Xcerra Corp - FORM 10-Q

Xcerra Corp - FORM 10-Q - June 9, 2011

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EX-32 - CERTIFICATION OF THE CEO AND CFO PURSUANT TO RULE 13A-14(B) - Xcerra Corp	dex32.htm
EX-31.2 - CERTIFICATION OF THE CHIEF FINANCIAL OFFICER PURSUANT TO RULE 13A-14(A) - Xcerra Corp	dex312.htm
EX-31.1 - CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER PURSUANT TO RULE 13A-14(A) - Xcerra Corp	dex311.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, 2011

¨	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 2, 2011
Common Stock, $0.05 par value per share		49,527,491 shares

LTX-CREDENCE CORPORATION

Index


		Page Number
Part I.	FINANCIAL INFORMATION

Item 1.	Financial Statements

	Consolidated Balance Sheets as of April 30, 2011 and July 31, 2010		3

	Condensed Consolidated Statements of Operations and Comprehensive Income for the Three and Nine Months Ended April 30, 2011 and April 30, 2010		4

	Consolidated Statements of Cash Flows for the Nine Months Ended April 30, 2011 and April 30, 2010		5

	Notes to Consolidated Financial Statements		6-18

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		19

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		28

Item 4.	Controls and Procedures		28

Part II.	OTHER INFORMATION

Item 1.	Legal Proceedings		29

Item 1A.	Risk Factors		29

Item 6.	Exhibits		35

	SIGNATURE		36

	EXHIBIT INDEX		37

LTX-CREDENCE CORPORATION

CONSOLIDATED BALANCE SHEETS

(In thousands)


	April 30, 2011		July 31, 2010
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	116,278	$	74,978
Marketable securities		31,468		18,458
Accounts receivable—trade, net of allowances of $47 and $108, respectively		41,858		45,622
Accounts receivable—other		1,231		1,174
Inventories		21,328		21,039
Prepaid expenses and other current assets		5,618		4,585

Total current assets		217,781		165,856
Property and equipment, net		21,479		26,277
Intangible assets, net		7,807		12,277
Goodwill		43,030		43,030
Other assets (includes $207 and $256, respectively, in restricted cash)		748		771

Total assets	$	290,845	$	248,211

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt	$	873	$	826
Accounts payable		15,804		16,639
Other accrued expenses		25,895		29,090
Deferred revenues		5,194		8,317

Total current liabilities		47,766		54,872
Other long-term liabilities		15,873		16,587
Commitments and contingent liabilities (Note 5)
Stockholders’ equity:
Common stock		2,477		2,453
Additional paid-in capital		754,620		752,188
Accumulated other comprehensive income		33		36
Accumulated deficit		(529,924)		(577,925)

Total stockholders’ equity		227,206		176,752

Total liabilities and stockholders’ equity	$	290,845	$	248,211

See accompanying Notes to Consolidated Financial Statements.

LTX-CREDENCE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(Unaudited)

(In thousands, except per share data)


	Three Months Ended April 30,				Nine Months Ended April 30,
	2011		2010		2011		2010
Net product sales	$	48,435	$	45,020	$	155,340	$	110,671
Net service sales		10,230		11,049		31,520		35,248

Net sales		58,665		56,069		186,860		145,919
Cost of sales		22,203		23,921		71,730		67,603

Gross profit		36,462		32,148		115,130		78,316
Engineering and product development expenses		13,314		12,339		39,188		36,179
Selling, general and administrative expenses		11,755		11,414		37,611		29,295
Amortization of purchased intangible assets		1,490		2,664		4,471		7,992
Restructuring		248		788		363		2,027

Income from operations		9,655		4,943		33,497		2,823
Other income (expense):
Interest expense		(112)		(330)		(257)		(2,657)
Investment income		96		43		255		136
Other income, net		13,687		12		14,076		1,325
Gain on extinguishment of debt, net		—		2,126		—		3,057

Income before provision for (benefit from) income taxes		23,326		6,794		47,571		4,684
Provision for (benefit from) income taxes		(295)		(35)		(430)		236

Net income	$	23,621	$	6,829	$	48,001	$	4,448

Net income per share:
Basic	$	0.48	$	0.15	$	0.97	$	0.10
Diluted	$	0.47	$	0.14	$	0.96	$	0.10
Weighted-average common and common equivalent shares used in computing net income per share:
Basic		49,491		46,536		49,348		43,971
Diluted		50,368		47,496		50,240		44,725
Comprehensive income:
Net income	$	23,621	$	6,829	$	48,001	$	4,448
Unrealized loss on marketable securities		(1)		(11)		(3)		(111)

Comprehensive income	$	23,620	$	6,818	$	47,998	$	4,337

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,

	2011		2010
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	48,001	$	4,448
Add (deduct) non-cash items:
Stock-based compensation		2,851		3,089
Depreciation and amortization		13,434		18,820
Gain on extinguishment of debt, net		—		(3,057)
Restructuring		363		2,027
Other		406		1,544
Changes in operating assets and liabilities:

Accounts receivable		3,584		(14,877)
Inventories		(752)		9,569
Prepaid expenses		(1,030)		5,854
Other assets		(509)		462
Accounts payable		(835)		(3,131)
Accrued expenses		(4,215)		(9,633)
Deferred revenues		(3,123)		3,220


Net cash provided by operating activities		58,175		18,335
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales and maturities of available-for-sale securities		22,036		9,820
Purchases of available-for-sale securities		(35,523)		(326)
Purchases of property and equipment		(3,716)		(2,579)

Net cash (used in) provided by investing activities		(17,203)		6,915
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of tax withholdings for vested RSUs, net of proceeds from stock option exercises		(658)		(1,066)
Proceeds from equity offering, net of commissions and fees		—		47,878

Proceeds from shares issued from employees’ stock purchase plan		320		224
Proceeds from borrowings from revolving line of credit		—		59,988
Repayments of borrowings from revolving line of credit		—		(99,361)
Repayments of term loan		—		(12,200)
Repayments of convertible senior subordinated notes		—		(31,589)


Net cash used in financing activities		(338)		(36,126)
Effect of exchange rate changes on cash and cash equivalents		666		(92)


Net increase (decrease) in cash and cash equivalents		41,300		(10,968)
Cash and cash equivalents at beginning of period		74,978		86,488

Cash and cash equivalents at end of period	$	116,278	$	75,520

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. The Company designs, manufactures, markets and services 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 its 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.

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, 2010. 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, 2011 are not necessarily indicative of future trends or the Company’s results of operations for the entire fiscal year ending July 31, 2011.

Foreign Currency Remeasurement

The financial statements of the Company’s foreign subsidiaries are remeasured in accordance with Topic 830, Foreign Currency Matters, to the Financial Accounting Standards Board Accounting Standards Codification, (“FASB ASC”). 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 statements of operations as a component of Other income, net, and were not significant for the three and nine months ended April 30, 2011 and 2010, respectively.

Derivatives

The Company conducts business in a number of foreign countries, with certain transactions denominated in local currencies. The purpose of the Company’s foreign currency management is to minimize the effect of exchange rate fluctuations on certain foreign denominated net monetary assets. The Company does not use derivative financial instruments for trading or speculative purposes.

During the three months ended April 30, 2011, the Company entered into a derivative in the form of a foreign currency forward contract to minimize the effect of exchange rate fluctuations associated with the remeasurement of net monetary assets denominated in foreign currencies. This transaction did not qualify for hedge accounting under Topic 815, Derivatives and Hedging to the FASB ASC. The change in fair value of this derivative is recorded directly in the Company’s statement of operations, and is used to offset the change in fair value of the net monetary assets denominated in foreign currencies. The Company recorded $0.3 million of expense in Other income, net for the three and nine months ended April 30, 2011. There was no activity recorded for the same periods in 2010.

The notional amount and market amount of the foreign currency forward contract was $4.6 million and $4.9 million, respectively, at April 30, 2011. The following table summarizes the fair value of derivative instruments as of April 30, 2011 and July 31, 2010:


Derivatives not designated as hedging instruments:	Balance Sheet Location	April 30, 2011		July 31, 2010
		(in thousands)
Foreign exchange contract	Other accrued expenses	$	306	$	—

Revenue Recognition

The Company recognizes revenue based on guidance provided in Topic 605, Revenue Recognition, to the FASB ASC (“ASC 605”). 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 collectability is reasonably assured.

