UNITED
STATES
SECURITIES
AND EXCHANGE
COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark one)
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x
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended March 29,
2008
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or
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file number: 000-50307
FormFactor, Inc.
(Exact name of registrant as specified in its
charter)
DELAWARE
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13-3711155
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(State or other
jurisdiction of
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(I.R.S. Employer
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incorporation or
organization)
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Identification No.)
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7005 Southfront Road, Livermore, California 94551
(Address of principal executive offices,
including zip code)
(925) 290-4000
(Registrants telephone number, including
area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes
x
No
o
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer,
or a smaller reporting company
. See
definitions of large accelerated filer, accelerated filer and
smaller reporting company
in Rule 12b-2
of the Exchange Act. (Check one):
Large Accelerated filer
x
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Accelerated filer
o
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Non-accelerated filer
o
(Do not check if a smaller reporting company)
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Smaller reporting company
o
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2
of the Exchange Act). Yes
o
No
x
As
of April 27, 2008, 48,821,082 shares of the registrants common stock, par
value $0.001 per share, were outstanding.
FORMFACTOR, INC.
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 29,
2008
INDEX
PART I.
FINANCIAL INFORMATION
Item 1.
Financial
Statements
FORMFACTOR, INC.
CONDENSED CONSOLIDATED STATEMENTS
OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
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Three Months Ended
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March 29,
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March 31,
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2008
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2007
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Revenues
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$
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65,703
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$
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102,271
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Cost of revenues
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53,131
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47,988
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Gross margin
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12,572
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54,283
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Operating expenses:
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Research and development
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16,388
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14,102
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Selling, general and administrative
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22,658
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22,928
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Restructuring charge
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5,320
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Total operating expenses
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44,366
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37,030
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Operating income (loss)
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(31,794
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)
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17,253
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Interest income
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4,875
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5,444
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Other income (expense)
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793
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(119
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)
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Income (loss) before income taxes
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(26,126
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)
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22,578
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Provision (benefit) for income taxes
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(8,165
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)
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7,367
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Net income (loss)
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$
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(17,961
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)
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$
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15,211
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Net income (loss) per share:
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Basic
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$
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(0.37
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)
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$
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0.32
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Diluted
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$
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(0.37
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)
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$
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0.31
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Weighted-average number of shares used in per share calculations:
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Basic
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48,743
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47,384
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Diluted
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48,743
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49,060
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The accompanying notes are an integral part of these condensed
consolidated financial statements
3
FORMFACTOR, INC.
CONDENSED CONSOLIDATED BALANCE
SHEETS
(In thousands, except share and per share amounts)
(Unaudited)
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March 29,
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December 29,
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2008
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2007
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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400,634
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$
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315,232
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Marketable securities
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155,083
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254,814
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Accounts receivable, net
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57,214
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69,486
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Inventories
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26,609
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29,309
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Deferred tax assets
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18,121
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17,995
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Refundable income taxes
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9,207
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2,043
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Prepaid expenses and other current assets
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12,360
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13,461
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Total current assets
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679,228
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702,340
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Restricted cash
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2,250
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2,250
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Property and equipment, net
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126,222
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130,882
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Deferred tax assets
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11,709
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10,038
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Other assets
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9,780
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9,812
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Total assets
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$
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829,189
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$
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855,322
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LIABILITIES AND STOCKHOLDERS EQUITY
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Current liabilities:
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Accounts payable
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$
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34,188
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$
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42,893
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Accrued liabilities
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21,650
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30,029
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Income tax payable
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100
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1,328
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Deferred revenue and customer advances
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5,674
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5,535
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Deferred rent
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460
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462
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Total current liabilities
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62,072
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80,247
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Long term tax payable
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12,658
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12,248
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Deferred rent and other liabilities
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5,973
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5,877
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Total liabilities
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80,703
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98,372
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Commitments and contingencies (Note 11)
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Stockholders equity
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Preferred stock, $0.001 par value:
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10,000,000 shares authorized; no shares issued and outstanding at
March 29, 2008 and December 29, 2007, respectively
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Common stock, $0.001 par value:
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250,000,000 shares authorized; 48,811,602 and 48,642,258 shares
issued and outstanding at March 29, 2008 and December 29, 2007,
respectively
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49
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49
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Additional paid-in capital
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582,534
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573,553
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Accumulated other comprehensive income
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1,445
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929
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Retained earnings
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164,458
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182,419
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Total stockholders equity:
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748,486
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756,950
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Total liabilities and stockholders equity
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$
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829,189
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$
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855,322
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The accompanying notes are an integral part of these condensed
consolidated financial statements
4
F
ORMFACTOR, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
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Three Months Ended
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March 29,
2008
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March 31,
2007
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Cash flows from operating activities:
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Net income (loss)
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$
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(17,961
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$
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15,211
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Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
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Depreciation and amortization
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7,827
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6,146
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Stock-based compensation expense
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6,117
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7,378
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Deferred income taxes
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(1,551
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(961
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Excess tax benefits from equity based compensation plans
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(26
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(5,129
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Provision for excess and obsolete inventories
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5,473
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2,527
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Loss on disposal and impairment of property and equipment
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839
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195
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Changes in assets and liabilities:
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Accounts receivable
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12,282
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(18,709
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Inventories
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(2,934
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(5,868
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Prepaid expenses and other current assets
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2,757
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(307
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Refundable income taxes
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(7,164
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Other assets
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110
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(519
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Accounts payable
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(2,610
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8,213
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Accrued liabilities
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(7,998
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)
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(11,902
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Income taxes payable
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(752
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)
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8,504
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Deferred rent
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(97
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)
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43
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Deferred revenues and customer advances
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132
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1,213
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Net cash provided by (used in) operating activities
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(5,556
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)
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6,036
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Cash flows from investing activities:
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Acquisition of property and equipment
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(11,253
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)
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(14,083
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Purchase of marketable securities
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(123,618
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)
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(62,368
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)
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Proceeds from maturities and sales of marketable securities
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222,583
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42,624
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Net cash provided by (used in) investing activities
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87,712
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(33,827
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)
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Cash flows from financing activities:
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Proceeds from issuance of common stock
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3,253
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16,347
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Excess tax benefits from equity based compensation plans
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26
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5,129
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Net cash provided by financing activities
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3,279
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21,476
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Effect of exchange rate changes on cash and cash equivalents
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(34
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)
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(34
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Net increase (decrease) in cash and cash equivalents
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85,401
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(6,349
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)
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Cash and cash equivalents, beginning of the period
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315,232
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284,131
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Cash and cash equivalents, end of the period
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$
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400,633
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$
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277,782
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Supplemental disclosure of significant non-cash
investing activities:
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Purchases of property and equipment through accounts payable and
accrued liabilities
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$
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(7,943
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$
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1,613
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The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
FORMFACTOR, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Unaudited)
Note 1
Basis of Presentation
Basis of presentation.
The accompanying unaudited
condensed consolidated financial statements of FormFactor, Inc. and its
subsidiaries (the Company) have been prepared in accordance with accounting
principles generally accepted in the United States of America and pursuant to
the instructions to Form 10-Q and Article 10 of Regulation S-X of the
Securities and Exchange Commission (the SEC). Accordingly, the interim
financial statements do not include all of the information and footnotes
required by generally accepted accounting principles for annual financial
statements. In the opinion of management, all adjustments (consisting only of
normal recurring adjustments) considered necessary for a fair statement have
been included. Operating results for the three months ended March 29, 2008
are not necessarily indicative of the results that may be expected for the year
ending December 27, 2008, or for any other period. The balance sheet at December 29,
2007 has been derived from the audited consolidated financial statements at
that date but does not include all of the information and footnotes required by
accounting principles generally accepted in the United States of America for
complete financial statements. These financial statements and notes should be
read with the consolidated financial statements and notes thereto for the year
ended December 29, 2007 included in the Companys Annual Report on Form 10-K
filed with the SEC on February 27, 2008.
Fiscal Year.
The Company
operates on a 52/53 week fiscal year, whereby the year ends on the Saturday
nearest December 31. Fiscal year 2008 will end on December 27, 2008,
and will consist of 52 weeks.
Reclassifications.
Certain prior period balances have been reclassified
to conform to the current financial statement presentation. These consist of
the reclassification of refundable income taxes from prepaid and other current
assets into its own respective balance sheet line. These reclassifications had
no impact on previously reported results of operations or stockholders equity.
Note 2
Significant Accounting Policies
The Companys significant accounting policies are disclosed in the
Companys Annual Report on Form 10-K for the fiscal year ended December 29,
2007. As described in Note 5, the Company adopted certain provisions of
Financial Accounting Standards Board (FASB) Statement of Financial Accounting
Standards (
SFAS) No. 157,
Fair Value Measurements
as of the first day of the first quarter of
fiscal 2008.
Note 3
Departure of Executive Officer
On March 20, 2008, the Company entered into a Separation Agreement
and General Release (the Separation Agreement) with its former Senior Vice
President, and Chief Financial Officer who resigned from the Company effective March 21,
2008. In conjunction with the Separation
Agreement, the Company recorded an accrual for a $232,500 severance payment and
a modification charge of approximately $118,000 in stock-based compensation
resulting from the accelerated vesting of a portion of his unvested stock
options and an offsetting benefit of approximately $375,000 related to the
reversal of previously recognized expense for unvested stock options in the
first quarter of fiscal 2008.
Note 4
Restructuring Charge
The Company announced on February 5,
2008 a cost reduction plan that included reducing its global workforce. The
plan was designed to restructure the Company to better align with the market
environment. The majority of the
activities comprising the cost reduction plan were completed by the end of the
first quarter of fiscal 2008 and consisted primarily of global workforce
reductions and property and equipment impairments. The majority of the charges
associated with the cost reduction plan are expected to result in future cash
expenditures.
6
In addition, the Company
and Jorge L. Titinger, its Senior Vice President, Product Business Group,
mutually agreed to eliminate Mr. Titingers position as part of the
Companys restructuring activities in light of market and business conditions.
In connection with his departure,
the Company recorded charges
of approximately $613,000, consisting primarily of a severance payment of
$204,000 and approximately $287,000 in stock-based compensation resulting from
the accelerated vesting of a portion of his unvested restricted stock units
representing an aggregate of 18,680 shares. The charges are recorded as
components of restructuring in the Condensed Consolidated Statements of
Operations.
The following table
summarizes the activities related to the cost reduction plan as of March 29,
2008 (in thousands):
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Employee
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Property
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Total
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Severance and
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and Equipment
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Restructuring
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Benefits
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Impairment
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Charge
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Restructuring accrual beginning balance
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$
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$
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$
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Restructuring charges
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4,680
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640
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5,320
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Cash payments
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(1,508
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)
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(1,508
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)
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Non-cash settlements
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(417
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)
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(640
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)
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(1,117
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)
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Restructuring accrual ending balance
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$
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2,695
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$
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$
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2,695
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The
charges above have been reflected separately as restructuring in the Condensed
Consolidated Statement of Operations. The remaining accrual as of March 29,
2008 relates to severance benefits which will be paid within the next twelve
months. As such the restructuring accrual is recorded as a current liability
within accrued liabilities in the Condensed Consolidated Balance Sheets.
Subsequent to the end of the first quarter of fiscal
2008, the Company announced a second global cost reduction plan that will
include additional reductions in the global workforce and the consolidation of
a facility. See Note 15 - Subsequent Events.
