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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

 

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

For the quarterly period ended September 30, 2015

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

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 October 30, 2015 was 15,855,869.

 

 

 


Table of Contents

CASCADE MICROTECH, INC.

INDEX TO FORM 10-Q

 

     Page  
PART I - FINANCIAL INFORMATION   
Item 1.    Financial Statements   
   Condensed Consolidated Balance Sheets (unaudited) - September 30, 2015 and December 31, 2014      2   
   Condensed Consolidated Statements of Operations (unaudited) - Three and Nine Months Ended September 30, 2015 and 2014      3   
   Condensed Consolidated Statements of Comprehensive Income (unaudited) - Three and Nine Months Ended September 30, 2015 and 2014      4   
   Condensed Consolidated Statements of Cash Flows (unaudited) - Nine Months Ended September 30, 2015 and 2014      5   
   Notes to Condensed Consolidated Financial Statements (unaudited)      6   
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations      13   
Item 3.    Quantitative and Qualitative Disclosures About Market Risk      21   
Item 4.    Controls and Procedures      21   
PART II - OTHER INFORMATION   
Item 1A.    Risk Factors      22   
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds      22   
Item 6.    Exhibits      22   
Signatures      23   

 

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PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements

Cascade Microtech, Inc.

Condensed Consolidated Balance Sheets

(Unaudited, In thousands, except per share amounts)

 

     September 30,     December 31,  
     2015     2014  

Assets

    

Current Assets:

    

Cash and cash equivalents

   $ 30,131      $ 38,107   

Short-term marketable securities

     10,988        1,626   

Restricted cash

     4        61   

Accounts receivable, net of allowances of $260 and $208

     25,560        20,763   

Inventories

     25,123        24,642   

Prepaid expenses and other

     4,289        4,454   

Deferred income taxes

     3,018        3,027   
  

 

 

   

 

 

 

Total Current Assets

     99,113        92,680   

Fixed assets, net of accumulated depreciation of $30,285 and $28,407

     10,065        8,100   

Goodwill

     11,898        12,823   

Purchased intangible assets, net of accumulated amortization of $6,922 and $5,324

     9,960        12,572   

Deferred income taxes

     1,467        1,262   

Other assets

     724        944   
  

 

 

   

 

 

 

Total Assets

   $ 133,227      $ 128,381   
  

 

 

   

 

 

 

Liabilities and Shareholders’ Equity

    

Current Liabilities:

    

Accounts payable

   $ 8,659      $ 7,505   

Deferred revenue

     2,025        2,070   

Accrued liabilities

     8,480        9,505   
  

 

 

   

 

 

 

Total Current Liabilities

     19,164        19,080   

Deferred revenue

     393        329   

Other long-term liabilities

     1,583        1,511   
  

 

 

   

 

 

 

Total Liabilities

     21,140        20,920   

Shareholders’ Equity:

    

Common stock, $0.01 par value. Authorized 100,000 shares; issued and outstanding: 16,359 and 16,466

     164        165   

Additional paid-in capital

     109,468        111,480   

Accumulated other comprehensive loss

     (4,677     (3,127

Retained earnings (accumulated deficit)

     7,132        (1,057
  

 

 

   

 

 

 

Total Shareholders’ Equity

     112,087        107,461   
  

 

 

   

 

 

 

Total Liabilities and Shareholders’ Equity

   $ 133,227      $ 128,381   
  

 

 

   

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

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Table of Contents

Cascade Microtech, Inc.

Condensed Consolidated Statements of Operations

(Unaudited, In thousands, except per share amounts)

 

     For the Three Months Ended September 30,     For the Nine Months Ended September 30,  
     2015     2014     2015      2014  

Revenue

   $ 35,781      $ 32,749      $ 103,567       $ 99,429   

Cost of sales

     15,511        15,229        46,252         48,650   
  

 

 

   

 

 

   

 

 

    

 

 

 

Gross profit

     20,270        17,520        57,315         50,779   

Operating expenses:

         

Research and development

     4,344        3,554        12,208         10,223   

Selling, general and administrative

     11,414        10,352        33,756         31,412   
  

 

 

   

 

 

   

 

 

    

 

 

 
     15,758        13,906        45,964         41,635   
  

 

 

   

 

 

   

 

 

    

 

 

 

Income from operations

     4,512        3,614        11,351         9,144   

Other income (expense):

         

Interest income, net

     14        16        8         25   

Other, net

     (19     (235     277         (360
  

 

 

   

 

 

   

 

 

    

 

 

 

Total other income (expense), net

     (5     (219     285         (335
  

 

 

   

 

 

   

 

 

    

 

 

 

Income before income taxes

     4,507        3,395        11,636         8,809   

Income tax expense

     1,288        1,188        3,447         3,182   
  

 

 

   

 

 

   

 

 

    

 

 

 

Net income

     3,219        2,207        8,189         5,627   
  

 

 

   

 

 

   

 

 

    

 

 

 

Basic net income per share

   $ 0.19      $ 0.13      $ 0.49       $ 0.35   
  

 

 

   

 

 

   

 

 

    

 

 

 

Diluted net income per share

   $ 0.19      $ 0.13      $ 0.48       $ 0.34   
  

 

 

   

 

 

   

 

 

    

 

 

 

Shares used in per share calculations:

         

Basic

     16,529        16,357        16,549         16,286   
  

 

 

   

 

 

   

 

 

    

 

 

 

Diluted

     17,112        16,851        17,135         16,775   
  

 

 

   

 

 

   

 

 

    

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

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Table of Contents

Cascade Microtech, Inc.

