UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended March 31,June 30, 2014

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 May 5,August 1, 2014 was 16,231,517.16,334,754.

 

 

 


CASCADE MICROTECH, INC.

INDEX TO FORM 10-Q

 

   Page 

PART I - FINANCIAL INFORMATION

  
Item 1.  

Financial Statements

  
  

Condensed Consolidated Balance Sheets (unaudited) - March 31,June 30, 2014 and December 31, 2013

   2  
  

Condensed Consolidated Statements of Operations (unaudited) - Three and Six Months Ended March 31,June 30, 2014 and 2013

   3  
  

Condensed Consolidated Statements of Comprehensive Income (unaudited) - Three and Six Months Ended March 31,June 30, 2014 and 2013

   4  
  

Condensed Consolidated Statements of Cash Flows (unaudited) - ThreeSix Months Ended March 31,June 30, 2014 and 2013

   5  
  

Notes to Condensed Consolidated Financial Statements (unaudited)

   6  
Item 2.  

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

   1112  
Item 3.  

Quantitative and Qualitative Disclosures About Market Risk

   1720  
Item 4.  

Controls and Procedures

   1720  

PART II- OTHER INFORMATION

  
Item 1A.  

Risk Factors

   1821  
Item 2.  

Unregistered Sales of Equity Securities and Use of Proceeds

   1821  
Item 6.  

Exhibits

   1921  

Signatures

   2022  

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Cascade Microtech, Inc.

Condensed Consolidated Balance Sheets

(Unaudited, In thousands)thousands, except per share amounts)

 

  March 31,
2014
 December 31,
2013
   June 30, December 31, 
  2014 2013 

Assets

      

Current Assets:

      

Cash and cash equivalents

  $24,945   $17,172    $27,764   $17,172  

Short-term marketable securities

   2,737   4,278     1,683   4,278  

Restricted cash

   831   1,082     825   1,082  

Accounts receivable, net of allowances of $229 and $269

   21,642   26,520  

Accounts receivable, net of allowances of $217 and $269

   21,912   26,520  

Inventories

   25,598   24,884     27,095   24,884  

Prepaid expenses and other

   2,616   2,147     3,090   2,147  

Deferred income taxes

   2,270   2,268     2,273   2,268  
  

 

  

 

   

 

  

 

 

Total Current Assets

   80,639    78,351     84,642    78,351  

Fixed assets, net of accumulated depreciation of $27,489 and $27,730

   5,805    6,403  

Fixed assets, net of accumulated depreciation of $28,300 and $27,730

   6,796    6,403  

Goodwill

   14,473    14,471     14,361    14,471  

Purchased intangible assets, net of accumulated amortization of $5,962 and $5,228

   16,206    16,937  

Purchased intangible assets, net of accumulated amortization of $6,681 and $5,228

   15,364    16,937  

Deferred income taxes

   1,236    1,235     1,273    1,235  

Other assets, net of accumulated amortization of $4,404 and $4,349

   1,092    1,114  

Other assets, net of accumulated amortization of $4,453 and $4,349

   1,039    1,114  
  

 

  

 

   

 

  

 

 

Total Assets

  $119,451   $118,511    $123,475   $118,511  
  

 

  

 

   

 

  

 

 

Liabilities and Shareholders’ Equity

      

Current Liabilities:

      

Accounts payable

  $7,193   $7,229    $7,405   $7,229  

Deferred revenue

   2,092    2,555     2,183    2,555  

Accrued liabilities

   9,158    8,859     9,757    8,859  
  

 

  

 

   

 

  

 

 

Total Current Liabilities

   18,443    18,643     19,345    18,643  

Deferred revenue

   566    548     538    548  

Other long-term liabilities

   1,897    2,119     1,877    2,119  
  

 

  

 

   

 

  

 

 

Total Liabilities

   20,906    21,310     21,760    21,310  

Shareholders’ Equity:

      

Common stock, $0.01 par value. Authorized 100,000 shares; issued and outstanding: 16,186 and 16,218

   162    162  

Common stock, $0.01 par value. Authorized 100,000 shares; issued and outstanding: 16,313 and 16,218

   163    162  

Additional paid-in capital

   107,646    107,908     109,100    107,908  

Accumulated other comprehensive income

   132    118     19    118  

Accumulated deficit

   (9,395  (10,987   (7,567  (10,987
  

 

  

 

   

 

  

 

 

Total Shareholders’ Equity

   98,545    97,201     101,715    97,201  
  

 

  

 

   

 

  

 

 

Total Liabilities and Shareholders’ Equity

  $119,451   $118,511    $123,475   $118,511  
  

 

  

 

   

 

  

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

Cascade Microtech, Inc.

Condensed Consolidated Statements of Operations

(Unaudited, In thousands, except per share amounts)

 

  For the Three Months Ended March 31, 
  2014 2013   For the Three Months Ended June 30, For the Six Months Ended June 30, 
  2014 2013 2014 2013 

Revenue

  $33,810   $27,471    $33,452   $30,307   $67,262   $57,778  

Cost of sales

   17,537   15,928     16,466   16,032   34,003   31,960  
  

 

  

 

   

 

  

 

  

 

  

 

 

Gross profit

   16,273    11,543     16,986    14,275    33,259    25,818  

Operating expenses:

        

Research and development

   3,241    2,456     3,428    2,694    6,669    5,150  

Selling, general and administrative

   10,430    8,046     10,630    9,064    21,060    17,110  
  

 

  

 

   

 

  

 

  

 

  

 

 

Total operating expenses

   13,671    10,502     14,058    11,758    27,729    22,260  
  

 

  

 

   

 

  

 

  

 

  

 

 

Income from operations

   2,602    1,041     2,928    2,517    5,530    3,558  

Other income (expense):

        

Interest income, net

   2    20     7    2    9    22  

Other, net

   (69  (244   (56  (112  (125  (356
  

 

  

 

   

 

  

 

  

 

  

 

 

Total other income (expense), net

   (67  (224   (49  (110  (116  (334
  

 

  

 

   

 

  

 

  

 

  

 

 

Income before income taxes

   2,535    817     2,879    2,407    5,414    3,224  

Income tax expense

   943    70     1,051    221    1,994    291  
  

 

  

 

   

 

  

 

  

 

  

 

 

Net income

  $1,592   $747    $1,828   $2,186   $3,420   $2,933  
  

 

  

 

   

 

  

 

  

 

  

 

 

Basic net income per share

  $0.10   $0.05    $0.11   $0.15   $0.21   $0.21  
  

 

  

 

   

 

  

 

  

 

  

 

 

Diluted net income per share

  $0.10   $0.05    $0.11   $0.15   $0.20   $0.20  
  

 

  

 

   

 

  

 

  

 

  

 

 

Shares used in per share calculations:

        

Basic

   16,242    14,227     16,255    14,342    16,249    14,283  
  

 

  

 

   

 

  

 

  

 

  

 

 

Diluted

   16,679    14,599     16,751    14,652    16,725    14,626  
  

 

  

 

   

 

  

 

  

 

  

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

Cascade Microtech, Inc.

