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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended September 30, 2011

OR

 

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

For the transition period from             to             

Commission File No. 000-51072

 

 

CASCADE MICROTECH, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Oregon   93-0856709

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

9100 S.W. Gemini Drive

Beaverton, Oregon

  97008
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code: (503) 601-1000

 

 

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  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The number of shares of common stock outstanding as of November 9, 2011 was 14,113,099.

 

 

 


Table of Contents

CASCADE MICROTECH, INC.

INDEX TO FORM 10-Q

 

PART I - FINANCIAL INFORMATION    Page  

Item 1.

  

Financial Statements

  
  

Condensed Consolidated Balance Sheets (unaudited) – September 30, 2011 and December 31, 2010

     2   
  

Condensed Consolidated Statements of Operations (unaudited) - Three and Nine Months Ended September 30, 2011 and 2010

     3   
  

Condensed Consolidated Statements of Cash Flows (unaudited) - Nine Months Ended September 30, 2011 and 2010

     4   
  

Notes to Condensed Consolidated Financial Statements (unaudited)

     5   

Item 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     12   

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

     22   

Item 4.

  

Controls and Procedures

     22   
PART II - OTHER INFORMATION   

Item 1A.

  

Risk Factors

     23   

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

     23   

Item 6.

  

Exhibits

     23   

Signatures

     24   

 

1


Table of Contents

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Cascade Microtech, Inc.

Condensed Consolidated Balance Sheets

(Unaudited, In thousands)

 

      September  30,
2011
    December  31,
2010
 
      

Assets

    

Current Assets:

    

Cash and cash equivalents

   $ 13,537      $ 21,871   

Short-term marketable securities

     1,570        870   

Restricted cash

     1,508        1,704   

Accounts receivable, net of allowances of $229 and $415

     19,056        19,718   

Inventories

     24,150        20,764   

Prepaid expenses and other

     4,076        2,032   
  

 

 

   

 

 

 

Total Current Assets

     63,897        66,959   

Long-term marketable securities

     3,482        —     

Fixed assets, net of accumulated depreciation of $21,115 and $19,820

     9,550        9,973   

Goodwill

     1,007        985   

Purchased intangible assets, net of accumulated amortization of $2,264 and $1,654

     2,532        3,142   

Other assets, net of accumulated amortization of $3,595 and $3,248

     2,902        3,486   
  

 

 

   

 

 

 

Total Assets

   $ 83,370      $ 84,545   
  

 

 

   

 

 

 

Liabilities and Shareholders' Equity

    

Current Liabilities:

    

Accounts payable

     6,511        6,384   

Deferred revenue

     3,975        3,338   

Accrued liabilities

     8,297        6,293   
  

 

 

   

 

 

 

Total Current Liabilities

     18,783        16,015   

Deferred revenue

     143        109   

Other long-term liabilities

     4,542        2,815   
  

 

 

   

 

 

 

Total Liabilities

     23,468        18,939   

Shareholders' Equity:

    

Common stock, $0.01 par value. Authorized 100,000 shares; issued and outstanding: 14,744 and 14,500

     148        145   

Additional paid-in capital

     92,185        90,967   

Accumulated other comprehensive loss

     (483     (804

Accumulated deficit

     (31,948     (24,702
  

 

 

   

 

 

 

Total Shareholders' Equity

     59,902        65,606   
  

 

 

   

 

 

 

Total Liabilities and Shareholders' Equity

   $ 83,370      $ 84,545   
  

 

 

   

 

 

 

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements,

 

2


Table of Contents

Cascade Microtech, Inc.

Condensed Consolidated Statements of Operations

(Unaudited, In thousands, except per share amounts)

 

      For the Three Months Ended September 30,     For the Nine Months Ended September 30,  
      2011     2010     2011     2010  

Revenue

   $ 23,750      $ 24,424      $ 77,312      $ 66,556   

Cost of sales

     14,942        14,431        47,599        42,412   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     8,808        9,993        29,713        24,144   

Operating expenses:

        

Research and development

     3,175        2,860        8,937        8,886   

Selling, general and administrative

     9,444        6,557        25,471        23,444   

Amortization of purchased intangibles

     204        200        610        580   
  

 

 

   

 

 

   

 

 

   

 

 

 
     12,823        9,617        35,018        32,910   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     (4,015     376        (5,305     (8,766

Other income (expense):

        

Interest income, net

     20        9        51        54   

Other, net

     435        (437     251        12   
  

 

 

   

 

 

   

 

 

   

 

 

 
     455        (428     302        66   
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from continuing operations before income taxes

     (3,560     (52     (5,003     (8,700

Income tax expense (benefit)

     (9     41        239        (303
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from continuing operations

     (3,551     (93     (5,242     (8,397

Loss from discontinued operations, net of tax

     (1,777     (260     (2,004     (2,209
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (5,328   $ (353   $ (7,246   $ (10,606
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic and diluted loss per share from continuing operations

   $ (0.24   $ (0.01   $ (0.36   $ (0.59

Basic and diluted loss per share from discontinued operations

     (0.12     (0.02     (0.14     (0.15
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic and diluted net loss per share

   $ (0.36   $ (0.02   $ (0.50   $ (0.75
  

 

 

   

 

 

   

 

 

   

 

 

 

Shares used in basic and diluted per share calculations

     14,713        14,361        14,618        14,232   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements,

 

3


Table of Contents

Cascade Microtech, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited, In thousands)

 

      For the Nine Months Ended September 30,  
   2011     2010  

Cash flows from operating activities:

    

Net loss

   $ (7,246   $ (10,606

Adjustments to reconcile net loss to net cash used in operating activities:

    

Depreciation and amortization

     3,347        3,286   

Depreciation and amortization within discontinued operations

     277        426   

Stock-based compensation

     1,461        1,291   

Stock-based compensation within discontinued operations

     75        30   

Loss on disposal of long-lived assets and assets held for sale

     34        160   

Loss on write-down of contingent consideration held in escrow

     —          31   

Loss from disposal activities within discontinued operations

     1,509        —     

Deferred income taxes

     (46     (537

(Increase) decrease, net of the effect of acquisition and disposition, in:

    

Accounts receivable, net

     192        (5,253

Inventories, net

     (4,010     3,472   

Income taxes receivable

     1,072        578   

Prepaid expenses and other

     (2,903     (566

Increase, net of effect of acquisition and disposition, in:

    

Accounts payable

     186        592   

Deferred revenue

     658        221   

Accrued and other long-term liabilities

     3,895        957   
  

 

 

   

 

 

 

Net cash used in operating activities

     (1,499     (5,918

Cash flows from investing activities:

    

Purchase of marketable securities

     (7,604     (1,797

Proceeds from sale of marketable securities

     3,432        7,733   

Decrease in restricted cash

     257        —     

Purchase of fixed assets

     (3,423     (1,176

Proceeds from sale of fixed assets and assets held for sale

     120        —     

Cash paid for acquisition, net of cash acquired

     —          (7,052

Cash received from disposition of assets within discontinued operations

     525        —     
  

 

