TMCnet News
CASCADE MICROTECH INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) Forward-Looking Statements This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact made in this Quarterly Report on Form10-Q are forward-looking including, among others, statements regarding: industry prospects; future results of operations, including estimated revenue for the quarter ending June 30, 2013; our future financial position; our expectations and beliefs regarding future revenue growth; our estimated timeline for payment of lease abandonment costs; the future capabilities and functionality of our products and services; our strategies and intentions and potential sources of funds regarding acquisitions; our accounting and tax policies and the impact of adoption of accounting guidance, if any, on our financial position, results of operations or cash flows; potential charges to write down inventory in future periods; build-up of finished goods in preparation for orders ready to ship during the remainder of 2013; our future capital requirements and fixed asset additions for 2013, including for production-related equipment, facility improvements, research and development tools, business information systems and information technology equipment; seasonality of our revenues and expected increases in revenue recognition in the last month of each quarter; and our ability to meet our cash requirements for the next 12 months and for the foreseeable future. These statements relate to future events of our future financial performance. In some cases, you can identify forward-looking statements by terminology, including "intend," "could," "may," "will," "should," "expect," "plan," "anticipate," "believe," "estimate," "predict," "potential," "future," or "continue," the negative of these terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially 10-------------------------------------------------------------------------------- Table of Contents 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 and customer orders; constraints on supplies of components; excess or shortage of production capacity; potential failure of expected market opportunities to materialize; changes in foreign exchange rates; and other risks included in Item 1A to our Annual Report on Form 10-K as filed with the Securities and Exchange Commission on March 4, 2013. General We design, develop, manufacture and market advanced wafer probing solutions for the electrical measurement and testing of high performance semiconductor devices. Our products enable precision on-wafer measurement of integrated circuits. Our products are typically used in the early phases of the development of semiconductor processes where the accuracy and repeatability of measurements is critical to achieving yield from advanced process nodes. We design, manufacture and assemble our products in Beaverton, Oregon and Dresden, Germany and maintain global sales, service and support centers in North America, Germany, Japan, Taiwan, China and Singapore. We operate in two business segments: Systems and Probes. Sales of our probe stations are included in the Systems segment and sales of our analytical probes and production probe cards are included in the Probes segment. 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 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 in the first quarter of 2013 was flat at $27.5 million compared to the first quarter of 2012, primarily as a result of increased revenue in our Probes segment, partially offset by lower revenue from our Systems segment. Income from continuing operations was $0.7 million in both the first quarter of 2013 and 2012. Outlook Based on our current backlog, projected bookings and scheduled shipments, we anticipate revenues will be in the range of $27 million to $30 million for the second quarter of 2013. Critical Accounting Policies and the Use of Estimates The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that have become increasingly difficult to make in the current economic environment. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenue and expenses during the reporting period. On an on-going basis we evaluate our estimates, including those related to revenue recognition, bad debts, inventory, lives and recoverability of equipment and other long-lived assets, warranty obligations, deferred income tax assets, unrecognized income tax benefits, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. 11-------------------------------------------------------------------------------- Table of Contents We reaffirm the critical accounting policies and estimates as reported in our Annual Report on Form 10-K for the year ended December 31, 2012, which was filed with the Securities and Exchange Commission on March 4, 2013. 