Condensed Consolidated Statements of Comprehensive Income

(Unaudited, In thousands)

 

  For the Three Months Ended March 31,   

For the Three Months Ended

 

For the Six Months Ended

 
  2014   2013   June 30, June 30, 
  2014 2013 2014 2013 

Net income

  $1,592    $747    $1,828   $2,186   $3,420   $2,933  

Unrealized holding losses

   (3 (1 (3 (1

Change in cumulative translation adjustment

   14     (522   (110 267   (96 (255
  

 

   

 

   

 

  

 

  

 

  

 

 

Comprehensive income

  $1,606    $225    $1,715   $2,452   $3,321   $2,677  
  

 

   

 

   

 

  

 

  

 

  

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

Cascade Microtech, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited, In thousands)

 

  For the Three Months Ended March 31,   For the Six Months Ended June 30, 
  2014 2013   2014 2013 

Cash flows from operating activities:

      

Net income

  $1,592   $747    $3,420   $2,933  

Adjustments to reconcile net income to net cash flows provided by operating activities:

   

Adjustments to reconcile net income to net cash provided by operating activities:

   

Depreciation expense

   829   963     1,628   1,906  

Amortization of intangibles

   785   237     1,565   470  

Stock-based compensation

   449   334     1,270   872  

Loss on write-down or disposal of long-lived assets

   63   1     66   1  

Deferred income taxes

   (4 30     (12 49  

(Increase) decrease in:

      

Accounts receivable, net

   4,878   (63   4,586   (504

Inventories

   (499 483     (2,078 1,973  

Prepaid expenses and other

   (502 344     (797 433  

Increase (decrease) in:

      

Accounts payable

   (36 1,441     (985 88  

Deferred revenue

   (445 (1,050   (382 (2,092

Accrued and other long-term liabilities

   303   (2,008   1,331   (1,023
  

 

  

 

   

 

  

 

 

Net cash provided by operating activities

   7,413    1,459     9,612    5,106  

Cash flows from investing activities:

      

Purchase of marketable securities

   (629  (3,405   (1,128  (5,374

Proceeds from sale of marketable securities

   2,171    3,436     3,720    5,665  

Decrease in restricted cash

   251    —    

Purchase of fixed assets

   (513  (559   (1,108  (851

Proceeds from sale of fixed assets

   10    13     10    13  

Decrease in restricted cash

   249    1,061  

Cash paid for acquisitions, net of cash acquired

   (226  —       (654  —    
  

 

  

 

   

 

  

 

 

Net cash provided by (used in) investing activities

   1,064    (515

Net cash provided by investing activities

   1,089    514  

Cash flows from financing activities:

      

Principal payments on capital lease obligations

   —      (1   —      (2

Witholding taxes paid on net settlement of vested restricted stock units

   (174  (141

Withholding taxes paid on net settlement of vested restricted stock units

   (247  (202

Proceeds from issuances of common stock

   280    113     1,203    578  

Cash paid for repurchase of common stock

   (817  (58   (1,033  (58
  

 

  

 

   

 

  

 

 

Net cash used in financing activities

   (711  (87

Net cash provided by (used in) financing activities

   (77  316  

Effect of exchange rate changes on cash and cash equivalents

   7    (196   (32  (94
  

 

  

 

   

 

  

 

 

Increase in cash and cash equivalents

   7,773    661     10,592    5,842  

Cash and cash equivalents:

      

Beginning of period

   17,172    17,927     17,172    17,927  
  

 

  

 

   

 

  

 

 

End of period

  $24,945   $18,588    $27,764   $23,769  
  

 

  

 

   

 

  

 

 

Supplemental disclosure of cash flow information:

      

Cash paid for income taxes, net

  $146   $246    $717   $440  

Transfer of inventory from fixed assets

   (213  —    

Transfer to inventory from fixed assets

   (213  —    

See accompanying Notes to Condensed Consolidated Financial Statements.

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, 2013 is derived from our 2013 Annual Report on Form 10-K. The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in our 2013 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 with declines in value below cost being recorded quarterly as a component of cost of sales, therefore establishing a new cost basis for the inventory.

Inventory charges were as follows (in thousands):

 

   Three Months Ended
March 31,
 
   2014   2013 

Inventory charges

  $454    $393  
   Three Months Ended
June 30,
   Six Months Ended
June 30,
 
   2014   2013   2014   2013 

Inventory charges

  $344    $356    $799    $749  

Inventories consisted of the following (in thousands):

 

  March 31,
2014
   December 31
2013
   June 30,
2014
   December 31
2013
 

Raw materials

  $15,668    $15,234    $16,585    $15,234  

Work-in-process

   3,120     2,958     2,945     2,958  

Finished goods

   6,810     6,692     7,565     6,692  
  

 

   

 

   

 

   

 

 
  $25,598    $24,884    $27,095    $24,884  
  

 

   

 

   

 

   

 

 

Note 3. Net Income Per Share

The following table reconciles the shares used in calculating basic net income per share and diluted net income per share (in thousands):

 

  Three Months Ended
March 31,
   Three Months Ended
June 30,
   Six Months Ended
June 30,
 
  2014   2013   2014   2013   2014   2013 

Shares used to calculate basic net income per share

   16,242     14,227     16,255     14,342     16,249     14,283  

Dilutive effect of outstanding stock options and restricted stock units (“RSUs”)

   437     372  

Dilutive effect of outstanding options and restricted stock units (“RSUs”)

   496     310     476     343  
  

 

   

 

   

 

   

 

   

 

   

 

 

Shares used to calculate diluted net income per share

   16,679     14,599     16,751     14,652     16,725     14,626  
  

 

   

 

   

 

   

 

   

 

   

 

 

Securities not considered as they would have been antidilutive

   1,056     1,239     1,020     1,132     1,040     1,099  
  

 

   

 

   

 

   

 

   

 

   

 

 

Note 4. Product Warranty

We estimate a liability for costs to repair or replace products under warranty for periods ranging from 90 days to one year 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 costs. The liability for product warranties is included in Accrued liabilities on our Condensed Consolidated Balance Sheets.