 

   

 

 

 

Net cash used in investing activities

     (6,693     (2,292

Cash flows from financing activities:

    

Principal payments on capital lease obligations

     (10     (6

Withholding taxes paid on net settlement of vested restricted stock units

     (531     (119

Proceeds from issuances of common stock

     216        311   
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     (325     186   

Effect of exchange rate changes on cash

     183        (84
  

 

 

   

 

 

 

Decrease in cash and cash equivalents

     (8,334     (8,108

Cash and cash equivalents:

    

Beginning of period

     21,871        19,471   
  

 

 

   

 

 

 

End of period

   $ 13,537      $ 11,363   
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information:

    

(Cash paid) refunds received for income taxes, net

   $ 1,178      $ (73

Supplemental disclosure of non-cash information:

    

Common stock issued in connection with acquisition

   $ —        $ 3,177   

Fair value of assets acquired from acquisition

     —          21,029   

Liabilities assumed from acquisition

     —          (5,406

Fair value of note receivable received from disposition

     25        —     

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements,

 

4


Table of Contents

CASCADE MICROTECH, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. Basis of Presentation

The condensed consolidated financial information included herein has been prepared by Cascade Microtech, Inc. without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). However, such information reflects all adjustments, consisting only of normal recurring adjustments, which are, in the opinion of management, necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods. The financial information as of December 31, 2010 is derived from our 2010 Annual Report on Form 10-K. Certain amounts in the prior period financial statements have been reclassified to conform to the current period presentation. The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in our 2010 Annual Report on Form 10-K. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the full year.

Note 2. Inventories

Inventories are stated at the lower of standard cost, which approximates cost computed on a first-in, first-out basis, or market, and include materials, labor and manufacturing overhead. Demonstration goods, which are included as a component of finished goods, represent inventory that is used for customer demonstration purposes. This inventory is typically sold after 12 to 18 months. We analyze the carrying value of our inventory quarterly, considering a combination of factors including, but not limited to, the following: forecasted sales or usage, historical usage rates, estimated service period, product end-of-life dates, estimated current and future market values, service inventory requirements and new product introductions. We estimate market value based on factors including, but not limited to, replacement cost and estimated resale value. Based on these analyses, we recorded inventory charges of $0.1 million and $0.6 million, respectively, in the three and nine-month periods ended September 30, 2011 and $0.1 million and $1.7 million, respectively, in the comparable periods of 2010. Inventory charges for the nine-month period ended September 30, 2010 included restructuring costs of $1.1 million for discontinued products as we consolidated product lines after the acquisition of SUSS MicroTec Test Systems GmbH (“Suss Test”) in January 2010.

Inventories consisted of the following (in thousands):

 

     September 30,
2011
     December 31
2010
 

Raw materials

   $ 14,064       $ 12,437   

Work-in-process

     4,197         2,495   

Finished goods

     5,889         5,832   
  

 

 

    

 

 

 
   $ 24,150       $ 20,764   
  

 

 

    

 

 

 

Note 3. Net Loss Per Share

Since we were in a loss position for the three and nine-month periods ended September 30, 2011 and 2010, there was no difference between the number of shares used to calculate basic and diluted net loss per share for those periods. Potentially dilutive securities (in thousands) that are not included in the diluted per share calculations because they would be anti-dilutive totaled 1,430 for the three and nine-month periods ended September 30, 2011, and 1,615 for the three and nine-month periods ended September 30, 2010.

 

5


Table of Contents

Note 4. Comprehensive Income (Loss)

Comprehensive income (loss) was as follows (in thousands):

 

      Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
   2011     2010     2011     2010  

Net loss

   $ (5,328   $ (353   $ (7,246   $ (10,606

Unrealized holding losses

     (8     (7     10        (23

Change in cumulative translation adjustment

     (1,327     1,411        311        (594
    

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   $ (6,663   $ 1,051      $ (6,925   $ (11,223
  

 

 

   

 

 

   

 

 

   

 

 

 

Note 5. Product Warranty

We estimate a liability for costs to repair or replace products under warranty for a period of approximately twelve months when the related product revenue is recognized. The liability for product warranties is calculated as a percentage of sales. The percentage is based on historical product repair and replacement costs. The liability for product warranties is included in accrued liabilities on our consolidated balance sheet. Product warranty activity was as follows (in thousands):

 

     Nine Months Ended
September 30,
 
     2011     2010  

Warranty accrual, beginning of period

   $ 701      $ 277   

Reductions for warranty charges

     (613     (594

Additions to warranty reserve

     760        1,069   
  

 

 

   

 

 

 

Warranty accrual, end of period

   $ 848      $ 752   
  

 

 

   

 

 

 

Additions to the warranty reserve for the first nine months of 2010 included accrued warranty costs of $0.5 million assumed with the acquisition of Suss Test.

Note 6. Goodwill and Purchased Intangibles Assets

Goodwill

The change in goodwill was as follows (in thousands):

 

     Nine Months
Ended
September 30,
2011
     Year Ended
December 31,
2010
 

Balance, beginning of period

   $ 985       $ —     

Acquisition of SUSS Test

     —           1,058   

Effect of exchange rate changes

     22         (73
  

 

 

    

 

 

 

Balance, end of period

   $ 1,007       $ 985   
  

 

 

    

 

 

 

Purchased Intangible Assets

Purchased intangible assets, net included the following (in thousands):

 

     September 30,
2011
    December 31,
2010
 

Customer relationships

   $ 2,465      $ 2,465   

Other

     2,331        2,331   
  

 

 

   

 

 

 
     4,796        4,796   

Less accumulated amortization

     (2,264     (1,654
  

 

 

   

 

 

 
   $ 2,532      $ 3,142   
  

 

 

   

 

 

 

Purchased intangible asset amortization totaled $0.2 million in the three-month periods ended September 30, 2011 and 2010, and $0.6 million in the nine-month periods ended September 30, 2011 and 2010.