Note 5
Fair Value
Effective December 30, 2007, the Company adopted SFAS No. 157,
Fair Value Measurements. In February 2008, the FASB issued FASB Staff
Position No. FAS 157-2, Effective Date of FASB Statement No. 157,
which provides a one year deferral of the effective date of SFAS 157 for
non-financial assets and non-financial liabilities, except those that are
recognized or disclosed in the financial statements at fair value at least
annually. Therefore, the Company adopted the provisions of SFAS 157 with
respect to its financial assets and liabilities only. SFAS No. 157 defines
fair value, establishes a framework for measuring fair value in generally
accepted accounting principles, and expands disclosures about fair value
measurements. SFAS No. 157 applies under other accounting pronouncements
that require or permit fair value measurements and does not require any new
fair value measurements. The standard describes a fair value hierarchy based on
three levels of inputs, the first two of which are considered observable and
the last unobservable, that may be used to measure fair value:
·
Level 1 - Quoted prices in active markets for
identical assets or liabilities.
·
Level 2 - Inputs other than Level 1 that are
observable, either directly or indirectly, such as quoted prices for similar
assets or liabilities; quoted prices in markets that are not active; or other
inputs that are observable or can be corroborated by observable market data for
substantially the full term of the assets or liabilities.
·
Level 3 - Unobservable inputs that are supported by
little or no market activity and that are significant to the fair value of the
assets or liabilities.
7
The Company
measures and reports certain financial assets and liabilities at fair value on
a recurring basis, including money market funds, U.S. government securities,
municipal bonds, U. S. government sponsored enterprise securities, or agency
securities and foreign currency derivatives. In accordance with SFAS 157, the
following table represents the Companys fair value hierarchy for its financial
assets (cash equivalent and marketable securities) measured at fair value on a
recurring basis as of March 29, 2008 (in thousands):
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Level 1
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Level 2
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Total
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Cash Equivalents
|
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Money Market funds
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$
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229,623
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$
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|
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$
|
229,623
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|
U. S. Government securities
|
|
|
|
|
|
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Municipal bonds
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|
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|
70
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70
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|
Agency securities
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|
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95,888
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95,888
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|
Marketable Securities
|
|
|
|
|
|
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U. S. Government securities
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|
|
|
4,963
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4,963
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Municipal bonds
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74,342
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74,342
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Agency securities
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|
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75,778
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75,778
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Total Cash Equivalents and Marketable Securities
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|
$
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229,623
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$
|
251,041
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$
|
480,664
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|
Note 6 Inventories
Inventories are stated at the lower of cost (principally standard cost
which approximates actual cost on a first-in, first-out basis) or market value.
Adjustments for potential excess and obsolete inventory are made based on
managements analysis of inventory levels and future sales forecasts. Once the value is adjusted, the
original
cost of the Companys
inventory less the related inventory write-down represents the new cost basis
of such products. Reversal of these
write-downs is recognized only when the related inventory has been scrapped or
sold.
Inventories
consisted of the following:
|
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March 29,
|
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December 29,
|
|
|
|
2008
|
|
2007
|
|
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(In thousands)
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Raw materials
|
|
$
|
7,958
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|
$
|
12,442
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|
Work-in-progress
|
|
15,067
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12,971
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|
Finished goods
|
|
3,584
|
|
3,896
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|
|
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$
|
26,609
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|
$
|
29,309
|
|
Note 7
Warranty
The
Company offers warranties on its products, other than certain evaluation and
early adopter products that are not offered with warranty, and records a
liability for the estimated future costs associated with customer warranty
claims, which is based upon historical experience and the Companys estimate of
the level of future costs. Warranty costs are reflected in the consolidated
income statement as a cost of revenues. A reconciliation of the changes in the
Companys warranty liability (included in accrued liabilities) for the three
months ended March 29, 2008 and March 31, 2007, respectively,
follows:
|
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Three Months Ended
|
|
|
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March 29,
|
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March 31,
|
|
|
|
2008
|
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2007
|
|
|
|
(In thousands)
|
|
Warranty accrual beginning balance
|
|
$
|
1,383
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|
$
|
778
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Accrual for warranties issued during the period
|
|
1,840
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|
839
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|
Settlements made during the period
|
|
(920
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)
|
(795
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)
|
Warranty accrual ending balance
|
|
$
|
2,303
|
|
$
|
822
|
|
8
Note 8 Stock-Based Compensation
The Company
recorded stock-based compensation for the three months ended March 29,
2008 and March 31, 2007 as follows:
|
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Three Months Ended
|
|
|
March 29,
|
|
March 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
(In thousands)
|
|
Stock-based compensation expense by type of
award:
|
|
|
|
|
|
Employee stock options (1) (2)
|
|
$
|
4,224
|
|
$
|
5,595
|
|
Employee stock purchase plan
|
|
1,133
|
|
889
|
|
Restricted stock units (3) (4)
|
|
587
|
|
817
|
|
Net change in amounts capitalized as
inventory
|
|
173
|
|
77
|
|
Total stock-based compensation
|
|
6,117
|
|
7,378
|
|
Tax effect on stock-based compensation
|
|
(1,620
|
)
|
(2,584
|
)
|
Effect on net income (loss)
|
|
$
|
4,497
|
|
$
|
4,794
|
|
(1)
The three months ended March 29, 2008
includes approximately $256,000 in stock-based compensation resulting from the
acceleration of the vesting of a portion of the Companys former Chief
Financial Officers stock options in conjunction with his Separation Agreement
(See Note 3 - Departure of Executive Officer).
(2)
The
three months ended March 31, 2007 includes approximately $575,000 in
stock-based compensation resulting from the accelerated vesting of a portion of
the Companys former Presidents stock options in conjunction with his
separation agreement and general release.
(3)
The three months ended March 29,
2008 includes approximately $287,000 in stock-based compensation resulting from
the acceleration of the vesting of a portion of the Companys Senior Vice
President, Product Business Groups restricted stock units in conjunction with
his separation agreement and general release (See Note 4 Restructuring
Charge).
(4)
The
three months ended March 31, 2007 includes approximately $798,000 in
incremental stock-based compensation resulting from the acceleration of the
Companys former Presidents remaining unvested restricted stock units in
conjunction with his separation agreement and general release.
Equity Incentive Plans
The Company
has four incentive plans: 1996 Stock Option Plan, Incentive Option Plan and
Management Incentive Option Plan (collectively, the Prior Plans) and 2002
Equity Incentive Plan (2002 Plan), which became effective in June 2002.
As a result of the effectiveness of the 2002 Plan, the Company ceased granting
any options under the Prior Plans.
Stock Options
The following
weighted average assumptions were used in the estimated grant-date fair value
calculations using the Black-Scholes option pricing model for stock options for
the three months ended March 29, 2008 and March 31, 2007,
respectively:
|
|
Three Months Ended
|
|
|
|
March 29,
|
|
March 31,
|
|
|
|
2008
|
|
2007
|
|
Stock Options:
|
|
|
|
|
|
Dividend yield
|
|
|
|
|
|
Expected volatility
|
|
53.2
|
%
|
46.9
|
%
|
Risk-free interest rate
|
|
3.03
|
%
|
4.71
|
%
|
Expected term (in years)
|
|
4.75
|
|
4.75
|
|
9
Stock option activity under the Prior Plans and the 2002 Plan is set
forth below:
|
|
Shares
|
|
Options
|
|
Weighted Average
|
|
|
|
Available
|
|
Outstanding
|
|
Exercise Price
|
|
Balances, December 29, 2007
|
|
4,930,527
|
|
6,611,496
|
|
$
|
29.18
|
|
Additional shares reserved
|
|
2,432,112
|
|
|
|
|
|
Options granted
|
|
(759,510
|
)
|
759,510
|
|
22.05
|
|
Awards granted
|
|
(536,440
|
)
|
|
|
|
|
Options exercised
|
|
|
|
(25,408
|
)
|
6.18
|
|
Options cancelled
|
|
183,461
|
|
(183,461
|
)
|
37.72
|
|
Awards cancelled
|
|
1,800
|
|
|
|
|
|
Balances, March 29, 2008
|
|
6,251,950
|
|
7,162,137
|
|
$
|
28.29
|
|
Restricted Stock Units
Restricted
stock units are converted into shares of the Companys common stock upon
vesting on a one-for-one basis. The vesting of restricted stock units is
subject to the employees continuing service to the Company. The cost of these
awards is determined using the fair value of the Companys common stock on the
date of the grant, and compensation cost is recognized over the vesting period.
Restricted stock units generally vest over four years.
Activity of
the restricted stock units under the 2002 Plan during the three months ended March 29,
2008 is set forth below:
|
|
|
|
Weighted
|
|
|
|
|
|
Average Grant
|
|
|
|
Units
|
|
Date Fair Value
|
|
Restricted stock units at December 29,
2007
|
|
22,150
|
|
$
|
32.74
|
|
Awards Granted
|
|
536,440
|
|
20.10
|
|
Awards Cancelled
|
|
(1,800
|
)
|
19.36
|
|
Restricted stock units at March 29,
2008
|
|
556,790
|
|
$
|
20.61
|
|
Employee
Stock Purchase Plan
The Companys 2002 Employee Stock Purchase
Plan (the ESPP) provides that eligible employees may contribute up to 15% of
their eligible earnings toward the semi-annual purchase of the Companys common
stock. Under the ESPP, employees may purchase the Companys common stock
through payroll deductions at a price equal to 85% of the lower of the fair market
value at the beginning of the applicable offering period or at the end of each
applicable purchase period. Until February 1, 2007, each offering period
was generally two years in length, consisting of four six month purchase
periods. Effective from February 1, 2007, the offering periods under the
ESPP are a 12 month fixed offering period commencing on February 1 of
each calendar year and ending on January 31 of the subsequent calendar
year, and a six month fixed offering period commencing on August 1 of each
calendar year and ending on January 31 of the subsequent calendar year.
The 12 month offering period consists of two six month purchase periods
and the six month offering period consists of one six month purchase period.
During the three months ended March 29, 2008 and March 31, 2007,
150,410 shares and 122,523 shares, respectively, were issued under the ESPP. As
of March 29, 2008, the Company had $2.0 million of total unrecognized
deferred stock-based compensation related to ESPP grants, which will be
recognized over the weighted average period of 0.6 years. Compensation expense
is calculated using the fair value of the employees purchase rights under the
Black-Scholes model.
10
The following assumptions were used in the
estimated fair value calculations for the employees purchase rights:
|
|
Three Months Ended
|
|
|
|
March 29,
|
|
March 31,
|
|
|
|
2008
|
|
2007
|
|
ESPP:
|
|
|
|
|
|
Dividend yield
|
|
|
|
|
|
Expected volatility
|
|
52.0
|
%
|
44.2 - 61.8
|
%
|
Risk-free interest rate
|
|
2.13 - 2.15
|
%
|
3.69 - 5.18
|
%
|
Expected term (in years)
|
|
0.50 - 1.00
|
|
0.49 - 2.00
|
|
Note
9 Net Income (Loss) per Share
Basic net income (loss) per share is computed by dividing net income by
the weighted-average number of common shares outstanding for the period.
Diluted net income (loss) per share is computed giving effect to all potential
dilutive common stock, including stock options, restricted stock units and
common stock subject to repurchase.