Revenue related to equipment sales is recognized when: (a) the Company has a written sales agreement; (b) delivery has occurred; (c) the price is fixed or determinable; (d) collectability 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, and (5) 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. The arrangement consideration, or the amount of revenue to be recognized on each separate unit of accounting, is allocated at the inception of the arrangement to all deliverables on the basis of their relative selling price based on the provisions of ASU 2009-13.

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.

In August 2010, the Company adopted the provisions of ASU 2009-13, which is an update to ASC 605. The update establishes a selling price hierarchy for determining the vendor specific objective evidence of selling price or, if that’s not available, the estimated selling price of a deliverable under a revenue arrangement and is effective for the Company prospectively for revenue arrangements entered into or materially modified beginning on August 1, 2010. Adoption of the update did not have a material impact on the Company’s financial statements for the nine months ended April 30, 2011.

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, relating to certain software development costs, were insignificant for the three and nine months ended April 30, 2011 and 2010, respectively.

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, 2011 and 2010, respectively.

Income Taxes

The provision for or benefit from income taxes relates principally to operating results in foreign entities in jurisdictions primarily in Asia and Europe. The Company recorded an income tax benefit of $0.3 million and $0.4 million, respectively, for the three and nine months ended April 30, 2011, primarily due to the receipt of an income tax refund in the United States. For the three and nine months ended April 30, 2010, the Company recorded an income tax provision (benefit) of less than ($0.1) million and $0.2 million, respectively, primarily due to foreign tax on earnings in foreign jurisdictions.

As of April 30, 2011 and July 31, 2010, the total liability for unrecognized income tax benefits was $8.5 million and $8.6 million, respectively, (of which $4.8 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, 2011 and July 31, 2010, the Company had accrued approximately $1.3 million and $1.1 million, respectively, 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, France 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 on 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 $202.0 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 2010 Stock Plan (“2010 Plan”), 2004 Stock Plan (“2004 Plan”), 2001 Stock Plan (“2001 Plan”), 1999 Stock Plan (“1999 Plan”), and 1993 Stock Plan (“1993 Plan”). In addition, the Company assumed the StepTech, Inc. Stock Option Plan (the “STI 2000 Plan”) with its acquisition of StepTech, Inc. (“StepTech”) and the Credence 2005 Stock Incentive Plan (the “Credence 2005 Plan”) with its acquisition of Credence. The Company can only grant awards from the 2010 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 (“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. The Company recorded stock-based compensation expense of approximately $0.9 million and $2.9 million for the three and nine months ended April 30, 2011, respectively, and $1.1 million and $3.1 million, respectively, for the three and nine months ended April 30, 2010, in connection with its share-based payments.

There were no grants of equity awards made during the quarters ended April 30, 2011 and January 31, 2011.

The Company granted 692,700 restricted stock unit service-based awards during the quarter ended October 31, 2010, all of which have four-year vesting terms.

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 its 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 estimated selling price of non-standard warranty. Costs for non-standard warranties are expensed as incurred. Factors that impact the expected product 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 product warranty liability and adjusts it as necessary.

The following table shows the change in the product warranty liability, as required by Topic 460, Guarantees, to the FASB ASC, for the nine months ended April 30, 2011 and 2010:


	Nine Months Ended April 30,
Product Warranty Activity	2011		2010
	(in thousands)
Balance at beginning of period	$	4,398	$	3,496
Warranty expenditures for current period		(6,441)		(3,664)
Changes in liability related to pre-existing warranties		(257)		(762)
Provision for warranty costs in the period		5,145		5,271

Balance at end of period	$	2,845	$	4,341

Comprehensive income

Comprehensive income is composed of two components: net income and other comprehensive income. Other comprehensive income consists of unrealized gains and losses on the Company’s marketable securities.

Net income per Share

Basic net income per share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted net income 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 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,
	2011		2010		2011		2010
	(in thousands, except per share data)
Net income	$	23,621	$	6,829	$	48,001	$	4,448
Basic EPS:
Weighted average shares outstanding		49,491		46,536		49,348		43,971
Basic EPS	$	0.48	$	0.15	$	0.97	$	0.10
Diluted EPS:
Weighted average shares outstanding		49,491		46,536		49,348		43,971
Plus: impact of stock options and unvested restricted stock units		877		960		892		754

Weighted average common and common equivalent shares outstanding		50,368		47,496		50,240		44,725
Diluted EPS	$	0.47	$	0.14	$	0.96	$	0.10

For the three and nine months ended April 30, 2011 stock options to purchase approximately 1.5 million shares of common stock were not included in the calculation of diluted net income per share because their inclusion would have been anti-dilutive. For the three and nine months ended April 30, 2010 stock options to purchase approximately 2.1 million and 2.2 million shares, respectively, of common stock were also excluded from the calculation of diluted net income per share. These options could be dilutive in the future. In accordance with the contingently issuable shares guidance of Topic 260, Earnings Per Share, to the FASB ASC, the calculation of diluted net income per share for the three and nine months ended April 30, 2011 and April 30, 2010 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 Topic 320, Investments – Debt and Equity Securities, to the FASB ASC. The Company also holds certain investments in commercial paper that it considers to be held to maturity based on their maturity dates. 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 U.S. 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, 2011 was $1.0 million.

Gross unrealized gains and losses for the three and nine months ended April 30, 2011 and 2010 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 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 impairment losses recorded in the three or nine months ended April 30, 2011 or 2010.

Inventories

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


	April 30, 2011		July 31, 2010
	(in thousands)
Purchased components and parts	$	10,723	$	10,232
Units-in-progress		2,834		4,084
Finished units		7,771		6,723

Total inventories	$	21,328	$	21,039

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, 2011 and July 31, 2010, inventory is stated net of inventory reserves of $42.3 million and $45.6 million, respectively. There were no material inventory provisions required in the three and nine months ended April 30, 2011 or 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 $8.3 million and $13.2 million of previously reserved inventory for the three and nine months ended April 30, 2011, which represents the gross cash received from the customer. The Company released reserves of $2.0 million and $3.4 million in the three and nine months ended April 30, 2011, related to these sales. The Company had sales of $1.0 million and $1.0 million of previously reserved inventory for the three and nine months ended April 30, 2010. The Company released reserves of $0.4 million and $0.4 million in the three and nine months ended April 30, 2010, related to these sales.

Property and Equipment

Property and equipment acquired is recorded at cost. Property and equipment related to the Credence merger was recorded at fair value on 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. Equipment spares used for service and internally manufactured test systems used for testing components and engineering projects are recorded at cost and depreciated over 3 to 7 years. Repair and maintenance costs that do not extend the lives of property and equipment are expensed as incurred. Property and equipment are summarized as follows:


	April 30, 2011		July 31, 2010		Estimated Useful Lives
	(in thousands)				(in years)
Equipment spares	$	58,407	$	64,964		5 or 7
Machinery, equipment and internally manufactured systems		45,317		37,442		3-7
Office furniture and equipment		6,254		5,370		3-7
Purchased software		1,043		1,039		3
Land		2,524		2,524		—
Leasehold improvements		6,187		6,418		Term of lease or useful life, not to exceed 10 years

Property and equipment, gross		119,732		117,757
Less: accumulated depreciation and amortization		(98,253)		(91,480)

Property and equipment, net	$	21,479	$	26,277

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, 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. As of April 30, 2011 there were no indicators that required the Company to conduct a recoverability test at that date.

Goodwill and Other Intangibles

In accordance with Topic 350, Intangibles – Goodwill and Other, to the FASB ASC (“ASC 350”), the Company is required to review goodwill by reporting unit for impairment at least annually or more often if there are indicators of impairment present. The Company has determined its entire business represents one reporting unit. Historically, the Company has performed its annual impairment analysis during the fourth quarter of each year. The Company uses a discounted cash flow analysis to test goodwill 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, 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. As of April 30, 2011 the Company’s implied fair value exceeds the Company’s carrying value of its net assets and therefore no impairment exists as of that date.

Determining 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.

The Company’s Goodwill consists of the following:


Goodwill	April 30, 2011		July 31, 2010
	(in thousands)
Credence (August 29, 2008)	$	28,662	$	28,662
Step Tech (June 10, 2003)		14,368		14,368

Total goodwill	$	43,030	$	43,030

There was no change in the goodwill balance for the three or nine months ended April 30, 2011 or 2010.