 

6


Table of Contents

The estimated amortization of purchased intangible assets is as follows over the next five years and thereafter (in thousands):

 

Remainder of 2011

   $ 203   

2012

     720   

2013

     572   

2014

     378   

2015

     288   

Thereafter

     371   
  

 

 

 
   $ 2,532   
  

 

 

 

Note 7. Accrued Liabilities

Accrued liabilities consisted of the following (in thousands):

 

     September 30,
2011
     December 31,
2010
 

Accrued compensation and benefits

   $ 1,941       $ 1,897   

Accrued income taxes

     1,405         1,342   

Accrued sales taxes and VAT

     1,397         169   

Accrued warranty

     848         701   

Accrued commissions

     440         649   

Accrued restructuring costs

     1,256         310   

Other

     1,010         1,225   
  

 

 

    

 

 

 
   $ 8,297       $ 6,293   
  

 

 

    

 

 

 

Note 8. Stock-Based Compensation and Stock-Based Plans

Stock-based compensation was included in our statement of operations as follows (in thousands):

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2011      2010      2011      2010  

Cost of sales

   $ 49       $ 46       $ 149       $ 145   

Research and development

     102         92         320         200   

Selling, general and administrative

     301         292         992         946   

Discontinued operations

     53         11         75         30   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 505       $ 441       $ 1,536       $ 1,321   
  

 

 

    

 

 

    

 

 

    

 

 

 

Stock Incentive Plans

Stock option activity for the first nine months of 2011 was as follows:

 

     Options
Outstanding
    Weighted
Average
Exercise Price
 

Outstanding at December 31, 2010

     793,703      $ 6.85   

Granted

     72,631        6.28   

Exercised

     (8,748     4.20   

Forfeited

     (46,679     7.88   
  

 

 

   

Outstanding at September 30, 2011

     810,907        6.76   
  

 

 

   

 

7


Table of Contents

Restricted stock unit (“RSU”) activity for the first nine months of 2011 was as follows:

 

     Restricted
Stock
Units
    Weighted
Average
Grant Date
Per Share
Fair Value
 

Outstanding at December 31, 2010

     791,347      $ 5.90   

Granted

     128,652        5.76   

Vested

     (306,245     4.80   

Forfeited

     (49,207     4.92   
  

 

 

   

Outstanding at September 30, 2011

     564,547        6.55   
  

 

 

   

As of September 30, 2011, total unrecognized stock-based compensation related to outstanding, but unvested options and RSUs was $2.7 million, which will be recognized over the weighted average remaining vesting period of 2.5 years.

Employee Stock Purchase Plan

In January 2011, pursuant to the terms of our 2004 Employee Stock Purchase Plan (“ESPP”), and upon approval by our Board of Directors, the number of shares of our common stock available for purchase under the 2004 ESPP was increased from 700,000 to 800,000. Employees purchased 57,318 shares in the first nine months of 2011 for $0.2 million under the ESPP.

Note 9. Discontinued Operations

On September 22, 2011, we entered into an Asset Purchase Agreement (the “Agreement”) with R&D Sockets, Inc. (“Buyer”) and R&D Circuits Holdings LLC pursuant to which substantially all of the assets and liabilities related to our Sockets operations were sold to the Buyer for $525,000 in cash and a note receivable from the Buyer for $25,000 due September 23, 2012. In connection with the Agreement, we and the Buyer entered into an Assignment, Assumption and Amendment of Lease (the “Lease Assumption Agreement”) pursuant to which the Buyer assumed all of our obligations under the lease agreement dated as of February 6, 2009, as amended May 31, 2011, between us and Minnesota Industrial Properties Limited Partnership covering administrative offices and a manufacturing facility related to our Sockets business.

Certain financial information related to discontinued operations was as follows (in thousands):

 

     Three Months  Ended
September 30,
    Nine Months Ended
September 30,
 
     2011     2010     2011     2010  

Revenue

   $ 984      $ 849      $ 2,686      $ 2,115   
  

 

 

   

 

 

   

 

 

   

 

 

 

Pre-tax loss from discontinued operations

   $ (268   $ (260   $ (495   $ (2,224

Loss on disposal activities

     (1,509     —          (1,509     —     
  

 

 

   

 

 

   

 

 

   

 

 

 
     (1,777     (260     (2,004     (2,224

Income tax benefit

     —          —          —          15   
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from discontinued operations, net of income tax benefit

   $ (1,777   $ (260   $ (2,004   $ (2,209
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash generated from disposal activities

   $ 525      $ —        $ 525      $ —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Note 10. Segment Reporting

The segment data below is presented in the same manner that management currently organizes the segments for assessing certain performance trends. Our Chief Operating Decision Maker monitors the revenue streams and the operating income of our Systems sales and our Probes sales. We do not track our assets on a segment level, and, accordingly, that information is not provided. As discussed above, the sale our Sockets operations in September 2011 was accounted for as discontinued operations and, accordingly, the results of operations related to the Sockets operations have been eliminated from the segment financial data below and prior period amounts have been revised to conform to this presentation.

 

8


Table of Contents

Revenue and operating income information from continuing operations by segment was as follows (dollars in thousands):

 

Three Months Ended September 30, 2011

   Systems     Probes     Corporate
Unallocated
    Total  

Revenue

   $ 16,565      $ 7,185      $ —        $ 23,750   

Gross profit

   $ 5,162      $ 3,646      $ —        $ 8,808   

Gross margin

     31.2     50.7     —          37.1

Income (loss) from operations

   $ 817      $ 454      $ (5,286   $ (4,015

Three Months Ended September 30, 2010

                        

Revenue

   $ 18,025      $ 6,399      $ —        $ 24,424   

Gross profit

   $ 7,273      $ 2,720      $ —        $ 9,993   

Gross margin

     40.4     42.5     —          40.9

Income (loss) from operations

   $ 3,121      $ (265   $ (2,480   $ 376   

Nine Months Ended September 30, 2011

   Systems     Probes     Corporate
Unallocated
    Total  

Revenue

   $ 55,912      $ 21,400      $ —        $ 77,312   

Gross profit

   $ 19,632      $ 10,081      $ —        $ 29,713   

Gross margin

     35.1     47.1     —          38.4

Income (loss) from operations

   $ 7,074      $ 126      $ (12,505   $ (5,305

Nine Months Ended September 30, 2010

                        

Revenue

   $ 46,835      $ 19,721      $ —        $ 66,556   

Gross profit

   $ 15,622      $ 8,522      $ —        $ 24,144   

Gross margin

     33.4     43.2     —          36.3

Income (loss) from operations

   $ 2,161      $ (911   $ (10,016   $ (8,766

In preparing this financial information, certain expenses were allocated between the segments based on management estimates, while others were based on specific factors such as headcount. These factors can have a significant impact on the amount of income (loss) from operations for each segment. While we believe we have applied a reasonable methodology, assignment of other reasonable cost allocations to each segment could result in materially different segment income (loss) from operations.

We had one customer that represented approximately 11% of our total revenue from continuing operations in the three-month period ended September 30, 2010. No customer accounted for 10% or greater of our total revenue from continuing operations in the nine-month period ended September 30, 2010, or the three or nine-month periods ended September 30, 2011.

Note 11. Fair Value Measurements

Various inputs are used in determining the fair value of our financial assets and liabilities and are summarized into three broad categories:

 

   

Level 1 – quoted prices in active markets for identical securities;

 

   

Level 2 – other significant observable inputs, including quoted prices for similar securities, interest rates, credit risk, etc.; and

 

   

Level 3 – significant unobservable inputs, including our own assumptions in determining fair value.

The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.

