note 8 for a discussion of the impact of the implementation of this standard.

In June 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Codification (“ASC”) Topic 105, Generally Accepted Accounting Principles (“ASC 105”) which establishes the ASC as the single source of authoritative U.S. GAAP for non-governmental entities. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative U.S. GAAP for SEC registrants. As of August 1, 2009, the Company adopted ASC 105, which supersedes all existing non-SEC accounting and reporting standards, and all corresponding changes in the Company’s notes to the unaudited financial statements reflect the adoption of this standard.

Foreign Currency Remeasurement

The financial statements of the Company’s foreign subsidiaries are remeasured in accordance with Topic 830, Foreign Currency Matters, to the FASB ASC (formerly known as Statement of Financial Accounting Standards (“SFAS”) No. 52, Foreign Currency Translation). The Company’s functional currency is the U.S. dollar. Accordingly, the Company’s foreign subsidiaries remeasure monetary assets and liabilities at month-end exchange rates while long-term non-monetary items are remeasured at historical rates. Income and expense accounts are remeasured at the average rates in effect during the month, except for sales, cost of sales and depreciation, which are primarily remeasured at actual rates in effect at the transaction dates. Net realized gains or losses resulting from foreign currency remeasurement and transaction gains or losses are included in the consolidated results of operations as a component of other income, net, and were not significant for the three or nine months ended April 30, 2010 or 2009, respectively.

Revenue Recognition

The Company recognizes revenue based on guidance provided in SEC Staff Accounting Bulletin No. 104, (“SAB 104”), Revenue Recognition and Topic 605, Revenue Recognition, to the FASB ASC (formerly known as Emerging Issues Task Force (“EITF”) No. 00-21 Revenue Arrangements with Multiple Deliverables). The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the seller’s price is fixed or determinable and collectibility is reasonably assured.

Revenue related to equipment sales is recognized when: (a) we have a written sales agreement; (b) delivery has occurred; (c) the price is fixed or determinable; (d) collectibility is reasonably assured; (e) the product delivered is standard product with historically demonstrated acceptance; and (f) there is no unique customer acceptance provision or payment tied to acceptance or an undelivered element significant to the functionality of the system. Generally, payment terms are time based after product shipment. When sales to a customer involve multiple elements, revenue is recognized on the delivered element provided that (1) the undelivered element is a proven technology, (2) there is a history of acceptance on the product with the customer, (3) the undelivered element is not essential to the customer’s application, (4) the delivered item(s) has value to the customer on a stand-alone basis, (5) objective and reliable evidence of the fair value of the undelivered item(s) exists and (6) if the arrangement included a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) is considered probable and substantially in the control of the Company. If objective and reliable evidence of fair value exists for all elements in the arrangement, the arrangement consideration is allocated based on the relative fair values of each element. If the fair value of a delivered item is unknown, but the fair value of undelivered items are known, the residual method is used for allocating arrangement consideration which requires discounts in the sales value of the entire arrangement to be recognized in connection with the sale of the delivered items only.

Revenue related to spare parts is recognized on shipment.

Revenue related to maintenance and service contracts is recognized ratably over the duration of the contracts.

As further described in Note 11, the Company is currently assessing the impact to the Company’s financial statements of the adoption of ASC Update No. 2009-13, which is an update to Topic 605, Revenue Recognition. The update establishes a selling-price hierarchy for determining the selling price of a deliverable under a revenue arrangement. The update will become effective for the Company prospectively for revenue arrangements entered into or materially modified beginning on August 1, 2010, with earlier adoption permitted.

Engineering and Product Development Costs

The Company expenses all engineering, research and development costs as incurred. Expenses subject to capitalization in accordance with the Topic 985, Software, to the FASB ASC (formerly known as SFAS No. 86, Accounting for the Costs of Computer Software To Be Sold, Leased or Otherwise Marketed), relating to certain software development costs, were insignificant.

Shipping and Handling Costs

Shipping and handling costs are included in cost of sales in the consolidated statements of operations. These costs, when included in the sales price charged for products, are recognized in net sales. Shipping and handling costs were insignificant for the three and nine months ended April 30, 2010 and 2009, respectively.

Income Taxes

Income tax expense relates principally to operating results in foreign entities in jurisdictions primarily in Asia and Europe. The Company recorded an income tax provision/ (benefit) of less than ($0.1) million and $0.2 million, respectively, for the three and nine months ended April 30, 2010. For the three and nine months ended April 30, 2009, the Company recorded an income tax provision of $0.2 million and $0.8 million, respectively.

As of April 30, 2010 and July 31, 2009, the total liability for unrecognized income tax benefits was $13.9 million and $13.7 million, respectively, (of which $4.7 million and $4.4 million, if recognized, would impact the Company’s income tax rate). The Company recognizes interest and penalties related to uncertain tax positions as a component of income tax expense. As of April 30, 2010 and July 31, 2009, the Company had accrued approximately $1.1 million for potential payment of accrued interest and penalties.

The Company conducts business globally and, as a result, the Company and its subsidiaries or branches file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. In the normal course of business the Company is subject to examination by taxing authorities throughout the world, including such major jurisdictions as the United States, Singapore and Germany. With few exceptions, the Company is no longer subject to U.S. federal, state and local or non-U.S. income tax examinations for years before 2000.

As a result of the merger with Credence on August 29, 2008, a greater than 50% cumulative ownership change in both entities has triggered a significant limitation in net operating loss carryforward utilization. The Company’s ability to use operating and acquired net operating loss and credit carryforwards is subject to annual limitation as defined in sections 382 and 383 of the Internal Revenue Code. The Company currently estimates that the annual limitation on its use of net operating losses generated through August 29, 2008 will be approximately $10.1 million which, based on currently enacted federal carryforward periods, limits the amount of net operating losses able to be used to approximately $200.0 million. The Company will continue to assess the realizability of these carryforwards in subsequent periods.

Accounting for Stock-Based Compensation

The Company has various stock-based compensation plans, including the 2004 Stock Plan (“2004 Plan”), the 2001 Stock Plan (“2001 Plan”), the 1999 Stock Plan (“1999 Plan”), the 1995 LTX (Europe) Ltd. Approved Stock Option Plan (“U.K. Plan”). In addition, the Company assumed the StepTech, Inc. Stock Option Plan (the “STI 2000 Plan”) as part of its acquisition of StepTech as well as the Credence 2005 Stock Incentive Plan (the “Credence 2005 Plan”) as part of its acquisition of Credence. The Company can only grant options from the 2004 Plan or the Credence 2005 Plan.

The Company recognizes stock-based compensation on its equity awards in accordance with the provisions of Topic 718, Compensation – Stock Compensation, to the FASB ASC (formerly known as SFAS No. 123R, Share-Based Payment) (“ASC 718”). Under ASC 718, the Company is required to recognize, as expense, the estimated fair value of all share-based payments to employees. In accordance with this standard, the Company has elected to recognize the compensation cost of all service based awards on a straight-line basis over the vesting period of the award. Performance based awards are recognized ratably for each vesting tranche. The Company recorded stock-based compensation expense of approximately $1.1 million and $3.1 million for the three and nine months ended April 30, 2010, respectively, and $0.9 million and $3.3 million, respectively, for the three and nine months ended April 30, 2009, in connection with its share-based payments.

There were no equity awards granted during the quarter ended April 30, 2010.

During the quarter ended January 31, 2010, the Company granted an annual award of 140,000 RSUs to members of the Board of Directors with vesting terms of one year.

During the quarter ended October 31, 2009, the Company granted 2,567,000 RSUs to certain executives and key employees with vesting terms of between three months and four years. Of these, approximately 880,000 were granted to certain executives in lieu of cash as compensation related to a merger integration bonus tied to key success elements of the merger. These units vest over one year and the fair value of these awards are being recognized by the Company as a reduction to the bonus accrual.

Product Warranty Costs

The Company’s products are sold with warranty provisions that require it to remedy deficiencies in quality or performance of products over a specified period of time at no cost to our customers. The Company generally offers a warranty for all of its products, the standard terms and conditions of which are based on the product sold and the customer. For all testers sold, the Company accrues a liability for the estimated cost of standard warranty at the time of tester shipment and defers the portion of product revenue attributed to the fair value of non-standard warranty. Costs for non-standard warranty are expensed as incurred. Factors that impact the warranty liability include the number of installed testers, historical and anticipated product failure rates, material usage and service labor costs. The Company periodically assesses the adequacy of its recorded liability and adjusts amounts as necessary.

The following table shows the change in the product warranty liability, as required by Topic 460, Guarantees, to the FASB ASC (formerly known as FASB Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others), for the nine months ended April 30, 2010 and 2009:


	Nine Months Ended April 30,
Product Warranty Activity	2010			2009
	(in thousands)
Balance at beginning of period	$	3,496		$	908
Balance assumed from Credence		—			5,519
Warranty expenditures for current period		(3,664	)		(4,544	)
Provision for warranty costs in the period		4,509			1,774

Balance at end of period	$	4,341		$	3,657

Comprehensive income (loss)

Comprehensive income (loss) is composed of two components, net income (loss) and other comprehensive income (loss). Other comprehensive income (loss) consists of unrealized gains and losses on the Company’s marketable securities, cumulative translation adjustments and the effects of the pension liability gain.

Net income (loss) per Share

Basic net income (loss) per share is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted net income (loss) per share reflects the maximum dilution that would have resulted from the assumed exercise and share repurchase related to dilutive stock options, restricted stock units, and convertible debt and is computed by dividing net income (loss) by the weighted average number of common shares and the dilutive effect of all securities outstanding.

Reconciliation between basic and diluted earnings per share is as follows:


	Three Months Ended April 30,					Nine Months Ended April 30,
	2010		2009			2010		2009
	(in thousands, except per share data)
Net income (loss)	$	6,829	$	(27,819	)	$	4,448	$	(127,715	)
Basic EPS
Basic common shares		139,609		127,189			131,912		120,322
Basic EPS	$	0.05	$	(0.22	)	$	0.03	$	(1.06	)
Diluted EPS
Basic common shares		139,609		127,189			131,912		120,322
Plus: Impact of stock options and restricted stock units		2,878		—			2,263		—

Diluted common shares		142,487		127,189			134,175		120,322
Diluted EPS	$	0.05	$	(0.22	)	$	0.03	$	(1.06	)

For the three and nine months ended April 30, 2010, options to purchase approximately 6.4 million and 6.7 million shares, respectively, and 10.0 million shares for both the three and nine months ended April 30, 2009, of common stock were not included in the calculation of diluted net loss per share because their inclusion would have been anti-dilutive. These options could be dilutive in the future. The calculation of diluted net income (loss) per share also excludes 45,000 RSUs for the nine months ended April 30, 2010 and for the three and nine months ended April 30, 2009 in accordance with the contingently issuable shares guidance of Topic 260, Earnings Per Share, to the FASB ASC (formerly known as SFAS No. 128, Earnings Per Share). The calculation of diluted net income (loss) per share for the three and nine months ended April 30, 2010 and April 30, 2009 also excludes the impact of conversion features of the Company’s Convertible Senior Subordinated Notes due 2010 and 2011 as to include them would have been anti-dilutive.

Cash and Cash Equivalents and Marketable Securities

The Company considers all highly liquid investments that are readily convertible to cash and that have original maturity dates of three months or less to be cash equivalents. Cash and cash equivalents consist primarily of operating cash, money market accounts and reverse repurchase agreements. Marketable securities consist primarily of debt securities that are classified as available-for-sale, in accordance with the Topic 320, Investments – Debt and Equity Securities, to the FASB ASC (formerly known as SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities). Securities available for sale include corporate and governmental obligations with various contractual maturity dates some of which are greater than one year. The Company considers the securities to be liquid and convertible to cash within 30 days. The Company has the ability and intent, if necessary, to liquidate any security that the Company holds to fund operations over the next twelve months and as such has classified these securities as short-term. Governmental obligations include U.S. Government, State, Municipal and Federal Agency securities. The Company has an overnight sweep reverse repurchase agreement program with its bank for certain accounts to allow the Company to enter into secured overnight investments which generally provides a higher investment yield than a regular operating account. The bank provides the Company US treasury securities as collateral for the loan. The maturity of the reverse repurchase agreement is one day, at which point the securities are sold and the proceeds are returned to the Company, plus any accrued interest. The average daily balance of the reverse repurchase agreement for the quarter ended April 30, 2010 was $1.8 million.

Gross unrealized gains and losses for the three and nine months ended April 30, 2010 and April 30, 2009 were not significant. Realized profits, losses and interest are included in investment income in the Statements of Operations. Unrealized gains and losses are reflected as a separate component of comprehensive income (loss) and are included in Stockholders’ Equity. The Company analyzes its securities portfolio for impairment on a quarterly basis or upon occurrence of a significant change in circumstances. There were no significant impairment losses recorded in the three or nine months ended April 30, 2010 or April 30, 2009.

Inventories

Inventories are stated at the lower of cost or market, determined on the first-in, first-out (“FIFO”) method, and include materials, labor and manufacturing overhead. The components of inventories are as follows:


	April 30, 2010		July 31, 2009
	(in thousands)
Purchased components and parts	$	13,566	$	16,811
Units-in-progress		6,472		8,733
Finished units		6,775		9,795

Total inventories	$	26,813	$	35,339

The Company establishes inventory reserves when conditions exist that indicate inventory may be in excess of anticipated demand or is obsolete based upon assumptions about future demand for the Company’s products or market conditions. The Company regularly evaluates the ability to realize the value of inventory based on a combination of factors including the following: forecasted sales or usage, estimated product end of life dates, estimated current and future market value and new product introductions.

Purchasing and usage alternatives are also explored to mitigate inventory exposure. When recorded, reserves are intended to reduce the carrying value of inventory to its net realizable value. As of April 30, 2010 and July 31, 2009, inventory is stated net of inventory reserves of $45.1 million and $56.6 million, respectively. There were no material inventory provisions required in the three or nine months ended April 30, 2010. If actual demand for products deteriorates or market conditions are less favorable than projected, additional inventory reserves may be required. Such reserves are not reversed until the related inventory is sold or otherwise disposed of. The Company had sales of $0.4 million of previously written off inventory for the three and nine months ended April 30, 2010. The Company had $0 and $0.2 million, respectively, of sales of previously fully-written off inventory for the three months and nine months ended April 30, 2009.

Property and Equipment

Property and equipment is typically recorded at cost. Property and equipment acquired in an acquisition are recorded under the purchase method of accounting at their estimated fair value at the date of acquisition. The Company provides for depreciation and amortization on the straight-line method. Charges are made to operating expenses in amounts that are sufficient to amortize the cost of the assets over their estimated useful lives. Machinery, equipment and internally manufactured systems include LTX-Credence test systems used for testing components, engineering and applications development. Internally manufactured equipment is recorded at cost and depreciated over 3 to 7 years. Repairs and maintenance costs that do not extend the lives of property and equipment are expensed as incurred. Property and equipment are summarized as follows:


	(in thousands)						(in years)
	April 30, 2010			July 31, 2009			Estimated Useful Lives
Equipment spares	$	62,795		$	64,422		5 or 7
Machinery, equipment and internally manufactured systems		41,072			43,161		3-7
Office furniture and equipment		5,744			5,909		3-7
Leasehold improvements		6,578			6,633		Term of lease, not to exceed 10 years
Land		2,524			2,524		—
Purchased software		1,242			1,196		3

Property and equipment, gross		119,955			123,845
Less: accumulated depreciation and amortization		(89,982	)		(85,544	)

Property and equipment, net	$	29,973		$	38,301

Impairment of Long-Lived Assets Other Than Goodwill

On an on-going basis, management reviews the value and period of amortization or depreciation of long-lived assets. In accordance with Topic 360, Property, Plant and Equipment, to the FASB ASC (formerly known as SFAS No. 144, Accounting for Impairment or Disposal of Long-Lived Assets (“ASC 360”), the Company reviews whether impairment losses exist on long-lived assets when indicators of impairment are present. During this review, the Company reevaluates the significant assumptions used in determining the original cost of long-lived assets. Although the assumptions may vary, they generally include revenue growth, operating results, cash flows and other indicators of value. Management then determines whether there has been a permanent impairment of the value of long-lived assets based upon events or circumstances that have occurred since acquisition. The extent of the impairment amount recognized is based upon a determination of the impaired asset’s fair value.