Product warranty activity was as follows (in thousands):

 

  Three Months Ended
March 31,
   Six Months Ended June 30, 
  2014 2013   2014 2013 

Warranty accrual, beginning of period

  $745   $716    $745   $716  

Reductions for warranty charges

   (243 (366   (490 (399

Additions to warranty reserve

   240   327     493   288  
  

 

  

 

   

 

  

 

 

Warranty accrual, end of period

  $742   $677    $748   $605  
  

 

  

 

   

 

  

 

 

Note 5. Goodwill and Purchased Intangible Assets

Goodwill

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

 

  Three Months
Ended

March 31, 2014
   Year Ended
December 31,
2013
   Six Months
Ended

June 30, 2014
 Year Ended
December 31,
2013
 

Balance, beginning of period

  $14,471    $990    $14,471   $990  

Acquisition of the Reliability Test Product division of Aetrium Incorporated (“RTP”)

   —       641     —     641  

Acquisition of ATT Advanced Temperature Test Systems GmbH ATT (“ATT Systems”)

   —       12,551     —     12,551  

Effect of exchange rate changes

   2     289     (110 289  
  

 

   

 

   

 

  

 

 

Balance, end of period

  $14,473    $14,471    $14,361   $14,471  
  

 

   

 

   

 

  

 

 

Purchased Intangible Assets

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

 

  March 31,
2014
 December 31,
2013
   June 30,
2014
 December 31,
2013
 

Purchased Intangible Assets

   

Customer relationships

  $7,199   $7,198    $7,171   $7,198  

Core technology

   13,729   13,728     13,645   13,728  

Trademarks and tradenames

   1,240   1,239     1,229   1,239  
  

 

  

 

   

 

  

 

 
   22,168    22,165     22,045    22,165  

Less accumulated amortization

   (5,962  (5,228   (6,681  (5,228
  

 

  

 

   

 

  

 

 
  $16,206   $16,937    $15,364   $16,937  
  

 

  

 

   

 

  

 

 

Patents

   

Patents

  $4,632   $4,632  

Less accumulated amortization

   (4,453  (4,349
  

 

  

 

 
  $179   $283  
  

 

  

 

 

Purchased intangibleIntangible asset amortization is a component of Selling, general and administrative expense and was as follows (in thousands):

 

   Three Months Ended
March 31,
 
   2014   2013 

Amortization expense

  $730    $158  
   Three Months Ended
June 30,
   Six Months Ended
June 30,
 
   2014   2013   2014   2013 

Amortization expense

  $780    $234    $1,565    $470  

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

 

Remainder of 2014

  $2,170    $1,506  

2015

   2,814     2,896  

2016

   2,614     2,595  

2017

   2,595     2,577  

2018

   2,518     2,499  

Thereafter

   3,495     3,470  
  

 

   

 

 
  $16,206    $15,543  
  

 

   

 

 

Note 6. Accrued Liabilities

Accrued liabilities consisted of the following (in thousands):

 

  March 31,
2014
   December 31,
2013
   June 30,
2014
   December 31,
2013
 

Accrued compensation and benefits

  $2,859    $2,812    $4,121    $2,812  

Accrued sales taxes and VAT

   373     470     108     470  

Accrued income taxes

   1,284     492     1,773     492  

Accrued warranty

   742     745     748     745  

Contingent consideration related to our acquisition of RTP

   1,385     1,350     500     1,350  

Payable to seller related to our acquisition of ATT Systems

   518     746     514     746  

Accrued restructuring costs

   1,112     1,163     1,188     1,163  

Other

   885     1,081     805     1,081  
  

 

   

 

   

 

   

 

 
  $9,158    $8,859    $9,757    $8,859  
  

 

   

 

   

 

   

 

 

Note 7. Stock-Based Compensation and Stock-Based Plans

Stock-based compensation was included in our Condensed Consolidated Statements of Operations as follows (in thousands):

 

  Three Months Ended
March 31,
   Three Months Ended
June 30,
   Six Months Ended
June 30,
 
  2014   2013   2014   2013   2014   2013 

Cost of sales

  $58    $51    $62    $45    $120    $96  

Research and development

   64     53     76     47     140     100  

Selling, general and administrative

   327     230     683     446     1,010     676  
  

 

   

 

   

 

   

 

   

 

   

 

 
  $449    $334    $821    $538    $1,270    $872  
  

 

   

 

   

 

   

 

   

 

   

 

 

Stock Incentive Plans

Stock option activity for the first threesix months of 2014 was as follows:

 

  Options
Outstanding
 Weighted
Average
Exercise Price
   Options
Outstanding
 Weighted
Average
Exercise Price
 

Outstanding at December 31, 2013

   1,042,937   $6.52     1,042,937   $6.52  

Granted

   90,000   9.61     90,000   9.61  

Exercised

   (30,175 9.27     (98,686 8.98  

Forfeited

   (1,800 10.17     (1,800 10.17  
  

 

    

 

  

Outstanding at March 31, 2014

   1,100,962    6.70  

Outstanding at June 30, 2014

   1,032,451    6.55  
  

 

    

 

  

RSU activity for the first threesix months of 2014 was as follows:

 

  Restricted
Stock

Units
 Weighted
Average

Grant Date
Per Share
Fair Value
   Restricted
Stock

Units
 Weighted
Average

Grant Date
Per Share
Fair Value
 

Outstanding at December 31, 2013

   409,403   $6.87     409,403   $6.87  

Granted

   25,500   9.61     171,750   10.21  

Vested

   (42,645 6.76     (98,020 7.46  

Forfeited

   —      —       —      —    
  

 

    

 

  

Outstanding at March 31, 2014

   392,258    7.06  

Outstanding at June 30, 2014

   483,133    7.93  
  

 

    

 

  

As of March 31,June 30, 2014, total unrecognized stock-based compensation related to outstanding, but unvested, options and RSUs was $4.2$4.9 million, which will be recognized over the weighted average remaining vesting period of 2.62.5 years.

Employee Stock Purchase Plan

During the first six months of 2014, we issued 35,722 shares of our common stock pursuant to our 2013 Employee Share Purchase Plan (the “2013 ESPP”) at a price of $8.88 per share, which represented a discount of $1.90 per share from the fair value of our common stock on the date of issuance. As of June 30, 2014, a total of 964,278 shares remained available for issuance pursuant to the 2013 ESPP.

Note 8. 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.