 

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Following are the disclosures related to our financial assets that are reported at fair value on a recurring basis (in thousands):

 

     September 30, 2011      December 31, 2010  
     Fair Value      Input Level      Fair Value      Input Level  

Marketable securities – corporate obligations

   $ 3,026         Level 2       $ 751         Level 2   

Marketable securities – corporate equities

   $ 13         Level 1       $ 119         Level 1   

Marketable securities – U.S. agencies

   $ 2,013         Level 2       $ —           —     

Forward sale contracts for Japanese yen

   $ 780         Level 2       $ 1,602         Level 2   

The fair value of our marketable securities is determined based on quoted market prices for similar securities. The fair value of our forward contracts is based on quoted market prices for similar securities and is used for the purpose of determining any gain or loss on our foreign currency positions. We do not record the full value of the forward contracts on our balance sheet. We record the net unrealized gain or loss in our balance sheet and as a component of other income (expense).

The carrying values of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate fair value due to their short maturities.

No changes were made to our valuation techniques during the first nine months of 2011.

Note 12. Restructuring

Restructuring charges in 2011 relate to the previously announced integration and consolidation of our manufacturing operations, sales organization and corporate headquarters. Manufacturing operations for our Systems business have been consolidated at our Dresden, Germany facility and manufacturing operations for our Probes business, as well as our corporate headquarters, were consolidated at one of our Beaverton, Oregon facilities. As of September 30, 2011 these restructuring and consolidation activities are substantially complete. We do not expect to incur additional restructuring charges in the fourth quarter of 2011. In the first quarter of 2011, we recorded a net reversal of $0.1 million related to termination and severance related charges.

Restructuring costs were included in our condensed consolidated statements of operations as follows (in thousands):

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2011      2010      2011      2010  

Cost of sales

   $ 23       $ —         $ 137       $ 1,297   

Research and development

     —           —           —           127   

Selling, general and administrative

     2,088         —           3,278         1,061   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 2,111       $ —         $ 3,415       $ 2,485   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table summarizes the charges, expenditures and write-offs and adjustments related to our restructuring accruals (in thousands):

 

Nine Months Ended

September 30, 2011

   Beginning
Accrued
Liability
     Charged to
(Reversed
from)
Expense,
Net
    Expend-
itures
    Write-Offs
and
Adjust-
ments
     Ending
Accrued
Liability
 

Termination and severance related

   $ 276       $ (73   $ (58   $ 11       $ 156   

Lease abandonment

     34         3,488        (144     1,035         4,413   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 
   $ 310       $ 3,415      $ (202   $ 1,046       $ 4,569   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

We expect all accrued termination and severance related costs will be paid by the end of 2011 and the lease abandonment costs will be paid by the end of 2015.

 

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Note 13. Stock Repurchase Plan

In September 2011, our board of directors authorized a stock repurchase program under which up to $2 million of our common stock may be repurchased from time to time in the open market or in privately negotiated transactions. As of September 30, 2011 there had been no repurchases of common stock.

Note 14. Recent Accounting Guidance

ASU 2010-17

Accounting Standards Update (“ASU”) 2010-17, “Revenue Recognition – Milestone Method,” provides guidance on defining a milestone and determining when it may be appropriate to apply the milestone method of revenue recognition for research or development transactions. Research or development arrangements frequently include payment provisions whereby a portion or all of the consideration is contingent upon milestone events such as successful completion of phases in a drug study or achieving a specific result from the research or development efforts. An entity often recognizes these milestone payments as revenue in their entirety upon achieving the related milestone, commonly referred to as the milestone method. The amendments in ASU 2010-17 are effective on a prospective basis for milestones achieved in fiscal years, and interim periods within those years, beginning on or after June 15, 2010. The adoption of ASU 2010-17 effective January 1, 2011 did not have a material effect on our financial position, results of operations or cash flows.

ASU 2011-05

In June 2011, the Financial Accounting Standards Board (“FASB”) issued ASU 2011-05, “Presentation of Comprehensive Income,” which eliminates the current option of reporting other comprehensive income and its components in the statement of changes in equity. While the new guidance changes the presentation of comprehensive income, there are no changes to the components that are recognized in net income or other comprehensive income under current accounting guidance. Upon adoption of ASU 2011-05, comprehensive income will either be reported in a single continuous financial statement or in two separate but consecutive financial statements. ASU 2011-05 is effective for fiscal years and interim periods beginning after December 15, 2011. Since ASU 2011-05 relates to presentation of comprehensive income, we do not expect the adoption of ASU 2011-05 in the first quarter of 2012 to have an impact on our financial position, results of operations or cash flows.

ASU 2011-08

In September 2011, the FASB issued ASU No. 2011-08, “Testing Goodwill for Impairment.” ASU 2011-08 simplifies the goodwill impairment assessment by permitting a company to make a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount before applying the two-step goodwill impairment test. If the conclusion is that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the company would be required to conduct the current two-step goodwill impairment test. Otherwise, it would not need to apply the two-step test. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011 and early adoption is permitted. We don’t expect the adoption of ASU 2011-08 to have a material impact on our financial position, results of operations, or cash flows.

Note 15. Subsequent Event

During October 2011, heavy rain in Thailand resulted in flooding at the manufacturing facility of a key supplier for our probing stations. This supplier kept approximately $1.0 million of our inventory on consignment that could be damaged by water. At this time we are unable to estimate the potential loss, if any, related to this inventory.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward Looking Statements and Risk Factors

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact made in this Quarterly Report on Form 10-Q are forward-looking including, but not limited to, statements regarding industry prospects; future results of operations, including estimated revenue and earnings (loss) per share for the quarter ending December 31, 2011 or future financial position; our expectations and beliefs regarding future revenue growth and the results of our restructuring efforts; the future capabilities and functionality of our products and services, our strategies and intentions regarding acquisitions; our accounting and tax policies; our dividend policies and share repurchase program; the status of our inventory located in Thailand; and our future capital requirements. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology, including “intend,” “could,” “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “future,” or “continue,” the negative of these terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially from those expressed or implied in such forward-looking statements. In evaluating these statements, you should specifically consider various factors, including the risks included in Item 1A to our Annual Report on Form 10-K as filed with the Securities and Exchange Commission on March 2, 2011. These risk factors have not significantly changed since they were filed with our Form 10-K and included the following:

 

   

Our operating results have fluctuated in the past and are likely to fluctuate in the future, which could cause us to miss our guidance or analyst expectations and cause the trading price of our common stock to decline.

 

   

The cyclicality of the semiconductor industry affects our financial results, and, as a result, we may experience reduced sales or operating losses in a semiconductor industry downturn.

 

   

If we do not keep pace with technological developments in the semiconductor industry, especially the trend toward faster, smaller and lower cost chips, our revenue and operating results could suffer as potential customers decide to adopt our competitors’ products.

 

   

Consolidation of our customer base could adversely affect our revenues and results of operations.

 

   

Because we generally do not have a sufficient backlog of unfilled orders to meet our quarterly revenue targets, revenue in any quarter is substantially dependent upon customer orders received and fulfilled in that quarter.

 

   

We may make acquisitions, which could be costly, difficult to integrate with our operations, divert management resources and dilute shareholder value.