A reconciliation of the numerator and denominator used in the
calculation of basic and diluted net income (loss) per share follows (in
thousands):
|
|
Three Months Ended
|
|
|
|
March 29,
|
|
March 31,
|
|
|
|
2008
|
|
2007
|
|
Basic net income (loss) per share
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(17,961
|
)
|
$
|
15,211
|
|
Denominator:
|
|
|
|
|
|
Weighted-average common stock outstanding
|
|
48,743
|
|
47,384
|
|
Diluted net income (loss) per share
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(17,961
|
)
|
$
|
15,211
|
|
Denominator:
|
|
|
|
|
|
Weighted-average shares used in computing
basic net income (loss) per share
|
|
48,743
|
|
47,384
|
|
Add: Dilutive potential common shares used
in computing diluted net income (loss) per share
|
|
|
|
1,676
|
|
Weighted-average number of shares used in
computing diluted net income (loss) per share
|
|
48,743
|
|
49,060
|
|
The
following table sets forth the weighted-average potentially dilutive securities
excluded from the computation in the table above because their effect would
have been antidilutive (in thousands):
|
|
Three Months Ended
|
|
|
|
March 29,
|
|
March 31,
|
|
|
|
2008
|
|
2007
|
|
Options to purchase common stock
|
|
7,162
|
|
1,818
|
|
Restricted Stock Units
|
|
557
|
|
|
|
Employee Stock Purchase Plan
|
|
50
|
|
|
|
Total potentially dilutive securities
|
|
7,769
|
|
1,818
|
|
Note 10 Income Taxes
Under FASB Interpretation No. 48, Accounting
for Uncertainty in Income Taxes-an Interpretation of FAS 109, the Company
classifies interest and penalties related to uncertain tax positions as part of
income tax expense. The Company recognized interest expense of $115,000 and $248,000
for the three months ended March 29, 2008 and March 31, 2007,
respectively. As of March 29, 2008, the Company had approximately $981,000
of interest and zero penalties related to uncertain tax positions.
11
The amount of income taxes we pay is subject
to ongoing audits by federal, state and non-U.S. tax authorities which might
result in proposed assessments. Our estimate for the potential outcome for any
uncertain tax issue is judgmental in nature. However, we believe we have
adequately provided for any reasonably foreseeable outcome related to those
matters. Our future results may include favorable or unfavorable adjustments to
our estimated tax liabilities in the period the assessments are made or resolved
or when statutes of limitation on potential assessments expire. As of March 29,
2008, changes to our uncertain tax positions in the next 12 months, that are
reasonably possible, are not expected to have a significant impact on our
financial position or results of operations.
The Company and its subsidiaries file income
tax returns in the U.S. federal jurisdiction, various U.S. states and non-U.S.
jurisdictions. The Company is no longer subject to U.S. federal, state and
local, or non-U.S. income tax examinations by tax authorities for years prior
to 2001. The Company is currently under examination by the U.S. Internal
Revenue Service for fiscal year 2004 and the State of California Franchise Tax
Board for fiscal years 2004 and 2005.
Note
11 Commitments and Contingencies
Environmental
Matters
The Company is subject to U.S. federal, state
and local, and foreign governmental laws and regulations relating to the
protection of the environment, including those governing the discharge of
pollutants into the air and water, the management and disposal of hazardous
substances and wastes, the clean-up of contaminated sites and the maintenance
of a safe workplace. The Company believes that it complies in all material
respects with the environmental laws and regulations that apply to it,
including those of the California Department of Toxic Substances Control, the
Bay Area Air Quality Management District, the City of Livermore Water Resources
Division and the California Division of Occupational Safety and Health. The
Company received two notices of violation in fiscal 2007 and one notice of
violation in the first quarter of fiscal 2008 from the City of Livermore
regarding violation of certain applicable waste water discharge limits. For
each notice received, the Company promptly investigated the violation, took
appropriate steps to address the cause of the violation, and implemented
corrective measures to prevent a recurrence. We have implemented additional
waste water treatment capability in consultation with the City of Livermore,
and purchased additional waste water discharge capacity, which we require as a
result of our increased manufacturing capacity, through the City of Livermore.
No provision has been made for loss from environmental remediation liabilities
associated with the Companys Livermore facility because the Company believes
that it is not probable that a liability has been incurred as of March 29,
2008.
While the Company believes that it is in
compliance in all material respects with the environmental laws and regulations
that apply to it, in the future, the Company may receive additional
environmental violation notices, and if received, final resolution of the
violations identified by these notices could harm the Companys operations,
which may adversely impact its operating results and cash flows. New laws and
regulations, stricter enforcement of existing laws and regulations, the
discovery of previously unknown contamination at the Company or others sites
or the imposition of new cleanup requirements could also harm the Companys
operations, thereby adversely impacting its operating results and cash flows.
Legal Matters
From time to time, the Company may be subject
to legal proceedings and claims in the ordinary course of business. For fiscal
quarter ended March 29, 2008, the Company was not involved in any material
legal proceedings, other than the proceedings summarized below. In the future
the Company may become a party to additional legal proceedings, including
proceedings designed to protect its intellectual property rights that require
the Company to spend significant resources.
Patent Litigation
The Company is currently involved in patent
related litigation as part of its ongoing efforts to protect the intellectual
property embodied in its proprietary technology, including its MicroSpring
interconnect technology. These litigations include two actions that the Company
filed in 2004 in Seoul Southern District Court, located in Seoul, South Korea,
against Phicom Corporation, a Korean corporation, alleging infringement of the
Companys Korean Patent Nos. 252,457, entitled Method of Fabricating
Interconnections Using Cantilever Elements and Sacrificial Substrates,
324,064, entitled Contact Tip Structures for Microelectronic Interconnection Elements
and Methods of Making Same, 278,342, entitled Method of Altering the
Orientation of Probe Elements in a Probe Card Assembly and 399,210, entitled
Probe Card Assembly; as well as two actions the Company filed in 2006 in
Seoul Central District Court against Phicom alleging infringement of certain
claims of its Korean Patent No. 252,457. The Companys complaints seek
injunctive relief. These actions are all pending, except that the Seoul Central
District Court has denied the Companys request for the issuance of preliminary
injunctive relief in its 2006 injunction action. In April 2008, the Seoul Southern District
Court dismissed the Companys complaint as it related to Korean Patent Nos.
252,457 and 324,064. The Company plans
to appeal the dismissal to the Korea High Court.
12
In response to the Companys infringement actions, Phicom filed in the
Korean Intellectual Property Office, or KIPO, invalidity actions challenging
the validity of some or all of the claims of each of the Companys four patents
at issue in the Seoul District Court infringement actions. KIPO dismissed
Phicoms challenges against all four of the patents-at-issue. Phicom appealed
the dismissals of the challenges to the Korea Patent Court. In 2005, the Korea
Patent Court issued rulings holding invalid certain claims of the Companys
Korean Patent Nos. 278,342 and 399,210.
In 2006, the Korea Patent Court issued a ruling holding invalid certain
claims of the Companys Korean Patent No. 324,064, and also issued a ruling
upholding the validity of the Companys Korean Patent No. 252,457. The Company
appealed the Patent Court invalidity rulings to the Korea Supreme Court. Phicom
appealed the Patent Court ruling on Korean Patent No. 252,457 to the Korea
Supreme Court. In September 2007, the Korea Supreme Court affirmed the Patent
Court rulings holding invalid certain claims of the Companys Korean Patent
Nos. 278,342 and 399,210. In April 2008,
the Korea Supreme Court affirmed the Patent Court ruling holding invalid
certain claims of the Companys Korean Patent No. 324,064. The Korea Supreme Court has not ruled on
Phicoms appeal of the Patent Court ruling upholding our Korean Patent No.
252,457.
The Company has also initiated patent infringement litigation in the
United States against Phicom and Micronics Japan Co., Ltd. In 2005, the Company
filed a patent infringement lawsuit in the United States District Court for the
District of Oregon against Phicom charging that it is willfully infringing four
U.S. patents that cover key aspects of the Companys wafer probe cardsU.S.
Patent Nos. 5,974,662, entitled Method of Planarizing Tips of Probe Elements
of a Probe Card Assembly, 6,246,247, entitled Probe Card Assembly and Kit,
and Methods of Using Same, 6,624,648, entitled Probe Card Assembly and
5,994,152, entitled Fabricating Interconnects and Tips Using Sacrificial
Substrates. In 2006, the Company also filed an amended complaint in the same
Oregon district court that adds two additional patents to the litigation
against PhicomU.S. Patent Nos. 7,073,254, entitled Method for Mounting a
Plurality of Spring Contact Elements and 6,615,485, entitled Probe Card
Assembly and Kit, And Methods of Making Same. Phicom has answered the complaint
and the amended complaint by denying infringement, alleging defenses and
asserting counterclaims seeking adjudications on the validity and
enforceability of the Companys patents and whether Phicom is infringing those
patents. Also in 2006, the Company filed a patent infringement lawsuit in the
United States District Court for the Northern District of California against
Micronics Japan charging that it is willfully infringing four U.S. patents that
cover key aspects of the Companys wafer probe cardsU.S. Patent Nos.
6,246,247, entitled Probe Card Assembly and Kit, and Methods of Using Same,
6,509,751, entitled Planarizer for a Semiconductor Contactor, 6,624,648,
entitled Probe Card Assembly and 7,073,254, entitled Method for Mounting a
Plurality of Spring Contact Elements. Micronics Japan has answered the
complaint by denying infringement, alleging defenses and asserting
counterclaims seeking adjudications on the validity and enforceability of the
Companys patents and whether Micronics Japan is infringing those patents. The
complaints in these actions seek both injunctive relief and monetary damages.
These two district court actions have been stayed pending resolution of the
complaint that the Company filed with the United States International Trade
Commission, which is described below.
On or about November 13, 2007, the Company filed a complaint with the
United States International Trade Commission, or ITC, seeking institution of a
formal investigation by the United States International Trade Commission into
the activities of Micronics Japan and Phicom, and their respective U.S.
subsidiaries. The requested investigation encompasses U.S. Patent Nos.
5,994,152, entitled Fabricating Interconnects and Tips Using Sacrificial
Substrates, 6,509,751, entitled Planarizer for a Semiconductor Contactor,
6,615,485, entitled Probe Card Assembly and Kit, And Methods of Making Same,
6,624,648, entitled Probe Card Assembly, 7,168,162, entitled Method of
Manufacturing a Probe Card and 7,225,538, entitled Resilient Contact
Structures Formed and Then Attached to a Substrate, and alleges that
infringement by each of Micronics Japan and Phicom of certain of the identified
patents constitute unfair acts in violation of 19 U.S.C. Section 1337. In the
ITC complaint, the Company alleges violations of Section 337 of the Tariff Act
of 1930 in the importation into the United States of certain probe card
assemblies, components thereof and certain tested DRAM and NAND flash memory
devices and products containing such devices that infringe patents owned by the
Company, and requests a permanent exclusion order banning importation into the
United States of infringing products and certain downstream products.
On or about December 13, 2007, the ITC provided public notice that it
voted to institute an investigation of certain probe card assemblies,
components thereof and certain tested DRAM and NAND flash memory devices and
products containing such devices. The products at issue in this investigation
are probe card assemblies, which are used to test semiconductor devices that
have been fabricated on silicon wafers, memory chips that have been so tested,
and products containing such chips.