In connection with the merger with Credence, during the quarter ended October 31, 2008, the Company developed a product roadmap for the combined company which led to the phase out of approximately $3.7 million of certain long-lived assets related to the ASL3K RF, Diamond D-40, and Sapphire product lines. In light of the economic conditions existing at the time, the Company also recognized a $1.3 million loss on certain long-lived assets for which it did not believe it would recover the cost. Accordingly, the Company recorded an impairment loss for the three months ended October 31, 2008 of $5.0 million.

The Company experienced a significant decline in its stock price and lower than expected revenues for the year ended July 31, 2009, which caused the Company to conduct recoverability tests in accordance with ASC 360, based on undiscounted cash flows of the Company’s long-lived assets. As a result of these tests, the Company determined that subsequent to the quarter ended April 30, 2009, there were no additional impairment losses on long-lived assets for the year ended July 31, 2009. As a result of sustained improvement in the stock price as of April 30, 2010, increased sales, and overall improvement in the industry and the overall economy, there were no indictors that required the Company to conduct a recoverability test as of the quarter ended April 30, 2010.

Goodwill and Other Intangibles

In accordance with Topic 350, Intangibles – Goodwill and Other, to the FASB ASC (formerly known as SFAS No. 142, Goodwill and Other Intangible Assets) (“ASC 350”), the Company is required to review goodwill for impairment at least annually or more often if there are indicators of impairment present. Historically, the Company has performed its annual impairment analysis during the fourth quarter of each year. The provisions of ASC 350 require that a two-step impairment test be performed for goodwill. In the first step, the Company compares the fair value of each reporting unit to which goodwill has been allocated to its carrying value. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that unit, goodwill is considered not impaired and the Company is not required to perform further testing. If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, then the Company must perform the second step of the impairment test in order to determine the implied fair value of the reporting unit’s goodwill. If the carrying value of a reporting unit’s goodwill exceeds its implied fair value, then the Company would record an impairment loss equal to the difference. The Company has one reporting unit for purposes of performing its goodwill impairment testing.

Determining the number of reporting units and the fair value of a reporting unit requires the Company to make judgments and involves the use of significant estimates and assumptions. These estimates and assumptions include revenue growth rates and operating margins used to calculate projected future cash flows, risk-adjusted discount rates, future economic and market conditions and determination of appropriate market comparables. The Company bases its fair value estimates on assumptions it believes to be reasonable but that are unpredictable and inherently uncertain. Actual future results may differ from those estimates.

As a result of sustained improvement in the stock price as of April 30, 2010, increased sales, and overall improvement in the industry and the overall economy, there were no indicators that required the Company to conduct an interim recoverability test as of the quarter ended April 30, 2010.

Of the $43.0 million of total goodwill, $14.4 million at April 30, 2010 and July 31, 2009 represents the excess of acquisition costs over the estimated fair value of the net assets acquired from StepTech, Inc. (“StepTech”) on June 10, 2003. In connection with the merger with Credence, the Company has recorded approximately $28.6 million of goodwill in its consolidated balance sheet at April 30, 2010 and July 31, 2009. This amount represents the excess purchase price over the fair value of the net tangible and intangible assets acquired at August 29, 2008.

The following is a summary of activity for the Company’s goodwill for the nine months ended April 30, 2010 and 2009:


Goodwill Activity	April 30, 2010		April 30, 2009
	(in thousands)
Balance at beginning of period	$	43,030	$	14,368
Acquisition of Credence		—		29,974
Resolution of uncertain tax position		—		(451	)

Balance at end of period	$	43,030	$	43,891

Intangible assets, all of which relate to the Credence merger, consist of the following:


	Estimated Useful Life (in years)	As of April 30, 2010
Description	Estimated Useful Life (in years)	Gross Carrying Amount (in thousands)		Accumulated Amortization (in thousands)		Net Amount (in thousands)
Trade names	1.0	$	300	$	300	$	—
Distributor relationships	2.0		2,800		2,565		235
Key customer relationships	3.0		8,500		6,968		1,532
Developed technology—ASL	6.0		16,000		8,636		7,364
Developed technology—Diamond	9.0		9,400		5,286		4,114
Maintenance agreements	7.0		1,900		204		1,696

Total intangible assets		$	38,900	$	23,959	$	14,941


	Estimated Useful Life (in years)	As of July 31, 2009
Description	Estimated Useful Life (in years)	Gross Carrying Amount (in thousands)		Accumulated Amortization (in thousands)		Net Amount (in thousands)
Trade names	1.0	$	300	$	300	$	—
Distributor relationships	2.0		2,800		1,860		940
Key customer relationships	3.0		8,500		5,368		3,132
Developed technology—ASL	6.0		16,000		5,226		10,774
Developed technology—Diamond	9.0		9,400		3,213		6,187
Maintenance agreements	7.0		1,900		—		1,900

Total intangible assets		$	38,900	$	15,967	$	22,933

Intangible assets are amortized based upon the pattern of estimated economic use, over their estimated useful lives. The weighted average estimated useful life over which these intangible assets will be amortized is 5.8 years.

The Company expects amortization for these intangible assets to be:


For the fiscal year ending July 31,	Amount (in thousands)
Remainder of 2010	$	2,664
2011		5,961
2012		3,163
2013		1,583
2014		769
Thereafter		801

Total	$	14,941

3. BUSINESS COMBINATION

Merger with Credence Systems Corporation

On August 29, 2008, the Company and Credence completed the Merger contemplated by the Merger Agreement, pursuant to which Credence became a wholly-owned subsidiary of the Company and the Company changed its name to “LTX-Credence Corporation”. Pursuant to the Merger Agreement, each share of Credence common stock outstanding immediately prior to the effective time of the Merger (the “Effective Time”) was converted into the right to receive 0.6129 shares of the Company’s common stock. As a result of this conversion, an aggregate of 63.0 million shares of the Company’s common stock were issued to former stockholders of Credence and, immediately after the Effective Time, the former stockholders of Credence held 50.02% of the outstanding shares of the Company’s common stock and the continuing Company stockholders held 49.98% of the outstanding shares of the Company’s common stock. In addition, at the Effective Time, all outstanding options and other equity-based awards to acquire shares of Credence common stock were converted into options and other equity-based awards to acquire shares of the Company’s common stock, as adjusted to reflect the exchange ratio of the Merger.

In accordance with Topic 805, Business Combinations, to the FASB ASC (formerly known as SFAS No. 141, Business Combinations) (“ASC 805”) and based on the terms of the merger, LTX was the accounting acquirer. This conclusion was based on the facts that LTX board members and senior management control and represent a majority of the board of directors and senior management of the combined company, as well as the terms of the merger consideration, pursuant to which the Credence stockholders received a premium over the fair market value of their shares on the merger completion date. There were no preexisting relationships between the two companies.

The aggregate purchase price of approximately $129.3 million included 63.0 million shares of LTX common stock at an estimated fair value of $117.7 million; approximately 4.0 million of fully vested stock options granted to Credence employees in exchange for their vested Credence stock options, with an estimated fair value of approximately $1.5 million; and approximately $10.1 million of direct acquisition costs. There were no potential contingent consideration arrangements payable to the former Credence shareholders in connection with this transaction.

The Company has measured the fair value of the 63.0 million shares of the Company common stock issued as consideration in connection with the merger under EITF Issue No. 99-12, Determination of the Measurement Date for the Market Price of Acquirer Securities Issued in a Purchase Business Combination as codified in Topic 805. The Company determined the measurement date to be August 29, 2008, the date the transaction was completed, as the number of shares to be issued according to the exchange ratio was fixed without subsequent revision on that date. The Company valued the securities based on the average market price two days before and after the measurement date. The average stock price was determined to be approximately $1.87.

The following is a summary of the purchase price for Credence:


	(in thousands, except exchange ratio and price per share)
Number of Credence shares acquired		102,824
Multiplied by the exchange ratio		0.6129

Number of shares of LTX common stock issued to the holders of Credence common stock		63,021
Multiplied by the price per share of LTX common stock	$	1.87	$	117,723

Fair value of outstanding Credence stock options and restricted stock exchanged for LTX stock options and restricted stock (options calculated using the Company’s option pricing model)				1,508
Transaction costs				6,229
Other consideration				3,859

Purchase price			$	129,319

The above purchase price has been allocated based on the fair value of net assets acquired as follows:

Allocation of purchase consideration


	(in thousands)
Cash and cash equivalents, net of acquisition costs	$	131,666
Working capital as of August 29, 2008, net of cash and cash equivalents acquired		5,840
Identifiable intangible assets		38,900
Goodwill		29,113
In-process research and development		6,300
Property and equipment		28,501
Other long-term assets		20,732
Convertible Senior Subordinated Notes due 2010		(114,896	)
Other long-term liabilities		(16,837	)

Purchase price	$	129,319

Valuation of Intangible Assets and Goodwill

The purchase price for the merger with Credence has been allocated to assets acquired and liabilities assumed based on their fair values. The Company has then allocated the purchase price in excess of net tangible assets acquired to identifiable intangible assets, including in-process research and development, based upon a detailed valuation that uses information and assumptions provided by management, as further described below. Any excess purchase price over the fair value of the net tangible and intangible assets acquired is allocated to goodwill.

Identifiable Intangible Assets

Credence’s identifiable intangible assets included existing technology, customer relationships and trade names. Credence’s existing technology relates to patents, patent applications and know-how with respect to the technologies embedded in its currently marketed products.

LTX-Credence primarily used the income approach to value the existing technology and other intangibles. This approach calculates fair value by estimating future cash flows attributable to each intangible asset and discounting them to present value at a risk-adjusted discount rate.

In estimating the useful life of the acquired assets, the Company considered paragraph 11 of ASC 350, which lists the pertinent factors to be considered when estimating the useful life of an intangible asset. These factors included a review of the expected use by the combined company of the assets acquired, the expected useful life of another asset (or group of assets) related to the acquired assets, legal, regulatory or other contractual provisions that may limit the useful life of an acquired asset or may enable the extension of the useful life of an acquired asset without substantial cost, the effects of obsolescence, demand, competition and other economic factors, and the level of maintenance expenditures required to obtain the expected future cash flows from the asset. The Company expects to amortize these intangible assets over their estimated useful lives using a method that is based on estimated future cash flows as the Company believes this will approximate the pattern in which the economic benefits of the assets will be derived.

Acquired In-Process Research and Development

As part of the purchase price allocation for Credence, approximately $6.3 million of the purchase price has been allocated to acquired in-process research and development projects primarily related to Credence’s ASL and Diamond tester product lines. The amount allocated to acquired in-process research and development represents the estimated value based on risk-adjusted cash flows related to in-process projects that have not yet reached technological feasibility and have no alternative future uses as of the date of the acquisition. The primary basis for determining the technological feasibility of these projects was a detailed review of the development status of each project including factors such as costs incurred/remaining, technological risks achieved/remaining, and incompleteness.

The fair value assigned to acquired in-process technology was determined by estimating the costs to develop the acquired technology into commercially viable products, estimating the resulting net cash flows from the projects, and discounting the net cash flows to their present value. The revenue projection used to value the acquired in-process research and development was based on estimates of relevant market sizes and growth factors, expected trends in technology, and the nature and expected timing of new product introductions by us and our competitors. The resulting net cash flows from such projects were based on our estimates of cost of sales, operating expenses, and income taxes from such projects. The rates utilized to discount the net cash flows to their present value were based on estimated cost of capital calculations and the implied rate of return from the transaction model plus a risk premium. Due to the nature of the forecasts and the risks associated with the developmental projects, appropriate risk-adjusted discount rates were used for the in-process research and development projects. The discount rates are based on the stage of completion and uncertainties surrounding the successful development of the purchased in-process technology projects.

In accordance with ASC 805, the Company recorded a charge upon the consummation of the merger for the full amount of the acquired in-process research and development in the nine months ended April 30, 2009.

Supplemental Pro-Forma Information

The following unaudited pro-forma information presents the consolidated results of operations of LTX and Credence as if the merger had occurred at the beginning of the period presented, with pro-forma adjustments to give effect to amortization of intangible assets and certain other adjustments (in thousands, except per share data):


	Nine Months Ended April 30, 2009
Net sales	$	114,486
Net loss	$	(158,377	)
Net loss per share—basic and diluted	$	(1.35	)

The pro forma net loss for the nine months ended April 30, 2009 includes $58.9 million of charges related to Credence for excess and obsolete inventory provisions, property and equipment impairment, acquired in-process research and development, and amortization of acquired intangible assets, all of which was incurred after August 29, 2008. The unaudited pro forma results are not necessarily indicative of the results that the Company would have attained had the merger with Credence occurred at the beginning of the period presented. No pro forma information is presented for the other periods presented in the Company’s consolidated financial statements since Credence’s operations are included in the consolidated results for those periods.

4. SEGMENT REPORTING

In accordance with the provisions of Topic 280, Segment Reporting to the FASB ASC (formerly known as SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information) (“ASC 280”), the Company operates as one reporting segment, that is, the design, manufacture and marketing of automated test equipment for the semiconductor industry that is used to test system-on-a-chip, digital, analog and mixed signal integrated circuits. The Company and its chief operating decision maker had access to discrete financial information for two operating segments, LTX and Credence immediately subsequent to the completion of the merger. During fiscal 2009, the Company completed its merger integration activities and as a result, the Company’s financial accounting systems and organizational structure were fully integrated and discrete financial information and cash flows are no longer available as of the end of fiscal year 2009. Accordingly, as of April 30, 2010, the Company operates as one operating segment.

The Company’s net sales by geographic area for the three and nine months ended April 30, 2010 and 2009, along with the long-lived assets at April 30, 2010 and July 31, 2009, are summarized as follows:


	Three Months Ended April 30,				Nine Months Ended April 30,
	2010		2009		2010		2009
	(in thousands)
Net sales:
United States	$	11,264	$	11,030	$	46,132	$	47,513
Taiwan		16,139		4,915		37,030		11,536
Singapore		8,371		1,382		19,854		8,490
Switzerland		5,385		60		9,068		632
Philippines		3,902		743		6,432		12,332
All other countries (none of which is individually greater than 10% of net sales)		11,008		6,537		27,403		21,698

Total Net Sales	$	56,069	$	24,667	$	145,919	$	102,201

Long-lived assets consist of property and equipment:


	April 30, 2010		July 31, 2009
	(in thousands)
Long-lived assets:
United States	$	26,405	$	34,445
Singapore		1,945		1,837
Philippines		494		536
All other countries		1,129		1,483

Total long-lived assets	$	29,973	$	38,301

Transfer prices on products sold to foreign subsidiaries are intended to produce profit margins that correspond to the subsidiary’s sales and support efforts.

5. RESTRUCTURING

As a result of the Credence merger, the Company assumed previous Credence management approved restructuring plans designed to reduce headcount, consolidate facilities and to align that company’s capacity and infrastructure to anticipated customer demand and transition of its operations for higher utilization of facility space. In connection with these plans, the Company assumed a total liability of approximately $6.0 million. Subsequent to the completion of the Merger, the Company incurred approximately $0.9 million of additional expense related to these actions that was recorded in the Company’s statement of operations in fiscal 2009.