Condensed Consolidated Statements of Comprehensive Income

(Unaudited, In thousands)

 

     For the Three Months Ended September 30,     For the Nine Months Ended September 30,  
     2015      2014     2015     2014  

Net income

   $ 3,219       $ 2,207      $ 8,189      $ 5,627   

Unrealized holding gains (losses)

     —           —          1        (3

Change in cumulative translation adjustment

     33         (2,042     (1,551     (2,138
  

 

 

    

 

 

   

 

 

   

 

 

 
     33         (2,042     (1,550     (2,141
  

 

 

    

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 3,252       $ 165      $ 6,639      $ 3,486   
  

 

 

    

 

 

   

 

 

   

 

 

 

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 Nine Months Ended September 30,  
     2015     2014  

Cash flows from operating activities:

    

Net income

   $ 8,189      $ 5,627   

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

    

Depreciation expense

     2,257        2,452   

Amortization of intangibles

     1,876        2,317   

Stock-based compensation

     2,009        1,918   

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

     1        45   

Deferred income taxes

     —          (21

Excess tax benefits related to stock option exercises

     (292     —     

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

    

Accounts receivable, net

     (4,937     3,919   

Inventories

     10        (2,160

Prepaid expenses and other

     508        (1,370

Increase (decrease), net of effect of acquisition, in:

    

Accounts payable

     778        (598

Deferred revenue

     19        (473

Accrued and other long-term liabilities

     (1,102     2,088   
  

 

 

   

 

 

 

Net cash provided by operating activities

     9,316        13,744   

Cash flows from investing activities:

    

Purchase of marketable securities

     (15,369     (2,127

Proceeds from sale of marketable securities

     6,008        4,699   

Purchase of fixed assets

     (3,753     (3,123

Proceeds from sales of fixed assets

     1        34   

Decrease in restricted cash

     51        1,037   

Cash paid for acquisitions, net of cash acquired

     —          (654
  

 

 

   

 

 

 

Net cash used in investing activities

     (13,062     (134

Cash flows from financing activities:

    

Withholding taxes paid on net settlement of vested restricted stock units

     (501     (534

Excess tax benefits related to stock option exercises

     292        —     

Proceeds from issuances of common stock

     893        1,392   

Cash paid for repurchase of common stock

     (4,257     (1,033
  

 

 

   

 

 

 

Net cash used in financing activities

     (3,573     (175

Effect of exchange rate changes on cash and cash equivalents

     (657     (890
  

 

 

   

 

 

 

Increase (decrease) in cash and cash equivalents

     (7,976     12,545   

Cash and cash equivalents:

    

Beginning of period

     38,107        17,172   
  

 

 

   

 

 

 

End of period

   $ 30,131      $ 29,717   
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information:

    

Cash paid for income taxes, net

   $ 3,520      $ 913   

Supplemental disclosure of non-cash information:

    

Fixed asset purchases included in accounts payable

   $ 558      $ —     

Common stock repurchases included in accrued liabilities

     434        —     

Transfer to inventory from fixed assets

     —          213   

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, 2014 is derived from our 2014 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 2014 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 cost 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
September 30,
     Nine Months Ended
September 30,
 
     2015      2014      2015      2014  

Inventory charges

   $ 18       $ 694       $ 483       $ 1,493   

Inventories consisted of the following (in thousands):

 

     September 30,
2015
     December 31
2014
 

Raw materials

   $ 16,119       $ 14,120   

Work-in-process

     3,114         3,809   

Finished goods

     5,890         6,713   
  

 

 

    

 

 

 
   $ 25,123       $ 24,642   
  

 

 

    

 

 

 

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
September 30,
     Nine Months Ended
September 30,
 
     2015      2014      2015      2014  

Shares used to calculate basic net income per share

     16,529         16,357         16,549         16,286   

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

     583         494         586         489   
  

 

 

    

 

 

    

 

 

    

 

 

 

Shares used to calculate diluted net income per share

     17,112         16,851         17,135         16,775   
  

 

 

    

 

 

    

 

 

    

 

 

 

Securities not included as they would have been antidilutive

     861         978         858         984   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

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):

 

     Nine Months Ended
September 30,
 
     2015      2014  

Warranty accrual, beginning of period

   $ 797       $ 745   

Reductions for warranty charges

     (630      (616

Additions to warranty reserve

     683         690   
  

 

 

    

 

 

 

Warranty accrual, end of period

   $ 850       $ 819   
  

 

 

    

 

 

 

Note 5. Goodwill and Intangible Assets

Goodwill

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

 

