PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Cascade Microtech, Inc.
Condensed Consolidated Balance Sheets
(Unaudited, In thousands)
|
|
September 30,
2007
|
|
December 31,
2006
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
2,780
|
|
$
|
5,260
|
|
Short-term marketable securities
|
|
29,428
|
|
38,534
|
|
Accounts receivable, net of allowances of
$193 and $153
|
|
18,494
|
|
17,642
|
|
Inventories, net
|
|
17,316
|
|
15,094
|
|
Prepaid expenses and other
|
|
2,514
|
|
2,055
|
|
Deferred income taxes
|
|
2,236
|
|
2,042
|
|
Total Current Assets
|
|
72,768
|
|
80,627
|
|
|
|
|
|
|
|
Long-term marketable securities
|
|
3,598
|
|
9,662
|
|
Fixed assets, net of accumulated
depreciation of $14,122 and $13,385
|
|
14,365
|
|
6,818
|
|
Deferred income taxes
|
|
|
|
682
|
|
Goodwill
|
|
16,225
|
|
1,295
|
|
Purchased intangible assets, net
|
|
15,690
|
|
2,610
|
|
Other assets, net
|
|
2,504
|
|
2,092
|
|
Total Assets
|
|
$
|
125,150
|
|
$
|
103,786
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
Current portion of capital leases
|
|
$
|
6
|
|
$
|
|
|
Accounts payable
|
|
6,647
|
|
6,013
|
|
Deferred revenue
|
|
531
|
|
1,184
|
|
Accrued liabilities
|
|
4,529
|
|
5,026
|
|
Total Current Liabilities
|
|
11,713
|
|
12,223
|
|
|
|
|
|
|
|
Capital leases, net of current portion
|
|
24
|
|
|
|
Deferred income taxes
|
|
3,839
|
|
|
|
Deferred revenue
|
|
589
|
|
199
|
|
Other long-term liabilities
|
|
1,977
|
|
1,171
|
|
Total Liabilities
|
|
18,142
|
|
13,593
|
|
|
|
|
|
|
|
Shareholders Equity:
|
|
|
|
|
|
Common stock, $0.01 par value. Authorized
100,000 shares; issued and outstanding: 12,831 and 11,717
|
|
128
|
|
117
|
|
Additional paid-in capital
|
|
78,858
|
|
63,144
|
|
Accumulated other comprehensive loss -
unrealized holding gains (losses) on investments
|
|
19
|
|
(1
|
)
|
Retained earnings
|
|
28,003
|
|
26,933
|
|
Total Shareholders Equity
|
|
107,008
|
|
90,193
|
|
Total Liabilities and Shareholders Equity
|
|
$
|
125,150
|
|
$
|
103,786
|
|
See accompanying Notes to Condensed Consolidated Financial Statements.
2
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,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
21,343
|
|
$
|
22,950
|
|
$
|
67,930
|
|
$
|
62,247
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
11,355
|
|
12,929
|
|
36,628
|
|
34,688
|
|
Stock-based compensation
|
|
100
|
|
107
|
|
349
|
|
332
|
|
Gross profit
|
|
9,888
|
|
9,914
|
|
30,953
|
|
27,227
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
Research and development (includes $86,
$77, $254 and $230, respectively, of stock-based compensation)
|
|
2,723
|
|
2,231
|
|
8,482
|
|
6,379
|
|
Selling, general and administrative
(includes $385, $332, $1,154 and $854, respectively, of stock-based
compensation)
|
|
6,748
|
|
6,222
|
|
20,851
|
|
18,039
|
|
Amortization of purchased intangibles
|
|
667
|
|
|
|
1,328
|
|
|
|
|
|
10,138
|
|
8,453
|
|
30,661
|
|
24,418
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
(250
|
)
|
1,461
|
|
292
|
|
2,809
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
330
|
|
428
|
|
1,151
|
|
1,195
|
|
Interest expense
|
|
|
|
|
|
(1
|
)
|
|
|
Other, net
|
|
(101
|
)
|
272
|
|
(56
|
)
|
319
|
|
|
|
229
|
|
700
|
|
1,094
|
|
1,514
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
(21
|
)
|
2,161
|
|
1,386
|
|
4,323
|
|
Provision for income taxes
|
|
195
|
|
929
|
|
316
|
|
1,639
|
|
Net income (loss)
|
|
$
|
(216
|
)
|
$
|
1,232
|
|
$
|
1,070
|
|
$
|
2,684
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share
|
|
$
|
(0.02
|
)
|
$
|
0.11
|
|
$
|
0.09
|
|
$
|
0.24
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share
|
|
$
|
(0.02
|
)
|
$
|
0.10
|
|
$
|
0.08
|
|
$
|
0.23
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in per share calculations:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
12,799
|
|
11,475
|
|
12,447
|
|
11,420
|
|
Diluted
|
|
12,799
|
|
11,930
|
|
12,755
|
|
11,845
|
|
See accompanying Notes to Condensed Consolidated Financial Statements.
3
Cascade Microtech, Inc.
Condensed Consolidated Statements of Cash
Flows
(Unaudited, In thousands)
|
|
For the Nine Months Ended September 30,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
Net income
|
|
$
|
1,070
|
|
$
|
2,684
|
|
Adjustments to reconcile net income to net
cash flows provided by operating activities, net of acquisitions:
|
|
|
|
|
|
Depreciation and amortization
|
|
3,205
|
|
1,404
|
|
Stock-based compensation, net
|
|
1,757
|
|
1,416
|
|
Loss (gain) on disposal of fixed assets
|
|
104
|
|
(6
|
)
|
Deferred income taxes
|
|
(239
|
)
|
(140
|
)
|
Excess tax benefits related to stock option
exercises
|
|
(218
|
)
|
(407
|
)
|
(Increase) decrease, net of acquisitions,
in:
|
|
|
|
|
|
Accounts receivable, net
|
|
142
|
|
(2,547
|
)
|
Inventories, net
|
|
(1,607
|
)
|
(3,051
|
)
|
Prepaid expenses and other
|
|
(272
|
)
|
1,099
|
|
Increase (decrease), net of acquisitions,
in:
|
|
|
|
|
|
Accounts payable
|
|
238
|
|
1,792
|
|
Deferred revenue
|
|
(263
|
)
|
52
|
|
Accrued and other long-term liabilities
|
|
527
|
|
2,456
|
|
Net cash provided by operating activities
|
|
4,444
|
|
4,752
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
Purchase of marketable securities
|
|
(18,536
|
)
|
(41,060
|
)
|
Proceeds from sale of marketable securities
|
|
33,726
|
|
38,702
|
|
Purchase of fixed assets
|
|
(8,568
|
)
|
(3,065
|
)
|
Proceeds from disposal of fixed assets
|
|
4
|
|
7
|
|
Investment in patents and other assets
|
|
(735
|
)
|
(634
|
)
|
Cash paid for acquisitions, net of cash
acquired
|
|
(14,821
|
)
|
|
|
Net cash used in investing activities
|
|
(8,930
|
)
|
(6,050
|
)
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
Principal payments on capital lease
obligations
|
|
(3
|
)
|
(7
|
)
|
Excess tax benefits related to stock option
exercises
|
|
218
|
|
407
|
|
Proceeds from issuances of common stock
|
|
1,791
|
|
1,480
|
|
Net cash provided by financing activities
|
|
2,006
|
|
1,880
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash
equivalents
|
|
(2,480
|
)
|
582
|
|
|
|
|
|
|
|
Cash and cash equivalents:
|
|
|
|
|
|
Beginning of period
|
|
5,260
|
|
2,224
|
|
End of period
|
|
$
|
2,780
|
|
$
|
2,806
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow
information:
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
1
|
|
$
|
|
|
Cash paid for income taxes, net
|
|
1,054
|
|
80
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash
information:
|
|
|
|
|
|
Equipment acquired with capital lease
|
|
$
|
33
|
|
$
|
|
|
Common stock issued in connection with
Gryphics acquisition
|
|
11,959
|
|
|
|
Unrealized gain (loss) on investment
activities
|
|
20
|
|
83
|
|
See accompanying Notes to Condensed Consolidated Financial Statements.