Additionally, the Company recorded as part of its purchase accounting a liability of approximately $13.0 million in accordance with EITF Issue No. 95-3 (codified as part of ASC Topic 805), Recognition of Liabilities in Connection with a Purchase Business Combination primarily related to termination of certain Credence employees in connection with the Company’s merger with Credence. In addition, the Company recorded a charge to operations in the quarter ending October 31, 2008 for a liability of approximately $2.9 million for legacy LTX employees related to the merger with Credence and other post-employment obligations. The Company’s plan was finalized within one year of the date of the merger and all adjustments to severance and/or retention costs directly related to the Credence restructuring were recorded as an adjustment to goodwill. On January 20, 2009, the Company announced additional restructuring actions that resulted in a total charge of $9.0 million. Also, in the three months ended April 30, 2009, the Company recorded a charge of $5.7 million related to costs associated with vacating several facilities that are no longer being utilized. On April 23, 2009, the Company announced additional employee-related restructuring actions that resulted in a total charge of $3.0 million.

In the three months ended April 30, 2010, the Company recorded a charge of approximately $0.8 million related to additional square footage vacated in a previously restructured facility.

In the three months ended January 31, 2010, the Company recorded a charge of approximately $0.8 million related to changes in sub-lease assumptions and future rental payments on certain previously restructured facilities, reflecting current market conditions.

In the three months ended October 31, 2009, the Company recorded a charge of approximately $0.4 million related to further merger-integration costs associated with headcount reductions in Europe and due to the downsizing of the Company’s Hillsboro, Oregon, facility.

The following table sets forth the Company’s restructuring accrual activity for the nine months ended April 30, 2010 (in thousands):


	Severance Costs			Facility Leases			Total
Balance July 31, 2009	$	2,820		$	5,565		$	8,385
Additions to expense		438			1,589			2,027
Accretion and elimination of unfavorable lease liability		—			292			292
Cash paid		(2,482	)		(1,221	)		(3,703	)

Balance April 30, 2010	$	776		$	6,225		$	7,001

The Company has classified approximately $2.3 million of this balance as other accrued expenses on its consolidated balance sheet. The remaining balance of approximately $4.7 million primarily represents the present value of future facility lease payments and is classified as other long-term liabilities since these amounts will not be paid within the next twelve months.

6. COMMITMENTS AND CONTINGENCIES

In the ordinary course of business, the Company agrees from time to time to indemnify certain customers against certain third party claims for property damage, bodily injury, personal injury or intellectual property infringement arising from the operation or use of the Company’s products. Also, from time to time in agreements with suppliers, licensors and other business partners, the Company agrees to indemnify these partners against certain liabilities arising out of the sale or use of the Company’s products. The maximum potential amount of future payments the Company could be required to make under these indemnification obligations is theoretically unlimited; however, the Company has general and umbrella insurance policies that enable it to recover a portion of any amounts paid and many of its agreements contain a limit on the maximum amount, as well as limits on the types of damages recoverable. Based on the Company’s experience with such indemnification claims, it believes the estimated fair value of these obligations is minimal. Accordingly, the Company has no liabilities recorded for these agreements as of July 31, 2009 or April 30, 2010.

Subject to certain limitations, LTX-Credence indemnifies its current and former officers and directors for certain events or occurrences. Although the maximum potential amount of future payments LTX-Credence could be required to make under these agreements is theoretically unlimited, as there were no known or pending claims, the Company has not accrued a liability for these agreements as of July 31, 2009 or April 30, 2010.

The Company has approximately $8.3 million and $8.0 million, respectively, of non-cancelable inventory commitments with outsource suppliers as of April 30, 2010 and July 31, 2009. The Company expects to consume the inventory through normal operating activity over the next nine months.

The Company has operating lease commitments for certain facilities and equipment. Minimum lease payments under noncancelable leases at April 30, 2010, are as follows:

Lease Commitments:


For the fiscal year ending July 31,	Amount (in thousands)
Remainder of 2010	$	764
2011		4,901
2012		4,947
2013		4,435
2014		4,242
Thereafter		12,577

Total minimum lease payments	$	31,866

7. ACCRUED EXPENSES

Other accrued expenses consisted of the following at April 30, 2010 and July 31, 2009:


	(in thousands)
	April 30, 2010		July 31, 2009
Accrued compensation	$	9,553	$	11,828
Accrued vendor liability		4,698		8,036
Accrued income and local taxes		1,242		2,067
Warranty reserve		4,341		3,496
Accrued restructuring		2,341		4,342
Accrued interest		38		760
Accrued professional fees		1,260		1,647
Other accrued expenses		6,374		9,651

Total accrued expenses	$	29,847	$	41,827

Accrued vendor liability represents inventory physically located at the Company’s outsourced suppliers which the Company is obligated to purchase.

8. LONG TERM DEBT

Long-term debt consists of the following:


	April 30, 2010			July 31, 2009
	(in thousands)
Borrowings on Secured Credit Facility	$	—		$	39,400
Convertible Senior Subordinated Notes due 2011		800			32,610
Convertible Senior Subordinated Notes due 2010		1,520			1,520
Bank Term Loan		—			12,200

Total debt		2,320			85,730
Less: current portion		(1,520	)		(53,120	)

Total long-term debt	$	800		$	32,610

Loan Agreements with Silicon Valley Bank (“SVB”)

On February 25, 2009, the Company entered into a modification of its Loan Agreement with SVB to provide for a two-year secured revolving line of credit (the “First Loan Modification Agreement”) that expires in February 2011. The First Loan Modification Agreement allows for cash borrowings, letters of credit and cash management facilities under a secured revolving credit facility of up to a maximum of $40.0 million. Any amounts outstanding under the secured credit facility will accrue interest at a floating per annum rate equal to SVB’s prime rate, or if greater, 4.5%. The Company’s debt obligations under the secured credit facility with SVB may be accelerated upon the occurrence of an event of default, which includes customary events of default, including payment defaults, defaults in the performance of affirmative and negative covenants, the inaccuracy of representations or warranties, a cross-default related to indebtedness in an aggregate amount of $0.5 million or more, bankruptcy and insolvency related defaults, defaults relating to judgments and a material adverse change (as defined in the First Loan Modification Agreement).

The secured credit facility contains negative covenants applicable to the Company, including a financial covenant requiring the Company to maintain a minimum level of liquidity equal to cash and cash equivalents and marketable securities maintained in accounts at SVB in excess of amounts owed to SVB under the term loan, secured line of credit and standby letters of credit plus $7.0 million at all times, plus $20.0 million at the end of any fiscal quarter. The secured credit facility also contains restrictions on liens, capital expenditures, investments, indebtedness, fundamental changes to the borrower’s business, dispositions of property, making certain restricted payments (including restrictions on dividends and stock repurchases), entering into new lines of business and transactions with affiliates.

As part of this transaction, the Company capitalized approximately $0.4 million of legal and other third-party fees and is recognizing the costs over the two-year term of the secured credit facility, in accordance with the provisions of EITF 98-14, Debtor’s Accounting for Changes in Line-of-Credit or Revolving-Debt Arrangements (also codified in ASC 470). As of April 30, 2010 $0.2 million of these costs remains to be amortized.

During the quarter ended April 30, 2009, the Company entered into two additional loan modifications (the “Second Loan Modification Agreement” and the “Third Loan Modification Agreement”) with SVB. The nature of these modifications related to administrative changes made to the loan agreement for certain definitions and distribution clauses, in response to the exchange transactions further discussed below and had no accounting implications.

On August 5, 2009, the Company and SVB entered into a fourth loan modification agreement (the “Fourth Loan Modification Agreement”), which modified the terms of a liquidity covenant contained in the Loan Agreement and provides for adjustments in the amount of the revolving line of credit based on the level of Quick Assets (as defined in the Loan Agreement). In connection with the Fourth Loan Modification Agreement the Company repaid in full all principal and interest on its outstanding term loan with SVB.

As of April 30, 2010, the Company has no amount outstanding under the secured revolving credit facility. In comparative periods where there was an amount outstanding, because of the minimum level of liquidity required per the financial covenant noted above, the Company has classified the borrowings under the secured revolving credit facility as a current liability on its consolidated balance sheet.

Convertible Senior Subordinated Notes

At the date of the Merger, Credence had outstanding $122.5 million aggregate principal amount of 3.5% Convertible Senior Subordinated Notes due in May 2010 (“Notes”). In the year ended July 31, 2009, the Company repurchased approximately $87.0 million of principal amount of the Notes at a discount to their par value for a net cash consideration of $76.3 million, and also entered into an exchange transaction with two noteholders which reduced the aggregate principal amount outstanding but extended the due date to May 2011. In the three months ending October 31, 2009, the Company repurchased an additional $0.6 million of notes. In March 2010, the Company repurchased $33.5 million in aggregate principal and premium 3.5% Convertible Senior Subordinated Notes due 2011 at a discount to their par value for net cash consideration of $30.9 million.

The Company accounted for the repurchase of the notes as an extinguishment of debt in accordance with Topic 860, Transfers and Servicing, to the FASB ASC (formerly known as SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities, a Replacement of SFAS No. 125) (“Topic 860”) and has recorded a net gain on extinguishment of debt of $2.1 million and $3.1 million in the three and nine months ended April 30, 2010, respectively.

As a result, as of April 30, 2010, the Company has $1.5 million of notes outstanding that are due in May 2010 which were not part of the exchange transaction and $0.9 million principal of notes outstanding due in May 2011.

As noted above, in March and May of 2009, the Company entered into exchange transactions with two noteholders to exchange $47.3 million of Notes with $33.9 million of 3.5% Convertible Senior Subordinated Notes due May 2011 (“New Notes”), which included cash consideration of $10.6 million. The May transaction resulted from the Company’s Exchange Offer which was described in the Offering Circular, dated April 22, 2009 and the related Letter of Transmittal (collectively, the “Tender Offer Materials”). As the terms and conditions of the New Notes did not substantially change from the Notes, the Company concluded that the net present value of the New Notes did not significantly change and therefore accounted for the exchange transaction as a debt modification in accordance with the provisions of ASC 470. Accordingly, the net gain of $2.4 million on these exchange transactions was deferred and is being amortized over the remaining holding period of the New Notes. For the three and nine months ended April 30, 2010, the Company has recorded $0.3 million and $0.6 million, respectively, of this gain in the statement of operations. As of April 30, 2010, less than $0.1 million of the deferred gain is recorded on the Company’s consolidated balance sheet.

The New Notes are unsecured senior subordinated indebtedness of the Company, rank equally with the Notes and bear interest at the rate of 3.5% per annum. Interest is payable on the New Notes by the Company on May 15 and November 15 of each year through maturity on May 15, 2011, commencing on November 15, 2009. At maturity, the Company will be required to repay the outstanding principal of the New Notes, together with any accrued and unpaid interest thereon, and pay a maturity premium equal to 7.5% of such principal. New Notes may be issued only in denominations of $1,000 or an integral multiple thereof.

The New Notes are convertible, subject to the satisfaction of certain conditions or the occurrence of certain events as provided in the Indenture, into shares of the Company’s common stock at a conversion price per share of the Company’s common stock of $13.46 (subject to adjustment in certain events). The New Notes contain provisions known as net share settlement which, upon conversion of the New Notes, require the Company to pay holders in cash for up to the principal amount of the converted New Notes and to settle any amounts in excess of the cash amount in shares of the Company’s common stock.

Following a designated event generally defined as a change of control or some other termination of trading of the Company’s listed shares, the Company must offer to repurchase all of the New Notes then outstanding at a repurchase price in cash equal to 100% of the principal amount of the New Notes, plus accrued and unpaid interest, if any, to, but excluding, the date of payment and a premium equal to 7.5% of such principal.

If there is an event of default (as defined in the Indenture), the principal of and premium, if any, on all the New Notes and the interest accrued thereon may be declared immediately due and payable, subject to certain conditions set forth in the Indenture. These amounts automatically become due and payable in the case of certain types of bankruptcy, insolvency or reorganization events involving the Company.

The New Notes are subordinated in right of payment to the Company’s senior debt. No payment on account of principal of, interest or premium, if any, on, or any other amounts due on the New Notes and no redemption, repurchase or other acquisition of the New Notes may be made unless full payment of all amounts due on up to $60 million (inclusive of principal, premium, interest and other amounts) of the Company’s senior debt that has been designated “Designated Senior Debt” for purposes of the Indenture has been made or duly provided for pursuant to the terms of the instrument governing such Designated Senior Debt. In addition, the Indenture provides that if any of the holders of Designated Senior Debt provides notice, which is referred to as a payment blockage notice, to the Company and the Trustee that a non-payment default has occurred giving the holder of such Designated Senior Debt the right to accelerate the maturity thereof, no payment on the New Notes and no repurchase or other acquisition of the New Notes may be made for specified periods.

On August 1, 2009, the Company adopted FSP APB 14-1, Accounting for Convertible Debt Instruments That May be Settled in Cash upon Conversion (Including Partial Cash Settlement), codified into FASB ASC Subtopic 470-20, Debt with Conversion and Other Options related to the accounting for convertible debt instruments and allocated the par value of the New Notes between a liability (debt) and an equity component based on the fair value of the debt component as of the date the notes were assumed. On the modification dates the New Notes were reassessed and the debt component of the New Notes was valued at $31.2 million based on the contractual cash flows discounted at an appropriate comparable market non-convertible debt borrowing rate at the date of the Exchange Offer of 12.0%, with the equity component representing the residual amount of the proceeds of $2.7 million which was recorded as a debt discount. The difference between the fair value and the carrying value of the notes was reclassed to Additional Paid in Capital as a cumulative effect of adoption in the first quarter of fiscal 2010. The impact of adoption of FSP APB 14-1 was not material to any period presented and therefore the cumulative effect was recorded in the current period as interest expense in the Statement of Operations. The debt discount allocated to the debt component is amortized as additional interest expense over the term of the New Notes.

The Company also adopted the provisions of EITF 07-5, Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock, codified into FASB ASC 815, Derivatives and Hedging, which became effective for the Company on August 1, 2009. The Company determined that there was no impact to the Company upon adoption.

For the three and nine months ended April 30, 2010, the Company recorded interest expense in its statement of operations of less than $0.1 million and $0.5 million, respectively, associated with the amortization of the debt discount. The statement of operations and statement of cash flows for the three and nine months ended April 30, 2009 were not impacted by the adoption of the new guidance as the Exchange Offer occurred in May 2009.

The following table reflects the carrying value of the Convertible Senior Subordinated Notes due 2011 as of April 30, 2010 and July 31, 2009 (in thousands):


	April 30, 2010			July 31, 2009
Convertible Senior Subordinated Notes due 2011	$	876		$	32,610
Less: Unamortized debt discount		(76	)		—

Net carrying value—Convertible Senior Subordinated Notes due 2011	$	800		$	32,610

The remaining debt discount of $0.1 million as of April 30, 2010 is being amortized over the remaining term of the New Notes, which is approximately one year.

Covenants

As of April 30, 2010, the Company was in compliance with all underlying covenants associated with its various debt obligations, including maintaining approximately $70.4 million in cash and cash equivalents in accounts with SVB to meet the minimum level of liquidity covenant as modified by The Fourth Loan Modification.

9. FAIR VALUE MEASUREMENTS

The Company determines its fair value measurements for assets and liabilities based upon the provisions of Topic 820, Fair Value Measurements and Disclosures, to FASB ASC (formerly known as SFAS No. 157, Fair Value Measurements).

The Company holds short-term money market investments and certain other financial instruments which are carried at fair value. The Company determines fair value based upon quoted prices, when available, or through the use of alternative approaches when market quotes are not readily accessible or available.

Valuation techniques for fair value are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s best estimate, considering all relevant information. These valuation techniques involve some level of management estimation and judgment. The valuation process to determine fair value also includes making appropriate adjustments to the valuation model outputs to consider risk factors.

The fair value hierarchy of the Company’s inputs used in the determination of fair value for assets and liabilities during the current period consists of three levels. Level 1 inputs are composed of unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date. Level 2 inputs include quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; inputs other than quoted prices that are observable for the asset or liability; and inputs that are derived principally from or corroborated by observable market data by correlation or other means. Level 3 inputs incorporate the Company’s own best estimate of what market participants would use in pricing the asset or liability at the measurement date where consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model. If inputs used to measure an asset or liability fall within different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the fair value measurement of the asset or liability. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.