     Nine Months
Ended

September 30, 2015
     Year Ended
December 31,
2014
 

Balance, beginning of period

   $ 12,823       $ 14,471   

Effect of exchange rate changes

     (925      (1,648
  

 

 

    

 

 

 

Balance, end of period

   $ 11,898       $ 12,823   
  

 

 

    

 

 

 

Intangible Assets

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

 

     September 30,      December 31,  
     2015      2014  

Purchased Intangible Assets

     

Customer relationships

   $ 4,092       $ 4,323   

Core technology

     11,781         12,481   

Trademarks and tradenames

     1,009         1,092   
  

 

 

    

 

 

 
     16,882         17,896   

Less accumulated amortization

     (6,922      (5,324
  

 

 

    

 

 

 
   $ 9,960       $ 12,572   
  

 

 

    

 

 

 

Patents

     

Patents

   $ 4,632       $ 4,632   

Less accumulated amortization

     (4,632      (4,540
  

 

 

    

 

 

 
   $ —         $ 92   
  

 

 

    

 

 

 

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,
 
     2015      2014      2015      2014  

Intangible amortization

   $ 593       $ 752       $ 1,876       $ 2,317   

 

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

 

Remainder of 2015

   $ 596   

2016

     2,186   

2017

     2,167   

2018

     2,090   

2019

     1,626   

Thereafter

     1,295   
  

 

 

 
   $ 9,960   
  

 

 

 

Note 6. Accrued Liabilities

Accrued liabilities consisted of the following (in thousands):

 

     September 30,      December 31,  
     2015      2014  

Accrued compensation and benefits

   $ 3,551       $ 3,606   

Unrealized loss on forward contracts

     303         —     

Accrued sales taxes and VAT

     1,043         276   

Accrued income taxes

     800         1,628   

Accrued warranty

     850         797   

Payable to seller related to our acquisition of ATT Advanced Temperature Test Systems GmbH (“ATT Systems”)

     421         456   

Accrued restructuring costs

     413         1,959   

Other

     1,099         783   
  

 

 

    

 

 

 
   $ 8,480       $ 9,505   
  

 

 

    

 

 

 

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

In May 2015, our shareholders approved an increase of 800,000 shares in the number of shares approved for issuance pursuant to our 2010 Stock Incentive Plan (as amended, the “2010 Plan”) to a total of 3,669,600 shares. As of September 30, 2015, a total of 1,464,634 shares remained available for future issuance pursuant to the 2010 Plan.

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

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2015      2014      2015      2014  

Cost of sales

   $ 47       $ 70       $ 108       $ 190   

Research and development

     108         88         255         228   

Selling, general and administrative

     650         490         1,646         1,500   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 805       $ 648       $ 2,009       $ 1,918   
  

 

 

    

 

 

    

 

 

    

 

 

 

Stock Incentive Plans

Stock option activity for the first nine months of 2015 was as follows:

 

     Stock Options
Outstanding
     Weighted
Average
Exercise Price
 

Outstanding at December 31, 2014

     916,779       $ 6.10   

Granted

     82,300         14.34   

Exercised

     (72,381      7.62   

Forfeited

     (100      14.38   
  

 

 

    

Outstanding at September 30, 2015

     926,598         6.71   
  

 

 

    

 

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Table of Contents

RSU activity for the first nine months of 2015 was as follows:

 

     RSUs      Weighted
Average

Grant Date
Per Share
Fair Value
 

Outstanding at December 31, 2014

     395,724       $ 8.83   

Granted – time-based

     214,454         14.86   

Granted – performance-based

     49,000         14.34   

Vested

     (125,795      9.03   

Forfeited

     (16,186      7.91   
  

 

 

    

Outstanding at September 30, 2015

     517,197         11.84   
  

 

 

    

The performance-based RSUs will vest if new product revenue as a percentage of total revenue meets a certain target for the second half of 2017. If the target is met, the performance-based RSUs will be earned and vested in the first quarter of 2018 at between 50% and 100% of the total granted based upon the target achievement level. Stock-based compensation expense is recognized over the vesting period based on our determination of the probability of the awards being earned. As of September 30, 2015, we determined that the target was not probable of achievement, and accordingly, no expense was recognized.

As of September 30, 2015, total unrecognized stock-based compensation related to outstanding, but unvested, options and RSUs was $5.8 million, which will be recognized over the weighted average remaining vesting period of 2.3 years.

Employee Stock Purchase Plan

During the first nine months of 2015, we issued 36,542 shares of our common stock pursuant to our 2013 Employee Share Purchase Plan (the “2013 ESPP”) at a price of $9.13 per share, which represented a discount of $4.13 per share from the fair value of our common stock on the date of issuance. As of September 30, 2015, a total of 892,943 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 segment and our Probes segment. We do not track our assets on a segment level, and, accordingly, that information is not provided.