4
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) and requires
the use of management estimates. 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. During
the first quarter of 2007, we adopted Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty
in Income Taxes, as described in Note 10 below. The financial
information as of December 31, 2006 is derived from our 2006 Annual Report on
Form 10-K. Certain amounts in the prior period financial statements have been
reclassified to conform to the current period presentation. The condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements and the notes thereto included in our 2006
Annual Report on Form 10-K. The results of operations for the interim periods
presented are not necessarily indicative of the results to be expected for the
full year.
Note 2. Inventories
Inventories are stated at the lower of standard cost, which
approximates cost computed on a first-in, first-out basis, or market, and
include materials, labor and manufacturing overhead. Demonstration goods, which
are included as a component of finished goods, represent inventory that is used
for customer demonstration purposes. This inventory is typically sold after 12
to 18 months. We analyze the carrying value of our inventory quarterly,
considering a combination of factors including, but not limited to, the
following: forecasted sales or usage, historical usage rates, estimated service
period, product end-of-life dates, estimated current and future market values,
service inventory requirements and new product introductions. We estimate
market value based on factors including, but not limited to, replacement cost
and estimated resale value.
Inventories consisted of
the following (in thousands):
|
|
September 30,
|
|
December 31
|
|
|
|
2007
|
|
2006
|
|
Raw materials
|
|
$
|
8,475
|
|
$
|
6,205
|
|
Work-in-process
|
|
2,737
|
|
2,947
|
|
Finished goods
|
|
6,104
|
|
5,942
|
|
|
|
$
|
17,316
|
|
$
|
15,094
|
|
Note 3. Earnings Per Share
We compute net income
(loss) per share in accordance with SFAS No. 128, Earnings Per Share.
Under the provisions of SFAS No. 128, basic net income (loss) per
share is computed by dividing the net income (loss) for the period by the
weighted average number of shares of common stock outstanding during the
period. Diluted net income (loss) per share incorporates, to the extent they
are dilutive, the incremental shares issuable upon the assumed exercise of
stock options and warrants using the treasury stock method.
The following table reconciles
the shares used in calculating basic earnings per share to the shares used in
calculating diluted earnings per share (in thousands):
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Shares used to
calculate basic earnings per share
|
|
12,799
|
|
11,475
|
|
12,447
|
|
11,420
|
|
Dilutive effect
of outstanding stock options
|
|
|
|
455
|
|
308
|
|
425
|
|
Shares used to
calculate diluted earnings per share
|
|
12,799
|
|
11,930
|
|
12,755
|
|
11,845
|
|
|
|
|
|
|
|
|
|
|
|
Shares issuable
pursuant to stock options not considered as they would have been antidilutive
|
|
1,526
|
|
723
|
|
834
|
|
812
|
|
5
Note 4.
Acquisitions
Gryphics,
Inc.
On April 3, 2007, we
acquired Gryphics, Inc., a private company that
designs, manufactures and markets a range of high performance socket products
used for final production and evaluation testing of packaged semiconductor
integrated circuits. The results of operations from Gryphics, Inc. have
been included in our PPD segment from the date of acquisition.
We acquired all of the outstanding capital stock of Gryphics for
842,753 shares of our common stock with a fair market value of approximately
$12.0 million, based on the per share closing price of our common stock on the
day the stock was transferred, and cash of $13.7 million, subject to a
post-closing purchase price adjustment. The number of shares issued was
determined based on a contractual formula. Approximately $1.3 million of the
$13.7 million is being held in escrow for a one-year period to secure the
indemnification obligation of the shareholders of Gryphics. In addition, we
incurred $0.3 million of acquisition costs.
The acquisition was
accounted for by the purchase method of accounting, in accordance with SFAS No.
141, Business Combinations. The fair values of tangible and identifiable
intangible assets acquired, including useful lives, were based upon a valuation
as estimated by management with the assistance of an independent
appraiser. The following summarizes the fair values of the assets acquired
and liabilities assumed as of the acquisition date (in thousands):
|
|
|
|
Useful Life
|
|
Cash
|
|
$
|
999
|
|
|
|
Accounts
receivable
|
|
994
|
|
|
|
Inventories
|
|
614
|
|
|
|
Prepaid expenses
and other
|
|
168
|
|
|
|
Property, plant
and equipment
|
|
598
|
|
1 - 7 years
|
|
Trade name and
trademarks
|
|
1,136
|
|
10 years
|
|
Non-compete
agreements
|
|
156
|
|
2 years
|
|
Developed
technology
|
|
8,242
|
|
8 years
|
|
Customer
relationships
|
|
3,681
|
|
7 years
|
|
Goodwill
|
|
14,350
|
|
|
|
|
|
30,938
|
|
|
|
Accounts payable
|
|
(396
|
)
|
|
|
Deferred tax
liabilities
|
|
(4,566
|
)
|
|
|
|
|
$
|
25,976
|
|
|
|
Goodwill of $14.4 million was recorded as a result
of consideration paid in excess of the fair value of the net tangible assets
and liabilities acquired, which resulted from expected future revenues and the
workforce acquired. The goodwill has been assigned to the PPD segment. Within
one year from the purchase date, we may update the value allocated to the
purchased assets and the resulting goodwill balance as a result of information
received regarding the valuation of such assets and liabilities that was not
available at the time of purchase. Goodwill will not be amortized, but will be
periodically evaluated for potential impairment. None of the goodwill will be deductible
for income tax purposes.
Pro forma results of operations, assuming the above
acquisition occurred as of January 1, 2006, were as follows (in thousands,
except per share amounts):
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Total revenues
|
|
$
|
21,343
|
|
$
|
25,058
|
|
$
|
69,367
|
|
$
|
68,217
|
|
Net income
(loss)
|
|
(216
|
)
|
1,139
|
|
672
|
|
3,095
|
|
Basic earnings
(loss) per share
|
|
(0.02
|
)
|
0.09
|
|
0.05
|
|
0.25
|
|
Diluted earnings
(loss)per share
|
|
(0.02
|
)
|
0.09
|
|
0.05
|
|
0.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma historical results of operations are not necessarily
indicative of actual future results of operations.
Synatron GmbH
In July 2007, we
terminated our distribution agreement and acquired certain assets and
operations from our German distributor, Synatron GmbH, for an amount of $1.8
million in cash plus nominal acquisition costs. An
6
additional $0.2 million
was placed in escrow and will be paid for the purchase of Synatron in July 2008,
subject to meeting certain milestones pursuant to the agreement. The contingent
purchase price will be recorded when paid. We have established a new
subsidiary, Cascade Microtech, GmbH, which commenced operations as a direct
sales and support office in Munich, Germany.