The following table presents financial assets and liabilities measured at fair value and their related valuation inputs as of April 30, 2010 and as of July 31, 2009, respectively (in thousands):


	Total Fair Value of Asset or Liability		Fair Value Measurements at Reporting Date Using
April 30, 2010	Total Fair Value of Asset or Liability		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Cash and cash equivalents (1)	$	75,520	$	75,520	$	—	$	—
Short-term investments		461		461		—		—
Other assets (Restricted Cash)		369		369		—		—

Total Assets	$	76,350	$	76,350	$	—	$	—

Current liabilities (Convertible Notes)	$	1,520	$	—	$	1,520	$	—
Long-term debt, net of current		800		—		800		—

Total Liabilities	$	2,320	$	—	$	2,320	$	—


July 31, 2009	Total Fair Value of Asset or Liability		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Cash and cash equivalents (1)	$	86,488	$	86,488	$	—	$	—
Short-term investments		9,152		7,796		1,356		—
Prepaid expenses and other current assets (2)		561		561		—		—
Other assets (Restricted Cash)		1,449		777		672		—

Total assets	$	97,650	$	95,622	$	2,028	$	—

Current liabilities (Convertible Notes)	$	1,520	$	—	$	1,520	$	—
Long-term debt, net of current		32,610		—		32,610		—
Other accrued expenses (2)		561		561		—		—

Total liabilities	$	34,691	$	561	$	34,130	$	—

(1)	The cash and cash equivalents as of April 30, 2010 and July 31, 2009 includes cash held in operating accounts of approximately $8.5 million and $9.1 million, respectively, that are not subject to fair value measurements. For purposes of this disclosure they are included as having Level 1 inputs.

(2)	As of July 31, 2009, the Company had assets held in a Rabbi Trust, which generally included actively traded mutual funds and money market accounts.

The carrying value of the Company’s long term debt was estimated using inputs derived principally from market observable data, including current rates offered to the Company for debt of the same or similar maturities. Within the hierarchy of fair value measurement, these are level 2 inputs.

The carrying value of accounts receivable, prepaid expenses, accounts payable and accrued expenses approximate fair value due to their short-term nature.

There were no assets or liabilities related to non-recurring transactions requiring valuation disclosures as of April 30, 2010 or as of July 31, 2009.

10. STOCKHOLDERS’ EQUITY

On March 2, 2010, the Company announced the pricing of an underwritten public offering of 15,500,000 shares of its common stock at $2.85 per share. The Company also granted to its underwriters a 30-day option to purchase up to an aggregate of 2,325,000 additional shares of common stock to cover over-allotments, if any. This option was exercised on March 3, 2010, bringing the total number of shares issued by the Company in this offering to 17,825,000. The offering closed on March 8, 2010 and resulted in net proceeds to the Company, after deducting underwriting discounts and commissions and estimated offering expenses, of approximately $47.9 million. All of the shares offered by the Company were pursuant to an effective shelf registration statement previously filed with the SEC in November 2009. The impact of this transaction was recorded as a component of the Company’s stockholders’ equity for the quarter ended April 30, 2010.

11. RECENTLY ISSUED ACCOUNTING STANDARDS

Effective August 1, 2009, the Company adopted a new accounting standard update regarding business combinations. As codified under Accounting Standards Codification, or ASC, 805, this update provides that, upon initially obtaining control, an acquirer shall recognize 100 percent of the fair values of acquired assets, including goodwill and assumed liabilities, with only limited exceptions, even if the acquirer has not acquired 100 percent of its target. As a consequence, the step acquisition model will be eliminated. Additionally, it changes current practice, in part, as follows: (1) contingent consideration arrangements will be fair valued at the acquisition date and included on that basis in the purchase price consideration; (2) transaction costs will be expensed as incurred, rather than capitalized as part of the purchase price; (3) pre-acquisition contingencies, such as legal issues, will generally be accounted for in-purchase accounting at fair value; (4) in-process research and development will be capitalized and either amortized over the life of the product or written off if the project is abandoned or impaired; (5) changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date generally will affect income tax expense; and (6) restructuring costs generally will be expensed in periods subsequent to the acquisition date. Since this accounting update is applicable to acquisitions completed after August 1, 2009 and the Company did not have any business combinations subsequent to August 1, 2009, the adoption of this update did not have an impact on the Company’s consolidated financial statements. This accounting update also amended accounting for uncertainty in income taxes such that adjustments made to valuation allowances on deferred taxes and acquired tax contingencies associated with acquisitions that closed prior to the effective date of ASC 805 would also follow the provisions of this update. Thus, all changes to valuation allowances and liabilities for uncertain tax positions established in acquisition accounting will be recognized in current period income tax expense.

Effective August 1, 2009, the Company adopted the applicable sections of an accounting standard update as codified under ASC 820 for nonfinancial assets and liabilities that are measured or recognized at fair value on a non-recurring basis, which were previously deferred. These sections establish a framework for measuring fair value and expand financial statement disclosures about fair value measurements. The adoption of the various sections of ASC 820 did not have a material impact on the Company’s consolidated financial statements.

Effective August 1, 2009, the Company adopted an accounting standard update as codified under ASC 815 that requires the application of a two-step approach in evaluating whether an equity-linked financial instrument (or embedded feature) is indexed to a Company’s own stock, including evaluating the instrument’s contingent exercise and settlement provisions, and must be applied to all instruments outstanding on the date of adoption. The adoption of this update did not have an impact on the Company’s consolidated financial statements.

Effective July 31, 2009, the Company adopted an accounting standard update as codified under ASC 820-10-65 which provides guidelines for making fair value measurements more consistent and provides additional authoritative guidance in determining whether a market is active or inactive, and whether a transaction is distressed, and is applicable to all assets and liabilities (i.e. financial and nonfinancial) and will require enhanced disclosures. The adoption of this update did not have an impact on the Company’s consolidated financial statements.

Effective July 31, 2009, the Company adopted a new accounting standard update as codified under ASC 825. This update requires disclosures about fair value of financial instruments in interim as well as in annual financial statements. The adoption of this standard has resulted in the enhanced disclosure of the fair values attributable to debt instruments within this interim report. Since this update addresses disclosure requirements, the adoption of this update did not impact the Company’s financial position, results of operations or cash flows.

Effective July 31, 2009, the Company adopted an accounting standard update as codified under ASC 320-10-65, which provides additional guidance to provide greater clarity about the credit and noncredit component of an other-than-temporary impairment event related to debt securities and to more effectively communicate when an other-than-temporary impairment event has occurred. The adoption of this update did not have an impact on the Company’s consolidated financial statements.

In June 2009, the FASB issued the following new accounting standard which has not yet been integrated into the Codification, Statement of Financial Accounting Standards, or SFAS, No. 166, Accounting for Transfers of Financial Assets, an amendment of FASB Statement No. 140, or SFAS 166. Accordingly SFAS 166 will remain authoritative until integrated. SFAS 166 prescribes the information that a reporting entity must provide in its financial reports about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement in transferred financial assets. Specifically, among other aspects, SFAS 166 amends SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, or SFAS 140, by removing the concept of a qualifying special-purpose entity from SFAS 140 and removes the exception from applying FASB interpretation No. 46, Consolidation of Variable Interest Entities (revised), or FIN 46(R), to variable interest entities that are qualifying special-purpose entities. It also modifies the financial-components approach used in SFAS 140. SFAS 166 is effective for transfer of financial assets occurring on or after January 1, 2010. The Company has not had any transfer of financial assets subsequent to January 1, 2010, so therefore the adoption of this standard did not have any impact on the Company’s consolidated financial statements.

In August 2009, the FASB issued Update No. 2009-05, which amends ASC 820 to provide further guidance on how to measure the fair value of a liability, an area where practitioners have been seeking further guidance. It primarily does three things: 1) sets forth the types of valuation techniques to be used to value a liability when a quoted price in an active market for the identical liability is not available, 2) clarifies that when estimating the fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability and 3) clarifies that both a quoted price in an active market for the identical liability at the measurement date and the quoted price for the identical liability when traded as an asset in an active market when no adjustments to the quoted price of the asset are required are Level 1 fair value measurements. The update was effective beginning second quarter of 2010 for the Company. The adoption of this update did not have an impact the Company’s consolidated financial statements.

In October 2009, the FASB issued Update No. 2009-14, Certain Revenue Arrangements That Include Software Elements — a consensus of the FASB Emerging Issues Task Force, or ASU 2009-14. It amends ASC 985-605 such that tangible products, containing both software and non-software components that function together to deliver the tangible product’s essential functionality, are no longer within the scope of ASC 985-605. It also amends the determination of how arrangement consideration should be allocated to deliverables in a multiple-deliverable revenue arrangement. This update will become effective for the Company for revenue arrangements entered into or materially modified on or after August 1, 2010. Earlier application is permitted. The adoption of this update will not have an impact on the Company’s consolidated financial statements as the Company has concluded the software component of its tangible products is incidental.

In October 2009, the FASB issued ASC update No. 2009-13, to Topic 605, Revenue Recognition. These amendments establish a selling price hierarchy for determining the selling price of a deliverable. The selling price used for each deliverable will be based on vendor-specific objective evidence if available, third-party evidence if vendor-specific objective evidence is not available, or estimated selling price if neither vendor-specific objective evidence nor third-party evidence is available. The amendments also replace the term “fair value” in the revenue allocation guidance with “selling price” to clarify that the allocation of revenue is based on entity-specific assumptions rather than assumptions of a marketplace participant. In addition, the amendments eliminate the residual method of allocation and require that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method. The relative selling price method allocates any discount in the arrangement proportionally to each deliverable on the basis of each deliverable’s selling price. The amendments will become effective for the Company prospectively for revenue arrangements entered into or materially modified beginning on August 1, 2010, with earlier adoption permitted. The Company believes that the adoption of this new standard may have a material effect on its financial position and results of operations. However, the Company is not able to estimate the effect on its financial position and results of operations.

12. SUBSEQUENT EVENTS

On May 17, 2010, the Company repaid the remaining $1.5 million aggregate principal amount of 3.5% Convertible Senior Subordinated Notes due May 2010 with a total cash payment of $1,546,000 that included accrued interest. After this payment, the only remaining convertible notes outstanding are approximately $0.9 million which are due in May 2011 (as discussed further in Note 8).

On May 26, 2010, the Company announced that its Board of Directors has authorized the Company to submit a proposal to its stockholders at a special meeting seeking authorization to effect a reverse split of the Company’s common stock at a ratio of one-to-three. On May 26, 2010, the Company had approximately 146 million shares of common stock outstanding.

Item 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Industry Conditions and Outlook

LTX-Credence Corporation (“LTX-Credence” or the “Company”), provides focused, cost-optimized automated test equipment (ATE) solutions. We design, manufacture, market and service ATE solutions that address the broad, divergent test requirements of the wireless, computing, automotive and entertainment market segments. Semiconductor designers and manufacturers worldwide use our equipment to test their devices during the manufacturing process. After testing, these devices are then incorporated in a wide range of products, including computers, mobile internet equipment such as wireless access points and interfaces, broadband access products such as cable modems and set top boxes, personal communication products such as mobile phones and personal digital music players, consumer products such as televisions, videogame systems, digital cameras and automobile electronics, and for power management in portable and automotive electronics.

LTX-Credence focuses its marketing and sales efforts on integrated device manufacturers (IDMs), outsource assembly and test providers (OSATs), which perform manufacturing services for the semiconductor industry, and fabless companies, which design integrated circuits but have no manufacturing capability. We provide our customers with a comprehensive portfolio of test systems and a global network of strategically deployed applications and support resources.

LTX-Credence Corporation was incorporated in Massachusetts in 1976. Our executive offices are located at 1355 California Circle, Milpitas, California 95035 and our telephone number is 781-461-1000. The terms “LTX-Credence” and the “Company” refer to LTX-Credence Corporation and its wholly owned subsidiaries unless the context otherwise indicates. We make our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports available, free of charge, in the Investor Relations section of our website at www.ltxc.com as soon as reasonably practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission.

On August 29, 2008, LTX Corporation and Credence Systems Corporation (“Credence”) completed a merger of equals (“the Merger”). In connection with the merger, LTX Corporation changed its name to “LTX-Credence Corporation” (“LTXC”) and changed the symbol under which its common stock trades on the NASDAQ Global Market to “LTXC” and Credence Systems Corporation became a wholly-owned subsidiary of LTXC. On January 30, 2009, LTXC completed a statutory merger of Credence with and into LTXC with LTXC being the surviving corporation. Our results of operations for the nine months ended April 30, 2009 include Credence’s operating results from August 29, 2008 through April 30, 2009.

Industry Overview

Today, most electronic products contain a combination of integrated circuits (ICs). Each of these ICs has electrical circuitry that requires validation or testing during and after the manufacturing process. The final usability of the IC is determined by ATE. The testing of devices is a critical step during the semiconductor production process. Typically, semiconductor companies test each device at two different stages during the manufacturing process to ensure its functional and electrical performance prior to shipment to the device user. These companies use semiconductor testing equipment to first test a device after it has been fabricated but before it has been packaged to eliminate non-functioning parts. Then, after the functioning devices are packaged, they are tested again to determine if they fully meet performance specifications. Testing is an important step in the manufacturing process because it allows devices to be fabricated at both maximum density and performance—a key to the competitiveness of semiconductor manufacturers.

Three primary factors ultimately drive demand for semiconductor test equipment:

•

increases in unit production of semiconductor devices;

•

increases in the complexity and performance level of devices used in electronic products; and

•

the emergence of next generation device technologies.

Increases in unit production result primarily from the proliferation of the personal computer, growth of the telecommunications industry, consumer electronics, the mobile internet, broadband network access, the increased use of digital signal processing (DSP) devices, and automotive and power management applications. These increases in unit production, in turn lead to a corresponding increase in the need for test equipment.

Furthermore, demand is increasing worldwide for smaller, more highly integrated electronic products. This has led to ever higher performance and more complex semiconductor devices, which, in turn, results in a corresponding increase in the demand for equally sophisticated test equipment.

Finally, the introduction and adoption of a new generation of end-user products requires the development of next generation device technologies. For example, access to information is migrating from the stand-alone desktop computer, which might be physically linked to a local network, to the seamless, virtual network of the internet, which is accessible from anywhere by a variety of new portable electronic communication products. A critical enabling technology for this network and multimedia convergence is system in package (“SIP”). SIP provides the benefits of lower cost, smaller size and higher performance by combining advanced digital, analog and embedded memory technologies on a single device. Historically, these discrete technologies were only available on several separate semiconductor devices, each performing a specific function. By integrating these functions in a single package, SIP enables lower cost, smaller size, higher performance, and lower power consumption.

The increases in unit production of devices, the increase in complexity of those devices, and, ultimately, the emergence of new semiconductor device technology have mandated changes in the design, architecture and complexity of such test equipment. Semiconductor device manufacturers must still be able to test the increasing volume and complexity of devices in a reliable, cost-effective, efficient and flexible manner. However, the increased pace of technological change, together with the large capital investments required to achieve economies of scale, are changing the nature and urgency of the challenges faced by device designers and manufacturers.

The combination of ever increasing price pressure and the fact that technology that is not always cost effective to integrate into SIP has led to the need for testing solutions that cover segments of the semiconductor market. There is a need to maximize utilization on the semiconductor test floor and at the same time have the most cost effective test solution for various points or integration levels in technology. This requires a suite of test solution products that are optimized in technology and cost for the segment they are addressing thus maximizing efficiency and minimizing overall cost of test.

Critical Accounting Policies and the Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We based these estimates and assumptions on historical experience, and evaluate them on an on-going basis to ensure they remain reasonable under current conditions. Actual results could differ from those estimates. We believe that our most critical accounting policies upon which our financial reporting depends on and which involve the most complex and subjective decisions or assessments are as follows: revenue recognition, inventory reserves, income taxes, warranty, goodwill and other intangibles, impairment of long-lived assets and allowances for doubtful accounts.