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


			As of April 30, 2011
Description	Estimated Useful Life		Gross Carrying Amount		Accumulated Amortization		Net Amount
	(in years)		(in thousands)		(in thousands)		(in thousands)
Trade names		1.0	$	300	$	300	$	—
Distributor relationships		2.0		2,800		2,800		—
Key customer relationships		3.0		8,500		8,251		249
Developed technology—ASL		6.0		16,000		12,151		3,849
Developed technology—Diamond		9.0		9,400		7,116		2,284
Maintenance agreements		7.0		1,900		475		1,425

Total intangible assets			$	38,900	$	31,093	$	7,807


			As of July 31, 2010
Description	Estimated Useful Life		Gross Carrying Amount		Accumulated Amortization		Net Amount
	(in years)		(in thousands)		(in thousands)		(in thousands)
Trade names		1.0	$	300	$	300	$	—
Distributor relationships		2.0		2,800		2,800		—
Key customer relationships		3.0		8,500		7,502		998
Developed technology—ASL		6.0		16,000		9,773		6,227
Developed technology—Diamond		9.0		9,400		5,977		3,423
Maintenance agreements		7.0		1,900		271		1,629

Total intangible assets			$	38,900	$	26,623	$	12,277

Intangible assets are amortized based upon the pattern of estimated economic use over their estimated useful lives. The weighted average estimated remaining useful life over which these intangible assets will be amortized is 3.1 years.

The Company expects amortization for these intangible assets to be:


For the fiscal year ending July 31,	Amount
	(in thousands)
Remainder of 2011	$	1,490
2012		3,163
2013		1,583
2014		769
2015		396
Thereafter		406

Total	$	7,807

3. SEGMENT REPORTING

In accordance with the provisions of Topic 280, Segment Reporting to the FASB ASC, 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’s net sales by geographic area for the three and nine months ended April 30, 2011 and 2010, along with the long-lived assets at April 30, 2011 and July 31, 2010, are summarized as follows:


	Three Months Ended April 30,				Nine Months Ended April 30,
	2011		2010		2011		2010
	(in thousands)
Net sales:
United States	$	7,439	$	11,264	$	27,913	$	46,132
Taiwan		13,396		16,139		42,768		37,030
Singapore		8,389		8,371		18,321		19,854
Philippines		11,309		3,902		50,708		6,432
China/Hong Kong		6,018		285		10,863		1,161
All other countries		12,114		16,108		36,287		35,310

Total Net Sales	$	58,665	$	56,069	$	186,860	$	145,919

Long-lived assets consist of property and equipment:


	April 30, 2011		July 31, 2010
	(in thousands)
Long-lived assets:
United States	$	19,414	$	24,443
Singapore		673		79
Philippines		416		793
All other countries		976		962

Total long-lived assets	$	21,479	$	26,277

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

4. RESTRUCTURING

As a result of the Credence merger in August 2008, the Company assumed restructuring plans previously approved by Credence management 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.

During the quarter ended April 30, 2011, the Company recorded a charge of approximately $0.2 million, which included the impact of extending sublease assumptions on a previously restructured facility, offset by a benefit from reduced common area maintenance charges and sublease income from a tenant that started in April 2011. Also offsetting the charge was a release of severance reserves based on current estimated exposures.

During the quarter ended October 31, 2010, the Company extended the sublease assumptions for one of its previously restructured facilities which increased the accrued restructuring liability by $0.1 million. The accrued restructuring liability decreased by an additional $1.2 million during the nine months ended April 30, 2011 to $5.2 million related primarily to rent payments on restructured facilities.

As of April 30, 2011 the accrual for facility leases includes $3.7 million of long term payments to be made for the remainder of the respective lease terms which is included in other long term liabilities on the Company’s consolidated balance sheet. The remainder of the accrual of $1.5 million is included in accrued expenses on the Company’s consolidated balance sheet.

The following table sets forth the Company’s restructuring accrual activity for the nine months ended April 30, 2011 and April 30, 2010 (in thousands):


Restructuring Activity	Severance Costs		Facility Leases		Total
Balance July 31, 2010	$	84	$	5,810	$	5,894
Addition to (reduction of) expense		(24)		387		363
Accretion and elimination of unfavorable lease liability		—		100		100
Cash paid		(16)		(1,188)		(1,204)

Balance April 30, 2011	$	44	$	5,109	$	5,153


	Severance Costs		Facility Leases		Total
Balance July 31, 2009	$	2,820	$	5,565	$	8,385
Addition 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

5. COMMITMENTS AND CONTINGENCIES

The Company is subject to various legal proceedings, claims and litigation which arise in the ordinary course of operations. In the opinion of management, the amount of liability, if any, with respect to these actions would not materially affect the Company’s financial position, results of operations or cash flows.

As the Company previously disclosed, on November 17, 2010, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Verigy Ltd., a corporation organized under the laws of Singapore (“Verigy”), Alisier Limited, a corporation organized under the laws of Singapore (“Holdco”), Lobster-1 Merger Corporation, a Massachusetts corporation and a wholly-owned subsidiary of Verigy (“Merger Sub-1”), and Lobster-2 Merger Corporation, a Massachusetts corporation and a wholly-owned subsidiary of Holdco (“Merger Sub-2”).

On December 6, 2010, Verigy announced that it had received an unsolicited non-binding proposal from Advantest Corporation (“Advantest”) to acquire all of the outstanding Verigy ordinary shares for $12.15 per share in cash. Subsequently, on December 23, 2010, Verigy announced that it had received a revised non-binding proposal from Advantest to acquire all of the outstanding Verigy ordinary shares for $15.00 per share in cash.

On March 25, 2011, LTX-Credence notified Verigy of the termination of the Merger Agreement, effective immediately, due to the occurrence of a Triggering Event (as defined in the Merger Agreement) with respect to Verigy. In connection with the termination, Verigy paid LTX-Credence the $15,000,000 Verigy Termination Fee contemplated by the Merger Agreement on March 25, 2011. The Company recorded this receipt as a component of Other income, net in its consolidated statement of operations.

In the three and nine months ended April 30, 2011, the Company has incurred approximately $1.9 million and $4.7 million of expenses related to this transaction, of which $0.6 million and $3.4 million has been recorded in selling, general and administrative expenses on the Company’s consolidated statement of operations. The remaining $1.3 million was related to a break-up fee and was recorded as other income (expense).

As previously disclosed by the Company, the Company, its directors, Lobster-1 Merger Corporation, and Lobster-2 Corporation, were named as defendants in the following putative class action complaints:

•

Carneau v. LTX-Credence Corp., et. al., 110-cv-188153, filed on November 22, 2010 in the Superior Court of the State of California.

•

Khan v. LTX-Credence Corp., et.al,, 1-10-cv188773 filed December 1, 2010 in Santa Clara Superior Court.

•

Snitily v.Tacelli, et.al., No 1-10-cv-188922 filed on December 6, 2010 in Santa Clara Superior Court.

•

Shah v. Tacelli, et. al., No. 10- 4580, filed on November 23, 2010 in the Superior Court of the Commonwealth of Massachusetts.

•

Krieger v. LTX-Credence Corp., et. al., No. 10-04713, filed on December 3, 2010 in the Superior Court for the Commonwealth of Massachusetts.

•

Keuler v. LTX-Credence Corp., et. al., 1:10-cv-12058, filed on November 30, 2010 in the United States District Court for the District of Massachusetts.

•

Brookshire v. LTX-Credence Corp., et. al.,CV 10 5773 filed on December 17, 2010 in the United States District Court for the Northern District of California.

As of April 30, 2011 all of these actions have been dismissed.

On April 19, 2011, the Company received a demand letter pursuant to Mass. Gen. Laws ch. 156D, § 7.42 sent on behalf of Joel Krieger, a purported LTX-Credence shareholder, whose putative class action complaint, Krieger v. LTX-Credence Corp., et. al., No. 10-04713, filed on December 3, 2010 in the Superior Court for the Commonwealth of Massachusetts, was recently dismissed. The letter demands the Company commence legal proceedings against the Company’s directors and senior officers for breaches of their fiduciary duties, gross negligence and mismanagement, waste of corporate assets, and abuse of control, all arising out of the Company’s pursuit of a merger transaction with Verigy. Independent members of the Board of Directors are in the process of conducting an inquiry into the letter and matters raised therein.

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 April 30, 2011 or July 31, 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 April 30, 2011 or July 31, 2010.