The acquisition was
accounted for using the purchase method of accounting and the purchase price
was allocated as follows:
|
|
|
|
Useful Life
|
|
Customer
relationship
|
|
$
|
928
|
|
5 years
|
|
Customer backlog
|
|
265
|
|
Less than 1 year
|
|
Goodwill
|
|
574
|
|
|
|
Equipment
|
|
15
|
|
1 to 5 years
|
|
Acquisition
costs
|
|
19
|
|
|
|
|
|
$
|
1,801
|
|
|
|
The fair values of tangible and identifiable intangible assets
acquired, including useful lives, were based upon a valuation as estimated by
management with the assistance of an independent appraiser. The goodwill
of $574,000 was recorded as a result of the consideration paid in excess of the
fair value of the net assets acquired, which resulted from expected future
revenues. The goodwill has been assigned to the EPD segment. Goodwill will not
be amortized, but will be periodically evaluated for potential impairment. The
goodwill is expected to be deductible for income tax purposes.
Pro forma results of operations have not been included as the
acquisition would not be material to the operating results.
Note 5. Comprehensive
Income (Loss)
Comprehensive income
(loss) includes unrealized holding gains and losses on our available-for-sale
marketable securities, which are included as a separate component of
shareholders equity until realized. Unrealized holding gains (losses) were as
follows (in thousands):
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Unrealized
holding gains
|
|
$
|
45
|
|
$
|
66
|
|
$
|
20
|
|
$
|
83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total unrealized holding
gains (losses) were $19,000 and $(1,000), respectively, at September 30, 2007
and December 31, 2006.
Note 6. Product
Warranty
We estimate a liability
for costs to repair or replace products under warranties for a period of
approximately twelve months and technical support costs when the related
product revenue is recognized. The products are sold without a right of return
or price protection rights. The liability for product warranties is calculated
as a percentage of sales. The percentage is based on historical actual product
repair costs. The liability for product warranties is included in accrued
liabilities on our consolidated balance sheet.
Product warranty activity was as follows (in
thousands):
|
|
Nine Months Ended
September 30,
|
|
|
|
2007
|
|
2006
|
|
Warranty
accrual, beginning of period
|
|
$
|
536
|
|
$
|
488
|
|
Reductions for
warranty charges
|
|
(494
|
)
|
(348
|
)
|
Additions to
warranty reserve
|
|
434
|
|
463
|
|
Warranty
accrual, end of period
|
|
$
|
476
|
|
$
|
603
|
|
7
Note 7.
Goodwill and Purchased and Other Intangible Assets
The roll-forward of our goodwill was as follows (in
thousands):
|
|
Nine Months Ended
September 30,
|
|
|
|
2007
|
|
2006
|
|
Balance,
beginning of period
|
|
$
|
1,295
|
|
$
|
|
|
Acquisition of
Gryphics, Inc.
|
|
14,350
|
|
|
|
Acquisition of
Synatron
|
|
574
|
|
|
|
Adjustments to
goodwill
|
|
6
|
|
|
|
Balance, end of
period
|
|
$
|
16,225
|
|
$
|
|
|
Adjustments to goodwill include additional acquisition costs related to
our acquisition of eVue in the fourth quarter of 2006.
Included in other long-term assets on our
balance sheet were internally developed patents as follows:
(in
thousands):
|
|
September 30,
|
|
December 31,
|
|
|
|
2007
|
|
2006
|
|
Patents
|
|
$
|
5,328
|
|
$
|
4,641
|
|
Accumulated
amortization
|
|
(3,177
|
)
|
(2,859
|
)
|
|
|
$
|
2,151
|
|
$
|
1,782
|
|
Purchased intangible assets, net included the
following:
|
|
September 30,
|
|
December 31,
|
|
|
|
2007
|
|
2006
|
|
Developed
technology
|
|
$
|
8,242
|
|
$
|
|
|
Accumulated
amortization
|
|
(515
|
)
|
|
|
|
|
7,727
|
|
|
|
|
|
|
|
|
|
Purchased
patents
|
|
961
|
|
961
|
|
Accumulated
amortization
|
|
(120
|
)
|
(30
|
)
|
|
|
841
|
|
931
|
|
|
|
|
|
|
|
Developed
software technology
|
|
165
|
|
165
|
|
Accumulated
amortization
|
|
(55
|
)
|
(14
|
)
|
|
|
110
|
|
151
|
|
|
|
|
|
|
|
Customer
relationships
|
|
6,146
|
|
1,537
|
|
Accumulated
amortization
|
|
(529
|
)
|
(61
|
)
|
|
|
5,617
|
|
1,476
|
|
|
|
|
|
|
|
Trade names and
trademarks
|
|
1,136
|
|
|
|
Accumulated
amortization
|
|
(57
|
)
|
|
|
|
|
1,079
|
|
|
|
|
|
|
|
|
|
Non-compete
agreements
|
|
156
|
|
|
|
Accumulated
amortization
|
|
(39
|
)
|
|
|
|
|
117
|
|
|
|
|
|
|
|
|
|
Customer backlog
|
|
342
|
|
77
|
|
Accumulated
amortization
|
|
(143
|
)
|
(25
|
)
|
|
|
199
|
|
52
|
|
Total purchased
intangible assets, net
|
|
$
|
15,690
|
|
$
|
2,610
|
|
Amortization expense totaled $1.7 million and
$247,000, respectively, in the nine-month periods ended September 30, 2007 and
2006. Of the amortization expense, $318,000 and $247,000, respectively, was
included as a component of selling, general and administrative expense for the
nine-month periods ended September 30, 2007 and 2006.
8
Amortization of the identifiable intangible assets is
as follows over the next five years and thereafter (in thousands):
|
|
Internally
Developed
Patents
|
|
Developed
Technology
|
|
Purchased
Patents
|
|
Developed
Software
Technology
|
|
Customer
Relationships
|
|
Remainder of
2007
|
|
$
|
99
|
|
$
|
258
|
|
$
|
30
|
|
$
|
14
|
|
$
|
233
|
|
2008
|
|
333
|
|
1,030
|
|
120
|
|
55
|
|
931
|
|
2009
|
|
275
|
|
1,030
|
|
120
|
|
41
|
|
931
|
|
2010
|
|
206
|
|
1,030
|
|
120
|
|
|
|
931
|
|
2011
|
|
155
|
|
1,030
|
|
120
|
|
|
|
931
|
|
Thereafter
|
|
1,083
|
|
3,349
|
|
331
|
|
|
|
1,660
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade names
and
trademarks
|
|
Non-compete
agreements
|
|
Customer
Backlog
|
|
Remainder of
2007
|
|
$
|
28
|
|
$
|
20
|
|
$
|
66
|
|
2008
|
|
114
|
|
78
|
|
133
|
|
2009
|
|
114
|
|
19
|
|
|
|
2010
|
|
114
|
|
|
|
|
|
2011
|
|
114
|
|
|
|
|
|
Thereafter
|
|
595
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 8.
Accrued Liabilities
Accrued liabilities consisted of the following (in thousands):
|
|
September 30,
|
|
December 31,
|
|
|
|
2007
|
|
2006
|
|
Accrued
compensation and benefits
|
|
$
|
2,536
|
|
$
|
2,261
|
|
Income taxes
payable
|
|
185
|
|
1,072
|
|
Accrued warranty
|
|
476
|
|
536
|
|
Sales return
reserve
|
|
596
|
|
473
|
|
Other
|
|
736
|
|
684
|
|
|
|
$
|
4,529
|
|
$
|
5,026
|
|
Note 9.
Significant Customer and Segment Reporting
The segment data below
is presented in the same manner that management organizes the segments for
assessing certain performance trends. Beginning in the first quarter of 2007,
our Chief Operating Decision Maker began to monitor the revenue streams and the
gross profit of the Engineering Products Division (EPD) and the Production
Products Division (PPD), as opposed to revenue information only, which was
previously provided.