A summary of those accounting policies and estimates that we believe to be most critical to fully understand, and evaluate, our financial results is set forth below. The summary should be read in conjunction with our Consolidated Financial Statements and related disclosures elsewhere in this Form 10-Q.

Revenue Recognition

Our revenue recognition policy is described in detail in Note 2, Summary of Significant Accounting Policies, contained in the Notes to Consolidated Financial Statements included in this report. We recognize revenue when persuasive evidence of an arrangement exists, delivery or customer acceptance, if required, has occurred or services have been rendered, the price is fixed or determinable and collectibility is reasonably assured.

Inventory Valuation

At each balance sheet date, we evaluate our ending inventories for excess quantities and obsolescence. This evaluation includes analysis of sales levels by product and projections of future demand. These projections assist us in determining the carrying value of our inventory and are also used for near-term factory production planning. Generally, inventories on hand in excess of historical usage or forecasted demand are not valued. In addition, we write off inventories that are considered obsolete. Among other factors, management considers forecasted demand in relation to the inventory on hand, competitiveness of product offerings, and market conditions when determining obsolescence and net realizable value. We adjust remaining specific inventory balances to approximate the lower of our manufacturing cost or market value. If actual future demand or market conditions are less favorable than our projections as forecasted, additional inventory write-downs may be required and would be reflected in cost of sales in the period the revision is made. This would have a negative impact on our gross margin in that period. If in any period we are able to sell inventories that were not valued or that had been written off in a previous period, related revenues would be recorded without any offsetting charge to cost of sales, resulting in a net benefit to our gross margin in that period.

For the nine months ended April 30, 2009, we recorded an inventory-related provision of $19.3 million which consisted of excess and obsolete inventory as a result of the determination and implementation of our current combined company product roadmap following the merger of LTX Corporation and Credence Systems Corporation, as well as declining customer demand in the current industry environment.

Valuation of Goodwill

We follow the provisions of Topic 350, Intangibles – Goodwill and Other to the FASB ASC (formerly known as SFAS No. 142, Goodwill and Other Intangible Assets) (“ASC 350”), which requires that goodwill and intangible assets with indefinite useful lives are not amortized. Intangible assets with a definitive useful life are amortized over their estimated useful life. Assets recorded in these categories are tested for impairment at least annually or when a change in circumstances may result in future impairment. Management uses a discounted cash flow analysis to test goodwill, at least annually or when indicators of impairment exist, which requires that certain assumptions and estimates be made regarding industry economic factors and future profitability of the acquired business to assess the need for an impairment charge. The provisions of ASC 350 require that a two-step impairment test be performed for goodwill. In the first step, we will compare the fair value of the reporting unit to which goodwill has been allocated to its carrying value. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that unit, goodwill is considered not impaired and we are not required to perform further testing. If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, then we must perform the second step of the impairment test and determine the implied fair value of the reporting unit’s goodwill. If the carrying value of a reporting unit’s goodwill exceeds its implied fair value, then we would record an impairment loss equal to the difference. We have one reporting unit for purposes of performing its goodwill impairment testing.

Determining the number of reporting units and the fair value of a reporting unit requires us to make judgments and involves the use of significant estimates and assumptions. These estimates and assumptions include revenue growth rates and operating margins used to calculate projected future cash flows, risk-adjusted discount rates, future economic and market conditions and determining appropriate market comparables. We believe these assumptions to be reasonable, but actual conditions are unpredictable and inherently uncertain. Actual future results may differ from our estimates.

As discussed in Note 2 to the consolidated financial statements, there were no impairment conditions present during the quarter ending April 30, 2010, and therefore we did not conduct an interim impairment test. During the quarter ending April 30, 2009 we conducted analyses of the potential impairment of goodwill and concluded that this asset was not impaired at that date. We will perform these analyses if indicators of impairment return, or at least annually.

Valuation of Identifiable Intangible Assets

Our identifiable intangible assets include existing technology, customer relationships and trade names. Our existing technology relates to patents, patent applications and know-how with respect to the technologies embedded in its currently marketed products.

We primarily used the income approach to value the existing technology and other intangibles. This approach calculates fair value by estimating future cash flows attributable to each intangible asset and discounting them to present value at a risk-adjusted discount rate.

In estimating the useful life of the acquired assets, we considered paragraph 11 of ASC 350, which lists the pertinent factors to be considered when estimating the useful life of an intangible asset. These factors included a review of the expected use by the combined company of the assets acquired, the expected useful life of another asset (or group of assets) related to the acquired assets, legal, regulatory or other contractual provisions that may limit the useful life of an acquired asset or may enable the extension of the useful life of an acquired asset without substantial cost, the effects of obsolescence, demand, competition and other economic factors, and the level of maintenance expenditures required to obtain the expected future cash flows from the asset. We expect to amortize these intangible assets over their estimated useful lives using a method that is based on estimated future cash flows as we believe this will approximate the pattern in which the economic benefits of the assets will be derived.

Impairment of Long-Lived Assets

In connection with the merger with Credence, during the quarter ended October 31, 2008, we developed a product roadmap for the combined company which led to the phase out of approximately $3.7 million of certain long-lived assets related to the ASL3K RF, Diamond D-40, and Sapphire product lines. In light of the economic conditions existing at the time, we also recognized a $1.3 million loss on certain long-lived assets for which we did not believe we would recover the cost. Accordingly, we recorded an impairment loss for the three months ended April 30, 2009 of $5.0 million.

We experienced a significant decline in our stock price and lower than expected revenues for the year ended July 31, 2009, which caused us to conduct recoverability tests in accordance with Topic 360, Property, Plant and Equipment, to the FASB ASC (formerly known as SFAS No. 144), based on undiscounted cash flows of our long-lived assets which contemplates significant cost-savings. As a result of these tests, we determined there were no additional impairment losses on long-lived assets for the year ended July 31, 2009. As a result of sustained improvement in the stock price as of April 30, 2010, increased sales, and overall improvement in the industry and macro-economy, there were no indictors that required us to conduct a recoverability test as of April 30, 2010.

Valuation of Acquired In-Process Research and Development

As part of the purchase price allocation for Credence, approximately $6.3 million of the purchase price was allocated to acquired in-process research and development projects, primarily related to Credence’s ASL and Diamond tester product lines. The amount allocated to acquired in-process research and development represents the estimated value based on risk-adjusted cash flows related to in-process projects that have not yet reached technological feasibility and have no alternative future uses as of the date of the acquisition. The primary basis for determining the technological feasibility of these projects was a detailed review of the development status of each project including factors such as costs incurred/remaining, technological risks achieved/remaining, and incompleteness.

The rates utilized to discount the net cash flows to their present value were based on estimated cost of capital calculations and the implied rate of return from the transaction model plus a risk premium. Due to the nature of the forecasts and the risks associated with the developmental projects, appropriate risk-adjusted discount rates were used for the in-process research and development projects. The discount rates are based on the stage of completion and uncertainties surrounding the successful development of the purchased in-process technology projects.

In accordance with Topic 805, Business Combinations to the FASB ASC (formerly known as SFAS No. 141, Business Combinations) (“ASC 805”), we recorded a charge upon the consummation of the merger for the full amount of the acquired in-process research and development.

Recent Accounting Pronouncements

See Note 11 to the consolidated financial statements included in this Quarterly Report of Form 10-Q, regarding the impact of certain recent accounting pronouncements on our consolidated financial statements.

Results of Operations

The following table sets forth for the periods indicated the principal items included in the Consolidated Statement of Operations as percentages of net sales.


	Percentage of Net Sales
	Three Months Ended April 30,				Nine Months Ended April 30,
	2010		2009		2010		2009
Net sales	100.0	%	100.0	%	100.0	%	100.0	%
Cost of sales	42.7		71.7		46.3		66.3
Inventory-related provision	—		—		—		18.9

Gross profit	57.3		28.3		53.7		14.8
Engineering and product development expenses	22.0		67.1		24.8		57.5
Selling, general and administrative expenses	20.4		45.1		20.1		39.6
Impairment charges	—		—		—		5.7
Amortization of purchased intangible assets	4.7		18.0		5.5		11.6
Acquired in-process research and development	—		—		—		6.1
Restructuring	1.4		13.4		1.4		21.4

Income (loss) from operations	8.8		(115.3	)	1.9		(127.1	)
Other income (expense):
Interest expense	(0.6	)	(6.9	)	(1.8	)	(3.7	)
Investment income	0.1		1.3		0.1		2.0
Other income	—		4.9		0.9		1.5
Gain on extinguishment of debt, net	3.8		4.0		2.1		3.1

Income (loss) before provision (benefit) for income taxes	12.1		(112.0	)	3.2		(124.2	)
Provision (benefit) for income taxes	(0.1	)	0.8		0.2		0.8

Net income (loss)	12.2	%	(112.8	)%	3.0	%	(125.0	)%

The discussion below contains certain forward-looking statements relating to, among other things, estimates of economic and industry conditions, sales trends, expense levels and capital expenditures. Actual results may vary from those contained in such forward-looking statements. See “Business Risks” below.

Our results of operations for the nine months ended April 30, 2009 include the results of Credence’s operations from August 29, 2008 to April 30, 2009.

Three and Nine Months Ended April 30, 2010 Compared to the Three and Nine Months Ended April 30, 2009

Net sales. Net sales consist of semiconductor test equipment, system support and maintenance services, net of returns and allowances. Net sales for the three months ended April 30, 2010 increased 127.3% to $56.1 million as compared to $24.7 million in the same quarter of the prior year. Net sales for the nine months ended April 30, 2010 increased 42.8% to $145.9 million as compared to $102.2 million for the same nine month period of the prior year. The increase in net sales in the quarter and nine months ended April 30, 2010 as compared to the same periods in the prior year is due to improvement in the overall economic environment and higher demand from certain customers.

Service revenue, included in net sales, accounted for $11.0 million, or 19.7% of net sales, and $13.1 million, or 53.2% of net sales, for the three months ended April 30, 2010 and 2009, respectively, and $35.2 million or 24.2% of net sales, and $46.6 million or 45.6% of net sales for the nine months ended April 30, 2010 and 2009, respectively. The decrease in service revenue is primarily a result of a reduction in service contract usage in line with underutilization of testers due to prolonged unfavorable industry and market conditions which have significantly impacted the semiconductor industry capital expenditures for automated testing equipment.

Geographically, sales to customers outside of the United States were 79.9% and 69.2% of net sales for the three months ended April 30, 2010 and 2009, respectively, and 55.3% and 53.5% of net sales for the nine months ended April 30, 2010 and 2009, respectively. The increase in sales to customers outside the United States was a result of increased demand primarily in Taiwan and China, as well as an increase in the volume of sales to certain customers in Europe during the second and third quarters of fiscal 2010.

Inventory-related provision. There were no inventory-related provisions recorded in the nine months ended April 30, 2010. We recorded an inventory-related provision of $19.3 million or 18.9% of net sales in the nine months ended April 30, 2009. The provision consisted of $0.8 million related to the implementation of product roadmap decisions related to the ASL 3KMS line and $4.8 million related to future requirements of last time buy components related to the implementation of the product roadmap decisions. In addition, $6.6 million of the inventory related provision was a result of a significant reduction in the demand for the Sapphire products which have been negatively impacted by the current business conditions. The balance of the inventory related provision of approximately $1.2 million was related to our Fusion CX product line which is being phased out in favor of our Fusion MXc product line.

Gross profit margin. The gross profit margin was $32.1 million or 57.3% of net sales in the three months ended April 30, 2010, as compared to $7.0 million or 28.3% of net sales in the same quarter of the prior year. For the nine months ended April 30, 2010, the gross profit margin was $78.3 million or 53.7% of net sales as compared to $15.1 million or 14.8% of net sales for the nine months ended April 30, 2009. The increase in the gross profit margin for the three months ended April 30, 2010 as compared to April 30, 2009 was driven by an increase in revenue. The increase in the gross profit margin for the nine months ended April 30, 2010 as compared to the nine months ended April 30, 2009 was primarily the result of increased net sales coupled with lower cost of sales resulting from our merger-related integration savings, as well as the inventory-related provision of $19.3 million recorded in the nine months ended April 30, 2009 that did not recur in the nine months ended April 30, 2010.

Engineering and product development expenses. Engineering and product development expenses were $12.3 million, or 22.0% of net sales, in the three months ended April 30, 2010, as compared to $16.6 million, or 67.1% of net sales, in the same quarter of the prior year. For the nine months ended April 30, 2010, engineering and product development expenses were $36.2 million or 24.8% of net sales, compared to $58.7 million or 57.5% of net sales for the nine months ended April 30, 2009. The decrease in engineering and product development expenses for the three and nine months ended April 30, 2010 as compared to the three and nine months ended April 30, 2009 is principally a result of decreased payroll and operating expenses associated with our merger related integration cost reduction plan. As a result of this plan, headcount for engineering and product development was down from 626 at the beginning of FY 2009 to 311 as of April 30, 2010 in this area.

Selling, general and administrative expenses. Selling, general and administrative expenses were $11.4 million, or 20.4% of net sales, in the three months ended April 30, 2010, as compared to $11.1 million, or 45.1% of net sales, in the same quarter of the prior year. For the nine months ended April 30, 2010, selling, general and administrative expenses were $29.3 million or 20.1% of net sales as compared to $40.5 million or 39.6% of net sales for the nine months ended April 30, 2009. The decrease is principally a result of decreased headcount for sales, general and administrative from 357 at the beginning of fiscal 2009 to 148 as of April 30, 2010 in this area and merger-related expenses recorded in the three and nine months ended April 30, 2009 that did not recur in the three and nine months ended April 30, 2010.

Impairment charges. There were no impairment charges recorded during the three or nine months ended April 30, 2010. For the nine months ended April 30, 2009, impairment charges were $5.8 million or 5.7% of net sales. We recorded an impairment charge of $0.8 million related to the revaluation of our land in Hillsboro, Oregon, for the excess of book value over fair value. The impairment charges of $5.0 million for the quarter ended October 31, 2008 were primarily related to write-offs of certain consigned inventory and internal capital equipment acquired from Credence. The charge was based on our determination of the current combined company product roadmap, as well as declining customer demand due to the current industry environment. We have initiated a phase out of the Diamond D40 and ASL 3RF product lines and as such determined that the demonstration equipment and other equipment to support development of these products are no longer needed or useable in other products.

Amortization of purchased intangible assets. Amortization associated with intangible assets acquired from Credence was $2.7 million or 4.8% of net sales for the three months ended April 30, 2010 as compared to $4.4 million or 18.0% of net sales for the same quarter of the prior year. For the nine months ended April 30, 2010, amortization associated with these assets was $8.0 million or 5.5% of net sales as compared to $11.9 million or 11.6% of net sales for the nine months ended April 30, 2009. The underlying intangible assets relate to acquired technology, customer and distributor relationships. These intangible assets acquired in the Credence merger are being amortized over their estimated useful lives of between one and nine years based on their expected pattern of use.

Acquired in-process research and development. In connection with the Credence merger, we recorded a charge associated with the write-off of in-process research and development of $6.2 million or 6.1% of net sales for the nine months ended April 30, 2009. The most significant acquired in-process research and development relates to Credence’s ASL and Diamond tester product lines.

Restructuring. Restructuring expense was $0.8 million or 1.4% of net sales and $2.0 million or 1.4% of net sales for the three and nine months ended April 30, 2010, respectively, as compared to $3.3 million or 13.4% of net sales and $21.8 million or 21.4% of net sales for the same periods in the prior year. The restructuring expense of $0.8 million recorded in the three months ended April 30, 2010 is a result of additional vacated space in our Milpitas facility. The expense incurred in the first six months of fiscal 2010 related to a change in sublease assumptions based on market conditions and future estimated cash flows related to certain of the Company’s office locations, which were restructured during the second quarter of fiscal 2009, and employee termination-related costs associated with the downsizing of our Hillsboro office facility and Europe. The restructuring expense incurred in the three and nine months ended April 30, 2009 included employee termination-related severance and outplacement costs and post-employment benefits associated with the merger resulting from three separate restructuring actions announced in September 2008, January 2009 and April 2009. The expense incurred in the nine months ending April 30, 2009 also included costs associated with closing certain facilities.