The Company has approximately $10.9 million and $12.2 million, respectively, of non-cancelable inventory commitments with outsource suppliers as of April 30, 2011 and July 31, 2010. The Company expects to consume the inventory through normal operating activity.

The Company has operating lease commitments for certain facilities and equipment. Minimum lease payments under non-cancelable leases at April 30, 2011, are as follows:

Lease Commitments:


For the fiscal year ending July 31,	Amount
	(in thousands)
Remainder of 2011	$	1,387
2012		5,949
2013		5,218
2014		4,710
2015		4,248
Thereafter		6,006

Total minimum lease payments	$	27,518

6. ACCRUED EXPENSES

Other accrued expenses consisted of the following at April 30, 2011 and July 31, 2010:


	April 30, 2011		July 31, 2010
	(in thousands)
Accrued compensation	$	11,185	$	10,450
Warranty reserve		2,845		4,398
Accrued vendor liability		2,251		3,398
Accrued restructuring		1,488		1,490
Accrued income and local taxes		1,050		1,289
Accrued professional fees		876		965
Other accrued expenses		6,200		7,100

Total accrued expenses	$	25,895	$	29,090

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

7. LONG TERM DEBT

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 expired in February 2011. The First Loan Modification Agreement allowed for cash borrowings, letters of credit and cash management facilities under a secured revolving credit facility of $40.0 million. The Company has not renewed the secured revolving line of credit.

Convertible Senior Subordinated Notes Due 2011 (“Notes”)

The following table reflects the carrying value of the Company’s Convertible Senior Subordinated Notes due May 2011 as of April 30, 2011 and July 31, 2010:


	April 30, 2011		July 31, 2010
	(in thousands)
Convertible Senior Subordinated Notes due 2011	$	876	$	876
Less: Unamortized debt discount		(3)		(50)

Net carrying value—Convertible Senior Subordinated Notes due 2011	$	873	$	826

The Notes are unsecured senior subordinated indebtedness of the Company and bear interest at the rate of 3.5% per annum. Interest is payable on the notes by the Company on May 15 and November 15 of each year through maturity on May 15, 2011. At maturity, the Company repaid the outstanding principal of the Notes, together with accrued and unpaid interest thereon, and a maturity premium equal to 7.5% of such principal. The 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 $40.38 (subject to adjustment in certain events). The Notes contain provisions known as net share settlement which, upon conversion of the notes, require the Company to pay holders in cash for up to the principal amount of the converted notes and to settle any amounts in excess of the cash amount in shares of the Company’s common stock.

On August 1, 2009, the Company adopted 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 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 Notes were reassessed and the debt component of the 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 ASC 470-20 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 Notes. For the three and nine months ended April 30, 2011, the Company recorded interest expense in its statement of operations of less than $0.1 million and $0.3 million, associated with the amortization of the debt discount. The remaining debt discount as of April 30, 2011 is being amortized over the remaining term of the Notes, which is approximately fifteen days.

Covenants

As of April 30, 2011, the Company no longer has any debt obligations subject to covenants. As of May 15, 2011, the Company had repaid the entire outstanding principal amount of the Notes and was not subject to any debt obligations.

8. 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.

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, 2011 and as of July 31, 2010:


			Fair Value Measurements at Reporting Date Using (in thousands)
April 30, 2011	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)	$	115,278	$	114,277	$	1,001	$	—
Marketable securities (2)		26,570		5,959		20,611		—
Other assets (Restricted cash)		207		207		—		—

Total Assets	$	142,055	$	120,443	$	21,612	$	—


Convertible notes	$	873	$	—	$	873	$	—
Other accrued expenses (Foreign exchange contract (3)	$	306	$	—	$	306	$	—

Total Liabilities	$	1,179	$	—	$	1,179	$	—


July 31, 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)	$	74,978	$	74,978	$	—	$	—
Marketable securities (2)		17,360		3,426		13,934		—
Other assets (Restricted cash)		256		256		—		—

Total assets	$	92,594	$	78,660	$	13,934	$	—


Convertible notes	$	826	$	—	$	826	$	—

Total Liabilities	$	826	$	—	$	826	$	—

(1)

Cash and cash equivalents as of April 30, 2011 and July 31, 2010 includes cash held in operating accounts of approximately $9.1 million and $7.8 million, respectively, that are not subject to fair value measurements. For purposes of this disclosure they are included as having Level 1 inputs. Cash and cash equivalents as of April 30, 2011 exclude approximately $1.0 million of commercial paper which is held to maturity and not subject to fair value measurements.

(2)	Marketable securities as of April 30, 2011 and July 31, 2010 exclude approximately $4.9 million and $1.1 million, respectively, of commercial paper which is held to maturity and not subject to fair value measurements.

(3)	Other accrued expenses as of April 30, 2011 includes a derivative not designated as a hedging arrangement related to a foreign exchange contract of approximately $0.3 million.

The fair value of the Company’s convertible notes 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, 2011 or as of July 31, 2010.

9. STOCKHOLDERS’ EQUITY

On November 5, 2010, the Company’s Board of Directors adopted, subject to shareholder approval, the 2010 Stock Plan, and subsequently amended it on November 26, 2010 (“2010 Plan”). Under the terms of the 2010 Plan, the Company may issue up to 4,800,000 shares of the Company’s common stock (subject to adjustment in the event of stock splits and other similar events) pursuant to awards granted under the 2010 Plan. In addition, any unissued shares of the Company’s common stock, and any unused shares of the Company’s common stock as a result of termination, surrender, cancellation or forfeiture of outstanding awards under the Credence 2005 Plan, as amended and restated, and the 2004 Plan, which are referred to together as the Prior Plans, will be available for grant under the 2010 Plan. The 2010 Plan was approved by the Company’s shareholders at the annual meeting on December 7, 2010. All future grants of equity awards will be made out of the 2010 Plan, and no additional grants will be made under the Prior Plans.

On September 15, 2010, the Company’s Board of Directors approved a one-for-three reverse stock split of the Company’s common stock, pursuant to a previously obtained stockholders authorization. The Company filed Restated Articles of Organization on September 30, 2010 in order to effect the reverse stock split, and on a post-split basis, set the number of authorized shares of its common stock at 150,000,000. The Restated Articles of Organization were approved by the Company’s stockholders at the Special Meeting of Stockholders held on July 8, 2010.

Upon the effective time of the Restated Articles of Organization, each outstanding share of the Company’s common stock was automatically converted into one-third of a share of common stock. No fractional shares were issued in connection with the reverse stock split. Holders of common stock who would otherwise have received a fractional share of common stock pursuant to the reverse stock split received cash in lieu of the fractional share. The reverse stock split became effective for trading purposes at the opening of the Nasdaq Global Market on October 1, 2010. The effect of the reverse stock split has been retroactively applied to all periods presented.

10. RECENT ACCOUNTING PRONOUNCEMENTS

In March 2010, the FASB issued an Accounting Standards Update (“ASU”) 2010-17, Milestone Method of Revenue Recognition, to ASC 605, Revenue Recognition. The guidance in this consensus allows the milestone method as an acceptable revenue recognition methodology when an arrangement includes substantive milestones. The guidance provides a definition of substantive milestone and should be applied regardless of whether the arrangement includes single or multiple deliverables or units of accounting. The scope of this consensus is limited to the transactions involving milestones relating to research and development deliverables. The guidance includes enhanced disclosure requirements about each arrangement, individual milestones and related contingent consideration, information about substantive milestones and factors considered in the determination. The consensus is effective prospectively to milestones achieved in fiscal years, and interim periods within those years, after June 15, 2010. Early application and retrospective application are permitted. The Company adopted this final consensus prospectively in August 2010 and the adoption did not have a material impact on the Company’s financial position or results of operations.

In January 2010, the FASB issued ASU 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. The new guidance requires expanded disclosures related to transfers between Level 1 and Level 2 activities and a gross presentation for Level 3 activity. The new accounting guidance is effective for fiscal years and interim periods beginning after December 15, 2009, except for the new disclosures related to Level 3 activities, which are effective for fiscal years beginning after December 15, 2010 and for interim periods within those years. The new guidance was effective for the Company in the second quarter of fiscal year 2010, except for the new disclosures related to Level 3 activities, which became effective for the Company in the quarter ended January 31, 2011. The adoption of this guidance did not have an impact on the Company’s consolidated financial statements.

