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FORM > SEC Filings for FORM > Form 10-Q on 3-May-2013All Recent SEC Filings

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Form 10-Q for FORMFACTOR INC


3-May-2013

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


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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 29, 2012 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.

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 months ended March 30, 2013, we saw revenue increase compared to the corresponding period in fiscal 2012 in our SoC product markets, offset by a decrease in Flash product market. DRAM sales were unchanged compared to the corresponding period in fiscal 2012. The increase in SoC sales is attributed to the MicroProbe Acquisition, as defined below. Flash sales declined due to lower market demand.

We incurred a net loss of $19.8 million in the first three months of fiscal 2013 as compared to $17.5 million in the first three months of fiscal 2012. The increase in net loss period over period is primarily attributable to an increase in restructuring costs and higher intangible amortization costs and amortization of inventory step-up and backlog related to the MicroProbe Acquisition. The amortization of the the inventory step-up is complete. Amortization expense totaled $4.8 million for the first three months of 2013. We also incurred acquisition and integration costs totaling $0.9 million that were not incurred in the corresponding period of 2012. Excluding these non-recurring and MicroProbe Acquisition related costs, our gross margins and operating margins improved as a result of our on going initiatives to reduce manufacturing overhead costs, lower production material costs and reduce operating expenses.

Our cash, cash equivalents and marketable securities totaled $153.6 million as of March 30, 2013, as compared to $165.8 million at December 29, 2012. The decrease in our cash, cash equivalents and marketable securities balances was primarily due to the use of cash for operating activities in the first-fiscal quarter of 2013. 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 increasing our revenues, 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 second quarter of fiscal 2013 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:

Recent Acquisition. On October 16, 2012, pursuant to an Agreement and Plan of Merger and Reorganization dated as of August 31, 2012, 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").
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.


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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 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-sellable 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. All research and development costs are expensed as incurred. 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
                                          March 30,     March 31,
                                             2013          2012
Revenues                                   100.0  %       100.0  %
Cost of revenues                            82.8           88.1
Gross profit                                17.2           11.9
Operating expenses:
Research and development                    20.8           31.2
Selling, general and administrative         27.8           32.0
Restructuring charges, net                   7.6           (0.1 )
Impairments of long-lived assets             0.1            0.5
Total operating expenses                    56.3           63.6
Operating loss                             (39.1 )        (51.7 )
Interest income, net                         0.2            0.6
Other income, net                            0.8            1.2
Loss before income taxes                   (38.1 )        (49.9 )
Provision for (benefit from) income taxes   (0.4 )          0.3
Net loss                                   (37.7 )%       (50.2 )%

Three months ended March 30, 2013 and March 31, 2012:

Revenues

Revenues by Market
                             Three Months Ended
                    March 30,         March 31,
                      2013               2012       % Change
                     (In thousands, except percentages)
DRAM           $       21,970        $    21,934       0.2  %
Flash                   4,219              5,058     (16.6 )
SoC                    26,431              7,814     238.3
Total revenues $       52,620        $    34,806      51.2  %

Revenues for the three months ended March 30, 2013 increased 51%, or $17.8 million, compared to the prior year. For the three months ended March 30, 2013, our revenue remained relatively unchanged in our DRAM products and increased 238% in our SoC products, but was down approximately 17% in our Flash products. These fluctuations in revenue were primarily driven by unit volume.

The reduction in Flash revenue was primarily in the NOR area resulting from soft first-quarter fiscal 2013 demand for the sector, as gaming and other demand drivers are expected later in fiscal 2013.

Overall, our SoC revenues increased by 238%, or $18.6 million, in first three months of fiscal 2013 compared to the same period in 2012, of which $21.3 million was due to the MicroProbe Acquisition.


