Document
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-Q
 
(Mark one)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 30, 2019
 
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
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
7005 Southfront Road, Livermore, California 94551
(Address of principal executive offices, including zip code)
 
(925) 290-4000
(Registrant’s 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 ý  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 ý  No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated filer x
 
Accelerated filer o
 
 
 
Non-accelerated filer o
 
Smaller reporting company o
(Do not check if a smaller reporting company)
 
 
Emerging growth company o
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  o   

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No ý 

As of May 1, 2019, 74,581,339 shares of the registrant’s common stock, par value $0.001 per share, were outstanding.
 



FORMFACTOR, INC.
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 30, 2019
INDEX

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2



PART I - FINANCIAL INFORMATION
 
Item 1. Financial Statements
 
FORMFACTOR, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
(Unaudited)
 
March 30,
2019
 
December 29, 2018
ASSETS
 

 


Current assets:
 

 
 

Cash and cash equivalents
$
105,759

 
$
98,472

Marketable securities
54,086

 
50,531

Accounts receivable, net of allowance for doubtful accounts of $185 and $185
81,492

 
95,333

Inventories, net
83,216

 
77,706

Restricted cash
824

 
849

Refundable income taxes
1,261

 
1,260

Prepaid expenses and other current assets
11,747

 
13,669

Total current assets
338,385

 
337,820

Restricted cash
1,130

 
1,225

Operating lease, right-of-use-assets
34,397

 

Property, plant and equipment, net of accumulated depreciation of $266,274 and $263,102
54,697

 
54,054

Goodwill
188,925

 
189,214

Intangibles, net
60,385

 
67,640

Deferred tax assets
77,293

 
77,301

Other assets
1,409

 
968

Total assets
$
756,621

 
$
728,222

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 
Current liabilities:
 

 
 
Accounts payable
$
31,555

 
$
40,006

Accrued liabilities
22,559

 
27,731

Current portion of term loan, net of unamortized issuance cost of $128 and $160
33,622

 
29,840

Deferred revenue
6,885

 
4,941

Operating lease liabilities
6,022

 

Total current liabilities
100,643

 
102,518

Term loan, less current portion, net of unamortized issuance cost of $10 and $29
23,740

 
34,971

Deferred tax liabilities
2,306

 
2,355

Long-term operating lease liabilities
32,239

 

Other liabilities
4,705

 
8,214

Total liabilities
163,633

 
148,058


 

 
 
Stockholders’ equity:
 

 
 
Preferred stock, $0.001 par value:
 

 
 
10,000,000 shares authorized; no shares issued and outstanding

 

Common stock, $0.001 par value:
 

 
 
250,000,000 shares authorized; 74,488,498 and 74,139,712 shares issued and outstanding
74

 
74

Additional paid-in capital
871,617

 
862,897

Accumulated other comprehensive income (loss)
(599
)
 
780

Accumulated deficit
(278,104
)
 
(283,587
)
Total stockholders’ equity
592,988

 
580,164

Total liabilities and stockholders’ equity
$
756,621

 
$
728,222

 
The accompanying notes are an integral part of these condensed consolidated financial statements. 

3



FORMFACTOR, INC.
 CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
 
Three Months Ended
 
March 30,
2019
 
March 31,
2018
Revenues
$
132,213

 
$
118,290

Cost of revenues
79,692

 
73,161

Gross profit
52,521

 
45,129

Operating expenses:
 

 
 

Research and development
19,723

 
18,046

Selling, general and administrative
25,184

 
23,449

Total operating expenses
44,907

 
41,495

Operating income
7,614

 
3,634

Interest income
580

 
257

Interest expense
(595
)
 
(967
)
Other expense, net
(84
)
 
(512
)
Income before income taxes
7,515

 
2,412

Provision for income taxes
2,032

 
287

Net income
$
5,483

 
$
2,125

Net income per share:
 
 
 
Basic
$
0.07

 
$
0.03

Diluted
$
0.07

 
$
0.03

Weighted-average number of shares used in per share calculations:
 
 
 

Basic
74,362

 
72,826

Diluted
76,009

 
74,342

 
The accompanying notes are an integral part of these condensed consolidated financial statements.

4



FORMFACTOR, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
 
Three Months Ended
 
March 30,
2019
 
March 31,
2018
Net income
$
5,483

 
$
2,125

Other comprehensive income (loss), net of tax:
 
 
 
Translation adjustments and other
(917
)
 
2,166

Unrealized gains (losses) on available-for-sale marketable securities
151

 
(174
)
Unrealized gains (losses) on derivative instruments
(613
)
 
172

Other comprehensive income (loss), net of tax
(1,379
)
 
2,164

Comprehensive income
$
4,104

 
$
4,289


The accompanying notes are an integral part of these condensed consolidated financial statements.


5



FORMFACTOR, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
(Unaudited)
 
Shares
 
Common Stock
 
Additional Paid-in Capital
 
Accumulated Other Comprehensive Income
 
Accumulated Deficit
 
Total
 
Three Months Ended March 30, 2019
Balances, December 29, 2018
74,139,712

 
$
74

 
$
862,897

 
$
780

 
$
(283,587
)
 
$
580,164

Issuance of common stock under the Employee Stock Purchase Plan
301,497

 

 
3,670

 

 

 
3,670

Issuance of common stock pursuant to exercise of options for cash
19,207

 

 
90

 

 

 
90

Issuance of common stock pursuant to vesting of restricted stock units, net of stock withheld for tax
28,082

 

 
(302
)
 

 

 
(302
)
Stock-based compensation

 

 
5,262

 

 

 
5,262

Other comprehensive loss

 

 

 
(1,379
)
 

 
(1,379
)
Net income

 

 

 

 
5,483

 
5,483

Balances, March 30, 2019
74,488,498

 
$
74

 
$
871,617

 
$
(599
)
 
$
(278,104
)
 
$
592,988

 
Three Months Ended March 31, 2018
Balances, December 30, 2017
72,532,176

 
$
73

 
$
843,116

 
$
3,021

 
$
(387,573
)
 
$
458,637

Issuance of common stock under the Employee Stock Purchase Plan
341,670

 
1

 
3,704

 

 

 
3,705

Issuance of common stock pursuant to exercise of options for cash
105,610

 

 
1,049

 

 

 
1,049

Issuance of common stock pursuant to vesting of restricted stock units, net of stock withheld for tax
34,386

 

 
(357
)
 

 

 
(357
)
Stock-based compensation

 

 
3,737

 

 

 
3,737

Adoption of ASU 2017-12

 

 

 

 
(50
)
 
(50
)
Other comprehensive income

 

 

 
2,164

 

 
2,164

Net income

 

 

 

 
2,125

 
2,125

Balances, March 31, 2018
73,013,842

 
$
74

 
$
851,249

 
$
5,185

 
$
(385,498
)
 
$
471,010


The accompanying notes are an integral part of these condensed consolidated financial statements.