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

 

     Systems     Probes     Corporate
Unallocated
    Total  

Three Months Ended September 30, 2015

        

Revenue

   $ 19,146      $ 16,635      $ —        $ 35,781   

Gross profit

   $ 9,633      $ 10,637      $ —        $ 20,270   

Gross margin

     50.3     63.9     —          56.7

Income (loss) from operations

   $ 1,952      $ 6,452      $ (3,892   $ 4,512   

Three Months Ended September 30, 2014

        

Revenue

   $ 18,687      $ 14,062      $ —        $ 32,749   

Gross profit

   $ 8,162      $ 9,358      $ —        $ 17,520   

Gross margin

     43.7     66.5     —          53.5

Income (loss) from operations (1)

   $ 556      $ 6,459      $ (3,401   $ 3,614   

 

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Table of Contents
     Systems     Probes     Corporate
Unallocated
    Total  

Nine Months Ended September 30, 2015

        

Revenue

   $ 56,161      $ 47,406      $ —        $ 103,567   

Gross profit

   $ 27,296      $ 30,019      $ —        $ 57,315   

Gross margin

     48.6     63.3     —          55.3

Income (loss) from operations

   $ 4,779      $ 18,320      $ (11,748   $ 11,351   

Nine Months Ended September 30, 2014

        

Revenue

   $ 61,489      $ 37,940      $ —        $ 99,429   

Gross profit

   $ 27,499      $ 23,280      $ —        $ 50,779   

Gross margin

     44.7     61.4     —          51.1

Income (loss) from operations (1)

   $ 4,924      $ 14,785      $ (10,565   $ 9,144   

 

(1) Amortization expense of $0.7 million and $2.2 million for the three and nine-month periods ended September 30, 2014, respectively, was reclassified from Corporate Unallocated to Systems to conform with the current period presentation.

No customer accounted for 10% or greater of our total revenue in the three-month periods ended September 30, 2015 and 2014, or in the nine-month periods ended September 30, 2015 and 2014.

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):

 

     September 30, 2015      December 31, 2014  
     Fair Value      Input Level      Fair Value      Input Level  

Marketable securities – corporate equities

   $ 4         Level 1       $ 6         Level 1   

Marketable securities – corporate obligations

   $ 6,694         Level 2       $ 1,620         Level 2   

Marketable securities – U.S. treasury securities

   $ 4,290         Level 2       $ —           Level 2   

Forward sale contracts for Japanese yen

   $ (10      Level 2       $ 131         Level 2   

Forward purchase contract for euro

   $ (4      Level 2       $ (40      Level 2   

Forward sale contract for euro

   $ (287      Level 2       $ 929         Level 2   

The fair value of our marketable securities is determined based on quoted market prices for similar or identical securities. Any unrealized gain or loss is recorded as a component of Accumulated other comprehensive loss in our Condensed Consolidated Balance Sheets.

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 Statements of Operations as a component of Other income (expense).

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 nine months of 2015.

 

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Note 10. Stock Repurchases

In August 2015, our Board of Directors authorized a stock repurchase program under which we could repurchase up to $15.0 million of our common stock. This plan replaces, in its entirety, the November 2012 stock repurchase program, which had approximately $2.5 million of repurchase authority remaining. We did not repurchase any shares during the first six months of 2015. During the third quarter of 2015, we repurchased a total of 336,429 shares at a weighted-average price of $13.94 per share, for a total purchase price of $4.7 million. As of September 30, 2015, $10.3 million remained available for stock repurchases under the program authorized in August 2015, which does not have an expiration date.

See Note 14 for a discussion of shares repurchased in October 2015.

Note 11. Restructuring Accrual

Restructuring charges for the first nine months of 2015 relate to the consolidation of certain manufacturing, research and development operations, and the reorganization of business operations and the sales channel in Europe.

Restructuring charges for the first nine months of 2014 related to adjustments to our lease abandonment reserve.

Restructuring charges were as follows (in thousands):

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2015      2014      2015      2014  

Cost of sales

   $ —         $ —         $ 243       $ —     

Research and development

     —           —           19         —     

Selling, general and administrative

     —           (191      —           58   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ —         $ (191    $ 262       $ 58   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

 

Nine Months Ended

September 30, 2015

   Beginning
Accrued
Liability
     Charged to
Expense,
Net
     Expenditures     Write-Offs
and
Adjustments
     Ending
Accrued
Liability
 

Termination and severance related

   $ 308       $ 112       $ (420   $ —         $ —     

Factory transition

     —           150         (150     —           —     

Lease abandonment

     1,651         —           (1,238     —           413   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
   $ 1,959       $ 262       $ (1,808   $ —         $ 413   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

 

Nine Months Ended

September 30, 2014

   Beginning
Accrued
Liability
     Charged to
Expense,
Net
     Expenditures     Write-Offs
and
Adjustments
     Ending
Accrued
Liability
 

Lease abandonment

   $ 2,129       $ 58       $ (873   $ —         $ 1,314   

We expect to pay all accrued restructuring costs by the end of 2015.

Note 12. Line of Credit Amendment

In March 2015, we amended our $10.0 million line of credit agreement with JPMorgan Chase Bank, N.A. to extend the maturity date of our line of credit facility to March 5, 2018. All other terms remain the same. We did not have any amounts outstanding under the line of credit facility at September 30, 2015.

