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FORM > SEC Filings for FORM > Form 10-Q on 1-Nov-2013All Recent SEC Filings

Show all filings for FORMFACTOR INC

Form 10-Q for FORMFACTOR INC


1-Nov-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, such as projected market demands, projected technologies and products and industry acceptance and adoption of same, research and development programs, and sales and marketing initiatives, and financial results and operating results such as revenues, gross margins, operating expenses, projected costs and capital expenditures, 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 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. We are the largest probe card manufacturer, and semiconductor manufacturers use our wafer probe cards to perform wafer sort and test on semiconductor die, or chips, prior to wafer singulation. 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 28, 2013, total revenue increased by 64% and 40%, respectively, compared to the corresponding period in fiscal 2012. During the three and nine months ended September 28, 2013, DRAM sales were up 11% and down 10%, respectively, compared to the corresponding period in fiscal 2012. SoC sales for the three and nine months ended September 28, 2013 increased 360% and 293%, respectively, compared to the corresponding periods in fiscal 2012, primarily attributable to the MicroProbe Acquisition, as defined below. Flash memory sales for the three and nine months ended September 28, 2013, declined 15% and 14% versus the same period of fiscal 2012 due to lower market demand.

We incurred a net loss of $38.9 million in the first nine months of fiscal 2013 as compared to a net loss of $36.1 million in the first nine months of fiscal 2012. The increase in net loss 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 inventory and backlog step-up is complete. Amortization expense related to the MicroProbe Acquisition totaled $12.9 million for the first nine months of fiscal 2013, which includes amortization of the fixed asset fair value step-up. We also incurred acquisition and integration costs totaling $1.3 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 ongoing initiatives to reduce manufacturing overhead costs, lower production material costs and reduce operating expenses.


Our cash, cash equivalents and marketable securities and restricted cash totaled $157 million as of September 28, 2013, as compared to $166 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. In the second and third fiscal quarters of 2013 we generated approximately $1 million and approximately $1.8 million of cash, respectively. 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 decline in future fiscal quarters.

In the latter part of the third fiscal quarter of 2013, we began to experience a significant drop in demand caused primarily by execution challenges that resulted in withheld orders at one customer and a fire at SK Hynix's Wuxi, China facility that impacted probe card orders. This decline in demand resulted in lower than forecasted manufacturing utilization and coupled with lower margins on a specific high-volume DRAM design, increased warranty and service expenses caused by the execution challenges at a specific customer and increased excess inventory charges, negatively affected our gross margin for the third quarter. We expect the decline in demand will also adversely affect our revenue and profitability in the fourth fiscal quarter of 2013.

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:

MicroProbe 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.
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, seasonality, 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 historical usage and 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, design, 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.

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 28,       September 29,     September 28,      September 29,
                                 2013               2012               2013              2012
Revenues                        100.0  %            100.0  %          100.0  %           100.0  %
Cost of revenues                 81.5                80.2              79.2               78.2
Gross profit                     18.5                19.8              20.8               21.8
Operating expenses:
Research and development         15.2                20.8              17.6               23.2
Selling, general and
administrative                   19.2                28.1              22.4               26.2
Restructuring charges, net        0.2                 6.0               2.3                2.0
Loss on sale of subsidiary          -                   -               0.2                  -
Impairment of long-lived
assets                              -                 0.3               0.1                0.3
Total operating expenses         34.6                55.2              42.6               51.7
Operating loss                  (16.1 )             (35.4 )           (21.8 )            (29.9 )
Interest income, net              0.1                 0.4               0.2                0.4
Other income (expense),
net                              (0.1 )               0.4               0.3                0.9
Loss before income taxes        (16.1 )             (34.6 )           (21.3 )            (28.6 )
Provision for (benefit
from) income taxes               (0.2 )               0.4              (0.1 )             (1.0 )
Net loss                        (15.9 )%            (35.0 )%          (21.2 )%           (27.6 )%

Three and nine months ended September 28, 2013 and September 29, 2012:

Revenues

Revenues by Market

                                    Three Months Ended                                          Nine Months Ended
                     September 28,       September 29,
                         2013                2012            % Change       September 28, 2013       September 29, 2012      % Change
                                                            (In thousands, except percentages)
DRAM               $        28,852     $        25,993          11.0  %   $             77,501     $             85,995         (9.9 )%
Flash                        7,082               8,374         (15.4 )                  19,840                   23,092        (14.1 )
SoC                         31,700               6,895         359.8                    85,646                   21,794        293.0
Total revenues     $        67,634     $        41,262          63.9  %   $            182,987     $            130,881         39.8  %


Revenues for the three and nine months ended September 28, 2013 increased 64%, or $26.4 million, and 40%, or $52.1 million, respectively, compared to the corresponding periods in the prior year. For the three months ended September 28, 2013, our revenue increased approximately 11% in our DRAM products, decreased approximately 15% in our Flash memory products, and increased 360% in our SoC products as compared to the corresponding period in the prior year. These fluctuations in revenue were primarily driven by unit volume in the DRAM and Flash memory product markets and our MicroProbe acquisition in the SoC product market. Smart phone and tablet DRAM demand increased in the three months ended September 28, 2013 compared to the corresponding period in 2012, offset partially by a drop in PC-related DRAM demand.

The reduction in Flash memory revenue was primarily in the NOR area resulting from soft demand in the nine months ended September 28, 2013 for the sector.

Overall, our SoC revenues increased by $24.8 million and $63.9 million in the first three and nine months of fiscal 2013, respectively, compared to the same period in 2012, primarily due to the MicroProbe Acquisition.

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 28,       % of       September 29,       % of       September 28,       % of       September 29,       % of
                       2013          Revenue          2012          Revenue          2013          Revenue          2012          Revenue
                                                            (In thousands, except percentages)
North America    $        17,252       25.5 %   $         4,388       10.6 %   $        46,868       25.6 %   $        13,050       10.0 %
Taiwan                    22,953       33.9               6,979       16.9              54,128       29.6              28,059       21.4
South Korea               12,562       18.6              12,042       29.2              37,769       20.6              47,986       36.7
Asia-Pacific (1)           4,470        6.6               8,080       19.6              16,732        9.2              17,735       13.6
Japan                      6,072        9.0               8,060       19.5              14,499        7.9              19,434       14.8
Europe                     4,325        6.4               1,713        4.2              12,991        7.1               4,617        3.5
Total revenues   $        67,634      100.0 %   $        41,262      100.0 %            $182,987    100.0 %   $       130,881      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, Asia-Pacific and Europe sales for the three and nine months ended September 28, 2013, when compared to the same periods in 2012, is driven by SOC product shipments primarily from our MicroProbe Acquisition. MicroProbe's sales were not included in our consolidated revenues for the three and nine months ended September 29, 2012. The increase in Taiwan sales for the three and nine months ended September 28, 2013, when compared to same periods in 2012, is driven by a combination of SOC product shipments from our MicroProbe Acquisition and an increase in mobile phone and tablet-based DRAM and Flash demand. The increase in South Korea revenues for the three months ended September 2013 when compared to the same period in 2012 was primarily due to mobile processor-based SOC product shipments from our MicroProbe Acquisition. The decrease in South Korea revenues for the nine months ended September 2013 was due to reduced PC-related DRAM memory demand based on overall end-market demand and lower demand for our higher parallelism Flash product at a single customer. The decrease in Japan sales was driven by lower demand for our SmartMatrix 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                 Nine Months Ended
         September 28,     September 29,    September 28,     September 29,
              2013              2012             2013              2012
Micron          19.0 %                             10.2 %
Intel           15.5 %                *            15.8 %                *
SK Hynix        12.4 %             30.1 %          17.0 %             34.4 %
Samsung            *               15.6 %             *               13.1 %
Elpida             *               14.7 %             *                  *
                46.9 %             60.4 %          43.0 %             47.5 %

* Less than 10% of revenues.

