UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549

 

Form 10-Q/A

Amendment No. 1

 

(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 30, 2007

 

 

 

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

(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 x  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer x

Accelerated filer o

Non-accelerated filer 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 x

 

As of July 28, 2007, 48,016,014 shares of the registrant’s common stock, par value $0.001 per share, were outstanding.

 

 



 

EXPLANATORY NOTE

 

FormFactor, Inc. (the “Company”) previously announced its intention to restate its consolidated financial statements for the year ended December 30, 2006 including each of the fiscal quarters for that year and the first two quarters of fiscal 2007.  The Company is filing this Quarterly Report on Form 10-Q/A (the “Form 10-Q/A”) for the quarter ended June 30, 2007 to reflect the restatement of its consolidated financial statements, the notes thereto, and related disclosures for the quarter ended June 30, 2007.

 

During October 2007, the Company completed a review of its historical practices with respect to inventory valuation.  That review indicated that during fiscal 2006 and the first half of fiscal 2007 it did not consistently follow its accounting policies for valuing inventory.  The Company’s review indicates that the failure to adhere consistently to Company accounting policies for inventory valuation was limited to a small number of employees.  The Audit Committee of the Board of Directors has determined that senior management was not aware of the noncompliance.  The Company is implementing revised procedures designed to prevent a recurrence of the problem.  For more information on these matters, please refer to Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, Note 2 of the Notes to the Condensed Consolidated Financial Statements, and Item 4, “Controls and Procedures”.

 

This Form 10-Q/A has not been updated except as required to reflect the effects of the restatement. This amendment and restatement includes changes to Part I, Items 1, 2 and 4. Except as identified in the prior sentence, no other items included in the original Form 10-Q have been amended, and such items remain in effect as of the filing date of the original Form 10-Q. Additionally, this Form 10-Q/A does not purport to provide an update or a discussion of any other developments at the Company subsequent to the original filing.

 

FORMFACTOR, INC.

 

FORM 10-Q/A FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2007

 

INDEX

 

Part I.

Financial Information

3

 

 

 

Item 1.

Financial Statements(Restated):

3

 

 

 

 

Unaudited Condensed Consolidated Statements of Income for the three and six months ended June 30, 2007 and July 1, 2006.

3

 

 

 

 

Unaudited Condensed Consolidated Balance Sheets as of June 30, 2007 and December 30, 2006.

4

 

 

 

 

Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2007 and July 1, 2006.

5

 

 

 

 

Notes to Unaudited Condensed Consolidated Financial Statements

6

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

15

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

23

 

 

 

Item 4.

Controls and Procedures

23

 

 

 

Part II.

Other Information

24

 

 

 

Item 1.

Legal Proceedings

24

 

 

 

Item 1A.

Risk Factors

24

 

 

 

Item 4.

Submission of Matters to a Vote of Security Holders

26

 

 

 

Item 6.

Exhibits

27

 

 

 

Signature

 

28

 

 

 

Exhibit Index

 

29

 

2



 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

FORMFACTOR, INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share amounts)
(Unaudited)

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,
2007

 

July 1,
2006

 

June 30,
2007

 

July 1,
2006

 

 

 

As
restated

 

As
restated

 

As
restated

 

As
restated

 

Revenues

 

$

114,124

 

$

92,433

 

$

216,395

 

$

173,763

 

Cost of revenues

 

49,966

 

44,822

 

97,954

 

86,379

 

Gross margin

 

64,158

 

47,611

 

118,441

 

87,384

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Research and development

 

14,384

 

11,627

 

28,485

 

21,403

 

Selling, general and administrative

 

23,056

 

17,965

 

45,984

 

33,713

 

Total operating expenses

 

37,440

 

29,592

 

74,469

 

55,116

 

Operating income

 

26,718

 

18,019

 

43,972

 

32,268

 

Interest income

 

5,557

 

3,889

 

11,001

 

5,711

 

Other income (expense), net

 

(61

)

327

 

(181

)

(14

)

Income before income taxes

 

32,214

 

22,235

 

54,792

 

37,965

 

Provision for income taxes

 

11,109

 

7,678

 

18,476

 

13,332

 

Net income

 

$

21,105

 

$

14,557

 

$

36,316

 

$

24,633

 

Net income per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.44

 

$

0.32

 

$

0.76

 

$

0.56

 

Diluted

 

$

0.43

 

$

0.30

 

$

0.74

 

$

0.54

 

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

 

 

 

 

 

 

 

 

 

Basic

 

47,893

 

45,920

 

47,639

 

43,730

 

Diluted

 

49,516

 

48,165

 

49,289

 

45,792

 

 

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

 

3



 

FORMFACTOR, INC.

