##### 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, 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 June 30, 2007 (unaudited) and September 30, 2006
    
    
    3Condensed Consolidated Statements of Net Income (unaudited) for the three and nine months
ended June 30, 2007 and 2006
    
    
    4Condensed Consolidated Statements of Cash Flows (unaudited) for the nine months ended June
30, 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 1350302 Certification of Chief Executive Officer302 Certification of Chief Financial Officer906 Certification of 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)
 June 30,
    
    
    September 30,2007
    
    
    2006(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    10,803
    
    
    $
    51,071Marketable securities
    
    
    101,865
    
    
    
    24,875Accounts receivable, net of allowances of $541 and $616
    
    
    13,918
    
    
    
    17,338Receivable from sale of common stock
    
    
    
    
    
    
    31,185Inventories
    
    
    19,891
    
    
    
    22,378Deferred income taxes
    
    
    5,542
    
    
    
    4,512Prepaid expenses and other current assets
    
    
    1,736
    
    
    
    2,143Total current assets
    
    
    153,755
    
    
    
    153,502Property, plant and equipment, net
    
    
    10,846
    
    
    
    11,745Other assets
    
    
    507
    
    
    
    639Total assets
    
    $
    165,108
    
    
    $
    165,886LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    3,925
    
    
    $
    5,941Current portion of capital lease obligations
    
    
    273
    
    
    
    261Deferred revenue
    
    
    2,057
    
    
    
    9,409Accrued compensation and related liabilities
    
    
    3,261
    
    
    
    5,734Accrued income taxes
    
    
    2,523
    
    
    
    2,949Other accrued expenses
    
    
    3,174
    
    
    
    3,470Total current liabilities
    
    
    15,213
    
    
    
    27,764Long-term liabilities:Capital lease obligations, less current portion
    
    
    189
    
    
    
    379Deferred income taxes
    
    
    734
    
    
    
    941Other long-term liabilities
    
    
    419
    
    
    
    388Total long-term liabilities
    
    
    1,342
    
    
    
    1,708Stockholders equity:Preferred stock, par value $0.01 per share 10,000,000
shares authorized, no shares issued or outstanding as
of June 30, 2007 and September 30, 2006
    
    
    
    
    
    
    Common stock, par value $0.01 per share, 90,000,000
shares authorized as of June 30, 2007 and September 30,
2006; 22,961,053 and 22,655,283 shares outstanding as
of June 30, 2007 and September 30, 2006, respectively
    
    
    230
    
    
    
    227Additional paid in capital
    
    
    174,132
    
    
    
    169,709Accumulated deficit
    
    
    (25,809
    )
    
    
    (33,522
    )Total stockholders equity
    
    
    148,553
    
    
    
    136,414Total liabilities and stockholders equity
    
    $
    165,108
    
    
    $
    165,886
  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)2007
    
    
    2006
    
    
    2007
    
    
    2006Net revenue
    
    $
    19,858
    
    
    $
    36,779
    
    
    $
    65,202
    
    
    $
    87,791Cost of goods sold
    
    
    7,490
    
    
    
    12,256
    
    
    
    25,787
    
    
    
    28,605Gross profit
    
    
    12,368
    
    
    
    24,523
    
    
    
    39,415
    
    
    
    59,186Operating expensesSelling, general and administrative
    
    
    8,212
    
    
    
    8,014
    
    
    
    24,294
    
    
    
    21,259Research and development
    
    
    2,353
    
    
    
    2,088
    
    
    
    6,715
    
    
    
    6,555Operating income
    
    
    1,803
    
    
    
    14,421
    
    
    
    8,406
    
    
    
    31,372Interest expense
    
    
    94
    
    
    
    71
    
    
    
    345
    
    
    
    3,481Other (income) and expenseIncome from marketable securities
    
    
    (1,091
    )
    
    
    (615
    )
    
    
    (3,559
    )
    
    
    (1,097
    )Investment impairments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    24Increase in value of warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,466Other (income) expense, net
    
    
    
    
    
    
    33
    
    
    
    (8
    )
    
    
    21Income before taxes
    
    
    2,800
    
    
    
    14,932
    
    
    
    11,628
    
    
    
    23,477Provision for income taxes
    
    
    792
    
    
    
    5,260
    
    
    
    3,915
    
    
    
    10,158Net income
    
    $
    2,008
    
    
    $
    9,672
    
    
    $
    7,713
    
    
    $
    13,319Net income per share, basic
    
    $
    0.09
    
    
    $
    0.47
    
    
    $
    0.34
    
    
    $
    0.16Net income per share, diluted
    
    $
    0.09
    
    
    $
    0.46
    
    
    $
    0.33
    
    
    $
    0.09Weighted average shares outstanding, basic
    
    
    22,957,154
    
    
    
    20,651,934
    
    
    
    22,895,597
    
    
    