The investigation (337-TA-621) has been referred to the Honorable
Theodore R. Essex, an ITC administrative law judge, who will make an initial
determination as to whether there is a violation of Section 337, and that
initial determination is subject to review by the ITC. The ITC has announced a
scheduled hearing date of September 8, 2008, which would likely result in the
issuance of an initial determination by the administrative law judge on or
before December 19, 2008. The target date for the ITCs final determination is
March 19, 2009. ITC remedial orders in
Section 337 cases are effective when issued and become final 60 days after
issuance, subject to Presidential review. The Company is in the discovery phase
of the ITC proceeding.
13
Additionally, one or more third parties have initiated challenges in
foreign patent offices against other of the Companys patents. These actions
include proceedings filed in Korea against two of the Companys Korean patents
and proceedings filed in Taiwan against four of the Companys Taiwan patents.
No provision has been made for patent related litigation because the
Company believes that it is not probable that a liability had been incurred as
of March 29, 2008.
Securities Litigation
On October 31, 2007, a plaintiff filed a purported stockholder class
action in the United States District Court for the Northern District of
California in which the Company and certain of its current officers, including
one officer who is a director, are named as defendants under the caption Danny
McCasland, Individually and on Behalf of All Others Similarly Situated v.
FormFactor, Inc., Igor Y. Khandros, Ronald C. Foster and Richard M. Freeman.
Subsequently, plaintiffs filed two other purported stockholder class actions in
the United States District Court for the Northern District of California under
the captions Yuk Ling Lui, on Behalf of Herself and All Others Similarly
Situated v. FormFactor, Inc., Igor Y. Khandros, Ronald C. Foster and Richard M.
Freeman, and Victor Albertazzi, Individually and on Behalf of All Others
Similarly Situated v. FormFactor, Inc., Igor Y. Khandros, Ronald C. Foster and
Richard M. Freeman. The three actions have been consolidated. The plaintiffs
filed these actions following the Companys restatement of its financial
statements for the fiscal year ended December 30, 2006, for each of the fiscal
quarters for that year, and for the fiscal quarters ended March 31 and June 30,
2007. In April 2008, the designated lead
plaintiffs filed a Consolidated Amended Complaint. The plaintiffs claim violations of Sections
10(b) and 20(a), and Rule 10b-5 of the Securities Exchange Act of 1934,
alleging that the defendants knowingly issued materially false and misleading
statements regarding the Companys business and financial results prior to the
restatements. The plaintiffs seek to recover unspecified monetary damages,
equitable relief and attorneys fees and costs.
On or about May 5, 2008, the Company filed a motion to dismiss the
Consolidated Amended Complaint. The
Court has set a hearing date of July 18, 2008; a ruling date has not been set.
No provision has been made for the securities litigation because the
Company believes that it is not probable that a liability had been incurred as
of March 29, 2008.
Stockholder Derivative Litigation
On November 19, 2007, a plaintiff filed a purported stockholder
derivative action in the Superior Court of the State of California for the
County of Alameda in which the Company is named as a nominal defendant and
certain of its directors and officers are named as defendants under the caption
John King, Derivatively on Behalf of Nominal Defendant FormFactor, Inc. v. Dr.
Igor Y. Khandros, Dr. Homa Bahrami, Dr. Thomas J. Campbell, G. Carl Everett,
Jr., Lothar Maier, James A. Prestridge, Harvey A. Wagner, Ronald C. Foster and
Richard M. Freeman, and FormFactor, Inc. Subsequently, another plaintiff filed
a second purported stockholder class action in the Superior Court of the State
of California for the County of Alameda under the caption Joseph Priestley,
Derivatively on Behalf of FormFactor, Inc. v. Igor Y. Khandros, Mario Ruscev,
James A. Prestridge, Thomas J. Campbell, Harvey A. Wagner, G. Carl Everett,
Jr., Homa Bahrami, Lothar Maier, William H. Davidow and Joseph R. Bronson, and
FormFactor, Inc. The plaintiffs filed these two later actions following the
Companys restatement of its financial statements for the fiscal year ended
December 30, 2006, for each of the fiscal quarters for that year, and for the
fiscal quarters ended March 31 and June 30, 2007. The plaintiffs allege that
the defendants breached their fiduciary duties and violated applicable law by
issuing, and permitting the Company to issue, materially false and misleading
statements regarding the Companys business and financial results prior to the restatements.
The plaintiffs seek to recover monetary damages, and attorneys fees and
costs. The two derivative actions have
been consolidated, and a consolidated amended complaint is expected to be filed
in mid-July 2008.
No provision has been made for the stockholder derivative litigation
because the Company believes that it is not probable that a liability had been
incurred as of March 29, 2008.
We believe that the factual allegations and circumstances underlying
the legal proceedings in this Note 11 filed against us are without merit. We
also believe that we do not have a material monetary damages exposure in these
legal proceedings that would individually or in the aggregate have a material
adverse effect on our financial condition, liquidity or results of operations;
however, these legal proceedings have been costly and it is possible we will
incur significant, and possibly material, attorneys fees, which may not be
covered by our insurance policies. These legal proceedings may also divert our
managements time and attention away from business operations, which could
prove to be disruptive to our business operations. In addition, an unfavorable
outcome or settlement of these proceedings, particularly if it is not covered
by or exceeds our insurance coverage, could individually or in the aggregate
adversely impact our financial condition, liquidity or results of operations.
14
Indemnification
Arrangements
The Company from time to time in the ordinary course of its business
enters into contractual arrangements with third parties that include
indemnification obligations. Under these contractual arrangements, the Company
has agreed to defend, indemnify and/or hold the third party harmless from and
against certain losses. These arrangements may limit the time within which an
indemnification claim can be made, the type of the claim and the total amount
that the Company can be required to pay in connection with the indemnification
obligation. In addition, the Company has entered into indemnification
agreements with its directors and certain of its officers, and the Companys
bylaws contain indemnification obligations in favor of the Companys directors,
officers and agents. It is not possible to determine or reasonably estimate the
maximum potential amount of future payments under these indemnification
obligations due to the varying terms of such obligations, the history of prior
indemnification claims and the unique facts and circumstances involved in each
particular contractual arrangement and in each potential future claim for
indemnification. The Company has not had any requests for indemnification under
these arrangements. The Company has not recorded any liabilities for these
indemnification arrangements on the Companys condensed consolidated balance
sheet as of March 29, 2008.
Note
12 Stockholders Equity
Comprehensive Income
(Loss)
Comprehensive income (loss) includes foreign currency translation
adjustments and unrealized gains on available-for-sale securities, the impact
of which has been excluded from net income and reflected as components of
stockholders equity.
Components of comprehensive income (loss) were as follows:
|
|
Three Months Ended
|
|
|
March 29,
|
|
March 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
(In thousands)
|
|
Net income (loss)
|
|
$
|
(17,961
|
)
|
$
|
15,211
|
|
Change in unrealized gain on marketable
securities
|
|
(263
|
)
|
97
|
|
Cumulative translation adjustments
|
|
779
|
|
3
|
|
Comprehensive income (loss)
|
|
$
|
(17,445
|
)
|
$
|
15,311
|
|
Components of accumulated other comprehensive income was as follows:
|
|
March 29,
|
|
December 29,
|
|
|
|
2008
|
|
2007
|
|
|
|
(In thousands)
|
|
Unrealized gain on marketable securities
|
|
$
|
568
|
|
$
|
832
|
|
Foreign currency translation adjustments
|
|
877
|
|
97
|
|
Accumulated other comprehensive income
|
|
$
|
1,445
|
|
$
|
929
|
|
Note
13 Derivative Financial Instruments
As of March 29, 2008, the Company had
two outstanding foreign exchange forward contracts to sell 1,941,000,000
Japanese Yen for $19,452,796 with a contract rate of 99.78 Japanese Yen per
U.S. Dollar and a contract to sell 522,300,000 Korean Won for $525,189 with a
contract rate of 994.50 Korean Won per U.S. Dollar. Both contracts were entered
into on March 28, 2008 and mature on April 25, 2008. There was no
gain or loss relating to the derivative contracts recorded as of March 29,
2008.
Note
14 Recent Accounting Pronouncements
In April 2008, the FASB issued FASB final Staff Position (FSP) No. FAS
142-3, Determination of the Useful Life of Intangible Assets. This FSP is
intended to improve the consistency between the useful life of a recognized
intangible asset under SFAS No. 142, Goodwill and Other Intangible
Assets, and the period of expected cash flows used to measure the fair value
of the asset under SFAS No. 141(R), Business Combinations. This FSP is
effective for financial statements issued for fiscal years beginning after December 15,
2008, and interim periods within those years. Early adoption is prohibited.
15
In March 2008, the FASB issued SFAS No. 161,
Disclosures about Derivative Instruments and Hedging Activities, an amendment
of FASB Statement No. 133. SFAS No. 161 amends and expands the
disclosure requirements of SFAS No. 133 with the intent to provide users
of financial statements with an enhanced understanding of: (i) how and why an
entity uses derivative instruments; (ii) how derivative instruments and related
hedged items are accounted for under SFAS No. 133 and its related
interpretations and (iii) how derivative instruments and related hedged items
affect an entitys financial position, financial performance and cash flows.
This statement is effective for financial statements issued for fiscal years
and interim periods beginning after November 15, 2008, with early adoption
encouraged. The Company is currently assessing the impact of the adoption of
SFAS No. 161 on its consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, The Fair
Value Option for Financial Assets and Financial LiabilitiesIncluding an amendment
of FASB Statement No. 115. This statement permits entities to choose to
measure many financial instruments and certain other items at fair value.
Entities shall report unrealized gains and losses on items for which the fair
value option has been elected in earnings at each subsequent reporting
date. This statement is effective as of the beginning of an entitys
first fiscal year that begins after November 15, 2007. The adoption
of SFAS No. 159, effective January 1, 2008, did not have a material
impact on the Companys financial position, results of operations or cash flows
as the Company did not elect the fair value measurement option for any
additional financial instruments or other items.
Effective December 30, 2007, the Company
adopted SFAS No. 157, Fair Value Measurements. In February 2008,
the FASB issued FASB Staff Position No. FAS 157-2, Effective Date of FASB
Statement No. 157, which provides a one year deferral of the effective
date of SFAS 157 for non-financial assets and non-financial liabilities, except
those that are recognized or disclosed in the financial statements at fair
value at least annually. Therefore, the Company adopted the provisions of SFAS
157 with respect to its financial assets and liabilities only. SFAS No. 157
defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles, and expands disclosures about fair
value measurements. SFAS No. 157 applies under other accounting
pronouncements that require or permit fair value measurements and does not
require any new fair value measurements. The standard describes a fair value
hierarchy based on three levels of inputs, the first two of which are
considered observable and the last unobservable, that may be used to measure fair
value:
·
Level 1 - Quoted prices in active markets for
identical assets or liabilities.
·
Level 2 - Inputs other than Level 1 that are
observable, either directly or indirectly, such as quoted prices for similar
assets or liabilities; quoted prices in markets that are not active; or other
inputs that are observable or can be corroborated by observable market data for
substantially the full term of the assets or liabilities.
·
Level 3 - Unobservable inputs that are
supported by little or no market activity and that are significant to the fair
value of the assets or liabilities.
The adoption
of this statement for financial assets and liabilities did not have a material
impact on our consolidated results of operations and financial condition,
though required additional disclosures. (See Note 5 Fair Value.)
