Table of
Contents
UNITED
STATES SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark
one)
x
|
QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the
quarterly period ended June 27, 2009
or
o
|
TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the
transition period
from to
Commission file number: 000-50307
FormFactor, Inc.
(Exact name of registrant as specified in its
charter)
DELAWARE
|
|
13-3711155
|
(State
or other jurisdiction of
|
|
(I.R.S.
Employer
|
incorporation
or organization)
|
|
Identification
No.)
|
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 submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of the Regulation S-T (§232.405
of this chapter) during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files).
Yes
o
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
definition of large accelerated filer, accelerated filer and smaller
reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated filer
o
|
|
Accelerated filer
x
|
|
|
|
Non-accelerated filer
o
|
|
Smaller reporting company
o
|
(Do not check if
a smaller reporting company)
|
|
|
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 July 31, 2009, 49,469,534
shares of the registrants common stock, par
value $0.001 per share, were outstanding.
Table of
Contents
FORMFACTOR, INC.
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 27,
2009
INDEX
2
Table of Contents
PART I.
FINANCIAL INFORMATION
Item 1.
Financial
Statements
FORMFACTOR, INC.
CONDENSED CONSOLIDATED STATEMENTS
OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
June 27,
|
|
June 28,
|
|
June 27,
|
|
June 28,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
Revenues
|
|
$
|
31,198
|
|
$
|
52,013
|
|
$
|
58,567
|
|
$
|
117,716
|
|
Cost of revenues
|
|
32,524
|
|
40,912
|
|
63,572
|
|
94,043
|
|
Gross profit (loss)
|
|
(1,326
|
)
|
11,101
|
|
(5,005
|
)
|
23,673
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
13,938
|
|
15,821
|
|
28,047
|
|
32,209
|
|
Selling, general and administrative
|
|
18,263
|
|
22,705
|
|
44,574
|
|
45,363
|
|
Restructuring
|
|
264
|
|
3,223
|
|
7,943
|
|
8,543
|
|
Total operating expenses
|
|
32,465
|
|
41,749
|
|
80,564
|
|
86,115
|
|
Operating loss
|
|
(33,791
|
)
|
(30,648
|
)
|
(85,569
|
)
|
(62,442
|
)
|
Interest income
|
|
762
|
|
3,128
|
|
1,877
|
|
8,003
|
|
Other income (expense), net
|
|
(89
|
)
|
(652
|
)
|
(505
|
)
|
141
|
|
Loss before income taxes
|
|
(33,118
|
)
|
(28,172
|
)
|
(84,197
|
)
|
(54,298
|
)
|
Provision for (benefit from) income taxes
|
|
32,728
|
|
(9,513
|
)
|
19,592
|
|
(17,678
|
)
|
Net loss
|
|
$
|
(65,846
|
)
|
$
|
(18,659
|
)
|
$
|
(103,789
|
)
|
$
|
(36,620
|
)
|
Net loss per share:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(1.33
|
)
|
$
|
(0.38
|
)
|
$
|
(2.11
|
)
|
$
|
(0.75
|
)
|
Diluted
|
|
$
|
(1.33
|
)
|
$
|
(0.38
|
)
|
$
|
(2.11
|
)
|
$
|
(0.75
|
)
|
Weighted-average number of shares used in per share
calculations:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
49,394
|
|
48,835
|
|
49,297
|
|
48,789
|
|
Diluted
|
|
49,394
|
|
48,835
|
|
49,297
|
|
48,789
|
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
Table of Contents
FORMFACTOR, INC.
CONDENSED CONSOLIDATED BALANCE
SHEETS
(In thousands, except share and per share amounts)
(Unaudited)
|
|
June 27,
|
|
December 27,
|
|
|
|
2009
|
|
2008
|
|
ASSETS
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
183,106
|
|
$
|
337,926
|
|
Marketable
securities
|
|
303,712
|
|
184,968
|
|
Accounts
receivable, net of allowances for doubtful accounts of $9,151 at
June 27, 2009 and $4,220 at December 27, 2008
|
|
34,214
|
|
34,127
|
|
Inventories
|
|
18,560
|
|
18,788
|
|
Deferred
tax assets
|
|
7,085
|
|
23,039
|
|
Refundable
income taxes
|
|
14,791
|
|
29,413
|
|
Prepaid
expenses and other current assets
|
|
8,717
|
|
14,702
|
|
Total
current assets
|
|
570,185
|
|
642,963
|
|
Restricted
cash
|
|
680
|
|
680
|
|
Property
and equipment, net
|
|
100,898
|
|
113,813
|
|
Deferred
tax assets
|
|
1,815
|
|
20,580
|
|
Other
assets
|
|
1,248
|
|
7,674
|
|
Total
assets
|
|
$
|
674,826
|
|
$
|
785,710
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
Accounts
payable
|
|
$
|
20,562
|
|
$
|
33,214
|
|
Accrued
liabilities
|
|
16,229
|
|
25,693
|
|
Income
taxes payable
|
|
190
|
|
1,904
|
|
Deferred
revenue
|
|
9,771
|
|
4,946
|
|
Deferred
rent
|
|
455
|
|
452
|
|
Total
current liabilities
|
|
47,207
|
|
66,209
|
|
Long-term
income taxes payable
|
|
6,153
|
|
7,732
|
|
Deferred
rent and other liabilities
|
|
5,424
|
|
5,705
|
|
Total
liabilities
|
|
58,784
|
|
79,646
|
|
Commitments
and contingencies (Note 14)
|
|
|
|
|
|
Stockholders
equity
|
|
|
|
|
|
Preferred
stock, $0.001 par value:
|
|
|
|
|
|
10,000,000
shares authorized; no shares issued and outstanding at June 27,
2009 and December 27, 2008, respectively
|
|
|
|
|
|
Common
stock, $0.001 par value:
|
|
|
|
|
|
250,000,000
shares authorized; 49,467,371 and 49,062,308 shares issued and outstanding at
June 27, 2009 and December 27, 2008, respectively
|
|
49
|
|
49
|
|
Additional
paid-in capital
|
|
616,926
|
|
602,295
|
|
Accumulated
other comprehensive income
|
|
1,058
|
|
1,922
|
|
Retained
earnings (deficit)
|
|
(1,991
|
)
|
101,798
|
|
Total
stockholders equity
|
|
616,042
|
|
706,064
|
|
Total
liabilities and stockholders equity
|
|
$
|
674,826
|
|
$
|
785,710
|
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
Table of Contents
FORMFACTOR, INC.
CONDENSED CONSOLIDATED STATEMENTS
OF CASH FLOWS
(In thousands)
(Unaudited)
|
|
Six Months Ended
|
|
|
|
June 27,
|
|
June 28,
|
|
|
|
2009
|
|
2008
|
|
Cash flows from operating activities:
|
|
|
|
|
|
Net
loss
|
|
$
|
(103,789
|
)
|
$
|
(36,620
|
)
|
Adjustments
to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
Depreciation
and amortization
|
|
15,989
|
|
15,776
|
|
Stock-based
compensation expense
|
|
11,909
|
|
12,811
|
|
Deferred
income tax provision (benefit)
|
|
34,642
|
|
(2,653
|
)
|
Excess
tax benefits from equity based compensation plans
|
|
(437
|
)
|
(127
|
)
|
Provision
for doubtful accounts receivable
|
|
4,931
|
|
489
|
|
Provision
for excess and obsolete inventories
|
|
5,818
|
|
11,846
|
|
Loss
on disposal of property and equipment
|
|
144
|
|
982
|
|
Non-cash
restructuring
|
|
366
|
|
|
|
Changes
in assets and liabilities:
|
|
|
|
|
|
Accounts
receivable
|
|
(4,976
|
)
|
23,449
|
|
Inventories
|
|
(5,545
|
)
|
(7,391
|
)
|
Prepaids
and other current assets
|
|
5,858
|
|
1,911
|
|
Refundable
income taxes
|
|
14,683
|
|
(16,062
|
)
|
Other
assets
|
|
6,389
|
|
224
|
|
Accounts
payable
|
|
(8,252
|
)
|
(5,327
|
)
|
Accrued
liabilities
|
|
(8,752
|
)
|
(8,735
|
)
|
Income
tax payable
|
|
(3,285
|
)
|
(895
|
)
|
Deferred
rent
|
|
(257
|
)
|
(195
|
)
|
Deferred
revenues
|
|
4,821
|
|
2,266
|
|
Net
cash used in operating activities
|
|
(29,743
|
)
|
(8,251
|
)
|
Cash flows from investing activities:
|
|
|
|
|
|
Acquisition
of property and equipment
|
|
(8,753
|
)
|
(20,772
|
)
|
Purchases
of marketable securities
|
|
(287,616
|
)
|
(163,568
|
)
|
Proceeds
from maturities of marketable securities
|
|
149,430
|
|
147,352
|
|
Proceeds
from sales of marketable securities
|
|
18,905
|
|
153,789
|
|
Net
cash provided by (used) in investing activities
|
|
(128,034
|
)
|
116,801
|
|
Cash flows from financing activities:
|
|
|
|
|
|
Proceeds
from issuances of common stock and awards, net
|
|
2,565
|
|
3,453
|
|
Excess
tax benefits from equity based compensation plans
|
|
437
|
|
127
|
|
Net
cash provided by financing activities
|
|
3,002
|
|
3,580
|
|
Effect
of exchange rate changes on cash and cash equivalents
|
|
(45
|
)
|
(186
|
)
|
Net
increase (decrease) in cash and cash equivalents
|
|
(154,820
|
)
|
111,944
|
|
Cash
and cash equivalents, beginning of period
|
|
337,926
|
|
315,232
|
|
Cash
and cash equivalents, end of period
|
|
$
|
183,106
|
|
$
|
427,176
|
|
Supplemental cash flow disclosures:
|
|
|
|
|
|
Purchases
of property and equipment through accounts payable and accruals
|
|
$
|
(5,065
|
)
|
$
|
(9,153
|
)
|
Income
taxes paid (refunded), net
|
|
$
|
(26,576
|
)
|
$
|
|
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
Table of
Contents
FORMFACTOR, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Unaudited)
Note 1 Basis of Presentation
Basis of presentation.
The accompanying unaudited
condensed consolidated interim 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). The
Companys 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 considered
necessary to fairly present the Companys financial position, results of
operations and cash flows have been included. Operating results for the three
and six months ended June 27, 2009 are not necessarily indicative of the
results that may be expected for the year ending December 26, 2009, or for
any other period. The balance sheet at December 27, 2008 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 27,
2008 included in the Companys Annual Report on Form 10-K filed with the
SEC on February 27, 2009.
Fiscal Year
. The Company operates on a 52/53 week fiscal year,
whereby the year ends on the last Saturday of December. Fiscal 2009 will end on
December 26, 2009, and will consist of 52 weeks.
Reclassifications.
Certain prior period balances have been
reclassified to conform to the current financial statement presentation. None
of these reclassifications had an impact on reported net loss for any periods
presented.
Subsequent Events
.
The Company has
performed an evaluation of subsequent events through August 6, 2009, which
is the date the financial statements were issued.
Note 2 Recent
Accounting Pronouncements and Other Reporting Considerations
In June 2009, the
Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 168, The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles (SFAS
168). SFAS 168 establishes the FASB Accounting Standards Codification (the Codification)
as the single source of authoritative nongovernmental U.S. GAAP. The
Codification is effective for interim and annual periods ending after September 15,
2009. The adoption of this standard will not have a material impact on the
Companys financial statements.
In June 2009, the FASB
issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R) (SFAS
167). SFAS 167 is intended to improve financial reporting by providing
additional guidance to companies involved with variable interest entities and
by requiring additional disclosures about a companys involvement in variable
interest entities. This standard is effective for interim and annual periods
ending after November 15, 2009. The adoption of this standard is not
expected to have a material impact on the Companys financial statements.
In June 2009, the FASB
issued SFAS No. 166, Accounting for Transfers of Financial Assets (SFAS
166). SFAS 166 is a revision to SFAS No. 140, Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities, and will
require more information about transfers of financial assets and where companies
have continuing exposure to the risk related to transferred financial assets.
It eliminates the concept of a qualifying special purpose entity, changes the
requirements for derecognizing financial assets, and requires additional
disclosure. This standard is effective for interim and annual periods ending
after November 15, 2009. The adoption of this standard is not expected to
have a material impact on the Companys financial statements.
For the quarter beginning March 29,
2009, the Company adopted FASB Staff Position (FSP) FAS 115-2 and FAS 124-2, Recognition
and Presentation of Other-Than-Temporary Impairments (FSP FAS 115-2). FSP
FAS 115-2 amends the other-than-temporary impairment (OTTI) guidance in U.S.
GAAP to make the guidance more operational and to improve the presentation of
other-than-temporary impairments in a companys financial statements. Prior to
FSP FAS 115-2, if OTTI was determined to exist, the Company recognized an OTTI
charge into earnings in an amount equal to the difference between the
investments amortized cost basis and its fair value as of the balance sheet
date of the reporting period. Under FSP 115-2, if OTTI has been incurred, and
it is more-likely-than-not that the Company will not sell the investment
security
6
Table of Contents
before the recovery of its
amortized cost basis, then the OTTI is separated into (a) the amount
representing the credit loss and (b) the amount related to all other
factors. The amount of the total OTTI related to the credit loss is recognized
in earnings. The amount of the total OTTI related to other factors is
recognized in accumulated other comprehensive income (AOCI). There was no
initial effect of adoption on March 28, 2009.
For the quarter beginning March 29,
2009, the Company adopted FSP FAS 157-4, Determining Fair Value When the Volume
and Level of Activity for the Asset or Liability Have Significantly Decreased
and Identifying Transactions That Are Not Orderly (FSP FAS 157-4). FSP FAS
157-4 provides additional guidance for estimating fair value in accordance with
SFAS 157 when the volume and level of activity for an asset or liability have
significantly decreased. FSP FAS 157-4 also includes guidance on identifying
circumstances that indicate a transaction is not orderly. The adoption of FSP
FAS 157-4 did not have an impact on the Companys consolidated results of
operations or financial condition.
For the quarter beginning March 29,
2009, the Company adopted FSP FAS 107-1 and Accounting Principles Board (APB)
28-1, Interim Disclosures About Fair Value of Financial Instruments (FSP FAS
107-1). FSP FAS 107-1 amends SFAS No. 107, Disclosures about Fair Value
of Financial Instruments, to require disclosures about fair value of financial
instruments in interim financial statements as well as in annual financial
statements and also amends APB Opinion No. 28, Interim Financial
Reporting, to require those disclosures in all interim financial statements.
The adoption of FSP FAS 107-1 did not have an impact on the Companys
consolidated results of operations or financial condition. See Note 4 for
additional disclosures included in accordance with FSP FAS 107-1.
