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FORM > SEC Filings for FORM > Form 10-Q on 2-Nov-2012All Recent SEC Filings

Show all filings for FORMFACTOR INC

Form 10-Q for FORMFACTOR INC


2-Nov-2012

Quarterly Report


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

Cautionary Statement Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Securities Exchange Act of 1934 and the Securities Act of 1933, which are subject to risks, uncertainties and assumptions that are difficult to predict. The forward-looking statements include statements concerning, among other things, our business strategy, including anticipated trends and developments in and management plans for our business and the markets in which we operate, financial results, operating results, revenues, gross margin, operating expenses, products, projected costs and capital expenditures, research and development programs, sales and marketing initiatives, and competition. In some cases, you can identify these statements by forward-looking words such as "may," "might," "could," "should," "expect," "plan," "anticipate," "believe," "estimate," "predict," "intend" and "continue," the negative or plural of these words and other comparable terminology.

The forward-looking statements are only predictions based on our current expectations and our projections about future events. All forward-looking statements included in this Quarterly Report on Form 10-Q are based upon information available to us as of the filing date of this Quarterly Report on Form 10-Q. You should not place undue reliance on these forward-looking statements. We undertake no obligation to update any of these statements for any reason. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to differ materially from those expressed or implied by these statements. These factors include the matters discussed in the section titled "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2011 and in the section titled "Risk Factors" and elsewhere in this Quarterly Report on Form 10-Q. You should carefully consider the numerous risks and uncertainties described under these sections.

The following discussion and analysis should be read in conjunction with our condensed consolidated financial statements and the accompanying notes contained in this Quarterly Report on Form 10-Q. Unless expressly stated or the context otherwise requires, the terms "we," "our," "us" and "FormFactor" refer to FormFactor, Inc. and its subsidiaries.


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Overview

We design, develop, manufacture, sell and support precision, high performance advanced semiconductor wafer probe card products and solutions. Semiconductor manufacturers use our wafer probe cards to perform wafer sort and test on the semiconductor die, or chips, on the whole semiconductor wafer, which is prior to singulation of the wafer into individual separate chips. We work closely with our customers on product design, as each wafer probe card is a custom product that is specific to the chip and wafer designs of the customer. During wafer sort and test, a wafer probe card is mounted in a prober and electrically connected to a semiconductor tester. The wafer probe card is used as an interface to connect electrically with and test individual chips on a wafer. Our wafer probe cards are used by our customers in the front end of the semiconductor manufacturing process, as are our image sensor, parametric, or in-line, probe cards. We operate in a single industry segment and have derived substantially all of our revenues from the sale of wafer probe cards incorporating our proprietary technology, including our MicroSpring® interconnect technology and our ATRE™ test technology.
During the three and nine months ended September 29, 2012, we saw revenue decrease as compared to the same period in fiscal 2011 across our DRAM and SoC product markets, offset by an increase in Flash product markets. Our revenues decreased by 21%, or $10.9 million, in the three months ended September 29, 2012 as compared to the same period in fiscal 2011 and by 6%, or $8.2 million, in the nine months ended September 29, 2012, as compared to the same period in fiscal 2011. This decrease is attributed primarily to weakening DRAM end market demand. Market demand in SoC was also down in the three and nine months ended September 29, 2012 as compared to the same periods in fiscal 2011, driven by macroeconomic conditions. Improved market penetration in NAND Flash in a major NAND Flash manufacturer drove increased revenues in this segment.

We incurred a net loss of $14.5 million in the third quarter of fiscal 2012 as compared to a net loss of $9.9 million for the third quarter of fiscal 2011. Net loss increased quarter over quarter due to decreasing revenue and gross margin levels, as well as an increase in operating expenses due to restructuring charges of $2.5 million and acquisition costs of $1.2 million, partially offset by the foreign Customs and value-added tax, or VAT, accrual release of $0.6 million. We incurred a net loss of $36.1 million in the first nine months of fiscal 2012 as compared to $39.0 million in the first nine months of fiscal 2011. The decrease in net loss period over period is primarily attributable to improved gross margin levels driven by favorable product mix, lower material costs, and lower inventory reserve charges, as well as the reduction in operating expenses driven by both our restructuring actions undertaken throughout 2010 and 2011 and our continued focus on cost control efforts.

