Cascade Microtech (CSCD) 10-Q 2011 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2011

OR

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

For the transition period from            to            

Commission File No. 000-51072

CASCADE MICROTECH, INC.

(Exact name of registrant as specified in its charter)

Oregon	93-0856709
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

2430 N.W. 206th Avenue Beaverton, Oregon	97006
(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 (§ 229.405 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  ¨    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 6, 2011 was 14,616,290.

CASCADE MICROTECH, INC.

INDEX TO FORM 10-Q

		Page
PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets (unaudited) - March 31, 2011 and December 31, 2010		2
	Condensed Consolidated Statements of Operations (unaudited) - Three Months Ended March 31, 2011 and 2010		3
	Condensed Consolidated Statements of Cash Flows (unaudited) - Three Months Ended March 31, 2011 and 2010		4
	Notes to Condensed Consolidated Financial Statements (unaudited)		5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		10
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		17
Item 4.	Controls and Procedures		17
PART II - OTHER INFORMATION
Item 1A.	Risk Factors		18
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		18
Item 6.	Exhibits		18
Signatures			19

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PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Cascade Microtech, Inc.

Condensed Consolidated Balance Sheets

(Unaudited, In thousands)

	March 31, 2011			December 31, 2010
Assets
Current Assets:
Cash and cash equivalents	$	17,085		$	21,871
Short-term marketable securities		2,498			870
Restricted cash		1,975			1,704
Accounts receivable, net of allowances of $325 and $415		20,358			19,718
Inventories		22,137			20,764
Prepaid expenses and other		1,551			934
Taxes receivable		—			1,059
Deferred income taxes, net		39			39
Total Current Assets		65,643			66,959
Long-term marketable securities		3,258			—
Fixed assets, net of accumulated depreciation of $20,684 and $19,820		10,233			9,973
Goodwill		1,063			985
Purchased intangible assets, net of accumulated amortization of $1,857 and $1,654		2,939			3,142
Deferred income taxes, net		695			665
Other assets, net of accumulated amortization of $3,365 and $3,248		2,656			2,821
Total Assets	$	86,487		$	84,545
Liabilities and Shareholders’ Equity
Current Liabilities:
Accounts payable		7,792			6,384
Deferred revenue		3,326			3,338
Accrued liabilities		5,356			6,293
Total Current Liabilities		16,474			16,015
Deferred revenue		117			109
Other long-term liabilities		2,778			2,815
Total Liabilities		19,369			18,939
Shareholders’ Equity:
Common stock, $0.01 par value. Authorized 100,000 shares; issued and outstanding: 14,556 and 14,500		146			145
Additional paid-in capital		91,258			90,967
Accumulated other comprehensive income (loss)		310			(804	)
Accumulated deficit		(24,596	)		(24,702	)
Total Shareholders’ Equity		67,118			65,606
Total Liabilities and Shareholders’ Equity	$	86,487		$	84,545

See accompanying Notes to Condensed Consolidated Financial Statements.

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Cascade Microtech, Inc.

Condensed Consolidated Statements of Operations

(Unaudited, In thousands, except per share amounts)

	For the Three Months Ended March 31,
	2011			2010
Revenue	$	27,845		$	19,959
Cost of sales		16,617			14,573
Gross profit		11,228			5,386
Operating expenses:
Research and development		3,207			3,466
Selling, general and administrative		7,611			9,856
Amortization of purchased intangibles		203			180
Total operating expenses		11,021			13,502
Income (loss) from operations		207			(8,116	)
Other income (expense):
Interest income, net		19			32
Other, net		(17	)		(88	)
Total other income (expense), net		2			(56	)
Income (loss) before income taxes		209			(8,172	)
Income tax expense (benefit)		103			(772	)
Net income (loss)	$	106		$	(7,400	)
Basic net income (loss) per share	$	0.01		$	(0.53	)
Diluted net income (loss) per share	$	0.01		$	(0.53	)
Shares used in per share calculations:
Basic		14,528			14,025
Diluted		14,947			14,025

See accompanying Notes to Condensed Consolidated Financial Statements.

