Annual Reports

 
Quarterly Reports

  • 10-Q (Jun 8, 2011)
  • 10-Q (Mar 7, 2011)
  • 10-Q (Sep 2, 2010)
  • 10-Q (Jun 4, 2010)
  • 10-Q (Mar 5, 2010)
  • 10-Q (Sep 4, 2009)

 
8-K

 
Other

Verigy 10-Q 2006

 

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


FORM 10-Q


(MARK ONE)

 

 

 

x

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

 

 

 

 

 

FOR THE QUARTERLY PERIOD ENDED JULY 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: 000-52038


VERIGY LTD.

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

SINGAPORE

 

3825

(STATE OR OTHER JURISDICTION OF

 

(PRIMARY STANDARD INDUSTRIAL

INCORPORATION OR ORGANIZATION)

 

CLASSIFIED CODE NO.)

 

 

 

NO. 1 YISHUN AVE 7

 

 

SINGAPORE 768923

 

N/A

(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

 

(ZIP CODE)

 

REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE (+65) 6377-1688

(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST REPORT)


INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS.  YES  o   NO  x

INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS A LARGE ACCELERATED FILER, AN ACCELERATED FILER, OR NON-ACCELERATED FILER. SEE DEFINITION OF “ACCELERATED FILER AND LARGE ACCELERATED FILER” IN RULE 12b-2 OF THE EXCHANGE ACT. (CHECK ONE):

LARGE ACCELERATED FILER  o

 

ACCELERATED FILER  o

 

NON-ACCELERATED FILER  x

 

INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS A SHELL COMPANY (AS DEFINED IN RULE 12b-2 OF THE EXCHANGE ACT).  YES  o   NO  x

INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER’S CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE.

As of September 6, 2006, there were 58,651,559 ordinary shares of the company outstanding.

 







PART I — FINANCIAL INFORMATION

ITEM 1.                              CONDENSED COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

VERIGY LTD.

CONDENSED COMBINED AND CONSOLIDATED STATEMENTS OF OPERATIONS

(in millions, except per share amounts)

(Unaudited)

 

 

Three Months Ended
July 31,

 

Nine Months Ended
July 31,

 

 

 

2006

 

2005

 

2006

 

2005

 

Net revenue:

 

 

 

 

 

 

 

 

 

Products

 

$

181

 

$

93

 

$

482

 

$

224

 

Services

 

33

 

25

 

94

 

73

 

Total net revenue

 

214

 

118

 

576

 

297

 

 

 

 

 

 

 

 

 

 

 

Costs of sales (Note 3):

 

 

 

 

 

 

 

 

 

Cost of products

 

88

 

58

 

243

 

147

 

Cost of services

 

23

 

22

 

72

 

65

 

Total costs of sales

 

111

 

80

 

315

 

212

 

 

 

 

 

 

 

 

 

 

 

Operating expenses (Note 3):

 

 

 

 

 

 

 

 

 

Research and development

 

25

 

24

 

75

 

76

 

Selling, general and administrative

 

37

 

33

 

114

 

101

 

Restructuring charges

 

2

 

1

 

16

 

1

 

Separation costs

 

21

 

 

56

 

 

Total operating expenses

 

85

 

58

 

261

 

178

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from operations

 

18

 

(20

)

 

(93

)

Other income (expense), net

 

2

 

 

2

 

 

 

 

 

 

 

 

 

 

 

 

Income and loss before taxes

 

20

 

(20

)

2

 

(93

)

Provision for income taxes

 

7

 

2

 

16

 

11

 

Net income (loss)

 

$

13

 

$

(22

)

$

(14

)

$

(104

)

 

 

 

 

 

 

 

 

 

 

Net income (loss) per share – basis:

 

$

0.23

 

$

(0.44

)

$

(0.28

)

$

(2.08

)

 

 

 

 

 

 

 

 

 

 

Net income (loss) per share – diluted:

 

$

0.23

 

$

(0.44

)

$

(0.28

)

$

(2.08

)

 

 

 

 

 

 

 

 

 

 

Weighted average shares (in thousands) used in computing net income (loss) per share:

 

 

 

 

 

 

 

 

 

Basic

 

54,662

 

50,000

 

51,571

 

50,000

 

Diluted

 

54,681

 

50,000

 

51,571

 

50,000

 

 

The accompanying notes are an integral part of these condensed combined and consolidated financial statements.

3




VERIGY LTD.

CONDENSED COMBINED AND CONSOLIDATED BALANCE SHEETS

(in millions, except share amounts)

(Unaudited)

 

 

July 31,
2006

 

October 31,
2005

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

206

 

$

 

Trade accounts receivable, net

 

156

 

75

 

Related party accounts receivable

 

23

 

 

Inventory

 

79

 

110

 

Other current assets

 

36

 

14

 

Total current assets

 

500

 

199

 

Property, plant and equipment, net

 

36

 

18

 

Goodwill

 

18

 

17

 

Other long term assets

 

50

 

26

 

Total assets

 

$

604

 

$

260

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

69

 

$

21

 

Related party payable

 

14

 

 

Employee compensation and benefits

 

33

 

40

 

Deferred revenue

 

57

 

42

 

Income taxes and other taxes payable

 

8

 

32

 

Other accrued liabilities

 

14

 

23

 

Total current liabilities

 

195

 

158

 

 

 

 

 

 

 

Long-term liabilities

 

33

 

15

 

Total liabilities

 

228

 

173

 

 

 

 

 

 

 

Commitments and contingencies (Note 19 and 20)

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity

 

 

 

 

 

Owner’s net investment

 

 

86

 

Ordinary shares, no par value; 58,651,559 issued and outstanding at July 31, 2006

 

 

 

Additional paid in capital

 

358

 

 

Retained earnings

 

19

 

 

Accumulated other comprehensive income (loss)

 

(1

)

1

 

Total shareholders’ equity

 

376

 

87

 

Total liabilities and shareholders’ equity

 

$

604

 

$

260

 

 

The accompanying notes are an integral part of these condensed combined and consolidated financial statements.

4




VERIGY LTD.

CONDENSED COMBINED AND CONSOLIDATED STATEMENTS OF CASHFLOWS

(in millions)

(Unaudited)

 

 

Nine Months Ended
July 31,

 

 

 

2006

 

2005

 

Cash flows from operating activities:

 

 

 

 

 

Net loss

 

$

(14

)

$

(104

)

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

 

 

 

 

 

Depreciation and amortization

 

6

 

4

 

Excess and obsolete inventory-related charges

 

16

 

11

 

Loss on disposal of property, plant and equipment

 

3

 

 

Share-based compensation

 

8

 

 

Asset impairment and other exit costs

 

3

 

 

Pension curtailment and settlement net gains

 

(10

)

 

Restructuring charges pushed down by Agilent

 

3

 

 

Assets and liabilities retained by Agilent due to separation

 

82

 

 

Changes in assets and liabilities:

 

 

 

 

 

Trade accounts receivable

 

(81

)

(22

)

Related party receivable

 

(23

)

 

Inventory

 

15

 

(6

)

Accounts payable

 

48

 

(1

)

Employee compensation and benefits

 

(7

)

(4

)

Related party payable

 

14

 

 

Deferred revenue

 

15

 

6

 

Income taxes and other taxes payable

 

(24

)

8

 

Other current assets and accrued liabilities

 

(31

)

 

Other long term assets and long term liabilities

 

26

 

13

 

Net cash provided by (used in) operating activities

 

49

 

(95

)

Cash flows from investing activities:

 

 

 

 

 

Purchases of investments

 

 

(3

)

Investments in property, plant and equipment

 

(30

)

(7

)

Net cash used in investing activities

 

(30

)

(10

)

Cash flows from financing activities:

 

 

 

 

 

Net proceeds from sale of ordinary shares (IPO Proceeds)

 

121

 

 

Capital contributions by Agilent

 

19

 

 

Borrowings from Agilent

 

25

 

 

Repayment of debt to Agilent

 

(25

)

 

Distribution of share-based compensation (Note 7)

 

(7

)

 

Net Agilent invested equity

 

54

 

105

 

Net cash provided by financing activities

 

187

 

105

 

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

206

 

 

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$

206

 

$

 

 

 

 

 

 

 

Supplemental schedule of non-cash activities:

 

 

 

 

 

Deferred tax assets acquired upon separation

 

$

31

 

$

 

 

The accompanying notes are an integral part of these condensed combined and consolidated financial statements.

