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FORM > SEC Filings for FORM > Form 10-Q on 1-Aug-2014All Recent SEC Filings

Show all filings for FORMFACTOR INC

Form 10-Q for FORMFACTOR INC


1-Aug-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. 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 and six months ended June 28, 2014 increased 7%, or approximately $4.6 million, and 7%, or approximately $8.0 million, respectively, as compared to the corresponding periods in the prior year. For the three months ended June 28, 2014, our revenue increased 33% in our SoC products, decreased 1% in our DRAM products and decreased 48% in our Flash memory products, as compared to the corresponding period in the prior year. For the six months ended June 28, 2014, our revenues increased 23% in our SoC products, remained relatively unchanged in our DRAM products and decreased 34% in our Flash memory products, as compared to the corresponding period in the prior year.

We incurred a net loss of $17.0 million in the first six months of fiscal 2014 as compared to a net loss of $28.2 million in the first six 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 $149 million as of June 28, 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


generated $5.0 million of cash in the second 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:

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                                       Three Months Ended        Six Months Ended
                                      June 28,     June 29,    June 28,    June 29,
                                        2014         2013        2014        2013
Revenues                              100.0  %      100.0  %    100.0  %    100.0  %
Cost of revenues                       70.3          73.8        73.8        77.9
Gross profit                           29.7          26.2        26.2        22.1
Operating expenses:
Research and development               16.4          17.4        16.9        18.9
Selling, general and administrative    19.6          21.5        20.6        24.4
Restructuring charges, net              0.1           0.1         1.7         3.5
Loss on sale of subsidiary                -           0.5           -         0.3
Impairment of long-lived assets           -           0.2         0.6         0.2
Total operating expenses               36.1          39.7        39.8        47.3
Operating loss                         (6.4 )       (13.5 )     (13.6 )     (25.2 )
Interest income, net                    0.1           0.2         0.1         0.2
Other income (expense), net            (0.2 )         0.3        (0.2 )       0.5
Loss before income taxes               (6.5 )       (13.0 )     (13.7 )     (24.5 )
Provision (benefit) for income taxes   (0.1 )         0.3         0.2           -

Net loss (6.4 )% (13.3 )% (13.9 )% (24.5 )%

Three and six months ended June 28, 2014 and June 29, 2013:

Revenues

Revenues by Market

                       Three Months Ended                           Six Months Ended
                June 28,     June 29,
                  2014         2013      % Change     June 28, 2014      June 29, 2013     % Change
                                        (In thousands, except percentages)
SoC            $  36,508    $  27,515      32.7  %   $        66,266    $        53,946      22.8  %
DRAM              26,421       26,679      (1.0 )             48,602             48,649      (0.1 )
Flash              4,423        8,539     (48.2 )              8,443             12,758     (33.8 )
Total revenues $  67,352    $  62,733       7.4  %   $       123,311    $       115,353       6.9  %

Revenues for the three and six months ended June 28, 2014 increased 7%, or approximately $4.6 million, and 7%, or approximately $8.0 million, respectively, as compared to the corresponding periods in the prior year. For the three months ended June 28, 2014, our revenue increased 33% in our SoC products, decreased 1% in our DRAM products and decreased by 48% in our Flash memory products, as compared to the corresponding period in the prior year. For the six months ended June 28, 2014, our revenues increased 23% in our SoC products, remained relatively unchanged in our DRAM products and decreased 34% 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 market based on a combination of strong application processors, personal computer processors, and automotive applications demand. DRAM demand and revenue was effectively flat period to period. The decrease in Flash memory revenue was due to weakening demand in the NOR market and reduced demand for our TouchMatrix product at a major South Korean NAND Flash memory producer in the six months ended June 28, 2014.