 

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)
(Unaudited)

 

 

 

June 30,
2007

 

December 30,
2006

 

 

 

As restated

 

As restated

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

286,610

 

$

284,131

 

Marketable securities

 

239,588

 

208,263

 

Accounts receivable

 

78,575

 

54,571

 

Inventories

 

30,429

 

18,926

 

Deferred tax assets

 

14,565

 

14,496

 

Prepaid expenses and other current assets

 

14,319

 

12,138

 

Total current assets

 

664,086

 

592,525

 

Restricted cash

 

2,250

 

2,250

 

Property and equipment, net

 

112,352

 

94,064

 

Deferred tax assets

 

6,885

 

4,689

 

Other assets

 

1,612

 

945

 

Total assets

 

$

787,185

 

$

694,473

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

39,055

 

$

31,273

 

Accrued liabilities

 

27,498

 

28,334

 

Income taxes payable

 

6,322

 

7,979

 

Deferred rent

 

447

 

448

 

Deferred revenue and customer advances

 

6,371

 

7,273

 

Total current liabilities

 

79,693

 

75,307

 

Long term income taxes payable

 

11,363

 

 

Deferred rent and other long term liabilities

 

5,435

 

5,125

 

Total liabilities

 

96,491

 

80,432

 

Commitments and contingencies (Note 9)

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Preferred Stock, $0.001 par value:

 

 

 

 

 

10,000,000 shares authorized; no shares issued and outstanding at June 30, 2007 and December 30, 2006, respectively

 

 

 

Common stock, $0.001 par value:

 

 

 

 

 

250,000,000 shares authorized; 47,993,399 and 46,861,334 shares issued and outstanding at June 30, 2007 and December 30, 2006, respectively

 

48

 

47

 

Additional paid-in capital

 

545,545

 

504,709

 

Accumulated other comprehensive loss

 

(744

)

(244

)

Retained earnings

 

145,845

 

109,529

 

Total stockholders’ equity

 

690,694

 

614,041

 

Total liabilities and stockholders’ equity

 

$

787,185

 

$

694,473

 

 

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

 

4



 

FORMFACTOR, INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)
(Unaudited)

 

 

 

Six Months Ended

 

 

 

June 30, 2007

 

July 1, 2006

 

 

 

As restated

 

As restated

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

36,316

 

$

24,633

 

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

 

 

 

 

 

Depreciation and amortization

 

12,616

 

10,436

 

Stock-based compensation expense

 

13,840

 

9,243

 

Deferred income taxes

 

(2,277

)

(2,013

)

Excess tax benefits from equity based compensation plans

 

(5,470

)

(6,559

)

Provision for excess and obsolete inventories

 

5,234

 

7,872

 

Loss on disposal of equipment

 

283

 

30

 

Changes in assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(24,004

)

(909

)

Inventories

 

(16,689

)

(10,995

)

Prepaid expenses and other current assets

 

(2,227

)

(4,544

)

Other assets

 

(499

)

(294

)

Accounts payable

 

9,625

 

2,844

 

Accrued liabilities

 

(2,491

)

4,956

 

Income taxes payable

 

16,546

 

5,126

 

Deferred rent

 

102

 

(401

)

Deferred revenues and customer advances

 

(902

)

1,910

 

Net cash provided by operating activities

 

40,003

 

41,335

 

Cash flows from investing activities:

 

 

 

 

 

Acquisition of property and equipment

 

(30,641

)

(18,605

)

Purchase of marketable securities

 

(120,192

)

(124,853

)

Proceeds from maturities and sales of marketable securities

 

87,718

 

143,774

 

Net cash provided by (used in) investing activities

 

(63,115

)

316

 

Cash flows from financing activities:

 

 

 

 

 

Proceeds from issuance of common stock

 

20,112

 

190,826

 

Excess tax benefits from equity based compensation plans

 

5,470

 

6,559

 

Net cash provided by financing activities

 

25,582

 

197,385

 

Effect of exchange rate changes on cash and cash equivalents

 

9

 

85

 

Net increase in cash and cash equivalents

 

2,479

 

239,121

 

Cash and cash equivalents, beginning of the period

 

284,131

 

31,217

 

Cash and cash equivalents, end of the period

 

$

286,610

 

$

270,338

 

Supplemental disclosure of significant non-cash investing activities:

 

