##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2008
 OR
 o
    
    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 000-51828
 EAGLE TEST SYSTEMS, INC.
 (Exact name of registrant as specified in its charter)
 Delaware
    
    36-2917389(State of incorporation)
    
    (I.R.S. Employer Identification No.)2200 Millbrook Drive, Buffalo Grove, Illinois
    
    60089(Address of principal executive offices)
    
    (Zip Code)
 (847) 367-8282
 þ o
  Large accelerated filer  o
    
    Accelerated filer  þ
    
    Non-accelerated filer o (Do not check if a smaller reporting company)
    
    Smaller reporting company o
 o þ




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##### 



Table of Contents  EAGLE TEST SYSTEMS, INC.  (The Company)  INDEX
 PagePart I. Financial InformationItem 1. Financial StatementsCondensed Consolidated Balance Sheets as of June 30, 2008 (unaudited) and September 30, 2007
    
    
    3Condensed Consolidated Statements of Net Income (unaudited) for the three and nine months
ended June 30, 2008 and 2007
    
    
    4Condensed Consolidated Statements of Cash Flows (unaudited) for the nine months ended
June 30, 2008 and 2007
    
    
    5Notes to Condensed Consolidated Financial Statements (unaudited)
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    10Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    16Item 4. Controls and Procedures
    
    
    16Part II. Other InformationItem 1. Legal Proceedings
    
    
    17Item 1A. Risk Factors
    
    
    17Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    17Item 3. Defaults Upon Senior Securities
    
    
    18Item 4. Submission of Matters to a Vote of Security Holders
    
    
    18Item 5. Other Information
    
    
    18Item 6. Exhibits
    
    
    18Signatures
    
    
    19Exhibit Index
    
    
    20Amendment No. 2 to Employment Agreement between Eagle Test Systems, Inc. and Leonard Foxman
Amendment No. 2 to Employment Agreement between Eagle Test Systems, Inc. and Theodore Foxman
Amendment No. 2 to Employment Agreement between Eagle Test Systems, Inc. and Steve Hawrysz
Amendment No. 2 to Employment Agreement between Eagle Test Systems, Inc. and Jack WeimerCertification of CEO Pursuant to Section 302Certification of CFO Pursuant to Section 302Certification Pursuant to 18 U.S.C. Section 1350EX-10.1EX-10.2EX-10.3EX-10.4EX-31.1EX-31.2EX-32.1
  2




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 EAGLE TEST SYSTEMS, INC.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (In thousands, except share and per share data)
 June 30,
    
    
    September 30,2008
    
    
    2007(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    41,244
    
    
    $
    10,302Marketable securities
    
    
    43,410
    
    
    
    102,215Accounts receivable, net of allowances of $484 and
$585 as of June 30, 2008 and September 30, 2007,
respectively
    
    
    24,599
    
    
    
    18,238Inventories
    
    
    36,798
    
    
    
    22,233Deferred income taxes
    
    
    5,185
    
    
    
    4,410Prepaid expenses and other current assets
    
    
    1,667
    
    
    
    3,857Total current assets
    
    
    152,903
    
    
    
    161,255Property, plant and equipment, net
    
    
    14,302
    
    
    
    10,782Marketable securities
    
    
    28,609
    
    
    
    Deferred income taxes
    
    
    471
    
    
    
    Other assets
    
    
    571
    
    
    
    533Total assets
    
    $
    196,856
    
    
    $
    172,570LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    6,005
    
    
    $
    6,079Current portion of capital lease obligations
    
    
    201
    
    
    
    270Deferred revenue
    
    
    10,326
    
    
    
    6,441Accrued compensation and related liabilities
    
    
    4,496
    
    
    
    3,357Accrued income taxes
    
    
    1,346
    
    
    
    416Other accrued expenses
    
    
    3,902
    
    
    
    2,659Total current liabilities
    
    
    26,276
    
    
    
    19,222Long-term liabilities:Capital lease obligations, less current portion
    
    
    29
    
    
    
    124Deferred income taxes
    
    
    
    
    
    
    900Other long-term liabilities
    
    
    440
    
    
    
    434Total long-term liabilities
    
    
    469
    
    
    
    1,458Stockholders equity:Preferred stock, par value $0.01 per share
10,000,000 shares authorized, no shares issued or
outstanding
    
    
    
    
    