 

   

Intense competition in the semiconductor wafer probing business may reduce demand for our products and reduce our sales.

 

   

We obtain some of the materials, components and subassemblies used in our products from a single source or a limited group of suppliers. If these suppliers declare bankruptcy or are unable to provide us with these materials, components or subassemblies in adequate quantities and on a timely basis, we may be unable to manufacture our products or meet our customers’ needs.

 

   

We have long-lived assets, including fixed assets and intangible assets, recorded on our balance sheet. In the future, the fair value of certain long-lived assets may be reduced below their carrying value. If there has been an impairment of long-lived assets, we would be required to record non-cash asset impairment charges in future periods, which would adversely impact our results of operations.

 

   

We face economic, political and other risks associated with our international sales and operations, which could materially harm our operating results.

 

   

Due to our significant international operations and sales, we are exposed to foreign currency exchange rate risks that could adversely affect our revenues, gross margins and results of operations.

 

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Failure to retain key managerial, technical, sales and marketing personnel, independent manufacturers’ representatives and distributors or to attract new key personnel could harm our business.

 

   

Our customers’ evaluation processes can lead to lengthy sales cycles, during which we may incur significant costs that may not result in sales.

 

   

If our products contain defects, our reputation would be damaged, and we could lose customers and revenue and incur warranty expenses.

 

   

If we fail to protect our proprietary technology and rights, competitors may be able to use our technologies, which would weaken our competitive position and could reduce our sales.

 

   

Intellectual property infringement claims by or against us may result in litigation, the cost of which could be substantial and could prevent us from selling our products.

 

   

Our growth could strain our personnel and infrastructure resources, and, if we are unable to implement appropriate controls and procedures to manage our growth, we may not be able to successfully implement our business plan.

 

   

Our success depends on our continued investment in research and development, the level and effectiveness of which could reduce our profitability.

 

   

Any disruption in the operations of our manufacturing facilities could harm our business.

 

   

We rely on suppliers and contract manufacturers for the products we sell.

 

   

Some of our customers may experience sudden and unexpected changes in their financial condition, resulting in decreased sales and bad debts.

 

   

A reorganization could also result in significant disruption of our business and our relationships with our employees, suppliers and customers could be adversely affected.

 

   

We may fail to comply with environmental regulations, which could result in significant costs and harm our business.

 

   

Product liability claims may be asserted against us, resulting in costly litigation for which we may not have sufficient liability insurance.

 

   

We rely on a small number of customers for a significant portion of our revenue, and the termination of any of these relationships would adversely affect our business.

 

   

Unanticipated changes in our tax rates or exposure to additional income tax liabilities could affect our profitability.

 

   

We may be exposed to uninsured risks if the type and amount of coverage we carry are not adequate, or the insurance company is unable to honor claims.

 

   

Our officers and directors and their affiliates will control the outcome of matters requiring shareholder approval.

 

   

The anti-takeover provisions of our charter documents and Oregon law may inhibit a takeover or change in our control that shareholders may consider beneficial.

General

We design, develop, manufacture and market advanced wafer probing solutions for the electrical measurement and testing of high performance chips. We design, manufacture and assemble our products in Oregon and Dresden, Germany, with global sales, service and support centers in North America, Germany, Japan, Taiwan, China and Singapore.

Probe stations, which are included in our Systems segment, provide precise and accurate measurement of semiconductor electrical characteristics during chip design or when optimizing the chip fabrication process. Our probe stations are highly configurable and are typically sold with various accessories, including our engineering probes, as well as accessories from third parties. In addition, we design and build custom probe stations to address the specific requirements of our customers and generate revenue through the sales of service contracts.

Our engineering probes and production probe cards are included in our Probes segment. Our engineering probes are sold to serve as components of our probe stations, or less often, to serve as components of test equipment manufactured by third parties. Our production probe cards are designed and sold for high-volume production test applications, ranging from very low current parametric testing to sophisticated, high speed radio frequency testing.

 

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Overview

Revenue in the third quarter of 2011 decreased $0.7 million, or 2.8%, compared to the third quarter of 2010 as a result of changes in the timing of shipments. Loss from continuing operations in the third quarter of 2011 was $3.6 million compared to $0.1 million in the third quarter of 2010. The loss from continuing operations in the third quarter of 2011 included $2.1 million of restructuring related charges, and $0.5 million of factory moving and other project costs compared to acquisition related costs of $0.1 million the third quarter of 2010. Restructuring charges in the third quarter of 2011 were related to severance and abandonment of excess leased facilities in connection with the consolidation of our Systems manufacturing operations and our corporate headquarters.

Outlook

Based on our current backlog, projected bookings and scheduled shipments, we anticipate revenues will be in the range of $25 million to $29 million for the fourth quarter of 2011. We believe this will result in an earnings (loss) per share range of between ($0.05) loss per share and $0.10 earnings per share on a fully-diluted basis.

Critical Accounting Policies and the Use of Estimates

Management’s discussion and analysis of financial condition and results of operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. On an on-going basis we evaluate our estimates, including those related to revenue recognition, bad debts, inventory, lives and recoverability of equipment and other long-lived assets, warranty obligations, deferred income tax assets, unrecognized income tax benefits, restructuring charges, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that we believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

With the exception of our change in estimate regarding restructuring charges as discussed below, we reaffirm the critical accounting policies and estimates as reported in our Annual Report on Form 10-K for the year ended December 31, 2010, which was filed with the Securities and Exchange Commission on March 2, 2011.

Restructuring Charges

During 2011, we have taken certain actions to reduce our overall cost structure. We have recorded restructuring charges in connection with employees based on estimates of the expected costs associated with severance benefits. If the actual costs incurred exceed the estimated costs, additional expense will be recognized. If the actual costs are less than the estimated costs, a benefit will be recognized.

We have also recorded restructuring charges in connection with excess leased facilities to offset future rent, net of estimated sublease income that we believe could be reasonably obtained. We work with external real estate experts to develop assumptions used to determine a reasonable estimate of the net loss. Our estimates of expected sublease income could change based on factors that affect our ability to sublease those facilities, such as general economic conditions and the local real estate market. If the real estate markets worsen and we are not able to sublease the properties as expected, additional charges will be recognized in the period such determination is made. Likewise, if the real estate market strengthens and we are able to sublease the properties earlier or at more favorable rates than projected, a benefit will be recognized.

 

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Discontinued Operations

On September 22, 2011, we entered into an Asset Purchase Agreement (the “Agreement”) with R&D Sockets, Inc. (“Buyer”) and R&D Circuits Holdings LLC pursuant to which substantially all of the assets and liabilities related to our Sockets operations were sold to the Buyer for $525,000 in cash and a note receivable from the Buyer for $25,000 due September 23, 2012. In connection with the Agreement, we and the Buyer entered into an Assignment, Assumption and Amendment of Lease (the “Lease Assumption Agreement”) pursuant to which the Buyer assumed all of our obligations under the lease agreement dated as of February 6, 2009, as amended May 31, 2011, between us and Minnesota Industrial Properties Limited Partnership covering administrative offices and a manufacturing facility related to our Sockets business. See Note 9 of Notes to Condensed Consolidated Financial Statements for additional information.