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Revenues by Geographic Region

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


                                Three Months Ended
                  March 30,       % of      March 31,       % of
                     2013       Revenue        2012       Revenue
                        (In thousands, except percentages)
Taiwan           $    14,351      27.3 %   $     7,134      20.5 %
Japan                  5,062       9.6           3,687      10.6
North America         14,266      27.1           3,483      10.0
South Korea           10,134      19.3          15,966      45.9
Asia Pacific (1)       5,895      11.2           3,193       9.2
Europe                 2,912       5.5           1,343       3.8
Total revenues   $    52,620     100.0 %   $    34,806     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 increase in North America, Taiwan, Asia Pacific and Europe sales for the three months ended March 30, 2013, when compared to the same period in 2012, is driven by SOC product shipments primarily from our MicroPobe Acquisition. MicroProbe's sales were not included in our first quarter fiscal 2012. The decrease in South Korea revenues was primarily due to reduced DRAM and Flash demand in the first quarter 2013 based on overall end-market demand as compared to the same period one year ago. The increase in Japan sales was driven by market share gains of our Smart Matrix product at a major mobile DRAM producer.

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

Three Months Ended

             March 30,     March 31,
                2013          2012
SK hynix (1)    19.1 %         36.8 %
Samsung (2)        *           15.3 %
Intel (3)       18.0 %            *
Total           37.1 %         52.1 %



(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 Intel Corporation and its consolidated subsidiary Intel mobile communications South East Asia PTE LTD and Componente Intel de Costa Rica

* Less than 10% of revenues.

The percentages above reflect customers and their consolidated subsidiaries as of March 30, 2013. Prior period concentrations have been updated to reflect the current customer compositions.


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Gross Profit

                          Three Months Ended
                   March 30,               March 31,
                      2013                   2012
                  (In thousands, except percentages)
Gross profit  $         9,075         $           4,156
% of revenues            17.2 %                    11.9 %

Gross profit fluctuates with revenue levels, product mix, selling prices, factory loading, and material costs. For the three months ended March 30, 2013, gross profit increased compared to the same period in the prior year, primarily due to gross profit from the MicroProbe Acquisition, product mix and lower material costs, lower labor expenses and reduced overhead charges as a result of our cost reduction initiatives. This was offset by higher intangible amortization expenses associated with the MicroProbe Acquisition.

For the three months ended March 30, 2013, the primary driver for the improvement in gross profit was the MicroProbe Acquisition and factory utilization. MicroProbe's financial results are not included in the March 31, 2012 gross profit. We also benefited from improved product mix for our DRAM and Flash products. Our gross profit improvement was also driven by our cost reduction activities including the cessation of our Japan assembly and test activities in the fourth quarter of 2012, and other personnel restructuring initiatives. Gross profit improvement was offset by an increase in net inventory provision charges of $1.3 million. For the three months ended March 30, 2013, the value of previously reserved materials that were used in manufacturing and shipped was $0.3 million.

Gross profit included stock-based compensation of $0.5 million for the three months ended March 30, 2013, which was unchanged compared to $0.5 million for the three months ended March 31, 2012.

Gross profit also included $4.0 million of additional expense for amortization of intangible assets and amortization of inventory up-lift and backlog. It also included depreciation of the fixed asset up-lift. All of these additional expenses are from the MicroProbe Acquisition.

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
                              March 30,             March 31,
                                2013                   2012
                            (In thousands, except percentages)
Research and development $         10,929       $         10,847
% of revenues                        20.8 %                 31.2 %

Research and development expenses for the three months ended March 30, 2013 increased $0.1million, compared to the same periods in the prior year primarily due to the MicroProbe Acquisition. This was offset by a decrease in certain new technology product development related costs and a decrease in other costs as a result of our cost reduction efforts. As a percent of revenues, research and development expenses decreased 10.4% during the three months ended March 30, 2013 from the comparable period of the prior year.

In the three months ended March 30, 2013, costs related to our research and development activities increased from fiscal 2012 due to a net increase in headcount and personnel related costs of $1.2 million. We increased headcount from the Microprobe Acquisition. This increase was partially offset by reduced headcount from ongoing restructuring activities. We also reduced project and material costs of $1.1 million due to our decision to suspend activities for our next generation DRAM Matrix product and terminate certain SOC product development activities.

Stock-based compensation expenses included within research and development expenses were $1.0 million for the three months ended March 30, 2013 compared to $1.0 million for the same period in the prior year.