As such, the following
table summarizes revenue and gross profit for each segment. The results of
Gryphics, Inc. have been included in PPD from the acquisition date of April 3,
2007. The results of the Synatron GmbH acquisition have been included in EPD
from the acquisition date of July 3, 2007. See Note 4 for additional
information regarding our acquisitions. Prior period information has been
reclassified to match the current period presentation. We do not track our
assets on a segment level, and, accordingly, that information is not provided
(in thousands):
|
|
EPD
|
|
PPD
|
|
Total
|
|
Three
Months Ended September 30, 2007
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
15,719
|
|
$
|
5,624
|
|
$
|
21,343
|
|
Gross Profit
|
|
$
|
6,890
|
|
$
|
2,998
|
|
$
|
9,888
|
|
Gross Margin
|
|
43.8
|
%
|
53.3
|
%
|
46.3
|
%
|
|
|
|
|
|
|
|
|
Three
Months Ended September 30, 2006
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
18,116
|
|
$
|
4,834
|
|
$
|
22,950
|
|
Gross Profit
|
|
$
|
8,447
|
|
$
|
1,467
|
|
$
|
9,914
|
|
Gross Margin
|
|
46.6
|
%
|
30.3
|
%
|
43.2
|
%
|
9
|
|
EPD
|
|
PPD
|
|
Total
|
|
Nine
Months Ended September 30, 2007
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
53,187
|
|
$
|
14,743
|
|
$
|
67,930
|
|
Gross Profit
|
|
$
|
24,044
|
|
$
|
6,909
|
|
$
|
30,953
|
|
Gross Margin
|
|
45.2
|
%
|
46.9
|
%
|
45.6
|
%
|
|
|
|
|
|
|
|
|
Nine
Months Ended September 30, 2006
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
50,373
|
|
$
|
11,874
|
|
$
|
62,247
|
|
Gross Profit
|
|
$
|
23,127
|
|
$
|
4,100
|
|
$
|
27,227
|
|
Gross Margin
|
|
45.9
|
%
|
34.5
|
%
|
43.7
|
%
|
The segment data
provided is prepared in accordance with SFAS No. 131, Disclosures About
Segments of an Enterprise and Related Information, and is not meant to represent
stand alone divisional information. In preparing this financial information,
certain expenses were allocated between the segments based on management
estimates, while others were based on specific factors such as headcount. For
example, certain indirect costs related to the manufacture of key components by
PPD on behalf of EPD have been fully allocated to PPD. In addition, no
adjustments have been made to reflect the sale of these components by PPD to
EPD. These factors can have a significant impact on the amount of gross profit
for each segment. Assignment of other reasonable cost allocations to each
segment could result in materially different segment gross margins.
No customer accounted
for 10% or greater of our total revenue in the three-month or nine-month period
ended September 30, 2007. One customer accounted for 10% of our total revenue
in the nine-month period ended September 30, 2006. No other customer accounted
for 10% or more of our total revenue in the three or nine-month periods ended September
30, 2007 or 2006.
Note 10.
Adoption of Interpretation No. 48
In July 2006, the FASB
issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes,
which defines the threshold for recognizing the benefits of tax return
positions in the financial statements as more-likely-than-not to be sustained
by the taxing authority. Interpretation No. 48 applies to all tax positions
accounted for under SFAS No. 109, Accounting for Income Taxes. Interpretation
No. 48 is effective as of the beginning of the first fiscal year beginning
after December 15, 2006.
We adopted the
provisions of Interpretation No. 48 on January 1, 2007. In accordance with
paragraph 19, we elected to treat interest and penalties accrued on
unrecognized tax benefits as tax expense within our financial statements. Upon adoption, we analyzed our tax positions
to determine if there were any that were more-likely-than-not to be sustained
as of the adoption date. Based on this analysis, we determined that no
adjustment was required upon adoption of Interpretation No. 48.
At the date of adoption, we had unrecognized tax benefits of $0.7
million, of which $0.4 million would have an impact on the effective tax rate,
and interest and penalties accrued on unrecognized tax benefits were $49,000.
During the three and nine-month periods ended September 30, 2007,
unrecognized tax benefits increased by $0.4 million and $0.5 million,
respectively, and totaled $1.2 million as of September 30, 2007. Of the
$1.2 million, $0.9 million would have an impact on the effective tax rate.
Interest and penalties accrued on the unrecognized tax benefits totaled $0.2
million at September 30, 2007. Although we cannot be certain of the final
outcome of any ongoing tax examinations, we believe it is reasonably possible
that the total amount of unrecognized benefits will decrease in the range of
$0.6 million to $0.8 million within the next 12 months. There were no changes
in prior unrecognized tax benefits resulting from settlements with taxing
authorities or the lapse of applicable statutes of limitation during the three
or nine-month periods ended September 30, 2007.
10
The tax years
which remain open to examination in our major taxing jurisdictions were as follows:
Jurisdiction
|
|
Open Tax Years
|
|
U.S.
|
|
2004 - 2006
|
|
Japan
|
|
2000 - 2006
|
|
United Kingdom
|
|
2004 - 2006
|
|
Note 11.
New Accounting Pronouncements
EITF 07-3
In June 2007, the Emerging Issues Task Force (EITF) issued EITF 07-3,
Accounting for Advance Payments for Goods or Services to Be Used in Future
Research and Development Activities, which states that non-refundable advance
payments for services that will be consumed or performed in a future period in
conducting research and development activities on behalf of the company should
be recorded as an asset when the advance payment is made and then recognized as
an expense when the research and development activities are performed. EITF
07-3 is applicable prospectively to new contractual arrangement entered into in
fiscal years beginning after December 15, 2007. We do not expect the adoption
of EITF 07-3 to have a material effect on our financial position or results of
operations.
Item 2.
Managements Discussion
and Analysis of Financial Condition and Results of Operations
Forward
Looking Statements and Risk Factors
This
Quarterly Report on Form 10-Q contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. All statements
other than statements of historical fact made in this Quarterly Report on Form
10-Q are forward-looking, including, but not limited to, statements regarding
industry prospects; future results of operations or financial position; our
expectations and beliefs regarding future revenue growth; the future
capabilities and functionality of our products and services, our strategies and
intentions regarding acquisitions; the outcome of any litigation to which we
are a party; our accounting and tax policies; our future strategies regarding
investments, product offerings, research and development, market share, and
strategic relationships and collaboration; our dividend policies; and our
future capital requirements. These statements relate to future events or our
future financial performance. In some cases, you can identify forward-looking
statements by terminology, including intend, could, may, will, should,
expect, plan, anticipate, believe, estimate predict, potential, future,
or continue, the negative of these terms or other comparable terminology.
These statements are only predictions. Actual events or results may differ
materially from those expressed or implied in such forward-looking statements.
In evaluating these statements, you should specifically consider various
factors, including the risks included in Item 1A to our Annual Report on Form
10-K as filed with the Securities and Exchange Commission on March 16, 2007.
These risk factors have not significantly changed since they were filed with
our Form 10-K and included the following:
Our
operating results have fluctuated in the past and are likely to fluctuate in
the future, which could cause us to miss analyst expectations about these
results and cause the trading price of our common stock to decline.
The
cyclicality of the semiconductor industry affects our financial results, and,
as a result, we may experience reduced sales or operating losses in a
semiconductor industry downturn.