In October 2009, the FASB issued ASU 2009-14, Certain Revenue Arrangements That Include Software Elements—a consensus of the FASB Emerging Issues Task Force. 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 became effective for the Company for revenue arrangements entered into or materially modified on or after August 1, 2010. The adoption of this update did not have an impact on the Company’s consolidated financial statements the Company has concluded that its software and nonsoftware components of the tangible product function together to deliver the tangible product’s essential functionality. Therefore, the software is essential to the functionality of the Company’s testers and because of this the Company falls under the exception and is not subject to ASU 985-605.

In October 2009, the FASB issued ASU 2009-13, Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements—a consensus of the FASB Emerging Issues Task Force. 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 become effective for the Company for revenue arrangements entered into or materially modified beginning on August 1, 2010. The Company adopted this guidance in August 2010 and the adoption did not have a material impact on its consolidated financial statements for the three and nine months ended April 30, 2011.

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read together with the Consolidated Financial Statements and Notes thereto appearing elsewhere in this quarterly report on Form 10-Q. Certain statements in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” are forward-looking statements that involve risks and uncertainties. Words such as may, will, should, would, anticipates, expects, intends, plans, believes, seeks, estimates and similar expressions identify such forward-looking statements. The forward-looking statements contained herein are based on current expectations and entail various risks and uncertainties that could cause actual results to differ materially from those expressed in such forward-looking statements. Factors that might cause such a difference include, among other things, those set forth under “Risk Factors” and those appearing elsewhere in this Form 10-Q. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysis only as of the date hereof. We assume no obligations to update these forward-looking statements to reflect actual results or changes in factors or assumptions affecting forward-looking statements.

Overview

We provide focused, cost-optimized automated test equipment (ATE) solutions. We design, manufacture, market and service semiconductor test solutions that address the broad, divergent test requirements of the wireless, computing, automotive and entertainment market segments. Our semiconductor test equipment can test a broad range of analog, digital, mixed signal (a combination of analog and digital) and system in package, or SIP, semiconductor devices, all on a single test platform. 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.

We focus our 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.

As previously disclosed, on November 17, 2010, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Verigy Ltd., a corporation organized under the laws of Singapore (“Verigy”), Alisier Limited, a corporation organized under the laws of Singapore (“Holdco”), Lobster-1 Merger Corporation, a Massachusetts corporation and a wholly-owned subsidiary of Verigy (“Merger Sub-1”), and Lobster-2 Merger Corporation, a Massachusetts corporation and a wholly-owned subsidiary of Holdco (“Merger Sub-2”).

On March 25, 2011, we notified Verigy of the termination of the Merger Agreement, effective immediately, due to the occurrence of a Triggering Event (as defined in the Merger Agreement) with respect to Verigy. In connection with the termination, Verigy paid us the $15,000,000 Verigy Termination Fee contemplated by the Merger Agreement on March 25, 2011.

In the three and nine months ended April 30, 2011, we have incurred approximately $1.9 million and $4.7 million of expenses related to this transaction, of which $0.6 million and $3.4 million, respectively have been recorded in selling, general and administrative expenses on our consolidated statement of operations. The remaining $1.3 million was related to a break-up fee and was recorded as other income (expense).

See Note 5 to our consolidated financial statements for information regarding the status of pending shareholder lawsuits associated with this transaction.

On April 19, 2011, we received a demand letter pursuant to Mass. Gen. Laws ch. 156D, § 7.42 sent on behalf of Joel Krieger, a purported LTX-Credence shareholder, whose putative class action complaint, Krieger v. LTX-Credence Corp., et. al., No. 10-04713, filed on December 3, 2010 in the Superior Court for the Commonwealth of Massachusetts, was recently dismissed. The letter demands that we commence legal proceedings against the Company’s directors and senior officers for breaches of their fiduciary duties, gross negligence and mismanagement, waste of corporate assets, and abuse of control, all arising out of our pursuit of a merger transaction with Verigy. Independent members of the Board of Directors are in the process of conducting an inquiry into the letter and matters raised therein.

Industry Conditions and Outlook

We sell capital equipment and services to companies that design, manufacture, assemble or test semiconductor devices. The semiconductor industry is highly cyclical, causing in turn a cyclical impact on our financial results. 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 business. The level of capital expenditures by these semiconductor companies depends on the current and anticipated market demand for semiconductor devices and the products that incorporate them. Therefore, demand for our semiconductor test equipment is dependent on growth in the semiconductor industry. In particular, three primary characteristics of the semiconductor industry drive the demand for semiconductor test equipment:

•

increases in unit production of semiconductor devices;

•

increases in the complexity of semiconductor devices used in electronic products; and

•

the emergence of next generation device technologies, such as SIP.

The following graph shows the cyclicality in semiconductor test equipment orders and shipments from fiscal 1997 through fiscal 2010 (using the three month moving average), as calculated by SEMI, an industry trade organization:

LOGO

Consistent with our business strategy, we have continued to invest significant amounts in engineering and product development to develop and enhance our tester platforms during industry slowdowns. For the nine months ended April 30, 2011 engineering and product development expense was $39.2 million or 21.0% of net sales as compared to $36.2 million or 24.8% of net sales for the nine months ended April 30, 2010.

We believe that our competitive advantage in the semiconductor test industry is primarily driven by the ability of our tester platforms to meet or exceed the cost and technical specifications required for the testing of advanced semiconductor devices. Our current investment in engineering and product development is focused on enhancements to and additions to our product offerings with new options and instruments designed for specific market segments. We believe this will continue to differentiate our tester platforms from the product offerings of our competitors.

In addition, over the past several years, we have transitioned the manufacture of certain components and subassemblies to contract manufacturers, thereby reducing our fixed manufacturing costs associated with direct labor and overhead. We believe that transforming product manufacturing costs into variable costs will in the future allow us to improve our financial performance during cyclical downturns while preserving our historic gross margins during cyclical upturns.

We continue to maintain other cost reduction measures, such as the strict oversight and reduction in discretionary travel and other variable overhead expenses. We believe that these reductions in operating costs have reduced our costs while preserving our ability to fund critical product research and development efforts and continue to provide our customers with the levels of responsiveness and service they require.

We are also 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.

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 base 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 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 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 collectability is reasonably assured.

Inventory

We sell capital equipment to companies that design, manufacture, assemble, and test semiconductor devices. We are exposed to a number of economic and industry factors that could result in portions of our inventory becoming either obsolete or in excess of anticipated usage. These factors include, but are not limited to, changes in our customers’ capital expenditures, technological changes in our markets, our ability to meet changing customer requirements, competitive pressures in products and prices, and the availability of key components from our suppliers. Our policy is to establish inventory reserves when conditions exist that suggest our inventory may be in excess of anticipated demand or is obsolete based upon our assumptions about future demand for our products or market conditions. We regularly evaluate the ability to realize the value of our inventory based on a combination of factors including the following: historical usage rates, forecasted sales or usage, estimated product end of life dates, estimated current and future market values and new product introductions. Purchasing and alternative usage options are also explored to mitigate inventory exposure. When recorded, our reserves are intended to reduce the carrying value of our inventory to its net realizable value. Such reserves are not reversed until the related inventory is sold or otherwise disposed.

For the three and nine months ended April 30, 2011 we recorded sales of $8.3 million and $13.2 million of previously reserved inventory, which represents gross cash received from the customer. We released reserves of $2.0 million and $3.4 million in the three and nine months ended April 30, 2011, related to these sales. For the three and nine months ended April 30, 2010 we recorded sales of $1.0 million and $1.0 million of previously reserved inventory. We released reserves of $0.4 million and $0.4 million in the three and nine months ended April 30, 2010, related to these sales. For the three and nine months ended April 30, 2011 and April 30, 2010, we recorded no material provisions for obsolete inventory.

As of April 30, 2011 and July 31, 2010, our inventory of $21.3 million and $21.0 million, respectively, is stated net of inventory reserves of $42.3 million and $45.6 million, respectively, and primarily consists of Fusion, X-Series, ASL, and Diamond products.

Income Taxes

In accordance with Topic 740, Income Taxes (“ASC 740”) to the FASB ASC, we recognize deferred income taxes based on the expected future tax consequences of differences between the financial statement basis and the tax basis of assets and liabilities calculated using enacted tax rates for the year in which the differences are expected to be reflected in the tax return. Valuation allowances are established when necessary to reduce deferred taxes to the amount expected to be realized.