 

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Note 13. Recent Accounting Guidance

ASU 2015-11

In July 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-11 “Simplifying the Measurement of Inventory (Topic 330).” ASU 2015-11 simplifies the accounting for the valuation of all inventory not accounted for using the last-in, first-out (“LIFO”) method by prescribing inventory be valued at the lower of cost and net realizable value. ASU 2015-11 is effective for public companies’ annual periods, including interim periods within those fiscal years, beginning after December 15, 2016 on a prospective basis. Early adoption is permitted. We do not expect the adoption of ASU 2015-11 to have a material effect on our financial position, results of operations or cash flows.

ASU 2015-05

In April 2015, the FASB issued ASU 2015-05, “Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40).” ASU 2015-05 provides guidance regarding the accounting for a customer’s fees paid in a cloud computing arrangement; specifically about whether a cloud computing arrangement includes a software license, and if so, how to account for the software license. ASU 2015-05 is effective for public companies’ annual periods, including interim periods within those fiscal years, beginning after December 15, 2015 on either a prospective or retrospective basis. Early adoption is permitted. We do not expect the adoption of ASU 2015-05 to have a material effect on our financial position, results of operations or cash flows.

ASU 2015-02

In February 2015, the FASB issued ASU 2015-02, “Consolidation (Topic 810).” ASU 2015-02 amends guidance regarding the consolidation of certain legal entities. ASU 2015-02 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015, with early adoption permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. We do not expect the adoption of ASU 2015-02 to have any effect on our financial position, results of operations or cash flows.

ASU 2015-01

In January 2015, the FASB issued ASU 2015-01, “Income Statement – Extraordinary and Unusual Items (Subtopic 225-20).” ASU 2015-01 simplifies income statement presentation by eliminating the concept of extraordinary items. ASU 2015-01 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015, with early adoption permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. The adoption of ASU 2015-01 will not have any effect on our financial position, results of operations or cash flows.

ASU 2014-16

In November 2014, the FASB issued ASU 2014-16, “Derivatives and Hedging (Topic 815).” ASU 2014-16 addresses whether the host contract in a hybrid financial instrument issued in the form of a share should be accounted for as debt or equity. ASU 2014-16 is effective for annual periods and interim periods beginning after December 15, 2015. We do not currently have issued, nor are we investors in, hybrid financial instruments. Accordingly, we do not expect the adoption of ASU 2014-16 to have any effect on our financial position, results of operations or cash flows.

ASU 2014-12

In June 2014, the FASB issued 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.

 

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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, as amended, is effective for annual and interim periods beginning on or after December 15, 2017. 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.

Note 14. Subsequent Events

On October 1, 2015, we paid the remaining $0.4 million of the deferred purchase price related to our acquisition of ATT Systems. Following this payment, we do not owe any additional amounts related to this acquisition.

During October 2015, we repurchased 514,300 shares of our common stock pursuant to our August 2015 stock repurchase program for an average price of $14.55 per share, or a total of $7.5 million. Following these repurchases, $2.8 million remained available for future repurchases under the program.

 

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 Form10-Q are forward-looking including, among others, statements regarding: our future financial position and results of operations, including the estimated revenue for the fourth quarter of 2015; the future impact of any off-balance sheet arrangements; our estimated costs to repair or replace products under warranty; our estimated amortization of intangible assets; our strategies and intentions and potential sources of funds regarding any acquisitions; potential future inventory charges; our accounting and tax policies and the impact of adopting accounting guidance on our financial position, results of operations or cash flows; the anticipated cash required for our fixed asset purchases for 2015; seasonality of our revenues and expected increases in revenue in the last month of each quarter; our ability to meet our cash requirements for the next 12 months and for the foreseeable future and the sources we anticipate using to meet these cash requirements. 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, 2014 as filed with the Securities and Exchange Commission on March 12, 2015.

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 often 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. Many of our products 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.

 

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We operate in two business segments: Systems and Probes. Sales of our probe stations, thermal sub-systems 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 sub-systems 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 sub-systems offer a broad range of modular solutions that can be used in new installations, as well as upgrades to existing equipment.

we acquired our reliability test products in July 2013 from Aetrium Incorporated. 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 nine months of 2015 increased to $103.6 million and 55.3%, respectively, compared to $99.4 million and 51.1%, respectively, in the first nine months of 2014, reflecting increased sales in the Probes segment and increased gross margins in both the Systems and Probes segments. Net income was $8.2 million in the first nine months of 2015 compared to $5.6 million in the first nine months of 2014.

Outlook

Based on our current backlog, projected bookings and scheduled shipments, we anticipate revenues will be in the range of $37 million to $40 million for the fourth quarter of 2015.

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. The estimates we make may change in the future.

We reaffirm the critical accounting policies and estimates as reported in our Annual Report on Form 10-K for the year ended December 31, 2014, which was filed with the Securities and Exchange Commission on March 12, 2015.