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, 2013 2012 Revenue 100.0 % 100.0 % Cost of sales 58.0 56.6 Gross profit 42.0 43.4 Operating expenses: Research and development 8.9 10.1 Selling, general and administrative 29.3 28.7 Total operating expenses 38.2 38.8 Income from operations 3.8 4.6 Other income (expense), net (0.8 ) (1.4 ) Income before income taxes 3.0 3.1 Income tax expense 0.3 0.5 Net income 2.7 % 2.7 % (1) Percentages may not add due to rounding. Revenue and operating income information by segment was as follows (dollars in thousands): Corporate Three Months Ended March 31, 2013 Systems Probes Unallocated Total Revenue $ 17,700 $ 9,771 $ - $ 27,471 Gross profit $ 6,712 $ 4,831 $ - $ 11,543 Gross margin 37.9 % 49.4 % - 42.0 % Income (loss) from operations $ 1,642 $ 2,424 $ (3,025 ) $ 1,041 Three Months Ended March 31, 2012 Revenue $ 18,226 $ 9,317 $ - $ 27,543 Gross profit $ 7,220 $ 4,731 $ - $ 11,951 Gross margin 39.6 % 50.8 % - 43.4 % Income (loss) from operations $ 2,785 $ 1,875 $ (3,399 ) $ 1,261 Revenue Revenue information was as follows (dollars in thousands): Three Months Ended March 31, Dollar Revenue 2013 2012 Change % Change Systems $ 17,700 $ 18,226 $ (526 ) (2.9 )% Probes 9,771 9,317 454 4.9 % Total $ 27,471 $ 27,543 $ (72 ) (0.3 )% Systems The decrease in Systems revenue in the first quarter of 2013 compared to the first quarter of 2012 was primarily due to a decrease in unit sales, partially offset by an increase in average selling price ("ASP") due to product sales mix. We sold a higher number of 300mm and special application systems as a percentage of total sales in the first quarter of 2013 than in the comparable period of 2012. The increase in ASP was negatively impacted by changes in foreign currency exchange rates. Probes The increase in Probes revenue in the first quarter of 2013 compared to the first quarter of 2012 was primarily the result of an increase in sales volume, partially offset by a decrease in ASP due to discounts and changes in foreign currency exchange rates. 12 -------------------------------------------------------------------------------- Table of Contents Cost of Sales and Gross Margin Cost of sales includes purchased materials, fabrication, assembly, test, installation labor, overhead, customer-specific engineering costs, warranty costs, royalties and provision for inventory valuation reserves. Cost of sales information was as follows (dollars in thousands): Three Months Ended March 31, Dollar Cost of Sales 2013 2012 Change % Change Systems $ 10,988 $ 11,006 $ (18 ) (0.2 )% Probes 4,940 4,586 354 7.7 % Total $ 15,928 $ 15,592 $ 336 2.2 % Cost of sales was affected by changes in sales as discussed above combined with the factors that caused fluctuations in our gross margin (gross profit as a percentage of revenue), as discussed below. Gross margins were as follows: Three Months Ended March 31, Gross Margins 2013 2012 Systems 37.9 % 39.6 % Probes 49.4 % 50.8 % Overall 42.0 % 43.4 % Systems The decrease in Systems gross margins in the first quarter of 2013 compared to the first quarter of 2012 was primarily due to the decrease in sales volume, which resulted in higher unallocated fixed overhead costs recorded as a period expense in cost of sales. Probes The decrease in Probes gross margins in the first quarter of 2013 compared to the first quarter of 2012 was primarily due to a decrease in ASP, partially offset by higher sales volume, which resulted in lower unallocated fixed overhead costs recorded as a period expense in cost of sales. Overall The overall decrease in gross margins in the first quarter of 2013 compared to the first quarter of 2012 was attributable to the decreases in gross margin of both operating segments, partially offset by a mix shift to a higher percentage of Probes revenue in relation to total revenue. Research and Development Research and development costs are expensed as incurred and include compensation and related expenses for personnel, materials, consultants and overhead. Information regarding our research and development expense was as follows (dollars in thousands): Three Months Ended March 31, Dollar 2013 2012 Change % Change Research and development $ 2,456 $ 2,779 $ (323 ) (11.6 )% The decrease in research and development in the first quarter of 2013 compared to the first quarter of 2012 was primarily due to a $0.2 million decrease in project related expenses and a $0.1 million increase in government grant reimbursements. 13 -------------------------------------------------------------------------------- Table of Contents 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, purchased intangible asset amortization and overhead incurred in our sales, marketing, customer support, management, legal and other professional and administrative support functions, as well as costs to operate as a public company. Information regarding our SG&A expense was as follows (dollars in thousands): Three Months Ended March 31, Dollar 2013 2012 Change % Change Selling, general and administrative $ 8,046 $ 7,911 $ 135 1.7 % The increase in SG&A in the first quarter of 2013 compared to the first quarter of 2012 was primarily due to a $0.3 million increase in travel, meals and entertainment expenses, partially offset by a $0.1 million decrease in amortization expense and $0.1 million decrease in severance expense. 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) may also include other miscellaneous non-operating gains and losses. Other income (expense), net was comprised of the following (in thousands): Three Months Ended March 31, 2013 2012 Interest income, net $ 20 $ 10 Foreign currency losses (441 ) (457 ) Gains on foreign currency forward contracts 203 62 Other (6 ) (12 ) $ (224 ) $ (397 ) Interest income represents interest earned on cash and cash equivalents and investments in marketable securities. Foreign currency gains and losses primarily result from a combination of changes in foreign currency exchange rates and the net value of monetary assets and liabilities denominated in yen, euro and other foreign currencies. Income Taxes Information regarding our income tax expense was as follows: Three Months Ended March 31, 2013 2012 Income tax provision $ 70 $ 124 Income tax provision as a percentage of income from operations 