For the quarter beginning March 29,
2009, the Company adopted FASB Statement No. 165, Subsequent Events (SFAS
165). SFAS 165 establishes general standards of accounting for and disclosure
of events that occur after the balance sheet date but before financial
statements are issued or are available to be issued. It requires the disclosure
of the date through which an entity has evaluated subsequent events and the
basis for that datethat is, whether that date represents the date the
financial statements were issued or were available to be issued. This
disclosure should alert all users of financial statements that an entity has
not evaluated subsequent events after that date in the set of financial
statements being presented. Adoption of SFAS 165 did not have an impact on the
Companys consolidated results of operations or financial condition
.
The Emerging Issues Task
Force (EITF) No. 08-1, Revenue Arrangements with Multiple Deliverables,
is expected to modify the objective-and-reliable-evidence-of-fair-value
threshold in EITF Issue No. 00-21, Revenue Arrangements with Multiple
Deliverables. The modification would allow the use of an estimated selling
price for purposes of separating elements included in multiple-element
arrangements and allocating arrangement consideration when neither
vendor-specific objective evidence nor acceptable third-party evidence of the
selling price are available. In
addition, this modification would eliminate the residual method for allocation
of arrangement consideration. If this standard is enacted, it
could alter the timing of how the Company records revenue for future
arrangements. As the standard is not final, the Company cannot currently
predict what the impact of these changes could be on its consolidated financial
statements.
Note 3
Restructuring Charges
The Company accounts for
restructuring and separation costs in accordance with Statement of Financial
Accounting Standards No. 146, Accounting for Costs Associated with Exit
or Disposal Activities (SFAS No. 146).
The Company recorded restructuring charges of $0.3 million and $3.2
million for the three months ended June 27, 2009 and June 28, 2008,
respectively, and $7.9 million and $8.5 million for the six months ended June 27,
2009 and June 28, 2008, respectively. The restructuring plan implemented
in the first quarter of 2009 is discussed in detail below. For a complete
discussion of all restructuring actions that were implemented prior to fiscal
2009, please refer to the Notes to Consolidated Financial Statements included
in the Companys Annual Report on Form 10-K filed on February 27,
2009.
7
Table of
Contents
In the first quarter of
fiscal 2009, the Company implemented a global reorganization and cost reduction
plan (the Q1 2009 Restructuring Plan) designed to lower the Companys cash
breakeven level in order to enable the Company to sustain itself financially in
the current market environment. The Q1 2009 Restructuring Plan extended the
global cost reduction plans implemented during fiscal 2008 and included
workforce reductions of 178 employees spread across all functions of the
organization. The Q1 2009 Restructuring Plan also included other actions such
as the elimination of 24 contractor positions as well as non-replacement of
certain voluntary employee terminations. In accordance with SFAS 146, the
Company recorded $7.7 million in charges for this restructuring plan in the
first quarter of fiscal 2009, of which $7.3 million related to severance and
related benefits and $0.4 million related to write-down of certain assets taken
out of service. The Company incurred approximately $0.3 million
in connection with this restructuring
plan in the second quarter of fiscal 2009
related to severance and
related benefits
.
The
following table summarizes the activity related to the Q1 2009 Restructuring
Plan as of June 27, 2009 (in thousands):
|
|
Employee
Severance and
Benefits
|
|
Property
and Equipment
Write-down
|
|
Contract
Termination
and Other
|
|
Total
|
|
Accrual
at December 27, 2008
|
|
$
|
77
|
|
$
|
|
|
$
|
71
|
|
$
|
148
|
|
Q109
Restructuring charges
|
|
7,332
|
|
366
|
|
(19
|
)
|
7,679
|
|
Cash
payments
|
|
(5,287
|
)
|
|
|
19
|
|
(5,268
|
)
|
Non-cash
settlements
|
|
(217
|
)
|
(366
|
)
|
|
|
(583
|
)
|
Accrual
at March 28, 2009
|
|
1,905
|
|
|
|
71
|
|
1,976
|
|
Q209
Restructuring charges
|
|
250
|
|
|
|
14
|
|
264
|
|
Cash
payments
|
|
(776
|
)
|
|
|
|
|
(776
|
)
|
Accrual
at June 27, 2009
|
|
$
|
1,379
|
|
$
|
|
|
$
|
85
|
|
$
|
1,464
|
|
Restructuring
charges are reflected separately as Restructuring in the Condensed
Consolidated Statements of Operations. The remaining accrual as of June 27
, 2009
relates primarily to severance benefits
which will be paid within the next nine months. As such, the restructuring
accrual is recorded as a current liability within Accrued Liabilities in the
Condensed Consolidated Balance Sheets.
Note 4 Fair Value
The Company adopted SFAS No. 157, Fair Value
Measurements (SFAS 157) as of the beginning of its fiscal 2008 year for its
financial assets and financial liabilities.
In February 2008, 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. The Company adopted SFAS
157 as it relates to nonrecurring fair value measurement requirements for
non-financial assets and liabilities as of the beginning of its 2009 fiscal
year.
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 the quoted prices in
active markets, that are observable either directly or indirectly.
·
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.
8
Table of
Contents
Assets Measured at Fair Value on
a Recurring Basis
The
Company measures and reports certain assets and liabilities at fair value on a
recurring basis, including money market funds, U. S. government securities, municipal
bonds, 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 equivalents and marketable securities) measured at
fair value on a recurring basis as of June 27, 2009 (in thousands):
|
|
Level 1
|
|
Level 2
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
Cash equivalents
|
|
|
|
|
|
|
|
Money
market funds
|
|
$
|
144,660
|
|
$
|
|
|
$
|
144,660
|
|
Agency
securities
|
|
|
|
19,996
|
|
19,996
|
|
Marketable securities
|
|
|
|
|
|
|
|
U.
S. Treasury
|
|
|
|
48,456
|
|
48,456
|
|
Municipal
bonds
|
|
|
|
12,083
|
|
12,083
|
|
Agency
securities
|
|
|
|
243,175
|
|
243,175
|
|
Total
|
|
$
|
144,660
|
|
$
|
323,710
|
|
$
|
468,370
|
|
The Level 1 assets consist of the Companys
money market fund deposits
.
The Level 2 assets consist of the Companys available-for-sale debt
investment portfolio. The Companys investments are priced by pricing vendors
who provided observable inputs for their pricing without applying significant
judgments. Brokers pricing is used mainly when a quoted price is not available,
the investment is not priced by the Companys pricing vendors or when a broker
price is more reflective of fair values in the market in which the investment
trades. The Companys investments are labeled as Level 2 investments
because fair values for these investments are based on similar assets without
applying significant judgments. In addition, all of the Companys investments
have a sufficient level of trading volume to demonstrate that the fair values
used are appropriate for these investments.
9
Table of
Contents
Assets Measured at Fair Value on a Nonrecurring
Basis
The following table presents the Companys asset that
was measured at fair value on a nonrecurring basis during the six months ended June 27,
2009 (in thousands):
|
|
Six Months Ended
|
|
Fair Value Measured Using
|
|
|
|
June 27, 2009
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Asset:
|
|
|
|
|
|
|
|
|
|
Asset
held for sale (included in Prepaids and other current assets)
|
|
$
|
900
|
|
$
|
|
|
$
|
|
|
$
|
900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Level 3 asset consisted of a building held for
sale in Livermore, California. The Company used unobservable inputs to value
the building held for sale reflecting the Companys assumptions that market
participants would use in pricing this asset due to the absence of recent
comparable market transactions and inherent lack of liquidity.
The Companys fair value
processes include controls that are designed to ensure appropriate fair values
are recorded. Such controls include model validation, review of key model
inputs, and analysis of period-over-period fluctuations and independent
recalculation of prices.
Marketable Securities
Marketable securities at June 27, 2009 consisted of the following
(in thousands):
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Market
Value
|
|
U.
S. Treasury
|
|
$
|
63,235
|
|
$
|
231
|
|
$
|
(45
|
)
|
$
|
63,421
|
|
Agency
Securities
|
|
227,625
|
|
600
|
|
(16
|
)
|
228,209
|
|
Obligations
of states and political subdivisions
|
|
12,015
|
|
76
|
|
(9
|
)
|
12,082
|
|
|
|
$
|
302,875
|
|
$
|
907
|
|
$
|
(70
|
)
|
$
|
303,712
|
|
Marketable securities at December 27, 2008 consisted of the
following (in thousands):
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Market
Value
|
|
U.
S. Treasury
|
|
$
|
104,817
|
|
$
|
468
|
|
$
|
|
|
$
|
105,285
|
|
Agency
Securities
|
|
60,943
|
|
836
|
|
(24
|
)
|
61,755
|
|
Obligations
of states and political subdivisions
|
|
17,862
|
|
126
|
|
(60
|
)
|
17,928
|
|
|
|
$
|
183,622
|
|
$
|
1,430
|
|
$
|
(84
|
)
|
$
|
184,968
|
|
The Company typically invests in highly-rated securities with low
probabilities of default. The Companys investment policy requires investments
to be rated single-A or better, limits the types of acceptable investments,
concentration as to security holder and duration of the investment. The net
unrealized losses on the Companys investments during the three and six months
ended June 27, 2009 were caused primarily by changes in interest rates.
When evaluating the investments for other-than-temporary impairment, the
Company reviews factors such as the length of time and extent to which fair
value has been below the amortized cost basis, review of current market
liquidity, interest rate risk, the financial condition of the issuer, as well
as credit rating downgrades. The Company believes that the unrealized losses
are not other-than-temporary. The Company does not have a foreseeable need to
liquidate the portfolio and anticipates recovering the full cost of the
securities either as market conditions improve, or as the securities mature.
Contractual maturities of marketable securities as of June 27,
2009 were as follows (in thousands):
|
|
Amortized
Cost
|
|
Market
Value
|
|
Due
in one year or less
|
|
$
|
266,958
|
|
$
|
267,346
|
|
Due
after one year to three years
|
|
35,917
|
|
36,366
|
|
|
|
$
|
302,875
|
|
$
|
303,712
|
|
10
Table of
Contents
Realized gains on sales and maturities of marketable securities were
immaterial for the three and six months ended June 27, 2009. Realized
gains on sales and maturities of marketable securities were immaterial for the
three months ended June 28, 2008 and were $0.5 million for the six months
ended June 28, 2008.
Note 5 Allowance for Doubtful Accounts
A majority of the Companys
trade receivables are derived from sales to large multinational semiconductor
manufacturers throughout the world. In order to monitor potential credit
losses, the Company performs ongoing credit evaluations of its customers
financial condition. An allowance for doubtful accounts is maintained for
probable credit losses based upon the Companys assessment of the expected
collectibility of all accounts receivable. The allowance for doubtful accounts
is reviewed on a quarterly basis to assess the adequacy of the allowance. The
Company takes into consideration (1) any circumstances of which the
Company is aware of a customers inability to meet its financial obligations;
and (2) its judgments as to prevailing economic conditions in the industry
and their impact on its customers. If circumstances change, and the financial condition
of its customers are adversely affected and they are unable to meet their
financial obligations to the Company, the Company may need to take additional
allowances, which would result in an increase in the Companys net loss.
The Company recorded a
provision for doubtful accounts of $5.2 million in the first quarter of fiscal
2009 primarily due to the heightened risk of non-payment of accounts receivable
by certain customers facing financial difficulty. The Company recorded a
reduction to provision for doubtful accounts of $0.3 million in the second
quarter of fiscal 2009. The allowance for doubtful accounts consisted of the
following activity for the three and six months ended June 27, 2009 (in
thousands):
|
|
Allowance for
Doubtful
Accounts Receivable
|
|
Balance
at December 27, 2008
|
|
$
|
4,220
|
|
Additions/(reductions)
to provision
|
|
5,246
|
|
Deductions
|
|
|
|
Balance
at March 28, 2009
|
|
9,466
|
|
Additions/(reductions)
to provision
|
|
(315
|
)
|
Deductions
|
|
|
|
Balance
at June 27, 2009
|
|
$
|
9,151
|
|
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. Provision for estimated excess
and obsolete inventories 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.
The Company designs,
manufactures and sells a fully custom product into a market that has been
subject to cyclicality and significant demand fluctuations. Probe cards are
complex products, custom to a specific chip design and must be delivered on
short lead-times. Probe cards are manufactured in low volumes; therefore,
material purchases are often subject to minimum purchase order quantities in
excess of the actual demand. It is not uncommon for the Company 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 the Companys wafer probe cards. These factors make inventory valuation
adjustments part of the Companys normal recurring cost of revenue. Excess and
obsolete inventory write downs were $5.8 million, and $11.8 million
for the six months ended June 27, 2009, and June 28, 2008,
respectively. The Company retains a portion of the excess inventory until the
customers design is discontinued. The inventory may be used to satisfy
customer warranty obligations.
When the Companys products have been delivered, but
the revenue associated with that product is deferred because the related revenue
recognition criteria have not been met, the Company defers the related
inventory costs. The deferred inventory costs do not exceed the deferred
revenue amounts.
11
Table of Contents
Inventories consisted of the
following (in thousands):
|
|
June 27,
|
|
December 27,
|
|
|
|
2009
|
|
2008
|
|
Raw
materials
|
|
$
|
1,680
|
|
$
|
2,147
|
|
Work-in-progress
|
|
4,874
|
|
7,120
|
|
Finished
goods:
|
|
|
|
|
|
Deferred
cost of revenue
|
|
5,861
|
|
1,765
|
|
Manufactured
finished goods
|
|
6,145
|
|
7,756
|
|
|
|
$
|
18,560
|
|
$
|
18,788
|
|
Note 7
Warranty
The Company offers
warranties on its products 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 Condensed Consolidated Statements of Operations as a
cost of revenues.