Interest expense. Interest expense was $0.3 million for the three months ended April 30, 2010 as compared to $1.7 million for the three months ended April 30, 2009. For the nine months ended April 30, 2010, interest expense was $2.7 million compared to $3.8 million for the same period in 2009. Interest expense includes the recognition of the 3.5% interest due semi-annually on the outstanding convertible notes, as well as the ratable recognition of the premium due at maturity on the convertible notes due in May 2011, and interest incurred on borrowings from the secured revolving facility. The decrease on a quarter and year to date basis is primarily the result of the decrease in the principal balance of convertible notes outstanding as of April 30, 2010 versus April 30, 2009, the reduction in the outstanding borrowings under the secured revolving facility which was paid down in March 2010 with no subsequent borrowings, and the reduction of the balance of a term loan held with Silicon Valley Bank that was fully paid off during the first quarter of fiscal 2010.

Investment income. Investment income was less than $0.1 million for the three months ended April 30, 2010, as compared to $0.3 million for the three months ended April 30, 2009. For the nine months ended April 30, 2010, investment income was $0.1 million, compared to $2.0 million for the same period in 2009. The decrease was in line with the reduction of short-term investments as well as lower interest rates earned on short-term investments in the current fiscal year.

Other Income, net. Other income was less than $0.1 million for the three months ended April 30, 2010 as compared to other income of $1.2 million for the three months ended April 30, 2009. For the nine months ended April 30, 2010, other income was $1.3 million as compared to $1.5 million for the same period in fiscal 2009. Other income is primarily foreign exchange currency gains and losses, realized gains from sales of securities and fixed assets, collection of previously written off accounts receivable, and other smaller items.

Gain on extinguishment of debt, net. At the time of the completion of the merger, Credence had outstanding $122.5 million aggregate principal amount of 3.5% Convertible Senior Subordinated Notes due 2010 (“Notes”). In the three months ended April 30, 2010, we repurchased $32.4 million of principal amount of the outstanding notes at a discount to their par. The discount to the par resulted in a net gain on extinguishment of debt of approximately $0.6 million in the three months ended April 30, 2010. The results for the nine months ended April 30, 2010 also include the impact of repurchases made in the first quarter of fiscal 2010 that resulted in a net gain on extinguishment of approximately $0.3 million. We also recognized approximately $1.5 million and $2.1 million in the three and nine months ended April 30, 2010, respectively, of previously deferred gains from debt modifications under ASC 470 (EITF 96-19) recorded in prior periods. In the three and nine months ended April 30, 2009, we repurchased approximately $6.9 million and $78.9 million, respectively, of principal amount of the Notes at a discount to their par value. The discount to the par value resulted in a net gain on extinguishment of debt of approximately $1.0 million and $3.2 million in the three and nine months ended April 30, 2009.

Provision (benefit) for Income taxes. We recorded an income tax provision (benefit) of less than ($0.1) million and $0.2 million, respectively, for the three and nine months ended April 30, 2010 as compared to $0.2 million and $0.8 million, respectively, for the three and nine months ended April 30, 2009. The provisions were primarily due to foreign tax on earnings generated in foreign jurisdictions. As of April 30, 2010 and July 31, 2009, the total liability for unrecognized income tax benefits was $13.9 million and $13.7 million, respectively, of which $4.7 million and $4.4 million, if recognized, would favorably affect our income tax rate.

We expect to maintain a full valuation allowance on United States deferred tax assets until we can sustain an appropriate level of profitability to insure utilization of existing tax assets. Until such time, we would not expect to recognize any significant tax benefits in our results of operations.

Net income (loss). Net income was $6.8 million, or $0.05 per basic and diluted share, in the three months ended April 30, 2010, as compared to net loss of $27.8 million, or ($0.22) per basic and diluted share, in the same quarter of the prior year. For the nine months ended April 30, 2010, our net income was $4.4 million, or $0.03 per basic and diluted share, as compared to a net loss of $127.7 million or $(1.06) per basic and diluted share for the nine months ended April 30, 2009. The $34.6 million and $132.1 million decrease in net loss in the three and nine months ended April 30, 2010, respectively, as compared to the same periods in 2009 was principally due to $49.8 million of charges associated with impairment and inventory-related provisions associated with product roadmap determination, as well as restructuring expense, incurred in fiscal 2009 that did not recur in fiscal 2010, coupled with improved sales, gross margins, and reduced expenses associated with our merger-related integration cost reductions plans, for the comparative periods.

Liquidity and Capital Resources

The following is a summary of significant items impacting our liquidity and capital resources for the nine months ending April 30, 2010 (in millions):


Cash and cash equivalents and marketable securities at July 31, 2009	$	95.6
Pay down of Term Loan with Silicon Valley Bank (“SVB”)		(12.2	)
Repurchases of convertible notes		(31.6	)
Cash received from secondary equity offering, net		47.9
Pay down of credit revolver		(39.4	)
Capital expenditures		(2.6	)
Net proceeds from working capital improvements		18.3

Cash and cash equivalents and marketable securities at April 30, 2010	$	76.0

As of April 30, 2010, we had $76.0 million in cash and cash equivalents and marketable securities and net working capital of $90.1 million, as compared to $95.6 million of cash and cash equivalents and marketable securities and $47.2 million of net working capital at July 31, 2009. The decrease in the cash and cash equivalents and marketable securities was due to our pay down of our term loan with Silicon Valley Bank of $12.2 million, debt repurchases of $31.6 million, pay down of the secured credit revolver of $39.4 million, offset by our net income adjusted for non-cash items of $26.9 million, and proceeds of $47.9 million received from our secondary equity offering completed during the quarter ending April 30, 2010.

Accounts receivable from trade customers, net of allowances, was $38.2 million at April 30, 2010, as compared to $23.6 million at July 31, 2009. The increase is due mainly to revenues outpacing cash collections for the nine months ended April 30, 2010. The allowance for doubtful accounts was $0.1 million, or 0.3% of gross trade accounts receivable, at April 30, 2010 and $0.5 million, or 2.0% of gross trade accounts receivable at July 31, 2009.

Accounts receivable from other sources, principally amounts due from vendors, increased to $1.7 million at April 30, 2010, from the July 31, 2009 balance of $1.4 million, primarily due to an increase in volume of sales to these sources.

Net inventories decreased by $8.5 million to $26.8 million at April 30, 2010 as compared to $35.3 million at July 31, 2009 primarily due to the sale of production inventory in our normal course of doing business.

Prepaid expenses and other current assets decreased by $7.5 million to $4.7 million at April 30, 2010 as compared to $12.2 million at July 31, 2009 primarily due to collections of value-added tax (“VAT”) receivables, the liquidation of assets in a deferred compensation plan, reduction of our prepaid rent for the comparative periods related to our downsizing activities in our Oregon facility, and monthly amortization of prepaid insurance premiums.

As of April 30, 2010, future cash payments related to severance restructuring actions are approximately $0.8 million and are expected to be paid out within 12 months.

Capital expenditures totaled approximately $2.6 million for the nine months ended April 30, 2010, as compared to $5.5 million for the nine months ended April 30, 2009. Expenditures for the nine months ended April 30, 2010 were composed primarily of tester spare parts as well as property and equipment related to our acquisition of a board repair vendor. Expenditures for the nine months ended April 30, 2009 were composed of testers and tester spare parts.

We had $18.3 million in net cash provided by operating activities for the nine months ended April 30, 2010 as compared to net cash used in operating activities of $44.1 million for the nine months ended April 30, 2009. The net cash provided by operating activities for the nine months ended April 30, 2010 was primarily related to our net income of $4.4 million offset by a net increase in working capital of $8.6 million, and non-cash items, principally depreciation and amortization, of approximately $26.9 million. The net cash used in operating activities of $44.1 million for the nine months ended April 30, 2009 was primarily related to our net loss of $127.7 million offset by non-cash items, principally depreciation and amortization, inventory-related provision, and impairment charges, of approximately $60.4 million and a net decrease in working capital of $23.2 million.

We had $6.9 million in net cash provided by investing activities for the nine months ended April 30, 2010 as compared to net cash provided by investing activities of $136.3 million for the nine months ended April 30, 2009. The net cash provided by investing activities for the nine months ended April 30, 2010 was primarily related to $9.8 million in proceeds from sales and maturities of available-for-sale securities, offset by $2.6 million in purchases of property and equipment and $0.3 million of purchases of available-for-sale securities. The net cash provided by investing activities for the nine months ended April 30, 2009 was primarily related to $131.7 million in cash received from the merger with Credence, as well as proceeds from the maturities of available-for-sale securities of $10.1 million, offset by $5.5 million in purchases of property and equipment.

We had $36.1 million in net cash used in financing activities for the nine months ended April 30, 2010 as compared to net cash used in financing activities of $36.0 million for the nine months ended April 30, 2009. The net cash used in financing activities for the nine months ended April 30, 2010 was primarily related to payments made on our term loan of $12.2 million, payments of convertible senior subordinated notes of $31.6 million as well as net repayments of borrowings from our revolving credit facility of $39.4 million. These amounts were offset by proceeds received from our secondary equity offering of $47.9 million. The net cash used in financing activities for the nine months ended April 30, 2009 was primarily related to payments made on our convertible subordinated notes of $71.2 million and payments on our term loan of $3.9 million, offset by proceeds received from borrowings from our secured credit facility of $39.4 million.

Loan Agreements with Silicon Valley Bank (“SVB”)

On February 25, 2009, we entered into a modification of our Loan Agreement with SVB to provide for a two-year secured revolving line of credit (the “First Loan Modification Agreement”) that expires in February 2011. The First Loan Modification Agreement allows for cash borrowings, letters of credit and cash management facilities under a secured revolving credit facility of up to a maximum of $40.0 million. Any amounts outstanding under the secured credit facility will accrue interest at a floating per annum rate equal to SVB’s prime rate, or if greater, 4.5%. Our debt obligations under the secured credit facility with SVB may be accelerated upon the occurrence of an event of default, which includes customary events of default, including payment defaults, defaults in the performance of affirmative and negative covenants, the inaccuracy of representations or warranties, a cross-default related to indebtedness in an aggregate amount of $0.5 million or more, bankruptcy and insolvency related defaults, defaults relating to judgments and a material adverse change (as defined in the First Loan Modification Agreement).

The secured credit facility contains negative covenants applicable to us, including a financial covenant requiring us to maintain a minimum level of liquidity equal to cash and cash equivalents and marketable securities maintained in accounts at SVB in excess of amounts owed to SVB under the term loan, secured line of credit, and standby letters of credit plus $7.0 million at all times, plus $20.0 million at the end of any fiscal quarter. The secured credit facility also contains restrictions on liens, capital expenditures, investments, indebtedness, fundamental changes to the borrower’s business, dispositions of property, making certain restricted payments (including restrictions on dividends and stock repurchases), entering into new lines of business and transactions with affiliates.

As part of this transaction, we capitalized approximately $0.4 million of legal and other third-party fees and are recognizing the costs over the two-year term of the secured credit facility, in accordance with the provisions of EITF 98-14, Debtor’s Accounting for Changes in Line-of-Credit or Revolving-Debt Arrangements (also codified in ASC 470). As of April 30, 2010, $0.2 million of these costs remains to be amortized.

During the quarter ended April 30, 2009, we entered into two additional loan modifications (the “Second Loan Modification Agreement” and the “Third Loan Modification Agreement”) with SVB. The nature of these modifications related to administrative changes made to the loan agreement for certain definitions and distribution clauses, in response to the exchange transactions further discussed below and had no accounting implications.

On August 5, 2009, we entered into a fourth loan modification agreement (the “Fourth Loan Modification Agreement”) with SVB, which modified the terms of a liquidity covenant contained in the Loan Agreement and provides for adjustments in the amount of the revolving line of credit based on the level of Quick Assets (as defined in the Loan Agreement). In connection with the Fourth Loan Modification Agreement we have repaid in full all principal and interest on its outstanding term loan with SVB.

Convertible Senior Subordinated Notes

At the date of the Merger, Credence had outstanding $122.5 million aggregate principal amount of 3.5% Convertible Senior Subordinated Notes due in May 2010 (“Notes”). In the year ended July 31, 2009, we repurchased approximately $87.0 million of principal amount of the Notes at a discount to their par value for a net cash consideration of $76.3 million, and also entered into an exchange transaction with two noteholders which reduced the aggregate principal amount outstanding but extended the due date to May 2011. In the three months ending October 31, 2009, we repurchased an additional $0.6 million of notes. In March 2010, we repurchased $33.5 million in aggregate principal and premium 3.5% Convertible Senior Subordinated Notes due 2011 at a discount to their par value for net cash consideration of $30.9 million.

We accounted for the repurchase of the notes as an extinguishment of debt in accordance with Topic 860, Transfers and Servicing, to the FASB ASC (formerly known as SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities, a Replacement of SFAS No. 125) (“Topic 860”) and have recorded a net gain on extinguishment of debt of $2.1 million and $3.1 million in the three and nine months ended April 30, 2010, respectively.

As a result, as of April 30, 2010, we have $1.5 million of notes outstanding that are due in May 2010 which were not part of the exchange transaction and $0.9 million of notes outstanding due in May 2011.

As noted above, in March and May of 2009, we entered into exchange transactions with two noteholders to exchange $47.3 million of Notes with $33.9 million of 3.5% Convertible Senior Subordinated Notes due May 2011 (“New Notes”), which included cash consideration of $10.6 million. The May transaction resulted from our Exchange Offer which was described in the Offering Circular, dated April 22, 2009 and the related Letter of Transmittal (collectively, the “Tender Offer Materials”). As the terms and conditions of the New Notes did not substantially change from the Notes, we concluded that the net present value of the New Notes did not significantly change and therefore accounted for the exchange transaction as a debt modification in accordance with the provisions of ASC 470. Accordingly, the net gain of $2.4 million on these exchange transactions was deferred and is being amortized over the remaining holding period of the New Notes. For the three and nine months ended April 30, 2010, we have recorded $0.3 million and $0.6 million, respectively, of this gain in the statement of operations. As of April 30, 2010, less than $0.1 million of the deferred gain is recorded on our consolidated balance sheet.

The New Notes are unsecured senior subordinated indebtedness, rank equally with the Old Notes and bear interest at the rate of 3.5% per annum. Interest is payable on the New Notes by us on May 15 and November 15 of each year through maturity on May 15, 2011, commencing on November 15, 2009. At maturity, we will be required to repay the outstanding principal of the New Notes, together with any accrued and unpaid interest thereon, and pay a maturity premium equal to 7.5% of such principal. New Notes may be issued only in denominations of $1,000 or an integral multiple thereof.

The New Notes are convertible, subject to the satisfaction of certain conditions or the occurrence of certain events as provided in the Indenture, into shares of our common stock at a conversion price per share of our common stock of $13.46 (subject to adjustment in certain events). The New Notes contain provisions known as net share settlement which, upon conversion of the New Notes, require us to pay holders in cash for up to the principal amount of the converted New Notes and to settle any amounts in excess of the cash amount in shares of our common stock.

Following a designated event, generally defined as a change of control or some other termination of trading of our listed shares, we must offer to repurchase all of the New Notes then outstanding at a repurchase price in cash equal to 100% of the principal amount of the New Notes, plus accrued and unpaid interest, if any, to, but excluding, the date of payment and a premium equal to 7.5% of such principal.

