##### 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 December 31, 2006
 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 December 31, 2006 (unaudited) and September 30, 2006
    
    
    3Condensed Consolidated Statements of Net Income (unaudited) for the three months ended December 31, 2006 and 2005
    
    
    4Condensed Consolidated Statements of Cash Flows (unaudited) for the three months ended December 31, 2006 and 2005
    
    
    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
    
    
    15Item 4. Controls and Procedures
    
    
    15Part II. Other InformationItem 1. Legal Proceedings
    
    
    16Item 1A. Risk Factors
    
    
    16Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    16Item 3. Defaults Upon Senior Securities
    
    
    17Item 4. Submission of Matters to a Vote of Security Holders
    
    
    17Item 5. Other Information
    
    
    17Item 6. Exhibits
    
    
    17Signatures
    
    
    18Exhibit Index
    
    
    19Certification of CEO Pursuant to Section 302Certification of CFO Pursuant to Section 302Certification Pursuant to 18 U.S.C. Section 1350302 Certification of Chief Executive Officer302 Certification of Chief Financial Officer906 Certification of CEO and CFO302 Certification of Chief Executive Officer302 Certification of Chief Financial Officer906 Certifications
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PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 EAGLE TEST SYSTEMS, INC.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (In thousands, except share and per share data)
 December 31,
    
    
    September 30,2006
    
    
    2006(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    82,459
    
    
    $
    51,071Marketable securities
    
    
    28,575
    
    
    
    24,875Accounts receivable, net of allowances of $506 and $616
    
    
    11,133
    
    
    
    17,338Receivable from sale of common stock
    
    
    
    
    
    
    31,185Inventories
    
    
    22,121
    
    
    
    22,378Deferred income taxes
    
    
    4,848
    
    
    
    4,512Prepaid expenses and other current assets
    
    
    1,200
    
    
    
    2,143Total current assets
    
    
    150,336
    
    
    
    153,502Property, plant and equipment, net
    
    
    10,846
    
    
    
    11,745Other assets
    
    
    595
    
    
    
    639Total assets
    
    $
    161,777
    
    
    $
    165,886LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    4,367
    
    
    $
    5,941Current portion of capital lease obligations
    
    
    264
    
    
    
    261Deferred revenue
    
    
    3,488
    
    
    
    9,409Accrued compensation and related liabilities
    
    
    2,757
    
    
    
    5,734Accrued income taxes
    
    
    3,277
    
    
    
    2,949Other accrued expenses
    
    
    2,709
    
    
    
    3,470Total current liabilities
    
    
    16,862
    
    
    
    27,764Long-term liabilities:Capital lease obligations, less current portion
    
    
    312
    
    
    
    379Deferred income taxes
    
    
    845
    
    
    
    941Other long-term liabilities
    
    
    405
    
    
    
    388Total long-term liabilities
    
    
    1,562
    
    
    
    1,708Stockholders equity:Preferred stock, par value $0.01 per share 10,000,000
shares authorized, no shares issued or outstanding as
of December 31,2006 and September 30, 2006
    
    
    
    
    
    
    Common stock, par value $0.01 per share, 90,000,000
shares authorized as of December 31, 2006 and
September 30, 2006; 22,858,824 and 22,655,283 shares
outstanding as of December 31, 2006 and September 30,
2006, respectively
    
    
    229
    
    
    
    227Additional paid in capital
    
    
    172,780
    
    
    
    169,709Accumulated deficit
    
    
    (29,656
    )
    
    
    (33,522
    )Total stockholders equity
    
    
    143,353
    
    
    
    136,414Total liabilities and stockholders equity
    
    $
    161,777
    
    
    $
    165,886
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EAGLE TEST SYSTEMS, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF NET INCOME
 (In thousands, except share and per share data)
 Three MonthsEnded December 31,(unaudited)2006
    
    
    2005Net revenue
    
    $
    24,036
    
    
    $
    22,447Cost of goods sold
    
    
    9,877
    
    
    
    7,029Gross profit
    
    
    14,159
    
    
    
    15,418Operating expensesSelling, general and administrative
    
    
    7,414
    
    
    
    6,288Research and development
    
    
    2,154
    
    
    