 

 

 

 

Purchases of property and equipment through accounts payable and accrued liabilities

 

$

142

 

$

1,868

 

 

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

 

5



 

FORMFACTOR, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

Note 1 — Basis of Presentation

 

Basis of presentation. The accompanying unaudited condensed consolidated financial statements of FormFactor, Inc. and its subsidiaries (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America and pursuant to the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission (the “SEC”). Accordingly, the interim financial statements do not include all of the information and footnotes required by generally accepted accounting principles for annual financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair statement have been included. Operating results for the three and six months ended June 30, 2007 are not necessarily indicative of the results that may be expected for the year ending December 29, 2007, or for any other period. The balance sheet at December 30, 2006 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 30, 2006 included in the Company’s Annual Report on Form
10-K/A filed with the SEC.

 

Fiscal Year. The Company operates on a 52/53 week fiscal year, whereby the year ends on the Saturday nearest December 31. Fiscal year 2007 will end on December 29, 2007, and will consist of 52 weeks.

 

Note 2 – Restatement of Financial Statements

 

The Company completed a review of its historical practices with respect to inventory valuation.  That review indicated that during fiscal 2006 and the first half of fiscal 2007 the Company did not consistently follow its accounting policies for valuing inventory resulting in a misstatement of inventory and cost of revenue.  The change in inventory valuation impacted the amount of stock-based compensation capitalized into inventory due to the change in inventory turns.  As a result, the Board of Directors determined on November 8, 2007 that the Company would restate 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 impacts of the adjustments including the related tax impact are described below and in the following tables.

 

6



The following tables present the impact of the restatement adjustments on the Company’s Condensed Consolidated Balance Sheets as of June 30, 2007 and July 1, 2006:

 

 

 

June 30, 2007

 

 

 

As
Previously
Reported

 

Effect of
Restatement

 

Restated

 

 

 

(In thousands, except per share data)

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

286,610

 

 

 

$

286,610

 

Marketable securities

 

239,588

 

 

 

239,588

 

Accounts receivable

 

78,575

 

 

 

78,575

 

Inventories

 

32,004

 

$

(1,575

)

30,429

 

Deferred tax assets

 

12,569

 

1,996

 

14,565

 

Prepaid expenses and other current assets

 

14,319

 

 

 

14,319

 

Total current assets

 

663,665

 

421

 

664,086

 

Restricted cash

 

2,250

 

 

 

2,250

 

Property and equipment, net

 

112,352

 

 

 

112,352

 

Deferred tax assets

 

6,913

 

(28

)

6,885

 

Other assets

 

1,612

 

 

 

1,612

 

Total assets

 

$

786,792

 

$

393

 

$

787,185

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

39,055

 

 

 

$

39,055

 

Accrued liabilities

 

27,498

 

 

 

27,498

 

Income tax payable

 

5,316

 

$

1,006

 

6,322

 

Deferred revenue and customer advances

 

6,371

 

 

 

6,371

 

Deferred rent

 

447

 

 

 

447

 

Total current liabilities

 

78,687

 

1,006

 

79,693

 

Long term income taxes payable

 

11,239

 

124

 

11,363

 

Deferred rent and other liabilities

 

5,435

 

 

 

5,435

 

Total liabilities

 

95,361

 

1,130

 

96,491

 

Commitments and contingencies

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

 

Preferred stock, $0.001 par value:

 

 

 

 

 

Common stock, $0.001 par value:

 

48

 

 

 

48

 

Additional paid-in capital

 

545,545

 

 

 

545,545

 

Accumulated other comprehensive loss

 

(744

)

 

 

(744

)

Retained earnings

 

146,582

 

(737

)

145,845

 

Total stockholders’ equity:

 

691,431

 

(737

)

690,694

 

Total liabilities and stockholders’ equity

 

$

786,792

 

$

393

 

$

787,185

 

 

 

 

July 1, 2006

 

 

 

As Previously
Reported

 

Effect of
Restatement

 

Restated

 

 

 

(In thousands, except per share data)

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

270,338

 

 

 

$

270,338

 

Marketable securities

 

160,306

 

 

 

160,306

 

Accounts receivable

 

44,884

 

 

 

44,884

 

Inventories

 

24,057

 

$

(2,172

)

21,885

 

Deferred tax assets

 

11,339

 

 

 

11,339

 

Prepaid expenses and other current assets

 

11,771

 

 

 

11,771

 

Total current assets

 

522,695

 

(2,172

)

520,523

 

Restricted cash

 