5




VERIGY LTD.

CONDENSED COMBINED AND CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(in millions, except number of shares in thousands)

(Unaudited)

 

 

Ordinary Shares

 

Owner’s Net
Investment

 

Retained
Earnings

 

Accumulated
Other
Comprehensive
Income (loss)

 

Total

 

 

 

Additional

Number

 

Paid –In

of Shares

 

Capital

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of October 31, 2005

 

 

$

 

$

86

 

$

 

$

1

 

$

87

 

Components of comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

 

 

(34

)

20

 

 

(14

)

Capital contribution from Agilent through separation

 

50,000

 

186

 

(52

)

 

(1

)

133

 

Issuance of ordinary shares to underwriters (IPO)

 

8,652

 

121

 

 

 

 

121

 

Capital contribution from Agilent

 

 

19

 

 

 

 

19

 

Loss on initialization of pension liability position

 

 

 

 

(1

)

 

(1

)

Deferred tax assets acquired upon separation

 

 

31

 

 

 

 

31

 

Deferred stock-based compensation (Verigy options)

 

 

1

 

 

 

 

1

 

Change in foreign currency translation

 

 

 

 

 

(1

)

(1

)

Balance as of July 31, 2006

 

58,652

 

$

358

 

$

 

$

19

 

$

(1

)

$

376

 

 

The accompanying notes are an integral part of these condensed combined and consolidated financial statements.

6




VERIGY LTD.

NOTES TO CONDENSED COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1. OVERVIEW AND BASIS OF PRESENTATION

Overview

Verigy (“we,” “us” or the “Company”) designs, develops and manufactures semiconductor test equipment and provides test system solutions that are used in the manufacture of System-on-a-Chip (SOC), System-in-a-Package (SIP), high-speed memory and memory devices.  In addition to test equipment, our solutions include consulting, service and support offerings such as start-up assistance, application services and system calibration and repair.

On August 15, 2005, Agilent Technologies Inc. announced its intention to separate our business into a stand-alone publicly traded company focused on technology and innovation in semiconductor testing.  As of May 31, 2006, we had issued 50,000,000 ordinary shares to our then sole shareholder, Agilent. The separation of our business from Agilent was completed on June 1, 2006.  Until the completion of our initial public offering (“IPO”) on June 16, 2006, we were a wholly owned subsidiary of Agilent.

Our registration statement on Form S-1 was declared effective on June 12, 2006 (File No. 333-132291). Pursuant to the registration statement, we offered and sold 8.5 million of our ordinary shares in the IPO at a price of $15 per share, which less underwriting discount and commission, resulted in aggregate net proceeds of approximately $118.6 million, net of approximately $9 million of underwriting discounts and commissions. On July 6, 2006, the underwriters of the IPO exercised a portion of their over-allotment option which resulted in the issuance of additional 151,559 shares and generated approximately $2.1 million in net proceeds. The remaining portion of the underwriters’ over-allotment has lapsed.  As a result, we have approximately 58.7 million ordinary shares outstanding as of July 6, 2006.  In addition, Agilent made a payment to us of $19.3 million on July 14, 2006, the amount by which the aggregate net proceeds of our IPO were less than $140 million.

We will release Agilent by October 31, 2007 from specified guarantees or other security obligations that Agilent has entered into or will enter into on our behalf.  These guarantees and security arrangements relate to real property lease deposits and guarantees, security for company credit card programs and other credit arrangements and required deposits with governmental trade and tax agencies.   Since Agilent will have no obligation to maintain any such guarantees or other security obligations on our behalf following October 31, 2007, we will be liable for these deposits and guarantees that are currently estimated to be approximately $13 million in aggregate. 

Verigy and Agilent entered into a master separation and distribution agreement prior to the completion of our initial public offering that contains the key provisions relating to the separation, initial public offering and the distribution, which is currently intended to occur by the end of fiscal year 2006.  The master separation and distribution agreement describes generally the agreements and other documents that were delivered on the separation date, including the ancillary agreements.  These ancillary agreements include the general assignment and assumption agreement, the tax sharing agreement, the employee matters agreement, the intellectual property matters agreement, the manufacturing trademark license agreement and the transition services agreement. Agilent has advised us that it currently intends to distribute to its shareholders all of our ordinary shares that it holds by the end of its fiscal year, October 31, 2006.  In addition, pursuant to the master separation and distribution agreement, we entered into a revolving credit facility with Agilent on the separation date.  As of June 16, 2006, we have used part of our proceeds to repay Agilent $25 million, the amounts owing under a short-term revolving credit facility entered into with Agilent on the date of our separation.

Our fiscal year end is October 31, and our fiscal quarters end on January 31, April 30, and July 31.

Basis of Presentation

Prior to June 1, 2006, we had operated as part of Agilent, and not as a stand-alone company. Therefore, since Verigy had no separate existence prior to June 1, 2006, there were no financial statements prepared prior to June 1, 2006. The accompanying condensed combined and consolidated financial statements have been derived in accordance with accounting principles generally accepted in the United States (“U.S.”). Financial statements prior to June 1, 2006 were derived from the accounting records of Agilent using the historical basis of assets and liabilities of Verigy.

We have prepared the accompanying interim financial data for the three and nine months ended July 31, 2006 and 2005 pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).  Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the U.S. have been condensed or omitted pursuant to such rules and regulations. The following discussion should be read in conjunction with the combined financial statements as included in our prospectus which was declared effective on June 12, 2006.  In the opinion of management, the accompanying interim condensed combined and consolidated financial statements contain all normal and recurring adjustments necessary to state fairly our condensed consolidated financial position as of July 31, 2006, condensed combined and consolidated results of

7




operations for the three and nine months ended July 31, 2006 and 2005, and cash flow activities for the nine months ended July 31, 2006 and 2005.

We historically have received substantial management and shared administrative services from Agilent, and we and Agilent engage in certain transactions.  Prior to our separation from Agilent, we had relied on Agilent for substantially all of our operational and administrative support.  The condensed combined financial statements prior to June 1, 2006 include allocations of certain Agilent corporate expenses, including information technology resources and support; finance, accounting, and auditing services; real estate and facility management services; human resources activities; certain procurement activities; treasury services, customer contract administration, legal advisory services, and Agilent Labs services.  We had benefited from Agilent agreements with third parties related to cost sharing arrangements covering branding and marketing expenses, intellectual property licenses and agreements related to the use of real property.

Management believes the assumptions and allocations underlying the condensed combined and consolidated financial statements are reasonable and appropriate under the circumstances.  The expenses and cost allocations have been determined on a basis we consider to be a reasonable reflection of the utilization of services provided or the benefit received by us during the periods presented. However, the amounts recorded for these transactions and allocations are not necessarily representative of the amounts that would have been reflected in the financial statements had we been an entity that operated independently of Agilent.  Our future results of operations which will reflect our separation from Agilent will include costs and expenses for us to operate as an independent company, and, consequently, these costs and expenses may be materially different than our historical results of operations, financial position, and cash flows.  Accordingly, the financial statements for these periods are not necessarily indicative of our future results of operations, financial position, and cash flows.