    11,782,483Weighted average shares outstanding, diluted
    
    
    23,170,193
    
    
    
    20,937,003
    
    
    
    23,123,810
    
    
    
    16,973,554Income available to common stockholders:Net income
    
    $
    2,008
    
    
    $
    9,672
    
    
    $
    7,713
    
    
    $
    13,319Retained earnings adjustment for redemption of
redeemable preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11,430
    )Income available to common stockholders
    
    $
    2,008
    
    
    $
    9,672
    
    
    $
    7,713
    
    
    $
    1,889
  4




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##### Table of Contents



EAGLE
TEST SYSTEMS, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
 Nine Months EndedJune 30,2007
    
    
    2006(unaudited)Cash flows from operating activities:Net income
    
    $
    7,713
    
    
    $
    13,319Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    2,624
    
    
    
    2,253Investment 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
    
    
    380
    
    
    
    285Excess tax benefits from stock based compensation
    
    
    (395
    )
    
    
    Deferred income taxes
    
    
    (1,237
    )
    
    
    (2,705
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    3,420
    
    
    
    (10,695
    )Inventories
    
    
    2,992
    
    
    
    (4,894
    )Prepaid expenses and other current assets
    
    
    407
    
    
    
    (1,328
    )Other assets
    
    
    132
    
    
    
    (239
    )Accounts payable
    
    
    (2,016
    )
    
    
    6,378Deferred revenue
    
    
    (7,352
    )
    
    
    5,187Accrued compensation and related liabilities
    
    
    (2,473
    )
    
    
    1,311Accrued income taxes
    
    
    (31
    )
    
    
    3,237Other accrued expenses
    
    
    (296
    )
    
    
    (9
    )Other liabilities
    
    
    31
    
    
    
    35Net cash provided by operating activities
    
    
    3,890
    
    
    
    19,377Cash flows from investing activities:Net purchases of marketable securities
    
    
    (76,990
    )
    
    
    (13,000
    )Sale of property and equipment
    
    
    9
    
    
    
    Capital expenditures
    
    
    (2,230
    )
    
    
    (1,840
    )Net cash used in investing activities
    
    
    (79,211
    )
    
    
    (14,840
    )Cash flows from financing activities:Payments of long-term debt
    
    
    
    
    
    
    (30,595
    )Payments of capital lease obligations
    
    
    (178
    )
    
    
    (184
    )Redemption of redeemable preferred stock
    
    
    
    
    
    
    (32,500
    )Proceeds from issuance of common stock, net of issuance costs
    
    
    34,836
    
    
    
    86,680Excess tax benefits from stock based compensation
    
    
    395
    
    
    
    Net cash provided by financing activities
    
    
    35,053
    
    
    
    23,401Net increase (decrease) in cash and cash equivalents
    
    
    (40,268
    )
    
    
    27,938Cash and cash equivalents at beginning of period
    
    
    51,071
    
    
    
    9,976Cash and cash equivalents at end of period
    
    $
    10,803
    
    
    $
    37,914Supplemental disclosure:Transfer of equipment from fixed assets to inventory
    
    $
    505
    
    
    $
    
  5




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##### Table of Contents



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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##### Table of Contents



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:
 June 30,
    
    
    September 30,2007
    
    
    2006Raw materials
    
    $
    6,929
    
    
    $
    7,185Work-in-process
    
    
    4,190
    
    
    
    6,741Finished goods
    
    
    8,597
    
    
    
    6,086Inventory at customers under purchase orders
    
    
    175
    
    
    
    2,366$
    19,891
    
    
    $
    22,378
  4. Stockholders Equity and Long-Term Debt
 Equity Offerings
  Long-term Debt
  Warrants
  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. Net Income Per Share
   Three Months Ended
    
    
    Nine Months EndedJune 30,
    
    
    June 302007
    
    
    2006
    
    
    2007
    
    
    2006Net income
    
    $
    2,008
    
    
    $
    9,672
    
    
    $
    7,713
    
    
    $
    13,319Basic EPS:Adjustments to income:Retained earnings adjustment for
conversion of redeemable preferred stock *
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11,430
    )Income available to common stockholders
    
    
    2,008
    
    
    
    9,672
    
    
    
    7,713
    
    
    
    1,889Weighted-average common shares outstanding
    
    
    22,957,154
    
    
    
    20,651,934
    
    
    
    22,895,597
    
    
    
    11,782,483Basic net income per common share
    
    $
    0.09
    
    
    $
    0.47
    
    
    $
    0.34
    
    
    $
    0.16Diluted EPS:Adjustment to income:Dividend on redeemable preferred stock-as
converted
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    (406
    )Income available to common stockholders
    
    $
    2,008
    
    
    $
    9,672
    
    
    $
    7,713
    
    
    $
    1,483Weighted-average common shares outstanding
    
    
    22,957,154
    
    
    