Note
15-Subsequent Events
Appointment of Chief
Financial Officer
On March 28, 2008, the Company announced the appointment of Jean
Bernard Vernet as Chief Financial Officer and Senior Vice President, effective March 31,
2008.
As Chief Financial Officer, Mr. Vernet will be paid an annual base
salary of $325,000 and is eligible to receive a bonus under the Companys Key
Employee Bonus Plan at a target rate of 90% of base salary pursuant to his
letter agreement with the Company. For the first half of 2008, his semi-annual
bonus is guaranteed at 100% of base salary. Mr. Vernet received a sign-on
bonus of $100,000. The Company will reimburse his relocation expenses from
Canada, including real estate agent commissions up to $40,000 and costs for
moving his family and household goods, and pay him one months base salary as a
relocation allowance.
16
The Company granted Mr. Vernet, as of March 31, 2008, a
stock option under the 2002 Plan to purchase 50,000 shares of the Company common
stock with an estimated grant fair value of approximately $450,000 that vests
over four years, with 25% vesting on March 31, 2009 and the remainder
vesting in equal monthly installments over the following three years. The
Company also granted Mr. Vernet, as of March 31, 2008, restricted
stock units under the 2002 Plan, that represent the right to receive 20,000
shares of FormFactor common stock upon vesting with a grant fair value of
approximately $382,000. The restricted stock units will vest in four equal
installments on March 31
st
of each of 2009, 2010, 2011 and
2012.
Costs Associated
with Exit or Disposal Activities
On April 8, 2008, the Company announced its commitment to implement
a second global cost reduction plan that will include reducing its global
workforce by approximately 12%, with reductions primarily coming from the Companys
North America operations. The plan also includes the consolidation of a
facility in Livermore, California
. The plan is designed to restructure
the Company to better align with the market environment. A substantial portion
of the activities comprising the cost reduction plan are expected to be
completed by the end of the second quarter of fiscal 2008 with the remaining
activities to be completed in the third quarter of fiscal 2008. The Company
expects to record charges in the range of $3.5 to $4.5 million related to the
cost reduction plan,
which
includes costs associated with the facility consolidation. The Company
will record the charges in the second and third quarters of fiscal 2008 when
the particular activities comprising the plan are completed. A substantial
portion of the charges associated with the cost reduction plan are expected to
result in future cash expenditures.
Item 2.
Managements 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 may 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 based on information available to us
at the filing date of this Quarterly Report and our current expectations about
future events, which are inherently subject to change and involve risks and
uncertainties. You should not place undue reliance on these forward-looking
statements. We undertake no obligation to update any of these statements for
any reason. Actual events or results may differ materially from those expressed
or implied by these statements due to various factors including but not limited
to the matters discussed in the section titled Risk Factors in our Annual
Report on Form 10-K for the year ended December 29, 2007, in the
section titled Risk Factors in this Quarterly Report and elsewhere in this
Quarterly Report. You should carefully consider the numerous risks and
uncertainties described under these sections.
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with our condensed
consolidated financial statements and the accompanying notes contained in this
Quarterly Report. 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 cards and wafer test 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,
prior to singulation of the wafer into individual chips. During wafer sort and
test, a wafer probe card is mounted in a prober, which is in turn connected to
a semiconductor tester, and the wafer probe card is used as an interface to
connect electronically 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 parametric or in-line probe cards. We work closely with our customers to
design, develop and manufacture custom wafer probe cards. Each wafer probe card
is a custom product that is specific to the chip and wafer designs of the
customer. At the core of our product offering are our proprietary technologies,
including our MicroSpring interconnect technology and design processes. Our
MicroSpring interconnect technology includes a resilient contact element
manufactured at our production facilities in Livermore, California. We operate
in a single industry segment and have derived substantially all of our revenues
from the sale of wafer probe cards incorporating our MicroSpring interconnect
technology.
17
Our customers operate in the highly cyclical semiconductor industry and
are subject to significant fluctuations in the demand for their products.
Because of the nature of our customers and our business, our revenue growth is
driven in significant part by the number of new semiconductor designs that our
customers develop, the technology transitions involved in these designs and our
customers production volumes. In the past, this has resulted in our being subject
to demand fluctuations that have resulted in significant variations of
revenues, expenses and results of operations. We expect these fluctuations and
the resulting variations in our financial results to continue in future
periods.
Revenues.
We
derive substantially all of our revenues from product sales of wafer probe
cards. Wafer probe card sales, including service and non-recurring engineering
revenue associated with wafer probe card sales, accounted for virtually all of
our revenues in the first three months of fiscal 2008 and 2007. Revenues from
licensing of our design and manufacturing technologies have historically been
insignificant. 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. Revenues from our customers are
subject to quarterly, annual and other fluctuations due to design cycles,
technology adoption rates and cyclicality of the different end markets into which
our customers products are sold.
Cost of Revenues.
Cost of revenues
consists primarily of manufacturing materials, compensation 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 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-downs or write-offs as cost of revenues.
We design, manufacture and sell a fully
custom product 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 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-saleable
inventories equal to the difference between the cost of inventories and the
estimated market value based upon assumptions about future demand and market
conditions. If actual market conditions are less favorable than those projected
by management, additional inventory write downs would be required. Once
established, the original cost of our inventory less the related inventory valuation
adjustments represents the new cost basis of such products. Reversal of these
write downs is recognized only when the related inventory has been scrapped or
sold.
Research and Development
.
Research and development expenses include expenses related to product
development and design, engineering and material costs. Almost all research and
development costs are expensed as incurred. We plan to continue to invest a
significant amount in research and development activities to develop new
technologies for current and new markets and new applications in the future,
and to improve or advance existing technologies.
Selling, General and Administrative
.
Selling, general and administrative expenses include expenses related to sales,
marketing, and administrative personnel, internal and outside sales
representatives commissions, market research and consulting, and other sales,
marketing, and administrative activities. These expenses also include costs for
enforcing our patent rights and regulatory compliance costs.
Restructuring Charge.
Restructuring charge
includes expenses related to one-time employee termination severance pay and
benefits and property and equipment impairment charges incurred as part of the
Companys global cost reduction plan.
18
Use of
Estimates.
Our discussion
and analysis of our financial condition and results of operations are based
upon our unaudited condensed consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements
requires us to make estimates and judgments that affect the reported amount of
assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. On an on-going basis, we evaluate our
estimates, including those related to uncollectible receivables, inventories,
marketable securities, intangible assets, income taxes, warranty obligations,
excess component and order cancellation costs, contingencies and litigation,
and stock-based compensation. Our
estimates, which are based on historical experience and on various other
assumptions believed to be reasonable under the circumstances, allow us to make
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources.
Results of
Operations
The
following table sets forth our operating results as a percentage of revenues
for the periods indicated:
|
|
Three Months Ended
|
|
|
|
March 29,
|
|
March 31,
|
|
|
|
2008
|
|
2007
|
|
Revenues
|
|
100.0
|
%
|
100.0
|
%
|
Cost of revenues
|
|
80.9
|
|
46.9
|
|
Gross margin
|
|
19.1
|
|
53.1
|
|
Operating expenses:
|
|
|
|
|
|
Research and development
|
|
24.9
|
|
13.8
|
|
Selling, general and administrative
|
|
34.4
|
|
22.4
|
|
Restructuring charge
|
|
8.1
|
|
|
|
Total operating expenses
|
|
67.4
|
|
36.2
|
|
Operating income (loss)
|
|
(48.3
|
)
|
16.9
|
|
Interest income
|
|
7.4
|
|
5.3
|
|
Other income (expense)
|
|
1.2
|
|
(0.1
|
)
|
Income (loss) before income taxes
|
|
(39.7
|
)
|
22.1
|
|
Provision (benefit) for income taxes
|
|
(12.4
|
)
|
7.2
|
|
Net income (loss)
|
|
(27.3
|
)%
|
14.9
|
%
|
Three Months Ended March 29, 2008 and March 31, 2007
Revenues
|
|
Three Months Ended
|
|
|
|
March 29,
|
|
March 31,
|
|
|
|
|
|
2008
|
|
2007
|
|
% Change
|
|
|
|
(In thousands, except percentages)
|
|
Revenues by Market:
|
|
|
|
|
|
|
|
DRAM
|
|
$
|
40,175
|
|
$
|
75,489
|
|
(46.8
|
)%
|
Flash
|
|
16,218
|
|
16,700
|
|
(2.9
|
)
|
Logic
|
|
9,310
|
|
10,082
|
|
(7.7
|
)
|
Total revenues
|
|
$
|
65,703
|
|
$
|
102,271
|
|
35.7
|
%
|
Revenues
decreased 35.7% in the three months ended March 29, 2008 compared with the
three months ended March 31, 2007. The revenue decrease primarily resulted from
of weak demand for our advanced wafer probe cards caused by the current
downturn in the semiconductor market, particularly in the DRAM segment. We also
experienced pricing pressure on certain of our products.
Our
revenues for the three months ended March 29, 2008 and March 31, 2007 were
primarily generated by sales of wafer probe cards to manufacturers of DRAM
devices. Revenues for our products that address the DRAM segment in the first
three months of fiscal 2008 decreased significantly compared to the first three
months of fiscal 2007, primarily due to weak market conditions in which DRAM
device pricing fell below semiconductor manufacturers cash costs. Given the
current price of DRAM devices, our customers that manufacture DRAM devices took
certain actions, including decisions to delay test capacity expansions and
ramping of devices such as DDR3, to focus on improving test efficiency at
existing nodes and to delay the transition to the next technology node.
19
Revenues
from sales to flash memory device manufacturers was flat in the first three
months of fiscal 2008 compared to the first three months of fiscal 2007, mainly
due to a slowness in one NOR Flash device customers buying patterns.
Revenues
from manufacturers of logic devices decreased primarily due to delayed
production ramp of a key customers ongoing transition to advanced technology
nodes in both chipset application and high performance flip chip
microprocessors which are used in personal computer, gaming and graphics
applications.
Revenue by
Geographic Region
The
following table sets forth our revenues by geographic region for the periods
indicated.
|
|
Three Months Ended
|
|
|
|
March 29,
|
|
% of
|
|
March 31,
|
|
% of
|
|
|
|
2008
|
|
Revenues
|
|
2007
|
|
Revenues
|
|
|
|
(In thousands, except percentages)
|
|
Japan
|
|
$
|
30,202
|
|
46.0
|
%
|
$
|
28,091
|
|
27.5
|
%
|
Asia Pacific (excluding Japan)
|
|
19,871
|
|
30.2
|
|
35,011
|
|
34.2
|
|
North America
|
|
11,741
|
|
17.9
|
|
27,380
|
|
26.8
|
|
Europe
|
|
3,889
|
|
5.9
|
|
11,789
|
|
11.5
|
|
Total revenues
|
|
$
|
65,703
|
|
100.0
|
%
|
$
|
102,271
|
|
100.0
|
%
|
Geographic
revenue information is based on the location to which we send the customer
invoices. For example, certain Korean customers purchase through their North
American subsidiaries and accordingly, revenues derived from sales to such
customers are reflected in North America revenues.