 

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Results of Continuing Operations

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

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2015     2014     2015     2014  

Revenue

     100.0     100.0     100.0     100.0

Cost of sales

     43.3        46.5        44.7        48.9   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     56.7        53.5        55.3        51.1   

Operating expenses:

        

Research and development

     12.1        10.9        11.8        10.3   

Selling, general and administrative

     31.9        31.6        32.6        31.6   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     44.0        42.5        44.4        41.9   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     12.6        11.0        11.0        9.2   

Other income (expense), net

     —          (0.7     0.3        (0.3
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     12.6        10.4        11.2        8.9   

Income tax expense

     3.6        3.6        3.3        3.2   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     9.0     6.7     7.9     5.7
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Percentages may not add due to rounding.

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

 

     Systems     Probes     Corporate
Unallocated
     Total  

Three Months Ended September 30, 2015

         

Revenue

   $ 19,146      $ 16,635      $ —         $ 35,781   

Gross profit

   $ 9,633      $ 10,637      $ —         $ 20,270   

Gross margin

     50.3     63.9     —           56.7

Income (loss) from operations

   $ 1,952      $ 6,452      $ (3,892    $ 4,512   

Three Months Ended September 30, 2014

         

Revenue

   $ 18,687      $ 14,062      $ —         $ 32,749   

Gross profit

   $ 8,162      $ 9,358      $ —         $ 17,520   

Gross margin

     43.7     66.5     —           53.5

Income (loss) from operations (1)

   $ 556      $ 6,459      $ (3,401    $ 3,614   

 

     Systems     Probes     Corporate
Unallocated
     Total  

Nine Months Ended September 30, 2015

         

Revenue

   $ 56,161      $ 47,406      $ —         $ 103,567   

Gross profit

   $ 27,296      $ 30,019      $ —         $ 57,315   

Gross margin

     48.6     63.3     —           55.3

Income (loss) from operations

   $ 4,779      $ 18,320      $ (11,748    $ 11,351   

Nine Months Ended September 30, 2014

         

Revenue

   $ 61,489      $ 37,940      $ —         $ 99,429   

Gross profit

   $ 27,499      $ 23,280      $ —         $ 50,779   

Gross margin

     44.7     61.4     —           51.1

Income (loss) from operations (1)

   $ 4,924      $ 14,785      $ (10,565    $ 9,144   

 

(1) Amortization expense of $0.7 million and $2.2 million for the three and nine-month periods ended September 30, 2014, respectively, was reclassified from Corporate Unallocated to Systems to conform with the current period presentation.

 

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Revenue

Revenue information was as follows (dollars in thousands):

 

     Three Months Ended Sept. 30,      Dollar         

Revenue

   2015      2014      Change      % Change  

Systems

   $ 19,146       $ 18,687       $ 459         2.5

Probes

     16,635         14,062         2,573         18.3
  

 

 

    

 

 

    

 

 

    

Total

   $ 35,781       $ 32,749       $ 3,032         9.3
  

 

 

    

 

 

    

 

 

    

 

     Nine Months Ended Sept. 30,      Dollar         

Revenue

   2015      2014      Change      % Change  

Systems

   $ 56,161       $ 61,489       $ (5,328      (8.7 )% 

Probes

     47,406         37,940         9,466         24.9
  

 

 

    

 

 

    

 

 

    

Total

   $ 103,567       $ 99,429       $ 4,138         4.2
  

 

 

    

 

 

    

 

 

    

Systems

The increase in Systems revenue in the three-month period ended September 30, 2015 compared to the same period of 2014 was primarily related to an increase in service revenue.

The decrease in Systems revenue in the nine-month period ended September 30, 2015 compared to the same period of 2014 was primarily related to a decrease in unit sales of probe stations and thermal sub-systems, as well as changes in foreign currency exchange rates, partially offset by an increase in service revenue.

Probes

The increases in Probes revenue in the three- and nine-month periods ended September 30, 2015 compared to the same periods of 2014 were primarily the result of increases in unit sales of production probe cards driven by increased demand in the radio frequency (RF) and parametric markets.

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 Sept. 30,      Dollar         

Cost of Sales

   2015      2014      Change      % Change  

Systems

   $ 9,513       $ 10,525       $ (1,012      (9.6 )% 

Probes

     5,998         4,704         1,294         27.5
  

 

 

    

 

 

    

 

 

    

Total

   $ 15,511       $ 15,229       $ 282         1.9
  

 

 

    

 

 

    

 

 

    

 

     Nine Months Ended Sept. 30,      Dollar         

Cost of Sales

   2015      2014      Change      % Change  

Systems

   $ 28,865       $ 33,990       $ (5,125      (15.1 )% 

Probes

     17,387         14,660         2,727         18.6
  

 

 

    

 

 

    

 

 

    

Total

   $ 46,252       $ 48,650       $ (2,398      (4.9 )% 
  

 

 

    

 

 

    

 

 

    

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.