Agilent historically used a centralized approach to cash management and financing of its operations.  Transactions relating to Verigy prior to June 1, 2006 were accounted for through the Agilent invested equity account for Verigy.  Accordingly, none of the cash, cash equivalents or debt at the Agilent corporate level has been assigned to Verigy in the condensed combined financial statements prior to June 1, 2006.

Historically, Agilent provided funds to finance our working capital and other cash requirements, but we do not expect Agilent to provide any further funding to us. In the event we need to raise additional funds, we cannot be certain that we will be able to obtain additional financing on favorable terms, or at all. Our future capital requirements will depend on many factors, including the timing and extent of spending to support product development efforts, the expansion of sales and marketing activities, the timing of introductions of new products and enhancements to existing products, the costs to ensure access to adequate manufacturing capacity, market acceptance of our products and the cyclical and seasonal demand for our products. If we cannot raise funds on acceptable terms, if and when needed, we may not be able to develop or enhance our products and services, take advantage of future opportunities, grow our business or respond to competitive pressures, which could materially adversely affect our business, financial condition, cash flows and results of operations.

See Note 3, “Transactions with Agilent” for further information regarding the relationships we have with Agilent.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Combination

Our condensed combined and consolidated financial statements include the global historical assets, liabilities and operations. All significant intracompany transactions within Verigy have been eliminated. All significant transactions between us and other Agilent businesses are included in these condensed combined and consolidated financial statements. All intercompany transactions prior to our separation are considered to be effectively settled for cash in the condensed combined and consolidated statements of cash flows at the time the transaction is recorded. After the separation, transactions between Agilent and Verigy are accounted for through related party receivable and related party payable accounts.

Use of Estimates

The preparation of financial statements in accordance with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the amounts reported in our condensed combined and consolidated financial statements and accompanying notes. Management bases its estimates on historical experience and various other assumptions believed to be reasonable. Although these estimates are based on management’s knowledge of current events and actions that may impact us in the future, actual results may be different from the estimates. Our critical accounting policies are those that affect our financial statements materially and involve difficult, subjective or complex judgments by management. Those policies are revenue recognition, restructuring and asset impairment charges, inventory valuation, warranty, share-based compensation, retirement and post-retirement plan assumptions, valuation of goodwill and intangible assets and accounting for income taxes. Although these estimates are based on management’s knowledge of current events and actions that may impact the company in the future, actual results may be different from the estimates.

8




3. TRANSACTIONS WITH AGILENT

Intercompany and Related Party Transactions

We derived revenue from the sales of products to other Agilent businesses of $0.1 million and $0.6 million for the three months ended July 31, 2006 and 2005, respectively, and $1.1 million and $1.5 million for the nine months ended July 31, 2006 and 2005, respectively. The revenue prior to June 1, 2006 was recorded using a cost plus methodology and may not necessarily represent a price an unrelated third party would pay.

During the three months ended July 31, 2006 and 2005, we purchased materials from other Agilent businesses of approximately $1 million and $3 million, respectively. During the nine months ended July 31, 2006 and 2005, we purchased materials from other Agilent businesses of approximately $5 million and $6 million, respectively.  All purchases were at cost and were recorded in cost of products for the respective periods. 

Allocated Costs

The condensed combined and consolidated statements of operations include our direct expenses as well as allocations of expenses arising from shared services and infrastructure provided to us by Agilent. These allocated expenses include costs of centralized research and development, legal and accounting services, employee benefits, real estate and facilities, corporate advertising, insurance services, information technology, treasury and other corporate and infrastructure services. These expenses are allocated to us using estimates that we consider to be a reasonable reflection of the utilization of services provided to or benefits received by us. The allocation methods include headcount, square footage, actual consumption and usage of services, adjusted invested capital and others.

Allocated costs included in the accompanying condensed combined and consolidated statements of operations are as follows:

 

Three Months
Ended
July 31,

 

Nine Months
Ended
July 31,

 

 

 

2006

 

2005

 

2006

 

2005

 

 

 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

Cost of products

 

$

2

 

$

7

 

$

16

 

$

19

 

Research and development

 

1

 

5

 

10

 

14

 

Selling, general and administrative

 

4

 

13

 

39

 

38

 

Other expense, net

 

1

 

 

1

 

 

Total allocated costs

 

$

8

 

$

25

 

$

66

 

$

71

 

 

Since our separation from Agilent is effective June 1, 2006, the three months ended July 31, 2006 only includes one month (May) of allocated costs.

Related Party Accounts Receivable and Accounts Payable

 

July 31,
2006

 

October 31,
2005

 

 

 

(in millions)

 

Related Party Accounts Receivable from Agilent

 

$

23

 

$

 

 

 

 

 

 

 

Related Party Accounts Payable to Agilent

 

$

14

 

$

 

 

Related party accounts receivable from Agilent consists of approximately $13 million of cash collected by Agilent from our customers that had not yet been remitted to Verigy and approximately $10 million of payments due to us from Agilent related to the remaining funding for our pension and employee benefit plans in accordance with the master separation agreement. The cash collected from our customers is transferred to us on a weekly basis while the funding for our pension and employee benefit related plans is expected to occur after the final actuarial report is issued and agreed upon by both Verigy and Agilent as soon as practicable after the distribution date.

Related party accounts payable consists primarily of accrued liabilities for transition-related services provided to us by Agilent for June and July 2006. For the months of June and July, Agilent billed us for our use of their shared services under the transition services agreement and totalled approximately $14 million.

See Note 16, Separation Costs, for separation cost details and net gains associated with curtailment and settlement.

9




Agreements with Agilent

We share and operate under numerous agreements executed by Agilent with third parties, including but not limited to purchasing, manufacturing, supply, and distribution agreements; use of facilities owned, leased, and managed by Agilent; and software, technology and other intellectual property agreements.

4. IPO AND SEPARATION FROM AGILENT

On August 15, 2005, Agilent announced its intention to separate our business into a stand-alone publicly traded company. On June 12, 2006, we completed our initial public offering (“IPO”) of 8.5 million ordinary shares at a price of $15 per share, which less underwriting discount and commission, resulted in aggregate net proceeds of approximately $118.6 million. On July 6, 2006, the underwriters of the IPO exercised a portion of their over-allotment option which resulted in the issuance of additional 151,559 shares and generated approximately $2.1 million in net proceeds. The remaining portion of the underwriters’ over-allotment option has lapsed. As part of the offering, Agilent made a one-time payment to us of $19.3 million, the amount by which our net proceeds from the IPO were less than $140 million. Following the offering, Agilent owned approximately 50 million ordinary shares or approximately 85 percent of Verigy’s ordinary shares.

Verigy and Agilent, and, in some cases, their respective subsidiaries, entered into agreements in connection with the June 1, 2006 separation of our business from Agilent, including a master separation and distribution agreement. These agreements cover a variety of matters, including the transfer, ownership and licensing of intellectual property and other assets and liabilities relating to our business, the use of shared facilities, employee and tax-related matters and the transitional services. In addition, a loan agreement between Agilent and Veirgy, provided for a $25 million revolving credit facility from Agilent to Verigy on the separation date with interest at one-month LIBOR plus 50 basis points. As of July 31, 2006, all amounts were paid back and the agreement was terminated. The agreements relating to the separation from Agilent were negotiated and entered into in the context of a parent-subsidiary relationship.