The
increase in Japan sales of our revenues for the three months ended March 29,
2008 as compared to the same period in the prior year was primarily due to
increased sales of our NOR Flash and FCRAM product, which was largely offset by
our weaker DRAM business. The decrease in Asia Pacific for the three months
ended March 29, 2008 as compared to the same period in the prior year was
primarily due to the decrease in our DRAM product sales in the region. The
decrease in revenues in North America for the three months ended March 29,
2008 compared to the same period in the prior year was primarily driven by
decreased demand for our NAND Flash and Flash PC products related to product
transitions. Revenue in Europe decreased
for the three months ended March 29, 2008 primarily due to the decreased
demand for our Commodity and Specialty DRAM products partially offset by
increased demand for our Logic products in this region.
The
following customers accounted for more than 10% of our revenues for the three
months ended March 29, 2008 and March 31, 2007:
|
|
Three Months Ended
|
|
|
|
March 29,
|
|
March 31,
|
|
|
|
2008
|
|
2007
|
|
Elpida Memory
|
|
24.7
|
%
|
19.0
|
%
|
Spansion
|
|
17.2
|
|
|
*
|
Intel Corporation
|
|
12.6
|
|
11.6
|
|
Hynix Semiconductor
|
|
10.6
|
|
14.3
|
|
Qimonda
|
|
|
*
|
11.3
|
|
* Less than 10% of revenues.
20
Gross Margin
|
|
Three Months Ended
|
|
|
|
March 29,
|
|
March 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
(In thousands)
|
|
Gross margin
|
|
$
|
12,572
|
|
$
|
54,283
|
|
% of revenues
|
|
19.1
|
%
|
53.1
|
%
|
|
|
|
|
|
|
|
|
Gross
margin decreased for the three months ended March 29, 2008 compared with the
three months ended March 31, 2007 due to decreased volumes and revenues and a
product mix shift that led to higher production costs. Additionally, gross margins were negatively
impacted by an increase in warranty cost arising from higher return rate from
certain products. Further gross margin
erosion resulted from an increase in inventory write-downs, which was $7.2
million, or 11% of revenue as compared to $2.5 million, or 2.5% of revenue for
the three months ending March 31, 2007.
The higher inventory write-downs were associated with deterioration in
the DRAM memory segment.
Research and Development
|
|
Three Months Ended
|
|
|
|
March 29,
|
|
March 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
(In thousands)
|
|
Research and development
|
|
$
|
16,388
|
|
$
|
14,102
|
|
% of revenues
|
|
24.9
|
%
|
13.8
|
%
|
|
|
|
|
|
|
|
|
Research
and development expenses increased in absolute dollars for the three months
ended March 29, 2008 as compared to the same period in the prior year primarily
due to an increase in personnel costs, new technology, product development
related costs and facility expansion. For the three months ended March 29, 2008,
expenses related to new technology and product development increased $2.0
million, depreciation and facilities and information technology allocations
increased $0.3 million due to new investment in R&D equipment and
facilities expansion and personnel costs increased $0.2 million due to
increased headcount. Stock-based compensation decreased by $0.2 million in the
first three months of fiscal 2008 compared to the same period in fiscal 2007
primarily due to an increase in turnover which resulted in a higher forfeiture
rate used to calculate stock-based compensation expense. We are continuing our
strategic investments in research and development, including the development of
our next generation parallelism architecture and products, fine pitch memory
and logic products, advanced MicroSpring interconnect technology and new
process technologies. We are also making incremental investments in new
technologies and products as we focus on new market opportunities.
Selling, General and Administrative
|
|
Three Months Ended
|
|
|
|
March 29,
|
|
March 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
(In thousands)
|
|
Selling, general and administrative
|
|
$
|
22,658
|
|
$
|
22,928
|
|
% of revenues
|
|
34.4
|
%
|
22.4
|
%
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses decreased in absolute dollars for the three
months ended March 29, 2008 compared to the same periods in the prior year
primarily due to a decrease in expenses related to personnel costs. For the
three months ended March 29, 2008 personnel related costs decreased by
approximately $0.2 million primarily due to the suspension of the key employee
bonus plan and profit sharing, while combined outside legal services incurred
for protecting our intellectual property portfolio, tax services and other
expenses increased by approximately $1.4 million. In addition, stock-based
compensation expense also decreased $1.4 million for the three months ended March 29,
2008 primarily due to an increase in turnover which resulted a in higher forfeiture
rate used to calculate stock-based compensation expense.
21
Restructuring Charge
|
|
Three Months Ended
|
|
|
|
March 29,
|
|
March 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
(In thousands)
|
|
Restructuring charge
|
|
$
|
5,320
|
|
$
|
|
|
% of revenues
|
|
8.1
|
%
|
|
%
|
|
|
|
|
|
|
|
|
In the first quarter of fiscal 2008, in order to better align the company with the market environment, we implemented a cost reduction plan that included reducing our global workforce. We recorded a $5.3 million restructuring charge as a result of the plan which consisted primarily of involuntary employee termination and benefits costs and facility impairment charges related to vacating a manufacturing building in Livermore California. We anticipate that substantially all of the employee related charges will be paid by the end of the second quarter of fiscal 2008 and expect to realize a quarterly cost savings of approximately $4.0 million as a result of the reduced employee related expenses.
Interest Income and Other Income (Expense),
Net
|
|
Three Months Ended
|
|
|
|
March 29,
|
|
March 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
(In thousands)
|
|
Interest income
|
|
$
|
4,875
|
|
$
|
5,444
|
|
% of revenue
|
|
7.4
|
%
|
5.3
|
%
|
|
|
|
|
|
|
Other income (expense)
|
|
$
|
793
|
|
$
|
(119
|
)
|
% of revenues
|
|
1.2
|
%
|
(0.1
|
)%
|
The decrease in interest
income on cash, cash equivalents and marketable securities was primarily a
result of lower interest rates
for the three months ended March 29,
2008 as compared to the first three months ended March 31, 2007. Cash,
cash equivalents, restricted cash and marketable securities increased to $558.0
million at March 29, 2008 compared to $507.8 million at March 31,
2007. Other income for the three months ended March 29, 2008 and March 31,
2007 was mainly comprised of foreign currency gains and losses primarily
related to Japanese Yen.
Provision for Income Taxes
|
|
Three Months Ended
|
|
|
|
March 29,
|
|
March 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
(In thousands)
|
|
Provision (benefit) for income taxes
|
|
$
|
(8,165
|
)
|
$
|
7,367
|
|
Effective tax rate
|
|
(31.2
|
)%
|
32.6
|
%
|
|
|
|
|
|
|
|
|
Our
effective tax rate was 31.2% and 32.6% for the three months ended March 29,
2008 and March 31, 2007, respectively.
The effective tax rate for the three months ended March 29, 2008 is
a benefit compared to a provision for the same period in the prior year
primarily due to a projected pretax loss in the U.S. We believe that our Companys expected U.S.
loss is fully realizable based on sufficient amounts of taxes paid in prior
years for which the Company may file carryback refund claims. We also expect to incur a pre-tax loss in
Singapore for which no tax benefit is recognized, which will reduce the
expected consolidated benefit below the U.S. statutory rate.
Liquidity
and Capital Resources
As
of March 29, 2008, we had $555.7 million in cash, cash equivalents and
marketable securities compared to $570.0 million as of December 29, 2007.
22
Net
cash used in operating activities was $5.6 million for the three months ended March 29,
2008 compared to net cash provided by operating activities of $6.0 million for
the three months ended March 31, 2007.
Net cash used for operating activities was driven by the operating loss
incurred during the three months ended March 29, 2008. The use of cash also was the result of increases
in inventory and a significant decrease in accounts payable and accrued
liabilites offset by a decrease in accounts receivable. Non-cash items,
primarily depreciation and amortization expense, deferred income taxes,
stock-based compensation, and reserves for excess and obsolete inventory also
contributed to the use of cash in operating activities.
Accounts
receivable decreased $12.3 million for the three months ended March 29,
2008 compared with an increase of $18.7 million for the three months ended March 31,
2007. The decrease in accounts receivable was driven by the lower revenues for
the three months ended March 29, 2008. Our days sales outstanding from
receivables, or DSO, was 61 days at March 29, 2008 compared to 43 days at March 31,
2007, respectively. The increase in DSO
is primarily due to the significant decrease and relative linearity in revenue
for the three months ended March 29, 2008 combined with the increased mix
of customers with longer standard payment terms.
Cash
flows used for inventories were $2.9 million and $5.8 million for the three
months ended March 29, 2008 and March 31, 2007, respectively. The cash
flows used for inventories in the first quarter of fiscal 2008 was the result
of raw material purchases based on the expected demand for our products.
Accrued liabilities and accounts payable balance
decreases contributed to a $10.6 million use of operating cash for the three
months ended March 29, 2008. The
decrease in accounts payable was driven by the Companys efforts to control
costs during the period and the decrease in accrued liabilities was due
primarily to the payout of the fiscal 2007 employee performance bonuses,
profit-sharing, and reduced income tax payable offset by an increase for the
restructuring accrual.
Net cash provided by investing activities was $87.7
million for the three months ended March 29, 2008 compared with net cash
used in investing activities of $33.8 million for the three months ended March 31,
2007. Capital expenditures were $11.3
million for the three months ended March 29, 2008 and $14.1 million for
the three months ended March 31, 2007. Cash used in the acquisition of
property and equipment resulted primarily from capital expenditures in support
of factory capacity, service center and information technology system upgrades,
and new product technology. In addition, the liquidation of a significant
portion of the investments in municipal bonds, contributed to net cash provided
by investing activities for the three months ended March 29, 2008.
Net
cash provided by financing activities was $3.3 million for the three months
ended March 29, 2008 compared with $21.4 million for the three months
ended March 31, 2007. Net cash provided by financing activities for the
three months ended March 29, 2008 was primarily attributable to $0.2
million of net proceeds from the exercise of stock options and $3.1 million
received from the January 2008 purchases under the Companys 2002 Employee
Stock Purchase Plan or ESPP. Net cash
provided by financing activities for the three months ended March 31, 2007
was attributable to $13.2 million of net
proceeds from the exercise of stock options and $3.1 million received from ESPP
purchases.
Tax benefits related to the exercise of stock options during the three
months ended March 29, 2008 were $26,000 compared to $5.1 million for the
three months ended March 31, 2007 due to significant decrease in stock
option activity.
We
believe that we will be able to satisfy our working capital requirements for
the next twelve months through cash generated from operations, together with the
liquidity provided by our existing cash, cash equivalents and marketable
securities. Although we believe that we
have sufficient capital to fund our activities for at least the next twelve
months, our future capital requirements may vary materially from those
planned. We anticipate that the amount
of capital we will need in the future will depend on many factors, including
the timing and extent of spending to support product development efforts, the
expansion of sales and marketing activities, the cost of increasing
manufacturing capacity to meet projected demand, including our current global expansion
plans and the requirements of any potential investments in, or acquisitions of,
complementary businesses, products or technologies that we may enter into in
the future. Depending upon our future
capital requirements, we may seek additional equity or debt financing.
Additional funds may not be available on terms favorable to us or at all.
Off-Balance Sheet Arrangements
As
part of our ongoing business, we do not participate in transactions that
generate relationships with unconsolidated entities or financial partnerships,
such as entities often referred to as structured finance or special purpose
entities, which would have been established for the purpose of facilitating
off-balance sheet arrangements or other contractually narrow or limited
purposes. As of March 29, 2008 we are not involved in any such off-balance
sheet arrangements.