We have deferred tax assets resulting from tax credit carryforwards, net operating losses and other deductible temporary differences, which will reduce taxable income in future periods. ASC 740 requires that a valuation allowance be established when it is “more likely than not” that all or a portion of deferred tax assets will not be realized. A review of all available positive and negative evidence needs to be considered, including a company’s performance, the market environment in which it operates length of carryback and carryforward periods, existing sales backlog and future sales projections. Where there are cumulative losses in recent years, ASC 740 creates a strong presumption that a valuation allowance is needed. This presumption can be overcome in very limited circumstances. As a result of our cumulative loss position in recent years and the increased uncertainty relative to the timing of profitability in future periods, we continue to maintain a valuation allowance for our entire net deferred tax assets. The valuation allowance for deferred tax assets decreased from $550.7 million at July 31, 2009, to $223.4 million at July 31, 2010. The decrease in our valuation allowance compared to the prior year was primarily due to decreases in deferred tax assets with respect to net operating loss and credit carryforwards that are subject to annual limitations as defined in sections 382 and 383 of the Internal Revenue Code.

We expect to record a full valuation allowance on future tax benefits until we can sustain an appropriate level of profitability. Until such time, we would not expect to recognize any significant tax benefits in our future results of operations. We will continue to monitor the recoverability of our deferred tax assets on a periodic basis. As a result of the merger and Internal Revenue Service Code Section 382 guidance, the future utilization of the combined company’s net operating loss deductions will be significantly limited.

We adopted Subtopic 740-10, Accounting for Income Taxes, to the FASB ASC (“ASC 740-10”) on August 1, 2007. ASC 740-10 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. ASC 740-10 prescribes a recognition threshold and measurement of a tax position taken or expected to be taken in a tax return. There were no adjustments to our accumulated deficit as a result of the implementation of ASC 740-10.

Valuation of Goodwill

We follow the provisions of Topic 350, Intangibles—Goodwill and Other to the FASB ASC (“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 lives. Assets recorded in these categories are tested for impairment at least annually or when a change in circumstances may result in impairment. We use 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 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. As further discussed in Note 3 to the consolidated financial statements, we operate in one reporting unit.

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 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, 2011, and therefore we did not conduct an interim impairment test. During the quarter ending July 31, 2010, 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 prior to our annual impairment date.

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 our currently marketed products.

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

In estimating the useful life of 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 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.

Warranty

We provide standard warranty coverage on our systems, providing labor and parts necessary to repair the systems during the warranty period. We account for the estimated warranty cost as a charge to cost of sales when the revenue is recognized. The estimated warranty cost is based on historical product performance and field expenses. We use actual service hours and parts expense per system and apply the actual labor and overhead rates to estimate the warranty charge. The actual product performance and/or field expense profiles may differ, and in those cases we adjust the warranty accrual accordingly.

Allowance for Doubtful Accounts

A majority of our trade receivables are derived from sales to large multinational semiconductor manufacturers throughout the world. In order to monitor potential credit losses, we perform ongoing credit evaluations of our customers’ financial condition. An allowance for doubtful accounts is maintained for potential credit losses based upon our assessment of the expected collectability of all accounts receivable. The allowance for doubtful accounts is reviewed periodically to assess the adequacy of the allowances. In any circumstances in which we are aware of a customer’s inability to meet its financial obligations, we provide an allowance, which is based on the age of the receivables, the circumstances surrounding the customer’s financial situation and our historical experience. If circumstances change, and the financial condition of our customers were adversely affected resulting in their inability to meet their financial obligations to us, we may need to record additional allowances.

Recent Accounting Pronouncements

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

Results of Operations

The following tables set forth for the periods indicated the principal items included in the Consolidated Statement of Operations in dollars and as percentages of net sales.


	Condensed Consolidated Statement of Operations (in thousands)
	Three Months Ended April 30,				Nine Months Ended April 30,
	2011		2010		2011		2010
Net sales	$	58,665	$	56,069	$	186,860	$	145,919
Cost of sales		22,203		23,921		71,730		67,603

Gross profit		36,462		32,148		115,130		78,316
Engineering and product development expenses		13,314		12,339		39,188		36,179
Selling, general and administrative expenses		11,755		11,414		37,611		29,295
Amortization of purchased intangible assets		1,490		2,664		4,471		7,992
Restructuring		248		788		363		2,027

Income from operations		9,655		4,943		33,497		2,823
Other income (expense):
Interest expense		(112)		(330)		(257)		(2,657)
Investment income		96		43		255		136
Other income		13,687		12		14,076		1,325
Gain on extinguishment of debt, net		—		2,126		—		3,057

Income before provision for (benefit from) income taxes		23,326		6,794		47,571		4,684
Provision for (benefit from) income taxes		(295)		(35)		(430)		236

Net income	$	23,621	$	6,829	$	48,001	$	4,448


	Percentage of Net Sales
	Three Months Ended April 30,		Nine Months Ended April 30,
	2011	2010	2011	2010
Net sales	100.0%	100.0%	100.0%	100.0%
Cost of sales	37.8	42.7	38.4	46.3

Gross profit	62.2	57.3	61.6	53.7
Engineering and product development expenses	22.7	22.0	21.0	24.8
Selling, general and administrative expenses	20.0	20.4	20.1	20.1
Amortization of purchased intangible assets	2.5	4.7	2.4	5.5
Restructuring	0.4	1.4	0.2	1.4

Income from operations	16.6	8.8	17.9	1.9
Other income (expense):
Interest expense	(0.2)	(0.6)	(0.1)	(1.8)
Investment income	0.2	0.1	0.1	0.1
Other income	23.3	—	7.5	0.9
Gain on extinguishment of debt, net	—	3.8	—	2.1

Income before provision for (benefit from) income taxes	39.9	12.1	25.4	3.2
Provision for (benefit from) income taxes	(0.5)	(0.1)	(0.2)	0.2

Net income	40.4%	12.2%	25.6%	3.0%

Three and Nine Months Ended April 30, 2011 Compared to the Three and Nine Months Ended April 30, 2010

Net sales. Net sales consist of revenue from sales of semiconductor test equipment, system support and maintenance services, net of returns and allowances. Net sales for the three months ended April 30, 2011 increased 4.6% to $58.7 million as compared to $56.1 million in the same quarter of the prior year. Net sales for the nine months ended April 30, 2011 increased 28.1% to $186.9 million as compared to $145.9 million for the same nine month period of the prior year. The increase in net sales in the three and nine months ended April 30, 2011 as compared to the same periods in the prior year was due to improvement in the overall economic environment and higher demand from certain customers.

Service revenue, included in net sales, accounted for $10.2 million, or 17.4% of net sales, and $11.0 million, or 19.7% of net sales, for the three months ended April 30, 2011 and 2010, respectively, and $31.5 million or 16.9% of net sales, and $35.2 million or 24.2% of net sales for the nine months ended April 30, 2011 and 2010, respectively. The decrease in service revenue is primarily a result of a increased reliability and lower cost product sales which reduce the demand for service.

Geographically, sales to customers outside of the United States were 87.3% and 79.9% of net sales for the three months ended April 30, 2011 and 2010, respectively, and 85.1% and 68.4% of net sales for the nine months ended April 30, 2011 and 2010, respectively. The increase in sales to customers outside the United States was a result of increased demand primarily in Taiwan and China.

Gross profit. Gross profit was $36.5 million or 62.2% of net sales in the three months ended April 30, 2011, as compared to $32.1 million or 57.3% of net sales in the same quarter of the prior year. For the nine months ended April 30, 2011, gross profit was $115.1 million or 61.6% of net sales as compared to $78.3 million or 53.7% of net sales for the nine months ended April 30, 2010. The increase in gross profit for the three months ended April 30, 2011 as compared to April 30, 2010 was driven by the increase in total revenue of approximately 4.6% as well as a reduction in costs of goods sold of 7.0%. Additionally, during the quarter ending April 30, 2011 we had sales of certain legacy products, and of refurbished test systems, that had higher than typical margins, due to the usage of fully reserved inventory, and therefore had reduced cost of goods sold.

Engineering and product development expenses. Engineering and product development expenses were $13.3 million, or 22.7% of net sales, in the three months ended April 30, 2011, as compared to $12.3 million, or 22.0% of net sales, in the same quarter of the prior year. For the nine months ended April 30, 2011, engineering and product development expenses were $39.2 million or 21.0% of net sales, compared to $36.2 million or 24.8% of net sales for the nine months ended April 30, 2010. The increase in engineering and product development expenses for the three and nine months ended April 30, 2011 as compared to the three and nine months ended April 30, 2010 was principally a result of higher compensation expense from the reversal of salary reductions that occurred in the quarter ending July 31, 2010.

