Eagle Test Systems (EGLT)

Eagle Test Systems, Inc. (the Company) designs, manufactures, sells, and services automated test equipment (ATE) for the semiconductor industry. The Company's test systems test analog, mixed-signal, and RF (Radio Frequency) semiconductor devices. Semiconductor designers and manufacturers worldwide use semiconductor test systems to test devices at different stages during the manufacturing process. These tested devices are incorporated into a wide range of products, including digital cameras, MP3 players, cellular telephones, video/multimedia products, automotive electronics, computer peripherals, and notebook and desktop computers. The Company is headquartered in Buffalo Grove, Illinois, where the Company develops and manufactures its test systems. The Company operates in one industry segment: the design, manufacture and marketing of automated test equipment. The Company also maintains various offices worldwide for sales, service and research to support its customer base directly. The operations of, and net investment in, foreign subsidiaries are not material.

The firm was founded and began providing test solutions in 1976. EGLT's customers include semiconductor manufacturers, integrated device manufacturers, or IDMs, fabless design companies, and assembly and test subcontractors, including Allegro MicroSystems, Inc., Carsem Sdn. Bhd, Fairchild Semiconductor International, Inc., Infineon Technologies, Intersil Corporation, National Semiconductor Corporation, ON Semiconductor Corporation, STMicroelectronics N.V., Texas Instruments Incorporated and UTAC Thai Ltd. Since October 1, 2003, we have delivered over 900 test systems to more than 70 customers worldwide. EGLT completed its initial public offering in March 2006.

Strong Back Drop as Technology gets smaller and faster

Semiconductor manufacturers continuously strive for manufacturing and process improvements in order to satisfy the demand for smaller, better performing and lower cost semiconductors. Semiconductor manufacturers are aggressively pursuing strategies to reduce their overall cost-of-test by increasing the throughput of their test systems. Cost-of-test includes the initial ATE and ancillary equipment purchase price, as well as set-up and operating costs, and is often the most significant manufacturing cost, particularly for high-volume, low-cost devices. For these types of devices, ATE throughput, or the number of devices that can be tested in a given unit of time on a single test system, is a key determinant of cost-of-test per device and of a manufacturer's ability to compete profitably.

EGLT's products are designed to enable customers to achieve low overall cost-of-test per device. Management believes its test systems deliver increased test throughput for high-volume, price-sensitive semiconductors in the analog, mixed-signal and RF markets. The goal is to offer test systems that enable customers to achieve a high level of test accuracy and repeatability. The firm's flexible system architecture can be easily reconfigured and adapted to meet our customers' current and evolving testing needs. By focusing on low cost-of-test per device and based on informal feedback from customers, EGLT's test systems offer customers a competitive overall test solution that enables them to lower their semiconductor production costs and improve their profit opportunity.

Diversifying the Revenue Stream

ELGT's customers have historically been semiconductor device manufacturers, but recently its customer base has expanded to include assembly and test subcontractors, such as STATS ChipPAC Ltd. and Carsem Sdn. Semiconductor manufacturers and fabless semiconductor companies utilize these subcontractors to provide incremental capacity and to lower their fixed production costs. For the fiscal years 2007, 2006 and 2005, sales to Texas Instruments (TI) accounted for 30.7%, 52.9% and 44.3% of net revenue, respectively. TI is the only customer that accounts for 10% or more of net revenue. Although this has improved tremendously, we expect that a small number of customers will continue to represent a significant portion of revenue for the foreseeable future.

Strengthening the balance sheet

The firm's cash equivalents and marketable securities increased from $22.7 million in 2005 to $75.9 million in 2006, to $112.5 million as of September 30, 2007. Operating activities during the twelve months ended September 30, 2007 provided cash of $4.7 million, due to income of $10.7 million resulting primarily from sales of test systems and depreciation expense of $3.6 million that did not require cash. These increases in working capital were offset in part by working capital used for increased accounts receivables (net of deferred revenue) of $3.9 million, a decrease in accrued compensation expenses of $2.4 million from the payment of incentive compensation related to fiscal year 2006 operating performance, a $2.1 million decrease in accrued income taxes due to lower operating levels and a $1.7 million increase in other current assets from prepaid income taxes resulting from the Internal Revenue Service acceptance of a deferred revenue tax method change

The firm used some IPO cash to pay down debt as $63.1 of the $86.7 million from its initial public offering completed March 14, 2006, was used to redeem $30.6 million of senior subordinated notes and $32.5 million of redeemable preferred stock.

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