As is
the case with other companies in our industry, many of our customers defer
purchasing decisions until late each quarter. As a result, we are significantly
dependent upon the sale of our products in the third month of each quarter,
and, if we do not generate enough revenue in the third month of each quarter to
meet the earnings expectations of analysts or investors, the price of our
common stock could decline.
Because
we generally do not have a sufficient backlog of unfilled orders to meet our
quarterly revenue targets, revenue in any quarter is substantially dependent
upon customer orders received and fulfilled in that quarter.
We
continue to devote significant effort and resources to the growth and
development of our Pyramid Probe products, which has had, and could continue to
have, an adverse effect on our operating margins.
11
If we
do not keep pace with technological developments in the semiconductor industry,
especially the trend toward faster, smaller and lower cost chips, our revenue
and operating results could suffer as potential customers decide to adopt our
competitors products.
Intense
competition in the semiconductor wafer probing and test socket businesses may
reduce demand for our products and reduce our sales.
We
obtain some of the materials, components and subassemblies used in our products
from a single source or a limited group of suppliers. If these suppliers are
unable to provide us with these materials, components or subassemblies in
adequate quantities and on a timely basis, we may be unable to manufacture our
products or meet our customers needs.
We
depend upon the sale of our engineering probe stations for a significant
portion of our revenue, and a decline in demand for our engineering probe
stations would have a more significant impact on our revenue than a downturn in
demand for our analytical probes, production probe cards or test sockets.
We
may make future acquisitions, which may be costly, difficult to integrate with
our operations, divert management resources and dilute shareholder value.
We
face economic, political and other risks associated with our international
sales and operations, which could materially harm our operating results.
We
rely on independent manufacturers representatives and distributors for a
significant portion of our revenue, and a disruption in our relationship with
our manufacturers representatives or distributors would have a material
adverse effect on our revenue.
If
semiconductor manufacturers do not convert to 300mm wafers, or do not convert at
the rate we anticipate, our growth and profitability could be harmed.
There
is no assurance that products recently introduced for micro-fluidics research
for the life sciences industry will generate revenues and profits.
Failure
to retain key managerial, technical, and sales and marketing personnel or to
attract new key personnel could harm our business.
Our
customers evaluation processes can lead to lengthy sales cycles, during which
we may incur significant costs that may not result in sales.
If
our products contain defects, our reputation would be damaged, and we could
lose customers and revenue and incur warranty expenses.
If we
fail to protect our proprietary technology and rights, competitors may be able
to use our technologies, which would weaken our competitive position and could
reduce our sales.
Intellectual
property infringement claims by or against us may result in litigation, the
cost of which could be substantial and could prevent us from selling our
products.
Our
growth could strain our personnel and infrastructure resources, and, if we are
unable to implement appropriate controls and procedures to manage our growth,
we may not be able to successfully implement our business plan.
Our
success depends on our continued investment in research and development, the
level and effectiveness of which could reduce our profitability.
We
manufacture nearly all of our products at our Oregon facilities, and any
disruption in the operations of these facilities could harm our business.
We may
fail to comply with environmental regulations, which could result in
significant costs and harm our business.
Product
liability claims may be asserted against us, resulting in costly litigation for
which we may not have sufficient liability insurance.
We
rely on a small number of customers for a significant portion of our revenue,
and the termination of any of these relationships would adversely affect our
business.
Our
employment costs in the short-term are, to a large extent, fixed, and therefore,
any shortfall in sales would harm our operating results.
The
additional costs that we incur as a result of being a public company will
affect our operating results.
Unanticipated changes in our
tax rates or exposure to additional income tax liabilities could affect our
profitability.
Our
officers and directors and their affiliates will control the outcome of matters
requiring shareholder approval.
12
The
anti-takeover provisions of our charter documents and Oregon law may inhibit a
takeover or change in our control that shareholders may consider beneficial.
If
our stock price is volatile, securities class action litigation may be brought
against us, which could result in substantial costs.
Overview
We design,
develop and manufacture advanced wafer probing and test socket solutions for
the electrical measurement of high performance chips. We design, manufacture
and assemble our products in Beaverton, Oregon and Plymouth, Minnesota, with
global sales, service and support centers in North America, Europe, Japan,
Taiwan, China and Singapore. We were incorporated and introduced our first
commercial products in 1984.
Our
products include engineering probe stations, analytical probes, production
probe cards, application software and services. Engineering probe stations
address the need for precise and accurate measurement of semiconductor
electrical characteristics during chip design or when optimizing the chip
fabrication process. Our engineering 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 engineering probe stations to address the specific requirements of our
customers. Analytical probes are sold to serve as components of our engineering
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 production test applications, ranging from very low current parametric
testing to sophisticated, high speed radio frequency testing. We refer to
analytical probes and production probe cards as consumables, as they are
routinely replaced during the testing process. We also generate revenue through
the sale of service contracts to our customers.
Our
engineering probe stations, analytical probes and probing accessories are sold
through our Engineering Products Division (EPD). Our production probe cards
and test sockets are sold through our Production Products Division (PPD). To
date, we have derived the majority of our revenue from the sale of our
engineering probe stations, and we expect to continue to do so for the next few
years. Our production products revenue, however, increased as a percentage of
total revenues in the first nine months of 2007, due to the acquisition of
Gryphics, Inc. in April 2007, compared to the first nine months of 2006.
Our
engineering products business and operating results depend in significant part
on the level of capital expenditures related to semiconductor research and
development, which, in turn, depends upon current and anticipated market demand
for chips. Historically, the semiconductor industry has been highly cyclical
with recurring periods of over-supply, which has often resulted in a reduction
in demand for our products. While our financial results are impacted by cycles
within the semiconductor industry, we believe our business cycles are typically
less pronounced than those of other semiconductor equipment companies. We
believe this is due to our greater reliance on our customers research and
development capital spending and usage of test consumables rather than on our
customers spending to increase production capacity. Capital spending aimed at
increasing production capacity is one of the first areas in which most
semiconductor manufacturers reduce spending in an industry downturn.
While the
conversion to 300mm technology continues, high conversion costs combined with continued
process developments on 200mm wafers continue to make sales of our sub-300mm
probing systems an important component of our revenue stream for the
foreseeable future. 300mm technology more than doubles the available area on a
wafer, significantly increasing the number of chips per wafer and reducing per
unit manufacturing costs. Revenue from our 300mm engineering probe stations,
including all probes, accessories and other items sold therewith, represented
43.3% and 37.0% of our total EPD revenue in the first nine months of 2007 and
2006, respectively.
13
We sell our solutions to
most segments of the semiconductor industry, including manufacturers of
communications, wireless, microprocessors and other logic and memory chips. A
substantial portion of our revenue is generated from sales of our engineering
probe stations and analytical probes to research and development laboratories
of semiconductor manufacturers as well as to fabless semiconductor companies
and academic institutions. As a result, we sell to a geographically diversified
customer base, with more than 50% of our revenue in 2007 and 2006 generated
outside of North America, primarily in Japan, other Asian countries and, to a
lesser extent, Europe.
We sell our products both
directly through our own sales force and indirectly through a combination of
manufacturers representatives and distributors. In North America and Asia,
excluding Japan, Taiwan, Singapore, Malaysia and portions of China, we sell
most of our products through manufacturers representatives. We sell certain
products in these regions directly. In Japan, Taiwan, Singapore, Malaysia and
China, we sell through Cascade Microtech Japan, K.K., Cascade Microtech Taiwan,
Cascade Microtech Singapore and Cascade Microtech China, our direct sales and
service subsidiary and branch offices, respectively. In Europe, we sell
primarily through distributors and manufacturers representatives, except in
the U.K., where we sell through our direct sales subsidiary, Cascade Microtech
Europe, Ltd. We also sell certain products directly in Germany, Austria,
Switzerland, China and Taiwan. In the rest of the world, we typically sell
through manufacturers representatives or distributors. Our distributors normally
place orders with us once they have received an order from an end-user
customer, and therefore, the total amount of inventory held by our distributors
at any given date is not material.