6



FORMFACTOR, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
Three Months Ended
 
March 30, 2019
 
March 31, 2018
Cash flows from operating activities:
 

 
 

Net income
$
5,483

 
$
2,125

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 

Depreciation
3,947

 
3,525

Amortization
7,090

 
7,194

Amortization (accretion) of discount on investments
(71
)
 
23

Amortization of operating lease, right-of-use assets
1,277

 

Stock-based compensation expense
5,295

 
3,756

Amortization of debt issuance costs
51

 
123

Deferred income tax provision

 
59

Provision for excess and obsolete inventories
2,725

 
2,045

Loss on disposal of long-lived assets
118

 
15

Loss on derivative instruments
59

 

Foreign currency transaction losses (gains)
121

 
(561
)
Changes in assets and liabilities:
 
 
 
Accounts receivable
13,805

 
3,354

Inventories
(8,658
)
 
(7,408
)
Prepaid expenses and other current assets
2,167

 
(247
)
Refundable income taxes
(1
)
 
(52
)
Other assets
(564
)
 
662

Accounts payable
(7,148
)
 
2,988

Accrued liabilities
(6,275
)
 
(9,521
)
Income tax payable
943

 
(829
)
Other liabilities
33

 
2,515

Deferred revenues
1,931

 
(444
)
Operating lease liabilities
(1,690
)
 

Net cash provided by operating activities
20,638

 
9,322

Cash flows from investing activities:
 

 
 

Acquisition of property, plant and equipment
(6,028
)
 
(3,831
)
Proceeds from sale of a subsidiary
28

 
20

Purchases of marketable securities
(12,382
)
 
(3,587
)
Proceeds from maturities of marketable securities
9,050

 
4,007

Net cash used in investing activities
(9,332
)
 
(3,391
)
Cash flows from financing activities:
 

 
 

Proceeds from issuances of common stock
3,870

 
4,754

Tax withholdings related to net share settlements of equity awards
(302
)
 
(357
)
Principal repayments on term loan
(7,500
)
 
(8,750
)
Net cash used in financing activities
(3,932
)
 
(4,353
)
Effect of exchange rate changes on cash, cash equivalents and restricted cash
(207
)
 
1,078

Net increase in cash, cash equivalents and restricted cash
7,167

 
2,656

Cash, cash equivalents and restricted cash, beginning of period
100,546

 
92,726

Cash, cash equivalents and restricted cash, end of period
$
107,713

 
$
95,382

Non-cash investing and financing activities:
 

 
 

Change in accounts payable and accrued liabilities related to property, plant and equipment purchases
$
(1,253
)
 
$
601

Operating lease, right-of-use assets obtained in exchange for lease obligations
35,713

 

Supplemental disclosure of cash flow information:
 
 
 
Cash paid for income taxes, net
$
1,082

 
$
771

Cash paid for interest
302

 
826

The accompanying notes are an integral part of these condensed consolidated financial statements.

7



FORMFACTOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1 — Basis of Presentation and New Accounting Pronouncements
 
Basis of Presentation
The accompanying condensed consolidated financial information of FormFactor, Inc. is unaudited and has been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission. However, such information reflects all adjustments, consisting only of normal recurring adjustments, which are, in the opinion of management, necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods. The financial information as of December 29, 2018 is derived from our 2018 Annual Report on Form 10-K. The condensed consolidated financial statements included herein should be read in conjunction with the consolidated financial statements and the notes thereto included in our 2018 Annual Report on Form 10-K. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the full year.
 
Fiscal Year 
We operate on a 52/53 week fiscal year, whereby the fiscal year ends on the last Saturday of December. Fiscal 2019 and 2018 each contain 52 weeks and the three months ended March 30, 2019 and March 31, 2018 each contained 13 weeks. Fiscal 2019 will end on December 28, 2019.

Reclassifications
Certain immaterial reclassifications were made to the prior period financial statements to conform to the current period presentation.

Critical Accounting Policies
Our critical accounting policies have not changed during the three months ended March 30, 2019 from those disclosed in our Annual Report on Form 10-K for the year ended December 29, 2018.

New Accounting Pronouncements

ASU 2018-15
In August 2018, the Financial Accounting Standard Board ("FASB") issued Accounting Standards Update ("ASU") 2018-15, "Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract." The new guidance clarifies the accounting for implementation costs in cloud computing arrangements. ASU 2018-15 is effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. ASU 2018-15 should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. We have not yet determined the impact of this standard on our financial statements.

ASU 2016-02, ASU 2018-10, ASU 2018-11 and ASU 2019-01
In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)," which requires the recognition of right-of-use assets and lease liabilities for all long-term leases, including operating leases, on the balance sheet. ASU 2016-02 was amended in July 2018 by both ASU 2018-10, "Codification Improvements to Topic 842, Leases," and ASU 2018-11, "Leases (Topic 842): Targeted Improvements" and in March 2019 by ASU 2019-01, "Leases (Topic 842): Codification Improvements." ASU 2016-02 provides additional guidance on the measurement of the right-of-use assets and lease liabilities and requires enhanced disclosures about our leasing arrangements. We adopted Topic 842 and all related amendments on December 30, 2018, the first day of fiscal 2019, using the modified transition approach. The modified transition approach permits a company to use its effective date as the date of initial application to apply the standard to its leases, and, therefore, not restate comparative prior period financial information. Consequently, prior period financial information is not updated, and the disclosures required under the new standard will not be provided for dates and periods before December 30, 2018. The standard provides several optional practical expedients in transition. We elected the ‘package of practical expedients,’ which permits us to not reassess, under the new standard, our prior conclusions about lease identification, lease classification and initial direct costs. We did not elect the use-of-hindsight or the practical expedient pertaining to land easements; the latter not being applicable to us. The new standard also provides practical expedients for an entity’s ongoing accounting. We elected the short-term lease recognition exemption. This means, for those leases that qualify, we will not recognize a right-of-use asset or lease liability, and this includes not recognizing right-of-use assets or lease liabilities for existing short-term leases of those assets in transition. We also elected the practical expedient to not separate lease and non-lease components for all our leases. The adoption of the lease standard did not have any effect on our previously reported Condensed

8



Consolidated Statements of Operations and did not result in a cumulative catch-up adjustment to opening equity. See Note 12 for additional information.

Note 2 — Concentration of Credit and Other Risks

Each of the following customers accounted for 10% or more of our revenues for the periods indicated:
 
Three Months Ended
 
March 30, 2019
 
March 31, 2018
Intel Corporation
21.3
%
 
14.0
%
SK Hynix Inc.
*

 
10.1

Samsung Electronics., LTD.
13.8

 
*


35.1
%
 
24.1
%
*Represents less than 10% of total revenues.

At March 30, 2019, two customers accounted for 16.7% and 10.7% of gross accounts receivable, respectively. At December 29, 2018, two customers accounted for 27.8% and 13.0% of gross accounts receivable, respectively.

Note 3 — Inventories, net

Inventories are stated at the lower of cost (principally standard cost, which approximates actual cost on a first in, first out basis) or net realizable value.
 
Inventories, net, consisted of the following (in thousands):
 
March 30,
2019
 
December 29,
2018
Raw materials
$
44,627

 
$
43,380

Work-in-progress
22,356

 
20,431

Finished goods
16,233

 
13,895

 
$
83,216

 
$
77,706


Note 4 — Goodwill and Intangible Assets

Goodwill by reportable segment was as follows (in thousands):
 
Probe Cards
 
Systems
 
Total
Goodwill, gross, as of December 30, 2017
$
172,482

 
$
17,438

 
$
189,920

Foreign currency translation

 
(706
)
 
(706
)
Goodwill, gross, as of December 29, 2018
172,482

 
16,732

 
189,214

Foreign currency translation

 
(289
)
 
(289
)
Goodwill, gross, as of March 30, 2019
$
172,482

 
$
16,443

 
$
188,925


We have not recorded any goodwill impairments as of March 30, 2019.

