##### 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 March 31,2007
 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
  o o þ
 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 March 31, 2007 (unaudited) and September 30, 2006
    
    
    3Condensed Consolidated Statements of Net Income (unaudited) for the three and six months
ended March 31, 2007 and 2006
    
    
    4Condensed Consolidated Statements of Cash Flows (unaudited) for the six months ended March
31, 2007 and 2006
    
    
    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
    
    
    20Certification of CEO Pursuant to Section 302Certification of CFO Pursuant to Section 302Certification Pursuant to 18 U.S.C. Section 1350Certification Pursuant to Section 302 by CEOCertification Pursuant to Section 302 by CFOCertification Pursuant to Section 906 by CEO and CFO
  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)
 March 31,
    
    
    September 30,2007
    
    
    2006(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    84,727
    
    
    $
    51,071Marketable securities
    
    
    28,575
    
    
    
    24,875Accounts receivable, net of allowances of $540 and $616
    
    
    13,679
    
    
    
    17,338Receivable from sale of common stock
    
    
    
    
    
    
    31,185Inventories
    
    
    20,346
    
    
    
    22,378Deferred income taxes
    
    
    6,298
    
    
    
    4,512Prepaid expenses and other current assets
    
    
    1,791
    
    
    
    2,143Total current assets
    
    
    155,416
    
    
    
    153,502Property, plant and equipment, net
    
    
    10,541
    
    
    
    11,745Other assets
    
    
    569
    
    
    
    639Total assets
    
    $
    166,526
    
    
    $
    165,886LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    3,474
    
    
    $
    5,941Current portion of capital lease obligations
    
    
    272
    
    
    
    261Deferred revenue
    
    
    5,521
    
    
    
    9,409Accrued compensation and related liabilities
    
    
    3,556
    
    
    
    5,734Accrued income taxes
    
    
    2,880
    
    
    
    2,949Other accrued expenses
    
    
    3,206
    
    
    
    3,470Total current liabilities
    
    
    18,909
    
    
    
    27,764Long-term liabilities:Capital lease obligations, less current portion
    
    
    257
    
    
    
    379Deferred income taxes
    
    
    778
    
    
    
    941Other long-term liabilities
    
    
    409
    
    
    
    388Total long-term liabilities
    
    
    1,444
    
    
    
    1,708Stockholders equity:Preferred stock, par value $0.01 per share 10,000,000
shares authorized, no shares issued or outstanding as
of March 31, 2007 and September 30, 2006
    
    
    
    
    
    
    Common stock, par value $0.01 per share, 90,000,000
shares authorized as of March 31, 2007 and September
30, 2006; 22,947,572 and 22,655,283 shares outstanding
as of March 31, 2007 and September 30, 2006,
respectively
    
    
    229
    
    
    
    227Additional paid in capital
    
    
    173,760
    
    
    
    169,709Accumulated deficit
    
    
    (27,816
    )
    
    
    (33,522
    )Total stockholders equity
    
    
    146,173
    
    
    
    136,414Total liabilities and stockholders equity
    
    $
    166,526
    
    
    $
    165,886
  3




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##### Table of Contents



EAGLE TEST SYSTEMS, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF NET INCOME (LOSS)
 (In thousands, except share and per share data)
 Three Months
    
    
    Six MonthsEnded March 31,
    
    
    Ended March 31,(unaudited)
    
    
    (unaudited)2007
    
    
    2006
    
    
    2007
    
    
    2006Net revenue
    
    $
    21,308
    
    
    $
    28,565
    
    
    $
    45,344
    
    
    $
    51,013Cost of goods sold
    
    
    8,420
    
    
    
    9,319
    
    
    
    18,296
    
    
    
    16,349Gross profit
    
    
    12,888
    
    
    
    19,246
    
    
    
    27,048
    
    
    
    34,664Operating expensesSelling, general and administrative
    
    
    8,668
    
    
    
    6,958
    
    
    
    16,083
    
    
    
    13,246Research and development
    
    
    2,208
    
    
    
    2,392
    
    
    
    4,362
    
    
    
    4,468Operating income
    
    
    2,012
    
    
    
    9,896
    
    
    
    6,603
    
    
    
    16,950Interest expense
    
    
    235
    
    
    
    2,430
    
    
    
    251
    
    
    
    3,410Other (income) and expenseIncome from marketable securities
    
    
    (1,212
    )
    
    
    (305
    )
    