Our cash, cash equivalents and marketable securities totaled approximately $276.2 million as of September 29, 2012, as compared to $296.7 million at December 31, 2011. The decrease in our cash, cash equivalents and marketable securities balances was primarily due to the use of cash for operating activities in the second and third fiscal quarters of 2012. We believe that we will be able to satisfy our working capital requirements for the next twelve months with the liquidity provided by our existing cash, cash equivalents and marketable securities. If we are unsuccessful in improving our operating efficiency, reducing our cash outlays or increasing our available cash through financing, our cash, cash equivalents and marketable securities will further decline in the fourth quarter of fiscal 2012 and future fiscal quarters.

We believe the following information is important to understanding our business, our financial statements and the remainder of this discussion and analysis of our financial condition and results of operations:

Revenues. We derive substantially all of our revenues from product sales of wafer probe cards. Revenues from our customers are subject to fluctuations due to factors including, but not limited to, design cycles, technology adoption rates, competitive pressure to reduce prices, cyclicality of the different end markets into which our customers' products are sold, market conditions in the semiconductor industry and macroeconomic issues. Historically, increases in revenues have resulted from increased demand for our existing products, the introduction of new, more complex products and the penetration of new markets. We expect that revenues from the sale of wafer probe cards will continue to account for substantially all of our revenues for the foreseeable future.

Cost of Revenues. Cost of revenues consists primarily of manufacturing materials, payroll, shipping and handling costs and manufacturing-related overhead. Our manufacturing operations rely upon a limited number of suppliers to provide key components and materials for our products, some of which are a sole source. We order materials and supplies based on backlog and forecasted customer orders. Tooling and setup costs related to changing manufacturing lots at our suppliers are also included in the cost of revenues. We expense all warranty costs and inventory write-down as cost of revenues.

We design, manufacture and sell custom advanced wafer probe cards into the semiconductor test market, which is subject to significant variability and demand fluctuations. Our wafer probe cards are complex products that are custom to a specific chip design of a customer and must be delivered on relatively short lead-times as compared to our overall manufacturing


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process. Our advanced wafer probe cards are manufactured in low volumes. It is not uncommon for us to acquire production materials and start certain production activities based on estimated production yields and forecasted demand prior to, and/or in excess of, actual demand for our wafer probe cards. We record an adjustment to our inventory valuation for estimated obsolete and non-saleable inventories based on assumptions about future demand, changes to manufacturing processes, and overall market conditions.

Research and Development. Research and development expenses include expenses related to product development, engineering and material costs. Almost all research and development costs are expensed as incurred, and capitalization of such costs has been immaterial in all periods to date. We plan to continue to invest in research and development activities to improve and enhance existing product technologies, to develop new products and product architectures, and to develop new technologies for current and new products and for new applications.

Selling, General and Administrative. Selling, general and administrative expenses include expenses related to sales, marketing, and administrative personnel, provision for doubtful accounts, internal and outside sales representatives' commissions, market research and consulting, and other sales, marketing, and administrative activities. These expenses also include costs for protecting and enforcing our intellectual property rights and regulatory compliance costs.

Restructuring Charges. Restructuring charges include costs related to employee termination benefits, costs of long-lived assets abandoned or impaired, as well as contract termination costs.

Impairment of Long-Lived Assets. Asset impairment charges include charges associated with the write down of assets that have no future expected benefit or assets for which circumstances indicate that the carrying amount of these assets may not be recoverable, as well as adjustments to the carrying amount of our assets held for sale.