9




Intangible assets were as follows (in thousands):
 
 
March 30, 2019
 
December 29, 2018
Other Intangible Assets
 
Gross
 
Accumulated Amortization
 
Net
 
Gross
 
Accumulated Amortization
 
Net
Existing developed technologies 
 
$
143,179

 
$
101,708

 
$
41,471

 
$
143,408

 
$
97,111

 
$
46,297

Trade name
 
11,997

 
10,206

 
1,791

 
12,023

 
9,173

 
2,850

Customer relationships
 
40,077

 
22,954

 
17,123

 
40,146

 
21,653

 
18,493

 
 
$
195,253

 
$
134,868

 
$
60,385

 
$
195,577

 
$
127,937

 
$
67,640


Amortization expense was included in our Condensed Consolidated Statements of Income as follows (in thousands):
 
Three Months Ended
 
March 30,
2019
 
March 31,
2018
Cost of revenues
$
4,719

 
$
5,157

Selling, general and administrative
2,371

 
2,037

 
$
7,090

 
$
7,194


The estimated future amortization of intangible assets is as follows (in thousands):
Fiscal Year
Amount
Remainder of 2019
$
19,249

2020
23,318

2021
12,592

2022
3,484

2023
1,742

 
$
60,385


Note 5 — Accrued Liabilities

Accrued liabilities consisted of the following (in thousands):
 
March 30, 2019
 
December 29, 2018
Accrued compensation and benefits
$
13,135

 
$
15,600

Accrued employee stock purchase plan contributions withheld
1,475

 
3,174

Accrued warranty
2,021

 
2,102

Accrued income and other taxes
2,906

 
4,222

Other accrued expenses
3,022

 
2,633

 
$
22,559

 
$
27,731



10



Note 6 — Restructuring Charges
 
Restructuring charges in the first quarter of fiscal 2019 compromised of costs related to employee termination benefits, cost of long-lived asset abandonment, as well as inventory write downs.

Restructuring charges were included in our Consolidated Statement of Operations as follows (in thousands):
 
Three Months Ended
 
March 30, 2019
 
March 31, 2018
Cost of revenues
$
120

 
$

Selling, general, and administrative
89

 

 
$
209

 
$


Changes to the restructuring accrual in the three months ended March 30, 2019 were as follows (in thousands):
 
Employee Severance and Benefits
 
Other Costs
 
Total Accrual
December 29, 2018
$
20

 
$

 
$
20

Restructuring charges
75

 
134

 
209

Non-cash settlement

 
(134
)
 
(134
)
March 30, 2019
$
95

 
$

 
$
95


Note 7 — Fair Value and Derivative Instruments

Whenever possible, the fair values of our financial assets and liabilities are determined using quoted market prices of identical securities or quoted market prices of similar securities from active markets. The three levels of inputs that may be used to measure fair value are as follows:
Level 1 valuations are obtained from real-time quotes for transactions in active exchange markets involving identical securities;
Level 2 valuations utilize significant observable inputs, such as quoted prices for similar assets or liabilities, quoted prices near the reporting date in markets that are less active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and
Level 3 valuations utilize unobservable inputs to the valuation methodology and include our own data about assumptions market participants would use in pricing the asset or liability based on the best information available under the circumstances.

We did not have any transfers of assets or liabilities measured at fair value on a recurring basis to or from Level 1, Level 2 or Level 3 during the three months ended March 30, 2019 or the year ended December 29, 2018.

The carrying values of Cash, Accounts receivable, net, Restricted cash, Prepaid expenses and other current assets, Accounts payable and Accrued liabilities approximate fair value due to their short maturities.

No changes were made to our valuation techniques during the first three months of fiscal 2019.


11



Assets and Liabilities Measured at Fair Value on a Recurring Basis
Assets and liabilities measured at fair value on a recurring basis were as follows (in thousands): 
March 30, 2019
 
Level 1
 
Level 2
 
Total
Assets:
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
Money market funds
 
$
3,077

 
$

 
$
3,077

Marketable securities:
 

 

 

 U.S. Treasuries
 
15,450

 

 
15,450

 Certificates of deposit
 

 
959

 
959

 Agency securities
 

 
11,631

 
11,631

 Corporate bonds
 

 
26,046

 
26,046

 Commercial paper
 

 

 


 
15,450

 
38,636

 
54,086

Interest rate swap derivative contracts
 

 
427

 
427

Total assets
 
$
18,527

 
$
39,063

 
$
57,590

Liabilities:
 
 
 
 
 
 
Foreign exchange derivative contracts
 
$

 
$
(377
)
 
$
(377
)

December 29, 2018
 
Level 1
 
Level 2
 
Total
Assets:
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
Money market funds
 
$
1,184

 
$

 
$
1,184

Marketable securities:
 
 
 
 
 
 
U.S. Treasuries
 
7,997

 

 
7,997

Certificates of deposit
 

 
957

 
957

Agency securities
 

 
8,608

 
8,608

Corporate bonds
 

 
30,674

 
30,674

Commercial paper
 

 
2,295

 
2,295

 
 
7,997

 
42,534

 
50,531

Interest rate swap derivative contracts
 

 
871

 
871

Total assets
 
$
9,181

 
$
43,405

 
$
52,586

 

We did not have any liabilities measured at fair value on a recurring basis at December 29, 2018.

Cash Equivalents
The fair value of our cash equivalents is determined based on quoted market prices for similar or identical securities.

Marketable Securities
We classify our marketable securities as available-for-sale and value them utilizing a market approach. Our investments are priced by pricing vendors who provide observable inputs for their pricing without applying significant judgment. Broker pricing is used mainly when a quoted price is not available, the investment is not priced by our pricing vendors or when a broker price is more reflective of fair value. Our broker-priced investments are categorized as Level 2 investments because fair value is based on similar assets without applying significant judgments. In addition, all of our investments have a sufficient level of trading volume to demonstrate that the fair value is appropriate.

Unrealized gains and losses were immaterial and were recorded as a component of Accumulated other comprehensive income in our Condensed Consolidated Balance Sheets. We did not have any other-than-temporary unrealized gains or losses at either period end included in these financial statements.


12



Interest Rate Swaps
The fair value of our interest rate swap contracts is determined at the end of each reporting period based on valuation models that use interest rate yield curves as inputs. For accounting purposes, our interest rate swap contracts qualify for, and are designated as, cash flow hedges. The cash flows associated with the interest rate swaps are reported in Net cash provided by operating activities in our Condensed Consolidated Statements of Cash Flows and the fair value of the interest rate swap contracts are recorded within Prepaid expenses and other current assets and Other assets in our Condensed Consolidated Balance Sheets.

The impact of the interest rate swaps on our Condensed Consolidated Statements of Income was as follows (in thousands):
 
 
Amount of Gain or (Loss) Recognized in Accumulated OCI on Derivative
 
Location of Gain or (Loss) Reclassified from Accumulated OCI into Income
 
Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income
 
Location of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion)
 
Amount of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion )
Three Months Ended March 30, 2019
 
$
(28
)
 
Interest expense
 
$
(208
)
 
Interest expense
 
$

Three Months Ended March 31, 2018
 
$
255

 
Interest expense
 
$
132

 
Interest expense
 
$


Foreign Exchange Derivative Contracts
We operate and sell our products in various global markets. As a result, we are exposed to changes in foreign currency exchange rates. We utilize foreign currency forward contracts to hedge against future movements in foreign exchange rates that affect certain existing foreign currency denominated assets and liabilities and forecasted foreign currency revenue and expense transactions. Under this program, our strategy is to have increases or decreases in our foreign currency exposures mitigated by gains or losses on the foreign currency forward contracts in order to mitigate the risks and volatility associated with foreign currency transaction gains or losses.