2,250

 

 

 

2,250

 

Property and equipment, net

 

88,586

 

 

 

88,586

 

Deferred tax assets

 

6,524

 

 

 

6,524

 

Other assets

 

739

 

 

 

739

 

Total assets

 

$

620,794

 

$

(2,172

)

$

618,622

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

29,034

 

 

 

$

29,034

 

Accrued liabilities

 

23,214

 

 

 

23,214

 

Income tax payable

 

9,016

 

$

(756

)

8,260

 

Deferred revenue and customer advances

 

5,186

 

 

 

5,186

 

Deferred rent

 

313

 

 

 

313

 

Total current liabilities

 

66,763

 

(756

)

66,007

 

Long term income taxes payable

 

 

 

 

 

Deferred rent and other liabilities

 

3,652

 

 

 

3,652

 

Total liabilities

 

70,415

 

(756

)

69,659

 

Stockholders’ equity

 

 

 

 

 

 

 

Preferred stock, $0.001 par value:

 

 

 

 

 

Common stock, $0.001 par value:

 

47

 

 

 

47

 

Additional paid-in capital

 

472,778

 

 

 

472,778

 

Accumulated other comprehensive loss

 

(807

)

 

 

(807

)

Retained earnings

 

78,361

 

(1,416

)

76,945

 

Total stockholders’ equity:

 

550,379

 

(1,416

)

548,963

 

Total liabilities and stockholders’ equity

 

$

620,794

 

$

(2,172

)

$

618,622

 

 

7



 

The following tables present the impact of the restatement adjustments on the Company’s Condensed Consolidated Statements of Income for the three and six months ended June 30, 2007 and July 1, 2006:

 

 

 

Three Months Ended June 30, 2007

 

Six Months Ended June 30, 2007

 

 

 

As Previously
Reported

 

Effect of
Restatement

 

Restated

 

As Previously
Reported

 

Effect of
Restatement

 

Restated

 

 

 

(In thousands, except per share data)

 

(In thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

114,124

 

 

 

$

114,124

 

$

216,395

 

 

 

$

216,395

 

Cost of revenues

 

53,663

 

$

(3,697

)

49,966

 

102,230

 

$

(4,276

)

97,954

 

Gross margin

 

60,461

 

3,697

 

64,158

 

114,165

 

4,276

 

118,441

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

14,384

 

 

 

14,384

 

28,485

 

 

 

28,485

 

Selling, general and administrative

 

23,056

 

 

 

23,056

 

45,984

 

 

 

45,984

 

Total operating expenses

 

37,440

 

 

 

37,440

 

74,469

 

 

 

74,469

 

Operating income

 

23,021

 

3,697

 

26,718

 

39,696

 

4,276

 

43,972

 

Interest income

 

5,557

 

 

 

5,557

 

11,001

 

 

 

11,001

 

Other expense, net

 

(61

)

 

 

(61

)

(181

)

 

 

(181

)

Income before income taxes

 

28,517

 

3,697

 

32,214

 

50,516

 

4,276

 

54,792

 

Provision for income taxes

 

9,867

 

1,242

 

11,109

 

17,034

 

1,442

 

18,476

 

Net income

 

$

18,650

 

$

2,455

 

$

21,105

 

$

33,482

 

$

2,834

 

$

36,316

 

Net income per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.39

 

$

0.05

 

$

0.44

 

$

0.70

 

$

0.06

 

$

0.76

 

Diluted

 

$

0.38

 

$

0.05

 

$

0.43

 

$

0.68

 

$

0.06

 

$

0.74

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

47,893

 

47,893

 

47,893

 

47,639

 

47,639

 

47,639

 

Diluted

 

49,516

 

49,516

 

49,516

 

49,289

 

49,289

 

49,289

 

 

 

 

Three Months Ended July 1, 2006

 

Six Months Ended July 1, 2006

 

 

 

As Previously
Reported

 

Effect of
Restatement

 

Restated

 

As Previously
Reported

 

Effect of
Restatement

 

Restated

 

 

 

(In thousands, except per share data)

 

(In thousands, except per share data)

 

 

 

 

 

 

 

Revenues

 

$

92,433

 

 

 

$

92,433

 

$

173,763

 

 

 

$

173,763

 

Cost of revenues

 

43,707

 

$

1,115

 

44,822

 

84,207

 

$

2,172

 

86,379

 

Gross margin

 

48,726

 

(1,115

)

47,611

 

89,556

 

(2,172

)

87,384

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

11,627

 

 

 