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Selling, General and Administrative

                                               Three Months Ended
                                         March 30,             March 31,
                                           2013                   2012
                                       (In thousands, except percentages)
Selling, general and administrative $         14,618       $         11,148
% of revenues                                   27.8 %                 32.0 %

Selling, general and administrative expenses increased $3.5 million for the three months ended March 30, 2013 from the comparable period of the prior year primarily due to the MicroProbe Acquisition. As a percent of revenues, selling, general and administrative expenses decreased 4.2% during the three months ended March 30, 2013 from the comparable periods of the prior year, primarily due to higher revenues. Additionally, intangible amortization costs and integration expenses due to the MicroProbe Acquisition were $1.6 million in the three months ended March 30, 2013.

For the three months ended March 30, 2013, salary and payroll related costs for selling, general and administrative functions, including incentive bonuses, increased by $1.6 million as compared to the same periods in the prior year primarily due to the MicroProbe Acquisition. Additionally, general operating expenses and facility related costs increased $0.4 million and project related materials and costs increased $0.1 million in the three months ended March 30, 2013 compared to the comparable period of the prior year. Legal and outside service fees decreased $0.2 million during the three months ended March 30, 2013 as compared to the same period in the prior year, due to cost reduction efforts and the settlement of certain legal proceedings.

Stock-based compensation expenses included within selling, general and administrative expense were $1.5 million for the three months ended March 30, 2013 compared to $1.5 million for the same period in the prior year. We had reduced stock-based compensation expense due to lower headcount, which was offset by expenses related to grants to MicroProbe employees.

Restructuring Costs, net

                                     Three Months Ended
                               March 30,               March 31,
                                  2013                   2012
                             (In thousands, except percentages)
Restructuring costs, net $           3,980         $          (33 )
% of revenues                          7.6 %                 (0.1 )%

For the three months ended March 30, 2013, restructuring charges increased $4.0 million from the comparable period of the prior year. Our restructuring activities are discussed below.

2013 Restructuring Activities

In the first-fiscal quarter of 2013, we implemented a restructuring plan (the "Q1 2013 Restructuring Plan") which resulted in the reduction of our global workforce by 31 employees across the organization. In addition we reduced our temporary workforce by approximately 20 positions. Total restructuring charges for the quarter was $4.0 million for severance and related benefits and impairment charges for certain equipment, associated with our decision to suspend our next generation DRAM Matrix and terminate certain SoC product development initiatives. The activities comprising this reduction in workforce will be completed by the end of the second quarter of fiscal 2013. Anticipated cost savings associated with these actions range from $2.0 million to $2.5 million per quarter in subsequent quarters.

2012 Restructuring Activities

In the first fiscal quarter of 2012, we did not undertake any new restructuring activities.


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The liabilities we have accrued represent our best estimate of the obligations we expect to incur and could be subject to adjustment as market conditions change. The remaining cash payments associated with our various reductions in workforce are expected to be paid by the end of the second quarter of fiscal 2013.

Impairment of Long-lived Assets


                                            Three Months Ended
                                     March 30,               March 31,
                                       2013                     2012
                                    (In thousands, except percentages)
Impairment of long-lived assets $           58           $            168
% of revenues                              0.1 %                      0.5 %

During the three months ended March 30, 2013, we recorded an impairment charge of $0.1 million related to certain manufacturing assets which will no longer be utilized.

We recorded impairment charges of $0.2 million in the first quarter of fiscal 2012 related to certain assets which were previously held for sale that were determined to no longer be sellable or used for internal purposes.

Management believes it is reasonably possible that additional impairment charges that would reduce further the carrying amounts of our property, plant and equipment and intangible assets may arise in fiscal 2013 if we are unable to achieve operating results anticipated by our forecasted financial plan. Interest Income, Net and Other Income, Net

                                 Three Months Ended
                          March 30,               March 31,
                            2013                     2012
                         (In thousands, except percentages)
Interest income, net $          107           $            212
% of revenue                    0.2 %                      0.6 %
Other income, net    $          423           $            410
% of revenues                   0.8 %                      1.2 %

Interest income is primarily earned on our cash, cash equivalents and marketable . . .

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