We do not use derivative financial instruments for speculative or trading purposes. For accounting purposes, certain of our foreign currency forward contracts are not designated as hedging instruments and, accordingly, we record the fair value of these contracts as of the end of our reporting period in our Condensed Consolidated Balance Sheets with changes in fair value recorded within Other income (expense), net in our Condensed Consolidated Statement of Income for both realized and unrealized gains and losses. Certain of our foreign currency forward contracts are designated as cash flow hedges, and, accordingly, we record the fair value of these contracts as of the end of our reporting period in our Condensed Consolidated Balance Sheets with changes in fair value recorded as a component of accumulated other comprehensive income and reclassified into earnings in the same period in which the hedged transaction affects earnings, and in the same line item on the Condensed Consolidated Statements of Income as the impact of the hedge transaction. At March 30, 2019, we expect to reclassify $0.4 million of the amount accumulated in other comprehensive income (loss) to earnings during the next 12 months, due to the recognition in earnings of the hedged forecasted transactions.

The fair value of our foreign exchange derivative contracts was determined based on current foreign currency exchange rates and forward points. All of our foreign exchange derivative contracts outstanding at March 30, 2019 will mature in the fourth quarter of fiscal 2019.

The following table provides information about our foreign currency forward contracts outstanding as of March 30, 2019 (in thousands):
Currency
 
Contract Position
 
Contract Amount (Local Currency)
 
Contract Amount (U.S. Dollars)
Euro Dollar
 
Buy
 
(2,511
)
 
$
(3,320
)
Japanese Yen
 
Buy
 
(324,310
)
 
(2,932
)
Korean Won
 
Buy
 
(2,982,606
)
 
(2,651
)
Total USD notional amount of outstanding foreign exchange contracts
 
 
 
 
 
$
(8,903
)

Our foreign currency contracts are classified within Level 2 of the fair value hierarchy as they are valued using pricing models that utilize observable market inputs.


13



The impact of foreign exchange derivative contracts not designated as cash flow hedges on our Condensed Consolidated Statements of Income was as follows (in thousands):
 
 
 
Amount of Gain Recognized on Derivatives
 
 
 
 
Three Months Ended
Derivatives Not Designated as Hedging Instruments
 
Location of Gain Recognized on Derivatives
 
March 30, 2019
 
March 31, 2018
Foreign exchange forward contracts
 
Other expense, net
 
$
314

 
$
862


The impact of foreign exchange derivative contracts designated as cash flow hedges on our Condensed Consolidated Statements of Income was as follows (in thousands):
 
 
Amount of Loss Recognized in Accumulated OCI on Derivative
 
Location of Loss Reclassified from Accumulated OCI into Income
 
Amount of Loss Reclassified from Accumulated OCI into Income
Three Months Ended March 30, 2019
 
$
(435
)
 
Cost of revenues
 
$
(32
)
 
 
 
 
Research and development
 
(19
)
 
 
 
 
Selling, general and administrative
 
(7
)
 
 
 
 
 
 
$
(58
)
 
 
 
 
 
 
 
Three Months Ended March 31, 2018
 
$

 

 
$


Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis
We measure and report goodwill and intangible assets at fair value on a non-recurring basis if we determine these assets to be impaired or in the period when we make a business acquisition. There were no assets or liabilities measured at fair value on a nonrecurring basis during the three months ended March 30, 2019 or March 31, 2018.

Note 8 — Warranty
 
We offer warranties on certain products and record a liability for the estimated future costs associated with warranty claims at the time revenue is recognized. The warranty liability is based upon historical experience and our estimate of the level of future costs. While we engage in product quality programs and processes, our warranty obligation is affected by product failure rates, material usage and service delivery costs. We continuously monitor product returns for warranty and maintain a reserve for the related expenses based upon our historical experience and any specifically identified failures. As we sell new products to our customers, we must exercise considerable judgment in estimating the expected failure rates. This estimating process is based on historical experience of similar products, as well as various other assumptions that we believe to be reasonable under the circumstances.

We provide for the estimated cost of product warranties at the time revenue is recognized as a component of Cost of revenues in our Condensed Consolidated Statement of Income.

Changes in our warranty liability were as follows (in thousands):
 
Three Months Ended
 
March 30,
2019
 
March 31,
2018
Balance at beginning of period
$
2,102

 
$
3,662

Accruals
889

 
1,025

Settlements
(970
)
 
(1,848
)
Balance at end of period
$
2,021

 
$
2,839



14



Note 9 — Stockholders’ Equity and Stock-Based Compensation
 
Common Stock Repurchase Program
In February 2017, our Board of Directors authorized a program to repurchase up to $25 million of outstanding common stock to offset potential dilution from issuances of common stock under our employee stock purchase plan and equity incentive plan. The share repurchase program will expire on February 1, 2020. Repurchased shares are retired upon the settlement of the related transactions with the excess of cost over par value charged to additional paid-in capital. All repurchases are made in compliance with Rule 10b-18 under the Securities Exchange Act of 1934, as amended.

During the three months ended March 30, 2019, we did not repurchase any shares. As of March 30, 2019, $6.0 million remained available for future repurchases.

Restricted Stock Units
Restricted stock unit ("RSU") activity under our equity incentive plan was as follows:
 
 
Units
 
Weighted Average Grant Date Fair Value
RSUs at December 29, 2018
3,102,226

 
$
12.79

Awards vested
(47,696
)
 
10.17

Awards forfeited
(17,501
)
 
12.77

RSUs at March 30, 2019
3,037,029

 
12.83


The total fair value of RSUs vested during the three months ended March 30, 2019 was $0.7 million.

Performance Restricted Stock Units
We may grant Performance RSUs ("PRSUs") to certain executives, which vest based upon us achieving certain market performance criteria. There were no PRSUs granted during the first quarter of fiscal 2019. PRSUs are included as part of the RSU activity above.

Stock Options
Stock option activity under our equity incentive plan was as follows:
 
Options Outstanding
 
Weighted Average Exercise Price
 
Weighted Average Remaining Contractual Life in Years
 
Aggregate Intrinsic Value
Outstanding at December 29, 2018
524,725

 
$
8.00

 
 
 
 
Options exercised
(19,207
)
 
4.69

 
 
 
 
Outstanding at March 30, 2019
505,518
 
$
8.12

 
2.88
 
$
4,028,192

Vested and expected to vest at March 30, 2019
505,518

 
$
8.12

 
2.88
 
$
4,028,192

Exercisable at March 30, 2019
505,518

 
$
8.12

 
2.88
 
$
4,028,192


Employee Stock Purchase Plan
Information related to activity under our Employee Stock Purchase Plan ("ESPP") was as follows:
 
Three Months Ended
 
March 30, 2019
Shares issued
301,497

Weighted average per share purchase price
$
12.18

Weighted average per share discount from the fair value of our common stock on the date of issuance
$
4.85



15



Stock-Based Compensation
Stock-based compensation was included in our Condensed Consolidated Statements of Income as follows (in thousands):
 
Three Months Ended
 
March 30,
2019
 
March 31,
2018
Cost of revenues
$
950

 
$
920

Research and development
1,519

 
1,302

Selling, general and administrative
2,826

 
1,534

Total stock-based compensation
$
5,295

 
$
3,756

 

Unrecognized Compensation Costs
At March 30, 2019, the unrecognized stock-based compensation was as follows (dollars in thousands): 
 
Unrecognized Expense
 
Average Expected Recognition Period in Years
Restricted stock units
$
20,178

 
1.87
Performance restricted stock units
4,991

 
1.99
Employee stock purchase plan
975

 
0.84
Total unrecognized stock-based compensation expense
$
26,144

 


Note 10 — Net Income per Share

The following table reconciles the shares used in calculating basic net income per share and diluted net income per share (in thousands):
 
Three Months Ended
 
March 30,
2019
 
March 31,
2018
Weighted-average shares used in computing basic net income per share
74,362

 
72,826

Add potentially dilutive securities
1,647

 
1,516

Weighted-average shares used in computing diluted net income per share
76,009

 
74,342

 
 
 
 
Securities not included as they would have been antidilutive
38

 
19


Note 11 — Commitments and Contingencies

Leases
See Note 12.