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

 

  Systems Probes Corporate
Unallocated
 Total   Systems Probes Corporate
Unallocated
 Total 

Three Months Ended March 31, 2014

     

Three Months Ended June 30, 2014

     

Revenue

  $21,560   $12,250   $—     $33,810    $21,824   $11,628   $—     $33,452  

Gross profit

  $9,198   $7,075   $—     $16,273    $10,139   $6,847   $—     $16,986  

Gross margin

   42.7 57.8  —     48.1   46.5 58.9  —     50.8

Income (loss) from operations

  $2,479   $4,426   $(4,303 $2,602    $3,352   $3,900   $(4,324 $2,928  

Three Months Ended March 31, 2013

     

Three Months Ended June 30, 2013

     

Revenue

  $17,700   $9,771   $—     $27,471    $19,847   $10,460   $—     $30,307  

Gross profit

  $6,712   $4,831   $—     $11,543    $8,760   $5,515   $—     $14,275  

Gross margin

   37.9 49.4  —     42.0   44.1 52.7  —     47.1

Income (loss) from operations

  $1,642   $2,424   $(3,025 $1,041    $3,268   $2,990   $(3,741 $2,517  

   Systems  Probes  Corporate
Unallocated
  Total 

Six Months Ended June 30, 2014

     

Revenue

  $43,384   $23,878   $—     $67,262  

Gross profit

  $19,337   $13,922   $—     $33,259  

Gross margin

   44.6  58.3  —      49.4

Income (loss) from operations

  $5,831   $8,326   $(8,627 $5,530  

Six Months Ended June 30, 2013

     

Revenue

  $37,547   $20,231   $—     $57,778  

Gross profit

  $15,472   $10,346   $—     $25,818  

Gross margin

   41.2  51.1  —      44.7

Income (loss) from operations

  $4,910   $5,414   $(6,766 $3,558  

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.

No customer accounted for 10% or greater of our total revenue in the three-monthsix-month periods ended March 31,June 30, 2014 or 2013, or in the three-month period ended June 30, 2014. We had one customer which represented 11.3% of our total revenue in the three-month period ended June 30, 2013.

Note 9. 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.

The disclosures related to our financial assets and (liabilities) that are reported at fair value on a recurring basis are as follows (in thousands):

 

  March 31, 2014  December 31, 2013  June 30, 2014   December 31, 2013 
  Fair Value Input Level  Fair Value Input Level  Fair Value Input Level   Fair Value Input Level 

Marketable securities – corporate equities

  $1   Level 1  $1   Level 1  $4    Level 1    $1    Level 1  

Marketable securities – corporate obligations

  $2,736   Level 2  $4,277   Level 2  $1,679    Level 2    $4,277    Level 2  

Forward sale contracts for Japanese yen

  $2,626   Level 2  $523   Level 2  $2,960    Level 2    $523    Level 2  

Forward purchase contract for euro

  $1,375   Level 2  $2,061   Level 2  $545    Level 2    $2,061    Level 2  

Forward sale contract for euro

  $24,821   Level 2  $24,561   Level 2  $25,203    Level 2    $24,561    Level 2  

Contingent consideration related to our acquisition of RTP

  $(1,385 Level 3  $(1,350 Level 3  $(500  Level 3    $(1,350  Level 3  

The fair value of our marketable securities is determined based on quoted market prices for similar or identical 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 Condensed Consolidated Balance Sheets. We record the net unrealized gain or loss in our Condensed Consolidated Balance Sheet and as a component of Other income (expense).

The fair value of the contingent consideration related to our acquisition of RTP is determined based on the present value of probability weighted payments expected to be made under the terms of the agreement.

The carrying values of Cash and cash equivalents, Restricted cash, Accounts receivable, Prepaid expenses and other, Accounts payable and Accrued liabilities approximate fair value due to their short maturities.

No changes were made to our valuation techniques during the first quartersix months of 2014.

The following table summarizes our Level 3 activity for our contingent consideration liability (in thousands):

 

   Level 3 

Balance at December 31, 2013

  $1,350  

Increase in contingent consideration due to re-measurement

   35  
  

 

 

 

Balance at March 31, 2014

  $1,385  
  

 

 

 
   Level 3 

Balance at December 31, 2013

  $1,350  

Decrease in contingent consideration due to re-measurement

   (422

Payment of contingent consideration

   (428
  

 

 

 

Balance at June 30, 2014

  $500  
  

 

 

 

Note 10. Stock Repurchases

In November 2012, our Board of Directors authorized a stock repurchase program under which up to $2.0 million of our common stock could be repurchased from time to time in the open market or in privately negotiated transactions. WeIn May 2014, our Board of Directors authorized an increase to the stock repurchase

program of $2.0 million. In the first six months of 2014 we repurchased 88,445111,256 shares of our common stock in the first quarter of 2014 at a weighted average price of $9.24$9.28 per share, or a total of $0.8$1.0 million. As of March 31,June 30, 2014, $0.8$2.6 million remained available for repurchases. This planrepurchase under the program. The repurchase program does not have an expiration date.

Note 11. Restructuring Accrual

Restructuring charges related to adjustments to our lease abandonment reserve were recorded as a component of Selling, general and administrative as follows:

   Three Months Ended
June 30,
   Six Months Ended
June 30,
 
   2014   2013   2014   2013 

Lease abandonment and termination

  $249    $112    $249    $112  
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   Beginning
Accrued
Liability
   Charged to
Expense,
Net
   Expend-
itures
   Write-Offs
and
Adjust-

ments
  Ending
Accrued
Liability
 

Six Months Ended June 30, 2014

         

Lease abandonment

  $2,129    $249    $—      $(578 $1,800  

As of June 30, 2014, approximately $0.6 million of total accrued restructuring costs are included in Other long-term liabilities. The remainder is classified as a component of Accrued liabilities. We expect the lease abandonment costs will be paid by the end of 2015.

Note 11.12. Recent Accounting Guidance

ASU 2014-12

In June 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-12, “Compensation – Stock Compensation (Topic 718).” ASU 2014-12 addresses accounting for share-based payments when the terms of an award provide that a performance target could be achieved after the requisite service period. ASU 2014-12 indicates that, in such situations, the performance target should be treated as a performance condition and, accordingly, the performance target should not be reflected in estimating the grant-date fair value of the award. Instead, compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved. ASU 2014-12 is effective for annual periods and interim periods beginning after December 15, 2015. We do not expect the adoption of ASU 2014-12 to have a material effect on our financial position, results of operations or cash flows.