 

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Gross margins were as follows:

 

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

Gross Margins

   2015     2014     2015     2014  

Systems

     50.3     43.7     48.6     44.7

Probes

     63.9     66.5     63.3     61.4

Overall

     56.7     53.5     55.3     51.1

Systems

The increases in Systems gross margins in the three- and nine-month periods ended September 30, 2015 compared to the same periods of 2014 were primarily due to changes in sales mix as discussed above, decreased inventory reserve charges and other manufacturing overhead costs, and changes in foreign currency exchange rates.

Probes

The decrease in Probes gross margin in the three-month period ended September 30, 2015 compared to the same period of 2014 was primarily due to an increase in manufacturing overhead costs.

The increase in Probes gross margins in the nine-month period ended September 30, 2015 compared to the same period of 2014 was primarily due to increased unit sales, which increased factory utilization and decreased unabsorbed period expenses.

Overall

The overall increases in gross margins in the three- and nine-month periods ended September 30, 2015 compared to the same periods of 2014 were primarily attributable to shifts in mix to a greater percentage of our revenue being derived from our Probes segment, as well as to the individual segment items 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 Sept. 30,     Dollar         
     2015     2014     Change      % Change  

Research and development

   $ 4,344      $ 3,554      $ 790         22.2

As a percentage of revenue

     12.1     10.9     
     Nine Months Ended Sept. 30,     Dollar         
     2015     2014     Change      % Change  

Research and development

   $ 12,208      $ 10,223      $ 1,985         19.4

As a percentage of revenue

     11.8     10.3     

The increases in research and development in the three- and nine-month periods ended September 30, 2015 compared to the same periods of 2014 were primarily due to:

 

    increases of $0.5 million and $1.2 million, respectively, in salaries and benefits; and

 

    increases of $0.3 million and $0.6 million, respectively, in project-related expenses.

The increases in the 2015 periods compared to the 2014 periods as a percentage of revenue were primarily due to increased investment in new product development.

Selling, General and Administrative

Selling, general and administrative (“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.

 

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

 

     Three Months Ended Sept. 30,     Dollar         
     2015     2014     Change      % Change  

Selling, general and administrative

   $ 11,414      $ 10,352      $ 1,062         10.3

As a percentage of revenue

     31.9     31.6     

 

     Nine Months Ended Sept. 30,     Dollar         
     2015     2014     Change      % Change  

Selling, general and administrative

   $ 33,756      $ 31,412      $ 2,344         7.5

As a percentage of revenue

     32.6     31.6     

The increases in SG&A in the three- and nine-month periods ended September 30, 2015 compared to the same periods of 2014 were primarily due to:

 

    increases of $0.3 million and $1.2 million, respectively, in salaries and benefits;

 

    increases of $0.3 million and $0.8 million, respectively, in selling expenses;

 

    an increase of $0.4 million in the nine-month period in professional service fees;

 

    increases of $0.2 million and $0.1 million, respectively, in travel, meals and entertainment expenses;

 

    increases of $0.2 million and $0.1 million, respectively, in event fees;

 

    increases of $0.2 million and $0.1 million, respectively, in stock-based compensation; partially offset by

 

    decreases of $0.2 million and $0.4 million, respectively, in amortization expense.

The increases in the 2015 periods compared to the 2014 periods as a percentage of revenue were primarily due to increased investment in the sales and marketing organizations.

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 September 30,      Nine Months Ended September 30,  
     2015      2014      2015      2014  

Interest income, net

   $ 14       $ 16       $ 8       $ 25   

Foreign currency gains (losses)

     51         (2,248      (1,242      (2,344

Gains (losses) on foreign currency forward contracts

     (84      2,013         1,506         2,020   

Other

     14         —           13         (36
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ (5    $ (219    $ 285       $ (335
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest income represents interest earned on cash and cash equivalents and investments in marketable securities. Interest expense in the first nine months of 2015 represents interest paid related to a tax audit in Germany.

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. Foreign currency exchange rates were more consistent in the three-month period ended September 30, 2015 compared to the comparable period of 2014, which resulted in decreased gains and losses from foreign currency and foreign currency forward contracts.

 

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Income Taxes

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

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     2015     2014     2015     2014  

Income tax provision

   $ 1,288      $ 1,188      $ 3,447      $ 3,182   

Income tax provision as a percentage of income before income taxes

     28.6     35.0     29.6     36.1

Generally, the provision for income taxes is the result of the mix of profits and losses earned by us and our subsidiaries in tax jurisdictions with a broad range of income tax rates and changes in tax reserves. The first nine months of 2015 includes a $0.2 million discrete tax benefit resulting from the favorable resolution of a tax audit in Germany, and a $0.2 million discrete tax benefit for a change in estimate related to 2014 research and development tax credits. These tax benefits represents approximately 3.1% of income before income taxes in the nine-month period ended September 30, 2015.

Our income tax expense in the three- and nine-month periods ended September 30, 2015 and 2014 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 affected by changes in statutory tax rates and laws in the U.S. and foreign jurisdictions. It is also affected by discrete items that may occur in any given year, but are not consistent from year to year.

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 September 30, 2015, the net deferred tax assets on our Condensed Consolidated Balance Sheets totaled $4.5 million, and related primarily 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.