Contractual Commitments and Purchase Obligations
Our purchase obligations and other contractual obligations have not materially changed as of March 30, 2019 from those disclosed in our Annual Report on Form 10-K for the year ended December 29, 2018.

Legal Matters
From time to time, we may be subject to legal proceedings and claims in the ordinary course of business. As of March 30, 2019, and as of the filing of this Quarterly Report on Form 10-Q, we were not involved in any material legal proceedings.


16



Note 12 — Leases

We lease real estate space under non-cancelable operating lease agreements for commercial and industrial space, as well as our corporate headquarters located in Livermore, California. Our leases have remaining terms of 1 to 10 years, and some leases include options to extend up to 20 years. We also have operating leases for automobiles with remaining lease terms of 1 to 4 years. We did not include any of our renewal options in our lease terms for calculating our lease liability as the renewal options allow us to maintain operational flexibility and we are not reasonably certain we will exercise these options at this time. The weighted-average remaining lease term for our operating leases was 8 years at March 30, 2019 and the weighted-average discount rate was 4.7%.

The components of lease expense were as follows (in thousands):
 
Three Months Ended
 
March 30,
2019
Lease expense:

Operating lease expense
$
1,745

Short-term lease expense
17

Variable lease expense
419


$
2,181


Future minimum payments under our non-cancelable operating leases were as follows as of March 30, 2019 (in thousands):
Fiscal Year
 
Amount
Remainder of 2019
 
$
4,950

2020
 
6,698

2021
 
5,819

2022
 
4,890

2023
 
4,432

Thereafter
 
20,406

 
 
$
47,195


Note 13 — Revenue

Transaction price allocated to the remaining performance obligations: On March 30, 2019, we had $3.9 million of remaining performance obligations, which were comprised of deferred service contracts and extended warranty contracts not yet delivered. We expect to recognize approximately 74% of our remaining performance obligations as revenue in the remainder of fiscal 2019, and approximately 26% in fiscal 2020 and thereafter. The foregoing excludes the value of other remaining performance obligations as they have original durations of one year or less, and also excludes information about variable consideration allocated entirely to a wholly unsatisfied performance obligation.

Contract balances: The timing of revenue recognition may differ from the timing of invoicing to customers. Accounts receivable is recorded at the invoiced amount, net of an allowance for doubtful accounts. A receivable is recognized in the period we deliver goods or provide services or when our right to consideration is unconditional. A contract asset is recorded when we have performed under the contract but our right to consideration is conditional on something other than the passage of time. Contract assets as of March 30, 2019 and December 29, 2018 were $0.6 million and $0.3 million, respectively, and are reported on the Condensed Consolidated Balance Sheets as a component of Prepaid expenses and other current assets.

Contract liabilities include payments received in advance of performance under a contract and are satisfied as the associated revenue is recognized. Contract liabilities are reported on the Condensed Consolidated Balance Sheets on a contract-by-contract basis at the end of each reporting period as a component of Deferred revenue and Other liabilities. Contract liabilities as of March 30, 2019 and December 29, 2018 were $7.6 million and $5.7 million, respectively. During the three months ended March 30, 2019, we recognized $1.4 million of revenue that was included in contract liabilities as of December 29, 2018.

Costs to obtain a contract: We generally expense sales commissions when incurred as a component of Selling, general and administrative expense as the amortization period is typically less than one year.


17



Revenue by Category: Refer to Note 14 of Notes to Consolidated Financial Statements for further details.

Note 14 — Operating Segments and Enterprise-Wide Information

Our chief operating decision maker ("CODM") is our Chief Executive Officer, who reviews operating results to make decisions about allocating resources and assessing performance for the entire company. We operate in two reportable segments consisting of the Probe Cards segment and the Systems segment. The following table summarizes the operating results by reportable segment (dollars in thousands):
 
Three Months Ended
 
March 30, 2019
 
March 31, 2018
 
Probe Cards
 
Systems
 
Corporate and Other
 
Total
 
Probe Cards
 
Systems
 
Corporate and Other
 
Total
Revenues
$
108,103

 
$
24,110

 
$

 
$
132,213

 
$
94,928

 
$
23,362

 
$

 
$
118,290

Gross profit
$
45,294

 
$
13,016

 
$
(5,789
)
 
$
52,521

 
$
40,071

 
$
11,135

 
$
(6,077
)
 
$
45,129

Gross margin
41.9
%
 
54.0
%
 
%
 
39.7
%
 
42.2
%
 
47.7
%
 
%
 
38.2
%

Operating results provide useful information to our management for assessment of our performance and results of operations. Certain components of our operating results are utilized to determine executive compensation along with other measures.

Corporate and Other includes unallocated expenses relating to amortization of intangible assets, share-based compensation, and restructuring charges, net, which are not used in evaluating the results of, or in allocating resources to, our reportable segments.

Certain revenue category information by reportable segment was as follows (in thousands):
 
Three Months Ended
 
March 30, 2019
 
March 31, 2018
 
Probe Cards
 
Systems
 
Total
 
Probe Cards
 
Systems
 
Total
Market:
 
 
 
 
 
 
 
 
 
 
 
    Foundry & Logic
$
71,580

 
$

 
$
71,580

 
$
58,439

 
$

 
$
58,439

    DRAM
28,886

 

 
28,886

 
30,266

 

 
30,266

    Flash
7,637

 

 
7,637

 
6,223

 

 
6,223

    Systems

 
24,110

 
24,110

 

 
23,362

 
23,362

Total
$
108,103

 
$
24,110

 
$
132,213

 
$
94,928

 
$
23,362

 
$
118,290

Timing of revenue recognition:
 
 
 
 
 
 
 
 
 
 
 
    Products transferred at a point in time
$
107,491

 
$
23,142

 
$
130,633

 
$
94,434

 
$
22,521

 
$
116,955

    Services transferred over time
612

 
968

 
1,580

 
494

 
841

 
1,335

Total
$
108,103

 
$
24,110

 
$
132,213

 
$
94,928

 
$
23,362

 
$
118,290

Geographical region:
 
 
 
 
 
 
 
 
 
 
 
    United States
$
27,655

 
$
6,608

 
$
34,263

 
$
26,488

 
$
6,375

 
$
32,863

    South Korea
25,018

 
1,705

 
26,723

 
13,916

 
1,074

 
14,990

    Taiwan
21,257

 
1,130

 
22,387

 
25,971

 
1,751

 
27,722

    China
18,151

 
3,692

 
21,843

 
9,027

 
3,247

 
12,274

    Japan
5,300

 
5,132

 
10,432

 
10,132

 
3,540

 
13,672

    Europe
5,373

 
4,120

 
9,493

 
5,573

 
5,929

 
11,502

    Asia-Pacific1
2,790

 
473

 
3,263

 
3,490

 
1,325

 
4,815

    Rest of the world
2,559

 
1,250

 
3,809

 
331

 
121

 
452

Total
$
108,103

 
$
24,110

 
$
132,213

 
$
94,928

 
$
23,362

 
$
118,290

1 Asia-Pacific includes all countries in the region except China, Japan, South Korea, and Taiwan, which are disclosed separately.