Critical Accounting Policies and the Use of
Estimates
Managements discussion and analysis of financial condition and results
of operations is based upon our condensed consolidated financial statements,
which have been prepared in accordance with U.S. generally accepted accounting
principles. The preparation of condensed consolidated financial statements
requires us to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses and related disclosure of contingent
assets and liabilities. On an on-going basis, we evaluate our estimates,
including those related to revenue recognition, inventory, bad debts,
investments, income taxes, contingencies and litigation. We base our estimates
on historical experience and on various other assumptions that are believed to
be reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
With the exception of the adoption of Interpretation No. 48 as
described in Note 10 of Notes to Condensed Consolidated Financial Statements,
we reaffirm the critical accounting policies and estimates as reported in our
Annual Report on Form 10-K for the year ended December 31, 2006, which was
filed with the Securities and Exchange Commission on March 16, 2007.
14
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 September 30,
|
|
For the Nine Months
Ended September 30,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Revenue
|
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
Cost of sales
and stock-based compensation
|
|
53.7
|
|
56.8
|
|
54.4
|
|
56.3
|
|
Gross profit
|
|
46.3
|
|
43.2
|
|
45.6
|
|
43.7
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
Research and
development
|
|
12.8
|
|
9.7
|
|
12.5
|
|
10.2
|
|
Selling, general
and administrative
|
|
31.6
|
|
27.1
|
|
30.7
|
|
29.0
|
|
Amortization of
purchased intangibles
|
|
3.1
|
|
|
|
2.0
|
|
|
|
Total operating
expenses
|
|
47.5
|
|
36.8
|
|
45.1
|
|
39.2
|
|
Income (loss)
from operations
|
|
(1.2
|
)
|
6.4
|
|
0.4
|
|
4.5
|
|
Other income,
net
|
|
1.1
|
|
3.1
|
|
1.6
|
|
2.4
|
|
Income (loss)
before income taxes
|
|
(0.1
|
)
|
9.4
|
|
2.0
|
|
6.9
|
|
Provision for
(benefit from) income taxes
|
|
0.9
|
|
4.0
|
|
0.5
|
|
2.6
|
|
Net income
(loss)
|
|
(1.0
|
)%
|
5.4
|
%
|
1.6
|
%
|
4.3
|
%
|
(1) Percentages may not add due to rounding.
The following table
summarizes revenue and gross profit for each of our segments. Prior period
information has been reclassified to match the current period presentation
(dollars in thousands):
|
|
EPD
|
|
PPD
|
|
Total
|
|
Three
Months Ended September 30, 2007
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
15,719
|
|
$
|
5,624
|
|
$
|
21,343
|
|
Gross Profit
|
|
$
|
6,890
|
|
$
|
2,998
|
|
$
|
9,888
|
|
Gross Margin
|
|
43.8
|
%
|
53.3
|
%
|
46.3
|
%
|
|
|
|
|
|
|
|
|
Three
Months Ended September 30, 2006
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
18,116
|
|
$
|
4,834
|
|
$
|
22,950
|
|
Gross Profit
|
|
$
|
8,447
|
|
$
|
1,467
|
|
$
|
9,914
|
|
Gross Margin
|
|
46.6
|
%
|
30.3
|
%
|
43.2
|
%
|
|
|
EPD
|
|
PPD
|
|
Total
|
|
Nine Months Ended September 30, 2007
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
53,187
|
|
$
|
14,743
|
|
$
|
67,930
|
|
Gross Profit
|
|
$
|
24,044
|
|
$
|
6,909
|
|
$
|
30,953
|
|
Gross Margin
|
|
45.2
|
%
|
46.9
|
%
|
45.6
|
%
|
|
|
|
|
|
|
|
|
Nine
Months Ended September 30, 2006
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
50,373
|
|
$
|
11,874
|
|
$
|
62,247
|
|
Gross Profit
|
|
$
|
23,127
|
|
$
|
4,100
|
|
$
|
27,227
|
|
Gross Margin
|
|
45.9
|
%
|
34.5
|
%
|
43.7
|
%
|
The segment data provided is prepared in accordance with SFAS No. 131, Disclosures
About Segments of an Enterprise and Related Information, and is not meant to
represent stand alone divisional information. See Note 9 of Notes to Condensed Consolidated
Financial Statements above for additional information.
Revenue decreased $1.7 million, or 7.0%, to $21.3 million in the
three-month period ended September 30, 2007 compared to $23.0 million in
the three-month period ended September 30, 2006 and increased $5.7 million, or
9.1%, to $67.9 million in the nine-month period ended September 30, 2007
compared to $62.2 million in the nine-month period ended September 30, 2006.
The decrease in the three-month period ended September 30, 2007 compared to the
three-month period ended September 30, 2006 was primarily due to lower EPD
revenue as described below.
15
EPD revenue decreased $2.4 million, or 13.2%, to
$15.7 million in the three-month period ended September 30, 2007 compared
to $18.1 million in the three-month period ended September 30, 2006 and
increased $2.8 million, or 5.6%, to $53.2 million in the nine-month period
ended September 30, 2007 compared to $50.4 million in the nine-month period
ended September 30, 2006.
Certain financial information which contributed to the EPD revenue
results was as follows:
|
|
Three Months Ended
September 30, 2007
Compared to Three
Months Ended
September 30, 2006
|
|
Nine Months Ended
September 30, 2007
Compared to Nine
Months Ended
September 30, 2006
|
|
Percentage
increase (decrease) in unit sales
|
|
(13.8
|
)%
|
0.8
|
%
|
Percentage
increase (decrease) in average order total
|
|
(7.1
|
)%
|
9.6
|
%
|
Average order total includes the sales price of all analytical probes,
probe cards and other accessories purchased with an engineering probe station.
The decrease in unit sales in the three-month period ended September
30, 2007 compared to the three-month period ended September 30, 2006
was primarily due to some order delays and orders being pushed out into future
quarters. We did not experience order cancellations in the third quarter of
2007 or in the first part of the fourth quarter of 2007 through the date of
this report.
For the nine-month period ended September 30, 2007 compared to the same
period of 2006, increases in unit sales of our 300mm systems were offset by
decreases in unit sales of our non-300mm systems. The increase in the 300mm systems
was due to increased customer demand. As more customers transition to our 300mm
systems, sales of non-300mm systems typically decline as a percentage of total
system sales.
The decrease in the average order total in the three-month period ended
September 30, 2007 compared to the same period of 2006 was due primarily to
product mix changes with a higher percentage of units sold being non-300mm
systems.
For the nine-month period ended September 30, 2007 compared to the same
period of 2006, increases in average order total were attributable to increased
unit sales of our 300mm systems, which have a higher average sales price than
our non-300mm systems.
Other EPD revenue was flat in the three-month period ended September
30, 2007 compared to the same period of 2006 and decreased 3.4% in the
nine-month period ended September 30, 2007 compared to the same period of 2006.
The decrease in the nine-month period ended September 30, 2007 compared to the
same period of 2006 was primarily due to lower stand-alone analytical probe
revenue.
