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| FORM > SEC Filings for FORM > Form 10-K on 13-Mar-2013 | All Recent SEC Filings |
13-Mar-2013
Annual Report
On October 16, 2012, pursuant to an Agreement and Plan of Merger and
Reorganization (the "Acquisition Agreement"), dated as of August 31, 2012, as
amended, a wholly-owned subsidiary of FormFactor merged with and into Astria
Semiconductor Holding, Inc., including its subsidiary MicroProbe, Inc. (together
"MicroProbe"), with Astria continuing as the surviving corporation and as a
wholly-owned subsidiary of FormFactor (the "MicroProbe Acquisition"). The
Acquisition was accounted for using the acquisition method of accounting under
which assets and liabilities of MicroProbe were recorded at their respective
fair values including an amount for goodwill representing the difference between
the acquisition consideration and the fair value of the identifiable net assets.
The total acquisition consideration of $113.8 million was determined based on
the terms of the Acquisition Agreement which consisted of a) $100 million in
cash, subject to a $3.3 million decrease based on MicroProbe's working capital
as of the consummation of the acquisition relative to an agreed upon target,
b) 3,020,944 shares of FormFactor's common stock valued at the closing market
price of $4.57 on October 16, 2012, and c) a settlement of $3.25 million related
to patent litigation between the two parties.
MicroProbe is a semiconductor equipment company that designs, develops,
manufactures, sells and services high performance, custom designed advanced SoC
wafer probe cards and analytical test equipment used in the semiconductor
industry. MicroProbe is a global company with operations in the U.S. and Asia, including China, South Korea, Singapore and Taiwan. The acquisition of MicroProbe enables us to leverage the combination of two advanced wafer probe card manufacturers and expand our SoC product portfolio to meaningfully diversify our business. Our preliminary allocation of the acquisition price at fair value includes intangible assets of $77.6 million and goodwill of $31.0 million. We incurred $3.0 million of acquisition and integration costs which were reported as selling, general and administrative expense in our Consolidated Statement of Operations for fiscal 2012 (see Note 3 - Acquisitions of the Notes to the Consolidated Financial Statements).
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:
Fiscal Year. Fiscal years ended December 29, 2012 and December 25, 2010 had 52
weeks each and fiscal year ended December 31, 2011 had 53 weeks. Our fiscal year
ends on the last Saturday in December.
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 and market conditions in the
semiconductor industry. 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, manufacturing?related overhead
and amortization of certain intangible assets. 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 provisions 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 process. As our
advanced wafer probe cards are manufactured in low volumes and must be delivered
on relatively short lead-times, 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 or in excess of actual demand for our
wafer probe cards. We record an adjustment to our inventory valuation for
estimated obsolete and non-sellable inventories based on assumptions about
future demand, past usage, 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 have 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 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, administrative activities, and amortization of certain intangible
assets. These expenses also include costs for protecting and enforcing our
patent rights and regulatory compliance costs.
Restructuring Charges. Restructuring charges include costs related to employee
termination benefits, cost 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.
Use of Estimates. The preparation of consolidated financial statements in
conformity with generally accepted accounting principles in the United States of
America ("GAAP") requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Estimates may change as new information is obtained. We believe that the estimates, assumptions and judgments involved in revenue recognition, fair value of marketable securities, allowance for doubtful accounts, reserves for product warranty, valuation of obsolete and slow moving inventory, business combinations, legal contingencies, realizability of goodwill, the assessment of recoverability of long-lived assets, valuation and recognition of stock-based compensation, provision for income taxes and related deferred tax assets, valuation and tax liabilities and accruals for other liabilities have the greatest potential impact on our consolidated financial statements. Actual results could differ from those estimates.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, which have been prepared
in accordance with GAAP. The preparation of these financial statements require
us to make estimates and assumptions that affect the reported amounts of assets
and liabilities at the date of the financial statements and the reported amounts
of net revenue and expenses in the reporting period. Our accounting policies are
fundamental to understanding our financial condition and results of operations
reported in our financial statements and related disclosures. We have identified
the following accounting policies as being critical because they require our
management to make particularly difficult, subjective and/or complex judgments
about the effect of matters that are inherently uncertain. We evaluate our
estimates and assumptions on an ongoing basis and we base these estimates and
assumptions on current facts, historical experiences and various other factors
and assumptions that are believed to be reasonable under the circumstances.