18



Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Cautionary Statement Regarding Forward-Looking Statements
 
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Securities Exchange Act of 1934 and the Securities Act of 1933, which are subject to risks and uncertainties. The forward-looking statements include statements concerning, among other things, our business strategy, financial and operating results, gross margins, liquidity and capital expenditure requirements, impact of accounting standards and our share repurchase plan. In some cases, you can identify these statements by forward-looking words, such as "may," "might," "will," "could," "should," "expect," "plan," "anticipate," "believe," "estimate," "predict," "intend" and "continue," the negative or plural of these words and other comparable terminology.

The forward-looking statements are only predictions based on our current expectations and our projections about future events. All forward-looking statements included in this Quarterly Report on Form 10-Q are based upon information available to us as of the filing date of this Quarterly Report on Form 10-Q. You should not place undue reliance on these forward-looking statements. We have no obligation to update any of these statements. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to differ materially from those expressed or implied by these statements, including risks related to general market trends, our ability to execute our business strategy and other risks discussed in the section titled “Risk Factors” and elsewhere in our Annual Report on Form 10-K for the year ended December 29, 2018 and in this Quarterly Report on Form 10-Q. You should carefully consider the numerous risks and uncertainties described under these sections.
 
The following discussion and analysis should be read in conjunction with our condensed consolidated financial statements and the accompanying notes contained in this Quarterly Report on Form 10-Q. Unless expressly stated or the context otherwise requires, the terms “we,” “our,” “us” and “FormFactor” refer to FormFactor, Inc. and its subsidiaries.

Overview

FormFactor, Inc., headquartered in Livermore, California, is a leading provider of electrical test and measurement technologies. We provide a broad range of high-performance probe cards, analytical probes, probe stations and thermal sub-systems to both semiconductor companies and scientific institutions. Our products provide electrical information from a variety of semiconductor and electro-optical devices and integrated circuits from research, to development through production. Customers use our products and services to lower production costs, improve yields, and enable development of their complex next-generation products.

We operate in two reportable segments consisting of the Probe Cards segment and the Systems segment. Sales of our probe cards and analytical probes are included in the Probe Cards segment, while sales of our probe stations and thermal sub-systems are included in the Systems segment.

We generated net income of $5.5 million in the first three months of fiscal 2019 as compared to $2.1 million in the first three months of fiscal 2018. The increase in net income was primarily due to increased revenue from our Probe Cards segment, partially offset by higher operating expenses and higher provision for income taxes.

Critical Accounting Policies and the Use of Estimates

Management’s Discussion and Analysis and Note 2 to the Consolidated Financial Statements in our 2018 Annual Report on Form 10-K describe the significant accounting estimates and critical accounting policies used in preparation of the Consolidated Financial Statements. Actual results in these areas could differ from management’s estimates. During the three months ended March 30, 2019, there were no significant changes in our critical accounting policies or estimates from those reported in our Annual Report on Form 10-K for the year ended December 29, 2018, which was filed with the Securities and Exchange Commission on February 26, 2019.


19



Results of Operations
 
The following table sets forth our operating results as a percentage of revenues for the periods indicated:
 
 
Three Months Ended
 
March 30,
2019
 
March 31,
2018
Revenues
100.0
 %
 
100.0
 %
Cost of revenues
60.3

 
61.8

Gross profit
39.7

 
38.2

Operating expenses:
 
 
 
Research and development
14.9

 
15.3

Selling, general and administrative
19.0

 
19.8

Total operating expenses
33.9

 
35.1

Operating income
5.8

 
3.1

Interest income
0.4

 
0.2

Interest expense
(0.5
)
 
(0.8
)
Other expense, net
(0.1
)
 
(0.5
)
Income before income taxes
5.6

 
2.0

Provision for income taxes
1.5

 
0.2

Net income
4.1
 %
 
1.8
 %

Revenues by Segment and Market
 
Three Months Ended
 
March 30, 2019
 
March 31, 2018
 
(In thousands)
Probe Cards
$
108,103

 
$
94,928

Systems
24,110

 
23,362

 
$
132,213

 
$
118,290


 
Three Months Ended
 
March 30, 2019
 
% of Revenues
 
March 31, 2018
 
% of Revenues
 
$ Change
 
% Change
 
(Dollars in thousands)
Probe Cards Markets:
 
 
 
 
 
 
 
 
 
 
 
Foundry & Logic
$
71,580

 
54.1
%
 
$
58,439

 
49.4
%
 
$
13,141

 
22.5
 %
DRAM
28,886

 
21.9

 
30,266

 
25.6

 
(1,380
)
 
(4.6
)
Flash
7,637

 
5.8

 
6,223

 
5.3

 
1,414

 
22.7

Systems Market:


 


 


 


 

 

Systems
24,110

 
18.2

 
23,362

 
19.7

 
748

 
3.2

Total revenues
$
132,213

 
100.0
%
 
$
118,290

 
100.0
%
 
$
13,923

 
11.8
 %

The increase in Foundry & Logic product revenue for the three months ended March 30, 2019, compared to the three months ended March 31, 2018, was primarily the result of lower demand in the prior year from one major customer as a result of delays in its node transitions. This major customer accounted for 21.3% of total revenues for the first three months ended March 30, 2019, compared to 14.0% for the first three months ended March 31, 2018.

The decrease in DRAM product revenue for the three months ended March 30, 2019, compared to the three months ended March 31, 2018, was driven by decreased unit sales.


20



The increase in Flash product revenue for the three months ended March 30, 2019, compared to the three months ended March 31, 2018, was driven by increased unit sales as a result of increased design wins and customer demand.

The increase in Systems product revenue for the three months ended March 30, 2019, compared to the three months ended March 31, 2018, was driven by changes in product sales mix of probe stations, which includes a new 200mm platform, partially offset by lower revenue from thermal sub-systems.

Revenues by Geographic Region
 
Three Months Ended
 
March 30, 2019
 
% of
Revenue
 
March 31, 2018
 
% of
Revenue
 
(Dollars in thousands)
United States
$
34,263

 
25.9
%
 
$
32,863

 
27.8
%
South Korea
26,723

 
20.2

 
14,990

 
12.7

Taiwan
22,387

 
16.9

 
27,722

 
23.4

China
21,843

 
16.5

 
12,274

 
10.4

Japan
10,432

 
7.9

 
13,672

 
11.6

Europe
9,493

 
7.2

 
11,502

 
9.7

Asia-Pacific1
3,263

 
2.5

 
4,815

 
4.1

Rest of the world
3,809

 
2.9

 
452

 
0.4

Total revenues
$
132,213

 
100.0
%
 
$
118,290

 
100.0
%

1 Asia-Pacific includes all countries in the region except China, Japan, South Korea and Taiwan, which are disclosed separately.
 
Geographic revenue information is based on the location to which we ship the product. For example, if a certain South Korean customer purchases through their U.S. subsidiary and requests the products to be shipped to an address in South Korea, this sale will be reflected in the revenue for South Korea rather than U.S.