Results of Continuing Operations

The following table sets forth our consolidated statement of operations data for the periods indicated as a percentage of revenue.(1)

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
         2011             2010             2011             2010      

Revenue

     100.0     100.0     100.0     100.0

Cost of sales

     62.9        59.1        61.6        63.7   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     37.1        40.9        38.4        36.3   

Operating expenses:

        

Research and development

     13.4        11.7        11.6        13.4   

Selling, general and administrative

     39.8        26.8        32.9        35.2   

Amortization of purchased intangibles

     0.9        0.8        0.8        0.9   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     54.0        39.4        45.3        49.4   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     (16.9     1.5        (6.9     (13.2

Other income (expense), net

     1.9        (1.8     0.4        0.1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from continuing operations before income taxes

     (15.0     (0.2     (6.5     (13.1

Income tax expense (benefit)

     —          0.2        (0.3     (0.4
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from continuing operations

     (15.0     (0.4     (6.8     (12.7

Loss from discontinued operations, net of tax

     (7.5     (1.0     (2.6     (3.3
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (22.4 )%      (1.4 )%      (9.4 )%      (15.9 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Percentages may not add due to rounding.

Certain financial information by segment was as follows (dollars in thousands):

 

Three Months Ended September 30, 2011

   Systems     Probes     Corporate
Unallocated
    Total  

Revenue

   $ 16,565      $ 7,185      $ —        $ 23,750   

Gross profit

   $ 5,162      $ 3,646      $ —        $ 8,808   

Gross margin

     31.2     50.7     —          37.1

Income (loss) from operations

   $ 817      $ 454      $ (5,286   $ (4,015

Three Months Ended September 30, 2010

                        

Revenue

   $ 18,025      $ 6,399      $ —        $ 24,424   

Gross profit

   $ 7,273      $ 2,720      $ —        $ 9,993   

Gross margin

     40.4     42.5     —          40.9

Income (loss) from operations

   $ 3,121      $ (265   $ (2,480   $ 376   

 

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Table of Contents

Nine Months Ended September 30, 2011

   Systems     Probes     Corporate
Unallocated
    Total  

Revenue

   $ 55,912      $ 21,400      $ —        $ 77,312   

Gross profit

   $ 19,632      $ 10,081      $ —        $ 29,713   

Gross margin

     35.1     47.1     —          38.4

Income (loss) from operations

   $ 7,074      $ 126      $ (12,505   $ (5,305

Nine Months Ended September 30, 2010

                        

Revenue

   $ 46,835      $ 19,721      $ —        $ 66,556   

Gross profit

   $ 15,622      $ 8,522      $ —        $ 24,144   

Gross margin

     33.4     43.2     —          36.3

Income (loss) from operations

   $ 2,161      $ (911   $ (10,016   $ (8,766

 

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Table of Contents

Revenue

Revenue information was as follows (dollars in thousands):

 

     Three Months Ended Sept. 30,      Dollar
Change
    % Change  

Revenue

       2011              2010           

Systems

   $ 16,565       $ 18,025       $ (1,460     (8.1 )% 

Probes

     7,185         6,399         786        12.3
  

 

 

    

 

 

    

 

 

   

Total

   $ 23,750       $ 24,424       $ (674     (2.8 )% 
  

 

 

    

 

 

    

 

 

   
     Nine Months Ended Sept. 30,      Dollar
Change
    % Change  

Revenue

       2011              2010           

Systems

   $ 55,912       $ 46,835       $ 9,077        19.4

Probes

     21,400         19,721         1,679        8.5
  

 

 

    

 

 

    

 

 

   

Total

   $ 77,312       $ 66,556       $ 10,756        16.2
  

 

 

    

 

 

    

 

 

   

Systems

Certain financial information which contributed to the Systems revenue results was as follows:

 

     Three Months Ended
September 30, 2011
Compared to Three
Months Ended
September 30, 2010
    Nine Months Ended
September 30, 2011
Compared to Nine
Months Ended
September 30, 2010
 

Percentage decrease in probe station unit sales

     (37.3 )%      (11.8 )% 

Percentage increase in average sales price (“ASP”)

     28.3     36.3

The decrease in revenue for the three-month period ended September 30, 2011 compared to same period of the prior year was primarily the result of a decrease in unit sales, offset partially by an increase in ASP. The increase in revenue for the nine-month period ended September 30, 2011 compared to the same period of the prior year was primarily the result of an increase in ASP, offset partially by a decrease in unit sales.

The decreases in unit sales in the three and nine-month periods ended September 30, 2011 compared to the same periods of 2010 were primarily due to the timing of units sold and a decrease in sales of more compact 150mm manual stations. ASP’s in the three and nine-month periods ended September 30, 2011 compared to the same periods of 2010 were positively affected by changes in sales mix, as a larger number of higher-end 300mm and special application stations were sold relative to total unit sales.

Probes

The increases in Probes revenue for the three and nine-month periods ended September 30, 2011 compared to the same periods of 2010 were primarily the result of higher unit sales of our production probe cards and engineering probes.

Cost of Sales and Gross Margin

Cost of sales includes purchased materials, fabrication, assembly, test, installation labor, overhead, customer-specific engineering costs, warranty costs, royalties and provision for inventory valuation reserves.

 

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Cost of sales information was as follows (dollars in thousands):

 

     Three Months Ended Sept. 30,      Dollar
Change
    % Change  

Cost of Sales

       2011              2010           

Systems

   $ 11,403       $ 10,752       $ 651        6.1

Probes

     3,539         3,679         (140     (3.8 )% 
  

 

 

    

 

 

    

 

 

   

Total

   $ 14,942       $ 14,431       $ 511        3.5
  

 

 

    

 

 

    

 

 

   
     Nine Months Ended Sept. 30,      Dollar
Change
    % Change  

Cost of Sales

       2011              2010           

Systems

   $ 36,280       $ 31,213       $ 5,067        16.2

Probes

     11,319         11,199         120        1.1
  

 

 

    

 

 

    

 

 

   

Total

   $ 47,599       $ 42,412       $ 5,187        12.2
  

 

 

    

 

 

    

 

 

   

Cost of sales was affected by changes in sales as discussed above combined with fluctuations in our gross margin (gross profit as a percentage of revenue), as discussed below.

Gross margins were as follows:

 

     Three Months  Ended
September 30,
    Nine Months  Ended
September 30,
 

Gross Margins

   2011     2010     2011     2010  

Systems

     31.2     40.4     35.1     33.4

Probes

     50.7     42.5     47.1     43.2

Overall

     37.1     40.9     38.4     36.3

Systems

The decrease in Systems gross margins in the three-month period of 2011 compared to the same period of 2010 was primarily due to factory relocation costs in the third quarter of 2011 of approximately $0.4 million and decreased sales volumes, which resulted in higher unallocated fixed overhead costs recorded as period expenses in cost of sales.