PPD revenue increased $0.8 million, or 16.3%, to $5.6 million
in the three-month period ended September 30, 2007 compared to
$4.8 million in the three-month period ended September 30, 2006 and
increased $2.8 million, or 24.2%, to $14.7 million in the nine-month period
ended September 30, 2007 compared to $11.9 million in the nine-month period
ended September 30, 2006. These increases were due to the addition of Gryphics,
Inc. revenues during the second quarter of 2007.
During the last several quarters, we have been adding probe card
capabilities in the form of headcount and equipment. Although we expect to add
additional equipment during the next few quarters, we do not anticipate further
headcount additions. We have
recently expanded our clean room space and increased our manufacturing
capacity. When new equipment installations are complete in 2008, we expect to
have manufacturing capacity of approximately $60 million annually, compared to
our current capacity of approximately $40 million annually.
16
Cost of Sales and Gross Profit
Cost of sales includes
purchased materials, fabrication, assembly, test and installation labor and
overhead, customer-specific engineering costs, warranty costs, royalties and
provision for inventory valuation reserves.
Fluctuations in gross profit
as a percentage of revenue, or gross margin, primarily result from changes in
geographic mix, product mix, general pricing dynamics and yields in some of our
production lines. Sales in Europe typically have a lower margin than sales in
North America and Japan due to our use of third-party distributors in Europe.
Within EPD, we typically achieve higher gross margins on the consumables than
on the engineering probe stations.
Cost of sales, including stock-based compensation expense, decreased
$1.5 million, or 12.1%, to $11.5 million in the three-month period ended
September 30, 2007 compared to $13.0 million in the three-month period
ended September 30, 2006 and increased $2.0 million, or 5.6%, to $37.0 million
in the nine-month period ended September 30, 2007 compared to $35.0 million in
the nine-month period ended September 30, 2006.
These increase (decrease) was primarily due to the following:
|
|
Three Months Ended
September 30, 2007
Compared to Three
Months Ended
September 30, 2006
|
|
Nine Months Ended
September 30, 2007
Compared to Nine
Months Ended
September 30, 2006
|
|
Increased
(decreased) direct costs, such as raw materials, resulting from changes in revenue
and product mix
|
|
$
|
(1,087,400
|
)
|
$
|
1,391,000
|
|
Increase in
salaries and related costs in EPD labor due to higher production activities and
wage increases
|
|
92,000
|
|
676,600
|
|
Increase in
supplies due to higher production volumes
|
|
54,700
|
|
232,700
|
|
Decrease in
salaries and related costs in PPD resulting from changes in headcount and
other labor
|
|
(370,500
|
)
|
(58,100
|
)
|
Decrease due to
increased allocation of costs to research and development expense due to
increased research and development fab runs
|
|
(94,100
|
)
|
(647,200
|
)
|
Other decreases
|
|
(94,700
|
)
|
405,000
|
|
|
|
$
|
(1,500,000)
|
|
$
|
2,000,000
|
|
Gross
profit was flat at $9.9 million in the three-month period ended September 30,
2007 compared to the same period of 2006 as the decrease due to lower sales was
offset by an increase in the gross margin percentage. Gross profit increased
$3.8 million, or 13.7%, to $31.0 million in the nine-month period ended
September 30, 2007 compared to $27.2 million in the same period of 2006.
The increase in the nine-month period was primarily
attributable to the increased sales discussed above.
Our gross margin increased to 46.3% in the three-month
period ended September 30, 2007 compared to 43.2% in the same period of 2006
and increased to 45.6% in the nine-month period ended September 30, 2007
compared to 43.7% in the same period of 2006. The gross margin improvements
were within PPD and resulted primarily from the inclusion of gross margin from
Gryphics, Inc. product sales beginning during the second quarter of 2007, as well
as increased fab run allocations to research and development expense. The
increase in the number of research and development fab runs resulted in an
increase in research and development expenses and a decrease in cost of sales.
The decreases in gross margin in EPD in the three and nine-month periods ended
September 30, 2007 compared to the same periods of 2006 were primarily due to
the mix of product sales and some price discounts.
Research and Development
Research and development
costs are expensed as incurred and include compensation and related expenses
for personnel, materials, consultants and overhead. From time to time, we enter
into arrangements that provide for the reimbursement of research and
development expenses. Such reimbursements are netted against gross research and
development expenses.
Research and development expenses increased $0.5 million, or 22.1%, to
$2.7 million in the three-month
17
period ended September 30, 2007 compared to $2.2 million in the
three-month period ended September 30, 2006 and increased $2.1 million, or
33.0%, to $8.5 million in the nine-month period ended September 30, 2007
compared to $6.4 million in the nine-month period ended September 30, 2006. The
increases were primarily due to the following:
|
|
Three Months Ended
September 30, 2007
Compared to Three
Months Ended
September 30, 2006
|
|
Nine Months Ended
September 30, 2007
Compared to Nine
Months Ended
September 30, 2006
|
|
Increase in
salaries and benefits primarily due to increases in headcount
|
|
$
|
317,600
|
|
$
|
885,300
|
|
Increase in
stock-based compensation due to increased headcount and annual awards
|
|
9,000
|
|
24,000
|
|
Increase related
to the increasing number of research and development fab runs
|
|
94,100
|
|
647,200
|
|
Increases in
other costs, including supplies
|
|
79,300
|
|
543,500
|
|
|
|
$
|
500,000
|
|
$
|
2,100,000
|
|
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, patent and trademark amortization and overhead incurred in our
sales, marketing, customer support, management, legal and other professional
and administrative support functions, as well as costs to operate as a public
company.
SG&A expense increased $0.5 million, or 8.4%, to $6.7 million
in the three-month period ended September 30, 2007 compared to
$6.2 million in the three-month period ended September 30, 2006 and
increased $2.9 million, or 15.6%, to $20.9 million in the nine-month period
ended September 30, 2007 compared to $18.0 million in the nine-month period
ended September 30, 2006. The increases were primarily due to the following:
|
|
Three Months Ended
September 30, 2007
Compared to Three
Months Ended
September 30, 2006
|
|
Nine Months Ended
September 30, 2007
Compared to Nine
Months Ended
September 30, 2006
|
|
Increase
(decrease) in costs related to our China and Taiwan sales offices, which
opened in the second quarter of 2006
|
|
$
|
(42,600
|
)
|
$
|
504,700
|
|
Increase in
salaries and related expenses due to increased headcount
|
|
261,000
|
|
1,228,200
|
|
Increase
(decrease) in IT services, labor and software due to international expansion
demands
|
|
(5,100
|
)
|
207,600
|
|
Increase in
accounting fees for public company compliance
|
|
120,200
|
|
160,700
|
|
Increased
stock-based compensation due to increased headcount and annual awards
|
|
53,000
|
|
300,000
|
|
Increase related
to recruiting costs for Chief Operating Officer and German sales manager
|
|
42,600
|
|
145,000
|
|
Decrease related
to decreased legal costs as a result of patent protection law suits filed in
the first quarter of 2006 and generally lower activity in the 2007 periods
|
|
(163,800
|
)
|
(497,600
|
)
|
Other
|
|
234,700
|
|
851,400
|
|
|
|
$
|
500,000
|
|
$
|
2,900,000
|
|
Amortization of Purchased
Intangibles
Amortization of purchased intangibles includes amortization related to
our acquisition of certain assets of the eVue product line in the fourth
quarter of 2006, acquisition of Gryphics, Inc. in the second quarter of 2007,
and the acquisition of Synatron in the third quarter of 2007. Purchased
intangibles totaled $15.7 million at September 30, 2007 and current
amortization is approximately $0.6 million per quarter.