Changes in revenue by geographic region for the three months ended March 30, 2019 compared to the three months ended March 31, 2018 were primarily attributable to changes in customer demand, shifts in customer regional manufacturing strategies, and product sales mix.

Cost of Revenues and Gross Margins

Cost of revenues consists primarily of manufacturing materials, compensation and benefits, shipping and handling costs, manufacturing-related overhead and amortization of certain intangible assets. Our manufacturing operations rely on 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, inventory provisions and amortization of certain intangible assets as cost of revenues.

Our gross profit and gross margin were as follows (dollars in thousands):
 
Three Months Ended
 
March 30, 2019
 
March 31, 2018
 
$ Change
 
% Change
Gross profit
$
52,521

 
$
45,129

 
$
7,392

 
16.4
%
Gross margin
39.7
%
 
38.2
%
 

 



21



Our gross profit and gross margin by segment were as follows (dollars in thousands):
 
Three Months Ended
 
March 30, 2019
 
March 31, 2018
 
Probe Cards
 
Systems
 
Corporate and Other
 
Total
 
Probe Cards
 
Systems
 
Corporate and Other
 
Total
Gross profit
$45,294
 
$
13,016

 
$
(5,789
)
 
$
52,521

 
$40,071
 
$
11,135

 
$
(6,077
)
 
$
45,129

Gross margin
41.9
%
 
54.0
%
 
%
 
39.7
%
 
42.2
%
 
47.7
%
 
%
 
38.2
%

Probe Cards
For the three months ended March 30, 2019, gross profit in the Probe Cards segment increased compared to the three months ended March 31, 2018 primarily due to increased sales. Gross margins remained relatively consistent as positive impacts from higher volume and factory utilization were offset by the impact of a less favorable product mix.

Systems
For the three months ended March 30, 2019, gross profit and gross margin in the Systems segment increased compared to the three months ended March 31, 2018 due to increased sales and a favorable product mix.

Corporate and Other includes unallocated expenses relating to amortization of intangible assets, share-based compensation expense, and restructuring charges, net, which are not used in evaluating the results of, or in allocating resources to, our reportable segments.

Overall
Gross profit and gross margin fluctuate with revenue levels, product mix, selling prices, factory loading and material costs. For the three months ended March 30, 2019, compared to the three months ended March 31, 2018, revenue and gross profit increased due to higher unit sales and product mix.

Cost of revenues included stock-based compensation expense as follows (in thousands):
 
Three Months Ended
 
March 30,
2019
 
March 31,
2018
Stock-based compensation
$
950

 
$
920


Future gross margins may be adversely impacted by lower revenues, unfavorable product mix and lower factory utilization even though we have taken significant steps to reduce our operating cost structure. Our gross margins may also be adversely affected if we are required to record additional inventory write-downs for estimated average selling prices that are below cost.

Research and Development
 
Three Months Ended
 
March 30, 2019
 
March 31, 2018
 
$ Change
 
% Change
 
(Dollars in thousands)
Research and development
$
19,723

 
$
18,046

 
$
1,677

 
9.3
%
% of revenues
14.9
%
 
15.3
%
 
 
 
 

The increase in research and development expenses in the three months ended March 30, 2019 when compared to corresponding period in prior year was primarily driven by an increase in employee incentive compensation due to increased profitability from higher revenues.


22



A detail of the change is as follows (in millions):
 
Three Months Ended March 30, 2019 compared to Three Months Ended March 31, 2018
 
Employee compensation costs
$
1.3

Stock-based compensation
0.2

Other general operations
0.2


$
1.7


Research and development included stock-based compensation expense as follows (in thousands):
 
Three Months Ended
 
March 30,
2019
 
March 31,
2018
Stock-based compensation
$
1,519

 
$
1,302


Selling, General and Administrative
 
Three Months Ended
 
March 30, 2019
 
March 31, 2018
 
$ Change
 
% Change
 
(Dollars in thousands)
Selling, general and administrative
$
25,184

 
$
23,449

 
$
1,735

 
7.4%
% of revenues
19.0
%
 
19.8
%
 

 


The increase in selling, general and administrative in the three months ended March 30, 2019 when compared to the corresponding period in the prior year was primarily due to an increase in employee incentive compensation due to increased profitability from higher revenues and stock-based compensation, partially offset by a reduction in consulting fees.
 
A detail of the change is as follows (in millions):
 
Three Months Ended March 30, 2019 compared to Three Months Ended March 31, 2018
 
Consulting fees
$
(1.0
)
Stock-based compensation
1.3

Employee compensation
1.1

Amortization of intangibles
0.3


$
1.7


Selling, general and administrative included stock-based compensation expense as follows (in thousands):
 
Three Months Ended
 
March 30,
2019
 
March 31,
2018
Stock-based compensation
$
2,826

 
$
1,534



23



Interest Income and Interest Expense
 
Three Months Ended
 
March 30,
2019
 
March 31,
2018
 
(Dollars in thousands)
Interest Income
$
580

 
$
257

Weighted average balance of cash and investments
$
151,451

 
$
133,634

Weighted average yield on cash and investments
2.03
%
 
1.50
%

 
 
 
Interest Expense
$
595

 
$
967

Average debt outstanding
$
64,835

 
$
106,058

Weighted average interest rate on debt
4.51
%
 
3.61
%
 
Interest income is earned on our cash, cash equivalents, restricted cash and marketable securities. The increase in interest income for the three months ended March 30, 2019 compared with corresponding period of the prior year was attributable to higher investment yields, as well as higher average investment balances.

Interest expense primarily includes interest on our term loan and interest-rate swap derivative contracts, as well as term loan issuance costs amortization charges. The decrease in interest expense for the three months ended March 30, 2019 compared to the same period of the prior year was primarily due to lower outstanding debt balances as a result of principal payments made, partially offset by higher interest rates.

Other Expense, Net
Other expense, net, primarily includes the effects of foreign currency impact and various other gains and losses.

Provision for Income Taxes
 
Three Months Ended
 
March 30,
2019
 
March 31,
2018
 
(In thousands, except percentages)
Provision for income taxes
$
2,032

 
$
287

Effective tax rate
27.0
%
 
11.9
%

Provision for income taxes reflects the tax provision on our operations in foreign and U.S. jurisdictions, offset by tax benefits from lapsing of statute of limitations related to uncertain tax positions in foreign jurisdictions. In the fourth quarter of fiscal 2018 we released our valuation allowance against certain U.S. deferred tax assets as sufficient positive evidence existed to support the realization of such deferred tax assets, resulting in an increase in our effective tax rate for the three months ended March 30, 2019 compared to the three months ended March 31, 2018.


Liquidity and Capital Resources

Capital Resources
Our working capital was $237.7 million at March 30, 2019, which did not change significantly compared to $235.3 million at December 29, 2018.

Cash and cash equivalents primarily consist of deposits held at banks and money market funds. Marketable securities primarily consist of U.S. agency securities and corporate bonds. We typically invest in highly-rated securities with low probabilities of default. Our investment policy requires investments to be rated single A or better, and limits the types of acceptable investments, issuer concentration and duration of the investment.

Our cash, cash equivalents and marketable securities totaled approximately $159.8 million at March 30, 2019, compared to $149.0 million at December 29, 2018. We believe that we will be able to satisfy our working capital requirements and scheduled term loan repayments for at least the next twelve months with the liquidity provided by our existing cash, cash equivalents, marketable securities and cash provided by operations. To the extent necessary, we may consider entering into short and long-term debt

24



obligations, raising cash through a stock issuance, or obtaining new financing facilities, which may not be available on terms favorable to us. Our future capital requirements may vary materially from those now planned.