    20,651,934
    
    
    
    22,895,597
    
    
    
    11,782,483Plus impact of convertible preferred stock and
warrants and stock options, as applicable
    
    
    213,039
    
    
    
    285,069
    
    
    
    228,213
    
    
    
    5,191,071Diluted common shares
    
    
    23,170,193
    
    
    
    20,937,003
    
    
    
    23,123,810
    
    
    
    16,973,554Diluted income per common share
    
    $
    0.09
    
    
    $
    0.46
    
    
    $
    0.33
    
    
    $
    0.09
 
 *
    
    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. 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
 Nine Months EndedJune 30,2007
    
    
    2006Balance at beginning of period
    
    $
    1,068
    
    
    $
    563Warranty expenditures
    
    
    (1,725
    )
    
    
    (727
    )Provisions for warranty
    
    
    1,720
    
    
    
    987Balance at end of period
    
    $
    1,063
    
    
    $
    823
 9




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##### Table of Contents



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
    
    
    Nine MonthsEnded
    
    
    EndedJune 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net revenue
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of goods sold
    
    
    37.7
    
    
    
    33.3
    
    
    
    39.5
    
    
    
    32.6Gross profit
    
    
    62.3
    
    
    
    66.7
    
    
    
    60.5
    
    
    
    67.4Operating expensesSelling, general and administrative
    
    
    41.3
    
    
    
    21.8
    
    
    
    37.3
    
    
    
    24.2Research and development
    
    
    11.9
    
    
    
    5.7
    
    
    
    10.3
    
    
    
    7.5Operating income
    
    
    9.1
    
    
    
    39.2
    
    
    
    12.9
    
    
    
    35.7Interest expense
    
    
    0.5
    
    
    
    0.2
    
    
    
    0.5
    
    
    
    4.0Income from marketable securities
    
    
    (5.5
    )
    
    
    (1.6
    )
    
    
    (5.4
    )
    
    
    (1.2
    )Increase in value of warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6.2Income before taxes
    
    
    14.1
    
    
    
    40.6
    
    
    
    17.8
    
    
    
    26.7Provision for income taxes
    
    
    4.0
    
    
    
    14.3
    
    
    
    6.0
    
    
    
    11.5Net income
    
    
    10.1
    %
    
    
    26.3
    %
    
    
    11.8
    %
    
    
    15.2
    %
  Three Months Ended
    
    
    Nine Months EndedJune 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006United States
    
    $
    3,829
    
    
    
    19.3
    %
    
    $
    14,642
    
    
    
    39.8
    %
    
    $
    26,438
    
    
    
    40.5
    %
    
    $
    27,219
    
    
    
    31.0
    %Malaysia
    
    
    2,712
    
    
    
    13.7
    
    
    
    13,490
    
    
    
    36.7
    
    
    
    10,616
    
    
    
    16.3
    
    
    
    34,736
    
    
    
    39.6Philippines
    
    
    3,260
    
    
    
    16.4
    
    
    
    *
    
    
    
    *
    
    
    
    *
    
    
    
    *
    
    
    
    *
    
    
    
    *Thailand
    
    
    2,399
    
    
    
    12.1
    
    
    
    *
    
    
    
    *
    
    
    
    *
    
    
    
    *
    
    
    
    *
    
    
    
    *Other
    
    
    7,658
    
    
    
    38.5
    
    
    
    8,647
    
    
    
    23.5
    
    
    
    28,148
    
    
    
    43.2
    
    
    
    25,836
    
    
    
    29.4Total
    
    $
    19,858
    
    
    
    100.0
    %
    
    $
    36,779
    
    
    
    100.0
    %
    
    $
    65,202
    
    
    
    100.0
    %
    
    $
    87,791
    
    
    
    100.0
    %
 
 *
    
    Less than 10% of total revenues 12




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Three Months
    
    Nine MonthsEnded
    
    EndedJune 30,
    
    June 30,2007
    
    2006
    
    2007
    
    2006Intersil Corporation
    
    
    *
    %
    
    
    10.4
    %
    
    
    *
    %
    
    
    *
    %National Semiconductor Corporation
    
    
    *
    
    
    
    *
    
    
    
    *
    
    
    
    10.2ON Semiconductor Corporation
    
    
    14.1
    
    
    
    *
    
    
    
    10.5
    
    
    
    *Texas Instruments Incorporated
    
    
    29.3
    
    
    
    55.0
    
    
    
    30.5
    
    
    
    51.4
 
 *
    
    Less than 10%. Comparison of Three and Nine Months Ended June 30, 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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##### 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, 2007, we retained
approximately $23.6 million of these net proceeds, none
of which were used during the three-month period ended
June 30, 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
 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: August 02, 2007
    By:
    /s/ Leonard A. FoxmanLeonard A. FoxmanChief Executive Officer and President 19




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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