ASU 2014-09

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606).” ASU 2014-09 clarifies the principles for recognizing revenue and develops a common revenue standard for GAAP and the International Accounting Standards Board. ASU 2014-09 is effective for annual and interim periods beginning on or after December 15, 2016. Early adoption is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. We are evaluating the effect that ASU 2014-09 will have on our consolidated financial statements and related disclosures. We have not yet selected a transition method nor have we determined the effect of the standard on our ongoing financial reporting.

ASU 2013-11

In July 2013, the FASB issued ASU No. 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.” ASU 2013-11 amends the guidance related to the presentation of unrecognized tax benefits and allows for the reduction of a deferred tax asset for a net operating loss (“NOL”) carryforward whenever the NOL or tax credit carryforward would be available to reduce the additional taxable income or tax due if the tax position is disallowed. ASU 2013-11 is effective for annual and interim periods for fiscal years beginning after December 15, 2013, and

early adoption is permitted. Since ASU 2013-11 relates only to the presentation of unrecognized tax benefits, our adoption of ASU 2013-11 in January 2014 did not have a material effect on our financial position, results of operations or cash flows.

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

Forward-Looking Statements

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 Form10-Q are forward-looking including, among others, statements regarding: industry prospects; future results of operations, including estimated revenue for the quarter ending JuneSeptember 30, 2014; our future financial position; our expectations and beliefs regarding future revenue growth; the future impact of any off-balance sheet arrangements; our estimated costs to repair or replace products under warranty; our strategies and intentions and potential sources of funds regarding acquisitions; our accounting and tax policies and the impact of adoption of accounting guidance, if any, on our financial position, results of operations or cash flows; potential charges to write down inventory in future periods; our future capital requirements and fixed asset additions for 2014; seasonality of our revenues and expected increases in revenue in the last month of each quarter; and our ability to meet our cash requirements for the next 12 months and for the foreseeable future. These statements relate to future events of 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 such forward-looking statements. In evaluating these statements, you should specifically consider various factors, including: changes in demand for our products; changes in product mix; the timing of shipments, customer orders and capital expenditures; constraints on availability of components; excess or shortage of production capacity; potential failure of expected market opportunities to materialize; changes in foreign exchange rates; and other risks included in Item 1A to our Annual Report on Form 10-K as filed with the Securities and Exchange Commission on March 5, 2014.

General

We design, develop, manufacture and market advanced wafer probing, thermal and reliability solutions for the electrical measurement and testing of high performance semiconductor devices. Our products enable precision on-wafer measurement of integrated circuits and are typically used in the early phases of the development of semiconductor processes where the accuracy and repeatability of measurements is critical to achieving yield from advanced process nodes. They are also used in production applications to test semiconductor devices prior to completion of the manufacturing process. We design, manufacture and assemble our products in Beaverton, Oregon, North St. Paul, Minnesota, Munich, Germany, and Dresden, Germany and maintain global sales, service and support centers in North America, Germany, Japan, Taiwan, China and Singapore.

We operate in two business segments: Systems and Probes. Sales of our probe stations, thermal subsystems and reliability test systems are included in the Systems segment and sales of our analytical probes and production probe cards are included in the Probes segment.

Our probe stations provide precise and accurate measurement of semiconductor electrical characteristics during device design or when optimizing the chip fabrication process. Our probe stations are highly configurable and are typically sold with various accessories, including our analytical 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. We also generate revenue through the sales of service contracts for our stations.

Our thermal subsystems are designed and produced by ATT Systems, a wholly-owned subsidiary based in Munich, Germany, which we acquired in October 2013. ATT Systems produces thermal chuck systems used in probe stations, as well as specific systems for testing electronic components, hybrids, PCBs or other assemblies at the test site. Designed for thermal and mechanical stability and precision, our thermal subsystems offer a broad range of modular solutions that can be used in new installations, as well as upgrades to existing equipment.

Our reliability test products were acquired in July 2013 from Aetrium Incorporated and are designed and manufactured in St. Paul, Minnesota. The 1164 Reliability Test System is a modular and scalable test platform that can be used in a wide range of reliability test applications, including Electro Migration (EM)(“EM”), Stress Migration (SM)(“SM”), Time Dependent Dielectric Breakdown (TDDB)(“TDDB”), Stress Induced Leakage Current (SILC)(“SILC”) and Bias Temperature Instability (BTI)(“BTI”). In addition to the 1164 Reliability Test System, we also offer the Symphony Wafer Level Reliability (WLR)(“WLR”) Test System which, when combined with either an automated or semi-automated probe station, and our Conductor software, provides users with the necessary tools for automated and unattended WRL testing to shorten product development cycles and enhance product quality.

Our analytical 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 integrated circuit (“RFIC”) testing. These probe cards are used in conjunction with third party equipment from manufacturers such as Advantest, Agilent and Teradyne.

Overview

Revenue and gross margin in the first quartersix months of 2014 increased to $33.8$67.3 million and 48.1%49.4%, respectively, compared to $27.5$57.8 million and 42.0%44.7%, respectively, in the first quartersix months of 2013, reflecting increased sales and gross margins in both the Systems and Probes segments. Net income was $1.6$3.4 million in the first quartersix months of 2014 compared to $0.7$2.9 million in the first six months of 2013.

During the second quarter of 2013.2014, we settled our contingent liability related to our acquisition of the Reliability Test Product division of Aetrium Incorporated (“RTP”) for $0.4 million, resulting in a $0.4 million credit to Selling, general and administrative expense since we had $0.8 million accrued for such payment. As of June 30, 2014, $0.5 million remained accrued for potential payments related to the seller’s indemnification obligations, which we expect to settle by February 2015.

Also during the second quarter of 2014, we recorded $0.2 million in additional lease abandonment costs as a component of Selling, general and administrative expense as a result of a change in our estimated income from sub-leasing the respective property.

Outlook

Based on our current backlog, projected bookings and scheduled shipments, we anticipate revenues will be in the range of $32 million to $35 million for the secondthird quarter of 2014.

Critical Accounting Policies and the Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that have become increasingly difficult to make in the current economic environment. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenue and expenses during the reporting period.

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, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that we believe 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.

We reaffirm the critical accounting policies and estimates as reported in our Annual Report on Form 10-K for the year ended December 31, 2013, which was filed with the Securities and Exchange Commission on March 5, 2014.