    
    (2,467
    )
    
    
    (483
    )Investment impairments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    24Increase in value of warrants
    
    
    
    
    
    
    3,275
    
    
    
    
    
    
    
    5,466Other (income) expense, net
    
    
    
    
    
    
    (10
    )
    
    
    (9
    )
    
    
    (12
    )Income before taxes
    
    
    2,989
    
    
    
    4,506
    
    
    
    8,828
    
    
    
    8,545Provision for income taxes
    
    
    1,150
    
    
    
    2,733
    
    
    
    3,123
    
    
    
    4,898Net income
    
    $
    1,839
    
    
    $
    1,773
    
    
    $
    5,705
    
    
    $
    3,647Net income (loss) per share, basic
    
    $
    0.08
    
    
    $
    (1.04
    )
    
    $
    0.25
    
    
    $
    (1.06
    )Net income (loss) per share, diluted
    
    $
    0.08
    
    
    $
    (1.04
    )
    
    $
    0.25
    
    
    $
    (1.06
    )Weighted average shares outstanding, basic
    
    
    22,895,803
    
    
    
    9,299,266
    
    
    
    22,864,818
    
    
    
    7,326,312Weighted average shares outstanding, diluted
    
    
    23,122,421
    
    
    
    9,299,266
    
    
    
    23,099,357
    
    
    
    7,326,312Income (loss) available to common stockholders:Net income
    
    $
    1,839
    
    
    $
    1,773
    
    
    $
    5,705
    
    
    $
    3,647Retained earnings adjustment for redemption of
redeemable preferred stock
    
    
    
    
    
    
    (11,430
    )
    
    
    
    
    
    
    (11,430
    )Income (loss) available to common stockholders
    
    $
    1,839
    
    
    $
    (9,657
    )
    
    $
    5,705
    
    
    $
    (7,783
    )
  4




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EAGLE TEST SYSTEMS, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In thousands)
 Six Months EndedMarch 31,2007
    
    
    2006(unaudited)Cash flows from operating activities:Net income
    
    $
    5,705
    
    
    $
    3,647Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    1,800
    
    
    
    1,479Investment impairments
    
    
    
    
    
    
    24Gain on sale of property and equipment
    
    
    (9
    )
    
    
    Accretion of discount and redemption premium on long-term debt
    
    
    
    
    
    
    1,752Increase in value of warrants
    
    
    
    
    
    
    5,466Non cash compensation related to stock options
    
    
    179
    
    
    
    205Excess tax benefits from stock based compensation
    
    
    (316
    )
    
    
    Deferred income taxes
    
    
    (1,949
    )
    
    
    (172
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    3,659
    
    
    
    (7,596
    )Inventories
    
    
    2,538
    
    
    
    (2,052
    )Prepaid expenses and other current assets
    
    
    352
    
    
    
    (1,227
    )Other assets
    
    
    70
    
    
    
    (214
    )Accounts payable
    
    
    (2,467
    )
    
    
    5,742Deferred revenue
    
    
    (3,888
    )
    
    
    6,344Accrued compensation and related liabilities
    
    
    (2,178
    )
    
    
    464Accrued income taxes
    
    
    247
    
    
    
    901Other accrued expenses
    
    
    (264
    )
    
    
    1,102Other liabilities
    
    
    21
    
    
    
    30Net cash provided by operating activities
    
    
    3,500
    
    
    
    15,895Cash flows from investing activities:Purchases of marketable securities
    
    
    (3,700
    )
    
    
    (13,000
    )Sale of property and equipment
    
    
    9
    
    
    
    Capital expenditures
    
    
    (1,102
    )
    
    
    (800
    )Net cash used in investing activities
    
    
    (4,793
    )
    
    
    (13,800
    )Cash flows from financing activities:Payments of long-term debt
    
    
    
    
    
    
    (30,595
    )Payments of capital lease obligations
    
    
    (111
    )
    
    
    (123
    )Redemption of redeemable preferred stock
    
    
    
    
    
    
    (32,500
    )Proceeds from issuance of common stock, net of issuance costs
    
    
    34,744
    
    
    
    86,656Excess tax benefits from stock based compensation
    
    
    316
    
    
    
    Net cash provided by financing activities
    
    
    34,949
    
    
    
    23,438Net increase in cash and cash equivalents
    
    
    33,656
    
    
    
    25,533Cash and cash equivalents at beginning of period
    
    
    51,071
    
    
    
    9,976Cash and cash equivalents at end of period
    
    $
    84,727
    
    
    $
    35,509Supplemental disclosure:Transfer of equipment from fixed assets to inventory
    
    $
    506
    
    
    $
    
  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.
    