Selling, general and administrative expenses. Selling, general and administrative expenses were $11.8 million, or 20.0% of net sales, in the three months ended April 30, 2011, as compared to $11.4 million, or 20.4% of net sales, in the same quarter of the prior year. For the nine months ended April 30, 2011, selling, general and administrative expenses were $37.6 million or 20.1% of net sales as compared to $29.3 million or 20.1% of net sales for the nine months ended April 30, 2010. The increase for the nine months ended April 30, 2011 was principally a result of higher compensation expense from the reversal of salary reductions that occurred in the quarter ending July 31, 2010, and also increased profit sharing expense and sales commissions based on increased revenues and profitability for this period as compared to the same period in the prior year.

Amortization of purchased intangible assets. Amortization associated with intangible assets acquired from Credence was $1.5 million or 2.5% of net sales for the three months ended April 30, 2011 as compared to $2.7 million or 4.7% of net sales for the same quarter of the prior year. For the nine months ended April 30, 2011, amortization associated with these assets was $4.5 million or 2.4% of net sales as compared to $8.0 million or 5.5% of net sales for the nine months ended April 30, 2010. The underlying intangible assets relate to acquired technology, and 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.

Restructuring. Restructuring expense was $0.2 million or 0.4% of net sales and $0.4 million or 0.2% of net sales for the three and nine months ended April 30, 2011, respectively as compared to $0.8 million or 1.4% of net sales and $2.0 million or 1.4% of net sales for the same periods in the prior year. The restructuring expense of $0.2 million recorded in the three months ended April 30, 2011 is a result of extending out sublease assumptions for a previously restructured facility, offset by a reduction in common area maintenance charges and changes in sublease income for a previously restructured facility, and a release of severance accruals that were no longer needed. The restructuring expense of $0.8 million recorded in the three months ended April 30, 2010 was a result of additional vacated space in a previously restructured facility. The expense incurred in the first nine months of fiscal 2010 related to a change in sublease assumptions based on market conditions and future estimated cash flows related to certain of our office locations, which were restructured during the second quarter of fiscal 2009, and employee termination-related costs associated with Europe and the downsizing of our Hillsboro office facility.

Interest expense. Interest expense was $0.1 million for the three months ended April 30, 2011 as compared to $0.3 million for the three months ended April 30, 2010. For the nine months ended April 30, 2011, interest expense was $0.3 million compared to $2.7 million for the same period in 2010. 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, which expired in February 2011. The decrease from the nine months ended April 30, 2010 to April 30, 2011 was due to a reduction in the convertible notes balance due to repurchases in April 30, 2010 and repayment of $1.5 million notes due May 2010, resulting in lower outstanding principal for the comparative periods. Also, the three months ended April 30, 2010 includes interest due to our borrowings under the credit revolver, which was not borrowed against during fiscal year 2011 and which expired in February 2011.

Investment income. Investment income was less than $0.1 million for the three months ended April 30, 2011 and 2010, respectively. For the nine months ended April 30, 2011, investment income was $0.3 million, compared to $0.1 million for the same period in 2010. This is a function for the overall investment market and the generally low interest rates available.

Other income, net. Other income was $13.7 million for the three months ended April 30, 2011 as compared to other income of less than $0.1 million for the three months ended April 30, 2010. For the nine months ended April 30, 2011, other income was $14.1 million as compared to $1.3 million for the same period in fiscal 2010. Other income for the three months ended April 30, 2011 is primarily related to the receipt of the $15.0 million merger related break-up fee, partially offset by $1.3 million paid as part of our contractual obligation to our third party advisor.

Gain on extinguishment of debt, net. There were no debt repurchases made during the three and nine months ended April 30, 2011. At the time of the completion of the merger with Credence Systems Corporation, 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.

Provision for (benefit from) income taxes. We recorded an income tax benefit of $0.3 million and $0.4 million, respectively, for the three and nine months ended April 30, 2011 as compared to an income tax provision (benefit) of less than ($0.1) million and a provision of $0.2 million, respectively, for the three and nine months ended April 30, 2010. The provisions were primarily due to income tax refunds received and foreign tax on earnings generated in foreign jurisdictions. As of April 30, 2011 and July 31, 2010, the total liability for unrecognized income tax benefits was $8.5 million and $8.6 million, respectively, (of which $4.8 million, if recognized, would impact our income tax rate). We recognize interest and penalties related to uncertain tax positions as a component of income tax expense.

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. Net income was $23.6 million, or $0.48 per basic and $0.47 per diluted share, in the three months ended April 30, 2011, as compared to $6.8 million, or $0.15 per basic and $0.14 per diluted share, in the same quarter of the prior year. Included in the net income of $23.6 million for the three months ended April 30, 2011 is $13.7 million or $0.27 per share of net proceeds from the Verigy break-up fee. For the nine months ended April 30, 2011, our net income was $48.0 million or $0.97 per basic share and $0.96 diluted, as compared to $4.4 million or $0.10 per basic and diluted share for the nine months ended April 30, 2010.

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, 2011 (in millions):


	Nine Months Ended April 30, 2011
	Nine Months Ended April 30, 2011
	(in millions)
Cash, cash equivalents and marketable securities at July 31, 2010	$	93.4
Merger related break-up fee, net of expenses		10.3
Capital expenditures		(3.7)
Other sources of cash, primarily cash from operations		47.7

Cash and cash equivalents and marketable securities at April 30, 2011	$	147.7

As of April 30, 2011, we had $147.7 million in cash, cash equivalents and marketable securities and net working capital of $170.0 million, as compared to $93.4 million of cash, cash equivalents and marketable securities and $111.0 million of net working capital at July 31, 2010. The increase in the cash, cash equivalents and marketable securities was primarily due to net income of $48.0 million for the nine months ended April 30, 2011 and other sources of cash from operations.

Accounts receivable from trade customers, net of allowances, was $41.9 million at April 30, 2011, as compared to $45.6 million at July 31, 2010. Accounts receivable decreased during the nine months ending April 30, 2011 despite an increase in revenue of $6.0 million or 11.6% for the quarter ended April 30, 2011due primarily to strong collection results. The allowance for doubtful accounts was less than $0.1 million, or 0.1% of gross trade accounts receivable, at April 30, 2011.

Prepaid expenses and other current assets increased by $1.0 million to $5.6 million at April 30, 2011 as compared to $4.6 million at July 31, 2010 primarily due to the timing of prepaid insurance premiums and maintenance contract renewals and other expenses, and increase in value added tax receivables.

As of April 30, 2011, future cash payments related to severance restructuring actions are less than $0.1 million and are expected to be paid out within 12 months.

Capital expenditures totaled approximately $3.7 million for the nine months ended April 30, 2011, as compared to $2.6 million for the nine months ended April 30, 2010. Capital expenditures for the nine months ended April 30, 2011 and April 30, 2010 were composed primarily of capital related to certain engineering projects and tester spare parts to support a larger installed base of test equipment.

We had $58.2 million in net cash provided by operating activities for the nine months ended April 30, 2011, as compared to net cash provided by operating activities of $18.3 million for the nine months ended April 30, 2010. The net cash provided by operating activities for the nine months ended April 30, 2011 was primarily related to our net income of $48.0 million, non-cash items, principally depreciation and amortization and stock based compensation, of approximately $17.1 million, slightly offset by an increase in working capital of $6.9 million. The net cash provided by operating activities for the nine months ended April 30, 2010 was primarily related to net income of $4.4 million, non-cash items, principally depreciation and amortization and stock based compensation, of approximately $22.4 million, offset by an increase in working capital of $8.5 million.

We had $17.2 million in net cash used in investing activities for the nine months ended April 30, 2011 as compared to net cash provided by investing activities of $6.9 million for the nine months ended April 30, 2010. The net cash used in investing activities for the nine months ended April 30, 2011 was primarily related to $35.5 million of purchases of available-for-sale securities, $3.7 million of purchases of property and equipment, offset by $22.0 million of proceeds from sales and maturities of available-for-sale securities. 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.

