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FORM > SEC Filings for FORM > Form 10-Q on 6-May-2014All Recent SEC Filings

Show all filings for FORMFACTOR INC

Form 10-Q for FORMFACTOR INC


6-May-2014

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 and uncertainties. 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," "will," "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 have no obligation to update any of these statements. 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 28, 2013 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 on 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. Using our wafer probe cards to test at this stage of the manufacturing process, our customers can reduce their cost of test by identifying defective chips prior to incurring the time and costs of packaging defective 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. 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.
Historically, sales for wafer probe cards for testing Dynamic Random Access Memory, or DRAM, devices have made up the majority of our revenues. In October 2012, we completed the acquisition of Astria Semiconductor Holdings, Inc., including its subsidiary Micro-Probe Incorporated (together "MicroProbe"). The majority of MicroProbe's revenue is made up of sales of wafer probe cards for testing System-on-Chip, or SoC devices.
Revenues for the three months ended March 29, 2014 increased 6%, or $3.3 million, as compared to the corresponding period in the prior year. For the three months ended March 29, 2014, our revenues increased approximately 13% in our SoC products, increased 1% in our DRAM products and decreased approximately 5% in our Flash memory products, as compared to the corresponding period in the prior year.

We incurred a net loss of $12.7 million in the first three months of fiscal 2014 as compared to a net loss of $19.8 million in the first three months of fiscal 2013. The decrease in net loss is primarily attributable to our ongoing cost reduction and restructuring efforts as well as increased revenues.

Our cash, cash equivalents and marketable securities and restricted cash totaled approximately $144 million as of March 29, 2014, as compared to approximately $152 million at December 28, 2013. 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


2014. We believe that we will be able to satisfy our working capital requirements for at least 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 years.

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 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. 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 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, administrative personnel, internal and outside sales representatives' commissions, market research and consulting, and other sales, marketing, administrative activities, amortization of certain intangible assets, and provision for doubtful accounts. 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, 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 for assets that have been determined to be impaired 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:

                                       21
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                                        Three Months Ended
                                     March 29,     March 30,
                                        2014          2013
Revenues                              100.0  %       100.0  %
Cost of revenues                       78.0           82.8
Gross profit                           22.0           17.2
Operating expenses:
Research and development               17.4           20.8
Selling, general and administrative    21.9           27.8
Restructuring charges, net              3.6            7.6
Impairment of long-lived assets         1.3            0.1
Total operating expenses               44.2           56.3
Operating loss                        (22.2 )        (39.1 )
Interest income, net                    0.1            0.2
Other income (expense), net            (0.1 )          0.8
Loss before income taxes              (22.2 )        (38.1 )
Provision (benefit) for income taxes    0.6           (0.4 )
Net loss                              (22.8 )%       (37.7 )%

Three months ended March 29, 2014 and March 30, 2013:

Revenues

Revenues by Market

                             Three Months Ended
                    March 29,         March 30,
                      2014               2013       % Change
                     (In thousands, except percentages)
SoC            $       29,758        $    26,431      12.6  %
DRAM                   22,181             21,970       1.0
Flash                   4,020              4,219      (4.7 )
Total revenues $       55,959        $    52,620       6.3  %

Revenues for the three months ended March 29, 2014 increased 6%, or $3.3 million, as compared to the corresponding period in the prior year. For the three months ended March 29, 2014, our revenue increased approximately 13% in our SoC products, increased 1% in our DRAM products and decreased approximately 5% in our Flash memory products, as compared to the corresponding period in the prior year. The overall increase in revenues was primarily driven by higher unit volume in the SoC wire bond product market. Smart phone and tablet DRAM demand increased in the three months ended March 29, 2014 compared to the corresponding period in 2013 and was partially offset by reduced demand for personal computing commodity DRAM. The slight decrease in Flash memory revenue was primarily in the NAND Flash memory area resulting from reduced demand for our TouchMatrix product in the three months ended March 29, 2014.

Revenues by Geographic Region

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


                                       22
--------------------------------------------------------------------------------


                                Three Months Ended
                  March 29,       % of      March 30,       % of
                     2014       Revenue        2013       Revenue
                        (In thousands, except percentages)
North America    $    15,742      28.1 %   $    14,266      27.1 %
South Korea           12,620      22.6          10,134      19.3
Taiwan                 9,625      17.2          14,351      27.3
Japan                  7,690      13.7           5,062       9.6
Europe                 6,096      10.9           2,912       5.5
Asia-Pacific (1)       4,186       7.5           5,895      11.2
Total revenues   $    55,959     100.0 %   $    52,620     100.0 %



(1) Asia-Pacific includes all countries in the region except Taiwan, South Korea, and Japan, 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 revenue for Asia-Pacific rather than North America.