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Results of Operations

The following table sets forth our operating results as a percentage of revenues
for the periods indicated:

                                        Three Months Ended                    Nine Months Ended
                                 September 29,       September 24,     September 29,      September 24,
                                      2012               2011               2012              2011
Revenues                             100.0  %            100.0  %          100.0  %           100.0  %
Cost of revenues                      80.2                77.0              78.2               81.4
Gross profit                          19.8                23.0              21.8               18.6
Operating expenses:
Research and development              20.8                20.0              23.2               23.6
Selling, general and
administrative                        28.1                21.5              26.2               25.0
Restructuring charges, net             6.0                 0.5               2.0                0.1
Impairment of long-lived assets        0.3                 0.2               0.3                0.3
Total operating expenses              55.2                42.2              51.7               49.0
Operating loss                       (35.4 )             (19.2 )           (29.9 )            (30.4 )
Interest income, net                   0.4                 0.6               0.4                0.8
Other income (expense), net            0.4                (0.1 )             0.9                0.1
Loss before income taxes             (34.6 )             (18.7 )           (28.6 )            (29.5 )
Provision for (benefit from)
income taxes                           0.4                 0.3              (1.0 )             (1.5 )
Net loss                             (35.0 )%            (19.0 )%          (27.6 )%           (28.0 )%

Three and nine months ended September 29, 2012 and September 24, 2011:

Revenues

Revenues by Market
                                       Three Months Ended                                        Nine Months Ended
                          September 29,       September 24,
                              2012                2011          % Change      September 29, 2012       September 24, 2011     % Change
                                                              (In thousands, except percentages)
DRAM                    $        25,993     $        36,496      (28.8 )%   $             85,995     $             97,295      (11.6 )%
Flash                             8,374               7,329       14.3                    23,092                   18,789       22.9
SoC                               6,895               8,290      (16.8 )                  21,794                   23,017       (5.3 )
Total revenues          $        41,262     $        52,115      (20.8 )%   $            130,881     $            139,101       (5.9 )%

Revenues for the three and nine months ended September 29, 2012 decreased 21%, or $10.9 million, and 6%, or $8.2 million, compared to the revenues of the comparable periods of the prior year. For the three months ended September 29, 2012, our revenue decreased approximately 29% in our DRAM products and 17% in our SoC products, but was up approximately 14% in our Flash products. These fluctuations in revenue were primarily driven by unit volume.

Our revenues for the three and nine months ended September 29, 2012 were primarily generated by sales of wafer probe cards to manufacturers of DRAM devices. Revenues from sales to DRAM device manufacturers in the three months ended September 29, 2012 decreased as compared to revenue from DRAM device manufacturers for the comparable period of the prior year due to worldwide unfavorable macro-economic conditions. Revenues from the sales to DRAM device manufacturers for the nine months ended September 29, 2012 were down 12% compared to the prior year.
Revenues from sales to Flash memory device manufacturers increased significantly during the three and nine months ended September 29, 2012 as compared to the same periods in the prior year. The increase was driven by increased penetration into a NAND Flash manufacturer and increased demand from existing NOR manufacturers.


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Revenues from sales to SoC device manufacturers decreased in the three and nine months ended September 29, 2012, compared to the comparable periods in the prior year, primarily due to macroeconomic conditions driving lower demand and spend rates from our customers.
Revenues by Geographic Region

The following table sets forth our revenues by geographic region for the periods indicated:

                                        Three Months Ended                                                  Nine Months Ended
                      September 29,       % of       September 24,       % of                                % of                                % of
                          2012          Revenue          2011          Revenue      September 29, 2012     Revenue      September 24, 2011     Revenue
                                                                    (In thousands, except percentages)
Taiwan              $         6,979       16.9 %   $         9,883       19.0 %   $             28,059       21.4 %   $             44,251       31.8 %
Japan                         8,060       19.5              11,664       22.4                   19,434       14.8                   24,881       17.9
North America                 4,388       10.6               7,033       13.5                   13,050       10.0                   20,388       14.7
South Korea                  12,042       29.2              16,767       32.2                   47,986       36.7                   33,385       24.0
Asia Pacific (1)              8,080       19.6               5,153        9.9                   17,735       13.6                   11,009        7.9
Europe                        1,713        4.2               1,615        3.0                    4,617        3.5                    5,187        3.7
Total revenues      $        41,262      100.0 %   $        52,115      100.0 %   $            130,881      100.0 %   $            139,101      100.0 %


______________________________________


(1) Asia-Pacific includes all countries in the region except Taiwan, Japan and South Korea, which are disclosed separately.