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Cascade Microtech, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited, In thousands)

	For the Three Months Ended March 31,
	2011			2010
Cash flows from operating activities:
Net income (loss)	$	106		$	(7,400	)
Adjustments to reconcile net income (loss) to net cash flows provided by (used in) operating activities:
Depreciation and amortization		1,165			1,243
Stock-based compensation, net		480			479
Loss on disposal of long-lived assets		—			40
Loss on write-down of assets held for sale		25			—
Deferred income taxes		(16	)		(519	)
(Increase) decrease, net of the effect of acquisition, in:
Accounts receivable, net		(487	)		(383	)
Inventories		(888	)		2,269
Income taxes receivable		1,059			13
Prepaid expenses and other		(521	)		(833	)
Increase (decrease), net of the effect of acquisition, in:
Accounts payable		998			805
Deferred revenue		(40	)		(890	)
Accrued and other long-term liabilities		(1,102	)		1,864
Net cash provided by (used in) operating activities		779			(3,312	)
Cash flows from investing activities:
Purchase of marketable securities		(5,756	)		(1,797	)
Proceeds from sale of marketable securities		875			4,035
Purchase of fixed assets		(794	)		(387	)
Increase in restricted cash		(132	)		—
Cash paid for acquisition, net of cash acquired		—			(7,052	)
Net cash used in investing activities		(5,807	)		(5,201	)
Cash flows from financing activities:
Principal payments on capital lease obligations		(4	)		(3	)
Witholding taxes paid on net settlement of vested restricted stock units		(188	)		(50	)
Proceeds from issuances of common stock		—			60
Net cash provided by (used in) financing activities		(192	)		7
Effect of exchange rate changes on cash		434			(204	)
Decrease in cash and cash equivalents		(4,786	)		(8,710	)
Cash and cash equivalents:
Beginning of period		21,871			19,471
End of period	$	17,085		$	10,761
Supplemental disclosure of cash flow information:
Refunds received for income taxes, net	$	1,178		$	13
Supplemental disclosure of non-cash information:
Common stock issued in connection with acquisition	$	—		$	3,177
Fair value of assets acquired from acquisition		—			21,029
Liabilities assumed from acquisition		—			(5,406	)

See accompanying Notes to Condensed Consolidated Financial Statements.

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CASCADE MICROTECH, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. Basis of Presentation

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

Note 2. Inventories

Inventories are stated at the lower of standard cost, which approximates cost computed on a first-in, first-out basis, or market, and include materials, labor and manufacturing overhead. Demonstration goods, which are included as a component of finished goods, represent inventory that is used for customer demonstration purposes. This inventory is typically sold after 12 to 18 months. We analyze the carrying value of our inventory quarterly, considering a combination of factors including, but not limited to, the following: forecasted sales or usage, historical usage rates, estimated service period, product end-of-life dates, estimated current and future market values, service inventory requirements and new product introductions. We estimate market value based on factors including, but not limited to, replacement cost and estimated resale value. Based on these analyses, we recorded inventory charges of $0.3 million and $1.6 million, respectively, in the first quarter of 2011 and 2010. Inventory charges for the first quarter of 2010 included restructuring costs of $1.0 million for discontinued products.

Inventories consisted of the following (in thousands):

	March 31,		December 31
	2011		2010
Raw materials	$	13,881	$	12,437
Work-in-process		2,892		2,495
Finished goods		5,364		5,832
	$	22,137	$	20,764

Note 3. Net Income (Loss) Per Share

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

Three Months Ended March 31,	2011		2010
Shares used to calculate basic net income (loss) per share		14,528		14,025
Dilutive effect of outstanding stock options and restricted stock units (“RSUs”)		419		—
Shares used to calculate diluted net income (loss) per share		14,947		14,025
Securities not considered as they would have been antidilutive		659		1,259

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Note 4. Comprehensive Income (Loss)

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

Three Months Ended March 31,	2011		2010
Net income (loss)	$	106	$	(7,400	)
Unrealized holding gains (losses)		4		(10	)
Change in cumulative translation adjustment		1,110		(611	)
Comprehensive income (loss)	$	1,220	$	(8,021	)

Note 5. Product Warranty

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

Three Months Ended March 31,	2011			2010
Warranty accrual, beginning of period	$	701		$	277
Reductions for warranty charges		(398	)		(211	)
Additions to warranty reserve		395			625
Warranty accrual, end of period	$	698		$	691

Additions to the warranty reserve for the first quarter of 2010 included accrued warranty costs of $0.5 million assumed with the acquisition of SUSS MicroTec Test Systems GmbH (“SUSS Test”).