Actual results may differ materially and adversely from our estimates. Our
management has discussed the development, selection, application and disclosure
of these critical accounting policies with the Audit Committee of our Board of
Directors.
Revenue Recognition: We recognize revenue when persuasive evidence of an
arrangement exists, title and risk of loss has transferred to the customer, the
selling price is fixed or determinable and collection of the related receivable
is reasonably assured. In instances where final acceptance of the deliverable is
specified by the customer, revenue is deferred until all acceptance criteria
have been met.
In October 2009, the Financial Accounting Standards Board issued Accounting
Standards Update No. 2009-13, "Multiple-Deliverable Revenue Arrangements". The
guidance eliminates the residual method of revenue recognition and allows the
use of management's best estimate of selling price ("BESP") for individual
elements of an arrangement when vendor-specific objective evidence ("VSOE") or
third-party evidence ("TPE") is unavailable. We have adopted this guidance
effective with the first quarter of fiscal 2011 and it has been applied on a
prospective basis for revenue arrangements entered into or materially modified
after December 25, 2010.
This guidance does not generally change the units of accounting for our revenue
transactions. We do not have a significant number of product offerings with
multiple elements. Our multiple-element arrangements generally include probe
cards and product maintenance and repair services. We allocate revenue to the
deliverables based upon their relative selling price. Revenue allocated to each
unit of accounting is then recognized when persuasive evidence of an arrangement
exists, delivery has occurred or services are rendered, the sales price or fee
is fixed or determinable and collectability is reasonably assured. Product
maintenance and repair services are deferred and recognized ratably over the
period during which the services are performed, generally one year, and costs
are recorded as incurred.
When applying the relative selling price method, we determine the selling price
for each deliverable using VSOE, TPE or BESP. For the vast majority of our
arrangements involving multiple deliverables, such as sales of products with
services, the entire fee from the arrangement is allocated to each respective
element based on its relative selling price, using VSOE. For those deliverables
for which we cannot establish VSOE, we have determined our best estimate of
selling price, as the Company has determined it is unable to establish TPE of
selling price for the deliverables. The objective of BESP is to determine the
price at which we would transact a sale if the deliverable were sold on a
stand-alone basis. We determine BESP for a deliverable by considering multiple
factors including, but not limited to, market conditions, competitive landscape,
internal costs, gross margin objectives and pricing practices. The determination
of BESP is made through consultation with and formal approval by our management,
taking into consideration the go-to-market strategy.
The adoption of the new revenue recognition accounting standards did not have a
material impact on our consolidated financial position, results of operations,
or cash flows for fiscal 2012 and fiscal 2011. If the new accounting standards
for revenue recognition had been applied in the same manner during fiscal 2010,
there would not have been a material impact on total net revenues.
Revenues from the licensing of our design and manufacturing technology, which
have not been material to date, are
recognized over the term of the license agreement or when the significant
contractual obligations have been fulfilled.