We will release Agilent by October 31, 2007 from specified guarantees or other security obligations that Agilent has entered into or will enter into on our behalf.  These guarantees and security arrangements relate to real property lease deposits and guarantees, security for company credit card programs and other credit arrangements and required deposits with governmental trade and tax agencies.   Since Agilent will have no obligation to maintain any such guarantees or other security obligations on our behalf following October 31, 2007, we will be liable for these deposits and guarantees that are currently estimated to be approximately $13 million in aggregate. 

For up to two years following our separation from Agilent, Agilent will continue to provide services and access to resources necessary for Verigy under the transition services agreement. In general, these services and resources include facilities management, site information technology infrastructure, use of various applications and support systems, as well as employee related services for transitional employees remaining with Agilent. Under the transition services agreement, Verigy has the ability to negotiate with Agilent for the provision of additional transition services not set forth in the agreement, which additional services will generally be subject to the provisions of the agreement. The agreement will terminate, and Agilent will have no obligation to provide any further transition services to Verigy, two years after the separation date. For the three months ended July 31, 2006, the total transition services costs were approximately $14 million.

The distribution of Agilent’s shares of Verigy is expected to be complete by the end of fiscal 2006. However, there are various conditions to the completion of the distribution and Agilent will determine the timing, structure and all terms of the distribution taking into account factors such as market conditions. Agilent will not be obligated to complete the distribution, and the distribution may not occur by the fiscal year end or at all.

Indemnifications to Verigy

In connection with our spin-off, Agilent has agreed to indemnify us, for certain liabilities that were excluded from the separation and were not transferred to us, for specified IPO-related liabilities and other specified items.

5. NEW ACCOUNTING PRONOUNCEMENTS

In December 2004, FASB issued Statement of Financial Accounting Standards No. 123 (Revised 2004) “Share-Based Payment” (“SFAS 123R”). SFAS 123R addresses all forms of share-based payment (“SBP”) awards, including shares issued under employee stock purchase plans, stock options, restricted stock and stock appreciation rights. SFAS 123R requires us to expense SBP awards with compensation cost for SBP awards based on fair value. In March 2005, the Securities and Exchange Commission (“SEC”) released Staff accounting Bulletin No. 107 “Share-Based Payment” (“SAB No. 107”), which expresses views of the SEC Staff about the application of SFAS 123R.

We adopted the provisions of SFAS 123R using the modified prospective transition method beginning November 1, 2005, the

10




first day of the first quarter of fiscal 2006. In accordance with that transition method, we have not restated prior periods for the effect of compensation expense calculated under SFAS 123R. We have selected the Black-Scholes option-pricing model as the most appropriate method for determining the estimated fair value of all our awards.

Under this new standard, our estimate of compensation expense will require a number of complex and subjective assumptions including our share price volatility, employee exercise patterns (expected life of the options), future forfeitures and related tax effects. Compensation expense for share-based equity awards issued after November 1, 2005 is recognized on a straight-line basis over the vesting period of the award. For awards issued prior to November 1, 2005, we recognize SBP compensation expense based on the accelerated method described in FASB Interpretation No. 28 “Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans” (“FIN 28”). The adoption of SFAS 123R also requires additional accounting related to income taxes as well as additional disclosure related to the cash flow effects resulting from share-based compensation. We recorded approximately $1.7 million and $8.2 million charge for share compensation expenses of the Agilent and Verigy options for the three and nine months ended July 31, 2006, respectively. 

Upon final distribution of Verigy shares by Agilent, unvested Agilent stock options held by Verigy employees will terminate. To the extent options are vested as of the date of distribution, Verigy employees, except those who are retirement-eligible, will have a period of three months in which to exercise the Agilent options before they terminate. Retirement eligible employees will have a period of up to three years in which to exercise the Agilent options before they terminate. Exercise of Agilent options by Verigy employees will have no impact on our financial statements or on our outstanding ordinary shares. To the extent that the Agilent options were not vested as of the distribution date, Verigy will replace the Agilent options with new Verigy options based on a conversion ratio determined at the distribution date. The newly issued Verigy options will retain the same terms and conditions, including the vesting term as the corresponding Agilent options which they will replace.

In November 2005, the FASB issued FASB Staff Position (“FSP”) FAS No. 123(R)-3, “Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards.” (“FSP FAS 123(R)-3”) FSP FAS 123(R)-3 provides a practical exception when a company transitions to the accounting requirements in SFAS 123R. SFAS 123R requires a company to calculate the pool of excess tax benefits available to absorb tax deficiencies recognized subsequent to adopting SFAS 123R, termed the Additional Paid in Capital Pool “APIC Pool”, assuming the company had been following the recognition provisions prescribed by FAS 123. We have elected to use the guidance in FSP FAS 123(R)-3 to calculate our APIC Pool. FSP FAS 123(R)-3 is effective immediately. The adoption of the FSP did not have an impact on our overall results of operations or financial position.

In March 2006, the FASB issued an exposure draft of a proposed amendment to SFAS No. 87, “Employers’ Accounting for Pensions,” SFAS No. 88, “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits,” SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions” and SFAS No. 132(R), “Employers’ Disclosures about Pensions and Other Postretirement Benefits—an amendment of FASB Statements No. 87, 88, and 106.”  The proposed amendment would improve existing reporting for defined benefit postretirement plans.  Under the exposure draft, proposed amendment would become effective for fiscal years ending after December 15, 2006, generally on a retrospective basis.  We will evaluate the impact of any change in accounting standards on our results of operations or financial position when the final interpretation is issued.

In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109” (“FIN 48”). This interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes.” It prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position as well as provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The provisions of FIN 48 will be effective for fiscal years beginning after December 15, 2006 and are to be applied to all tax positions upon initial adoption of this standard. Only tax positions that meet the more-likely-than-not recognition threshold at the effective date may be recognized or continue to be recognized upon adoption of FIN 48. The cumulative effect of applying the provisions of FIN 48 should be reported as an adjustment to the opening balance of retained earnings (or other appropriate components of equity) for that fiscal year. We expect to adopt this pronouncement beginning in our fiscal year 2008 and we have not yet determined the potential financial impact of adopting FIN 48.

In June 2006, the FASB issued Emerging Issues Tax Force (EITF) Issue No. 06-3, “How Sales Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (i.e. Gross Versus Net Presentation)” (“EITF 06-3”).  EITF 06-3 requires disclosure of accounting policy regarding the gross or net presentation of point-of-sales taxes such as sales tax and value-added tax. If taxes included in gross revenues are significant, the amount of such taxes for each period for which an income statement is presented should also be disclosed. EITF 06-3 will be effective for the first annual or interim reporting period beginning after December 15, 2006. We will be adopting this pronouncement beginning in our fiscal year 2007 and do not currently believe that it will have a material impact on our financial statements.

11




6. NET INCOME (LOSS) PER SHARE

Basic net income (loss) per share is calculated by dividing net income (loss) by the weighted-average number of ordinary shares outstanding. The weighted-average number of ordinary shares outstanding does not include the dilutive effect of ordinary equivalent shares, such as share options.  Diluted net income (loss) per share is calculated by dividing net income (loss) by the weighted-average ordinary shares outstanding plus the dilutive effect of ordinary equivalent shares, such as share options.  Diluted net income (loss) per share does not include outstanding Agilent options held by Verigy employees, as these are not options to purchase Veirgy stock.  The calculation of diluted net income (loss) per share excludes shares of potential ordinary shares if the effect is anti-dilutive.