Results of Operations

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

 

  For the Three Months
Ended March 31,
   For the Three Months
Ended June 30,
 For the Six Months
Ended June 30,
 
  2014 2013   2014 2013 2014 2013 

Revenue

   100.0 100.0   100.0 100.0 100.0 100.0

Cost of sales

   51.9   58.0     49.2   52.9   50.6   55.3  
  

 

  

 

   

 

  

 

  

 

  

 

 

Gross profit

   48.1    42.0     50.8    47.1    49.4    44.7  

Operating expenses:

        

Research and development

   9.6    8.9     10.2    8.9    9.9    8.9  

Selling, general and administrative

   30.8    29.3     31.8    29.9    31.3    29.6  
  

 

  

 

   

 

  

 

  

 

  

 

 

Total operating expenses

   40.4    38.2     42.0    38.8    41.2    38.5  
  

 

  

 

   

 

  

 

  

 

  

 

 

Income from operations

   7.7    3.8     8.8    8.3    8.2    6.2  

Other income (expense), net

   (0.2  (0.8   (0.1  (0.4  (0.2  (0.6
  

 

  

 

   

 

  

 

  

 

  

 

 

Income before income taxes

   7.5    3.0     8.6    7.9    8.0    5.6  

Income tax expense

   2.8    0.3     3.1    0.7    3.0    0.5  
  

 

  

 

   

 

  

 

  

 

  

 

 

Net income

   4.7  2.7   5.5  7.2  5.1  5.1
  

 

  

 

   

 

  

 

  

 

  

 

 

 

(1)Percentages may not add due to rounding.

Revenue and operating incomeCertain financial information by segment was as follows (dollars in thousands):

 

  Systems Probes Corporate
Unallocated
 Total   Systems Probes Corporate
Unallocated
 Total 

Three Months Ended March 31, 2014

     

Three Months Ended June 30, 2014

     

Revenue

  $21,560   $12,250   $—     $33,810    $21,824   $11,628   $—     $33,452  

Gross profit

  $9,198   $7,075   $—     $16,273    $10,139   $6,847   $—     $16,986  

Gross margin

   42.7 57.8  —     48.1   46.5 58.9  —     50.8

Income (loss) from operations

  $2,479   $4,426   $(4,303 $2,602    $3,352   $3,900   $(4,324 $2,928  

Three Months Ended March 31, 2013

     

Three Months Ended June 30, 2013

     

Revenue

  $17,700   $9,771   $—     $27,471    $19,847   $10,460   $—     $30,307  

Gross profit

  $6,712   $4,831   $—     $11,543    $8,760   $5,515   $—     $14,275  

Gross margin

   37.9 49.4  —     42.0   44.1 52.7  —     47.1

Income (loss) from operations

  $1,642   $2,424   $(3,025 $1,041    $3,268   $2,990   $(3,741 $2,517  

   Systems  Probes  Corporate
Unallocated
  Total 

Six Months Ended June 30, 2014

     

Revenue

  $43,384   $23,878   $—     $67,262  

Gross profit

  $19,337   $13,922   $—     $33,259  

Gross margin

   44.6  58.3  —      49.4

Income (loss) from operations

  $5,831   $8,326   $(8,627 $5,530  

Six Months Ended June 30, 2013

     

Revenue

  $37,547   $20,231   $—     $57,778  

Gross profit

  $15,472   $10,346   $—     $25,818  

Gross margin

   41.2  51.1  —      44.7

Income (loss) from operations

  $4,910   $5,414   $(6,766 $3,558  

Revenue

Revenue information was as follows (dollars in thousands):

 

  Three Months Ended March 31,   Dollar
Change
   % Change   Three Months Ended June 30,   Dollar     

Revenue

  2014   2013     2014   2013   Change   % Change 
        

Systems

  $21,560    $17,700    $3,860     21.8  $21,824    $19,847    $1,977     10.0

Probes

   12,250     9,771     2,479     25.4   11,628     10,460     1,168     11.2
  

 

   

 

   

 

     

 

   

 

   

 

   

Total

  $33,810    $27,471    $6,339     23.1  $33,452    $30,307    $3,145     10.4
  

 

   

 

   

 

     

 

   

 

   

 

   
  Six Months Ended June 30,   Dollar     

Revenue

  2014   2013   Change   % Change 
        

Systems

  $43,384    $37,547    $5,837     15.5

Probes

   23,878     20,231     3,647     18.0
  

 

   

 

   

 

   

Total

  $67,262    $57,778    $9,484     16.4
  

 

   

 

   

 

   

Systems

The increaseincreases in Systems revenue in the first quarter ofthree- and six-month periods ended June 30, 2014 compared to the first quartersame periods of 2013 waswere primarily attributablerelated to increased unit sales related to our acquisitions from the second half of 2013. This increase wasThese increases were partially offset by a decreasedecreases in average selling prices as we sold fewer 300mm stations, which have higher average selling prices, relative to total unit sales.prices.

Probes

The increaseincreases in Probes revenue in the first quarter ofthree- and six-month periods ended June 30, 2014 compared to the first quartersame periods of 2013 waswere primarily the result of increasedincreases in unit sales of both production probe cards and analytical 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.

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

 

  Three Months Ended March 31,   Dollar
Change
   % Change   Three Months Ended June 30,   Dollar   

Cost of Sales

  2014   2013     2014   2013   Change % Change 
       

Systems

  $12,362    $10,988    $1,374     12.5  $11,685    $11,087    $598   5.4

Probes

   5,175     4,940     235     4.8   4,781     4,945     (164 (3.3)% 
  

 

   

 

   

 

     

 

   

 

   

 

  

Total

  $17,537    $15,928    $1,609     10.1  $16,466    $16,032    $434    2.7
  

 

   

 

   

 

     

 

   

 

   

 

  
  Six Months Ended June 30,   Dollar   

Cost of Sales

  2014   2013   Change % Change 
       

Systems

  $24,047    $22,075    $1,972   8.9

Probes

   9,956     9,885     71   0.7
  

 

   

 

   

 

  

Total

  $34,003    $31,960    $2,043    6.4
  

 

   

 

   

 

  

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

Gross margins were as follows:

 

  Three Months Ended March 31,   Three Months Ended June 30, Six Months Ended June 30, 

Gross Margins

  2014 2013   2014 2013 2014 2013 
     

Systems

   42.7 37.9   46.5 44.1 44.6 41.2

Probes

   57.8 49.4   58.9 52.7 58.3 51.1

Overall

   48.1 42.0   50.8 47.1 49.4 44.7

Systems

The increaseincreases in Systems gross margins in the first quarter ofthree- and six-month periods ended June 30, 2014 compared to the first quartersame periods of 2013 waswere primarily attributabledue to our acquisitions during the second half of 2013. The acquired product lines increased the average gross margin of all Systems products.