Geographic revenue information is based on the location to which we ship the customer product. For example, if a certain South Korean customer purchases through their North American subsidiary and requests the products to be shipped to an address in Asia-Pacific, this sale will be reflected in the revenues for Asia-Pacific rather than North America.

The decrease in South Korea revenues for the three months ended September 29, 2012 compared to the same period in the prior year was primarily due to reduced DRAM demand in the third quarter based on overall end market demand reduction coupled with high buy rates in the first and second quarters by a DRAM producer in the region. This was partly offset by increased market penetration of our NAND Flash products to customers in this region, and the continued market adoption and ramp of our SmartMatrix and TouchMatrix products across the DRAM and Flash markets, respectively. The decrease for the three and nine months comparable periods in Taiwan was primarily driven by a decrease in DRAM product shipments to that region, partially offset by higher NOR Flash product shipments. Revenues in North America for the three and nine months comparable periods also decreased, driven by a combination of a decrease in DRAM shipments, shipment of an increasing percentage of North American Flash manufacturer's probecard orders to their Asia-based test facilities, and slowing SoC demand due to macroeconomic conditions. Revenue in Europe for the three and nine comparable periods were relatively flat. Decreased Japan revenues in the three and nine month comparable periods were the result of decreased commodity DRAM demand in the region, partially offset by increase in SoC revenues driven by continued growth of a customer for our SoC products in Japan. Revenues in Asia Pacific for the three and nine month periods increased, primarily driven by sales of our SmartMatrix DRAM products in that region.


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The following customers accounted for more than 10% of our revenues for the periods indicated:

                                               Three Months Ended                     Nine Months Ended
                                        September 29,      September 24,      September 29,      September 24,
                                            2012                2011              2012                2011
SK hynix (1)                                  30.1 %              24.5 %            34.4 %              16.3 %
Samsung (2)                                   15.6 %              14.2 %            13.1 %              11.8 %
Tera Probe Inc                                   *                14.3 %               *                   *
Elpida (3)                                    14.7 %                 *                 *                   *
Micron Technology (4)                            *                   *                 *                   *
Total                                         60.4 %              53.0 %            47.5 %              28.1 %


 ______________________________________


(1) Includes SK hynix and its consolidated subsidiary SK hynix Semiconductor (China) Ltd.

(2) Includes Samsung Semiconductor, Inc. and its consolidated subsidiary Samsung Austin Semiconductor

(3) Includes Elpida Memory, Inc. and its consolidated subsidiary Rexchip Electronics Corporation

(4) Includes Micron Technology, Inc. and its consolidated subsidiaries, including Micron Semiconductor Asia Pte. Ltd., Micron Semiconductor Italia S.r.L., Micron Semiconductor Israel Ltd. and Micron Japan Ltd.

* Less than 10% of revenues.

The percentages above reflect customer constellations as of September 29, 2012. Prior period concentrations have been updated to reflect the current customer compositions.

Gross Profit

                     Three Months Ended                   Nine Months Ended
               September 29,     September 24,     September 29,     September 24,
                   2012              2011              2012              2011
                               (In thousands, except percentages)
Gross profit  $       8,152     $      11,974     $      28,475     $      25,933
% of revenues          19.8 %            23.0 %            21.8 %            18.6 %

Gross profit fluctuates with revenue levels, product mix, selling prices, factory loading, and material costs. For the three months ended September 29, 2012, gross profit declined compared to the same period in the prior year, primarily due to lower production volume, increase in quarterly excess and obsolete inventory and higher warranty costs. For the nine months ended September 29, 2012, gross margin increased compared to the same period in the prior year, primarily due to changes in product mix, as well as overall initiatives to reduce excess and obsolete inventory, and cost reduction initiatives.