A reconciliation of the
changes in the Companys warranty liability (included in accrued liabilities in
the Condensed Consolidated Balance Sheets) is as follows (in thousands):
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
June 27,
|
|
June 28,
|
|
June 27,
|
|
June 28,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
Warranty
accrual beginning balance
|
|
$
|
914
|
|
$
|
2,303
|
|
$
|
1,098
|
|
$
|
1,383
|
|
Accrual
for warranties issued during the period
|
|
(200
|
)
|
648
|
|
(28
|
)
|
2,488
|
|
Settlements
made during the period
|
|
(80
|
)
|
(1,471
|
)
|
(436
|
)
|
(2,391
|
)
|
Warranty
accrual ending balance
|
|
$
|
634
|
|
$
|
1,480
|
|
$
|
634
|
|
$
|
1,480
|
|
Note 8 Property and Equipment
Property and equipment
consisted of the following (in thousands):
|
|
Useful Life
(in years)
|
|
June 27,
2009
|
|
December 27,
2008
|
|
Machinery
and equipment
|
|
5 to 7
|
|
112,958
|
|
109,808
|
|
Computer
equipment and software
|
|
3 to 5
|
|
28,741
|
|
28,378
|
|
Furniture
and fixtures
|
|
5
|
|
7,041
|
|
6,860
|
|
Leasehold
improvements
|
|
1 to 15
|
|
70,438
|
|
70,699
|
|
|
|
|
|
219,178
|
|
215,745
|
|
Less:
Accumulated depreciation and amortization
|
|
|
|
(132,499
|
)
|
(116,900
|
)
|
|
|
|
|
86,679
|
|
98,845
|
|
Construction-in-progress
|
|
|
|
14,219
|
|
14,968
|
|
|
|
|
|
$
|
100,898
|
|
$
|
113,813
|
|
|
|
|
|
|
|
|
|
|
|
In fiscal 2007, as part of
its global manufacturing plan, the Company entered into a land lease offer
agreement to establish a manufacturing facility in Singapore. During fiscal
2008, the Company decided not to proceed with the construction of the new
manufacturing facility at this proposed site in Singapore. Accordingly in the
first quarter of fiscal 2009, the Company entered into a contract for the early
termination of the land lease offer agreement in Singapore and received
$6.7 million in exchange for surrendering to the lessor the lease offer
and related land.
12
Table of
Contents
Note 9 Comprehensive loss
Comprehensive loss includes
foreign currency translation adjustments and unrealized gains (losses) 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
loss were as follows (in thousands):
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
June 27,
|
|
June 28,
|
|
June 27,
|
|
June 28,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
Net
loss
|
|
$
|
(65,846
|
)
|
$
|
(18,659
|
)
|
$
|
(103,789
|
)
|
$
|
(36,620
|
)
|
Unrealized
loss on investments, net of taxes
|
|
(151
|
)
|
(571
|
)
|
(564
|
)
|
(835
|
)
|
Cumulative
translation adjustments
|
|
359
|
|
(554
|
)
|
(300
|
)
|
226
|
|
Other
Comprehensive income (loss)
|
|
208
|
|
(1,125
|
)
|
(864
|
)
|
(609
|
)
|
Comprehensive
Loss
|
|
$
|
(65,638
|
)
|
$
|
(19,784
|
)
|
$
|
(104,653
|
)
|
$
|
(37,229
|
)
|
Components of accumulated
other comprehensive income were as follows (in thousands):
|
|
June 27,
|
|
December 27,
|
|
|
|
2009
|
|
2008
|
|
Unrealized
gains and losses on investments, net of tax
|
|
$
|
516
|
|
$
|
1,080
|
|
Foreign
currency translation adjustments
|
|
542
|
|
842
|
|
Accumulated
other comprehensive income
|
|
$
|
1,058
|
|
$
|
1,922
|
|
Note 10 Stockholders Equity
Stock
Option Plans
The Company has three equity
incentive plans: Incentive Option Plan and Management Incentive Option Plan
(together, the Prior Plans), and 2002 Equity Incentive Plan (2002 Plan),
which became effective in June 2002. Upon the effectiveness of the 2002
Plan, the Company ceased granting any equity awards under the Prior Plans,
although forfeited, repurchased, cancelled or terminated Prior Plan shares are
transferred to the 2002 Plan.
13
Table of Contents
Stock option activity under
the Prior Plans and the 2002 Plan during the six months ended June 27,
2009 is set forth below:
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
Aggregate
|
|
|
|
Options
|
|
Weighted Average
|
|
Contractual
|
|
Intrinsic
|
|
|
|
Outstanding
|
|
Exercise Price
|
|
Life
in Years
|
|
Value
|
|
Balance
at December 27, 2008
|
|
6,686,820
|
|
$
|
27.36
|
|
|
|
|
|
Options
granted
|
|
12,500
|
|
15.25
|
|
|
|
|
|
Options
exercised
|
|
(42,498
|
)
|
8.76
|
|
|
|
|
|
Options
cancelled:
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
(220,130
|
)
|
32.86
|
|
|
|
|
|
Expired
|
|
(25,434
|
)
|
38.42
|
|
|
|
|
|
Balance
at March 28, 2009
|
|
6,411,258
|
|
27.23
|
|
4.65
|
|
$
|
9,061,934
|
|
Options
granted
|
|
327,500
|
|
17.11
|
|
|
|
|
|
Options
exercised
|
|
(104,794
|
)
|
7.85
|
|
|
|
|
|
Options
cancelled:
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
(243,520
|
)
|
37.71
|
|
|
|
|
|
Expired
|
|
(233,705
|
)
|
30.39
|
|
|
|
|
|
Balance
at June 27, 2009
|
|
6,156,739
|
|
$
|
26.49
|
|
4.66
|
|
$
|
7,180,708
|
|
|
|
|
|
|
|
|
|
|
|
Vested
and expected to vest at June 27, 2009
|
|
5,795,389
|
|
$
|
26.55
|
|
4.59
|
|
$
|
7,070,283
|
|
|
|
|
|
|
|
|
|
|
|
Ending
Exercisable at June 27, 2009
|
|
4,375,847
|
|
$
|
25.96
|
|
4.28
|
|
$
|
6,806,348
|
|
The weighted average
grant-date fair value of options granted during the three and six months ended June 27,
2009 was $7.82 per share and $7.81 per share, respectively. The intrinsic value
of option exercises during the three and six months ended June 27, 2009
was $1.2 million and $1.5 million, respectively. Cash received from stock
option exercises during the three and six months ended June 27, 2009 was
$0.8 million and $1.2 million, respectively and, the gross tax benefit realized
by the Company was approximately $1.7 million and $3.7 million for the three
and six months ended June 27, 2009, respectively.
14
Table of
Contents
Restricted
Stock Units
Activity of the restricted
stock units under the 2002 Plan during the six months ended June 27, 2009
is set forth below:
|
|
|
|
Weighted
|
|
|
|
|
|
Average Grant
|
|
|
|
Units
|
|
Date Fair Value
|
|
Restricted
stock units at December 27, 2008
|
|
583,865
|
|
$
|
19.92
|
|
Awards
granted
|
|
25,300
|
|
14.90
|
|
Awards
released
|
|
(117,307
|
)
|
20.10
|
|
Awards
cancelled
|
|
(35,923
|
)
|
18.87
|
|
Restricted
stock units at March 28, 2009
|
|
455,935
|
|
19.65
|
|
Awards
granted
|
|
686,190
|
|
17.13
|
|
Awards
released
|
|
(31,730
|
)
|
20.87
|
|
Awards
cancelled
|
|
(13,432
|
)
|
19.18
|
|
Restricted
stock units at June 27, 2009
|
|
1,096,963
|
|
$
|
18.05
|
|
Note 11
Stock-Based Compensation
The Company applies the
provisions of SFAS No. 123(R), using the modified prospective transition
method. SFAS 123(R) requires companies to recognize the cost of
employee services received in exchange for awards of equity instruments based
upon the grant-date fair value of those awards.
The table below shows the
stock-based compensation charges included in the Condensed Consolidated
Statement of Operations (in thousands):
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
June 27,
|
|
June 28,
|
|
June 27,
|
|
June 28,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
Stock-based
compensation expense included in:
|
|
|
|
|
|
|
|
|
|
Cost
of revenues
|
|
$
|
935
|
|
$
|
1,189
|
|
$
|
1,693
|
|
$
|
2,547
|
|
Research
and development
|
|
1,449
|
|
1,601
|
|
2,438
|
|
2,754
|
|
Selling,
general and administrative
|
|
4,738
|
|
3,758
|
|
7,562
|
|
6,887
|
|
Restructuring
|
|
|
|
146
|
|
216
|
|
623
|
|
Total
stock-based compensation
|
|
7,122
|
|
6,694
|
|
11,909
|
|
12,811
|
|
Tax
effect on stock-based compensation
|
|
(2,400
|
)
|
(2,210
|
)
|
(4,018
|
)
|
(3,831
|
)
|
Total
stock-based compensation, net of tax
|
|
$
|
4,722
|
|
$
|
4,484
|
|
$
|
7,891
|
|
$
|
8,980
|
|
Stock-based compensation
expense for the three and six months ended June 27, 2009 includes
$2,477,000 resulting from the modification and acceleration of the vesting of a
portion of the options awarded to the Companys
founder and former
Executive Chairman of the Board of Directors
in conjunction with his
separation agreement and general release. Stock-based compensation expense for
the six months ended June 28, 2008 includes approximately $256,000 in
stock-based compensation expense resulting from the modification and
acceleration of the vesting of a portion of the Companys former Chief
Financial Officers stock options in conjunction with his separation agreement
and general release and approximately $287,000 in stock-based compensation
expense resulting from the acceleration of the vesting of a portion of the
Companys former Senior Vice President, Product Business Groups restricted
stock units in conjunction with his separation agreement and general release.
15
Table of Contents
Stock Options
The following
weighted-average assumptions were used in the estimated grant-date fair value
calculations for stock options:
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
June 27,
|
|
June 28,
|
|
June 27,
|
|
June 28,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
Stock Options:
|
|
|
|
|
|
|
|
|
|
Dividend
yield
|
|
|
|
|
|
|
|
|
|
Expected
volatility
|
|
53.3
|
%
|
53.5
|
%
|
53.4
|
%
|
53.3
|
%
|
Risk-free
interest rate
|
|
1.68
|
%
|
2.64
|
%
|
1.68
|
%
|
2.99
|
%
|
Expected
term (in years)
|
|
4.67
|
|
4.75
|
|
4.67
|
|
4.75
|
|
Employee Stock Purchase Plan
During the six months ended June 27,
2009 and June 28, 2008, 154,145 shares and 150,410 shares, respectively,
were issued under the 2002 Employee Stock Purchase Plan (ESPP).
Unrecognized Compensation Costs
At June 27, 2009, the unrecognized stock-based
compensation, adjusted for estimated forfeitures, was as follows (in
thousands):
|
|
|
|
Average Expected
|
|
|
|
Unrecognized
|
|
Recognition Period
|
|
|
|
Expense
|
|
in years
|
|
Stock
options
|
|
$
|
20,063
|
|
1.45
|
|
Restricted
stock units
|
|
13,064
|
|
3.2
|
|
Employee
Stock Purchase Plan
|
|
700
|
|
0.8
|
|
Total
unrecognized share-based compensation expense
|
|
$
|
33,827
|
|
|
|
Note 12 Net Loss per Share
Basic net (loss) per share
is computed by dividing net (loss) by the weighted-average number of common
shares outstanding for the period. Diluted net (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.
Diluted loss per share for the three and
six months ended June 27, 2009 and June 28, 2008 were based only on
the weighted-average number of shares outstanding during that period as the
inclusion of any common stock equivalents would have been anti-dilutive.
16
Table of Contents
A reconciliation of the
numerator and denominator used in the calculation of basic and diluted net
(loss) per share follows (in thousands):
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
June 27,
2009
|
|
June 28,
2008
|
|
June 27,
2009
|
|
June 28,
2008
|
|
|
|
(In thousands)
|
|
Basic net loss per share
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(65,846
|
)
|
$
|
(18,659
|
)
|
$
|
(103,789
|
)
|
$
|
(36,620
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
|
Weighted
average common stock outstanding
|
|
49,394
|
|
48,835
|
|
49,297
|
|
48,789
|
|
Diluted net loss per share
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(65,846
|
)
|
$
|
(18,659
|
)
|
$
|
(103,789
|
)
|
$
|
(36,620
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
|
Weighted-average
shares used in computing basic net loss per share
|
|
49,394
|
|
48,835
|
|
49,297
|
|
48,789
|
|
Add
stock options, restricted stock, ESPP, warrants and common stock subject to
repurchase
|
|
|
|
|
|
|
|
|
|
Weighted
average shares used in computing diluted net loss per share
|
|
49,394
|
|
48,835
|
|
49,297
|
|
48,789
|
|
The following table sets forth the weighted-average of
all potentially dilutive securities excluded from the computation in the table
above because their effect would have been antidilutive:
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
June 27,
|
|
June 28,
|
|
June 27,
|
|
June 28,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
Options
to purchase common stock
|
|
5,373
|
|
7,021
|
|
5,475
|
|
6,981
|
|
Restricted
stock units
|
|
31
|
|
46
|
|
|
|
38
|
|
Employee
Stock Purchase Plan
|
|
98
|
|
1,536
|
|
98
|
|
913
|
|
Total
potentially dilutive securities
|
|
5,502
|
|
8,603
|
|
5,573
|
|
7,932
|
|
Note 13 Income
Taxes
The Company recognized an income tax provision of
$32.7 million and $19.6 million for the three months and six months ended June 27,
2009, respectively, despite losses before taxes. The provision is primarily due
to a valuation allowance of $44.7 million, which includes excess tax benefits
recognized during the second quarter of fiscal 2009 and prior quarters, against
the Companys Federal and state deferred tax assets in accordance with SFAS No. 109,
Accounting for Income Taxes. The valuation allowance was recorded at the end
of the second quarter of 2009 to reduce certain Federal and state net deferred
tax assets to their anticipated realizable value. The remaining realizable
value was determined by evaluating the potential to recover the value of these
assets through the utilization of loss carrybacks.
SFAS 109 requires the consideration of a valuation
allowance to reflect the likelihood of realization of deferred tax assets.
Significant management judgment is required in determining any valuation
allowance recorded against deferred tax assets. In evaluating the ability
to recover deferred tax assets, the Company considered available positive and
negative evidence giving greater weight to its recent cumulative losses and its
ability to carryback losses against prior taxable income and lesser weight to
its projected financial results due to the challenges of forecasting future
periods. The Company also considered, commensurate with its objective
verifiability, the forecast of future taxable income including the reversal of
temporary differences and the implementation of feasible and prudent tax
planning strategies. The Company performed this evaluation as of the year
ended December 27, 2008 and the three months ended March 28,
2009. At that time the Company continued to have sufficient positive
evidence, primarily a cumulative profits position, the ability to carryback
losses against prior taxable income and an expectation of improving operating
results, showing a valuation allowance was not required. At the end of
the second quarter of 2009, changes in previously anticipated expectations has
necessitated a valuation allowance against the excess tax benefits recognized
in this quarter and prior quarters since they are no longer more likely than
not realizable. Under current tax laws, this valuation allowance will not
limit the Companys ability to utilize Federal and state deferred tax assets
provided it can generate sufficient future taxable income.
17
Table of Contents
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 $10,000 and
$53,000 for the three months ended June 27, 2009 and June 28, 2008,
respectively, and $130,000 and $75,000 for the six months ended June 27,
2009 and June 28, 2008, respectively. As of June 27, 2009, the
Company had approximately $443,000 of interest and zero penalties related to
uncertain tax positions.