    
    Common stock, par value $0.01 per share,
90,000,000 shares authorized, 22,974,177 shares
issued and outstanding
    
    
    230
    
    
    
    230Additional paid in capital
    
    
    175,483
    
    
    
    174,474Accumulated deficit
    
    
    (4,673
    )
    
    
    (22,814
    )Accumulated other comprehensive income (loss)
    
    
    (929
    )
    
    
    Total stockholders equity
    
    
    170,111
    
    
    
    151,890Total liabilities and stockholders equity
    
    $
    196,856
    
    
    $
    172,570
  3




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##### Table of Contents



EAGLE TEST SYSTEMS, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF NET INCOME
 (In thousands, except share and per share data)
 Three Months
    
    
    Nine MonthsEnded June 30,
    
    
    Ended June 30,(unaudited)
    
    
    (unaudited)2008
    
    
    2007
    
    
    2008
    
    
    2007Net revenue
    
    $
    35,459
    
    
    $
    19,858
    
    
    $
    99,593
    
    
    $
    65,202Cost of goods sold
    
    
    12,185
    
    
    
    7,490
    
    
    
    36,718
    
    
    
    25,787Gross profit
    
    
    23,274
    
    
    
    12,368
    
    
    
    62,875
    
    
    
    39,415Operating expensesSelling, general and administrative
    
    
    10,112
    
    
    
    8,212
    
    
    
    28,618
    
    
    
    24,294Research and development
    
    
    3,150
    
    
    
    2,353
    
    
    
    9,352
    
    
    
    6,715Operating income
    
    
    10,012
    
    
    
    1,803
    
    
    
    24,905
    
    
    
    8,406Interest expense
    
    
    4
    
    
    
    94
    
    
    
    12
    
    
    
    345Other (income) and expenseIncome from marketable securities
    
    
    (927
    )
    
    
    (1,091
    )
    
    
    (3,146
    )
    
    
    (3,559
    )Other income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8
    )Income before taxes
    
    
    10,935
    
    
    
    2,800
    
    
    
    28,039
    
    
    
    11,628Provision for income taxes
    
    
    4,114
    
    
    
    792
    
    
    
    9,898
    
    
    
    3,915Net income
    
    $
    6,821
    
    
    $
    2,008
    
    
    $
    18,141
    
    
    $
    7,713Net income per share, basic
    
    $
    0.30
    
    
    $
    0.09
    
    
    $
    0.79
    
    
    $
    0.34Net income per share, diluted
    
    $
    0.30
    
    
    $
    0.09
    
    
    $
    0.79
    
    
    $
    0.33Weighted average shares outstanding, basic
    
    
    22,974,177
    
    
    
    22,957,154
    
    
    
    22,974,177
    
    
    
    22,895,597Weighted average shares outstanding, diluted
    
    
    23,071,585
    
    
    
    23,170,193
    
    
    
    23,096,584
    
    
    
    23,123,810Comprehensive Income:Net income
    
    $
    6,821
    
    
    $
    2,008
    
    
    $
    18,141
    
    
    $
    7,713Unrealized loss on marketable
securities, net of taxes
    
    
    (135
    )
    
    
    
    
    
    
    (929
    )
    
    
    Comprehensive income
    
    $
    6,686
    
    
    $
    2,008
    
    
    $
    17,212
    
    
    $
    7,713
  4




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EAGLE TEST SYSTEMS, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In thousands)
 Nine Months EndedJune 30,2008
    
    
    2007(unaudited)Cash flows from operating activities:Net income
    
    $
    18,141
    
    
    $
    7,713Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    2,974
    
    
    
    2,624Gain on sale of property and equipment
    
    
    
    
    
    
    (9
    )Non-cash compensation related to stock options
    
    
    1,009
    
    
    
    380Excess tax benefits from stock based compensation
    
    
    
    
    
    
    (395
    )Deferred income taxes
    
    
    (1,534
    )
    
    
    (1,237
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    (6,361
    )
    
    
    3,420Inventories
    
    
    (14,522
    )
    
    
    2,992Prepaid expenses and other current assets
    
    
    2,190
    
    
    
    407Other assets
    
    
    (38
    )
    
    
    132Accounts payable
    
    
    (74
    )
    
    
    (2,016
    )Deferred revenue
    
    
    3,885
    
    
    
    (7,352
    )Accrued compensation and related liabilities
    
    
    1,139
    
    
    