Goodwill: Goodwill represents the excess of the purchase price over the fair
value of assets acquired and liabilities assumed. We have determined that we
operate in a single segment and have a single reporting unit associated with the
design, development, manufacture, sale and support of precision, high
performance advanced semiconductor wafer probe cards. In September 2011, the
FASB amended its guidance to simplify testing goodwill for impairment, allowing
an entity to first assess qualitative factors to determine whether it is
necessary to perform a two-step quantitative goodwill impairment test. If an
entity determines as a result of the qualitative assessment that it is more
likely than not that the fair value of a reporting unit is less than its
carrying amount, then the quantitative impairment test is required. Otherwise,
no further testing is required. The performance of the quantitative impairment
test involves a two-step process. The first step of the impairment test involves
comparing the fair values of the applicable reporting units with their aggregate
carrying values, including goodwill. We generally determine the fair value of
our reporting unit using the income approach methodology of valuation that
includes the discounted cash flow method as well as other generally accepted
valuation methodologies. If the carrying amount of a reporting unit exceeds the
reporting unit's fair value, we perform the second step of the quantitative
impairment test to determine the amount of impairment loss. The second step of
the goodwill impairment test involves comparing the implied fair value of the
affected reporting unit's goodwill with the carrying value of that goodwill. We
performed our goodwill impairment test in the fourth fiscal quarter. No
impairment charges associated with our goodwill and intangible assets were
recorded during fiscal 2012.
Business Acquisitions: Our consolidated financial statements include the
operations of an acquired business after the completion of the acquisition. We
account for acquired businesses using the acquisition method of accounting. The
acquisition method of accounting for acquired businesses requires, among other
things, that most assets acquired and liabilities assumed be recognized at their
estimated fair values as of the acquisition date, and that the fair value of
acquired intangible assets including in-process research and development, or
IPR&D, be recorded on the balance sheet. Also, transaction costs are expensed as
incurred. Any excess of the purchase price over the assigned values of the net
assets acquired is recorded as goodwill.
Cash, Cash Equivalents and Marketable Securities: Cash and cash equivalents
consist of deposits and financial instruments which are readily convertible into
cash and have original maturities of 90 days or less at the time of acquisition.
Marketable securities consist primarily of highly liquid investments with
maturities of greater than 90 days when purchased. We generally classify our
marketable securities at the date of acquisition as available-for-sale. These
securities are reported at fair value with the related unrealized gains and
losses included in "Accumulated other comprehensive income", a component of
stockholder's equity, net of tax. Any unrealized losses which are considered to
be other-than-temporary impairments are recorded in "Other income, net" in the
Consolidated Statements of Operations. Realized gains (losses) on the sale of
marketable securities are determined using the specific-identification method
and recorded in "Other income, net" in the Consolidated Statements of
Operations. We measure our cash equivalents and marketable securities at fair
value.
All of our available-for-sale investments are subject to a periodic impairment
review. We record a charge to earnings when a decline in fair value is
significantly below cost basis and judged to be other-than-temporary, or have
other indicators of impairments. If the fair value of an available-for-sale
investment is less than its amortized cost basis, an other-than-temporary
impairment is triggered in circumstances where (1) we intend to sell the
instrument, (2) it is more likely than not that we will be required to sell the
instrument before recovery of its amortized cost basis, or (3) a credit loss
exists where we do not expect to recover the entire amortized cost basis of the
instrument. If we intend to sell or it is more likely than not that we will be
required to sell the available-for-sale investment before recovery of its
amortized cost basis, we recognize an other-than-temporary impairment charge
equal to the entire difference between the investment's amortized cost basis and
its fair value.
Restructuring Charges: Restructuring charges include costs related to employee
termination benefits, long-lived assets impaired or abandoned, and contract
termination costs. The determination of when we accrue for employee termination
benefits and which standard applies depends on whether the termination benefits
are provided under a one-time benefit arrangement or under an on-going benefit
arrangement. For restructuring charges recorded as an on-going benefit
arrangement, a liability for post-employment benefits is recorded when payment
is probable, the amount is reasonably estimable, and the obligation relates to
rights that have vested or accumulated. For restructuring charges recorded as a
one-time benefit arrangement, we recognize a liability for employee termination
benefits when a plan of termination, approved by management and establishing the
terms of the benefit arrangement, has been communicated to employees. The timing
of the recognition of one-time employee termination benefits is dependent upon
the period of time the employees are required to render service after
communication. If employees are not required to render service in order to
receive the termination benefits or if employees will not be retained to render
service beyond the minimum legal notification period, a liability for the
termination benefits is recognized at the communication date. In instances where
employees will be retained to render service beyond the minimum legal
notification period, the liability for employee termination benefits is measured
initially at the communication date based on the fair value of the liability as
of the termination date and is recognized ratably over the future service
period. We
continually evaluate the adequacy of the remaining liabilities under our
restructuring initiatives.