8.6 % 14.4 % Our income tax expense in the first quarters of 2013 and 2012 primarily related to estimated tax expense on income in foreign tax jurisdictions. We periodically evaluate the potential realization of our deferred income tax assets and, if necessary, record a valuation allowance to reduce the net carrying value of such assets to the amount expected to be realized. We evaluated the potential realization of deferred income tax assets as of March 31, 2013 and concluded that the existing valuation allowance was required. It is at least reasonably possible that, within the next twelve months, a review of the objective evidence may indicate that a portion, or all, of our valuation allowance will no longer be appropriate. If such a determination is made, release of the valuation allowance would be recognized as an income tax benefit to continuing operations in the period in which such assessment is made and the amount recognized could be material. 14-------------------------------------------------------------------------------- Table of Contents As of March 31, 2013, deferred tax assets totaled $10.4 million and our valuation allowance totaled $9.8 million. Net operating loss carryforwards, on a tax effected basis, totaled $3.5 million as of March 31, 2013. Liquidity and Capital Resources Net cash provided by operating activities in the first quarter of 2013 was $1.5 million and primarily consisted of our net income of $0.7 million, net non-cash expenses of $1.6 million and net changes in our operating assets and liabilities as described below. Accounts receivable, net was flat at $21.1 million at both March 31, 2013 and December 31, 2012. Inventories decreased by $0.8 million to $23.5 million at March 31, 2013, compared to $24.3 million at December 31, 2012. The decrease in inventory was primarily due to Inventory charges of $0.4 million in the first quarter of 2013 for excess and obsolete inventory and the effect of exchange rate changes on euro-denominated inventory. Shipments of inventory during the first quarter of 2013 were partially offset by purchases of raw materials in preparation for orders expected to ship during the next two quarters of 2013. If our actual results are significantly different than our current expectations for 2013, we may incur additional charges to write down inventory in future periods. Accounts payable increased by $1.4 million to $7.3 million at March 31, 2013, compared to $5.9 million at December 31, 2012, primarily due to the timing of vendor payments and increased purchases of raw materials inventory for orders expected to ship during the first two quarters of 2013. Deferred revenue decreased by $1.1 million to $2.8 million at March 31, 2013, compared to $3.9 million at December 31, 2012, primarily due to a decrease in customer deposits. The decrease was primarily related to a large order recognized in the first quarter of 2013 that had previously been deferred. Accrued liabilities decreased by $1.5 million to $5.1 million at March 31, 2013, compared to $6.6 million at December 31, 2012, primarily due to decreases in accrued compensation and benefits, and decreases in accrued income taxes, sales taxes and value added tax. Other long-term liabilities decreased by $0.5 million to $2.4 million at March 31, 2013, compared to $2.9 million at December 31, 2012, primarily due to the decrease in accrued lease abandonment costs. Fixed asset purchases of $0.6 million in the first quarter of 2013 primarily related to production-related equipment. We anticipate fixed asset additions for all of 2013 to be approximately $3.6 million, primarily for production-related equipment, facility improvements, research and development tools, business information systems and information technology equipment. In November 2012, our board of directors authorized a stock repurchase program under which up to $2.0 million of our common stock could be repurchased from time to time in the open market or in privately negotiated transactions. During the first quarter of 2013, a total of 9,800 shares were repurchased at an average price of $5.87 per share, for a total purchase price of $0.1 million. As of March 31, 2013, $1.6 million remained available for repurchases. This plan does not have an expiration date. Changes in our assets and liabilities as presented on our Condensed Consolidated Statements of Cash Flows do not equal the changes in such assets and liabilities as calculated for our Condensed Consolidated Balance Sheets due to the effects of fluctuating foreign exchange rates. We anticipate meeting our cash requirements for the next 12 months and for the foreseeable future from existing cash and cash equivalents and short-term marketable securities, which totaled $23.9 million at March 31, 2013. 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 equity shareholders. 15 -------------------------------------------------------------------------------- Table of Contents Recent Accounting Guidance See Note 11 of Notes to Condensed Consolidated Financial Statements. Contractual Commitments The following is a summary of our contractual commitments and obligations as of March 31, 2012 (in thousands): Payments Due By Period Remainder 2014 and 2016 and 2018 and Contractual Obligation Total Of 2013 2015 2017 beyond Operating leases $ 15,593 $ 2,564 $ 6,817 $ 3,441 $ 2,771 Purchase order commitments(1) 6,286 6,258 28 - - Forward contracts 2,751 2,751 - - - $ 24,630 $ 11,573 $ 6,845 $ 3,441 $ 2,771 (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. |