We had $0.3 million in net cash used in financing activities for the nine months ended April 30, 2011 as compared to net cash used in financing activities of $36.1 million for the nine months ended April 30, 2010. The net cash used in financing activities for the nine months ended April 30, 2011 was primarily related to payments of tax withholdings for vested restricted stock units, partially offset by proceeds from stock option exercises and shares issued from the employee stock purchase plan. The net cash used in financing activities for the nine months ended April 30, 2010 was primarily related to payments of convertible senior subordinated notes of $31.6 million, net payments of borrowings on our revolving line of credit of $39.4 million, as well as payments made on our term loan of $12.2 million. These payments were partially offset by proceeds from our equity offering of $47.9 million.

Loan Agreements with Silicon Valley Bank

On February 25, 2011, our $40.0 million secured revolving credit facility with Silicon Valley Bank expired. We have not renewed and have no plans to renew the agreement for this facility. See Note 7 to the consolidated financial statements for more information.

Convertible Senior Subordinated Notes (“Notes”)

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


	April 30, 2011
	(in thousands)
Convertible Senior Subordinated Notes due 2011	$	876
Less: Unamortized debt discount		(3)

Net carrying value—Convertible Senior Subordinated Notes due 2011	$	873

The Notes are unsecured senior subordinated indebtedness and bear interest at the rate of 3.5% per annum. Interest is payable on the Notes on May 15 and November 15 of each year through maturity on May 15, 2011. At maturity, we repaid the outstanding principal of the Notes, together with accrued and unpaid interest thereon, a maturity premium equal to 7.5% of such principal. The 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 $40.38 (subject to adjustment in certain events).

On August 1, 2009, we adopted 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 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 Notes were reassessed and the debt component of the 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 ASC 470-20 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 Notes. For the three and nine months ended April 30, 2011, we recorded interest expense in its statement of operations of less than $0.1 million for both periods associated with the amortization of the debt discount. The remaining debt discount of less than $0.1 million as of April 30, 2011 is being amortized over the remaining term of the Notes, which is approximately fifteen days.

As of April 30, 2011, we had $147.7 million of cash and cash equivalents and marketable securities less $0.9 million of debt obligations or net cash available of $146.8 million. We repaid the outstanding obligation related to our convertible notes on May 15, 2011. We believe that our net cash available 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 of May 15, 2011, we had repaid the entire outstanding principal amount of Notes and were not subject to any debt obligations.

Covenants

As of April 30, 2011, the Company no longer has any debt obligations subject to covenants.

Commitments and Contingencies

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

The aggregate outstanding amount of our contractual obligations was $39.3 million as of April 30, 2011. 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 future periods:


	Total		2011		2012–2013		2014–2015		Thereafter
	(in thousands)
Contractual Obligations:
Operating leases	$	27,518	$	1,387	$	11,167	$	8,958	$	6,006
Inventory commitments		10,892		10,892		—		—		—
Convertible senior subordinated notes due 2011 (including interest)		890		890		—		—		—
Severance		44		44		—		—		—

Total Contractual Obligations	$	39,344	$	13,213	$	11,167	$	8,958	$	6,006

Off-Balance Sheet Arrangements

As of April 30, 2011 we did not have any off-balance sheet arrangements.

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 2010 Annual Report on Form 10-K.

Item 4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures. Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of April 30, 2011. 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 our 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 our disclosure controls and procedures as of April 30, 2011, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance levels.

Changes in Internal Controls. There was no change in our 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, 2011 that has materially affected, or is reasonably likely to materially affect our internal control over financial reporting.

Limitations on the Effectiveness of Controls

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that the Company’s disclosure controls and procedures or our 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 1.

Legal Proceedings

As we previously discussed, the Company, our directors, Lobster-1 Merger Corporation, and Lobster-2 Corporation, were named as defendants in the following putative class action complaints:

—

Carneau v. LTX-Credence Corp., et. al., 110-cv-188153, filed on November 22, 2010 in the Superior Court of the State of California,

—

Khan v. LTX-Credence Corp., et.al,, 1-10-cv188773 filed on December 1, 2010 in Santa Clara Superior Court,

—

Snitily v.Tacelli, et.al., No 1-10-cv-188922 filed on December 6, 2010 in Santa Clara Superior Court,

—

Shah v. Tacelli, et. al., No. 10- 4580, filed on November 23, 2010 in the Superior Court of the Commonwealth of Massachusetts,

—

Krieger v. LTX-Credence Corp., et. al., No. 10-04713, filed on December 3, 2010 in the Superior Court for the Commonwealth of Massachusetts,

—

Keuler v. LTX-Credence Corp., et. al., 1:10-cv-12058, filed on November 30, 2010 in the United States District Court for the District of Massachusetts,

—

Brookshire v. LTX-Credence Corp., et. al.,CV 10 5773 filed on December 17, 2010 in the United States District Court for the Northern District of California.

As of April 30, 2011 all of these actions have been dismissed.

Item 1A.

Risk Factors

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. Any statements that are not statements of historical fact should be considered to be forward-looking statements. You can identify these forward-looking statements by our use of the words “believes,” “anticipates,” “plans,” “expects,” “may,” “will,” “would,” “should”, “seek”, “potential”, “predicts”, “targets”, “intends,” “estimates,” and similar expressions, whether in the negative or affirmative, however these are not the exclusive means of identifying forward-looking statements in this report. These statements are based on management’s current expectations and beliefs and are subject to a number of factors and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. These statements are not guarantees of future performance, involve certain risks, uncertainties and assumptions that are difficult to predict, and are based upon assumptions as to future events that may not prove accurate. Therefore, actual outcomes and results may differ materially from what is expressed herein. We have included below important factors that we believe could cause our actual results to differ materially from the forward-looking statements that we make. We urge you to consider the risks and uncertainties discussed elsewhere in this report and in the other documents filed by us with the SEC in evaluating our forward-looking statements. We have no plans to and do not assume any obligation to update any forward-looking statement we make. We caution readers not to place undue reliance upon any such forward-looking statements, which speak only as of the date made.

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 a cyclical impact on our financial results. Industry order rates declined significantly in fiscal 2009. Although industry conditions have improved, the timing and level of a sustained industry recovery remains uncertain at this time. Any failure by us 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 fixed costs, such as continued investment in research and development, capital equipment requirements and materials purchases from our suppliers.

We may incur substantial indebtedness in the future.

As of, May 15, 2011 we have repaid the $0.9 million remaining principal amount of 3.5% Convertible Senior Subordinated Notes due May 2011 and as of May 15, 2011 do not have any debt. 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 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 industry 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 downturn in our business.

There can be no assurance that we will be able to meet any future debt service obligations.

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

We expect that our existing cash and cash equivalents and marketable securities 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 2010, Spirox and Atmel accounted for 24% and 13% of our net sales, respectively. In fiscal years 2010, 2009 and 2008, Texas Instruments accounted for 12%, 10%, and 30%, respectively, of our net sales (which do not include sales of Credence Systems Corporation for fiscal 2008). In fiscal year 2008, STMicroelectronics accounted for 11% of our net sales (which do not include sales of Credence Systems Corporation for fiscal 2008). Sales to our ten largest customers accounted for 77% of revenues in fiscal year 2010 and 69% in fiscal year 2009. 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 are subject to environmental regulations due to our production and marketing of products in certain states and countries and may become subject to more such regulations in the future. 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 76% of our revenues for fiscal year 2010 and 64% of our revenues for fiscal year 2009. 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:

•

fluctuations in exchange rates;

•

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 laws.

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. 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 position, 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 and 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 a 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, 2011, our stock price ranged from a low of $4.98 to a high of $11.34. 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 we also review goodwill annually in accordance with Topic 350, Intangibles—Goodwill and Other, to FASB ASC.

One potential indicator of goodwill impairment is whether our fair value, as measured by our 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.

Item 6.

Exhibits

The exhibits filed as part of this Quarterly Report on Form 10-Q are set forth on the Exhibit Index immediately preceding such exhibits, and are incorporated herein by reference.

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, 2011	By:	/S/ MARK J. GALLENBERGER
		Mark J. Gallenberger
		Chief Financial Officer and Treasurer
		(Principal Financial Officer)

EXHIBIT INDEX


Exhibit Number		Description

2.1		Agreement and Plan of Merger by and among Verigy Ltd., Alisier Limited, Lobster-1 Merger Corporation, Lobster-2 Merger Corporation, and LTX-Credence Corporation, dated as of November 17, 2010 (Incorporated by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed on November 18, 2010)

31.1		Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act

31.2		Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act

32		Certification of the Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(b) of the Exchange Act and 18 U.S.C. Section 1350

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company