Revenues by Geographic Region

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

                                       23
--------------------------------------------------------------------------------



                                 Three Months Ended                                  Six Months Ended
                   June 28,        % of       June 29,       % of      June 28,       % of      June 29,       % of
                     2014        Revenue        2013       Revenue       2014       Revenue       2013       Revenue
                                                  (In thousands, except percentages)
North America    $    17,095       25.4 %   $   15,350       24.5 %   $  32,837       26.6 %   $  29,616       25.7 %
South Korea           14,662       21.8         15,073       24.0        27,282       22.1        25,207       21.9
Taiwan                11,343       16.8         16,824       26.8        20,968       17.0        31,175       27.0
Asia-Pacific (1)      10,101       15.0          6,367       10.1        14,287       11.7        12,262       10.6
Europe                 9,085       13.5          5,754        9.2        15,181       12.3         8,666        7.5
Japan                  5,066        7.5          3,365        5.4        12,756       10.3         8,427        7.3
Total revenues   $    67,352      100.0 %   $   62,733      100.0 %   $ 123,311      100.0 %   $ 115,353      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 and six months ended June 28, 2014, when compared to the same periods 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 and six months ended June 28, 2014, when compared to the same periods in 2013, was driven by a combination of decreased SoC product shipments and a decrease in commodity or personal computer based DRAM demand. The increase in South Korea revenues for the six months ended June 28, 2014 when compared to the same periods in 2013 was primarily due to increased mobile processor-based SOC product shipments. The increase in Japan revenues for the three and six months ended June 28, 2014 was driven primarily by higher demand for SoC wire bond products.

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

                Three Months Ended                  Six Months Ended
         June 28, 2014     June 29, 2013     June 28, 2014     June 29, 2013
SK Hynix        21.4 %             20.1 %         19.5 %               19.7 %
Intel           19.5               14.6           18.0                 16.1
Micron          12.2                  *           13.5                    *
                53.1 %             34.7 %         51.0 %               35.8 %

* Less than 10% of revenues.

Gross Profit

                     Three Months Ended                   Six Months Ended
               June 28, 2014     June 29, 2013     June 28, 2014     June 29, 2013
                               (In thousands, except percentages)
Gross profit  $      20,024     $      16,405     $      32,349     $      25,480
% of revenues          29.7 %            26.2 %            26.2 %            22.1 %

Gross profit fluctuates with revenue levels, product mix, selling prices, factory loading, and material costs. For the three and six months ended June 28, 2014, the amount of gross profit increased compared to the same periods 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. Gross profit also benefited from higher production volume driven by higher sales. This led to higher factory utilization on a relatively fixed base of overhead costs and resulted in improvements to our gross profits for all


product markets. In addition, we recognized $1.3 million of gross margin from a non-recurring, service transaction in the three months ended June 28, 2014.

Our net inventory provision charges declined by $1.0 million and $1.1 million between the three and six months ended June 28, 2014 and the corresponding period in the prior year. For the three and six months ended June 28, 2014, the value of previously reserved materials that were used in manufacturing and shipped was $0.8 million and $1.5 million, respectively.

Gross profit included stock-based compensation expense of $0.7 million and $1.2 million for the three and six months ended June 28, 2014, respectively, compared to $0.6 million and $1.2 million, respectively, for the three and six months ended June 29, 2013.

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         Six Months Ended
                          June 28,      June 29,     June 28,     June 29,
                            2014          2013         2014         2013
                                 (In thousands, except percentages)
Research and development $  11,074     $ 10,915     $ 20,821     $ 21,844
% of revenues                 16.4 %       17.4 %       16.9 %       18.9 %

Research and development expenses for the three and six months ended June 28, 2014 increased by $0.2 million and decreased by $1.0 million, respectively, compared to the same periods in the prior year.

The increase in the three months ended June 28, 2014 compared to the same period in the prior year was due to an increase of $0.6 million in project and material costs and $0.4 million in incentive compensation offset by a reduction of $0.8 million in personnel related costs as a result of our ongoing restructuring efforts.

The decrease in the six months ended June 28, 2014 compared to the same period in the prior year was due to reduction of $1.4 million in personnel related costs as a result of our ongoing restructuring efforts, $0.3 million in stock-based compensation and $0.1 million in general operating expenses offset by an increase of $0.4 million in project and material costs and $0.4 million of incentive compensation.