Gross Profit

                                           Three Months Ended                             Nine Months Ended
                               September 28, 2013     September 29, 2012      September 28, 2013     September 29, 2012
                                                          (In thousands, except percentages)
Gross profit                  $           12,546     $           8,152       $           38,026     $           28,475
% of revenues                               18.5 %                19.8 %                   20.8 %                 21.8 %

Gross profit fluctuates with revenue, product mix, selling prices, factory loading, and material costs. For the three and nine months ended September 28, 2013, the amount of gross profit increased compared to the same period in the prior year, primarily due to gross profit from the MicroProbe Acquisition, lower material costs, lower labor expenses and reduced overhead charges as a result of our cost reduction initiatives. This was partially offset by higher intangible amortization expenses associated with the MicroProbe Acquisition.

For the three and nine months ended September 28, 2013, the primary driver for the increase in gross profit was the MicroProbe Acquisition. MicroProbe's financial results are not included in gross profit for the three or nine months ended September 29, 2012. 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 actions and material cost reduction initiatives. Gross profit improvement was offset by an increase in net inventory provision charges of $1.1 million for the three months ended September 28, 2013 and $3.5 million for the first-nine months of fiscal 2013. For the three and nine months ended September 28, 2013, the value of previously reserved materials that were used in manufacturing and shipped was $0.8 million and $1.6 million, respectively.

Gross profit included stock-based compensation of $0.5 million and $1.7 million for the three and nine months ended September 28, 2013, respectively, compared to $0.6 million and $1.8 million for the three and nine months ended September 29, 2012, respectively.

Following the MicroProbe Acquisition, gross profit also included $3.2 million and $10.6 million of amortization of intangible assets in the three and nine months ended September 28, 2013, respectively.

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 when 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 28,      September 29,     September 28,     September 29,
                    2013              2012              2013              2012
                                (In thousands, except percentages)
R&D           $       10,301     $       8,573     $      32,145     $      30,355
% of revenues           15.2 %            20.8 %            17.6 %            23.2 %

Research and development expenses for the three and nine months ended September 28, 2013 increased by $1.7 million and $1.8 million, respectively, compared to the same periods in the prior year. While research and development expenses increased due to the MicroProbe Acquisition, this increase was partially offset by a decrease in other expenses as a result of our cost reduction efforts. As a percent of revenues, research and development expenses decreased 5.6% during the three months ended September 28, 2013 from the comparable period of the prior year due to our cost reduction efforts.

In the three and nine months ended September 28, 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 $0.9 million and $2 million, respectively, primarily due to the Microprobe Acquisition. This increase was partially offset by reduced headcount from ongoing restructuring activities. In the three months ended September 28, 2013, project and material costs also increased $0.7 million compared to the same period in the prior year.

Stock-based compensation expenses included in research and development expenses were $0.8 million and $2.7 million for the three and nine months ended September 28, 2013, respectively, compared to $1.0 million and $3.3 million for the three and nine months ended September 29, 2012 respectively.

Selling, General and Administrative

                                                Three Months Ended                             Nine Months Ended
                                     September 28, 2013     September 29, 2012     September 28, 2013     September 29, 2012
                                                               (In thousands, except percentages)
Selling, general and administrative $          12,952      $           11,594     $           41,057     $           34,273
% of revenues                                    19.2 %                  28.1 %                 22.4 %                 26.2 %

Selling, general and administrative expenses for the three and nine months ended September 28, 2013 increased $1.4 million and $6.8 million, respectively, compared to the same periods in the prior year. Selling, general and administrative expenses increased primarily due to the MicroProbe Acquisition. As a percent of revenues, selling, general and administrative expenses decreased approximately 9.0% during the three months ended September 28, 2013 from the comparable period of the prior year due to our cost reduction efforts.

For the three and nine months ended September 28, 2013, salary and payroll related costs for selling, general and administrative functions increased by $1.2 million and $3.6 million, respectively, as compared to the same periods in the prior year primarily due to the MicroProbe Acquisition. Additionally, amortization costs arising from intangible assets valued from the MicroProbe Acquisition increased by $2.3 million for the nine months ended September 28, 2013 as compared to the same period last year.

Stock-based compensation expenses included within selling, general and administrative expense were $1.6 million and $4.8 million, respectively for the three and nine months ended September 28, 2013 compared to $1.4 million and $4.4 million, respectively for the same periods in the prior year. Stock-based compensation expense increased due to grants to MicroProbe employees.

. . .

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