The increase in Systems gross margins in the nine-month period of 2011 compared to the same period of 2010 was primarily due to $0.8 million of purchase price allocation adjustments in the 2010 period to value finished goods and work-in-process inventory acquired with the SUSS Test acquisition at their estimated selling price less cost to sell. Accordingly, when such inventory was sold, it resulted in near zero gross margins.

Probes

The increases in Probes gross margins for the three and nine-month periods ended September 30, 2011, compared to the same periods of 2010, were primarily due to decreased factory costs and higher sales volumes, which resulted in lower unallocated fixed overhead costs recorded as period expenses in cost of sales.

Overall

Overall changes in gross margins are primarily attributable to changes in Systems gross margin as that segment represents greater than two-thirds of total revenue and cost of sales in all periods presented.

Research and Development

Research and development costs are expensed as incurred and include compensation and related expenses for personnel, materials, consultants and overhead.

 

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Information regarding our research and development expense was as follows (dollars in thousands):

 

     Three Months Ended Sept. 30,      Dollar
Change
     % Change  
         2011              2010            

Research and development

   $ 3,175       $ 2,860       $ 315         11.0
     Nine Months Ended Sept. 30,      Dollar
Change
     % Change  
     2011      2010        

Research and development

   $ 8,937       $ 8,886       $ 51         0.6

The increase in the three-month period ended September 30, 2011 compared to the same period of 2010 was primarily due to a $0.1 million increase in salary, benefits and incentive compensation, a $0.1 million increase in professional fees and a $0.1 million increase in project related expenses.

The increase in the nine-month period ended September 30, 2011 compared to the same period of 2010 was primarily due to a $0.5 million increase in salary, benefits and incentive compensation, offset by $0.2 million increase in government grant reimbursements, a $0.2 million decrease in professional fees and a $0.1 million decrease in project related expenses.

Selling, General and Administrative

Selling, general and administrative, or SG&A, expense includes compensation and related expenses for personnel, travel, outside services, manufacturers’ representative commissions, internally developed patent and trademark amortization and overhead incurred in our sales, marketing, customer support, management, legal and other professional and administrative support functions, as well as costs to operate as a public company.

Information regarding our SG&A expense was as follows (dollars in thousands):

 

     Three Months Ended Sept. 30,      Dollar
Change
     % Change  
         2011              2010            

Selling, general and administrative

   $ 9,444       $ 6,557       $ 2,887         44.0
     Nine Months Ended Sept. 30,      Dollar
Change
     % Change  
     2011      2010        

Selling, general and administrative

   $ 25,471       $ 23,444       $ 2,027         8.6

The increase in the three-month period ended September 30, 2011 compared to the same period of 2010 was primarily due to a $2.1 million increase in restructuring charges, a $0.4 million increase in salary, benefits and incentive compensation and a $0.3 million increase in professional fees.

The increase in the nine-month period ended September 30, 2011 compared to the same period of 2010 was primarily due to a $2.2 million increase in restructuring charges and a $0.6 million increase in salary, benefits and incentive compensation, partially offset by a $0.3 million decrease in internal and external commissions due to changes in commissions programs and sales mix and a $0.7 million decrease in professional fees primarily due to the acquisition of SUSS Test in January 2010.

Restructuring charges in SG&A during 2011 related to the abandonment of excess leased facilities in connection with the consolidation of our manufacturing operations and our corporate headquarters.

Amortization of Purchased Intangibles

Amortization of purchased intangibles includes amortization related to our acquisitions. Amortization totaled $0.2 million in the three-month periods ended September 30, 2011 and 2010, and $0.6 million in the nine-month periods ended September 30, 2011 and 2010. Net purchased intangibles totaled $2.5 million at September 30, 2011 and amortization currently totals approximately $0.2 million per quarter.

 

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Other Income (Expense)

Other income (expense) typically includes interest income, interest expense, gains and losses on foreign currency forward contracts and foreign currency gains and losses. Other income (expense) can also include other miscellaneous non-operating gains and losses.

Other income (expense), net was comprised of the following (in thousands):

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
         2011             2010         2011     2010  

Interest income, net

   $ 20      $ 9      $ 51      $ 54   

Foreign currency gains (losses)

     473        (400     367        41   

Losses on foreign currency forward contracts

     (44     (24     (158     (63

Other

     6        (13     42        34   
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 455      $ (428   $ 302      $ 66   
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest income represents interest earned on cash and cash equivalents and investments in marketable securities.

Foreign currency gains and losses primarily result from a combination of changes in foreign currency exchange rates and the net value of monetary assets and liabilities denominated in yen, euro and other foreign currencies.

Income Taxes

Our income tax expense totaled $0.2 million, or 4.8% of loss before income taxes, in the first nine months of 2011 and represents the estimated tax expense on income in foreign tax jurisdictions.

Our benefit from income taxes totaled $0.3 million, or 3.1% of loss before income taxes, in the first nine months of 2010 and represented a benefit for the release of valuation allowance on deferred tax assets in Germany due to the acquisition of SUSS Test in the first quarter of 2010, offset by tax expense due to expected taxable income in foreign tax jurisdictions for 2010.

Liquidity and Capital Resources

Changes in our assets and liabilities as presented on our Condensed Consolidated Statements of Cash Flows do not equal the changes in such assets and liabilities as calculated per our Condensed Consolidated Balance Sheets due to the effects of fluctuating foreign exchange rates and sale of our sockets business in September 2011.

Net cash used in operating activities in the first nine months of 2011 was $1.5 million and consisted of our net loss of $7.2 million, net non-cash expenses of $6.7 million and net changes in our operating assets and liabilities as described below.

Accounts receivable, net decreased by $0.6 million to $19.1 million at September 30, 2011, compared to $19.7 million at December 31, 2010. The decrease in accounts receivable was primarily due to lower sales, the sale of our Sockets business during the third quarter of 2011 and the timing of shipments during the third quarter of 2011 compared to the fourth quarter of 2010.

Inventories increased by $3.4 million to $24.2 million at September 30, 2011, compared to $20.8 million at December 31, 2010. The increase in inventory was primarily due to increased purchases in preparation of our factory consolidation and delays in the shipment of stations at the end of the third quarter of 2011. This increase was partially offset by inventory reserve charges of $0.6 million and sale of our sockets business in September 2011. If our actual results are significantly different than our current expectations for 2011, we may incur charges to write down inventory in future periods.

Prepaid expenses and other increased by $2.1 million to $4.1 million at September 30, 2011, compared to $2.0 million at December 31, 2010 primarily due to an increase in VAT receivables from Germany.

 

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Accrued liabilities increased by $2.0 million to $8.3 million at September 30, 2011, compared to $6.3 million at December 31, 2010 primarily due to an increase in accrued lease abandonment (restructuring) costs and accrued sales tax and VAT payables.