Note 6. Goodwill and Purchased Intangible Assets

Goodwill

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

Three Months Ended March 31,	2011		2010
Balance, beginning of period	$	985	$	—
Acquisition of SUSS Test		—		1,058
Effect of exchange rate changes		78		(23	)
Balance, end of period	$	1,063	$	1,035

Purchased Intangible Assets

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

	March 31,			December 31,
	2011			2010
Customer relationships	$	2,465		$	2,465
Other		2,331			2,331
		4,796			4,796
Less accumulated amortization		(1,857	)		(1,654	)
	$	2,939		$	3,142

Purchased intangible asset amortization totaled $0.2 million in the first quarter of 2011 and 2010.

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

Remainder of 2011	$	610
2012		720
2013		572
2014		378
2015		288
Thereafter		371
	$	2,939

Note 7. Accrued Liabilities

Accrued liabilities consisted of the following (in thousands):

	March 31, 2011		December 31, 2010
Accrued compensation and benefits	$	1,744	$	1,897
Accrued income taxes		1,377		1,342
Accrued warranty		698		701
Accrued commissions		510		649
Deferred rent accrual		354		339
Accrued restructuring costs		168		310
Other		505		1,055
	$	5,356	$	6,293

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

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

Three Months Ended March 31,	2011		2010
Cost of sales	$	50	$	49
Research and development		108		39
Selling, general and administrative		322		391
	$	480	$	479

Stock Incentive Plans

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

	Options Outstanding			Weighted Average Exercise Price
Outstanding at December 31, 2010		793,703		$	6.85
Granted		72,631			6.28
Exercised		—			—
Forfeited		(17,135	)		6.68
Outstanding at March 31, 2011		849,199			6.80

RSU activity for the first three months of 2011 was as follows:

	Restricted Stock Units			Weighted Average Grant  Date Per Share Fair Value
Outstanding at December 31, 2010		791,347		$	5.90
Granted		52,653			6.28
Vested		(85,315	)		5.43
Forfeited		(23,377	)		5.28
Outstanding at March 31, 2011		735,308			6.00

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As of March 31, 2011, total unrecognized stock-based compensation related to outstanding, but unvested options and RSUs was $3.4 million, which will be recognized over the weighted average remaining vesting period of 2.7 years.

Employee Stock Purchase Plan

In January 2011, pursuant to the terms of our 2004 Employee Stock Purchase Plan (“ESPP”), and upon approval by our Board of Directors, the number of shares of our common stock available for purchase under the 2004 ESPP was increased from 700,000 to 800,000. There were no purchases of stock in the first quarter of 2011 under the ESPP.

Note 9. 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 and Sockets 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):

Three Months Ended March 31, 2011	Systems			Probes and Sockets			Corporate Unallocated			Total
Revenue	$	19,532		$	8,313		$	—		$	27,845
Gross profit	$	7,269		$	3,959		$	—		$	11,228
Gross margin		37.2	%		47.6	%		—			40.3	%
Income (loss) from operations	$	3,228		$	(111	)	$	(2,910	)	$	207
Three Months Ended March 31, 2010
Revenue	$	12,658		$	7,301		$	—		$	19,959
Gross profit	$	2,774		$	2,612		$	—		$	5,386
Gross margin		21.9	%		35.8	%		—			27.0	%
Loss from operations	$	(2,007	)	$	(1,320	)	$	(4,789	)	$	(8,116	)

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-month periods ended March 31, 2011 or 2010.

Note 10. 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, prepayment speeds, credit risk, etc.; and

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

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

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

	March 31, 2011				December 31, 2010
	Fair Value		Input Level		Fair Value		Input Level
Marketable securities – corporate obligations	$	4,247		Level 2	$	751		Level 2
Marketable securities – corporate equities	$	—		—	$	119		Level 1
Marketable securities – U.S. agencies	$	1,509		Level 2	$	—		—
Forward sale contracts for Japanese yen	$	1,684		Level 2	$	1,602		Level 2

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

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

Equipment classified as held for sale at March 31, 2011 of $121,000 is measured at fair value on a non-recurring basis using the estimated selling prices of similar equipment, net of estimated costs to sell. During the first quarter of 2011, we recorded an impairment charge of $25,000 as a component of selling, general and administrative on our equipment held for sale.

Note 11. Restructuring

In the first quarter of 2011, we recorded a net reversal of restructuring charges related to the previously announced integration and consolidation of our manufacturing operations and sales organization. Manufacturing operations for our Systems business are being consolidated at our Dresden, Germany facility and manufacturing operations for our Probes business are being consolidated at one of our Beaverton, Oregon facilities. We expect the consolidation of our Systems manufacturing operations to be complete by the end of 2011, and the consolidation of our Probes manufacturing operations to be complete by the end of the second quarter of 2011. The restructuring of our sales organization was completed during the first quarter of 2011.