The amount of income taxes the Company pays is
subject to ongoing audits by Federal, state and non-U.S. tax authorities which
might result in proposed assessments. The Companys estimate for the potential
outcome for any uncertain tax issue is judgmental in nature. However, the Company
believes that it has adequately provided for any reasonably foreseeable outcome
related to those matters. The Companys future results may include favorable or
unfavorable adjustments to its estimated tax liabilities in the period the
assessments are made or resolved or when statutes of limitation on potential
assessments expire. As of June 27, 2009, changes to the Companys
uncertain tax positions in the next 12 months, that are reasonably possible,
are not expected to have a significant impact on its 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 currently under examination by the State of
California Franchise Tax Board for fiscal years 2004 and 2005.
18
Table of
Contents
Note 14 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. 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 June 27, 2009.
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 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 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 the fiscal quarter ended June 27,
2009, 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 initiated patent infringement litigation in the United
States against Phicom Corporation, a Korea corporation, and its U.S.
subsidiary, both collectively Phicom, and against Micronics
Japan Co., Ltd., a Japan corporation, and its U.S. subsidiary, both
collectively Micronics Japan. 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 adding two additional patents to the litigationU.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 answered the complaint and the amended
complaint by denying infringement, alleging defenses and asserting
counterclaims seeking adjudications on the validity, infringement and
enforceability of the Companys 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 answered the complaint by denying infringement,
alleging defenses and asserting counterclaims seeking adjudications on the
validity, infringement and enforceability of the Companys 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, or ITC, which is described below.
On or about November 13,
2007, the Company filed a complaint with the ITC seeking institution of a
formal investigation by the ITC into the activities of Micronics Japan and
Phicom. The requested investigation as filed encompassed 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. The ITC complaint 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. The asserted patents currently in the investigation are
U.S. Patent Nos. 5,994,152, 6,509,751, 6,615,485, 6,624,648 and 7,225,538.
19
Table of Contents
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) was originally referred to the Honorable Theodore R. Essex, an ITC
administrative law judge, and in July 2008 was reassigned to the Honorable
Charles E. Bullock, an ITC administrative law judge, who will make an initial
determination as to whether there is a violation of Section 337; that
initial determination is subject to review by the full ITC Commission, the
Commission. On or about January 23, 2009, the administrative law judge,
after a September 2008 hearing, issued a claim construction ruling
interpreting and defining terms of certain of the claims of the
patents-in-suit. On or about January 28, 2009, the Company voluntarily
withdrew its allegations to the extent that they encompassed its U.S. Patent No. 7,168,162,
and on or about February 13, 2009, the administrative law judge issued an
initial determination holding invalid the asserted claims of the Companys U.S.
Patent No. 6,624,648, after finding as part of the claim construction
ruling that one of the terms in the asserted claims of that patent is
indefinite. The Company appealed that initial determination of invalidity to
the Commission on or about February 18, 2009. The Commission agreed to review the initial
determination and a decision is expected within 30-60 days of the date of
filing this Form 10-Q.
The scheduled
hearing relating to the Companys U.S. Patent Nos. 5,994,152, 6,509,751,
6,615,485, and 7,225,538 was conducted from February 23, 2009 through March 6,
2009. The administrative law judge issued a decision, termed an Initial
Determination, on June 29, 2009. The Initial Determination is directed to
four FormFactor patents: 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, and 7,225,538, entitled Resilient Contact
Structures Formed and Then Attached to a Substrate. The Initial Determination
found all of the asserted claims of U.S. Patent Nos. 6,509,751, 6,615,485 and
7,225,538 valid and enforceable, and all but one of the asserted claims of U.S.
Patent No. 5,994,152 valid and all of the asserted claims
enforceable. The Initial Determination
did not find infringement of any of the asserted claims, and therefore did not
find a violation of Section 337.
FormFactor,
Micronics Japan and Phicom filed additional briefing to the Commission seeking
review of parts of the ALJs Initial Determination.
The Commission can accept, reject or modify any of the
ALJs recommendations. The Commission is
expected to announce which aspects of the recommendations it will review on or
before August 13, 2009, and for those parts of the Initial Determination
that are reviewed by the Commission, a ruling, termed the Final Determination,
is scheduled to be issued by October 29, 2009. The Final Determination, which is an ITC
remedial order in Section 337 cases, is effective when issued and becomes
final 60 days after issuance, subject to Presidential review.
In addition to the
United States litigations, the Company also initiated actions in Seoul, South
Korea against Phicom. In 2004 the Company filed two actions in Seoul Southern
District Court, located in Seoul, South Korea, against Phicom 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 and
seeking injunctive relief. These actions are all pending,
on appeal to
the High Court in Seoul as (i) on April 18, 2008, the Seoul Southern
District Court issued a ruling that dismissed the Companys complaint as it
related to Korean Patent Nos. 252,457 and 324,064, finding certain claims of
Patent Nos. 252,457 and 324,064 were invalid, and that one of the claims of
each of the patents was not infringed by Phicom, (ii) in July 2008,
the Seoul Central District Court dismissed the Companys complaint related to
Korean Patent No. 252,457, and (iii) on November 27, 2008, the
Seoul Southern District Court dismissed the Companys complaint related to
Korean Patent Nos. 278,342 and 399,210. The Company did not appeal the
judgment on the injunctive relief request related to Korean Patent No. 252,457
filed in the Seoul Central District.
20
Table of
Contents
In response to the
Companys initiation of the infringement actions in Korea, 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 Southern 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. In June 2008, the Korea Supreme Court
reversed the Patent Court ruling and finding invalid certain claims of the
Companys Korean Patent No. 252,457 and remanding the case for further
trial to the Patent Court.
Additionally, one
or more third parties have initiated challenges in the U.S. and foreign patent
offices against certain of the above and other of the Companys patents. These
actions include re-examination proceedings filed in the U.S. Patent and
Trademark Office against certain of the Companys U.S. Patents that are at
issue in the ITC investigation, proceedings 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 June 27, 2009. The
Company will incur material attorneys fees in prosecuting and defending the
various identified actions.
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 then officers, including one former officer who was
a director at the time of filing, 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 claimed 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. On July 25, 2008, the court granted the
defendants motion to dismiss the Consolidated Amended Complaint with leave to
amend. On August 22, 2008 the designated lead plaintiffs filed a Second
Amended Complaint. The Second Amended Complaint also alleged violations of
Sections 10(b) and 20(a), and Rule 10b-5 of the Securities
Exchange Act of 1934. The plaintiffs again claimed that defendants knowingly
issued materially false and misleading statements regarding the Companys
business and financial results prior to the restatement, as well as regarding
the development of the Harmony product line. Plaintiffs sought to recover
unspecified monetary damages, equitable relief and attorneys fees and costs.
Defendants filed a motion to dismiss the Second Amended Complaint on October 6,
2008, and a hearing on the motion was held on February 6, 2009. On July 14, 2009, the court issued a
ruling granting the Companys and the other defendants motion to dismiss the
second amended complaint without leave to amend. On July 28, 2009, plaintiffs filed a
Motion to Alter or Amend the Judgment and to Uphold a Revised, Narrowed Second
Amended Complaint. The revised complaint
does not contain the accounting and restatement allegations that were included
in the Second Amended Complaint but asks the Court to uphold only the
Harmony-related allegations. The hearing
on the Motion to Alter or Amend the Judgment is currently scheduled for September 11,
2009.
Plaintiffs will
have thirty days from the Courts ruling on the Motion to Alter or Amend the
Judgment to file an appeal with the Court of Appeals for the Ninth Circuit.
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 June 27, 2009.
21
Table of
Contents
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 then 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 to be filed
30 days after the United States District Court in the stockholder class
action enters a final ruling on the class action plaintiffs Motion to Alter or
Amend the Judgment in that action.
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 June 27,
2009.
Commercial Litigation
On February 20,
2009, the Company filed a complaint for breach of contract, common counts,
account stated and injunctive relief against Spansion, LLC, a Delaware
limited liability company (Spansion), in the state superior court located in
Santa Clara County, California. The complaint alleges that Spansion, in breach
of Spansions obligations under a purchase agreement entered into by the
Company and Spansion, has failed to pay the Company for probe cards that the
Company designed, developed and manufactured pursuant to several purchase
orders placed by Spansion with the Company pursuant to the agreement. The
complaint states that as of February 13, 2009, Spansion owed the Company
$8,094,533 for probe cards delivered by the Company and not paid for by
Spansion. In the complaint, the Company is seeking (i) payment of at least
$8,094,533, (ii) a temporary protective order and an injunction enjoining
Spansion from assigning or in any way divesting itself of any monies that the
Company believes Spansion received from a certain third party entity, (iii) a
prejudgment writ of attachment in favor of the Company over Spansions
corporate assets and property, (iv) costs and (v) attorneys
fees. Prior to making any appearance or
filing any answer in the action, Spansion filed for protection under Chapter 11
of the Bankruptcy Laws of the United States, which served to stay the Companys
complaint against Spansion. The Company
has not recognized $1.4 million of revenue related to shipments to Spansion and
has reserved the remaining $6.7 million of the outstanding receivable from
Spansion as of the end of the second quarter of fiscal 2009.
The Company
believes that the factual allegations and circumstances underlying the legal
proceedings in this Note 14 filed against the Company are without merit. The
Company also believes that it does not have a material monetary damages
exposure in these legal proceedings that would individually or in the aggregate
have a material adverse effect on its financial condition, liquidity or results
of operations; however, these legal proceedings have been costly and it is
possible the Company will incur significant, and possibly material, attorneys
fees, which may not be covered by its insurance policies. These legal
proceedings may also divert the Companys managements time and attention away
from business operations, which could prove to be disruptive to the Companys
business operations. In addition, an unfavorable outcome or settlement of these
proceedings, particularly if it is not covered by or exceeds the Companys
insurance coverage, could individually or in the aggregate adversely impact the
Companys financial condition, liquidity or results of operations.
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 liabilities.
These arrangements include indemnities in favor of customers in the event that
the Companys wafer probe cards infringe a third partys intellectual property
and the Companys lessors in connection with facility leasehold liabilities
that the Company may cause. In addition, the Company has entered into
indemnification agreements with its directors and certain of its officers, and
its bylaws contain
22
Table of
Contents
indemnification
obligations in favor of its directors, officers and agents. These indemnity
arrangements may limit the type of the claim, the total amount that the Company
can be required to pay in connection with the indemnification obligation and
the time within which an indemnification claim can be made. The duration of the
indemnification obligation may vary, and for most arrangements, survives the
agreement term and is indefinite. 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, the unique facts and circumstances
involved in each particular contractual arrangement and in each potential
future claim for indemnification, and the contingency of any potential
liabilities upon the occurrence of events that are not reasonably determinable.
The Company has not had any requests for indemnification under these
arrangements. The Company has not recorded any liabilities for these
indemnification arrangements on its condensed consolidated balance sheet as of June 27,
2009.
The Company
believes that substantially all of its indemnities and commitments provide for
limitations on the maximum potential future payments it could be obligated to
make. However, the Company is unable to estimate the maximum amount of
liability related to its indemnities and commitments because such liabilities
are contingent upon the occurrence of events which are not reasonably
determinable. The Companys management believes that any liability for these
indemnities and commitments would not be material to its accompanying
consolidated financial statements.
Note 15 Derivative Financial Instruments
SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities, requires companies to
recognize all derivative instruments as either assets or liabilities at fair
value in the statement of financial position. Effective January 1, 2009,
the Company adopted the changes to the disclosure requirements for derivative
and hedging activities of SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities an amendment of FASB Statement No. 133.
SFAS No. 161 requires the Company to provide enhanced disclosures about (a) how
and why the Company uses derivative instruments, (b) how derivative
instruments and related hedged items are accounted for under SFAS No. 133
and its related interpretations, and (c) how derivative instruments and
related hedged items affect the Companys financial position, financial
performance, and cash flows.
The Company
operates and sells its products in various global markets. As a result, the
Company is exposed to changes in foreign currency exchange rates. The Company
utilizes foreign currency forward contracts to hedge against future movements
in foreign exchange rates that affect certain existing foreign currency
denominated assets and liabilities. The Company does not use derivative
financial instruments for speculative or trading purposes. The Companys
derivative instruments, which are generally settled in the same quarter, are
not designated as hedging instruments under SFAS No.133, and therefore gains
and losses are recognized in Other income (expense), net.
As of June 27,
2009, there were three outstanding foreign exchange forward contracts to sell
Japanese Yen, Korean Won and Taiwan Dollars. The following table provides
information about the Companys foreign currency forward contracts outstanding
as of June 27, 2009 (in thousands):
|
|
Contract Amount
(Local Currency)
|
|
Contract Amount
(U.S. Dollars)
|
|
Japanese
Yen
|
|
1,807,353
|
|
$
|
18,967
|
|
Taiwan
Dollar
|
|
32,387
|
|
983
|
|
Korean
Won
|
|
3,015,469
|
|
2,339
|
|
Total
USD notional amount of outstanding foreign exchange contracts
|
|
|
|
$
|
22,289
|
|
The contracts were
entered into on June 26, 2009 and matured on July 28, 2009.
Accordingly, there were no amounts reported in the Companys Condensed
Consolidated Balance Sheets as of June 27, 2009 related to these
contracts. Additionally, no gains or losses relating to the outstanding
derivative contracts were recorded in the fiscal quarter ending June 27,
2009.
23
Table of
Contents
The location and amount of gains and losses related to
non-designated derivative instruments that matured in the fiscal quarter ended June 27,
2009 in the Condensed Consolidated Statement of Operations are as follows (in
thousands):
|
|
Location of Gain or
|
|
Amount of Gain or
|
|
Derivatives Not Designated as
Hedging
|
|
(loss) Recognized in
|
|
(Loss) Recognized in
|
|
Instruments Under SFAS
No. 133
|
|
Loss on Derivative
|
|
Loss on Derivative
|
|
|
|
|
|
|
|
Foreign
exchange forward contracts
|
|
Other Income (expense),
net
|
|
$
|
(792
|
)
|
Total
|
|
|
|
$
|
(792
|
)
|
Note 16 Departure of Executive Officer
The Company entered into a Separation Agreement and
Mutual Release as of May 1, 2009 (the Separation Agreement) with its
founder and former
Executive Chairman Dr. Igor Khandros, who
retired from the Company and the board of directors.
Under the terms of the Separation Agreement,
the Company
accelerated vesting of
options
to acquire 75,000 shares and permitted certain vested stock options to be
exercisable until the earlier of (i) May 1, 2014 or (ii) the
original expiration date of the applicable stock option (Refer to Note 11).
The Company and Dr. Khandros also entered into a
consulting agreement effective as of May 1, 2009 under which
Dr. Khandros
will continue to serve as a key advisor to the Company for a term of one-year
for a quarterly consulting fee of $75,000
. The consulting agreement was terminated by Dr. Khandros effective July 1, 2009.