Other long-term liabilities increased by $1.7 million to $4.5 million at September 30, 2011, compared to $2.8 million at December 31, 2010 primarily due to an increase in accrued lease abandonment (restructuring) costs.

Fixed asset purchases of $3.4 million in the first nine months of 2011 were primarily for improvements to our business information systems, research and development tools, production testing equipment and facility improvements related to our previously announced factory consolidation. We anticipate fixed asset additions for all of 2011 to be approximately $4.6 million primarily for production related equipment, facility improvements, research and development tools, business information systems and information technology equipment.

During the third quarter of 2011, we received $0.5 million in cash related to the sale of our Sockets business and will receive an additional $25,000 in the third quarter of 2012.

In September 2011, our board of directors authorized a stock repurchase program under which up to $2.0 million of our common stock may be repurchased from time to time in the open market or in privately negotiated transactions. As of September 30, 2011, there had been no stock repurchases. In November 2011, we repurchased $2.0 million, or 714,285 shares, of our common stock at an average price of $2.80 per share. Following this repurchase, no amounts remain available for repurchase under this program.

We anticipate meeting our cash requirements for the next 12 months and for the foreseeable future from existing cash and cash equivalents and short-term marketable securities, which totaled $15.1 million at September 30, 2011. In addition, we also had $3.5 million of long-term marketable securities at September 30, 2011.

We continue to evaluate opportunities for acquisition and expansion and any such transactions, if consummated, may use a portion of our cash and marketable securities.

Recent Accounting Guidance

See Note 14 of Notes to Condensed Consolidated Financial Statements.

Contractual Commitments

The following is a summary of our contractual commitments and obligations as of September 30, 2011 (in thousands):

 

     Payments Due By Period  

Contractual Obligation

   Total      Remainder
of 2011
     2012 and
2013
     2014 and
2015
     2016 and
beyond
 

Operating Leases

   $ 11,833       $ 778       $ 5,751       $ 4,614       $ 690   

Capital Leases

     22         4         18         —           —     

Purchase Order Commitments

     4,763         3,963         800         —           —     

Forward contracts

     780         780         —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 17,398       $ 5,525       $ 6,569       $ 4,614       $ 690   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Purchase order commitments primarily represent open orders for inventory.

Seasonality

Typically, our revenue is lower in our fiscal first quarter than in our fiscal fourth quarter preceding it. In addition, as is typical in our industry, we recognize a large percentage of our quarterly revenue in the last month of the quarter. However, our seasonality can be affected by general economic trends and it should not be expected that historical revenue patterns will continue.

 

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Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes in our reported market risks or risk management policies since the filing of our 2010 Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission on March 2, 2011.

Item 4. Controls and Procedures

Changes in Internal Control Over Financial Reporting

There has been no change in our internal control over financial reporting during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Disclosure Controls and Procedures

Our management has evaluated, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934 (the “Exchange Act”). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures are effective in ensuring that information required to be disclosed in our Exchange Act reports is (1) recorded, processed, summarized and reported in a timely manner, and (2) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Limitation on Effectiveness of Controls

Our management, including our Chief Executive Officer and Chief Financial Officer, do not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all errors and all occurrences of fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control systems are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of all controls must be considered relative to their costs. Control systems can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. In addition, over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that the control systems will detect all control issues, including instances of fraud, if any.

 

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PART II – OTHER INFORMATION

Item 1A. Risk Factors

Our Annual Report on Form 10-K for the year ended December 31, 2010 includes a detailed discussion of our risk factors. There have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K, other than as set forth below. Accordingly, the information in this Form 10-Q should be read in conjunction with the risk factors and information disclosed in our Annual Report on Form 10-K for the year ended December 31, 2010, which was filed with the Securities and Exchange Commission on March 2, 2011 and the risk factor set forth below. See also Part I, Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, in this report under the heading “Forward-Looking Statements and Risk Factors.”

Inventory located in Thailand may be subject to damage due to flood conditions.

As of November 1, 2011, approximately $1.0 million of our inventory on consignment is located at a manufacturing facility of a key supplier in Thailand. Recent flooding at this facility may endanger this inventory or result in delays in accessing it. As of the date of this report, we are unable to assess whether the inventory has been damaged. Any damage to this inventory or any such delay in accessing it could adversely affect our results of operations and financial condition.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Use of Proceeds

We filed a registration statement on Form S-1, File No. 333-113256 for an initial public offering of common stock, which was declared effective by the Securities and Exchange Commission on December 15, 2004. In that offering, we sold an aggregate of 3.3 million shares of our common stock with net offering proceeds of $41.6 million. No payments were made to our directors or officers or their associates, holders of 10% or more of any class of our equity securities or to any affiliates.

As of September 30, 2011, we had used approximately $5.5 million of those proceeds for the repayment of indebtedness and $27.1 million, net of cash acquired, for our acquisitions of the eVue product line and Gryphics, Inc. and certain assets of Synatron GmbH and SUSS Test.

Item 6. Exhibits

The following exhibits are filed herewith or incorporated by reference hereto and this list is intended to constitute the exhibit index:

 

    2.1   Asset Purchase Agreement dated as of September 22, 2011 by and among Cascade Microtech, Inc., Gryphics, Inc., R&D Sockets, Inc. and R&D Circuits Holdings LLC*. Incorporated by reference to Form 8-K as filed with the Securities and Exchange Commission on September 26, 2011.
  10.1   Assignment, Assumption and Amendment of Lease dated as of September 22, 2011 by and among Cascade Microtech, Inc. and R&D Sockets, Inc.*. Incorporated by reference to Form 8-K as filed with the Securities and Exchange Commission on September 26, 2011.
  31.1   Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934.
  31.2   Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934.
  32.1   Certification of Chief Executive Officer pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.
  32.2   Certification of Chief Financial Officer pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.
101.INS**   XBRL Instance Document.
101.SCH**   XBRL Taxonomy Extension Schema Document.
101.CAL**   XBRL Taxonomy Extension Calculation Linkbase Document.
101.LAB**   XBRL Taxonomy Extension Label Linkbase Document.
101.PRE**   XBRL Taxonomy Extension Presentation Linkbase Document.

 

* Schedules and similar attachments to the Asset Purchase Agreement and the Lease Assumption Agreement have been omitted pursuant to Item 601(b)(2) of Regulation S-K. We agree to furnish supplementally a copy of any omitted schedule or similar attachment to the Securities and Exchange Commission upon request.
** Pursuant to Rule 406T of Regulation S-T, the Interactive data Files on Exhibit 101, submitted electronically herewith, are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 or the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Date: November 9, 2011   CASCADE MICROTECH, INC.
  (Registrant)
 

 

By:

 

/s/ MICHAEL D. BURGER

  Michael D. Burger
  Director, President
  and Chief Executive Officer
  (Principal Executive Officer)
  By:  

/s/ JEFF KILLIAN

  Jeff Killian
  Chief Financial Officer and Treasurer
  (Principal Financial and Accounting Officer)

 

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