UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

For the quarterly period ended JuneSeptember 30, 2014

OR

For the transition period from                    to                    

Commission File No. 000-51072

CASCADE MICROTECH, INC.

(Exact name of registrant as specified in its charter)

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.

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 August 1,October 31, 2014 was 16,334,754.16,371,498.

CASCADE MICROTECH, INC.

INDEX TO FORM 10-Q

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Cascade Microtech, Inc.

Condensed Consolidated Balance Sheets

(Unaudited, In thousands, except per share amounts)

See accompanying Notes to Condensed Consolidated Financial Statements.

Cascade Microtech, Inc.

Condensed Consolidated Statements of Operations

(Unaudited, In thousands, except per share amounts)

See accompanying Notes to Condensed Consolidated Financial Statements.

Cascade Microtech, Inc.

Condensed Consolidated Statements of Comprehensive Income

(Unaudited, In thousands)

See accompanying Notes to Condensed Consolidated Financial Statements.

Cascade Microtech, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited, In thousands)

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):

Inventories consisted of the following (in thousands):

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):

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):

Note 5. Goodwill and Intangible Assets

Goodwill

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

Intangible Assets

Intangible assets, net included the following (in thousands):

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

		Three Months Ended September 30,								Nine Months Ended September 30,
		2014				2013				2014				2013
Intangible amortization		$	752			$	264			$	2,317			$	735

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

Note 6. Accrued Liabilities

Accrued liabilities consisted of the following (in thousands):

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):

Stock Incentive Plans

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

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

As of JuneSeptember 30, 2014, total unrecognized stock-based compensation related to outstanding, but unvested, options and RSUs was $4.9$4.8 million, which will be recognized over the weighted average remaining vesting period of 2.52.4 years.

Employee Stock Purchase Plan

During the first sixnine 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 JuneSeptember 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):

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 six-monththree or nine-month periods ended JuneSeptember 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:

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):

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 sixnine months of 2014.

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

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. In May 2014, our Board of Directors authorized an increase to the stock repurchase

program of $2.0 million. In the first sixnine months of 2014 we repurchased 111,256 shares of our common stock

at a weighted average price of $9.28 per share, or a total of $1.0 million. As of JuneSeptember 30, 2014, $2.6 million remained available for repurchase under the program. The repurchase program does not have an expiration date.

Note 11. Restructuring Accrual

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

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

As of JuneSeptember 30, 2014, approximately $0.6$0.3 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 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.

Note 13. Subsequent Events

On October 1, 2014, we paid $0.5 million of the deferred purchase price related to our acquisition of ATT Systems. Following this payment, we owe an additional $0.5 million related to this acquisition, which will be paid on October 1, 2015.

On October 10, 2014, we paid $0.4 million of contingent consideration related to our acquisition of RTP. There are no additional payments related to this acquisition.

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

Forward-LookingForward 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 Form10-Q are forward-looking including, among others, statements regarding: industry prospects; future results of operations, including estimated revenue for the quarter ending September 30,December 31, 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 for the year ended December 31, 2013 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”), Stress Migration (“SM”), Time Dependent Dielectric Breakdown (“TDDB”), Stress Induced Leakage Current (“SILC”) and Bias Temperature Instability (“BTI”). In addition to the 1164 Reliability Test System, we also offer the Symphony Wafer Level Reliability (“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 sixnine months of 2014 increased to $67.3$100.7 million and 49.4%50.4%, respectively, compared to $57.8$86.0 million and 44.7%45.6%, respectively, in the first sixnine months of 2013, reflecting increased sales and gross margins in both the Systems and Probes segments. Net income was $3.4$5.6 million in the first sixnine months of 2014 compared to $2.9$4.6 million in the first sixnine months of 2013.

During the second quarter of 2014, we settled oura 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

On October 10, 2014, we paid the final contingent liability related to RTP of June 30,$0.4 million. A credit of $0.1 million to Selling, general and administrative expense was recognized in the third quarter of 2014 since $0.5 million remainedhad previously been accrued for potentialthe payment. There are no additional payments related to this acquisition.

On October 1, 2014, we paid $0.5 million of the seller’s indemnification obligations,deferred purchase price related to our acquisition of ATT Advanced Temperature Test Systems GmbH (“ATT”). Following this payment, we owe an additional $0.5 million related to this acquisition, which we expect to settle by Februarywill be paid on October 1, 2015.

Also during the secondthird quarter of 2014, we recorded a credit of $0.2 million in additional lease abandonmentto restructuring 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.a property located in Oregon.

Outlook

Based on our current backlog, projected bookings and scheduled shipments, we anticipate revenues will be in the range of $32$35 million to $35$38 million for the thirdfourth 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 Continuing Operations

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

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