    2,076Operating income
    
    
    4,591
    
    
    
    7,054Interest expense
    
    
    16
    
    
    
    980Other (income) and expenseIncome from marketable securities
    
    
    (1,254
    )
    
    
    (178
    )Investment impairments
    
    
    
    
    
    
    24Increase in value of warrants
    
    
    
    
    
    
    2,191Other (income) expense, net
    
    
    (9
    )
    
    
    (3
    )Income before taxes
    
    
    5,838
    
    
    
    4,040Provision for income taxes
    
    
    1,972
    
    
    
    2,165Net income
    
    $
    3,866
    
    
    $
    1,875Net income per share, basic
    
    $
    0.17
    
    
    $
    0.13Net income per share, diluted
    
    $
    0.17
    
    
    $
    0.10Weighted average shares outstanding, basic
    
    
    22,834,508
    
    
    
    5,396,248Weighted average shares outstanding, diluted
    
    
    23,096,885
    
    
    
    14,024,119Income available to common stockholders:Net income
    
    $
    3,866
    
    
    $
    1,875Net income allocated to preferred stockholders
    
    
    
    
    
    
    (1,152
    )Income available to common stockholders
    
    $
    3,866
    
    
    $
    723
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EAGLE TEST SYSTEMS, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In thousands)
 Three Months EndedDecember 31,2006
    
    
    2005(unaudited)Cash flows from operating activities:Net income
    
    $
    3,866
    
    
    $
    1,875Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    909
    
    
    
    739Investment impairments
    
    
    
    
    
    
    24Gain on sale of property and equipment
    
    
    (9
    )
    
    
    Accretion of discount and redemption premium on long-term debt
    
    
    
    
    
    
    71Increase in value of warrants
    
    
    
    
    
    
    2,191Non cash compensation related to stock options
    
    
    5
    
    
    
    36Deferred income taxes
    
    
    (432
    )
    
    
    (151
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    6,205
    
    
    
    (7,196
    )Inventories
    
    
    564
    
    
    
    633Prepaid expenses and other current assets
    
    
    943
    
    
    
    (979
    )Other assets
    
    
    44
    
    
    
    (395
    )Accounts payable
    
    
    (1,574
    )
    
    
    2,281Deferred revenue
    
    
    (5,921
    )
    
    
    1,764Accrued compensation and related liabilities
    
    
    (2,977
    )
    
    
    (726
    )Accrued income taxes
    
    
    328
    
    
    
    2,755Other accrued expenses
    
    
    (761
    )
    
    
    683Other liabilities
    
    
    17
    
    
    
    20Net cash provided by operating activities
    
    
    1,207
    
    
    
    3,625Cash flows from investing activities:Purchases of marketable securities
    
    
    (3,700
    )
    
    
    (5,000
    )Sale of property and equipment
    
    
    9
    
    
    
    Capital expenditures
    
    
    (317
    )
    
    
    (316
    )Net cash used in investing activities
    
    
    (4,008
    )
    
    
    (5,316
    )Cash flows from financing activities:Payments of capital lease obligations
    
    
    (64
    )
    
    
    (62
    )Proceeds from issuance of common stock, net of issuance costs
    
    
    34,253
    
    
    
    Net cash provided by (used in) financing activities
    
    
    34,189
    
    
    
    (62
    )Net increase (decrease) in cash and cash equivalents
    
    
    31,388
    
    
    
    (1,753
    )Cash and cash equivalents at beginning of period
    
    
    51,071
    
    
    
    9,976Cash and cash equivalents at end of period
    
    $
    82,459
    
    
    $
    8,223
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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
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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. Inventories
  December 31,
    
    
    September 30,2006
    
    
    2006Raw materials
    
    $
    7,819
    
    
    $
    7,185Work-in-process
    
    
    4,628
    
    
    
    6,741Finished goods
    
    
    9,237
    
    
    
    6,086Inventory at customers under purchase orders
    
    
    437
    
    
    
    2,366$
    22,121
    
    
    $
    22,378
  4. Stockholders Equity and Long-Term Debt
 Equity Offerings
  Long-term Debt
  Warrants
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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 EndedDecember 31,2006
    