Other Income (Expense)
Other
income (expense) typically includes interest income, interest expense, gains
and losses on sales of investments and transaction and remeasurement related
foreign currency gains and losses. Other income (expense) can also include
other miscellaneous non-operating gains and losses. Transaction related foreign
18
currency
gains and losses result from gains and losses recognized on foreign exchange
forward contracts and on certain of our accounts receivable that are
denominated in Japanese yen.
Interest income represents interest earned on cash and cash equivalents
and investments in marketable securities and totaled $330,000 and $1.2 million,
respectively, in the three and nine-month periods ended September 30, 2007
compared to $428,000 and $1.2 million, respectively, in the comparable periods
of 2006. The decrease in the three-month period ended September 30, 2007
compared to the same period of 2006 was due to the use of $14.9 million, net of
cash acquired, for the purchase of Gryphics, Inc. in April 2007 and the
purchase of Synatron GmbH in July 2007 and the use of $8.6 million during the
first nine months of 2007 for the purchase of fixed assets, partially offset by
$4.4 million of cash generated by operations in the first nine months of 2007.
These decreases were partially offset by higher interest rates in the 2007
periods compared to the 2006 periods.
Other income (expense), net was comprised of the following (in
thousands):
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Foreign currency
remeasurement gain (loss)
|
|
$
|
(38
|
)
|
$
|
117
|
|
$
|
(50
|
)
|
$
|
108
|
|
Foreign currency
transaction gain
|
|
35
|
|
155
|
|
103
|
|
207
|
|
Other
|
|
(98
|
)
|
|
|
(109
|
)
|
4
|
|
|
|
$
|
(101
|
)
|
$
|
272
|
|
$
|
(56
|
)
|
$
|
319
|
|
Income Taxes
Our provision for income taxes totaled $0.3 million, or 22.8%, of
income before income taxes, and $1.6 million, or 37.9%, of income before income
taxes, in the first nine months of 2007 and 2006, respectively. The effective
tax rate in the first nine months of 2007 included a benefit for research and
experimentation tax credits, which were reinstated in December 2006. The
effective tax rate in the first nine months of 2006 did not include any benefit
for research and experimentation tax credits since legislation related to such
credits was expired during that period.
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 carry forwards. 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.
At September 30, 2007, we had a net deferred tax liability on our
balance sheet totaling $1.6 million, primarily related to deferred tax
liabilities assumed with the Gryphics, Inc. acquisition.
Liquidity and Capital
Resources
We anticipate meeting
our cash requirements for the next 12 months and for the foreseeable
future from existing cash, short-term marketable securities and long-term
marketable securities, which totaled $35.8 million at September 30, 2007,
as well as from cash expected to be generated from operations. In the first
nine months of 2007, we used $14.9 million of cash, net of cash acquired, for
acquisitions as discussed in Note 4 of Notes to Consolidated Financial
Statements.
Net cash provided by
operating activities in the first nine months of 2007 was $4.4 million and
consisted of net income of $1.1 million, depreciation, amortization and
stock-based compensation of $5.0 million and net changes in our operating
assets and liabilities as described below.
Accounts receivable, net
increased $0.9 million to $18.5 million at September 30, 2007 compared to
$17.6 million at December 31, 2006, due primarily to an increase in
our days sales outstanding and the assumption of accounts receivable with the
acquisition of Gryphics. In addition, a greater percentage of our revenue was
in the last month of the third quarter of 2007 as compared to the last month of
the fourth quarter
19
of 2006. Our days sales
outstanding was approximately 79 days at September 30, 2007 compared to 71 days
at December 31, 2006.
Inventories increased
$2.2 million to $17.3 million at September 30, 2007 compared to
$15.1 million at December 31, 2006, primarily due to the timing of
systems orders and shipments and the purchase of inventory with the acquisition
of Gryphics. We believe that our inventory levels at September 30, 2007 are
adequate given our revenue projections for the fourth quarter of 2007.
Deferred income taxes were a net liability of $1.6 million at September
30, 2007 compared to a net asset of $2.7 million at December 31, 2006. The
change in deferred income taxes was due primarily to deferred tax liabilities
recorded in connection with the Gryphics, Inc. acquisition.
Net cash used in
investing activities of $8.9 million in the first nine months of 2007
resulted from $8.6 million used for the purchase of fixed assets and $14.9
million, net of cash acquired, used for the acquisition of Gryphics, Inc. and
Synatron GmbH. These uses were offset by a net maturity and sale of marketable
securities of $15.2 million. Purchases of fixed assets primarily were for our
PPD capacity expansion project. We anticipate spending approximately $2.0
million in the remainder of 2007 for fixed assets, primarily for PPD capacity
expansion.
Net cash provided by
financing activities of $2.0 million in the first nine months of 2007 resulted
primarily from $1.8 million of proceeds from the exercise of employee stock
options and the sale of stock pursuant to our employee stock purchase plan and
$0.2 million of tax benefits related to stock option exercises.
New Accounting Pronouncements
See Note 11 of Notes to Consolidated Financial
Statements for a discussion of new accounting pronouncements.
Seasonality
Typically, our revenue
is lower in our fiscal first quarter than in our fiscal fourth quarter
preceding it. In addition, as is typical in our industry, we recognize a large
percentage of our quarterly revenue in the last month of the quarter.
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 2006 Annual
Report on Form 10-K, which was filed with the Securities and Exchange
Commission on March 16, 2007.
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Item 4. Controls and Procedures
Changes in Internal Control Over Financial
Reporting
Other than as described below, 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.
We acquired Gryphics, Inc. on April 3, 2007 and Synatron GmbH on July
3, 2007. In connection with these acquisitions, we are reviewing our internal
control over financial reporting and implementing new processes and procedures
to integrate the activities associated with accounting for Gryphics, Inc and
Synatron GmbH.
We have excluded Gryphics, Inc. and Synatron
GmbH from our assessment of the effectiveness of our internal control over
financial reporting as of September 30, 2007.
Disclosure Controls and
Procedures
Our management has evaluated, under the supervision and with the
participation of our Chief Executive Officer and Chief Financial Officer, the
effectiveness of our disclosure controls and procedures as of the end of the
period covered by this report pursuant to Rule 13a-15(b) under the
Securities Exchange Act of 1934 (the Exchange Act). Based on that evaluation,
our Chief Executive Officer and Chief Financial Officer have concluded that, as
of the end of the period covered by this report, our disclosure controls and
procedures are effective in ensuring that information required to be disclosed
in our Exchange Act reports is (1) recorded, processed, summarized and reported
in a timely manner, and (2) accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial Officer, as
appropriate to allow timely decisions regarding required disclosure.
Limitation on Effectiveness of
Controls
Our management, including our Chief Executive Officer and Chief
Financial Officer, do not expect that our disclosure controls and procedures or
our internal control over financial reporting will prevent or detect all errors
and all occurrences of fraud. A control system, no matter how well designed and
operated, can provide only reasonable, not absolute, assurance that the
objectives of the control systems are met. Further, the design of a control
system must reflect the fact that there are resource constraints, and the
benefits of all controls must be considered relative to their costs. Control
systems can be circumvented by the individual acts of some persons, by
collusion of two or more people, or by management override of the control. In
addition, over time, controls may become inadequate because of changes in
conditions, or the degree of compliance with the policies or procedures may
deteriorate. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that the control systems
will detect all control issues, including instances of fraud, if any.
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