If we are unsuccessful in maintaining or growing our revenues, maintaining or reducing our cost structure (in response to an industry demand downturn or other event), or increasing our available cash through debt or equity financings, our cash, cash equivalents and marketable securities may decline in fiscal 2019.

We utilize a variety of tax planning and financing strategies to manage our worldwide cash and deploy funds to locations where needed. As part of these strategies, we indefinitely reinvest a portion of our foreign earnings. Should we require additional capital in the United States, we may elect to repatriate indefinitely-reinvested foreign funds or raise capital in the United States.

Cash Flows
The following table sets forth our net cash flows from operating, investing and financing activities:
 
Three Months Ended
 
March 30, 2019
 
March 31, 2018
 
(In thousands)
Net cash provided by operating activities
$
20,638

 
$
9,322

Net cash used in investing activities
(9,332
)
 
(3,391
)
Net cash used in financing activities
(3,932
)
 
(4,353
)

Operating Activities 
Net cash provided by operating activities for the three months ended March 30, 2019 was primarily attributable to net income of $5.5 million and $20.6 million of net non-cash expenses, offset by operating assets and liabilities using $5.5 million of cash as discussed in more detail below.

Accounts receivable, net, decreased $13.8 million to $81.5 million at March 30, 2019, compared to 95.3 million at December 29, 2018, as a result of changes in customer sales mix, timing of customer shipments and timing of customer payments.

Inventories, net, increased $5.5 million to $83.2 million at March 30, 2019, compared to $77.7 million at December 29, 2018, as a result of increased inventory purchases to shorten lead time and improve pricing, and timing of customer demand.

Accounts payable decreased $8.5 million to $31.6 million at March 30, 2019, compared to $40.0 million at December 29, 2018, as a result of timing of vendor payments.

Accrued liabilities decreased $5.2 million to $22.6 million at March 30, 2019, compared to $27.7 million at December 29, 2018, as a result of timing of employee payroll, decreases in employee stock purchase plan withholdings due to timing within the plan's withholding period, and a decrease in accrued sales taxes due to timing of payments.

Investing Activities
Net cash used in investing activities for the three months ended March 30, 2019 was primarily related to $6.0 million of cash used in the acquisition of property, plant and equipment, as well as $3.3 million of net purchases of marketable securities.

Financing Activities
Net cash used in financing activities for the three months ended March 30, 2019 primarily related to $7.5 million of principal payments made towards the repayment of our term loan and $0.3 million related to tax withholdings associated with the net share settlements of our equity awards, partially offset by $3.9 million of proceeds received from issuances of common stock under our employee stock purchase plan and stock option plans.


25



Debt Facility

On June 24, 2016, we entered into a credit agreement (the “Credit Agreement”) with HSBC Bank USA, National Association ("HSBC"). Pursuant to the Credit Agreement, the lenders provided us with a senior secured term loan facility of $150 million (the “Term Loan”). The proceeds of the Term Loan were used to finance a portion of the purchase price paid in connection with the acquisition of Cascade Microtech.

The Term Loan bears interest at a rate equal to, at our option, (i) the applicable London Interbank Offered Rate ("LIBOR") rate plus 2.00% per annum or (ii) Base Rate (as defined in the Credit Agreement) plus 1.00% per annum. We have currently elected to pay interest at 2.00% over the one-month LIBOR rate. Interest payments are payable in monthly installments over a five-year period.

On July 25, 2016 we entered into an interest rate swap agreement with HSBC and other lenders to hedge the interest payments on the Term Loan for the notional amount of $95.6 million. As future levels of LIBOR over the life of the loan are uncertain, we entered into these interest-rate swap agreements to hedge the exposure in interest rate risks associated with movement in LIBOR rates. By entering into the agreements, we convert a floating rate interest at one-month LIBOR plus 2% into a fixed rate interest at 2.939%. As of March 30, 2019, the notional amount of the loan that is subject to this interest rate swap is $45.0 million. See Note 7 of Notes to Condensed Consolidated Financial Statements for additional information.

The Term Loan amortizes in equal quarterly installments, which began June 30, 2016, in annual amounts equal to 5% for year one, 10% for year two, 20% for year three, 30% for year four and 35% for year five. The Credit Agreement allows voluntary prepayment to be made at any time to prepay the Term Loan in whole or in part without penalty or premium. As of March 30, 2019, we have made prepayments of $40.0 million in addition to scheduled installments per the Credit Agreement. For the three months ended March 30, 2019, we did not make any prepayments in addition to scheduled installments.

The obligations under the Term Loan are guaranteed by substantially all of our assets and the assets of our domestic subsidiaries, subject to certain customary exceptions.

The Credit Agreement contains negative covenants customary for financing of this type, as well as certain financial maintenance covenants. As of March 30, 2019, the balance outstanding pursuant to the Term Loan was $57.5 million at an interest rate of 4.5% and we were in compliance with all covenants under the Credit Agreement.

Stock Repurchase Program

In February 2017, our Board of Directors authorized a program to repurchase up to $25 million of outstanding common stock to offset potential dilution from issuances of common stock under our stock-based compensation plans. The share repurchase program will expire on February 1, 2020. During the three months ended March 30, 2019, we did not repurchase any shares of common stock. As of March 30, 2019, $6.0 million remained available for future repurchases.

Repurchased shares are retired upon the settlement of the related trade transactions with the excess of cost over par value charged to additional paid-in capital. All repurchases were made in compliance with Rule 10b-18 under the Securities Exchange Act of 1934, as amended.

Contractual Obligations and Commitments

Other than our operating lease commitments as disclosed in Note 12 of Notes to Condensed Consolidated Financial Statements, our contractual obligations and commitments have not materially changed as of March 30, 2019 from those disclosed in our Annual Report on Form 10-K for the year ended December 29, 2018.

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 March 30, 2019, we were not involved in any such off-balance sheet arrangements.

Recent Accounting Pronouncements

See Note 1 of Notes to Condensed Consolidated Financial Statements.

26



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 29, 2018. Our exposure to market risk has not changed materially since December 29, 2018.

Item 4. Controls and Procedures
 
Evaluation of Disclosure Controls and Procedures
 
Based on our management’s 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
 
As of December 30, 2018, we implemented internal controls to ensure we adequately evaluated our contracts and properly valued the right-of-use assets and lease liabilities for the new accounting standard related to leases on our financial statements. There have been no other changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that have materially affected, or are 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 a 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 Quarterly Report on 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. 


27



PART II - OTHER INFORMATION
 
Item 1A. Risk Factors

There have been no material changes during the three months ended March 30, 2019 to the risk factors discussed in our Annual Report on Form 10-K for the year ended December 29, 2018. 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 for the year ended December 29, 2018 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.
 
Item 6. Exhibits

The following exhibits are filed herewith and this list constitutes the exhibit index.
Exhibit
 
 
 
Incorporated by Reference
 
Filed
Number
 
Exhibit Description
 
Form
 
Date
 
Number
 
Herewith
3.1
 

 
S-1
 
October 20, 2003
 
3.01
 
 
3.2
 

 
8-K
 
July 22, 2016
 
3.2
 
 
31.01
 
 
 
 
 
 
 
 
X
31.02
 
 
 
 
 
 
 
 
X
32.01