    InventoriesInventories consist of the following:
 March 31,
    
    
    September 30,2007
    
    
    2006Raw materials
    
    $
    6,623
    
    
    $
    7,185Work-in-process
    
    
    3,875
    
    
    
    6,741Finished goods
    
    
    8,924
    
    
    
    6,086Inventory at customers under purchase orders
    
    
    924
    
    
    
    2,366$
    20,346
    
    
    $
    22,378
  4. Stockholders Equity and Long-Term Debt
 Equity Offerings
  Long-term Debt
  Warrants
  7




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EAGLE TEST SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(In thousands, except share and per share data)
(Unaudited)
 5. Net Income Per Share
   Three Months Ended
    
    
    Six Months EndedMarch 31,
    
    
    March 312007
    
    
    2006
    
    
    2007
    
    
    2006Net income
    
    $
    1,839
    
    
    $
    1,773
    
    
    $
    5,705
    
    
    $
    3,647Basic EPS:Adjustments to income:Retained
earnings
adjustment
for
conversion
of
redeemable
preferred
stock *
    
    
    
    
    
    
    (11,430
    )
    
    
    
    
    
    
    (11,430
    )Income (loss)
available to common
stockholders
    
    
    1,839
    
    
    
    (9,657
    )
    
    
    5,705
    
    
    
    (7,783
    )Weighted-average
common shares
outstanding
    
    
    22,895,803
    
    
    
    9,299,266
    
    
    
    22,864,818
    
    
    
    7,326,312Basic net income (loss)
per common share
    
    $
    0.08
    
    
    $
    (1.04
    )
    
    $
    0.25
    
    
    $
    (1.06
    )Diluted EPS:Weighted-average common
shares outstanding
    
    
    22,895,803
    
    
    
    9,299,266
    
    
    
    22,864,818
    
    
    
    7,326,312Plus impact of
convertible preferred
stock and warrants and
stock options, as
applicable
    
    
    226,618
    
    
    
    
    **
    
    
    234,539
    
    
    
    
    **Diluted common shares
    
    
    23,122,421
    
    
    
    9,299,266
    
    
    
    23,099,357
    
    
    
    7,326,312Diluted (loss) per common share
    
    $
    0.08
    
    
    $
    (1.04
    )
    
    $
    0.25
    
    
    $
    (1.06
    )
 
 *
    
    The difference between the fair market value of the Redeemable Preferred Stock at date of
issue of $21,070 and the redemption price of $32,500 was charged to retained earnings. This
adjustment is used to reduce net income to arrive at income available to common stockholders for
purposes of calculating earnings per common share in accordance with Emerging Issues Task Force
Topic D-42-The Effect on the Calculation of Earnings per Share for the Redemption or Induced
Conversion of Preferred Stock.**
    
    This element of the diluted EPS computation is not applicable since the impact on the
computation would be anti-dilutive. 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)
 6. Income Taxes
  Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement No. 109,
 7. Commitments and Contingencies
 Contingencies
   Product Warranty
   Product Warranty Activity
 Six Months EndedMarch 31,2007
    
    
    2006Balance at beginning of period
    
    $
    1,068
    
    
    $
    563Warranty expenditures
    
    
    (1,199
    )
    
    
    (390
    )Provisions for warranty
    
    
    826
    
    
    
    492Balance at end of period
    
    $
    695
    
    
    $
    665
 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, 2006. 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.
    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
    
    Six MonthsEnded
    
    EndedMarch 31,
    
    March 31,2007
    
    2006
    
    2007
    
    2006Net revenue
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of goods sold
    
    
    39.5
    
    
    
    32.6
    
    
    
    40.4
    
    
    
    32.0Gross profit
    
    
    60.5
    
    
    
    67.4
    
    
    
    59.6
    
    
    
    68.0Operating expensesSelling, general and administrative
    
    
    40.7
    
    
    
    24.4
    
    
    
    35.4
    
    
    
    26.0Research and development
    
    
    10.4
    
    
    
    8.4
    
    
    
    9.6
    
    
    
    8.8Operating income
    
    
    9.4
    
    
    
    34.6
    
    
    