23
Recent Accounting Pronouncements
In
April 2008, the Financial Accounting Standards Board (FASB) issued FASB
Staff Position (FSP) No. FAS 142-3, Determination of the Useful Life of
Intangible Assets. This FSP is intended to improve the consistency between the
useful life of a recognized intangible asset under Statement of Financial
Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible
Assets, and the period of expected cash flows used to measure the fair value
of the asset under SFAS No. 141(R), Business Combinations. This FSP is
effective for financial statements issued for fiscal years beginning after December 15,
2008, and interim periods within those years. Early adoption is prohibited.
In
March 2008, the FASB issued SFAS No. 161, Disclosures about
Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133.
SFAS No. 161 amends and expands the disclosure requirements of SFAS No. 133
with the intent to provide users of financial statements with an enhanced
understanding of: 1) how and why an entity uses derivative instruments; 2) how
derivative instruments and related hedged items are accounted for under SFAS No. 133
and its related interpretations and 3) how derivative instruments and related
hedged items affect an entitys financial position, financial performance and
cash flows. This statement is effective for financial statements issued for
fiscal years and interim periods beginning after November 15, 2008, with
early adoption encouraged. We are is currently assessing the impact of the
adoption of SFAS No. 161 on our consolidated financial statements.
In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option
for Financial Assets and Financial LiabilitiesIncluding an amendment of FASB
Statement No. 115. This statement permits entities to choose to measure
many financial instruments and certain other items at fair value.
Entities shall report unrealized gains and losses on items for which the fair
value option has been elected in earnings at each subsequent reporting
date. This statement is effective as of the beginning of an entitys
first fiscal year that begins after November 15, 2007. The adoption
of SFAS No. 159, effective January 1, 2008, did not have a material
impact on our financial position, results of operations or cash flows as we did
not elect the fair value measurement option for any additional financial
instruments or other items.
Effective
December 30, 2007, we adopted SFAS No. 157, Fair Value Measurements.
In February 2008, the FASB issued FASB Staff Position No. FAS 157-2, Effective
Date of FASB Statement No. 157, which provides a one year deferral of the
effective date of SFAS 157 for non-financial assets and non-financial
liabilities, except those that are recognized or disclosed in the financial
statements at fair value at least annually. Therefore, we adopted the
provisions of SFAS 157 with respect to its financial assets and liabilities
only. SFAS No. 157 defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles, and expands
disclosures about fair value measurements. SFAS No. 157 applies under
other accounting pronouncements that require or permit fair value measurements
and does not require any new fair value measurements. The standard describes a
fair value hierarchy based on three levels of inputs, the first two of which are
considered observable and the last unobservable, that may be used to measure
fair value:
·
Level 1 - Quoted prices in active markets for identical assets or
liabilities.
·
Level 2 - Inputs other than Level 1 that are observable, either
directly or indirectly, such as quoted prices for similar assets or
liabilities; quoted prices in markets that are not active; or other inputs that
are observable or can be corroborated by observable market data for
substantially the full term of the assets or liabilities.
·
Level 3 - Unobservable inputs that are supported by little or no market
activity and that are significant to the fair value of the assets or
liabilities.
The adoption of this
statement did not have a material impact on our consolidated results of
operations and financial condition.
Item 3.
Quantitative
and Qualitative Disclosures About Market Risk
Interest
Rate Sensitivity
Our
exposure to market risk for changes in interest rates relates primarily to our
investment portfolio. We invest in a number of securities including U.S. government
securities, U.S. government sponsored enterprises, municipal bonds and money
market funds. We attempt to ensure the safety and preservation of our invested
principal funds by limiting default risk, market risk and reinvestment risk. We
mitigate default risk by investing in high grade investment securities. By
policy, we limit the amount of credit exposure to an issuer, except U.S.
Treasuries and U.S. agencies. We do not use interest rate derivative
instruments to manage interest rate exposures nor do we invest for trading or
speculative purposes. The fair market value of our fixed rate securities may be
adversely impacted by increases in interest rates while income earned on
floating rate securities may decline as a result of decreases in interest
rates. If overall interest rates had fallen by 10% in the first fiscal quarter
of 2008, our as reported interest income would have declined approximately $1.6
million, assuming consistent investment levels.
24
As
of March 29, 2008, all of our investments were in money market accounts,
municipal bonds, U.S. government sponsored enterprises and U.S. government
securities.
Foreign
Currency Exchange Risk
We
conduct certain operations in foreign currencies. We enter into currency
forward exchange contracts to hedge a portion, but not all, of existing foreign
currency denominated amounts. Gains and losses on these contracts are generally
recognized in income. Because the effect of movements in currency exchange
rates on the currency forward exchange contracts generally offsets the related
effect on the underlying items being hedged, these financial instruments are
not expected to subject us to risks that would otherwise result from changes in
currency exchange rates. We do not use derivative financial instruments for
trading or speculative purposes. The Company recognized net gain of $0.3
million for the quarter ended March 29, 2008, from the fluctuation in
foreign exchange rates and the valuation of these hedge contracts in our
financial statements under other expense.
Item 4.
Controls and
Procedures
Evaluation
of Disclosure Controls and Procedures
Our
management, including our Chief Executive Officer and Chief Financial Officer,
evaluated the effectiveness of our disclosure controls and procedures as
defined in Exchange Act Rule 13a-15(e) as of March 29, 2008 in
connection with the filing of this Form 10-Q. Based on that evaluation,
our Chief Executive Officer and Chief Financial Officer concluded that, as of March 29,
2008, in light of the material weakness described below, our disclosure
controls and procedures were not effective to ensure that information we are
required to disclose in reports that we file or submit under the Exchange Act
is recorded, processed, summarized and reported within the time periods specified
in rules and forms of the SEC and is accumulated and communicated to our
management as appropriate to allow timely decisions regarding required
disclosure.
A material weakness is a deficiency, or a combination of deficiencies,
in internal control over financial reporting, such that there is a reasonable
possibility that a material misstatement of the companys annual or interim
financial statements will not be prevented or detected on a timely basis.
The
following material weakness in internal control over financial reporting
existed as of March 29, 2008. We did not maintain effective controls over
the valuation of inventory and the related cost of revenues accounts.
Specifically, we did not maintain effective controls to ensure that the
estimation process to value inventory complied with our companys accounting
policies. This control deficiency resulted in the restatement of our annual and
interim financial statements for 2006 and interim financial statements for the
first and second quarters of 2007 and audit adjustments to our annual financial
statements for fiscal 2007. Additionally, this control deficiency could result
in a misstatement of the inventory and cost of revenues accounts that would
result in a material misstatement of our financial statements that would not be
prevented or detected.
Notwithstanding
the material weakness, our companys financial statements in this Form 10-Q
fairly present, in all material respects, the financial condition, results of
operations and cash flows of our company as of and for the periods presented in
accordance with generally accepted accounting principles in the United States.
Managements Plan for Remediation
We are making progress on the implementation of our managements plan
to remediate the material weakness. The remediation plan addresses the design
of controls and revision of procedures regarding inventory valuation and
includes:
·
Analysis of
changes in the level of excess and obsolete inventory by category,
·
Separate
re-performance of excess and obsolete inventory calculation,
·
Hiring personnel
with requisite experience and providing ongoing training and supervision, and
·
Implementation
of new software functionality for valuing inventory.
25
Changes in Internal Control over Financial Reporting
Our management, including our Chief Executive Officer and Chief
Financial Officer, evaluated our internal
control over financial reporting as defined in Exchange Act Rule 13a-15(f) to
determine whether any changes in our internal control over financial reporting
occurred during the first quarter of fiscal 2008 that materially affected, or
are reasonably likely to materially affect, our internal control over financial
reporting. Based on that evaluation, there have been no such changes during the
first quarter of fiscal 2008.
Limitations on the Effectiveness of Controls
Control systems, no matter how well designed and operated, can provide
only reasonable, not absolute, assurance that the control systems objectives
are being met. Further, the design of any control systems must reflect the fact
that there are resource constraints, and the benefits of all controls must be
considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within our company have been
detected. These inherent limitations include the realities that judgments in
decision making can be faulty and that breakdowns can occur because of simple
error or mistake. Control systems can also be circumvented by the individual
acts of some persons, by collusion of two or more people, or by management
override of the controls. The design of any system of controls is based in part
on certain assumptions about the likelihood of future events, and there can be
no assurance that any design will succeed in achieving its stated goals under
all potential future conditions. Over time, controls may become inadequate
because of changes in conditions or deterioration in the degree of compliance
with policies or procedures.
CEO and CFO Certifications
We
have attached as exhibits to this Form 10-Q the certifications of our
Chief Executive Officer and Chief Financial Officer, which are required in
accordance with the Exchange Act. We recommend that this Item 4 be read in
conjunction with the certifications for a more complete understanding of the
subject matter presented.
PART II.
OTHER INFORMATION
Item 1.
Legal Proceedings
The information relating to Legal Matters set
forth under Note 11 - Commitments and Contingencies of the Notes to Unaudited
Condensed Consolidated Financial Statements of this Form 10-Q is
incorporated herein by reference.
Item 1A.
Risk Factors
In
addition to the other information in this Form 10-Q, you should carefully
consider the risk factors discussed in our Annual Report on Form 10-K for
the year ended December 29, 2007 and the updated risk factors set forth
below in evaluating FormFactor and our business. If any of the identified risks
actually occur, our business, financial condition and results of operations
could suffer, the trading price of our common stock could decline and you may
lose all or part of your investment in our common stock. The risks and
uncertainties described in our Annual Report on Form 10-K and below are
not the only ones we face. Additional risks that we currently do not know about
or that we currently believe to be immaterial may also impair our business
operations.
We disclosed the risk factors below in our Annual
Report on Form 10-K for the year ended December 29, 2007. We have
updated certain of these risk factors and provided an additional risk factor to
reflect changes and events in the first quarter of fiscal 2008 as set forth
below.
Cyclicality
in the semiconductor industry historically has affected our sales and may do so
in the future, and as a result we would experience reduced revenues or
operating results.
The semiconductor industry has historically
been cyclical and is characterized by wide fluctuations in product supply and
demand. From time to time, this industry has experienced significant downturns,
often in connection with, or in anticipation of, maturing product and
technology cycles, excess inventories and declines in general economic
conditions. This cyclicality could cause our operating results to decline
dramatically from one period to the next. For example, our revenues in the
first quarter of fiscal 2008 declined by 45.5% compared to our revenues for the
fourth quarter of fiscal 2007. By way of further example, we expect our
revenues to be substantially lower in the second quarter of fiscal 2008
compared to the first quarter of fiscal 2008 due in significant part to
deteriorating semiconductor market conditions, particularly in the DRAM
segment, and we cannot provide any assurance when semiconductor market
conditions will improve. Our business depends heavily upon the development and
manufacture of new semiconductors, the rate at which semiconductor
manufacturers make transitions to smaller nanometer technology nodes and
implement tooling cycles, the volume of production by semiconductor
manufacturers and the overall financial strength of our customers, which, in
turn, depend upon the current and anticipated market demand for semiconductors
and products, such as personal computers and cell phones, that use
semiconductors. Semiconductor manufacturers generally sharply curtail their
spending, including their equipment spending, during industry downturns and
historically have lowered their spending disproportionately more than the
decline in their revenues. This is particularly true when there is a point
during an industry cycle in which the semiconductor manufacturers costs
related to semiconductor devices approaches or exceeds the sales price of the
devices. As a result, if we are unable to adjust our levels of manufacturing
and human resources or manage our costs and deliveries from suppliers in
response to lower spending by semiconductor manufacturers, our gross margin may
decline and cause us to experience operating losses.