As a percent of revenues, research and development expenses decreased 1.0% and 2.0%, respectively, during the three and six months ended June 28, 2014, from the comparable periods of the prior year.

Stock-based compensation expense included in research and development expenses was $0.9 million and $1.6 million, respectively, for the three and six months ended June 28, 2014, compared to $0.8 million and $1.8 million, respectively, for the three and six months ended June 29, 2013.

Selling, General and Administrative

                                           Three Months Ended                   Six Months Ended
                                     June 28, 2014     June 29, 2013     June 28, 2014     June 29, 2013
                                                     (In thousands, except percentages)
Selling, general and administrative $      13,191     $      13,487     $      25,445     $      28,105
% of revenues                                19.6 %            21.5 %            20.6 %            24.4 %

Selling, general and administrative expenses for the three and six months ended June 28, 2014 decreased by $0.3 million and $2.7 million, respectively, compared to the same periods in the prior year.


The decrease in the three months ended June 28, 2014 compared to the same period in the prior year was due to a reduction of $0.7 million in personnel related costs as a result of our ongoing restructuring efforts, $0.6 million in general operating expenses as a result of our ongoing cost reduction efforts and $0.3 million in indirect sales commission offset by an increase of $0.7 million in incentive compensation, $0.3 million in foreign payroll taxes and $0.3 million in stock based compensation.

The decrease in the six months ended June 28, 2014 compared to the same period in the prior year was due to a reduction of $1.3 million in personnel related costs as a result of our ongoing restructuring efforts, $0.9 million in acquisition and integration related costs, $0.8 million in general operating expenses as a result of our ongoing cost reduction efforts, $0.3 million in travel costs, $0.3 million in sales commission and $0.2 million in project materials offset by an increase of $0.6 in incentive compensation, $0.3 million in foreign payroll taxes and $0.2 million in stock based compensation.

As a percent of revenues, selling, general and administrative expenses decreased approximately 1.9% and 3.8%, respectively, during the three and six months ended June 28, 2014 from the comparable periods of the prior year.

Stock-based compensation expense included within selling, general and administrative expenses was $1.9 million and $3.4 million, respectively, for the three and six months ended June 28, 2014, compared to $1.7 million and $3.2 million, respectively, for the three and six months ended June 29, 2013.

Restructuring Charges, net

                              Three Months Ended         Six Months Ended
                            June 28,      June 29,     June 28,     June 29,
                              2014          2013         2014         2013
                                   (In thousands, except percentages)
Restructuring charges, net $    59       $    92      $  2,056     $  4,072
% of revenues                  0.1 %         0.1 %         1.7 %        3.5 %

For the three months ended June 28, 2014, restructuring charges decreased by $33 thousand from the comparable period of the prior year. For the six months ended June 28, 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. During the three months ended June 28, 2014, we eliminated an additional 2 full-time employees and recorded $59 thousand in severance charges.

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 activities comprising these restructuring activities and the related cash payments were completed and paid by June 28, 2014.

2013 Restructuring Activities

In the first 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 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. In the second quarter of fiscal 2013, we recorded $0.1 million of severance and related benefits due to the reduction of 4 employees across the organization. The activities comprising these restructuring activities were completed in fiscal 2013.


Loss on Sale of Subsidiary

                                         Three Months Ended                         Six Months Ended
                                 June 28, 2014         June 29, 2013        June 28, 2014       June 29, 2013
                                                     (In thousands, except percentages)
Loss on sale of subsidiary             -             $          300               -            $        300
% of revenues                          - %                      0.5 %             - %                   0.3 %

On June 29, 2013, we sold TMMC, a wholly owned subsidiary of MicroProbe based in Carson City, Nevada. TMMC's assets were sold to its management team for a purchase consideration of $1.0 million. FormFactor received approximately $0.2 million in cash upon the sale in the second fiscal quarter of 2013 and an approximately $0.8 million note to be repaid over 7 years at a 5% interest rate. The fair value of the note was discounted to approximately $0.5 million as of . . .

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