Restructuring costs (reversals) were included in our statement of operations as follows (in thousands):

Three Months Ended March 31,	2011			2010
Cost of sales	$	59		$	1,097
Research and development		—			96
Selling, general and administrative		(166	)		935
	$	(107	)	$	2,128

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

Three Months Ended March 31, 2010	Beginning Accrued Liability		Charged to Expense, Net			Expenditures			Write-Offs and Adjustments		Ending Accrued Liability
Termination and severance related	$	276	$	(117	)	$	(26	)	$	11	$	144
Lease abandonment		34		10			(20	)		—		24
	$	310	$	(107	)	$	(46	)	$	11	$	168

We expect all accrued termination and severance related costs will be paid by the end of 2011. We also expect to incur additional lease abandonment and facility vacating charges totaling approximately $4.9 million to $5.4 million throughout the remainder of 2011 related to the consolidation of our manufacturing operations.

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Note 12. Recent Accounting Guidance

ASU 2010-17

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

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact made in this Quarterly Report on Form 10-Q are forward-looking including, but not limited to, statements regarding industry prospects; future results of operations or financial position; our expectations and beliefs regarding future revenue growth; the future capabilities and functionality of our products and services, our strategies and intentions regarding acquisitions; the outcome of any litigation to which we are a party; our accounting and tax policies; our future strategies regarding investments, product offerings, research and development, market share, and strategic relationships and collaboration; our dividend policies; and our future capital requirements. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology, including “intend,” “could,” “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “future,” or “continue,” the negative of these terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially from those expressed or implied in such forward-looking statements. In evaluating these statements, you should specifically consider various factors, including the risks included in Item 1A to our Annual Report on Form 10-K as filed with the Securities and Exchange Commission on March 2, 2011. These risk factors have not significantly changed since they were filed with our Form 10-K and included the following:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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General

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

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

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 testing. Our test sockets are designed and sold for both production and engineering test applications, typically for high speed digital and radio frequency testing.

Overview

Revenue in the first quarter of 2011 increased $7.8 million, or 39.5%, to $27.8 million compared to the revenue of $20.0 million in the first quarter of 2010 as a result of improvements the semiconductor and semiconductor equipment markets. Net income in the first quarter of 2011 was $0.1 million compared to a net loss of $7.4 million in the first quarter of 2010, primarily due to the increase in revenue and a reduction in acquisition and restructuring related charges.

Outlook

Based on our current backlog and projected bookings, we anticipate revenues will be in the range of $26 million to $29 million for the second quarter of 2011.

Critical Accounting Policies and the Use of Estimates

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

We reaffirm the critical accounting policies and estimates as reported in our Annual Report on Form 10-K for the year ended December 31, 2010, which was filed with the Securities and Exchange Commission on March 2, 2011.

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Results of Operations

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

	For the Three Months Ended March 31,
	2011			2010
Revenue		100.0	%		100.0	%
Cost of sales		59.7			73.0
Gross profit		40.3			27.0
Operating expenses:
Research and development		11.5			17.4
Selling, general and administrative		27.3			49.4
Amortization of purchased intangibles		0.7			0.9
Total operating expenses		39.6			67.6
Income (loss) from operations		0.7			(40.7	)
Other income (expense), net		0.0			(0.3	)
Income (loss) before income taxes		0.8			(40.9	)
Income tax expense (benefit)		0.4			(3.9	)
Net income (loss)		0.4	%		(37.1	)%

(1) Percentages may not add due to rounding.

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

Three Months Ended March 31, 2011	Systems			Probes and Sockets			Corporate Unallocated			Total
Revenue	$	19,532		$	8,313		$	—		$	27,845
Gross profit	$	7,269		$	3,959		$	—		$	11,228
Gross margin		37.2	%		47.6	%		—			40.3	%
Income (loss) from operations	$	3,228		$	(111	)	$	(2,910	)	$	207
Three Months Ended March 31, 2010
Revenue	$	12,658		$	7,301		$	—		$	19,959
Gross profit	$	2,774		$	2,612		$	—		$	5,386
Gross margin		21.9	%		35.8	%		—			27.0	%
Loss from operations	$	(2,007	)	$	(1,320	)	$	(4,789	)	$	(8,116	)

Revenue

Revenue increased $7.8 million, or 39.5%, to $27.8 million in the first quarter of 2011 compared to $20.0 million in the first quarter of 2010 as described in more detail below.