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, uncertainties and assumptions that are difficult to predict. The
forward-looking statements include statements concerning, among other things,
our business strategy, including anticipated trends and developments in and
management plans for our business and the markets in which we operate,
financial results, operating results, revenues, gross margin, operating
expenses, products, projected costs and capital expenditures, research and
development programs, sales and marketing initiatives, and competition. In some
cases, you can identify these statements by forward-looking words such as may,
might, will, could, should, expect, plan, anticipate, believe, estimate,
predict, intend and continue, the negative or plural of these words and
other comparable terminology.
The
forward-looking statements are only predictions based on our current
expectations and our projections about future events. All forward-looking
statements included in this Quarterly Report are based upon information
available to us as of the filing date of this Quarterly Report. You should not
place undue reliance on these forward-looking statements. We undertake no
obligation to update any of these statements for any reason. These
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause our actual results, levels of activity,
performance or achievements to differ materially from those expressed or
implied by these statements. These factors include the matters discussed in the
section titled Risk Factors in our Annual Report on Form 10-K for the
year ended December 27, 2008, and in the section titled Risk Factors and
elsewhere in this Quarterly Report. You should carefully consider the numerous
risks and uncertainties described under these sections.
The
following discussion and analysis should be read in conjunction with our
condensed consolidated financial statements and the accompanying notes
contained in this Quarterly Report. Unless expressly stated or the context
otherwise requires, the terms we, our, us and FormFactor refer to
FormFactor, Inc. and its subsidiaries.
Overview
We
design, develop, manufacture, sell and support precision, high performance
advanced semiconductor wafer probe card products and solutions. Semiconductor
manufacturers use our wafer probe cards to perform wafer sort and test on the
semiconductor die, or chips, or the whole semiconductor wafer, which is prior
to singulation of the wafer into individual separate chips. We work closely
with our customers on product design, as each wafer probe card is a custom
product that is specific to the chip and wafer designs of the customer. We
operate in a single industry segment and have derived substantially all of our
revenues from the sale of wafer probe cards incorporating our proprietary
technology, including our MicroSpring® interconnect technology.
24
Table of Contents
The
oversupply of memory devices coupled with the overall global economic downturn
and uncertainty in fiscal 2008 had a significant impact on global semiconductor
device manufacturing. As the second quarter of fiscal 2009 progressed, we saw
our markets continued to be affected by the continuing global macroeconomic
downturn which resulted in a significant decrease in demand and a challenging
environment for our advanced wafer probe cards. Revenues for the second quarter
of fiscal 2009 were $31.2 million, reflecting a decline of 40% from the second
quarter of fiscal 2008. This revenue decline was in each of the product markets
we addressDynamic Random Access Memory, or DRAM, NAND and NOR Flash memory and
System on a Chip, or SoC, and was primarily due to a number of factors
including the relative supply and demand of various semiconductor devices and
end products incorporating those devices, semiconductor manufacturers efforts
to curtail spending and conserve cash by taking capacity offline, reducing
production, delaying the transition to new technology nodes and postponing the
implementation of tooling cycles.
We
incurred a net loss of $65.8 million in the second quarter of fiscal 2009 as
compared to net loss of $18.7 million for the second quarter of fiscal 2008
primarily due to lower revenues as well as the inclusion of a $44.7 million
valuation allowance for our deferred tax assets. We incurred a net loss of
$103.8 million in the first half of fiscal 2009 as compared to net loss of
$36.6 million for the first half of fiscal 2008 primarily due to lower
revenues, the inclusion of a valuation allowance of $44.7 million for our
deferred tax assets, the inclusion of $7.9 million of restructuring charges as
well as $4.9 million in provision for bad debts due to the heightened risk of
non-payment of certain accounts receivable. Net loss for the first half of
fiscal 2008 included $8.5 million in restructuring charges and $0.5 million in
provision for doubtful debts. In the first quarter of fiscal 2009, we initiated
a global reorganization and cost reduction plan designed to lower our cash
breakeven level in order to enable us to sustain ourselves financially in the
current market environment. As part of the plan, we reduced our workforce by
approximately 22%. We also implemented certain non-severance measures that we
expect to result in future cost savings.
In
addition, we are restructuring our operations through our global regionalization
strategy by, for example, placing more decision-making in regions close to our
semiconductor customers to enhance customer relationships, strengthening our
local design, application and service capabilities to improve customer
responsiveness, changing our manufacturing structure for shorter cycle time and
improved product delivery capabilities, and realigning our research and
development efforts. We have accelerated our regionalization efforts by bringing
up back-end manufacturing in Asia. We
qualified our back-end manufacturing in Korea during our first quarter of
fiscal 2009 and plan to do so in Japan in the fourth quarter of fiscal 2009,
followed by Singapore in fiscal 2010.
The combination of these initiatives is intended to result in a lower manufacturing
cost, a simplified manufacturing process and decreased cycle times for our
customers.
We
established a valuation allowance of $44.7 million against the excess tax
benefits recognized in prior quarters. This charge resulted in an income tax expense,
rather than an income tax benefit, for the three and six months ended June 27,
2009. This valuation allowance was based on our quarterly assessment of the
realizability of our deferred tax assets. Significant management judgment is
required in determining any valuation allowance recorded against deferred tax
assets. In evaluating the ability to
recover deferred tax assets, we considered available positive and negative
evidence giving greater weight to our recent cumulative losses, ability to
carryback losses against prior taxable income and lesser weight to our
projected financial results due to the challenges of forecasting future
periods. We also considered,
commensurate with its objective verifiability, the forecast of future taxable
income including the reversal of temporary differences and the implementation
of feasible and prudent tax planning strategies.
The necessity for this valuation allowance and
any future adjustments will be based on the available positive and negative
evidence at that time, commensurate with its objective verifiability.
Under current
tax law, this valuation allowance will not limit our ability to utilize Federal
and state deferred tax assets provided we can generate sufficient future
taxable income. Our tax provisions in future periods will primarily
consist of income taxes on our profits in certain jurisdictions outside of the
US.
Our
cash, cash equivalents and marketable securities totaled approximately $486.8
million as of June 27, 2009 as compared to $522.9 million at December 27,
2008. While there are no specific significant transactions or arrangements that
are likely to materially affect liquidity, economic uncertainty and weak credit
markets are driving our customers to delay their procurement as well as payment
decisions which could adversely delay and affect our cash collections. We
believe that we will be able to satisfy our working capital requirements for
the next twelve months with the liquidity provided by our existing cash, cash
equivalents and marketable securities. If we are unsuccessful in improving our
operating efficiency, reducing our cash outlays or increasing our available
cash through financing, our cash, cash equivalents and marketable securities
will further decline in the second half of fiscal 2009.
25
Table of Contents
We
believe it is likely that the global economic and semiconductor industry
downturns will persist; however, we cannot predict their severity or duration.
Given the overall weakness of the United States economy and the global
macroeconomy, and the current downturn in the semiconductor industry and its
effects on demand for our products, we are unable to precisely forecast when or
if revenues and profitability will return to previous levels.
Revenues.
We derive substantially all
of our revenues from product sales of wafer probe cards. Revenues from our
customers are subject to fluctuations due to factors including, but not limited
to, design cycles, technology adoption rates, competitive pressure to reduce
prices, cyclicality of the different end markets into which our customers
products are sold and market conditions in the semiconductor industry.
Historically, increases in revenues have resulted from increased demand for our
existing products, the introduction of new, more complex products and the
penetration of new markets. We expect that revenues from the sale of wafer
probe cards will continue to account for substantially all of our revenues for
the foreseeable future.
Cost of Revenues.
Cost of revenues consists
primarily of manufacturing materials, payroll and manufacturing-related
overhead. Our manufacturing operations rely upon a limited number of suppliers
to provide key components and materials for our products, some of which are a
sole source. We order materials and supplies based on backlog and forecasted
customer orders. Tooling and setup costs related to changing manufacturing lots
at our suppliers are also included in the cost of revenues. We expense all
warranty costs and inventory provisions or write-offs of inventory 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.
Research and Development
. Research and
development expenses include expenses related to product development,
engineering and material costs. Almost all research and development costs are
expensed as incurred. We plan to continue to invest in research and development
activities to improve and enhance existing technologies and to develop new
technologies for current and new markets and for new applications.
Selling, General and Administrative
. Selling, general and administrative expenses
include expenses related to sales, marketing, and administrative personnel,
provision for doubtful accounts, internal and outside sales representatives
commissions, market research and consulting, and other sales, marketing, and
administrative activities. These expenses also include costs for protecting and
enforcing our patent rights and regulatory compliance costs.
Restructuring Charges.
Restructuring charges
include expenses related to employee termination severance pay and benefits,
and property and equipment impairment charges incurred as part of our global
cost reduction plans.
Use of Estimates.
Our discussion and analysis
of our financial condition and results of operations are based upon our
unaudited condensed consolidated financial statements. The preparation of
consolidated financial statements in conformity with generally accepted
accounting principles in the United States of America (GAAP) requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities, the disclosure of contingent assets and liabilities
at the date of the financial statements, and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates. Estimates may change as new information is obtained.
Significant items that are subject to such estimates include the fair value of
revenue elements, fair value of marketable securities, allowance for doubtful
accounts, reserves for product warranty, valuation of obsolete and slow moving
inventory, valuation and recognition of stock-based compensation, provision for
income taxes and valuation allowance for deferred tax assets and, tax
liabilities and accruals for other liabilities.
26
Table of Contents
Results of
Operations
The following table sets forth our operating results
as a percentage of revenues for the periods indicated:
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
June 27,
|
|
June 28,
|
|
June 27,
|
|
June 28,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
Revenues
|
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
Cost
of revenues
|
|
104.3
|
|
78.7
|
|
108.5
|
|
79.9
|
|
Gross
profit (loss)
|
|
(4.3
|
)
|
21.3
|
|
(8.5
|
)
|
20.1
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
44.7
|
|
30.4
|
|
47.9
|
|
27.4
|
|
Selling,
general and administrative
|
|
58.5
|
|
43.7
|
|
76.1
|
|
38.4
|
|
Restructuring
charge
|
|
0.8
|
|
6.2
|
|
13.6
|
|
7.3
|
|
Total
operating expenses
|
|
104.1
|
|
80.3
|
|
137.6
|
|
73.1
|
|
Operating
loss
|
|
(108.3
|
)
|
(59.0
|
)
|
(146.1
|
)
|
(53.0
|
)
|
Interest
income, net
|
|
2.4
|
|
6.0
|
|
3.2
|
|
6.8
|
|
Other
income (expense)
|
|
(0.3
|
)
|
(1.3
|
)
|
(0.9
|
)
|
0.1
|
|
Loss
before income taxes
|
|
(106.2
|
)
|
(54.3
|
)
|
(143.8
|
)
|
(46.1
|
)
|
Provision
for (benefit from) income taxes
|
|
104.9
|
|
(18.3
|
)
|
33.5
|
|
(15.0
|
)
|
Net
loss
|
|
(211.1
|
)%
|
(36.0
|
)%
|
(177.2
|
)%
|
(31.1
|
)%
|
Three and Six Months Ended June 27, 2009 and June 28, 2008:
Revenues
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
June 27,
|
|
June 28,
|
|
|
|
June 27,
|
|
June 28,
|
|
|
|
|
|
2009
|
|
2008
|
|
% Change
|
|
2009
|
|
2008
|
|
% Change
|
|
|
|
(In thousands, except percentages)
|
|
Revenues
by Market:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DRAM
|
|
$
|
25,267
|
|
$
|
31,721
|
|
(20.3
|
)%
|
$
|
48,813
|
|
$
|
71,896
|
|
(32.1
|
)%
|
Flash
|
|
1,852
|
|
11,519
|
|
(83.9
|
)
|
2,471
|
|
27,737
|
|
(91.1
|
)
|
Logic
|
|
4,079
|
|
8,773
|
|
(53.5
|
)
|
7,283
|
|
18,083
|
|
(59.7
|
)
|
Total
revenues
|
|
$
|
31,198
|
|
$
|
52,013
|
|
(40.0
|
)%
|
$
|
58,567
|
|
$
|
117,716
|
|
(50.2
|
)%
|
The decrease in revenue for the three and
six months ended June 27, 2009 was primarily due to weak demand for our
advanced wafer probe cards caused by the continued weakness in the
semiconductor market. For certain of our products we also experienced pricing
pressure due to the availability of competitive products, which also
contributed to the decrease in revenues.
Our revenues for
the three and six months ended June 27, 2009 were primarily generated by
sales of wafer probe cards to manufacturers of DRAM devices. Revenues for our
products that address the DRAM segment declined significantly in the three and
six months ended June 27, 2009 as compared to the comparable periods in
the prior year, primarily due to continued weak market conditions in which DRAM
device pricing fell below the industry average of semiconductor manufacturers
cash costs. Given the current price of
DRAM devices, our customers that manufacture DRAM devices took certain actions,
including decisions to delay transitions to new technology nodes, test capacity
expansions and ramping of key devices.
We also experienced pricing pressure on certain DRAM test products due
to the competitive environment.
Revenues from sales to Flash memory device
manufacturers also decreased significantly in the three months and six ended June 27,
2009 compared to the comparable periods in the prior year, with the decrease
driven by sales decline in both NOR and NAND Flash wafer probe cards. The
weakness in NOR Flash can be attributed to a decline in purchases by certain
key customers. The decrease was primarily driven by a decline in revenues from
NOR Flash wafer probe cards resulting from our largest NOR customer filing for
bankruptcy protection in the first quarter of fiscal 2009. Additionally,
revenues from NAND Flash wafer probe cards declined as NAND Flash memory device
manufacturers significantly reduced their output in the first quarter of fiscal
2009, in an attempt to promote industry absorption of excess inventories.
27
Table of Contents
Revenues from manufacturers of SoC devices
decreased in the three and six months ended June 27, 2009 compared to the
comparable periods in the prior year, primarily due to the overall downturn in
the semiconductor industry which negatively impacted the revenues from sales of
our wafer probe cards.
The weak macroeconomic and credit
environments have adversely impacted the profitability of our customers and
their capital spending and are likely to result in product revenues in the near
term that are lower than our revenue levels in comparable periods during prior
fiscal years.