The following is a reconciliation of the basic and diluted net income (loss) per share computations for the periods presented below:

 

Three Months Ended

 

Nine Months Ended

 

 

 

July 31,

 

July 31,

 

 

 

2006

 

2005

 

2006

 

2005

 

Basic Net Income (loss) Per Share

 

 

 

 

 

 

 

 

 

Net income (loss) (in millions)

 

$

13

 

$

(22

)

$

(14

)

$

(104

)

Weighted average number of ordinary shares

 

54,662

 

50,000

 

51,571

 

50,000

 

Basic net income (loss) per share

 

$

0.23

 

$

(0.44

)

$

(0.28

)

$

(2.08

)

 

 

 

 

 

 

 

 

 

 

Diluted Net Income (loss) Per Share

 

 

 

 

 

 

 

 

 

Net income (loss) (in millions)

 

$

13

 

$

(22

)

$

(14

)

$

(104

)

Weighted average number of ordinary shares

 

54,662

 

50,000

 

51,571

 

50,000

 

Potentially dilutive common stock equivalents – stock options and other employee stock plans

 

19

 

 

 

 

Total shares for purpose of calculating diluted net income (loss) per share

 

54,681

 

50,000

 

51,571

 

50,000

 

Diluted net income (loss) per share

 

$

0.23

 

$

(0.44

)

$

(0.28

)

$

(2.08

)

 

 

 

 

 

 

 

 

 

 

Weighted average shares are presented in thousands.

 

 

 

 

 

 

 

 

 

 

The dilutive effect of outstanding options and restricted stock units is reflected in diluted net income per share by application of the treasury stock method, which includes consideration of share-based compensation required by SFAS No. 123(R).

The following table presents options to purchase ordinary shares, which were not included in the computation of diluted net income per share because they were anti-dilutive.

 

 

Three Months Ended
July 31,

 

Nine Months Ended
July 31,

 

 

 

2006

 

2005

 

2006

 

2005

 

Non-qualified share options

 

 

 

 

 

 

 

 

 

Number of options to purchase ordinary shares (in thousands)

 

1,200

 

 

1,200

 

 

Weighted-average exercise price

 

$

15

 

$

 

$

15

 

$

 

Average common stock price

 

$

15

 

$

 

$

15

 

$

 

 

 

 

 

 

 

 

 

 

 

Restricted share units

 

 

 

 

 

 

 

 

 

Number of restricted share units (in thousands)

 

141

 

 

141

 

 

Weighted-average exercise price

 

$

15

 

$

 

$

15

 

$

 

Average common stock price

 

$

15

 

$

 

$

15

 

$

 

 

7. SHARE-BASED COMPENSATION

As of November 1, 2005, we adopted the provisions of SFAS No. 123 (R) which requires the measurement and recognition of compensation expense for all share-based payment awards made to our employees and directors including employee stock option awards and employee stock purchases made under our Employee Stock Purchase Plan (“ESPP”).

Share-Based Compensation for Newly Issued Verigy Options

Following our registration statement on Form S-1 effective date, June 12, 2006, certain of our employees and directors were granted non-qualified share options and restricted share units.  For the newly issued Verigy options, we have recognized compensation expense based on the estimated grant date fair value method required under SFAS No. 123 (R) using a straight-line amortization method. As SFAS No. 123 (R) requires that share-based compensation expense be based on awards that are ultimately expected to vest, estimated share-based compensation for the three and nine month periods ended July 31, 2006 has been reduced for estimated forfeitures.  Verigy expenses restricted share units based on fair market value of the shares at the date of grant over the period which the restrictions lapse.

12




Share-Based Payment Award Activity Related to Verigy Options

The following table summarizes equity share-based payment award activity for the nine months ended July 31, 2006:

 

 

Shares

 

Weighted
Average
Exercise Price

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

Outstanding as of October 31, 2005

 

 

 

Granted

 

1,202

 

$

15

 

Exercised

 

 

 

Cancellations

 

(2

)

$

15

 

Outstanding as of July 31, 2006

 

1,200

 

$

15

 

 

The following table summarizes information about all options to purchase shares of Verigy ordinary shares outstanding at July 31, 2006:

 

 

 

Options Outstanding

 

 

 

Range of
Exercise Prices

 

Number
Outstanding

 

Weighted
Average
Remaining
Contractual
Life

 

Weighted
Average
Exercise
Price

 

Aggregate
Intrinsic Value

 

 

 

(in thousands)

 

 

 

 

 

(in thousands)

 

$       0 – 15

 

1,197

 

6.9 years

 

$

15

 

$

23

 

$15.01 – 20

 

3

 

7.0 years

 

$

16

 

 

 

 

1,200

 

6.9 years

 

$

15

 

$

23

 

 

The aggregate intrinsic value in the table above represents the total pretax intrinsic value, based on Verigy’s closing stock price of $14.95 at July 31, 2006, which would have been received by award holders had all award holders exercised their awards that were in-the-money as of that date.  As of July 31, 2006, none of the Verigy options were exercisable.  Pursuant to the vesting schedule for the director and employee options granted to date by Verigy, the first vesting date for any grant is January 8, 2007.

Impact of the Adoption of SFAS No. 123 (R) Related to Newly Issued Verigy Options

The impact on our results for share-based compensation for Verigy options for the three and nine month periods ended July 31, 2006 was as follows:

 

Three Months

 

Nine Months

 

 

 

Ended

 

Ended

 

 

 

July 31,

 

July 31,

 

 

 

2006

 

2006

 

 

 

(in millions, except per share data)

 

 

 

 

 

 

 

Cost of products and services

 

$

0.1

 

$

0.1

 

Research and development

 

0.1

 

0.1

 

Selling, general and administrative

 

0.4

 

0.4

 

Total share-based compensation expense

 

$

0.6

 

$

0.6

 

 

 

 

 

 

 

Impact of share-based compensation expense related to Verigy options on our net income (loss) per share:

 

 

 

 

 

Basic

 

$

(0.01

)

$

(0.01

)

Diluted

 

$

(0.01

)

$

(0.01

)

 

For the three months ended July 31, 2006, we did not capitalize any share-based compensation within inventory.  For the nine months ended July 31, 2006, share-based compensation capitalized within inventory was insignificant.

The weighted average grant date fair value of awards related to Verigy options, as determined under SFAS No. 123 (R), granted during the three and nine month periods ended July 31, 2006 was $7.28 and $7.28 per share, respectively.  For the three and nine months ended July 31, 2006, the tax benefit realized from exercised stock options and similar awards was insignificant. As of July 31, 2006, the total unrecorded deferred share-based compensation balance for unvested shares, net of expected forfeitures was approximately $10.9 million.

13




Valuation Assumptions for Verigy Options

The fair value of options granted was estimated at grant date using a Black-Scholes options-pricing model with the following weighted-average assumptions:

 

Three Months Ended
July 31, 2006

 

Nine Months Ended
July 31, 2006

 

 

 

 

 

 

 

Risk-free interest rate for options

 

5.0

%

5.0

%

Risk-free interest rate for the ESPP

 

5.0

%

5.0

%

Dividend yield

 

0

%

0

%

Volatility for options

 

55.9

%

55.9

%

Volatility for the ESPP

 

38.7

%

38.7

%

 

 

 

 

 

 

Expected option life

 

4.10 years

 

4.10 years

 

Expected life for the ESPP

 

6 months

 

6 months

 

 

The Black-Scholes model requires the use of highly subjective and complex assumptions, including the option’s expected life and the price volatility of the Company’s underlying stock.  Because we did not have historical data, we used data from peer companies to determine our assumptions for the expected option life and the volatility of our stock price.  For the risk-free interest rate, we used the rate of return on US Treasury Strips as of June 12, 2006 with maturities commensurate with expected option life assumptions.