Systems

Systems revenue increased $6.8 million, or 54.3%, to $19.5 million in the first quarter of 2011 compared to $12.7 million in the first quarter of 2010. Certain financial information which contributed to the Systems revenue results was as follows:

	First quarter of 2011 compared to first quarter of 2010
Percentage increase in unit sales		17.9	%
Percentage increase in average sales price		31.9	%

We realized increased unit sales in the first quarter of 2011 compared to the first quarter of 2010 due to an improvement in the semiconductor equipment market.

Average sales prices in the first quarter of 2011 compared to the first quarter of 2010 were positively affected by changes in sales mix, as a higher number of higher-end 300mm and special application systems were sold.

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Probes and Sockets

Probes and Sockets revenue increased $1.0 million, or 13.9%, to $8.3 million in the first quarter of 2011 compared to $7.3 million in the first quarter of 2010. This increase was primarily the result of higher unit sales of our production probe cards and test sockets.

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 increased $2.0 million, or 14.0%, to $16.6 million in the first quarter of 2011 compared to $14.6 million in the first quarter of 2010. The increase in cost of sales in the first quarter of 2011 compared to the first quarter of 2010 was the result of the increase in sales as discussed above, partially offset by a $1.0 million decrease in restructuring related charges and an overall increase in gross margin (gross profit as a percentage of net sales), as discussed below, to 40.3% in the first quarter of 2011, compared to 27.0% in the first quarter of 2010.

The increase in gross margin in the first quarter of 2011 compared to the first quarter of 2010 was primarily due to inventory valuation charges of $0.3 million in the first quarter of 2011 compared to $1.6 million in the first quarter of 2010. Of the $1.6 million inventory charge in the first quarter of 2010, $1.0 million represented a restructuring cost for Systems products that were discontinued following our acquisition of SUSS MicroTec Test Systems GmbH (“SUSS Test”) in January 2010.

Systems

The gross margin in Systems increased to 37.2% in the first quarter of 2011 from 21.9% in the first quarter of 2010. The increase was primarily due to charges in the first quarter of 2010 that included restructuring costs of $1.1 million and a $0.6 million purchase price allocation adjustment to value finished goods and work-in-process inventory acquired with the SUSS Test acquisition at their estimated selling price less cost to sell. Accordingly, when such inventory was sold, it resulted in near zero gross margin. Restructuring costs included as a component of cost of sales in the first quarter of 2010 consisted of inventory charges on discontinued products of $1.0 million and severance costs of $0.1 million.

Probes and Sockets

The gross margin in Probes and Sockets increased to 47.6% in the first quarter of 2011 from 35.8% in the first quarter of 2010. The increase in gross margin was primarily due to the increase in sales as there was a decrease in unallocated fixed overhead costs recorded as a period expense in cost of sales and a decrease in inventory valuation charges.

Research and Development

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

Research and development expenses decreased $0.3 million, or 7.5%, to $3.2 million in the first quarter of 2011 compared to $3.5 million in the first quarter of 2010. The decrease was primarily due to a $0.3 million decrease in professional fees and a $0.1 million decrease in severance and termination costs as a result of the acquisition of SUSS Test in January 2010. These factors were partially offset by a $0.1 million increase in stock-based compensation.

Selling, General and Administrative

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

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SG&A expenses decreased $2.3 million, or 22.8%, to $7.6 million in the first quarter of 2011 compared to $9.9 million in the first quarter of 2010. The decrease was primarily due to a $1.1 million decrease in restructuring expenses and a $0.8 million decrease in professional fees. These decreases were primarily due to the acquisition of SUSS Test in January 2010. In addition, there was a $0.3 million decrease in internal and external commissions due to changes in commissions programs and sales mix, and a $0.1 million increase in stock-based compensation.

Amortization of Purchased Intangibles

Amortization of purchased intangibles includes amortization related to our acquisitions. Amortization expense increased to $203,000 in the first quarter of 2011 compared to $180,000 in the first quarter of 2010 due to acquisition timing in January 2010. Net purchased intangibles totaled $2.9 million at March 31, 2011 and amortization currently totals approximately $0.2 million per quarter.