Probes

The increaseincreases in Probes gross margins in the first quarter ofthree- and six-month periods ended June 30, 2014 compared to the first quartersame periods of 2013 waswere primarily due to increased unit sales, which increased factory utilization and decreased unabsorbed period expenses.

Overall

The overall increaseincreases in gross margins in the first quarter ofthree and six-month periods ended June 30, 2014 compared to the first quartersame periods of 2013 waswere primarily attributable to product mix, as we sold a higher number of Probes relative to total sales. The increaseincreases in gross margin waswere also positively affected by sales of products acquired in the second half of 2013 as discussed above.

Research and Development

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

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

 

   Three Months Ended March 31,   Dollar
Change
   % Change 
   2014   2013     

Research and development

  $3,241    $2,456    $785     32.0
   Three Months Ended June 30,   Dollar
Change
     
   2014   2013     % Change 

Research and development

  $3,428    $2,694    $734     27.2
   Six Months Ended June 30,   Dollar
Change
     
   2014   2013     % Change 

Research and development

  $6,669    $5,150    $1,519     29.5

The increaseincreases in research and development in the first quarter ofthree- and six-month periods ended June 30, 2014 compared to the first quartersame periods of 2013 waswere primarily due to a $0.4to:

increases of $0.5 million increaseand $0.9 million, respectively, in salaries and benefits related primarily to our acquisitions in the second half of 2013, a $0.32013;

increases of $0.2 million increaseand $0.5 million, respectively, in project-related expensesexpenses; and

a $0.1 million decrease in government grant reimbursements.

reimbursements for the six-month period ended June 30, 2014.

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, intangible asset 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 March 31,   Dollar
Change
   % Change 
   2014   2013     

Selling, general and administrative

  $10,430    $8,046    $2,384     29.6
   Three Months Ended June 30,   Dollar
Change
     
   2014   2013     % Change 

Selling, general and administrative

  $10,630    $9,064    $1,566     17.3
   Six Months Ended June 30,   Dollar
Change
     
   2014   2013     % Change 

Selling, general and administrative

  $21,060    $17,110    $3,950     23.1

The increaseincreases in SG&A in the first quarter ofthree- and six-month periods ended June 30, 2014 compared to the first quartersame periods of 2013 waswere primarily due to $0.8increases of:

$0.8 million increaseand $1.5 million, respectively, in salaries and benefits related primarily to our expanded workforce due to our acquisitions in the second half of 2013, a $0.52013;

$0.5 million increaseand $1.1 million, respectively, in amortization of purchased intangibles,intangibles;

$0.1 million and a $0.4 million, respectively, in professional service fees;

$0.2 million and a $0.4 million, respectively, in selling expenses;

$0.2 million and a $0.3 million, increase in professional service fees, a $0.2 million increase in selling expenses, a $0.1 million increaserespectively, in stock-based compensation,compensation; and

$0.1 million and a $0.1 million, increaserespectively, in recruiting and severance.restructuring costs.

These factors were partially offset by a $0.4 million reduction in our contingent consideration accrual related to our acquisition of RTP.

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 and gains and losses of foreign currency forward contracts.losses. Other income (expense) maycan also include other miscellaneous non-operating gains and losses.

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

 

  Three Months Ended March 31,   Three Months Ended
June 30,
 Six Months Ended
June 30,
 
  2014 2013   2014 2013 2014 2013 

Interest income, net

  $2   $20    $7   $2   $9   $22  

Foreign currency gains (losses)

   18   (441

Gains (losses) on foreign currency forward contracts

   (53 203  

Foreign currency losses

   (114 (249 (96 (690

Gains on foreign currency forward contracts

   60   147   7   350  

Other

   (34 (6   (2 (10 (36 (16
  

 

  

 

   

 

  

 

  

 

  

 

 
  $(67 $(224  $(49 $(110 $(116 $(334
  

 

  

 

   

 

  

 

  

 

  

 

 

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

Information regarding our income tax expense was as follows:follows (dollars in thousands):

 

  Three Months Ended March 31,   Three Months Ended June 30, Six Months Ended June 30, 
  2014 2013   2014 2013 2014 2013 

Income tax provision

  $943   $70    $1,051   $221   $1,994   $291  

Income tax provision as a percentage of income before income taxes

   37.2 8.6   36.5 9.2 36.8 9.0

Our income tax expense in the first quarters ofthree and six-months periods ended June 30, 2014 and 2013 primarily related to estimated tax expense on income in the U.S. and foreign tax jurisdictions.

Our effective tax rate may differ from the U.S. federal statutory rate primarily as a result of the effects of state and foreign income taxes and may be effectedaffected by changes in statutory tax rates and laws in the U.S. and foreign jurisdictions. The increases in our effective tax rate for the three- and six-month periods ended June 30, 2014 compared to the same periods of the prior year were primarily the result of releasing the majority of our valuation allowance on deferred tax assets in the fourth quarter of 2013. The tax benefit of these deferred tax assets, which consisted primarily of net operating loss carryforwards, were fully recognized in the fourth quarter of 2013 and, therefore, were no longer available to offset current tax expense in future periods. In addition, the effective tax rate in the first quartersix months of 2014 does not include any federal benefit from research and experimentation tax credits since legislation related to such credits expired and has not been renewed.

Deferred tax assets arise from the tax benefit of amounts expensed for financial reporting purposes but not yet realized for tax purposes and from unutilized tax credits and net operating loss carryforwards. We evaluate our deferred tax assets on a regular basis to determine if a valuation allowance is required. To the extent it is determined that it is more likely than not that we will not realize the benefit of our deferred tax assets, we record a valuation allowance against deferred tax assets.

As of March 31,June 30, 2014, the net deferred tax assets on our Consolidated Balance Sheets totaled $3.5 million, net of a valuation allowance of $0.2 million, and are primarily related to tax credits and other temporary differences.

Liquidity and Capital Resources

Changes in our assets and liabilities as presented in our Consolidated Statements of Cash Flows do not equal the changes in such assets and liabilities as calculated from our Consolidated Balance Sheets due to the effects of fluctuating foreign currency exchange rates and acquisitions.

Net cash provided by operating activities in the first quartersix months of 2014 was $7.4$9.6 million and primarily consisted of our net income of $1.6$3.4 million, net non-cash charges of $2.1$4.5 million and net changes in our operating assets and liabilities as described below.

Accounts receivable, net decreased by $4.9$4.6 million to $21.6$21.9 million at March 31,June 30, 2014, compared to $26.5 million at December 31, 2013, primarily due to the timing of sales and collections.