Share-Based Compensation for Agilent Options Held by Verigy Employees

Share-based compensation. Prior to our separation from Agilent, our employees participated in Agilent’s stock-based compensation plans. Until November 1, 2005, we accounted for stock-based awards, based on Agilent’s stock, using the intrinsic value method of accounting in accordance with Accounting Principles Board Opinion No. 25 “Accounting for Stock Issued to Employees” (“APB 25”) and related interpretations. Under the intrinsic value method, we recorded compensation expense related to stock options in our condensed combined and consolidated statements of operations when the exercise price of our employee stock-based award was less than the market price of the underlying Agilent stock on the date of the grant. We had no stock option expenses where the exercise price was less than the market price on the date of the grant in any of the periods presented.

Share-Based Payment Award Activity Related to Agilent Options Held by Verigy Employees

The following table summarizes equity share-based payment award activity for the nine months ended July 31, 2006:

 

 

Shares

 

Weighted
Average
Exercise Price

 

 

 

(in thousands)

 

 

 

 

 

 

 

Outstanding as of October 31, 2005

 

4,498

 

$

28

 

Granted

 

584

 

$

34

 

Exercised

 

(1,063

)

$

25

 

Cancellations

 

(233

)

$

28

 

Net Transfer Outs - Agilent employees

 

(1,010

)

$

29

 

Outstanding as of July 31, 2006

 

2,776

 

$

30

 

 

The following table summarizes information about all options to purchase shares of Agilent common stock outstanding at July 31, 2006:

 

 

 

 

Options Outstanding

 

 

 

 

 

Options Exercisable

 

 

 

Range of
Exercise Prices

 

Number
Outstanding

 

Weighted
Average
Remaining
Contractual
Life

 

Weighted
Average
Exercise
Price

 

Aggregate
Intrinsic
Value

 

Number
Exercisable

 

Weighted
Average
Remaining
Contractual
Life

 

Weighted
Average
Exercise
Price

 

Aggregate
Intrinsic
Value

 

 

 

(in thousands)

 

 

 

 

 

(in thousands)

 

(in thousands)

 

 

 

 

 

(in thousands)

 

$    0 – 15

 

58

 

6.1 years

 

$

13

 

$

888

 

40

 

6.1 years

 

$

13

 

$

610

 

$15.01 – 25

 

747

 

7.6 years

 

$

20

 

$

6,006

 

231

 

6.9 years

 

$

19

 

$

2,079

 

$25.01 – 30

 

596

 

5.0 years

 

$

27

 

$

801

 

570

 

4.8 years

 

$

27

 

$

729

 

$30.01 – 40

 

1,142

 

7.4 years

 

$

34

 

 

399

 

4.8 years

 

$

35

 

 

$40.01 – 50

 

157

 

2.7 years

 

$

44

 

 

157

 

2.7 years

 

$

44

 

 

$50 and over

 

76

 

3.4 years

 

$

71

 

 

75

 

3.4 years

 

$

71

 

 

 

 

2,776

 

6.5 years

 

$

30

 

$

7,695

 

1,472

 

4.9 years

 

$

32

 

$

3,418

 

 

14




The aggregate intrinsic value in the table above represents the total pretax intrinsic value, based on Agilent’s closing stock price of $28.44 at July 31, 2006, which would have been received by award holders had all award holders exercised their awards that were in-the-money as of that date. The total number of in-the-money awards exercisable as of July 31, 2006 was approximately 0.8 million. The aggregate intrinsic value of awards exercised during the three and nine months ended July 31, 2006 was $0.3 million and $16.3 million, respectively.

Impact of the Adoption of SFAS No. 123 (R) Related to Agilent Options Held by Verigy Employees

Agilent adopted SFAS No. 123 (R) using the modified prospective transition method beginning November 1, 2005. Accordingly, during the nine months ended July 31, 2006, we recorded share-based compensation expense for awards granted prior to, but not yet vested, as of November 1, 2005 as if the fair value method required for pro forma disclosure under SFAS No. 123 was in effect for expense recognition purposes, adjusted for estimated forfeitures. For these awards, we have continued to recognize compensation expense using the accelerated amortization method under FIN 28. For share-based awards granted after November 1, 2005, we have recognized compensation expense based on the estimated grant date fair value method required under SFAS No. 123 (R). For these awards we have recognized compensation expense using a straight-line amortization method. As SFAS No. 123 (R) requires that share-based compensation expense be based on awards that are ultimately expected to vest, estimated share-based compensation for the three and nine months ended July 31, 2006 has been reduced for estimated forfeitures.

We recorded the distribution of share-based compensation expenses for Agilent options as an increase in Agilent’s invested equity in Verigy.

The calculations are based on Agilent stock options held by our employees and Agilent’s assumptions. At the distribution date, employees will have a period of 3 months in which to exercise their vested Agilent options. To the extent that our employees’ Agilent options are unvested as of the distribution date, Verigy will replace the Agilent options with new Verigy options using a conversion ratio determined at the distribution date. The ratio will be based upon the average of the high and low of the stock price of Agilent common stock on the trading day before the distribution date compared to the average of the high and low share price of our ordinary shares on the distribution date. After the separation, our option program and practices may, or may not, be similar to Agilent’s. As a result of these changes, the expense associated with future options may be substantially different than the historical data.

The impact on our results for share-based compensation for Agilent options for the three and nine months ended July 31, 2006 was as follows:

 

Three Months

 

Nine Months

 

 

 

Ended

 

Ended

 

 

 

July 31,

 

July 31,

 

 

 

2006

 

2006

 

 

 

(in millions, except per share data)

 

 

 

 

 

 

 

Cost of products and services

 

$

0.3

 

$

1.5

 

Research and development

 

0.1

 

1.0

 

Selling, general and administrative

 

0.7

 

5.1

 

Total share-based compensation expense

 

$

1.1

 

$

7.6

 

 

 

 

 

 

 

Impact of share-based compensation expense related to Agilent options on our net income (loss) per share:

 

 

 

 

 

Basic

 

$

(0.02

)

$

(0.15

)

Diluted

 

$

(0.02

)

$

(0.15

)

 

For the three and nine months ended July 31, 2006, our share-based compensation capitalized within inventory was insignificant.

For the three months ended July 31, 2006, there were no Agilent option grants for Verigy employees. The weighted average grant date fair value of awards related to Agilent options, as determined under SFAS No. 123 (R), granted during the nine months ended July 31, 2006, was $10.38 per share.  For the three and nine months ended July 31, 2006, the tax benefit realized from exercised stock options and similar awards was insignificant. As of July 31, 2006, the total unrecorded deferred share-based compensation balance for unvested shares, net of expected forfeitures was insignificant.

15




Valuation Assumptions for Agilent Options Held by Verigy Employees

The fair value of options granted was estimated at grant date using a Black-Scholes options-pricing model with the following weighted-average assumptions:

 

Three Months Ended

 

Nine Months Ended

 

 

 

July 31,

 

July 31,

 

 

 

2006

 

2005

 

2006

 

2005

 

 

 

 

 

 

 

 

 

 

 

Risk-free interest rate for options

 

5.0

%

3.9

%

4.3

%

3.5

%

Risk-free interest rate for the ESPP

 

5.0

%

3.3

%

4.5

%

2.4

%

Dividend yield

 

0

%

0

%

0

%

0

%

Volatility for options

 

31

%

31

%

29

%

39

%

Volatility for the ESPP

 

26

%

26

%

29

%

37

%

Expected option life

 

4.25 years

 

4 years

 

4.25 years

 

4 years

 

Expected life for the ESPP

 

6 months

 

6 months –
1.5 years

 

6 months –
1 year

 

6 months –
2 years

 

 

The Black-Scholes model requires the use of highly subjective and complex assumptions, including the option’s expected life and the price volatility of the underlying stock.  Beginning November 1, 2005, the expected stock price volatility assumption was determined using the implied volatility for Agilent’s stock. Prior to the adoption of SFAS No. 123 (R), a combination of historical and implied volatility was used in deriving our expected volatility assumption. We have determined that implied volatility is more reflective of market conditions and a better indicator of expected volatility than a combined method of determining volatility.