    (2,473
    )Accrued income taxes
    
    
    930
    
    
    
    (31
    )Other accrued expenses
    
    
    1,243
    
    
    
    (296
    )Other liabilities
    
    
    6
    
    
    
    31Net cash provided by operating activities
    
    
    8,988
    
    
    
    3,890Cash flows from investing activities:Net purchases of marketable securities
    
    
    
    
    
    
    (76,990
    )Net proceeds from the sales of marketable securities
    
    
    28,655
    
    
    
    Sale of property and equipment
    
    
    
    
    
    
    9Capital expenditures
    
    
    (6,537
    )
    
    
    (2,230
    )Net cash provided by (used in) investing activities
    
    
    22,118
    
    
    
    (79,211
    )Cash flows from financing activities:Payments of capital lease obligations
    
    
    (164
    )
    
    
    (178
    )Proceeds from issuance of common stock, net of issuance costs
    
    
    
    
    
    
    34,836Excess tax benefits from stock based compensation
    
    
    
    
    
    
    395Net cash provided by (used in) financing activities
    
    
    (164
    )
    
    
    35,053Net increase (decrease) in cash and cash equivalents
    
    
    30,942
    
    
    
    (40,268
    )Cash and cash equivalents at beginning of period
    
    
    10,302
    
    
    
    51,071Cash and cash equivalents at end of period
    
    $
    41,244
    
    
    $
    10,803Supplemental disclosure:Transfer of equipment from fixed assets to inventory
    
    $
    43
    
    
    $
    505
  5




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EAGLE TEST SYSTEMS, INC.
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (In thousands, except share and per share data)
 (Unaudited)
 1. The Company
  2. Summary of Significant Accounting Policies
 Basis of Presentation
   Preparation of Financial Statements and Use of Estimates
  Stock Options
  6




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EAGLE TEST SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(In thousands, except share and per share data)
(Unaudited)
 3. Marketable Securities
 Accounting for Certain Investments in Debt and
Equity Securities
  June 30,
    
    
    September 30,2008
    
    
    2007Short-term marketable securities:Auction rate securities
    
    $
    4,000
    
    
    $
    53,940Variable rate demand notes
    
    
    39,410
    
    
    
    48,275$
    43,410
    
    
    $
    102,215Long-term marketable securities:Auction rate securities
    
    $
    28,609
    
    
    $
    $
    28,609
    
    
    $
    
 4. Inventories
  June 30,
    
    
    September 30,2008
    
    
    2007Raw materials
    
    $
    14,097
    
    
    $
    7,766Work-in-process
    
    
    4,350
    
    
    
    4,499Finished goods
    
    
    15,917
    
    
    
    8,317Inventory at customers under purchase orders
    
    
    2,434
    
    
    
    1,651$
    36,798
    
    
    $
    22,233
  7




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##### Table of Contents



EAGLE TEST SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(In thousands, except share and per share data)
(Unaudited)
 5. Stockholders Equity
 Equity Offerings
  6. Net Income Per Share
   Three Months Ended
    
    
    Nine Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net income
    
    $
    6,821
    
    
    $
    2,008
    
    
    $
    18,141
    
    
    $
    7,713Basic EPS:Weighted-average common shares outstanding
    
    
    22,974,177
    
    
    
    22,957,154
    
    
    
    22,974,177
    
    
    
    22,895,597Basic net income per common share
    
    $
    0.30
    
    
    $
    0.09
    
    
    $
    0.79
    
    
    $
    0.34Diluted EPS:Weighted-average common shares outstanding
    
    
    22,974,177
    
    
    
    22,957,154
    
    
    
    22,974,177
    
    
    
    22,895,597Plus impact of stock options
    
    
    97,408
    
    
    
    213,039
    
    
    
    122,407
    
    
    
    228,213Diluted common shares
    
    
    23,071,585
    
    
    
    23,170,193
    
    
    
    23,096,584
    
    
    
    23,123,810Diluted EPS
    
    $
    0.30
    
    
    $
    0.09
    
    
    $
    0.79
    
    
    $
    0.33
 7. Other Comprehensive Income (Loss)
  Three Months Ended
    
    
    Nine Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Unrealized losses on marketable securities,
net of taxes of $(89) and $(612)
    
    $
    (135
    )
    
    $
    
    
    
    $
    (929
    )
    
    $
    Other comprehensive income (loss), net of taxes
    
    $
    (135
    )
    