For the three months ended September 29, 2012, the primary driver for the decline in gross profit was an increase in net inventory provision charges of $0.5 million. This increase in inventory provision charges reflects a drop in customer demand for the company's products as a result of global economic conditions and uncertainty. Excess custom inventories are not uncommon for us because our advanced wafer probe cards are custom designs manufactured in low volumes, but which must be delivered on relatively short lead times. This requires us to acquire production materials and start certain production activities based on estimated production yields and forecast demand prior to and/or in excess of, actual demand for our wafer probe cards. For the three months ended September 29, 2012, the value of previously reserved materials that were used in manufacturing and shipped was $0.6 million.

For the three months ended September 29, 2012, the decline in gross profit was also driven by an increase in warranty provision of $0.5 million due to higher repair costs for probe cards serviced under our warranty provisions.

For the nine months ended September 29, 2012, the primary driver for the improvement in gross profit was improved product mix for our DRAM products and lower material costs. Gross profit also benefited from a decrease in net inventory provision charges of $0.5 million. For the nine months ended September 29, 2012, the value of previously reserved materials that were used in manufacturing and shipped was $0.8 million.


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Gross profit included stock-based compensation of $0.6 million and $1.8 million for the three and nine months ended September 29, 2012, respectively, compared to $0.7 million and $2.3 million for the three and nine months ended September 24, 2011, respectively, with the decrease being primarily due to declining stock prices, decreased headcount and a reduction in the number of awards granted, partially offset by expenses related to current year grants.

In the future, our gross profits may be adversely impacted by lower levels of product revenues, even though we have taken significant steps to reduce our operating cost structure. Our gross profits may also be adversely affected if we are required to record additional inventory provision charges and inventory write-downs if estimated average selling prices of products held in finished goods and work in process inventories are below the manufacturing cost of those products.

Research and Development

                                               Three Months Ended                   Nine Months Ended
                                        September 29,      September 24,     September 29,     September 24,
                                             2012              2011              2012              2011
                                                         (In thousands, except percentages)
Research and development               $        8,573     $      10,423     $      30,355     $      32,861
% of revenues                                    20.8 %            20.0 %            23.2 %            23.6 %

Research and development expenses for the three and nine months ended September 29, 2012 decreased $1.9 million and $2.5 million, respectively, compared to the same periods in the prior year primarily due to changes in certain new technology product development related costs and the decrease in other costs as a result of our cost reduction efforts. As a percent of revenues, research and development expenses remained relatively flat during the three and nine months ended September 29, 2012 from the comparable period of the prior year.

In the three and nine months ended September 29, 2012, costs related to our research and development activities decreased from fiscal 2011 due to reduced materials and related costs of $1.4 million and $1.8 million, as well as reduced headcount, licensing and equipment, and related costs of $0.3 million and $1.1 million, partially offset by increased facilities costs of $56,000 and $0.3 million and increased stock-based compensation charges, respectively. Stock-based compensation included within research and development expenses was $1.0 million and $3.3 million for the three and nine months ended September 29, 2012, compared to $0.9 million and $3.1 million for the three and nine months ended September 24, 2011, with the increase being primarily due to current year grants, offset by declining stock prices.
We are continuing our strategic investments in research and development, including investments in the development of our next generation architecture and products for testing DRAM devices, new vertical technology directed to testing SoC devices, advanced MicroSpring interconnect technology, ATRE wafer test technology and new process technologies. We remain committed to product development in new and emerging wafer test technologies.

Selling, General and Administrative

                                              Three Months Ended                   Nine Months Ended
                                       September 29,      September 24,     September 29,     September 24,
                                            2012              2011              2012              2011
                                                        (In thousands, except percentages)
. . .
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