Net cash provided by operating activities in the first nine months of 2015 was $9.3 million and primarily consisted of our net income of $8.2 million, and non-cash charges of $5.9 million, as adjusted for changes in our operating assets and liabilities as described below.

Accounts receivable, net increased by $4.8 million to $25.6 million at September 30, 2015, compared to $20.8 million at December 31, 2014, primarily due to the timing of shipments and customer payments.

Inventories increased by $0.5 million to $25.1 million at September 30, 2015, compared to $24.6 million at December 31, 2014. The increase in inventory was primarily related to an increase in anticipated sales in the fourth quarter of 2015, offset by inventory charges of $0.5 million in 2015 for excess and obsolete inventory. If our actual results are significantly different than our current expectations for 2015, we may incur additional charges to write down inventory in future periods.

Prepaid expenses and other decreased by $0.2 million to $4.3 million at September 30, 2015, compared to $4.5 million at December 31, 2014, primarily due to a decrease in unrealized gains on foreign currency exchange contracts, partially offset by an increase in deposits for capital equipment purchases.

 

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Accounts payable increased by $1.2 million to $8.7 million at September 30, 2015, compared to $7.5 million at December 31, 2014, primarily due to increased inventory purchases and the timing of payments to vendors.

Accrued liabilities decreased by $1.0 million to $8.5 million at September 30, 2015, compared to $9.5 million at December 31, 2014, primarily due to a $1.5 million decrease in accrued restructuring costs and a $0.8 million decrease in accrued income taxes, partially offset by a $0.8 million increase in accrued sales taxes and VAT, and a $0.3 million increase in unrealized losses on foreign currency exchange contracts.

Cash used for fixed asset purchases of $3.8 million in the first nine months of 2015 primarily related to production-related equipment, and research and development tools. At September 30, 2015, we also had $0.6 million of fixed assets purchases in accounts payable. We anticipate that cash used for fixed asset purchases for all of 2015 will be between $6 million and $8 million, depending on the timing of payments to vendors.

In August 2015, our Board of Directors authorized a stock repurchase program under which we could repurchase up to $15.0 million of our common stock could be repurchased. This plan replaces, in its entirety, the November 2012 stock repurchase program, which had approximately $2.5 million of repurchase authority remaining. We did not repurchase any shares during the first six months of 2015. During the third quarter of 2015, we repurchased a total of 336,429 shares at a weighted-average price of $13.94 per share, for a total purchase price of $4.7 million. In addition, in October 2015, we repurchased a total of 514,300 shares at an average price of $14.55 per share, or a total of $7.5 million. Following the October repurchases, $2.8 million remained available for stock repurchases under the program authorized in August 2015, which 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. In March 2015, we amended the line of credit agreement to extend the maturity date of the LOC to March 5, 2018. The LOC 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 September 30, 2015, 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, Short-term marketable securities and Restricted cash, which totaled $41.1 million at September 30, 2015. 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 13 of Notes to Condensed Consolidated Financial Statements.

 

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Contractual Commitments

The following is a summary of our contractual commitments and obligations as of September 30, 2015 (in thousands):

 

     Payments Due By Period  

Contractual Obligation

   Total      Remainder
of 2015
     2016 and
2017
     2018 and
2019
     2020 and
beyond
 

Operating leases

   $ 9,598       $ 941       $ 4,725       $ 3,278       $ 654   

Purchase order commitments(1)

     7,218         6,414         804         —           —     

Additional consideration related to our acquisition of ATT Systems

     421         421         —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 17,237       $ 7,776       $ 5,529       $ 3,278       $ 654   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(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 2014 Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission on March 12, 2015.

 

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

 

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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, 2014 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, 2014, which was filed with the Securities and Exchange Commission on March 12, 2015.

 

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

We repurchased the following shares of our common stock during the third quarter of 2015:

 

     Total number
of shares
purchased
     Average
price paid
per share
     Total number of
shares purchased
as part of publicly
announced plan(1)
     Maximum dollar
amount that may

yet be purchased
under the plan
(in thousands)
 

July 1 to July 31

     —         $ —           —         $ 2,541   

August 1 to August 31

     274,728         14.02         274,728         11,148   

September 1 to September 30

     61,701         13.61         61,701         10,309   
  

 

 

       

 

 

    

Total

     336,429         13.94         336,429         10,309   
  

 

 

       

 

 

    

 

(1) In August 2015, our Board of Directors authorized a stock repurchase program under which we could repurchase up to $15.0 million of our common stock. This plan replaces, in its entirety, the November 2012 stock repurchase program, which had approximately $2.5 million of repurchase authority remaining. We did not repurchase any shares during the first six months of 2015. During the third quarter of 2015, we repurchased a total of 336,429 shares at a weighted-average price of $13.94 per share, for a total purchase price of $4.7 million. In addition, in October 2015, we repurchased a total of 514,300 shares at an average price of $14.55 per share, or a total of $7.5 million. Following the October repurchases, $2.8 million remained available for stock repurchases under the program authorized in August 2015, which 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:

 

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.

 

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SIGNATURES

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

 

Date: November 4, 2015       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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