    14.6
    
    
    
    33.2Interest expense
    
    
    1.1
    
    
    
    8.5
    
    
    
    0.5
    
    
    
    6.7Income from marketable securities
    
    
    (5.7
    )
    
    
    (1.1
    )
    
    
    (5.4
    )
    
    
    (0.9
    )Increase in value of warrants
    
    
    
    
    
    
    11.4
    
    
    
    
    
    
    
    10.7Income before taxes
    
    
    14.0
    
    
    
    15.8
    
    
    
    19.5
    
    
    
    16.7Provision for income taxes
    
    
    5.4
    
    
    
    9.6
    
    
    
    6.9
    
    
    
    9.6Net income
    
    
    8.6
    %
    
    
    6.2
    %
    
    
    12.6
    %
    
    
    7.1
    %
  Three Months Ended
    
    
    Six Months EndedMarch 31,
    
    
    March 312007
    
    
    2006
    
    
    2007
    
    
    2006United States
    
    $
    11,273
    
    
    
    52.9
    %
    
    $
    6,835
    
    
    
    23.9
    %
    
    $
    22,601
    
    
    
    49.9
    %
    
    $
    12,599
    
    
    
    24.7
    %Malaysia
    
    
    2,903
    
    
    
    13.6
    
    
    
    10,300
    
    
    
    36.1
    
    
    
    7,898
    
    
    
    17.4
    
    
    
    21,240
    
    
    
    41.6Philippines
    
    
    2,401
    
    
    
    11.3
    
    
    
    *
    
    
    
    *
    
    
    
    *
    
    
    
    *
    
    
    
    *
    
    
    
    *Taiwan
    
    
    *
    
    
    
    *
    
    
    
    4,397
    
    
    
    15.4
    
    
    
    *
    
    
    
    *
    
    
    
    5,808
    
    
    
    11.4Thailand
    
    
    *
    
    
    
    *
    
    
    
    3,498
    
    
    
    12.2
    
    
    
    *
    
    
    
    *
    
    
    
    *
    
    
    
    *Other
    
    
    4,731
    
    
    
    22.2
    
    
    
    3,535
    
    
    
    12.4
    
    
    
    14,845
    
    
    
    32.7
    
    
    
    11,366
    
    
    
    22.3Total
    
    $
    21,308
    
    
    
    100.0
    %
    
    $
    28,565
    
    
    
    100.0
    %
    
    $
    45,344
    
    
    
    100.0
    %
    
    $
    51,013
    
    
    
    100.0
    %
 
 *
    
    Less than 10% of total revenues 12




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Three Months
    
    Six MonthsEnded
    
    EndedMarch 31,
    
    March 31,2007
    
    2006
    
    2007
    
    2006Allegro MicroSystems, Incorporated
    
    
    *
    %
    
    
    *
    %
    
    
    10.5
    %
    
    
    *
    %National Semiconductor Corporation
    
    
    *
    
    
    
    *
    
    
    
    *
    
    
    
    13.4ON Semiconductor Corporation
    
    
    17.0
    
    
    
    11.7
    
    
    
    *
    
    
    
    *Texas Instruments Incorporated
    
    
    42.6
    
    
    
    61.4
    
    
    
    31.0
    
    
    
    48.8
 
 *
    
    Less than 10%. Comparison of Three and Six Months Ended March 31, 2007 and 2006
 Net Revenue.
  Gross Profit.
  Selling, General and Administrative.
  Research and Development.
  13




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##### Table of Contents



Interest Expense.
  Income from Marketable Securities.
  Increase in Value of Warrants.
 Provision for Income Taxes.
  14




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Liquidity and Capital Resources
    15




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




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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 March 31, 2007, we retained
approximately $23.6 million of these net proceeds, none
of which were used during the three month period ended
March 31, 2007. 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
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Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
  
 Item 6. Exhibits
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SIGNATURES
  EAGLE TEST SYSTEMS, INC.Date: May 7, 2007
    
    By:
    
    /s/ Leonard A. Foxman

Leonard A. FoxmanChief Executive Officer and President
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##### Table of Contents



EXHIBIT INDEX
  Exhibit No.
    
    Description31.1
    
    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.
 
 *
    
    This certification shall not be deemed filed for purposes of Section 18 of the Securities
Exchange Act of 1934, or otherwise subject to the liability of that Section, nor shall it be deemed
to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities
Exchange Act of 1934. 20