Revenue by
Geographic Region
The following table sets
forth our revenues by geographic region for the periods indicated:
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
June 27,
|
|
%
of
|
|
June 28,
|
|
%
of
|
|
June 27,
|
|
%
of
|
|
June 28,
|
|
%
of
|
|
|
|
2009
|
|
Revenues
|
|
2008
|
|
Revenues
|
|
2009
|
|
Revenues
|
|
2008
|
|
Revenues
|
|
|
|
(In
thousands except percentages)
|
|
Japan
|
|
$
|
14,018
|
|
44.9
|
%
|
$
|
18,611
|
|
35.8
|
%
|
$
|
33,884
|
|
57.9
|
%
|
$
|
40,666
|
|
34.5
|
%
|
North
America
|
|
6,232
|
|
20.0
|
|
12,344
|
|
23.7
|
|
9,180
|
|
15.7
|
|
24,480
|
|
20.8
|
|
Asia
Pacific
|
|
9,794
|
|
31.4
|
|
15,779
|
|
30.3
|
|
13,035
|
|
22.3
|
|
42,532
|
|
36.1
|
|
Europe
|
|
1,154
|
|
3.7
|
|
5,279
|
|
10.1
|
|
2,468
|
|
4.2
|
|
10,038
|
|
8.5
|
|
Total
revenues
|
|
$
|
31,198
|
|
100
|
%
|
$
|
52,013
|
|
100
|
%
|
$
|
58,567
|
|
100
|
%
|
$
|
117,716
|
|
100
|
%
|
Geographic revenue
information is based on the location to which we ship the customer product. For
example, certain South Korean customers purchase through their North American
subsidiaries and accordingly, if the product is shipped to an address in South
Korea it is reflected in the revenue for Asia Pacific.
The decreases in Japan and
Asia Pacific for the three and six months ended June 27, 2009 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 and six months ended June 27, 2009 compared to the same period
in the prior year was primarily driven by decreased demand for all our products
in this region. Revenue in Europe decreased for the three months ended June 27,
2009 primarily due to the decreased demand for all of our products in this
region.
The
following customers accounted for more than 10% of our revenues:
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
June 27,
|
|
June 28,
|
|
June 27,
|
|
June 28,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
Elpida
Memory
|
|
42.8
|
%
|
29.6
|
%
|
56.0
|
%
|
26.9
|
%
|
Spansion
|
|
*
|
|
12.5
|
|
*
|
|
15.1
|
|
Intel
Corporation
|
|
*
|
|
17.4
|
|
*
|
|
14.7
|
|
*
Less than 10% of revenues.
28
Table of
Contents
Gross Profit
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
June 27,
|
|
June 28,
|
|
June 27,
|
|
June 28,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
|
(In thousands
except percentages)
|
|
Gross
profit (loss)
|
|
$
|
(1,326
|
)
|
$
|
11,101
|
|
$
|
(5,005
|
)
|
$
|
23,673
|
|
Gross
margin (loss)
|
|
(4.3
|
)%
|
21.3
|
%
|
(8.5
|
)%
|
20.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin fluctuates with
revenue levels, product mix, selling prices, factory loading, and material
costs. For the three and six months ended June 27, 2009, gross margin
declined compared to the same period in the prior year, primarily due to the
significant decline in revenue driving lower factory utilization, thereby
increasing unit manufacturing costs, combined with declines in average selling
prices as well as unfavorable change in product mix
from higher margin to lower margin products
. This decline
was partially mitigated by lower personnel costs as a result of our fiscal 2008
and 2009 global cost reduction plans as well as a decline in inventory
write-downs. Inventory provision decreased from $11.8 million or 10% of
revenues in the first six months of fiscal 2008 to $5.8 million, or 9.9%
of revenues, in the first six months of fiscal 2009.
The higher inventory write-downs in first
six months of fiscal 2008 were associated with deterioration in the DRAM memory
segment in that period.
Excess custom inventories are not uncommon for us as our advanced wafer
probe cards are custom designs manufactured in low volumes and must be
delivered on relatively short lead times, which requires 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. Stock-based compensation included in g
ross margin was
$0.9 million or 3.0% of revenues, and $1.2 million, or 2.3% of revenues,
in the three months ended June 27, 2009 and June 28, 2008,
respectively, and $1.7 million, or 2.9% of revenues and $2.5 million, or 2.2% of
revenues for the six months ended June 27, 2009 and June 28, 2008,
respectively. The decline of stock-based compensation, in absolute dollars, was
primarily as a result of reductions in headcount as a result of our 2008 and
2009 global cost reduction plans.
In the near future, our gross margins will likely continue to be
adversely affected by lower levels of product revenues in comparison to the
same periods in the prior fiscal year, even though we have taken significant
steps to reduce our production levels and operating cost structure.
Additionally, we may be required to record additional inventory write-downs if
estimated average selling prices of products held in finished goods and work in
process inventories at a quarter-end date are below the manufacturing cost of
those products.
Research and
Development
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
June 27,
|
|
June 28,
|
|
June 27,
|
|
June 28,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
|
(In thousands
except percentages)
|
|
Research
and development
|
|
$
|
13,938
|
|
$
|
15,821
|
|
$
|
28,047
|
|
$
|
32,209
|
|
% of
revenues
|
|
44.7
|
%
|
30.4
|
%
|
47.9
|
%
|
27.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development expenses decreased in absolute dollars for the
three and six months ended June 27, 2009 compared to the same period in
the prior year primarily due to a decrease in certain new technology product
development related costs, personnel costs and depreciation, facilities and
information technology allocations. For the three and six months ended June 27,
2009, personnel costs decreased $1.4 million and $2.8 million, respectively,
primarily due to reductions in headcount as a result of our global
reorganization plans, expenses related to new technology and product
development increased slightly, and depreciation and facilities and information
technology allocations decreased $0.7 million and $0.9 million, respectively,
primarily due to the implementation of corporate cost reduction initiatives.
Stock-based compensation included within research and development was
$1.4 million for the three months ended June 27, 2009 compared to
$1.6 million for the three months ended June 28, 2008, and $2.5
million for the first half of fiscal 2009 as compared to $2.8 million for the
first half of fiscal 2008. The decline in stock-based compensation in absolute
dollars was primarily due to reductions in headcount due to the 2008 and 2009
global cost reduction plans.
As a percent of revenues, research and development expenses increased
during the three and six months ended June 27, 2009 as compared to the
comparable periods in the prior year, primarily due to the declining revenue
base.
29
Table of
Contents
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 SoC products, advanced MicroSpring interconnect
technology and new process technologies. We remain committed to product
development in new and emerging technologies.
Selling, General and Administrative
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
June 27,
|
|
June 28,
|
|
June 27,
|
|
June 28,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
|
(In thousands except percentages)
|
|
Selling,
general and administrative
|
|
$
|
18,263
|
|
$
|
22,705
|
|
$
|
44,574
|
|
$
|
45,363
|
|
% of
revenues
|
|
58.5
|
%
|
43.7
|
%
|
76.1
|
%
|
38.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses decreased in absolute dollars for the three
and months ended June 27, 2009 compared to the same period in the prior
year primarily due to a decrease in personnel-related costs, other
discretionary spending, facilities-related costs and, depreciation. For the
three and six months ended June 27, 2009, personnel related costs
decreased by approximately $2.3 and $4.7 million, respectively, primarily
due to the work force reductions, other discretionary spending decreased by
$0.4 million and $0.9 million, respectively, due to the newly implemented
corporate cost reduction initiatives and facilities-related costs and
depreciation decreased $0.8 million and $1.1 million, respectively. Outside
legal and other professional fees decreased by $1.5 million in the three months
ended June 27, 2009 and increased by $0.3 million in the six months ended June 27,
2009, as compared to the comparable periods in the prior year. The change in
legal fees for the three and six months ended June 27, 2009 was primarily
due to the scheduling of the International Trade Commission hearing on the
investigation (337-TA-621) arising out of our complaint filed in late 2007. The
increase for the six months ended June 27, 2009 was due to the fact the
hearing was conducted during the first quarter of fiscal 2009, during which we
also incurred fees and costs related to hearing preparation activities.
The decrease during the three months ended June 27, 2009 reflects
that the majority of the fees and costs related to the hearing and post hearing
activities were completed by the end of the first quarter of fiscal 2009. In
comparison, in the second quarter of fiscal 2008, we were engaged in active
discovery activities.
Additionally, we recorded a reduction in the provision for doubtful
accounts of $0.3 million in the three months ended June 27, 2009, compared
to a provision of $0.5 million in the three months ended June 28, 2008.
Provision for doubtful accounts was $4.9 million in the six months ended June 27,
2009 compared to $0.5 million in the comparable period in the prior year. In
addition, stock-based compensation included within selling, general and
administrative expense was $4.7 million and $7.6 million for the three and six
months ended June 27, 2009, compared to $3.8 million and $6.9 million
for the three and six months ended June 28, 2008. The increase in
stock-based compensation was due to an option modification charge of $2.5
million in connection with the retirement of Dr. Igor Y. Khandros, our
founder and former executive chairman of our board of directors in May 2009,
offset in part by a decrease due to reductions in headcount as a result of our
2008 and 2009 global cost reduction plans.
As a percent of revenue, selling, general and administrative expenses
increased in three and six months ended June 27, 2009 as compared to the
comparable periods in the prior year, primarily due to the declining revenue
base.
Restructuring Charges
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
June 27,
|
|
June 28,
|
|
June 27,
|
|
June 28,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
|
(In thousands except percentages)
|
|
Restructuring
charges
|
|
$
|
264
|
|
$
|
3,223
|
|
$
|
7,943
|
|
$
|
8,543
|
|
% of
revenues
|
|
0.8
|
%
|
6.2
|
%
|
13.6
|
%
|
7.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30
Table
of Contents
In the first quarter of
fiscal 2009, we implemented the Q1 2009 Restructuring Plan that included
reducing our global workforce by 22%. The Q1 2009 Restructuring Plan extended
the cost reduction plans implemented during fiscal 2008 and impacted employees
across all functions of the organization. We recorded $7.7 million in relation
to the Q1 2009 Restructuring Plan in the first quarter of fiscal 2009 and $0.3
million in relation to the Q1 2009 Restructuring Plan in the second quarter of
fiscal 2009. The plan consisted primarily of involuntary employee terminations
and benefit costs and write-down of certain assets taken out of service. During the three and six months ended June 27,
2009, we paid $0.8 million and $6.1 million of severance and benefits
related to the Q1 Restructuring 2009 Plan. We anticipate that the remainder of
the employee-related charges resulting from the cost reduction plan implemented
in the first quarter of fiscal 2009 will be paid within the next nine months.
We expect to realize a quarterly cost savings of approximately $3.4 million as
a result of the
actions
taken in the first quarter of fiscal 2009 related to this plan
.
In both the first
and second quarters of fiscal 2008, we implemented global cost reduction plans
that included reducing our global workforce. We recorded $3.2 million and $8.5
million in restructuring charges in the three and six months ended June 28,
2008, respectively. Both plans consisted primarily of involuntary employee
termination and benefit costs and facility impairment charges related to
vacating buildings in Livermore, California. Substantially all of the employee
related charges related to the first quarter of fiscal 2008 and second quarter
of fiscal 2008 cost reduction plans were paid by the end of fiscal 2008.
Interest Income and Other Income
(Expense), Net
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
June 27,
|
|
June 28,
|
|
June 27,
|
|
June 28,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
|
(In thousands except percentages)
|
|
Interest
income
|
|
$
|
762
|
|
$
|
3,128
|
|
$
|
1,877
|
|
$
|
8,003
|
|
% of
revenue
|
|
2.4
|
%
|
6.0
|
%
|
3.2
|
%
|
6.8
|
%
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense)
|
|
$
|
(89
|
)
|
$
|
(652
|
)
|
$
|
(505
|
)
|
$
|
141
|
|
% of
revenues
|
|
(0.3
|
)%
|
(1.3
|
)%
|
(0.9
|
)%
|
0.1
|
%
|
The decrease in
interest income on cash, cash equivalents and marketable securities
for the three
and six months ended June 27, 2009
was primarily a result of lower interest yields
as compared to
the comparable periods in the prior year as well as lower average balances.
Weighted average yields for the three months ended June 27, 2009 and June 28,
2008 were 0.73% and 2.22%, respectively and weighted average yields for the six
months ended June 27, 2009 and June 28, 2008 were 0.75% and 2.81%,
respectively. Cash, cash equivalents, restricted cash and marketable securities
were $487.5 million at June 27, 2009 compared to $523.6 million at June 28,
2008. Other income (expense) for the three and six months ended June 27,
2009 was mainly comprised of bank fees and foreign currency losses primarily
related to Japanese Yen offset by net realized gains related to the sale of
investments.
Provision for (Benefit from) Income
Taxes
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
June 27,
|
|
June 28,
|
|
June 27,
|
|
June 28,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
|
(In thousands, except percentages)
|
|
Provision
for (benefit from) income taxes
|
|
$
|
32,728
|
|
$
|
(9,513
|
)
|
$
|
19,592
|
|
$
|
(17,678
|
)
|
Effective
tax rate
|
|
98.8
|
%
|
(33.8
|
)%
|
23.3
|
%
|
(32.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We
recognized an income tax provision of $32.7 million and $19.6 million for the
three months and six months ended June 27, 2009, respectively, despite
losses before taxes. The provision is primarily due to a valuation allowance of
$44.7 million, which includes excess tax benefits recognized during the second
quarter of fiscal 2009 and prior quarters, against the our Federal and state
deferred tax assets in accordance with SFAS No. 109, Accounting for
Income Taxes. The valuation allowance was recorded at the end of the second
quarter of 2009 to reduce certain Federal and state net deferred tax assets to
their anticipated realizable value. The remaining realizable value was
determined by evaluating the potential to recover the value of these assets through
the utilization of loss carrybacks.
31
Table of Contents
SFAS
109 requires the consideration of a valuation allowance to reflect the
likelihood of realization of deferred tax assets. Significant management
judgment is required in determining any valuation allowance recorded against
deferred tax assets. In evaluating the ability to recover deferred tax
assets, we considered available positive and negative evidence giving greater
weight to our recent cumulative losses and our ability to carryback losses
against prior taxable income and lesser weight to our projected financial
results due to the challenges of forecasting future periods. We also
considered, commensurate with its objective verifiability, the forecast of
future taxable income including the reversal of temporary differences and the
implementation of feasible and prudent tax planning strategies. We
performed this evaluation as of the year ended December 27, 2008 and the
three months ended March 28, 2009. At that time we continued to have
sufficient positive evidence, primarily a cumulative profits position, the
ability to carryback losses against prior taxable income and an expectation of
improving operating results, showing a valuation allowance was not
required. At the end of the second quarter of fiscal 2009, changes in
previously anticipated expectations has necessitated a valuation allowance
against the excess tax benefits recognized in this quarter and prior quarters
since they are no longer more likely than not realizable. Under current
tax laws, this valuation allowance will not limit our ability to utilize
Federal and state deferred tax assets provided we can generate sufficient
future taxable income.