26
We depend upon the sale of our wafer probe cards for
substantially all of our revenues, and the majority of our wafer probe cards
are utilized by semiconductor manufacturers for testing DRAM devices; if we
experience a downturn in demand for our products, our revenues could decline.
We
have historically derived substantially all of our revenues from the sale of
our wafer probe cards to manufacturers of DRAM, flash memory devices, and
microprocessor, chipset and other logic devices. For the three months ended March 29,
2008 and for fiscal year 2007, sales to manufacturers of DRAM devices accounted
for 61.2% and 70.9%, respectively, of our revenues, sales to manufacturers of
flash memory devices accounted for 24.7% and 19.2%, respectively, of our
revenues, and sales to manufacturers of logic devices accounted for 14.2% and
9.8%, respectively, of our revenues.
We anticipate that sales of our wafer probe cards
will represent a substantial majority of our revenues for the foreseeable
future. Our success depends in large part upon the continued acceptance of our
products within these markets and our ability to continue to develop and introduce
new products that meet our customers requirements on a timely basis for these
markets. In particular, to continue to grow our business, we need to further
penetrate the flash memory market and to gain additional market share with
flash memory manufacturers. We also need to successfully qualify and deliver
our DRAM and flash wafer probe card products incorporating our Harmony
architecture. While we have successfully qualified and delivered certain
Harmony-based wafer probe cards which are being used by some of our customers
in commercial volume during the fabrication of semiconductor devices, and
reduced manufacturing lead times, this does not necessarily mean that we have
solved all manufacturing issues for all designs of our Harmony-based products.
To the extent that we are unable to realize cost reductions and manufacturing
efficiencies in the production of our wafer probe cards or if we are not able
to timely deliver our products, our revenues and business operations could be
adversely impacted and our ability to grow could suffer. If chip manufacturers
fail to make architecture, node or technology transitions as we anticipate, or
if anticipated or announced transitions are delayed, it could adversely impact
our revenues and operating results. In addition, we might not be able to
sustain or increase our revenues from sales of our wafer probe cards,
particularly if conditions in the semiconductor market continue to deteriorate
or do not improve or if the market enters into another downturn. Any decrease
in revenues from sales of our wafer probe cards could harm our business more
than it would if we offered a more diversified line of products
We derive a substantial portion of
our revenues from a small number of customers, and our revenues could decline
significantly if any major customer cancels, reduces or delays a purchase of
our products.
A relatively small number of customers has accounted for a significant
portion of our revenues in any particular period. Four customers accounted for 65.1%
of our revenues in the first three months of fiscal 2008, and four customers
accounted for 63.0% of our revenues in fiscal year 2007. In first three months
of fiscal 2008 and for fiscal year 2007, our ten largest customers accounted
for 87.1% and 90.7%, respectively, of our revenues. We anticipate that sales of
our products to a relatively small number of customers will continue to account
for a significant portion of our revenues. The cancellation or deferral of even
a small number of purchases of our products could significantly reduce our
revenues in any particular quarter. Cancellations or deferrals could result
from a downturn in the semiconductor industry, manufacturing delays, quality or
reliability issues with our products, or interruptions to our customers
operations due to fire, natural disasters or other events. Our customers could
cease purchasing our products with short or no notice to us or fail to pay all
or part of an invoice. In some situations, our customers might be able to
cancel orders without a significant penalty. In addition, consolidation in the
semiconductor industry, particularly among manufacturers of DRAM, could reduce
our customer base, lead to lost or delayed sales and reduced demand for our
wafer probe cards and result in pricing pressures. Additionally, certain
customers may not want to rely entirely or substantially on a single wafer
probe card supplier and, as a result, such customers could reduce their
purchases of our wafer probe cards.
If we do not efficiently implement changes to our
business execution structure, our business could continue to decline.
After having gone through an extended period of rapid growth and
expansion over the last several years, our main focus has been on growing
capacity and meeting customer mission-critical needs. During the current downturn within the
semiconductor industry, in general, and in our industry, in particular, we will
focus on reengineering our execution structure to better position us for long-term,
profitable growth. Our business could decline and we might not succeed if we do
not successfully and efficiently implement appropriate changes to our business
execution structure, including placing more decision-making on resources in
geographic territories close to our customers, changing our manufacturing
structure for shorter cycle time and improved customer responsiveness, and
restructuring our research and development group.
If we do
not effectively manage our growth and other changes in our business, our
business might not succeed.
Our rapid growth in recent years has placed
significant demands on our management team, information systems and design,
applications and manufacturing infrastructure. Our ability to continue to grow
successfully and to proactively manage other changes in our business, including
deteriorating semiconductor market conditions and other market challenges,
requires an effective planning, implementation and management process. We must
continue to improve and expand our controls, systems and infrastructure in a timely
and efficient manner, and execute measures for enabling operational
efficiencies, increasing productivity and supporting growth. For example, we
recently announced a global cost reduction plan to bring our operations and
expenses in line with the current market environment. However, the resources
for managing our business and its challenges may not be available when we need
them, or we may not address our companys challenges adequately or in a
27
timely manner, which would limit our growth.
Our controls, systems and infrastructure might not be adequate to support a
growing public company and our global design and manufacturing plan. For
example, if we do not implement scalable information technology systems and
continue to improve our manufacturing processes in a timely manner, we may not
be able to upgrade our accounting and internal control systems, and maintain or
expand our current manufacturing capacity, improve our manufacturing yields, reduce
manufacturing cycle times and expand our design, applications and service
center capabilities globally, which could, in turn, have a negative impact on
our operating results. In addition, if our plans to grow our business involve
the acquisition of businesses, we will need to invest the necessary resources,
and to improve our corporate systems and infrastructure in order to enable the
successful integration of any acquired businesses. If our management fails to
effectively manage our growth or respond to changes in our business, our
business might not succeed.
Because we conduct most of our
business internationally, we are subject to operational, economic, financial
and political risks abroad.
Sales of our products to customers outside the United States have
accounted for a significant part of our revenues. Our international sales as a
percentage of our revenues were 82.1% and 82.2%, respectively, for the three
months ended March 29, 2008 and for fiscal year 2007, respectively.
Additionally, certain of our Korean customers purchase through their North
American subsidiaries. In the future, we expect international sales,
particularly in Europe, Japan, South Korea and Taiwan, to continue to account
for a significant percentage of our revenues. Accordingly, we will be subject
to risks and challenges that we would not otherwise face if we conducted our
business only in the United States. These risks and challenges include:
·
compliance
with a wide variety of foreign laws and regulations;
·
legal
uncertainties regarding taxes, tariffs, quotas, export controls, export
licenses and other trade barriers;
·
political
and economic instability in, or foreign conflicts that involve or affect, the
countries of our customers;
·
difficulties
in collecting accounts receivable and longer accounts receivable payment
cycles;
·
difficulties
in staffing and managing personnel, distributors and representatives;
·
reduced
protection for intellectual property rights in some countries;
·
currency
exchange rate fluctuations, which could affect the value of our assets
denominated in local currency, as well as the price of our products relative to
locally produced products;
·
seasonal
fluctuations in purchasing patterns in other countries; and
·
fluctuations
in freight rates and transportation disruptions.
Any of these factors could harm our existing international operations
and business or impair our ability to continue expanding into international
markets.
28
Item 6.
Exhibits
The
following exhibits are filed herewith:
Exhibit
|
|
|
|
Incorporated by Reference
|
|
Filed
|
Number
|
|
Exhibit Description
|
|
Form
|
|
Date
|
|
Number
|
|
Herewith
|
|
|
|
|
|
|
|
|
|
|
|
10.01+
|
|
Employment
Offer Letter dated November 23, 2007 to Dr. Mario Ruscev
|
|
8-K
|
|
1/7/08
|
|
000-50307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.02+
|
|
Employment
Offer Letter dated March 1, 2008 to Jean Bernard Vernet
|
|
8-K
|
|
3/31/08
|
|
000-50307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.03+
|
|
Separation
Agreement and General Release dated March 20, 2008 with Ronald C. Foster
|
|
8-K
|
|
3/26/08
|
|
000-50307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.04+
|
|
Separation
Agreement and General Release dated April 15, 2008 with Jorge L.
Titinger
|
|
8-K
|
|
4/21/08
|
|
000-50307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31.01
|
|
Certification
of Chief Executive Officer pursuant to 15 U.S.C. Section 7241, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
|
|
X
|
|
|
|
|
|
|
|
|
|
|
|
31.02
|
|
Certification
of Chief Financial Officer pursuant to 15 U.S.C. Section 7241, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
|
|
X
|
|
|
|
|
|
|
|
|
|
|
|
32.01*
|
|
Certification
of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
|
|
X
|
*
This exhibit
shall not be deemed filed for purposes of Section 18 of the Securities
Exchange Act of 1934 or otherwise subject to the liabilities of that section,
nor shall it be deemed incorporated by reference in any filing under the
Securities Act of 1933 or the Securities Exchange Act of 1934, whether made
before or after the date hereof and irrespective of any general incorporation
language in any filings.
+
Indicates a
management contract or compensatory plan or arrangement.
29
SIGNATURE
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
|
FORMFACTOR, INC.
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|
|
|
|
|
|
By:
|
/s/ JEAN B. VERNET
|
|
|
|
|
|
|
|
Jean B. Vernet
|
|
|
|
Chief Financial Officer
|
|
|
|
(Principal
Financial Officer and
Duly Authorized Officer)
|
|
|
|
|
May 8, 2008
|
|
|
|
|
|
|
|
|
30
EXHIBIT
INDEX
Exhibit
|
|
|
|
Incorporated by Reference
|
|
Filed
|
Number
|
|
Exhibit Description
|
|
Form
|
|
Date
|
|
Number
|
|
Herewith
|
|
|
|
|
|
|
|
|
|
|
|
10.01+
|
|
Employment
Offer Letter dated November 23, 2007 to Dr. Mario Ruscev
|
|
8-K
|
|
1/7/08
|
|
000-50307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.02+
|
|
Employment
Offer Letter dated March 1, 2008 to Jean Bernard Vernet
|
|
8-K
|
|
3/31/08
|
|
000-50307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.03+
|
|
Separation
Agreement and General Release dated March 20, 2008 with Ronald C. Foster
|
|
8-K
|
|
3/26/08
|
|
000-50307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.04+
|
|
Separation
Agreement and General Release dated April 15, 2008 with Jorge L.
Titinger
|
|
8-K
|
|
4/21/08
|
|
000-50307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31.01
|
|
Certification
of Chief Executive Officer pursuant to 15 U.S.C. Section 7241, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
|
|
X
|
|
|
|
|
|
|
|
|
|
|
|
31.02
|
|
Certification
of Chief Financial Officer pursuant to 15 U.S.C. Section 7241, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
|
|
X
|
|
|
|
|
|
|
|
|
|
|
|
32.01*
|
|
Certification
of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
|
|
X
|
*
This exhibit
shall not be deemed filed for purposes of Section 18 of the Securities
Exchange Act of 1934 or otherwise subject to the liabilities of that section,
nor shall it be deemed incorporated by reference in any filing under the
Securities Act of 1933 or the Securities Exchange Act of 1934, whether made
before or after the date hereof and irrespective of any general incorporation
language in any filings.
+
Indicates a
management contract or compensatory plan or arrangement.
31
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