The increases in North America and Europe revenues for the three months ended March 29, 2014, when compared to the same period in 2013, were driven by increased SoC product shipments for both flip chip and wire bond applications. The decrease in Taiwan revenues for the three months ended March 29, 2014, when compared to the same period in 2013, was driven by a combination of decreased SoC product shipments and a decrease in mobile phone and tablet-based DRAM and Flash demand. The increase in South Korea revenues for the three months ended March 29, 2014 when compared to the same period in 2013 was primarily due to increased mobile processor-based SOC product shipments. The increase in Japan revenues was driven by higher demand for both SoC wire bond products and our SmartMatrix DRAM product.

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

Three Months Ended

         March 29,     March 30,
            2014          2013
SK Hynix    17.1 %         19.1 %
Intel       16.2 %         18.0 %
Micron      15.0 %            *
            48.3 %         37.1 %

* Less than 10% of revenues.

Gross Profit

                         Three Months Ended
                 March 29, 2014        March 30, 2013
                 (In thousands, except percentages)
Gross profit  $          12,325       $       9,075
% of revenues              22.0 %              17.2 %

Gross profit fluctuates with revenue levels, product mix, selling prices, factory loading, and material costs. For the three months ended March 29, 2014, the amount of gross profit increased compared to the same period in the prior year, primarily due to lower material costs, lower labor expenses and overhead charges as a result of our cost reduction initiatives and favorable production yields. Our net inventory provision charges remained relatively flat between the three months ended


March 29, 2014 and the corresponding period in the prior year. For the three months ended March 29, 2014, the value of previously reserved materials that were used in manufacturing and shipped was $0.8 million.

Gross profit included stock-based compensation expense of $0.5 million for the three months ended March 29, 2014 and March 30, 2013, respectively.

Future gross margins 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 margins 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 29,             March 30,
                     2014                   2013
                 (In thousands, except percentages)
R&D           $          9,747       $         10,929
% of revenues             17.4 %                 20.8 %

Research and development expenses for the three months ended March 29, 2014 decreased by $1.2 million compared to the same period in the prior year as a result of our ongoing cost reduction and restructuring efforts which were primarily comprised of a reduction in our headcount and stock compensation expense of approximately $0.6 million and $0.4 million, respectively. As a percent of revenues, research and development expenses decreased 3.4% during the three months ended March 29, 2014 from the comparable period of the prior year.

Stock-based compensation expense included in research and development expenses was $0.6 million for the three months ended March 29, 2014 compared to $1.0 million for the three months ended March 30, 2013.

Selling, General and Administrative

                                               Three Months Ended
                                       March 29, 2014        March 30, 2013
                                       (In thousands, except percentages)
Selling, general and administrative $           12,254      $       14,618
% of revenues                                     21.9 %              27.8 %

Selling, general and administrative expenses for the three months ended March 29, 2014 decreased by $2.4 million compared to the same period in the prior year as a result of our ongoing cost reduction and restructuring efforts which were primarily comprised of a reduction in our integration and headcount expense of approximately $1.0 million and $0.7 million, respectively. Additionally, our overall travel and general operating expenses decreased by approximately $0.6 million compared to the same period in the prior year. As a percent of revenues, selling, general and administrative expenses decreased approximately 5.9% during the three months ended March 29, 2014 from the comparable period of the prior year.

Stock-based compensation expense included within selling, general and administrative expenses was $1.5 million for the three months ended March 29, 2014 compared to $1.5 million for the same period in the prior year.


Restructuring Charges, net

                                       Three Months Ended
                                March 29,               March 30,
                                   2014                   2013
                               (In thousands, except percentages)
Restructuring charges, net $         1,997         $           3,980
% of revenues                          3.6 %                     7.6 %

For the three months ended March 29, 2014, restructuring charges decreased by $2.0 million from the comparable period of the prior year. Our restructuring activities are discussed below.

2014 Restructuring Activities

On January 27, 2014, we announced a global organizational restructuring and cost reduction plan (the "Q1 2014 Restructuring Plan"). As part of the plan, the Company eliminated 52 full-time employees. In addition, we reduced our temporary workforce by 9 positions. We recorded $2.0 million of restructuring charges during the first fiscal quarter of fiscal 2014, which was comprised of $1.4 million in severance and related benefits and $0.6 million in impairment charges for certain equipment that would no longer be utilized. We expect to realize about $2 million in savings per quarter beginning in the second quarter of fiscal 2014.