We
anticipate we will continue to record a valuation allowance against the losses
of certain jurisdictions, primarily Federal and state, until such time as we
are able to determine it is more likely than not the deferred tax asset will be
realized. Such position is dependent on whether there will be sufficient
future taxable income to realize such deferred tax assets. We
expect our future tax provisions, during the time such valuation allowances are
recorded, will consist primarily of the tax expense of our non-US jurisdictions
that are profitable.
Under
FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes-an
Interpretation of FAS 109, we classify interest and penalties related to
uncertain tax positions as part of income tax expense. We recognized interest
expense of $10,000 and $53,000 for the three months ended June 27, 2009
and June 28, 2008, respectively, and $130,000 and $75,000 for the six
months ended June 27, 2009 and June 28, 2008, respectively. As of June 27,
2009, we had approximately $443,000 of interest and zero penalties related to
uncertain tax positions.
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 that 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 June 27, 2009, 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.
We and our subsidiaries file income tax returns in
the U.S. Federal jurisdiction, various U.S. states and non-U.S. jurisdictions.
We are currently under examination by the State of California Franchise Tax
Board for fiscal years 2004 and 2005.
Liquidity and Capital Resources
(Dollars in thousands)
|
|
June 27,
2009
|
|
Change
|
|
December 27,
2008
|
|
Working
capital
|
|
$
|
522,978
|
|
(9.3
|
)%
|
$
|
576,754
|
|
Cash
and cash equivalents and marketable securities
|
|
486,818
|
|
(6.9
|
)
|
522,894
|
|
|
|
|
|
|
|
|
|
|
|
Working capital:
The decrease in working capital in the six months
ended June 27, 2009 was primarily due to a decrease in our cash, cash equivalents
and marketable securities balances due to use of cash for operating and
investing activities, lower refundable taxes due to the receipt of a federal
income tax refund of $29.0 million in March 2009, an increase in deferred
revenue due to lengthening of customer payment terms, offset in part by
decreases in accounts payable and accrued liabilities.
Cash, cash equivalents and marketable securities:
Cash and cash equivalents consist of
deposits held at major banks, money market funds and U.S. government securities
that at the time of purchase had maturities of 90 days or less. Marketable
securities consist of U.S. government and agency securities and municipal
bonds. Cash, cash equivalents and marketable securities include $11.9 million
held by our foreign subsidiaries as of June 27, 2009.
32
Table of
Contents
Day Sales
Outstanding:
Days sales outstanding from receivables, or DSO, was 114 days at June 27,
2009 compared with 87 days at December 27, 2008. The increase in DSO is
primarily due to the significant shift to longer payment terms for several
customers. A
dditionally, with the
continuing challenges in the semiconductor market, a few of our customers which
are in a cash preservation mode are extending payments past their original due
dates.
|
|
Six Months Ended
|
|
(Dollars in thousands)
|
|
June 27,
2009
|
|
Change
|
|
June 28,
2008
|
|
Cash
used in operating activities
|
|
$
|
(29,742
|
)
|
260
|
%
|
$
|
(8,251
|
)
|
Cash
provided by (used in) investing activities
|
|
(128,034
|
)
|
(210
|
)
|
116,801
|
|
Cash
provided by financing activities
|
|
3,002
|
|
(16
|
)
|
3,580
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from operating activities:
Net cash used
in operating activities for the six months ended June 27, 2009 was
primarily driven by the operating loss offset in part by non-cash charges.
The net change in operating assets and liabilities for the six months
ended June 27, 2009 consisted primarily of
the increase in gross accounts receivable and deferred
revenue due a shift to longer payment terms for several customers, decrease in
refundable income taxes due to the receipt of a federal income tax refund of
$29.0 million in March 2009, a decrease in prepaid expenses due to the
receipt of a consumption tax refund of $3.4 million and a decrease in other
assets due to the receipt of $6.7 million related to the termination of a
prepaid land lease agreement in Singapore,
offset by the decrease in
accounts payable and accrued liabilities.
Cash flows from investing activities:
The cash flows used in investing
activities for the six months ended June 27, 2009 primarily relate to the
purchase of marketable securities and cash used for capital expenditures in
support of information technology system upgrades and new product technology.
We carefully monitor our
investments to minimize risks and have not experienced other-than-temporary
investment losses. Except for experiencing declining yields, our investment
portfolio has not been negatively impacted by the ongoing economic turmoil in
the credit markets.
Cash flows from financing activities:
The cash flows provided by financing
activities for the six months ended June 27, 2009 are primarily due to
$1.9 million received from the January 2009 purchase under our 2002
Employee Stock Purchase Plan, or ESPP and net proceeds from the exercise of
stock options offset by stock withheld in lieu of payment of employee taxes
related to the release of restricted stock units of $0.7 million.
Our
cash, cash equivalents and marketable securities declined in the second quarter
of fiscal 2009. Given the uncertainty in the global economy and the downturn in
the semiconductor industry coupled with the decrease in demand for our
products, we are focusing on improving our operating efficiency to achieve
break even operating cash flow. Our actions have included operational expense
reduction initiatives, re-timing or eliminating certain capital spending and
research and development projects and re-negotiating longer payment terms with
our vendors. We believe that we will be able to satisfy our cash requirements
for the next twelve months with the liquidity provided by our existing cash,
cash equivalents and marketable securities. We are also considering
establishing manufacturing and technology partnerships, or to seek short and
long-term debt obligations, or to obtain new financing facilities which may not
be available on terms favorable to us or at all. Our future capital
requirements may vary materially from those now planned. However, if we are
unsuccessful in improving our operating efficiency, reducing our cash outlays
or increasing our available cash through financing, our cash, cash equivalents
and marketable securities will further decline in the remaining quarters of
fiscal 2009.
Off-Balance Sheet Arrangements
Historically,
we have not participated in transactions that have generated 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 June 27, 2009, we
were not involved in any such off-balance sheet arrangements.
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Recent Accounting Pronouncements
For a
discussion on the impact of recently issued accounting pronouncements, please
refer to Note 2 of the Notes to the Unaudited Condensed Consolidated Financial
Statements in this Quarterly Report on Form 10-Q.
Item 3.
Quantitative
and Qualitative Disclosures About Market Risk
For financial market
risks related to changes in interest rates and foreign currency exchange rates,
reference is made to Item 7A: Quantitative and Qualitative Disclosures about
Market Risk contained in Part II of our Annual Report on Form 10-K
for the fiscal year ended December 27, 2008. Our exposure to market risk
has not changed materially since December 27, 2008.
Item 4.
Controls and
Procedures
Evaluation of Disclosure Controls and Procedures
Based
on our managements evaluation (with the participation of our principal
executive officer and principal financial officer), as of the end of the period
covered by this report, our principal executive officer and principal financial
officer have concluded that our disclosure controls and procedures (as defined
in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange
Act of 1934, as amended, (the Exchange Act)) are effective to ensure that
information required to be disclosed by us in reports that we file or submit
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in Securities and Exchange Commission rules and
forms and is accumulated and communicated to our management, including our
principal executive officer and principal financial officer, as appropriate to
allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There
was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act) during our second quarter of fiscal 2009
that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
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 14 - Commitments
and Contingencies of the Notes to Condensed Consolidated Financial Statements
of this Form 10-Q is incorporated herein by reference.
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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 27,
2008, 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.
The global economic downturn could continue to negatively
affect our business, results of operations, and financial condition.
The ongoing financial crisis and resulting global
economic downturn have caused and could continue to cause adverse effects on
our business. Our customers could continue to curtail their capital
expenditures and to defer their adoption of emerging technologies in response
to slow demand for consumer and other products incorporating devices tested
with our wafer probes. We may also experience the insolvency of key suppliers,
leading to delays in the development and shipment of our products, increased
expense and a loss of revenue. For example, Electroglas, Inc., which
has been an important technology partner in the development of certain
manufacturing equipment for future products, filed for bankruptcy protection in
June 2009 and its business is expected to be sold in the bankruptcy
proceedings. The future of Electroglass business is uncertain, and if
Electroglas, or the acquirer of Electroglass business, fails to perform its
obligations under its agreements with us our ability to complete our new
products on a timely basis could be impaired. While we have
internal capabilities regarding the manufacturing equipment development effort
and have also engaged with third parties on the development of manufacturing
equipment having similar functionality, it is possible that those internal
efforts and engagements will have a lengthy bring-up time and negatively impact
our ability to complete new products and realize revenue from those products.
We may also experience increased impairment charges
due to declines in the fair values of marketable debt securities. Further, a
protracted downturn could result in additional customers filing for bankruptcy
protection or insolvency proceedings, which would continue to negatively impact
our ability to collect accounts receivables and realize revenue for product
shipped to such customers. For example, in fiscal 2009, our customers, Spansion
and Qimonda filed such actions in the United States and other jurisdictions.
Continued turbulence in the U.S. and international markets and economies may
adversely affect our liquidity and financial condition, and the liquidity and
financial condition of our customers and their ability to obtain financing.
We derive a
substantial portion of our revenues from a small number of customers, and we
could continue to experience significant declines in our revenues if any major
customer does not place, cancels, reduces or delays a purchase of our products,
or does not pay us.
A relatively small number of
customers have accounted for a significant portion of our revenues in any
particular period. One customer accounted for 42.8% of our revenues in the
quarter ended June 27, 2009, and three customers accounted for 58.6% of
our revenues in the quarter ended June 27, 2009. In the second quarter of
fiscal 2009, our ten largest customers accounted for 83.1% 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. In the
first quarter of fiscal 2009, fewer than ten customers accounted for all of our
revenues. As a result of the ongoing global economic and semiconductor
downturns, we have experienced significant declines in our revenues. In the
future, the cancellation, reduction or deferral of even a small number of
purchases of our products could significantly reduce our revenues in any
particular quarter. Cancellations, reductions or deferrals could result from a
prolonged or another 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.
Furthermore, because our probe cards are custom products designed for our
customers unique wafer designs, any cancellations, reductions or delays can
result in significant, non-recoverable costs. In some situations, our customers
might be able to cancel or reduce orders without a significant penalty. Our
customers could also fail to pay all or part of an invoice for our products. In
the current global economic and semiconductor industry downturns, we are more
exposed to this non-payment risk because of concerns regarding the financial
viability of certain semiconductor manufacturers. For example, in the first
quarter of fiscal 2009, we recorded a $5.2 million pre-tax expense to
increase our allowance for doubtful accounts as a result of the heightened
non-payment risk of accounts receivable primarily related to three customers.
Additionally, on February 20, 2009, we filed a complaint in a California
state superior court against Spansion, LLC in which we are seeking, among other
things, payment of approximately $8.1 million for probe cards purchased by
and delivered to Spansion; the action was stayed by Spansion LLCs filing for bankruptcy
protection in the United States. We may
be unable to recognize revenue and we may incur additional charges for bad debt
reserve to the extent certain of our customers continue to face financial
difficulties during this downturn. It is also possible that if we make the
decision to file one or more additional actions against customers to seek
payment of outstanding receivables that it will negatively impact a customer
relationship and result in lost revenues in the future. Customers with financial difficulties may be
forced to materially reduce or discontinue operations, file for bankruptcy or
other relief, or may be acquired by one of our other customers, any of which
would further reduce our customer base.
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The markets in
which we participate are competitive, and if we do not compete effectively, our
operating results could be harmed.
We are experiencing increased competition in the wafer
probe card market and we expect competition to intensify in the future.
Increased competition has resulted and in the future is likely to result in
price reductions, reduced gross margins or loss of market share. Competitors
might introduce new competitive products for the same markets that our products
currently serve. These products may have better performance, lower prices
and/or broader acceptance than our products. In addition, for products such as
wafer probe cards, semiconductor manufacturers typically qualify more than one
source, to avoid dependence on a single source of supply. As a result, our
customers would likely purchase products from our competitors. Current and
potential competitors include Aehr Test Systems, AMST Co., Ltd.,
Feinmetall GmbH, Japan Electronic Materials Corporation, Korea
Instrument Co., Ltd., SV Probe Inc., Micronics
Japan Co., Ltd., Microfriend Inc., MicroProbe Inc., Phicom
Corporation, Technoprobe Asia Pte. Ltd., Tokyo Cathode Laboratory Co., Ltd.,
TSE Co., Ltd., Verigy Ltd., and Wentworth Laboratories, Inc.,
among others. Many of our current and potential competitors have greater name
recognition, larger customer bases, more established customer relationships or
greater financial, technical, manufacturing, marketing and other resources than
we do. As a result, they might be able to respond more quickly to new or
emerging technologies and changes in customer requirements, devote greater
resources to the development, promotion, sale and support of their products,
and reduce prices to increase market share. Some of our competitors also supply
other types of test equipment, or offer both advanced wafer probe cards and
needle probe cards. Those competitors that offer both advanced wafer probe
cards and needle probe cards might have strong, existing relationships with our
existing customers or with potential customers. Because we do not offer a
needle probe card or other conventional technology wafer probe card for less
advanced applications, it may be difficult for us to introduce our advanced
wafer probe cards to these customers and potential customers for certain wafer
test applications. It is also possible
that one or more of our competitors may be able to increase their relative
revenue with mutual customers, resulting in a loss of revenue share to us. It is further possible that existing or new
competitors, including test equipment manufacturers, may offer new technologies
that reduce the value of our wafer probe cards.
If we fail to protect
our proprietary rights, our competitors might gain access to our technology,
which could adversely affect our ability to compete successfully in our markets
and harm our operating results.
If we chose not to protect our proprietary rights
adequately or fail in our efforts to protect our proprietary rights, our
competitors might gain access to our technology. Unauthorized parties might
attempt to copy aspects of our products or to obtain and use information that
we regard as proprietary. Others might independently develop similar or
competing technologies or methods or design around our patents. In addition,
the laws of many foreign countries in which we or our customers do business do
not protect our intellectual property rights to the same extent as the laws of
the United States. To date, we have not been successful in our efforts to
enforce our proprietary rights in South Korea.
As a result, our proprietary rights could be compromised, our
competitors might offer products similar to ours and we might not be able to
compete successfully. We also cannot assure that:
·
our
means of protecting our proprietary rights will be adequate;
·
patents
will be issued from our pending or future applications;
·
our
existing or future patents will be sufficient in scope or strength to provide
any meaningful protection or commercial advantage to us;
·
our
patents or other intellectual property will not be invalidated, circumvented or
successfully challenged in the United States or foreign countries; or
·
others
will not misappropriate our proprietary technologies or independently develop
similar technologies, duplicate our products or design around any of our
patents or other intellectual property, or attempt to manufacture and sell
infringing products in countries that do not strongly enforce intellectual
property rights.