Other Income (Expense)

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

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

	Three Months Ended March 31,
	2011			2010
Interest income, net	$	19		$	32
Foreign currency gains (losses)		29			(122	)
Gains (losses) on foreign currency forward contracts		(59	)		23
Other		13			11
	$	2		$	(56	)

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

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

Income Taxes

Our income tax expense totaled $0.1 million, or 49.3% of income before income taxes, in the first quarter of 2011 and represents the estimated tax expense on income in foreign tax jurisdictions.

Our benefit from income taxes totaled $0.8 million, or 9.4% of loss before income taxes, in the first quarter of 2010 and represented a benefit for the release of valuation allowance on deferred tax assets in Germany due to the acquisition of SUSS Test, partially offset by tax expense in certain other foreign tax jurisdictions.

Liquidity and Capital Resources

Net cash provided by operating activities in the first quarter of 2011 was $0.8 million and consisted of our net income of $0.1 million, net non-cash expenses of $1.7 million and net changes in our operating assets and liabilities as described below.

Accounts receivable, net increased by $0.7 million to $20.4 million at March 31, 2011, compared to $19.7 million at December 31, 2010. The increase in accounts receivable was primarily due to our increased sales in the first quarter of 2011 compared to the fourth quarter of 2010.

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Inventories increased by $1.3 million to $22.1 million at March 31, 2011, compared to $20.8 million at December 31, 2010. The increase in inventory was primarily due to increased purchases to support our increased sales and the effect of exchange rate change on euro-denominated inventory, partially offset by inventory reserve charges of $0.3 million. If our actual results are significantly different than our current expectations for 2011, we may incur charges to write down inventory in future periods.

Accounts payable increased by $1.4 million to $7.8 million at March 31, 2011, compared to $6.4 million at December 31, 2010 primarily due to increased inventory purchases to support our increased sales.

Accrued liabilities decreased by $1.0 million to $5.3 million at March 31, 2011, compared to $6.3 million at December 31, 2010 primarily due to a decreases in accrued commissions and incentive compensation, accrued restructuring costs and accrued VAT payments.

Fixed asset purchases of $0.8 million in the first quarter of 2011 were primarily for improvements to our business information systems and facility improvements related to our previously announced factory consolidation. We anticipate fixed asset additions for all of 2011 to be approximately $5.3 million, primarily for production related equipment, facility improvements, research and development tools and information technology.

We anticipate meeting our cash requirements for the next 12 months and for the foreseeable future from existing cash and cash equivalents and marketable securities, which totaled $22.8 million at March 31, 2011.

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

Recent Accounting Guidance

See Note 12 of Notes to Condensed Consolidated Financial Statements.

Contractual Commitments

The following is a summary of our contractual commitments and obligations as of March 31, 2011 (in thousands):

	Payments Due By Period
Contractual Obligation	Total		Remainder of 2011		2012 and 2013		2014 and 2015		2016 and beyond
Operating Leases	$	12,989	$	2,814	$	5,933	$	4,159	$	83
Capital Leases		27		13		14		—		—
Purchase Order Commitments		10,224		10,224		—		—		—
Forward contracts		1,684		1,684		—		—		—
	$	24,924	$	14,735	$	5,947	$	4,159	$	83

Purchase order commitments primarily represent open orders for inventory.

Seasonality

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

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Off-Balance Sheet Arrangements

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

Item 4. Controls and Procedures

Changes in Internal Control Over Financial Reporting

There has been no change in our internal control over financial reporting 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 are effective in ensuring that information required to be disclosed in our Exchange Act reports is (1) recorded, processed, summarized and reported in a timely manner, and (2) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Limitation on Effectiveness of Controls

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

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PART II – OTHER INFORMATION

Item 1A. Risk Factors

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

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

Use of Proceeds

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

As of March 31, 2011, we had used approximately $5.5 million of those proceeds for the repayment of indebtedness and $27.1 million, net of cash acquired, for our acquisitions of the eVue product line and Gryphics, Inc. and certain assets of Synatron GmbH and SUSS Test.

Item 6. Exhibits

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

10.1	Executive Incentive Plan for the Six-Month Period Ending June 30, 2011. Incorporated by reference to Form 8-K filed April 7, 2011.
31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934.
31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934.
32.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.
32.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.

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SIGNATURES

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

Date: May 6, 2011	CASCADE MICROTECH, INC.
	(Registrant)
	By:	/s/ MICHAEL D. BURGER
	Michael D. Burger
	Director, President and Chief Executive Officer
	(Principal Executive Officer)
	By:	/s/ JEFF KILLIAN
	Jeff Killian
	Chief Financial Officer and Treasurer
	(Principal Financial and Accounting Officer)

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