We record charges related to long-lived assets to be abandoned when the assets
cease to be used. When we cease using a building or other asset with remaining
non-cancelable lease payments continuing beyond our use period, we record a
liability for remaining payments under lease arrangements, as well as for
contract termination costs, that will continue to be incurred under a contract
for its remaining term without economic benefit to us at the cease-use date.
Given the significance of, and the timing of the execution of such activities,
this process is complex and involves periodic reassessments of estimates made at
the time the original decisions were made, including evaluating real estate
market conditions for expected vacancy periods and sub-lease rents. Although we
believe that these estimates accurately reflect the costs of our restructuring
plans, actual results may differ, thereby requiring us to record additional
provisions or reverse a portion of such provisions.
Warranty Obligations: We offer warranties on certain products and record a
liability for the estimated future costs associated with warranty claims at the
time revenue is recognized. The warranty liability is based upon historical
experience and our estimate of the level of future costs. While we engage in
extensive product quality programs and processes, our warranty obligation is
affected by product failure rates, material usage and service delivery costs
incurred in correcting a product failure. We continuously monitor product
returns for warranty and maintain a reserve for the related expenses based upon
our historical experience and any specifically identified field failures. As we
sell new products to our customers, we must exercise considerable judgment in
estimating the expected failure rates. This estimating process is based on
historical experience of similar products, as well as various other assumptions
that we believe to be reasonable under the circumstances.
Inventory Valuation: We state our inventories at the lower of cost (principally
standard cost which approximates actual cost on a first in, first out basis) or
market value. We continually assess the value of our inventory and will
periodically write down its value for estimated excess inventory and product
obsolescence based upon assumptions about forecasted future sales, past usage,
and market conditions. On a quarterly basis, we review inventory quantities on
hand and on order under non-cancelable purchase commitments in comparison to our
past usage and estimated forecast of product demand for the next six months to
determine what inventory quantities, if any, may not be sellable. Based on this
analysis, we write down the affected inventory value for estimated excess and
obsolescence charges. At the point of loss recognition, a new, lower cost basis
for that inventory is established, and subsequent changes in facts and
circumstances do not result in the restoration or increase in that newly
established cost basis. Market conditions are subject to change, and demand for
our products can fluctuate significantly. Actual consumption of inventories
could differ from forecasted demand and this difference could have a material
impact on our gross profit and inventory balances based on additional provisions
for excess or obsolete inventories or a benefit from the sale of inventories
previously written down.
Allowance for Doubtful Accounts: A majority of our trade receivables are
derived from sales to large multinational semiconductor manufacturers throughout
the world. In order to monitor potential credit losses, we perform ongoing
credit evaluations of our customers' financial condition. An allowance for
doubtful accounts is maintained for probable credit losses based upon our
assessment of the expected collectability of all accounts receivable. The
allowance for doubtful accounts is reviewed on a quarterly basis to assess the
adequacy of the allowance. We take into consideration (1) any circumstances of
which we are aware of a customer's inability to meet its financial obligations
and (2) our judgments as to prevailing economic conditions in the industry and
their impact on our customers.
Impairment of Long-Lived Assets: We test long-lived assets or asset groups for
recoverability when events or changes in circumstances indicate that their
carrying amounts may not be recoverable. Circumstances which could trigger a
review include, but are not limited to: significant decreases in the market
price of the asset; significant adverse changes in the business climate or legal
factors; accumulation of costs significantly in excess of the amount originally
expected for the acquisition or construction of the asset; current period cash
flow or operating losses combined with a history of losses or a forecast of
continuing losses associated with the use of the asset; and current expectation
. . .
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