We have spent in the past and may be required to spend
in the future significant resources to monitor and protect our intellectual
property rights. We presently believe that it is likely that two or more of our
competitors are using methodologies or have implemented structures into certain
of their products that are covered by one or more of our intellectual property
rights. We have in the past brought claims to protect our rights, and we are
currently involved in patent infringement litigation, including an ongoing
proceeding against two competitors before the International Trade Commission,
or ITC. The ITC administrative law judge issued a decision, or initial
determination, on June 29, 2009, which did not find infringement of our
asserted claims under the four U.S. patents at issue and therefore, did not
find a violation of Section 337 of the Tariff Act of 1930. We have filed
additional briefing to the ITC seeking review of parts of the June 29
th
initial
determination. We, however, may not obtain a favorable ruling from the
ITC. In certain cases, our competitors
have initiated re-examination proceedings in the U.S. Patent and Trademark
Office and
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invalidity proceedings in foreign patent offices
against certain of our patents. Any litigation, whether or not resolved in our
favor, and whether initiated by us or by a third party, could result in
significant and possibly material expense to us and divert the efforts of our
management and technical personnel. In addition, while patents are territorial
and a ruling on a certain given patent does not necessarily impact the validity
or enforceability of a corresponding or related patent in a different country,
an adverse ruling in one country might negatively impact our ability to enforce
the corresponding or related patent in other countries. Finally, certain of our
customer contracts contain provisions that require us to defend and/or
indemnify our customers for third party intellectual property infringement
claims, which would increase the cost to us of an adverse ruling in such a
claim. An adverse determination could also negatively impact our ability to
license certain of our technologies and methods to others, and result in our
competitors being allowed to sell products with, or add to their products,
features and benefits contained in our products, thereby reducing our
competitive advantages over these competing products.
If we do not
innovate and keep pace with technological developments in the semiconductor
industry, our products might not be competitive and our revenues and operating
results could suffer.
We must continue to innovate and to invest in research
and development to improve our competitive position and to meet the testing
requirements of our customers. Our future growth depends, in significant part,
upon our ability to work effectively with and anticipate the testing needs of
our customers and to develop and support new products and product enhancements
to meet these needs on a timely and cost-effective basis. Our customers
testing needs are becoming more challenging as the semiconductor industry
continues to experience rapid technological change driven by the demand for
complex circuits that are shrinking in size and at the same time are increasing
in speed and functionality and becoming less expensive to produce. Examples of
trends driving demand for technological research and development include
semiconductor manufacturers transitions to 70 and below nanometer technology
nodes, to one gigabit density devices, to Double Data Rate II, or DDR II,
architecture devices, and to Double Data Rate III, or DDR III, architecture
devices. Our customers expect that they will be able to integrate our wafer
probe cards into any manufacturing process as soon as it is deployed.
Therefore, to meet these expectations and remain competitive, we must
continually design, develop and introduce on a timely basis new products and product
enhancements with improved features. Successful product design, development and
introduction on a timely basis require that we:
·
design
innovative and performance-enhancing product architectures, technologies and
features that differentiate our products from those of our competitors;
·
in
some cases engage with third parties who have particular expertise in order to
complete one or more aspects of the design and manufacturing process;
·
transition
our products to new manufacturing technologies;
·
identify
emerging technological trends in our target markets;
·
maintain
effective marketing strategies;
·
respond
effectively to technological changes or product announcements by others; and
·
adjust
to changing market conditions quickly and cost-effectively.
Not only do we need the technical expertise to
implement the changes necessary to keep our technologies current, but we must also
rely heavily on the judgment of our management to anticipate future market
trends. If we are unable to timely predict industry changes, or if we are
unable to modify our products or design, manufacture and deliver new products
on a timely basis, or if a third party with which we engage does not timely
deliver a component or service for one of our product modifications or new
products, we might lose customers or market share. In addition, we might not be
able to recover our research and development expenditures, which could harm our
operating results.
If semiconductor manufacturers do not
migrate elements of final test to wafer probe test, market acceptance of other
applications of our technology could be delayed.
We are working with some existing
and new customers as they evolve the focus of their semiconductor test efforts
from the individual device level to the wafer level. This evolution is
typically a long-term process in which the outcome and the affect on our
business is not clear. Semiconductor manufacturers might not adopt
wafer-level final test in a way that uses our technology. Our technology
to perform elements of final test on the wafer may not scale with the needs of
semiconductor manufacturers. Further, the pace and manner in which wafer-level
testing is adopted will also vary by manufacturer and will be affected by
factors like capital tooling cycles and end market growth in different
application segments. We believe, for example, that testing in stacked
packaging or 3-D packaging applications is more likely to migrate to wafer
level test than other applications. If the migration of elements of
final test to wafer probe test does not grow as we anticipate, or if
semiconductor manufacturers do not adopt our technology for their wafer probe
test requirements, market acceptance of other applications for our technology
could be delayed. In addition, to the extent manufacturers do not invest in
wafer test technology enabling the identification of known good die, or KGD, or
if the projected or anticipated investment in such technology is delayed or
reduced, it could delay the introduction of certain of our technologies and
negatively affect our business.
Changes in test strategies, equipment
and processes could cause us to lose revenues.
The
demand for wafer probe cards depends in large part upon the number of
semiconductor designs, the pace of technology and architecture transitions in
chip designs, and overall semiconductor unit volume. The time it takes to test
a wafer depends upon the number of devices being tested, the complexity of
these devices, the test software program and the test equipment itself.
As test programs become increasingly effective and test throughput
increases, the number of wafer probe cards required to test a given volume of
devices declines. Therefore, advances in the test process could cause us to
lose sales. Further, most semiconductor manufacturers are
implementing chip designs featuring built-in self-test (BIST) capabilities or
similar design for testability (DFT) functions or methodologies that increase
test throughput and reduce the cost of test
.
These efforts include strategies
to reduce the technical requirements on test equipment, or to improve gather
data about device performance early in the manufacturing process, or to test
the device later in the life of the product for quality assurance
purposes. In some cases, BIST or DFT can create opportunities for
our technologies. In other cases BIST or DFT can reduce requirements for
wafer level test and therefore reduce our opportunities. Although we seek
to work with our customers to show ways that our technologies can be applied
together with BIST and DFT approaches to create opportunities to further reduce
the cost of test, the overall impact of BIST and DFT technologies, as
they exist today and as they may be developed in the future, could slow the
migration to wafer level testing and adversely affect our revenues.
Similar results could occur if new chip designs are implemented which we
are unable to test efficiently, or if semiconductor manufacturers reduce
generally the amount or degree of wafer test they perform. We incur
significant research and development expenses in conjunction with the
introduction of new product architectures and platforms. Often, we time our
product introductions to the introduction of new test equipment platforms or
the declination of manufacturers to adopt a new test platform. Because our
customers require both test equipment and wafer probe cards, any delay or
disruption in the introduction of new test equipment platforms would negatively
affect our growth.
We have recorded
significant restructuring, inventory write-off and asset impairment charges in
the past and may do so again in the future, which could have a material
negative impact on our business.
We recorded material restructuring charges related to
our global workforce reductions and impairment charges related to our
long-lived assets in the first and second quarters of fiscal 2008 and the first
quarter of fiscal 2009. If the current challenging economic conditions persist,
we may implement additional cost-reduction actions, which would require us to
take additional, potentially material, restructuring charges related to, among
other things, employee terminations or asset disposal or exit costs. We may
also be required to write off additional inventory if our product build plans
or usage of inventory experience further declines, and such additional
write-offs could constitute material charges. In addition, a further decline in
our stock price or significant adverse change in market conditions could
require us to take additional material
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impairment charges related to our long-lived assets.
Our long-lived assets with estimable useful lives are amortized over their
respective estimated useful lives using the straight-line method, and are
reviewed for impairment in accordance with SFAS No. 144,
Accounting for Impairment or Disposal of Long-Lived Assets
.
The valuation of our long-lived assets requires assumptions and estimates of
many critical factors, including revenue and market growth, operating cash
flows, market multiples, and discount rates. Declines in our stock price, or
any other adverse change in market conditions, particularly if such change has
the effect of changing one of the critical assumptions or estimates we used to
calculate the amount of impairment charge, could result in a change to the
estimation of fair value that could result in future impairment charges. Any
such additional material charges, whether related to restructuring or asset
impairment, may have a material negative impact on our operating results and
related financial statements.
Changes
in our tax rates, inability to realize our deferred tax assets or exposure to
additional tax liabilities could adversely affect our operating results.
We are subject to income taxes in both the United
States and various foreign jurisdictions, and our domestic and international
tax liabilities are subject to the allocation of expenses in different
jurisdictions. Our effective tax rate could be adversely affected by changes in
the mix of earnings in countries with different statutory tax rates, the
inability to realize our deferred tax assets, as a result of recurring losses,
changes in tax laws such as reducing the export sales and research and
development tax credits, changes in our operational activities in connection
with implementation of our global regionalization strategy, and material audit
assessments. For example, realization of our deferred tax assets, which are
predominantly in the United States, is dependent on our ability to generate
sufficient future taxable income in the United States. If we determine that we
may not be able to realize some portion of our deferred tax assets in the
future, we would record a valuation allowance against the deferred tax assets
that could result in additional income tax expense. For example, in the second
quarter of fiscal 2009, we recorded a non-cash charge of $44.7 million to
establish a valuation allowance against the excess tax benefits recognized in
prior quarters since they are no longer more likely than not realizable. This valuation allowance will not limit our
ability to utilize our
federal and state
deferred tax assets to offset future U.S. profits. In
addition, the amount of income taxes we pay could be subject to ongoing audits in various
jurisdictions and a material assessment by a governing tax authority could
adversely affect our operating results.
Our equity plans have evergreen provisions that
automatically increase the number of shares available for issuance each year
without stockholder approval, and as a result of this annual increase in
shares, you may experience dilution and we may not seek your approval for
further additions to our existing plans or for new plans.
Our 2002 Equity Incentive Plan and 2002 Employee Stock
Purchase Plan have evergreen provisions that automatically increase the number
of shares available for issuance under these plans each year without
stockholder approval. Specifically, our 2002 Equity Incentive Plans evergreen
provision increases the number of shares available for issuance on each January 1
st
by an amount
equal to 5% of the total amount of the companys outstanding common stock as of
December 31
st
of
the prior year, and our 2002 Employee Stock Purchase Plans evergreen provision
increases the number of shares available for issuance on each January 1
st
by an amount
equal to 1% of the total amount of the companys outstanding common stock as of
December 31
st
of
the prior year. These evergreen provisions, which have a compounding effect,
have been in place since the adoption of the plans in 2003. In 2009, these
evergreen provisions added 2,453,115 shares to the 2002 Equity Incentive Plan
and 490,623 shares to the 2002 Employee Stock Purchase Plan, which shares were
available for issuance on January 1, 2009. In 2008, these evergreen
provisions added 2,432,112 shares to the 2002 Equity Incentive Plan and 486,422
shares to the 2002 Employee Stock Purchase Plan, which shares were available
for issuance on January 1, 2008, and we had 49,062,308 shares of common
stock outstanding on December 27, 2008. In 2007, these evergreen
provisions added 2,343,067 shares to the 2002 Equity Incentive Plan and 468,613
shares to the 2002 Employee Stock Purchase Plan, which shares were available
for issuance on January 1, 2007, and we had 48,642,258 shares of common
stock outstanding on December 29, 2007. In 2006, these evergreen
provisions added 2,011,834 shares to the 2002 Equity Incentive Plan and 402,366
shares to the 2002 Employee Stock Purchase Plan, which shares were available
for issuance on January 1, 2006, and we had 46,861,334 shares of common
stock outstanding on December 30, 2006. In 2005, these evergreen
provisions added 1,944,281 shares to the 2002 Equity Incentive Plan and 388,856
shares to the 2002 Employee Stock Purchase Plan, which shares were available
for issuance on January 1, 2005, and we had 40,236,686 shares of common
stock outstanding on December 31, 2005. In 2004, these evergreen
provisions added 1,840,502 shares to the 2002 Equity Incentive Plan and 368,100
shares to the 2002 Employee Stock Purchase Plan, which shares were available
for issuance on January 1, 2004, and we had 38,885,637 shares of common
stock outstanding on December 25, 2004. Since the adoption of the plans,
we have added 13,024,911 shares to the 2002 Equity Incentive Plan and 2,604,980
shares under the 2002 Employee Stock Purchase Plan. Due to the annual increase
in the amount of shares available for issuance under these equity plans and to
the extent that we issue these shares and they become outstanding, you will
experience dilution. While the equity
plans are in effect, it is more likely that due to the plans' evergreen
provision, we will not ask our stockholders to approve or disapprove further
additions to the plans. In addition,
while the equity plans are in effect, it is more likely that due to the plans'
evergreen provisions, we will not ask our stockholders to approve or disapprove
the adoption of any new equity plans.
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Item
4.
Submission of Matters to a Vote of
Security Holders
We held our 2009 Annual Meeting of Stockholders on May 20,
2009 at our corporate headquarters at 7005 Southfront Road, Livermore, California
94551. At the meeting, our stockholders voted on the following two proposals
and cast their votes as follows to approve such proposals:
Proposal 1: To elect two Class III directors to
our board of directors, each to serve on our Board of Directors until his
successor has been elected and qualified or until his earlier death,
resignation or removal. The director nominees were:
Nominee
|
|
For
|
|
Withheld
|
|
James
A. Prestridge
|
|
46,610,369
|
|
485,143
|
|
Harvey
A. Wagner
|
|
46,543,774
|
|
551,738
|
|
Our board of directors consists of seven members and
is divided into three classes Class I, II and III. Each director is
elected for a three-year term of office, with one class of directors being
elected at each annual meeting of stockholders.
Proposal 2: To ratify the selection of
PricewaterhouseCoopers LLP as our independent registered public accounting firm
for fiscal year 2009:
For
|
|
Against
|
|
Abstain
|
|
46,972,720
|
|
54,817
|
|
67,975
|
|
Item 6.
Exhibits
The following exhibits are
filed herewith:
Exhibit
|
|
|
|
Incorporated by Reference
|
|
Filed
|
Number
|
|
Exhibit Description
|
|
Form
|
|
Date
|
|
Number
|
|
Herewith
|
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.
39
Table of
Contents
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.
|
|
|
|
|
|
|
By:
|
/s/ JEAN B.
VERNET
|
|
|
|
Jean B. Vernet
|
|
|
|
Chief Financial
Officer
|
|
|
|
(Principal
Financial Officer and Principal Accounting Officer)
|
|
|
|
|
Date: August 6,
2009
|
|
|
|
40
Table of
Contents
EXHIBIT
INDEX
Exhibit
|
|
|
|
Incorporated by Reference
|
|
Filed
|
Number
|
|
Exhibit Description
|
|
Form
|
|
Date
|
|
Number
|
|
Herewith
|
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.
41
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