Pro forma information.  Pro forma net income (loss) information, as required by Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation,” (“SFAS No. 123”) has been determined as if we had accounted for the employee stock options we granted, including shares issuable to our employees under the Agilent Employee Stock Purchase Plan, and the Option Exchange Program, under SFAS No. 123’s fair value method.

The pro forma information for the three and nine months ended July 31, 2005 was as follows:

 

Three Months

 

Nine Months

 

 

 

Ended

 

Ended

 

 

 

July 31,

 

July 31,

 

 

 

2005

 

2005

 

 

 

(in millions, except per share data)

 

 

 

 

 

 

 

Net loss as reported

 

$

(22

)

$

(104

)

SFAS No. 123 based compensation

 

(4

)

(14

)

Tax benefit

 

 

1

 

Net loss – pro forma

 

$

(26

)

$

(117

)

 

 

 

 

 

 

Net loss per share, basic and diluted:

 

 

 

 

 

As reported

 

$

(0.44

)

$

(2.08

)

Pro forma

 

$

(0.52

)

$

(2.34

)

 

8. INVENTORY

 

July 31,
2006

 

October 31,
2005

 

 

 

(in millions)

 

Finished goods

 

$

41

 

$

33

 

Work in progress

 

6

 

9

 

Raw materials

 

32

 

68

 

Total inventory

 

$

79

 

$

110

 

 

Finished goods inventory includes demonstration products of $18 million as of July 31, 2006, and $20 million as of October 31, 2005. Effective June 1, 2006, we sold approximately $19 million of raw material inventory to Flextronics for approximately net book value.  See Note 18 “Flextronics” for further details.

16




9. OTHER CURRENT ASSETS

 

July 31,
2006

 

October 31,
2005

 

 

 

(in millions)

 

Prepaid taxes

 

$

3

 

$

8

 

Other prepayments

 

4

 

2

 

Sundry receivables

 

25

 

 

Other

 

4

 

4

 

Total other current assets

 

$

36

 

$

14

 

 

The sundry receivables balance as of July 31, 2006, is primarily composed of sundry receivables from the sale of approximately $19 million of raw material inventory and approximately $2 million of machinery and equipment to Flextronics effective June 1, 2006. See Note 18 “Flextronics” for further details.

10. PROPERTY, PLANT AND EQUIPMENT, NET

 

July 31,
2006

 

October 31,
2005

 

 

 

(in millions)

 

Buildings and leasehold improvements

 

$

3

 

$

1

 

Software

 

21

 

4

 

Machinery and equipment

 

43

 

55

 

Total property, plant and equipment

 

67

 

60

 

 

 

 

 

 

 

Accumulated depreciation and amortization

 

(31

)

(42

)

Total property, plant and equipment, net

 

$

36

 

$

18

 

 

The significant increase in capitalized software during the nine months ended July 31, 2006, is primarily related to the implementation of our new enterprise resource planning system.

11. OTHER LONG TERM ASSETS

 

July 31,
2006

 

October 31,
2005

 

 

 

(in millions)

 

Deferred tax assets

 

$

31

 

$

8

 

Pension assets

 

 

3

 

Prepaid taxes

 

 

2

 

Investments

 

4

 

3

 

Other

 

15

 

10

 

Total other long term assets

 

$

50

 

$

26

 

 

Our investments consist of investments in private companies accounted for using the cost method as we have no significant influence over the investee. All of our investments are subject to periodic impairment review, which requires significant judgment to identify events or circumstances that would likely have a significant adverse effect on the future use of the investment. Charges related to other than temporary impairments were $0.3 million in fiscal 2005. This impairment charge was included in other income (expense), net in the combined statements of operations. No impairment charges were recorded in the other periods presented.

Upon our separation from Agilent, we did not retain any pre-separation deferred tax assets or liabilities. The $31 million deferred tax assets as of July 31, 2006, pertains solely to temporary differences between the book and tax basis of the net assets which were acquired upon our separation.

Information about our pension plans and associated assets are presented in Note 15, “Retirement and Post-Retirement Pension Plans”.

17




12. GOODWILL AND PURCHASED INTANGIBLE ASSETS

A summary of our goodwill activity for the nine months ended July 31, 2006 and 2005 is shown in the table below:

 

Nine Months Ended July 31,

 

 

 

2006

 

2005

 

 

 

(in millions)

 

 

 

 

 

 

 

Beginning balance at November 1

 

$

17

 

$

18

 

Currency translation adjustment

 

1

 

(1

)

Ending balance at July 31

 

$

18

 

$

17

 

 

13. GUARANTEES

Standard Warranty

A summary of our standard warranty accrual activity for the nine months ended July 31, 2006 and 2005 is shown in the table below:

 

Nine Months Ended July 31,

 

 

 

2006

 

2005

 

 

 

(in millions)

 

Beginning balance at November 1,

 

$

6

 

$

7

 

Accruals for warranties issued during the period

 

8

 

5

 

Accruals related to pre-existing warranties (including changes in estimates)

 

(1

)

(1

)

Settlements made during the period

 

(7

)

(6

)

Ending balance at July 31,

 

$

6

 

$

5

 

 

In our condensed combined and consolidated balance sheets, standard warranty accrual is presented in other accrued liabilities.

   Extended Warranty

A summary of our extended warranty deferred revenue activity for the nine months ended July 31, 2006 and 2005 is shown in the table below:

 

Nine Months Ended July 31,

 

 

 

2006

 

2005

 

 

 

(in millions)

 

Beginning balance at November 1,

 

$

13

 

$

13

 

Recognition of revenue

 

(5

)

(4

)

Deferral of revenue for new contracts

 

9

 

3

 

Ending balance at July 31,

 

$

17

 

$

12

 

 

In our condensed combined and consolidated balance sheets, current deferred revenue is presented separately and long-term deferred revenue is included in long-term liabilities.

Indemnifications

As is customary in our industry and as provided for in local law in the U.S. and other jurisdictions, many of our standard contracts provide remedies to our customers and others with whom we enter into contracts, such as defense, settlement, or payment of judgment for intellectual property claims related to the use of our products. From time to time, we indemnify customers, as well as our suppliers, contractors, lessors, lessees, companies that purchase our assets and others with whom we enter into contracts, against combinations of loss, expense, or liability arising from various triggering events related to the sale and the use of our products, the use of their goods and services, the use of facilities and state of our owned facilities, the state of the assets that we sell and other matters covered by such contracts, usually up to a specified maximum amount. In addition, from time to time, we also provide protection to these parties against claims related to undiscovered liabilities, additional product liability or environmental obligations. In our experience, claims made under such indemnifications are rare and the associated estimated fair value of the liability is not material.

Under the separation agreements we entered into with Agilent, we have agreed to indemnify Agilent in connection with

18




our activities conducted prior to and following our separation from Agilent in connection with our business and the liabilities that Verigy specifically assumed under the agreements. These indemnifications cover a variety of aspects of our business, including, but not limited to, employee, tax, intellectual property and environmental matters.

14. RESTRUCTURING AND ASSET IMPAIRMENT

Agilent’s Plans

Agilent launched a new restructuring program in 2005 to align its workforce with its smaller organization size after the announced sale of its semiconductor products business, completed on December 1, 2005, and its announced intention to spin Verigy off. Since October 2005, we have, reduced our workforce by approximately 200 people to approximately 1,450 employees as of July 31, 2006, primarily through attrition and involuntary terminations.