The liabilities we 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 fiscal quarter of fiscal 2014. As such, the restructuring accrual is recorded as a current liability within 'Accrued liabilities' in the Condensed Consolidated Balance Sheets.

2013 Restructuring Activities

In the first fiscal quarter of fiscal 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. We also suspended development activities and engineering efforts for our next generation DRAM Matrix platform and terminated development activities for a certain SoC product platform. We recorded
$4.0 million of restructuring charges during the first fiscal quarter of fiscal 2013, which was comprised of $1.3 million in severance and related benefits and $2.7 million in impairment charges for certain equipment that would no longer be utilized. The activities comprising this restructuring activity were completed in fiscal 2013.

Impairment of Long-lived Assets


                                           Three Months Ended
                                     March 29,              March 30,
                                        2014                   2013
                                   (In thousands, except percentages)
Impairment of long-lived assets $           743           $         58
% of revenues                               1.3 %                  0.1 %

During the three months ended March 29, 2014, we recorded an impairment charge of $0.7 million related to certain manufacturing assets which will no longer be utilized.

Management believes it is reasonably possible that additional impairment charges that would further reduce the carrying amounts of our property, plant and equipment and intangible assets may arise in fiscal 2014 if we are unable to achieve cash flows anticipated by our forecasted financial plan.


Interest Income, Net and Other Income, Net

                                        Three Months Ended
                                 March 29,                March 30,
                                    2014                    2013
                                (In thousands, except percentages)
Interest income, net        $           79            $           107
% of revenue                           0.1  %                     0.2 %
Other income (expense), net $          (66 )          $           423
% of revenues                         (0.1 )%                     0.8 %

Interest income is primarily earned on our cash, cash equivalents and marketable securities. The decrease in interest income for the three months ended March 29, 2014 as compared with the same period of the prior year was primarily the result of lower average balances. Cash, cash equivalents, restricted cash and marketable securities were $144.4 million at March 29, 2014 compared to $151.5 million at December 28, 2013, and $154.0 million at March 30, 2013. The weighted-average yield on our cash, cash equivalents and marketable securities for the three months ended March 29, 2014 and March 30, 2013 was 0.17% and 0.31%, respectively.

Other income (expense), net is comprised primarily of foreign currency impact and various other gains and losses. The change in other income (expense), net for the three months ended March 29, 2014 compared to March 30, 2013 was due primarily to foreign currency exchange losses and a patent litigation settlement paid in the three months ended March 30, 2013.

Provision for (Benefit From) Income Taxes

                                                      Three Months Ended
                                               March 29,                March 30,
                                                  2014                    2013
                                              (In thousands, except percentages)
Provision for (benefit from) income taxes $          308            $          (207 )
Effective tax rate                                  (2.5 )%                     1.0 %

We recorded an income tax provision of $0.3 million for the three months ended March 29, 2014 as compared to an income tax benefit of $0.2 million for the three months ended March 30, 2013. Income tax provisions reflect the tax provision on our non-U.S. operations in foreign jurisdictions and the tax benefit from the lapsing of the statute of limitations in US and foreign jurisdictions. We continue to maintain a valuation allowance for our U.S. Federal and state deferred tax assets.

We classify interest and penalties related to uncertain tax positions as part of the income tax provision. For the three months ended March 30, 2013, we recognized an interest and penalty benefit of approximately $0.1 million. As of March 29, 2014 and March 30, 2013, we have accrued total interest and penalties of $0.2 million and $0.2 million for each of the respective periods related to the uncertain tax positions.

We anticipate that we will continue to record a valuation allowance against our U.S. and certain non U.S. deferred tax assets. We expect our future tax provisions, during the time such valuation allowances are recorded, will consist primarily of the tax provision of our profitable non-U.S. jurisdictions.

Our effective tax rate may vary from period to period based on changes in estimated taxable income or loss by jurisdiction, changes to the valuation allowance, changes to Federal, state or foreign tax laws, future expansion into areas with varying country, state, and local income tax rates, deductibility of certain costs and expenses by jurisdiction.

Liquidity and Capital Resources

Capital Resources: Our working capital was $175.5 million at March 29, 2014 and $173.9 million at December 28, 2013. The increase in working capital in the three months ended March 29, 2014 was primarily due to an increase in accounts receivable due to increased sales as compared to the three months ended December 28, 2013 and the reclassification of our long-lived assets to current assets as assets held for sale.


Cash and cash equivalents consist of deposits held at banks, money market funds, U.S. government securities and commercial paper that at the time of purchase had maturities of 90 days or less. Marketable securities consist of U.S. government and agency securities and commercial paper. We typically invest in highly-rated . . .

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