The New Notes are subordinated in right of payment to our senior debt. No payment on account of principal of, interest or premium, if any, on, or any other amounts due on the New Notes and no redemption, repurchase or other acquisition of the New Notes may be made unless full payment of all amounts due on up to $60 million (inclusive of principal, premium, interest and other amounts) of our senior debt that has been designated “Designated Senior Debt” for purposes of the Indenture has been made or duly provided for pursuant to the terms of the instrument governing such Designated Senior Debt. In addition, the Indenture provides that if any of the holders of Designated Senior Debt provides notice, which is referred to as a payment blockage notice, to us and the Trustee that a non-payment default has occurred giving the holder of such Designated Senior Debt the right to accelerate the maturity thereof, no payment on the New Notes and no repurchase or other acquisition of the New Notes may be made for specified periods.

On August 1, 2009, we adopted FSP APB 14-1, Accounting for Convertible Debt Instruments That May be Settled in Cash upon Conversion (Including Partial Cash Settlement), codified into FASB ASC Subtopic 470-20, Debt with Conversion and Other Options related to the accounting for convertible debt instruments and allocated the par value of the New Notes between a liability (debt) and an equity component based on the fair value of the debt component as of the date the notes were assumed. On the modification dates the New Notes were reassessed and the debt component of the New Notes was valued at $31.2 million based on the contractual cash flows discounted at an appropriate comparable market non-convertible debt borrowing rate at the date of the Exchange Offer of 12.0%, with the equity component representing the residual amount of the proceeds of $2.7 million which was recorded as a debt discount. The difference between the fair value and the carrying value of the notes was reclassed to Additional Paid in Capital as a cumulative effect of adoption in the first quarter of fiscal 2010. The impact of adoption of FSP APB 14-1 was not material to all periods presented and therefore the cumulative effect was recorded in the current period as interest expense in the Statement of Operations. The debt discount allocated to the debt component is amortized as additional interest expense over the term of the New Notes.

We also adopted the provisions of EITF 07-5, Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock, codified into FASB ASC 470, Debt, which became effective for us on August 1, 2009. We determined that there was not impact to our financials upon adoption.

For the three months and nine months ended April 30, 2010, we recorded additional interest expense in our statement of operations of less than $0.1 and $0.5 million, respectively, associated with the amortization of the debt discount. The statement of operations and statement of cash flows for the three and nine months ended April 30, 2009 were not impacted by the adoption of the new guidance as the Exchange Offer occurred in May 2009.

The following table reflects the carrying value of the Convertible Senior Subordinated Notes due 2011 as of April 30, 2010 and July 31, 2009 (in thousands):


	April 30, 2010			July 31, 2009
Convertible Senior Subordinated Notes due 2011	$	876		$	32,610
Less: Unamortized debt discount		(76	)		—

Net carrying value—Convertible Senior Subordinated Notes due 2011	$	800		$	32,610

The remaining debt discount of $0.1 million as of April 30, 2010 is being amortized over the term of the New Notes, which is approximately 1 year.

Covenants

As of April 30, 2010, we were in compliance with all underlying covenants associated with our various debt obligations, including maintaining approximately $70.4 million in cash and cash equivalents in accounts with SVB to meet our minimum level of liquidity covenant as modified by The Fourth Loan Modification.

We operate in a highly cyclical industry and we have and may continue to experience, with relatively short notice, significant fluctuations in demand for our products. This could result in a material effect on our liquidity position. In addition, our loan arrangement with SVB includes a material adverse change clause that could permit the bank to demand current payment of our long term loan in the event a material adverse change occurs under the terms of the loan agreement. We have met all financial and contractual agreements with SVB and management believes we have not triggered a material adverse condition as of April 30, 2010. To mitigate the impact on significant fluctuations in our business risk, we have completed a substantial and lengthy process of converting our manufacturing process to an outsource model. In addition, we continue to maintain other cost reduction measures, such as the strict oversight of discretionary travel, a company-wide reduction in base salary of 8% for a one year period which ended April 30, 2010, and other variable overhead expenses. We believe that these reductions in operating costs have not impaired our ability to fund critical product research and development efforts and allow us to continue to provide our customers with the levels of responsiveness and service they require. As such, we believe we can react to an industry downturn or a significant upturn much faster than in the past.

As of April 30, 2010, we have $76.0 million of cash less $1.5 million of short term debt obligations or net short term cash available of $74.5 million. As noted above, in March 2009 and May 2009, we successfully restructured $47.3 million of our convertible notes that were originally due in May 2010 to New Notes of $33.9 million which are due in May 2011, and in March 2010 we repurchased approximately $33.0 million of these notes, leaving a balance of $0.8 million net of discount remaining due in May 2011. We believe that our net short-term cash available of approximately $74.5 million, and cash flows expected to be generated by future operating activities will be sufficient to meet our cash requirements over the next twelve months.

As further described in Note 12 to our consolidated financial statements, on March 2, 2010, we announced the pricing of an underwritten public offering of 15,500,000 shares of our common stock at $2.85 per share. We also granted to our underwriters a 30-day option to purchase up to an aggregate of 2,325,000 additional shares of common stock to cover over-allotments, if any. This option was exercised on March 3, 2010, bringing the total number of shares issued by us in this offering to 17,825,000. The offering closed on March 8, 2010 and resulted in net proceeds to us, after deducting underwriting discounts and commissions and estimated offering expenses, of approximately $47.5 million. All of the shares offered by us were pursuant to an effective shelf registration statement previously filed with the SEC in November 2009. The impact of this transaction has been reflected in our financial results for the quarter ending April 30, 2010.

The world’s financial markets are currently experiencing significant turmoil, resulting in reductions in available credit, dramatically increased costs of credit, continued volatility in security prices, potential changes to existing credit terms, rating downgrades of investments and reduced valuations of securities generally. These events have materially and adversely impacted the availability of financing to a wide variety of businesses, and the resulting uncertainty has led to reductions in capital investments, overall spending levels, inventory levels, future product plans, and sales projections across industries and markets, including our own. These trends could have a material and adverse impact on the overall demand for our products and our ability to achieve targeted financial results, as well as our overall financial results from operations. In addition, our suppliers may also be adversely affected by economic conditions that may impact their ability to provide important components used in our manufacturing processes on a timely basis, or at all.

These conditions could also result in reduced capital resources because of reduced credit availability, higher costs of credit and the stretching of payables by creditors seeking to preserve their own cash resources. We are unable to predict the likely duration and severity of the current disruption in financial markets and adverse economic conditions in the U.S. and other countries but, the longer the duration, the greater risks we face in operating our business.

Commitments and Contingencies

Our major outstanding contractual obligations are related to our convertible senior subordinated notes, rental properties, inventory purchase commitments, severance payments and other operating leases.

As of the date of this filing we have no amounts outstanding under the secured credit facility. However we do have the ability to borrow under this facility until February 2011.

The aggregate outstanding amount of the contractual obligations is $41.9 million as of April 30, 2010. These obligations and commitments represent maximum payments based on current operating forecasts. Certain of the commitments could be reduced if changes to our operating forecasts occur in the future.

The following summarizes our contractual obligations as of the date of this filing and the effect such obligations are expected to have on our liquidity and cash flow in the future periods:


	Total		2010		2011–2012		2013–2014		Thereafter
	(in thousands)
Contractual Obligations:
Borrowings on secured credit facility (including interest)	$	—	$	—	$	—	$	—	$	—
Convertible senior subordinated notes due 2011 (including interest)		907		1		906		—		—
Operating leases		31,866		764		9,848		8,677		12,577
Inventory commitments		8,302		5,700		2,602		—		—
Severance		775		775		—		—		—

Total Contractual Obligations	$	41,850	$	7,240	$	13,356	$	8,677	$	12,577

Business Risks

This report includes or incorporates forward-looking statements that involve substantial risks and uncertainties and fall within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. You can identify these forward-looking statements by our use of the words “believes,” “anticipates,” “plans,” “expects,” “may,” “will,” “would,” “intends,” “estimates,” and similar expressions, whether in the negative or affirmative. We cannot guarantee that we actually will achieve these plans, intentions or expectations. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have included important factors in the cautionary statements, particularly under the heading “Business Risks,” that we believe could cause our actual results to differ materially from the forward-looking statements that we make. We do not assume any obligation to update any forward-looking statement we make.

Our sole market is the highly cyclical semiconductor industry, which causes a cyclical impact on our financial results.

We sell capital equipment to companies that design, manufacture, assemble, and test semiconductor devices. The semiconductor industry is highly cyclical, causing in turn a cyclical impact on our financial results. Industry order rates declined significantly in fiscal 2009. Although industry conditions have recently improved, the timing and level of a sustained industry recovery is uncertain at this time as we progress through our fiscal 2010. Any failure to expand in cycle upturns to meet customer demand and delivery requirements or contract in cycle downturns at a pace consistent with cycles in the industry could have an adverse effect on our business.

Any significant downturn in the markets for our customers’ semiconductor devices or in general economic conditions would likely result in a reduction in demand for our products and would negatively impact our business. Downturns in the semiconductor test equipment industry have been characterized by diminished product demand, excess production capacity, accelerated erosion of selling prices and excessive inventory levels. We believe the markets for newer generations of devices, including system in package (“SIP”), will also experience similar characteristics. Our market is also characterized by rapid technological change and changes in customer demand. In the past, we have experienced delays in commitments, delays in collecting accounts receivable and significant declines in demand for our products during these downturns, and we cannot be certain that we will be able to maintain or exceed our current level of sales.

Additionally, as a capital equipment provider, our revenue is driven by the capital expenditure budgets and spending patterns of our customers who often delay or accelerate purchases in reaction to variations in their businesses. Because a high portion of our costs are fixed, we are limited in our ability to reduce expenses and inventory purchases quickly in response to decreases in orders and revenues. In a contraction, we may not be able to reduce our significant fixed costs, such as continued investment in research and development and capital equipment requirements and materials purchases from our suppliers.

We may not be able to pay our debt and other obligations.

If our cash flow is inadequate to meet our obligations, we could face substantial liquidity problems. Through the date of this filing, in fiscal 2010 we repurchased approximately $32.4 million principal amount of Credence’s 3.5% Convertible Senior Subordinated Notes due May 2011, reducing our cash and cash equivalents and paid back approximately $1.5 million principal amount of Credence’s 3.5% Convertible Senior Subordinated Notes due May 2010. This is in addition to the significant repurchases made during the year ended July 31, 2009, when we repurchased approximately $87.0 million principal amount of Credence’s 3.5% Convertible Senior Subordinated Notes due May 2010. If we are unable to generate sufficient cash flow or otherwise obtain funds necessary to make the required payments on the remaining balance of Convertible Senior Subordinated Notes due May 2011, or certain of our other obligations, we would be in default under the terms thereof, which could permit the holders of those obligations to accelerate their maturity and also could cause default under future indebtedness we may incur. In addition, in the event of a material adverse change (as such term is defined in our loan agreements with Silicon Valley Bank) we would be in default under our revolving credit facility which could permit the bank to accelerate the maturity of the facility. Any such default could have material adverse effect on our business, prospects, financial position and operating results. In addition, we may not be able to repay amounts due in respect of our obligations, if payment of those obligations were to be accelerated following the occurrence of any other event of default as defined in the instruments creating those obligations.

We may incur substantial indebtedness in the future.

As of the date of this report, we have $0.9 million principal amount of 3.5% Credence Convertible Senior Subordinated Notes due May 2011. We may incur substantial additional indebtedness in the future. The incurrence of a substantial amount of indebtedness could, among other things,

•

make it difficult for us to make payments on our debt and other obligations;

•

make it difficult for us to obtain any necessary future financing for working capital, capital expenditures, debt service requirements or other purposes;

•

require the dedication of a substantial portion of any cash flow from operations to service for indebtedness, thereby reducing the amount of cash flow available for other purposes, including capital expenditures;

•

limit our flexibility in planning for, or reacting to changes in, our business and the industries in which we compete;

•

place us at a possible competitive disadvantage with respect to less leveraged competitors and competitors that have better access to capital resource; and

•

make us more vulnerable in the event of a further downturn in our business.

There can be no assurance that we will be able to meet our debt service obligations, including our obligations under the Notes.

We may need additional financing, which could be difficult to obtain.

We expect that our existing cash and cash equivalents and marketable securities, and borrowings from available bank financings, will be sufficient to meet our cash requirements to fund operations and expected capital expenditures for the foreseeable future. In the event we need to raise additional funds, we cannot be certain that we will be able to obtain such additional financing on favorable terms, if at all. Further, if we issue additional equity securities, stockholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of common stock. Future financings may place restrictions on how we operate our business. If we cannot raise funds on acceptable terms, if and when needed, we may not be able to develop or enhance our products and services, take advantage of future opportunities, grow our business or respond to competitive pressures, which could seriously harm our business.

The market for semiconductor test equipment is highly concentrated, and we have limited opportunities to sell our products.

The semiconductor industry is highly concentrated, and a small number of semiconductor device manufacturers and contract assemblers account for a substantial portion of the purchases of semiconductor test equipment generally, including our test equipment. In fiscal year 2009, Spirox and AMD accounted for 14% and 10% of our net sales, respectively. In fiscal years 2009, 2008 and 2007, Texas Instruments accounted for 10%, 30%, and 38%, respectively, of our net sales (which do not include sales of Credence Systems Corporation for fiscal 2008 or 2007). In fiscal year 2008, STMicroelectronics accounted for 11% of our net sales. Sales to our ten largest customers accounted for 69% of revenues in fiscal year 2009 and 78% in fiscal year 2008. Our customers may cancel orders with few or no penalties. If a major customer reduces orders for any reason, our revenues, operating results, and financial condition will be affected.

Our ability to increase our sales will depend in part upon our ability to obtain orders from new customers. Semiconductor manufacturers select a particular vendor’s test system for testing the manufacturer’s new generations of devices and make substantial investments to develop related test program applications and interfaces. Once a manufacturer has selected a test system vendor for a generation of devices, that manufacturer is more likely to purchase test systems from that vendor for that generation of devices, and, possibly, subsequent generations of devices as well. Therefore, the opportunities to obtain orders from new customers may be limited.

Our sales and operating results have fluctuated significantly from period to period, including from one quarter to another, and they may continue to do so.

Our quarterly and annual operating results are affected by a wide variety of factors that could adversely affect sales or profitability or lead to significant variability in our operating results or our stock price. This may be caused by a combination of factors, including the following:

•

sales of a limited number of test systems account for a substantial portion of our net sales in any particular fiscal quarter, and a small number of transactions could therefore have a significant impact;

•

order cancellations by customers;

•

lower gross margins in any particular period due to changes in:

•

our product mix,

•

the configurations of test systems sold,

•

the customers to whom we sell these systems, or

•

volume.

•

a long sales cycle, due to the high selling price of our test systems, the significant investment made by our customers, and the time required to incorporate our systems into our customers’ design or manufacturing process; and

•

changes in the timing of product orders due to:

•

unexpected delays in the introduction of products by our customers,

•

shorter than expected lifecycles of our customers’ semiconductor devices,

•

uncertain market acceptance of products developed by our customers, or

•

our own research and development.

We cannot predict the impact of these and other factors on our sales and operating results in any future period. Results of operations in any period, therefore, should not be considered indicative of the results to be expected for any future period. Because of this difficulty in predicting future performance, our operating results may fall below expectations of securities analysts or investors in some future quarter or quarters. Our failure to meet these expectations would likely adversely affect the market price of our common stock.

A substantial amount of the shipments of our test systems for a particular quarter occur late in the quarter. Our shipment pattern exposes us to significant risks in the event of problems during the complex process of final integration, test and acceptance prior to shipment. If we were to experience problems of this type late in our quarter, shipments could be delayed and our operating results could fall below expectations.

Our dependence on subcontractors and sole source suppliers may prevent us from delivering an acceptable product on a timely basis.