Summary information for the Agilent’s 2005 Plan

A summary of Agilent’s 2005 Plan restructuring activity during 2006 is shown in the table below:

 

 

Workforce
Reduction

 

Asset
Impairment
and
Consolidation
of Excess
Facilities

 

Total

 

 

 

(in millions)

 

Balance at October 31, 2005

 

$

1

 

$

 

$

1

 

Total charges including amount allocated by Agilent

 

14

 

3

 

17

 

Less allocated and paid by Agilent

 

(3

)

(3

)

(6

)

Less cash payments

 

(9

)

 

(9

)

Balance at April 30, 2006

 

3

 

 

3

 

Total restructuring charges allocated by Agilent

 

3

 

 

3

 

Less restructuring liabilities retained by Agilent

 

(6

)

 

(6

)

Balance at July 31, 2006

 

$

 

$

 

$

 

 

We had no accrued restructuring liability as of July 31, 2006, compared to $1 million liability as of October 31, 2005 related to the Agilent 2005 Restructuring Plan.  In accordance with the separation agreements with Agilent, Agilent will retain and pay for all restructuring liabilities associated with the 2005 restructuring plan.

A summary of the statement of operations impact of the charges resulting from all restructuring plans for the three and nine months ended July 31, 2006 and 2005, is shown below:

 

 

Three Months Ended
July 31,

 

Nine Months Ended
July 31,

 

 

 

2006

 

2005

 

2006

 

2005

 

 

 

(in millions)

 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

Restructuring charges (included in cost of sales)

 

$

2

 

$

 

$

5

 

$

 

Restructuring charges (included in operating expenses)

 

2

 

1

 

16

 

1

 

Total restructuring charges

 

$

4

 

$

1

 

$

21

 

$

1

 

 

The restructuring costs allocated to us by Agilent and included in the table above are shown separately below:

 

 

Three Months Ended
July 31,

 

Nine Months Ended
July 31,

 

 

 

2006

 

2005

 

2006

 

2005

 

 

 

(in millions)

 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

Restructuring charges (included in cost of sales)

 

$

1

 

$

 

$

1

 

$

 

Restructuring charges (included in operating expenses)

 

2

 

 

9

 

 

Total restructuring charges

 

$

3

 

$

 

$

10

 

$

 

 

19




Summary of Flextronics-related restructuring charges

 

 

Workforce
Reduction

 

Asset
Impairment
and
Consolidation
of Excess
Facilities

 

Total

 

 

 

(in millions)

 

Balance at October 31, 2005

 

$

 

$

 

$

 

Total restructuring charges during the quarter

 

0.7

 

 

0.7

 

Less cash payments

 

(0.7

)

 

(0.7

)

Balance at July 31, 2006

 

$

 

$

 

$

 

 

In connection with the transfer of our manufacturing activities to Flextronics, we have transferred approximately 85 employees to Flextronics, and Flextronics has assumed certain pension and other employee liabilities associated with these employees. We will be responsible for any liabilities associated with known future severance payments for the transferred employees and will benefit from the future services of these employees as they will be working exclusively on our products.  On June 1, 2006, Agilent paid into a trust account approximately $3 million, on our behalf, for the severance payments associated with the transferred employees. On July 14, 2006, we reimbursed Agilent for all these payments, in accordance with the master separation and distribution agreement.  In addition, an additional payment of approximately $2 million will be paid by us in the future associated with these transferred employees. We will defer these costs and recognize them ratably over the employees’ period of service until the date of the employees’ termination from Flextronics. For the three months ended July 31, 2006, we recorded approximately $0.7 million of such charges in cost of products.

15. RETIREMENT AND POST RETIREMENT PENSION PLANS

Costs for All U.S. and Non-U.S. Plans.  The following tables provide the principal components of total retirement-related benefit plans impact on income (loss) of Verigy for the three and nine months ended July 31, 2006:

 

 

U.S. Plans

 

Non-U.S. Plans

 

Total

 

 

 

Three Months Ended July 31,

 

 

 

2006

 

2005

 

2006

 

2005

 

2006

 

2005

 

 

 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Defined benefit and contribution pension plan costs

 

$

 

$

1.3

 

$

1.9

 

$

1.5

 

$

1.9

 

$

2.8

 

Non-pension post-retirement benefit costs

 

0.1

 

0.2

 

 

 

0.1

 

0.2

 

Total retirement-related plans costs

 

$

0.1

 

$

1.5

 

$

1.9

 

$

1.5

 

$

2.0

 

$

3.0

 

 

 

 

U.S. Plans

 

Non-U.S. Plans

 

Total

 

 

 

Nine Months Ended July 31,

 

 

 

2006

 

2005

 

2006

 

2005

 

2006

 

2005

 

 

 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Defined benefit and contribution pension plan costs

 

$

1.0

 

$

3.8

 

$

4.0

 

$

4.5

 

$

5.0

 

$

8.3

 

Non-pension post-retirement benefit costs

 

0.1

 

0.7

 

 

 

0.1

 

0.7

 

Total retirement-related plans costs

 

$

1.1

 

$

4.5

 

$

4.0

 

$

4.5

 

$

5.1

 

$

9.0

 

 

Retirement and Post – retirement Health Care Benefits for U.S Employees

Prior to the separation date, June 1, 2006, the former U.S. Agilent employees newly employed by Verigy benefited from Agilent 401(k) matching contributions.  These amounts were reflected in the respective costs of sales, research and development, and selling, general and administrative in the accompanying condensed combined and consolidated statement of operations.  Agilent allocated the 401(k) matching amounts to Verigy on a headcount basis.

Effective June 1, 2006, Verigy established a new defined contribution benefit plan (“Verigy 401(k) plan”) for its U.S employees.  Verigy’s 401(k) plan provides matching contribution of up to 4% of eligible compensation.  Eligible compensation consists of base and variable pay.  In addition, we also adopted the profit sharing plan for our U.S. employees, whereby the Company will make a maximum 2% contribution to the employee’s 401(k) plan if certain annual financial targets are achieved.  A small number of our U.S.

20




employees meeting certain age and service requirements will also receive an additional 2% profit sharing contribution to their 401(k) accounts if certain annual financial targets are achieved.

For the three and nine months ended July 31, 2006, the Company’s 401(k) matching expenses for our US employees were $0.3 million and $0.6 million, respectively.  For the three and nine months ended July 31, 2005, matching contribution expenses were $0.1 million and $0.3 million, respectively.

Effective June 1, 2006, Verigy made available certain retiree benefits to U.S. employees meeting certain age and service requirements upon termination of employment through Verigy’s Retiree Medical Account (RMA) Plan.  At the date of separation, Verigy’s responsibility for the retiree medical benefit obligation was approximately $3.1 million.  We are ratably recognizing this obligation over a period of 12 years, the estimated average working lifetime of these employees.  For the three months ended July 31, 2006, the expense amount recognized under the RMA plan was $0.1 million.

In connection with our separation from Agilent, Agilent has transferred to us the liabilities for the defined benefit plans for our employees located in Germany, Taiwan, Korea, France and Italy.  As of June 1, 2006, Agilent funded these newly established defined benefit plans at 80% of the accumulated benefit obligation based on an actuarial estimate which was performed as of the separation date. The final transfer, in order to fund the retirement plans up to 100% of the accumulated benefit obligation, will occur as soon as the actuarial valuation is completed and agreed to between both Verigy and Agilent as soon as practicable after the distribution date.

Non-U.S. Defined Benefit.  For the three and nine months ended July 31, 2006 and 2005, the net pension costs related to our employees participating in our non-U.S. defined benefit plans transferred from Agilent were comprised of:

 

Non U.S. Plans

 

 

 

Three Months Ended
July 31,

 

Nine Months Ended
July 31,

 

 

 

2006

 

2005

 

2006

 

2005

 

 

 

(in millions)