    $
    
    
    
    $
    (929
    )
    
    $
    
  8




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EAGLE TEST SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(In thousands, except share and per share data)
(Unaudited)
 8. Income Taxes
  Accounting for Uncertainty in Income Taxesan
interpretation of FASB Statement No. 109,
  9. Commitments and Contingencies
 Contingencies
   Product Warranty
   Product Warranty Activity
 Nine Months EndedJune 30,2008
    
    
    2007Balance at beginning of period
    
    $
    993
    
    
    $
    1,068Warranty expenditures
    
    
    (1,837
    )
    
    
    (1,725
    )Provisions for warranty
    
    
    2,098
    
    
    
    1,720Balance at end of period
    
    $
    1,254
    
    
    $
    1,063
 9




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Item 2.Managements Discussion and Analysis of Financial Condition and Results of
Operations
 Forward Looking Statements And Projections
 This Quarterly Report on Form 10-Q contains forward looking statements. Forward looking
statements relate to future events or our future financial performance. We generally identify
forward looking statements by terminology such as may, will, should, expects, plans,
anticipates, could, intends, target, projects, contemplates, believes, estimates,
predicts, potential or continue or the negative of these terms or other similar words. These
statements are only predictions. We have based these forward looking statements largely on our
current expectations and projections about future events and financial trends that we believe may
affect our business, results of operations and financial condition. The outcome of the events
described in these forward looking statements is subject to risks, uncertainties and other factors
described in Managements Discussion and Analysis of Financial Condition and Results of
Operations, and elsewhere in this Quarterly Report on Form 10-Q , and in the Risk Factors
contained in the Annual Report on Form 10-K for the period ended September 30, 2007. Accordingly,
you should not rely upon forward looking statements as predictions of future events. We cannot
assure you that the events and circumstances reflected in the forward looking statements will be
achieved or occur, and actual results could differ materially from those projected in the forward
looking statements. The forward looking statements made in this Quarterly Report on Form 10-Q
relate only to events as of the date on which the statements are made. We undertake no obligation
to update any forward looking statement to reflect events or circumstances after the date on which
the statement is made or to reflect the occurrence of unanticipated events.
 Overview
       10




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Critical Accounting Policies and Estimates
   Revenue Recognition.
 
    
    we have a written sales agreement;
    
    delivery has occurred or services have been rendered;
    
    the price is fixed or determinable; and
    
    collectibility is reasonably assured.
    Marketable Securities
  Inventory Reserves.
  Warranty Reserves.
 11




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Allowance for Sales Returns and Uncollectibles.
 Stock-Based Compensation.
 Income Taxes Accounting for Uncertainty in Income Taxesan interpretation
of FASB Statement No. 109,
 Results of Operations
  Three Months
    
    Nine MonthsEnded
    
    EndedJune 30,
    
    June 30,2008
    
    2007
    
    2008
    
    2007Net revenue
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of goods sold
    
    
    34.4
    
    
    
    37.7
    
    
    
    36.9
    
    
    
    39.5Gross profit
    
    
    65.6
    
    
    
    62.3
    
    
    
    63.1
    
    
    
    60.5Operating expensesSelling, general and administrative
    
    
    28.5
    
    
    
    41.3
    
    
    
    28.7
    
    
    
    37.3Research and development
    
    
    8.9
    
    
    
    11.9
    
    
    
    9.4
    
    
    
    10.3Operating income
    
    
    28.2
    
    
    
    9.1
    
    
    
    25.0
    
    
    
    12.9Interest expense
    
    
    
    
    
    
    0.5
    
    
    
    
    
    
    
    0.5Income from marketable securities
    
    
    (2.6
    )
    
    
    (5.5
    )
    
    
    (3.1
    )
    
    
    (5.4
    )Income before taxes
    
    
    30.8
    
    
    
    14.1
    
    
    
    28.1
    
    
    
    17.8Provision for income taxes
    
    
    11.6
    
    
    
    4.0
    
    
    
    9.9
    
    
    
    6.0Net income
    
    
    19.2
    %
    
    
    10.1
    %
    
    
    18.2
    %
    
    
    11.8
    %
  Three Months Ended
    
    
    Nine Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007United States
    
    $
    10,826
    
    
    
    30.5
    %
    
    $
    3,829
    
    
    
    19.3
    %
    
    $
    28,841
    
    
    
    29.0
    %
    
    $
    26,438
    
    
    