We rely on subcontractors to manufacture our test systems and many of the components and subassemblies for our products, and we rely on sole source suppliers for certain components. We may be required to qualify new or additional subcontractors and suppliers due to capacity constraints, competitive or quality concerns or other risks that may arise, including a result of a change in control of, or deterioration in the financial condition of, a supplier or subcontractor. The process of qualifying subcontractors and suppliers is a lengthy process. Our reliance on subcontractors gives us less control over the manufacturing process and exposes us to significant risks, especially inadequate capacity, late delivery, substandard quality, and high costs. In addition, the manufacture of certain of these components and subassemblies is an extremely complex process. If a supplier became unable to provide parts in the volumes needed or at an acceptable price, we would have to identify and qualify acceptable replacements from alternative sources of supply, or manufacture such components internally. The failure to qualify acceptable replacements quickly would delay the manufacturing and delivery of our products, which could cause us to lose revenues and customers.

We also may be unable to engage alternative production and testing services on a timely basis or upon terms favorable to us, if at all. If we are required for any reason to seek a new manufacturer of our test systems, an alternate manufacturer may not be available and, in any event, transitioning to a new manufacturer would require a significant lead time of nine months or more and would involve substantial expense and disruption of our business. Our test systems are highly sophisticated and complex capital equipment, with many custom components, and require specific technical know-how and expertise. These factors could make it more difficult for us to find a new manufacturer of our test systems if our relationship with our outsource suppliers is terminated for any reason, which would cause us to lose revenues and customers.

We are dependent on certain semiconductor device manufacturers as sole source suppliers of components manufactured in accordance with our proprietary design and specifications. We have no written supply agreement with these sole source suppliers and purchase our custom components through individual purchase orders.

Compliance with current and future environmental regulations may be costly and disruptive to our operations.

We may be subject to environmental and other regulations due to our production and marketing of products in certain states and countries. We are in the process of planning for and evaluating the impact of a directive to reduce the amount of hazardous materials in certain electronic components such as printed circuit boards. The directive is known as Directive 2002/95/EC of the European Parliament and of the Council of 27 January 2003 on the restriction of the use of certain hazardous substances in electrical and electronic equipment. “RoHS” is short for restriction of hazardous substances. The RoHS Directive banned the placing on the EU market of new electrical and electronic equipment containing more than agreed levels of lead, cadmium, mercury, hexavalent chromium, polybrominated biphenyl (PBB) and polybrominated diphenyl ether (PBDE), except where exemptions apply, from July 1, 2006. Manufacturers are required to ensure that their products, including their constituent materials and components, do not contain more than the minimum levels of the nine restricted materials in order to be allowed to export goods into the Single Market (i.e. of the European Community’s 27 Member States). We are uncertain as to the impact of compliance on future expenses and supply of materials used to manufacture our equipment. Any interruption in supply due to the unavailability of lead free products could have a significant impact on the manufacturing and delivery of our products. If a supplier became unable to provide parts in the volumes needed or at an acceptable price, we would have to identify and qualify acceptable replacements from alternative sources of supply or manufacture such components internally. The failure to qualify acceptable replacements quickly would delay the manufacturing and delivery of our products, which could cause us to lose revenues and customers.

Future mergers and acquisitions may be difficult to integrate, disrupt our business, dilute stockholder value or divert management attention.

We have in the past, and may in the future, seek to acquire or invest in additional businesses, products, technologies or engineers. For example, in August 2008 we completed our merger with Credence Systems Corporation and in June 2003, we completed our acquisition of StepTech, Inc. We may have to issue debt or equity securities to pay for future mergers or acquisitions, which could be dilutive to then current stockholders. We have also incurred and may continue to incur certain liabilities or other expenses in connection with acquisitions, which could materially adversely affect our business, financial condition and results of operations.

Mergers and acquisitions of high-technology companies are inherently risky, and no assurance can be given that future mergers or acquisitions will be successful and will not materially adversely affect our business, operating results or financial condition. Our past and future mergers and acquisitions may involve many risks, including:

•

difficulties in managing our growth following mergers and acquisitions;

•

difficulties in the integration of the acquired personnel, operations, technologies, products and systems of the acquired companies;

•

uncertainties concerning the intellectual property rights we purport to acquire;

•

unanticipated costs or liabilities associated with the mergers and acquisitions;

•

diversion of managements’ attention from other business concerns;

•

adverse effects on our existing business relationships with our or our acquired companies’ customers;

•

potential difficulties in completing projects associated with purchased in-process research and development; and

•

inability to retain employees of acquired companies.

Any of the events described in the foregoing paragraphs could have an adverse effect on our business, financial condition and results of operations and could cause the price of our common stock to decline.

We may not be able to deliver custom hardware options and related applications to satisfy specific customer needs in a timely manner.

We must develop and deliver customized hardware and applications to meet our customers’ specific test requirements. Our test equipment may fail to meet our customers’ technical or cost requirements and may be replaced by competitive equipment or an alternative technology solution. Our inability to provide a test system that meets requested performance criteria when required by a device manufacturer would severely damage our reputation with that customer. This loss of reputation may make it substantially more difficult for us to sell test systems to that manufacturer for a number of years. We have, in the past, experienced delays in introducing some of our products and enhancements.

Our dependence on international sales and non-U.S. suppliers involves significant risk.

International sales have constituted a significant portion of our revenues in recent years, and we expect that this composition will continue. International sales accounted for 64% of our revenues for fiscal year 2009 and 61% of our revenues for fiscal year 2008. In addition, we rely on non-U.S. suppliers for several components of the equipment we sell. As a result, a major part of our revenues and the ability to manufacture our products are subject to the risks associated with international commerce. A reduction in revenues or a disruption or increase in the cost of our manufacturing materials could hurt our operating results. These international relationships make us particularly sensitive to changes in the countries from which we derive sales and obtain supplies. Our outsource manufacturing suppliers in Malaysia and Thailand increase our exposure to these types of international risks. International sales and our relationships with suppliers may be hurt by many factors, including:

•

changes in law or policy resulting in burdensome government controls, tariffs, restrictions, embargoes or export license requirements;

•

political and economic instability in our target international markets;

•

longer payment cycles common in foreign markets;

•

difficulties of staffing and managing our international operations;

•

less favorable foreign intellectual property laws making it harder to protect our technology from appropriation by competitors; and

•

difficulties collecting our accounts receivable because of the distance and different legal rules.

In the past, we have incurred expenses to meet new regulatory requirements in Europe, experienced periodic difficulties in obtaining timely payment from non-U.S. customers, and been affected by economic conditions in several Asian countries. Our foreign sales are typically invoiced and collected in U.S. dollars. A strengthening in the dollar relative to the currencies of those countries where we do business would increase the prices of our products as stated in those currencies and could hurt our sales in those countries. Significant fluctuations in the exchange rates between the U.S. dollar and foreign currencies could cause us to lower our prices and thus reduce our profitability. These fluctuations could also cause prospective customers to push out or delay orders because of the increased relative cost of our products. In the past, there have been significant fluctuations in the exchange rates between the dollar and the currencies of countries in which we do business. While we have not entered into significant foreign currency hedging arrangements, we may do so in the future. If we do enter into foreign currency hedging arrangements, they may not be effective.

Our market is highly competitive, and we have limited resources to compete.

The test equipment industry is highly competitive in all areas of the world. Many other domestic and foreign companies participate in the markets for each of our products, and the industry is highly competitive. Our competitors in the market for semiconductor test equipment include Advantest Corporation, Teradyne Inc, and Verigy Ltd. All of these major competitors have substantially greater financial resources and more extensive engineering, manufacturing, marketing, and customer support capabilities.

We expect our competitors to enhance their current products and to introduce new products with comparable or better price and performance. The introduction of competing products could hurt sales of our current and future products. In addition, new competitors, including semiconductor manufacturers themselves, may offer new testing technologies, which may in turn reduce the value of our product lines. Increased competition could lead to intensified price-based competition, which would hurt our business and results of operations. Unless we are able to invest significant financial resources in developing products and maintaining customer support centers worldwide, we may not be able to compete effectively.

We are exposed to the risks associated with the volatility of the U.S. and global economies.

The lack of visibility regarding whether or when there will be sustained growth periods for the sale of electronic goods and information technology equipment, and uncertainty regarding the amount of sales, underscores the need for caution in predicting growth in the semiconductor test equipment industry in general and in our revenues and profits specifically. Slow or negative growth in the domestic economy may continue to materially and adversely affect our business, financial condition and results of operations for the foreseeable future. Our results of operations would be further adversely affected if we were to experience lower than anticipated order levels, cancellations of orders in backlog, extended customer delivery requirements or pricing pressure as a result of a slowdown. At lower levels of revenue, there is a higher likelihood that these types of changes in our customers’ requirements would adversely affect our results of operations because in any particular quarter a limited number of transactions accounts for an even greater portion of sales for the quarter.

Development of our products requires significant lead-time, and we may fail to correctly anticipate the technical needs of our customers.

Our customers make decisions regarding purchases of our test equipment while their devices are still in development. Our test systems are used by our customers to develop, test and manufacture their new devices. We therefore must anticipate industry trends and develop products in advance of the commercialization of our customers’ devices, requiring us to make significant capital investments to develop new test equipment for our customers well before their devices are introduced. If our customers fail to introduce their devices in a timely manner or the market does not accept their devices, we may not recover our capital investment through sales in significant volume. In addition, even if we are able to successfully develop enhancements or new generations of our products, these enhancements or new generations of products may not generate revenue in excess of the costs of development, and they may be quickly rendered obsolete by changing customer preferences or the introduction of products embodying new technologies or features by our competitors. Furthermore, if we were to make announcements of product delays, or if our competitors were to make announcements of new test systems, these announcements could cause our customers to defer or forego purchases of our existing test systems, which would also hurt our business.

Our success depends on attracting and retaining key personnel.

Our success will depend substantially upon the continued service of our executive officers and key personnel, none of whom are bound by an employment or non-competition agreement. Our success will depend on our ability to attract and retain highly qualified managers and technical, engineering, marketing, sales and support personnel. Competition for such specialized personnel is intense, and it may become more difficult for us to hire or retain them. Our volatile business cycles only aggravate this problem. Layoffs in any industry downturn could make it more difficult for us to hire or retain qualified personnel. 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 positions, or by our inability to attract and retain skilled employees.

We may not be able to protect our intellectual property rights.

Our success depends in part on our ability to obtain intellectual property rights and licenses and to preserve other intellectual property rights covering our products and development and testing tools. To that end, we have obtained certain domestic and international patents and may continue to seek patents on our inventions when appropriate. We have also obtained certain trademark registrations. The process of seeking intellectual property protection can be time consuming and expensive. We cannot ensure that:

•

patents will issue from currently pending or future applications;

•

our existing patents or any new patents will be sufficient in scope or strength to provide meaningful protection or any commercial advantage to us;

•

foreign intellectual property laws will protect our intellectual property rights; or

•

others will not independently develop similar products, duplicate our products or design around our technology.

If we do not successfully enforce our intellectual property rights, our competitive position could suffer, which could harm our operating results. We also rely on trade secrets, proprietary know-how and confidentiality provisions in agreements with employees and consultants to protect our intellectual property. Other parties may not comply with the terms of their agreements with us, and we may not be able to adequately enforce our rights against these people.

Third parties may claim we are infringing their intellectual property, and we could suffer significant litigation costs, licensing expenses or be prevented from selling our products.

Intellectual property rights are uncertain and involve complex legal and factual questions. We may be unknowingly infringing on the intellectual property rights of others and may be liable for that infringement, which could result in significant liability for us. If we do infringe the intellectual property rights of others, we could be forced to either seek a license to intellectual property rights of others or alter our products so that they no longer infringe the intellectual property rights of others. A license could be very expensive to obtain or may not be available at all. Similarly, changing our products or processes to avoid infringing the rights of others may be costly or impractical.

We are responsible for any patent litigation costs. If we were to become involved in a dispute regarding intellectual property, whether ours or that of another company, we may have to participate in legal proceedings. These types of proceedings may be costly and time consuming for us, even if we eventually prevail. If we do not prevail, we might be forced to pay significant damages, obtain licenses, modify our products or processes, stop making products or stop using processes.

Our stock price is volatile.

In the twelve-month period ending on April 30, 2010, our stock price ranged from a low of $0.37 to a high of $3.78. The price of our common stock has been and likely will continue to be subject to wide fluctuations in response to a number of events and factors, such as:

•

quarterly variations in operating results;

•

variances of our quarterly results of operations from securities analysts’ estimates;

•

changes in financial estimates and recommendations by securities analysts;

•

announcements of technological innovations, new products, or strategic alliances; and

•

news reports relating to trends in our markets.

In addition, the stock market in general, and the market prices for semiconductor-related companies in particular, have experienced significant price and volume fluctuations that often have been unrelated to the operating performance of the companies affected by these fluctuations. These broad market fluctuations may adversely affect the market price of our common stock, regardless of our operating performance.

We may record impairment charges which would adversely impact our results of operations.

We review our goodwill, intangible assets and long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amounts of these assets may not be recoverable, and also review goodwill annually in accordance with Topic 350, Intangibles – Goodwill and Other, to FASB ASC (formerly known as SFAS No. 142, Goodwill and Other Intangibles).

One potential indicator of goodwill impairment is whether our fair value, as measured by its market capitalization, has remained below our net book value for a significant period of time. Whether our market capitalization triggers an impairment charge in any future period will depend on the underlying reasons for the decline in stock price, the significance of the decline, and the length of time the stock price has been trading at such prices.

In the event that we determine in a future period that impairment exists for any reason, we would record an impairment charge in the period such determination is made, which would adversely impact our financial position and results of operations.

Internal control deficiencies or weaknesses that are not yet identified could emerge.

Over time we may identify and correct deficiencies or weaknesses in our internal controls and, where and when appropriate, report on the identification and correction of these deficiencies or weaknesses. However, the internal control procedures can provide only reasonable, and not absolute, assurance that deficiencies or weaknesses are identified. Deficiencies or weaknesses that have not been identified by us could emerge and the identification and correction of these deficiencies or weaknesses could have a material impact on our results of operations. If our internal controls over financial reporting are not considered adequate, we may experience a loss of public confidence, which could have an adverse effect on our business and stock price.

Charges to earnings resulting from the application of the purchase method of accounting may adversely affect the market value of our common stock following the completion of the merger.

In accordance with United States generally accepted accounting principles, which we refer to in this Report as GAAP, the merger of LTX and Credence has been accounted for using the purchase method of accounting, which will result in charges to earnings that could have an adverse impact on the market value of our common stock following the completion of the merger. Under the purchase method of accounting, the total estimated purchase price has been allocated to Credence’s net tangible assets, identifiable intangible assets or expense for in-process research and development based on their respective fair values as of August 29, 2008. We will incur additional amortization expense based on the identifiable amortizable intangible assets acquired in connection with the merger agreement and their relative useful lives. Additionally, to the extent the value of goodwill or identifiable intangible assets or other long-lived assets may become impaired, we will be required to incur material charges relating to the impairment. These amortization and potential impairment charges could have a material impact on our results of operations.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

There has been no material change in our Market Risk exposure since the filing of the 2009 Annual Report on Form 10-K.

Item 4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures. The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures as of April 30, 2010. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time period specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of the Company’s disclosure controls and procedures as of April 30, 2010, the Company’s Chief Executive Officer and Chief Financial Officer concluded that, as of such date, the Company’s disclosure controls and procedures were effective at the reasonable assurance levels.

Changes in Internal Controls. There was no change in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter ended April 30, 2010 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Limitations on the Effectiveness of Controls

The Company’s management, including the Chief Executive Officer and Chief Financial Officer, does not expect that the Company’s disclosure controls and procedures or the Company’s internal controls can prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. The inherent limitations in all control systems include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons or by collusion of two or more people. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

PART II—OTHER INFORMATION

Item 6.

Exhibits

(i)	Exhibit 31.1 and Exhibit 31.2—Rule 13a-14(a)/15d-14(a) Certifications

(ii)	Exhibit 32—Section 1350 Certifications

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.


	LTX-Credence Corporation

Date: June 9, 2010	By:	/S/ MARK J. GALLENBERGER
		Mark J. Gallenberger
		Chief Financial Officer and Treasurer
		(Principal Financial Officer)

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company