    
    2005Net income
    
    $
    3,866
    
    
    $
    1,875Basic EPS:Adjustments to income:Net income allocated to convertible
preferred shares
    
    
    
    
    
    
    (1,152
    )Income available to common stockholders
    
    
    3,866
    
    
    
    723Weighted-average common shares outstanding
    
    
    22,834,508
    
    
    
    5,396,248Basic net income per common share
    
    $
    0.17
    
    
    $
    0.13Diluted EPS:Adjustments to income:Dividend on redeemable preferred stock
as converted  5% cumulative
    
    $
    
    
    
    $
    (406
    )Warrant value adjustment
    
    
    
    
    
    
    
    *Income available to common stockholders
    
    $
    3,866
    
    
    $
    1,469Weighted-average common shares outstanding
    
    
    22,834,508
    
    
    
    5,396,248Plus impact of convertible preferred stock and
warrants and stock options, as applicable
    
    
    262,377
    
    
    
    8,627,871Diluted common shares
    
    
    23,096,885
    
    
    
    14,024,119Diluted EPS
    
    $
    0.17
    
    
    $
    0.10
 
 *
    
    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
 Three Months EndedDecember 31,2006
    
    
    2005Balance at beginning of period
    
    $
    1,068
    
    
    $
    563Warranty expenditures
    
    
    (587
    )
    
    
    (176
    )Provisions for warranty
    
    
    268
    
    
    
    242Balance at end of period
    
    $
    749
    
    
    $
    629
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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
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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.
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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 MonthsEndedDecember 31,2006
    
    
    2005Net revenue
    
    
    100.0
    %
    
    
    100.0
    %Cost of goods sold
    
    
    41.1
    
    
    
    31.3Gross profit
    
    
    58.9
    
    
    
    68.7Operating expenses
    
    
    30.8
    
    
    
    28.0Selling, general and administrative
    
    
    30.8
    
    
    
    28.0Research and development
    
    
    9.0
    
    
    
    9.3Operating income
    
    
    19.1
    
    
    
    31.4Interest expense
    
    
    0.1
    
    
    
    4.4Income from marketable securities
    
    
    (5.3
    )
    
    
    (0.8
    )Increase in value of warrants
    
    
    
    
    
    
    9.7Other (income) expense
    
    
    
    
    
    
    0.1Income before taxes
    
    
    24.3
    
    
    
    18.0Provision for income taxes
    
    
    8.2
    
    
    
    9.6Net income
    
    
    16.1
    %
    
    
    8.4
    %
  Three Months EndedDecember 31,2006
    
    
    2005United States
    
    $
    11,321
    
    
    
    47.1
    %
    
    $
    6,411
    
    
    
    28.6
    %Malaysia
    
    
    5,004
    
    
    
    20.8
    
    
    
    9,418
    
    
    
    42.0Other
    
    
    7,711
    
    
    
    32.1
    
    
    
    6,618
    
    
    
    29.4Total
    
    $
    24,036
    
    
    
    100.0
    %
    
    $
    22,447
    
    
    
    100.0
    %
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\

Three MonthsEndedDecember 31,2006
    
    2005Allegro Microsystems Incorporated.
    
    
    13.3
    %
    
    
    *
    %National Semiconductor Corporation
    
    
    *
    
    
    
    25.9Texas Instruments Incorporated
    
    
    20.6
    
    
    
    32.9
 
 *
    
    Less than 10%. Comparison of Three Months Ended December 31, 2006 and 2005
 Net Revenue.
 Gross Profit.
 Selling, General and Administrative.
 Research and Development.
 Interest Expense.
 Increase in Value of Warrants.
 Other Income.
 Provision for Income Taxes.
 13




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Liquidity and Capital Resources
    14




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Item 3.Quantitative and Qualitative Disclosures about Market Risk
   
 Item 4.Controls and Procedures
   15




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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 December 31, 2006, we retained
approximately $23.6 million of these net proceeds, none
of which were used during the three month period ended
December 31, 2006. 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
  17




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SIGNATURES
  EAGLE TEST SYSTEMS, INC.Date: February 12, 2007
    By:
    /s/ Leonard A. FoxmanLeonard A. FoxmanChief Executive Officer and President 18




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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.
 19