Inventories increased by $0.7$2.2 million to $25.6$27.1 million at March 31,June 30, 2014, compared to $24.9 million at December 31, 2013. The increase in inventory was primarily related to lower than expected sales of probe stations, partially offset by inventory charges of $0.5$0.8 million in the first quartersix months of 2014 for excess and obsolete inventory and sales of finished goods. If our actual results are significantly different than our current expectations for 2014, we may incur additional charges to write down inventory in future periods.

Long-term and short-term deferred revenue decreased by $0.4 million to $2.7 million at March 31,June 30, 2014, compared to $3.1 million at December 31, 2013, primarily due to a decrease in customer deposits on product orders.

Other long-term liabilities decreased by $0.2 million to $1.9 million at March 31,June 30, 2014, compared to $2.1 million at December 31, 2013, primarily due to a decrease in accrued lease abandonment costs.

Fixed asset purchases of $0.5$1.1 million in the first quartersix months of 2014 primarily related to production-related equipment, and research and development tools.tools and leasehold improvements. We anticipate that cash used for fixed asset additionspurchases for all of 2014 will be between $5.0 million and $6.0 million, depending on the timing of payments to be approximately $6.0 million.vendors.

In November 2012, our Board of Directors authorized a stock repurchase program under which up to $2.0 million of our common stock could be repurchased from time to time in the open market or in privately negotiated transactions. WeIn May 2014, our Board of Directors authorized an increase to the stock repurchase program of $2.0 million. In the first six months of 2014 we repurchased 88,445111,256 shares of our common stock in the first quarter of 2014 at a weighted average price of $9.24$9.28 per share, or a total of $0.8$1.0 million. As of March 31,June 30, 2014, $0.8$2.6 million remained available for repurchases. This planrepurchase under the program. The repurchase program does not have an expiration date.

In August 2013, we entered into a line of credit agreement with JPMorgan Chase Bank, N.A. for a maximum $10.0 million line of credit facility (the “LOC”), which may be limited by a borrowing base. The LOC expires August 31, 2015 and contains a $2.5 million sublimit for letters of credit. Interest is based primarily on the London Interbank Offered Rate (“LIBOR”). The LOC contains restrictive and financial covenants. On March 31,June 30, 2014, no amounts were outstanding under the LOC, no letters of credit were outstanding, $10.0 million was available for borrowing and we were in compliance with all covenants.

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 $27.7$29.4 million at March 31,June 30, 2014. In addition, we currently have $10 million available under the LOC as discussed above.

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 or may result in the issuance by us of debt or equity securities. Issuances of debt securities would increase our leverage and interest exposure; issuances of equity securities could dilute the ownership interest of our shareholders.

Recent Accounting Guidance

See Note 1112 of Notes to Condensed Consolidated Financial Statements.

Contractual Commitments

The following is a summary of our contractual commitments and obligations as of March 31,June 30, 2014 (in thousands):

 

  Payments Due By Period   Payments Due By Period 

Contractual Obligation

  Total   Remainder of
2014
   2015 and
2016
   2017 and
2018
   2019 and
beyond
   Total   Remainder of
2014
   2015 and
2016
   2017 and
2018
   2019 and
beyond
 

Operating leases

  $12,318    $2,786    $5,018    $3,253    $1,261    $11,420    $1,882    $5,025    $3,253    $1,260  

Purchase order commitments (1)

   6,762     6,496     266     —       —       6,684     6,120     564     —       —    

Forward contracts

   28,822     28,822     —       —       —       28,708     28,708     —       —       —    

Fair value of contingent consideration related to our acquisition of RTP

   1,385     1,385     —       —       —       500     300     200     —       —    

Additional consideration related to our acquisition of ATT Systems

   1,036     518     518     —       —       1,028     514     514     —       —    
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 
  $50,323    $40,007    $5,802    $3,253    $1,261    $48,340    $37,524    $6,303    $3,253    $1,260  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

 

(1)Purchase order commitments primarily represent open orders for inventory.

Seasonality

Typically, our first quarter revenues are lower than our revenues from the preceding fourth quarter. 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.

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 2013 Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission on March 5, 2014.

Item 4. Controls and Procedures

Changes in Internal Control Over Financial Reporting

There has been no change in our internal control over financial reporting that occurred 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 were 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. In addition, 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.

PART II – OTHER INFORMATION

Item 1A. Risk Factors

Our Annual Report on Form 10-K for the year ended December 31, 2013 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. 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, 2013, which was filed with the Securities and Exchange Commission on March 5, 2014.

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

Repurchases of Equity Securities

We made the following repurchases of our common stock during the firstsecond quarter of 2014:

 

   Total number
of shares
purchased
   Average
price paid
per share
   Total number of
shares purchased
as part of publicly
announced plan
   Maximum dollar
amount of shares
that may yet be
purchased under
the plan
 

January 1 to January 31

   —       —       —      $1.6 million  

February 1 to February 28

   28,648    $9.02     28,648    $1.4 million  

March 1 to March 31

   59,797    $9.35     59,797    $0.8 million  
  

 

 

     

 

 

   

Total

   88,445    $9.24     88,445    $0.8 million  
  

 

 

     

 

 

   
   Total number
of shares
purchased
   Average
price paid
per share
   Total number of
shares purchased
as part of publicly
announced plan
   Maximum dollar
amount of shares
that may yet be
purchased under
the plan
 

April 1 – April 30

   22,811    $9.45     22,811    $0.6 million  

May 1 – May 31

   —         —      $2.6 million  

June 1 – June 30

   —         —      $2.6 million  
  

 

 

     

 

 

   

Total

   22,811       22,811    $2.6 million  
  

 

 

     

 

 

   

These shares were repurchased pursuant to a plan approved by our board of directors in November 2012 and amended in May 2014, which authorized the repurchase of up to $2.0a total of $4.0 million of our common stock from time to time in the open market or in privately negotiated transactions. This planAs of June 30, 2014, $2.6 million remained available for repurchase under the program. The repurchase program does not have an expiration date.

Item 6. Exhibits

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

 

  10.1First amendment to Lease dated January 10, 2007, between Nimbus Center LLC and Cascade Microtech, Inc.
  10.2Third amendment to Lease dated January 23, 2014, between Nimbus Center LLC and Cascade Microtech, Inc.
  10.3Fourth amendment to Lease dated March 31, 2014, between Nimbus Center LLC and Cascade Microtech, Inc.
  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.DEF  XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB  XBRL Taxonomy Extension Label Linkbase Document.
101.PRE  XBRL Taxonomy Extension Presentation Linkbase Document.

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: May 9,August 6, 2014 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)

 

2022