    40.5
    %Malaysia
    
    
    12,058
    
    
    
    34.0
    
    
    
    2,712
    
    
    
    13.7
    
    
    
    35,240
    
    
    
    35.4
    
    
    
    10,616
    
    
    
    16.3Philippines
    
    
    *
    
    
    
    *
    
    
    
    3,260
    
    
    
    16.4
    
    
    
    *
    
    
    
    *
    
    
    
    *
    
    
    
    *Thailand
    
    
    *
    
    
    
    *
    
    
    
    2,399
    
    
    
    12.1
    
    
    
    *
    
    
    
    *
    
    
    
    *
    
    
    
    *Other
    
    
    12,575
    
    
    
    35.5
    
    
    
    7,658
    
    
    
    38.5
    
    
    
    35,512
    
    
    
    35.6
    
    
    
    28,148
    
    
    
    43.2Total
    
    $
    35,459
    
    
    
    100.0
    %
    
    $
    19,858
    
    
    
    100.0
    %
    
    $
    99,593
    
    
    
    100.0
    %
    
    $
    65,202
    
    
    
    100.0
    %
 
 *
    
    Less than 10% of total revenues 12




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Three Months
    
    Nine MonthsEnded
    
    EndedJune 30,
    
    June 30,2008
    
    2007
    
    2008
    
    2007Intersil Corporation
    
    
    10.7
    %
    
    
    *
    %
    
    
    *
    %
    
    
    *
    %ON Semiconductor Corporation
    
    
    *
    
    
    
    14.1
    
    
    
    *
    
    
    
    10.5Texas Instruments Incorporated
    
    
    28.1
    *
    
    
    29.3
    
    
    
    44.1
    
    
    
    30.5
 
 *
    
    Less than 10%. Comparison of Three and Nine Months Ended June 30, 2008 and 2007
 Net Revenue.
  Gross Profit.
  Selling, General and Administrative.
  Research and Development.
  13




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Interest Expense.
  Other Income.
  Provision for Income Taxes.
  14




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Liquidity and Capital Resources
    Accounting for Certain Investments in Debt and
Equity Securities
 15




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Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
 Item 4. Controls and Procedures
   16




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##### Table of Contents



Part II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 (a)
    
    Not applicable.(b)
    
    On March 8, 2006, our registration statement on Form S-1 (Registration
No. 333-130521) was declared effective for our initial public
offering, pursuant to which we offered and sold 6,130,000 shares of
common stock and received net proceeds of approximately $88.7 million.
We used these proceeds to repurchase all of our senior subordinated
notes and to redeem all outstanding shares of our redeemable preferred
stock, and to pay offering related expenses. As of June 30, 2008, we
retained approximately $23.6 million of these net proceeds, none of
which were used during the three month period ended June 30, 2008. We
intend to use the remaining $23.6 million of the net proceeds from our
initial public offering for general corporate purposes, including
working capital and possible acquisitions and investments. We
currently have no agreements or commitments with respect to any
acquisitions or investments and we do not currently have any
acquisitions or investments planned. Pending specific application of
our net proceeds, we plan to invest our net proceeds in government
securities and other short-term, investment-grade, marketable
securities.(c)
    
    Not applicable
 17




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##### Table of Contents



Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
  
 Item 6. Exhibits
  18




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##### Table of Contents



SIGNATURES
  EAGLE TEST SYSTEMS, INC.Date: July 30, 2008
    By:
    /s/ Leonard A. FoxmanLeonard A. FoxmanChief Executive Officer and President 19




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##### Table of Contents



EXHIBIT INDEX
  Exhibit No.
    
    Description10.1
    
    Amendment No. 2 to Employment Agreement between Eagle Test Systems, Inc. and Leonard Foxman dated
July 29, 2008.10.2
    
    Amendment No. 2 to Employment Agreement between Eagle Test Systems, Inc. and Theodore Foxman dated
July 29, 2008.10.3
    
    Amendment No. 2 to Employment Agreement between Eagle Test Systems, Inc. and Steve Hawrysz dated
July 29, 2008.10.4
    
    Amendment No. 2 to Employment Agreement between Eagle Test Systems, Inc. and Jack Weimer dated
July 29, 2008.31.1
    
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Chief Executive Officer.31.2
    
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Chief Financial Officer.32.1
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, by Chief Executive Officer and Chief Financial Officer.
 20