11,627

 

21,403

 

 

 

21,403

 

Selling, general and administrative

 

17,965

 

 

 

17,965

 

33,713

 

 

 

33,713

 

Total operating expenses

 

29,592

 

 

 

29,592

 

55,116

 

 

 

55,116

 

Operating income

 

19,134

 

(1,115

)

18,019

 

34,440

 

(2,172

)

32,268

 

Interest income

 

3,889

 

 

 

3,889

 

5,711

 

 

 

5,711

 

Other expense, net

 

327

 

 

 

327

 

(14

)

 

 

(14

)

Income before income taxes

 

23,350

 

(1,115

)

22,235

 

40,137

 

(2,172

)

37,965

 

Provision for income taxes

 

8,069

 

(391

)

7,678

 

14,088

 

(756

)

13,332

 

Net income

 

$

15,281

 

$

(724

)

$

14,557

 

$

26,049

 

$

(1,416

)

$

24,633

 

Net income per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.33

 

$

(0.01

)

$

0.32

 

$

0.60

 

$

(0.04

)

$

0.56

 

Diluted

 

$

0.32

 

$

(0.02

)

$

0.30

 

$

0.57

 

$

(0.03

)

$

0.54

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

45,920

 

45,920

 

45,920

 

43,730

 

43,730

 

43,730

 

Diluted

 

48,165

 

48,165

 

48,165

 

45,792

 

45,792

 

45,792

 

 

The following tables present the impact of the restatement adjustments on the Company’s Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2007 and July 1, 2006:

 

 

 

Three Months Ended June 30, 2007

 

Six Months Ended June 30, 2007

 

 

 

(In thousands)

 

(In thousands)

 

 

 

As Previously
Reported

 

Effect of
Restatement

 

Restated

 

As Previously
Reported

 

Effect of
Restatement

 

Restated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Components of other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in unrealized loss on marketable securities, net of tax

 

$

(534

)

 

 

$

(534

)

$

(437

)

 

 

$

(437

)

Translation adjustments

 

(66

)

 

 

(66

)

(63

)

 

 

(63

)

Net income

 

18,650

 

$

2,455

 

21,105

 

33,482

 

$

2,834

 

36,316

 

Comprehensive income

 

$

18,050

 

$

2,455

 

$

20,505

 

$

32,982

 

$

2,834

 

$

35,816

 

 

 

 

Three Months Ended July 1, 2006

 

Six Months Ended July 1, 2006

 

 

 

As Previously
Reported

 

Effect of
Restatement

 

Restated

 

As Previously
Reported

 

Effect of
Restatement

 

Restated

 

 

 

(In thousands)

 

(In thousands)

 

Components of other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in unrealized loss on marketable securities, net of tax

 

$

(240

)

 

 

$

(240

)

$

(523

)

 

 

$

(523

)

Translation adjustments

 

113

 

 

 

113

 

75

 

 

 

75

 

Net income

 

15,281

 

$

(724

)

14,557

 

26,049

 

$

(1,416

)

24,633

 

Comprehensive income

 

$

15,154

 

$

(724

)

$

14,430

 

$

25,601

 

$

(1,416

)

$

24,185

 

 

The restatement adjustments did not impact the total net cash flows from operating, financing, or investing activities in the condensed consolidated statements of cash flows for the three and six months ended June 30, 2007 and July 1, 2006.  Additionally, all notes to the consolidated financial statements affected by the restatements have been labeled as restated.

 

Note 3 — Significant Accounting Policies

 

The Company’s significant accounting policies are disclosed in the Company’s Annual Report on Form 10-K/A for the year ended December 30, 2006. The Company adopted the provisions of Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109,” (“FIN 48”) as of the first day of the first quarter of fiscal 2007. The Company has not otherwise materially changed its significant accounting policies.

 

Income Taxes

 

The Company adopted FIN 48 on December 31, 2006, the first day of the first quarter of fiscal 2007.  FIN 48 prescribes a

 

8



 

recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return that results in a tax benefit. Additionally, FIN 48 provides guidance on de-recognition, statement of operations classification of interest and penalties, accounting in interim periods, disclosure, and transition.  As a result of the implementation of FIN 48, the Company’s tax assets and liabilities did not differ from the assets and liabilities before adoption therefore, the Company did not record any cumulative effect adjustment as of the adoption date.  See Note 9 - Income Taxes for additional information.

 

Note 4 — Departure of Executive Officer

 

On January 30, 2007, the Company entered into a Separation Agreement and General Release (the “Separation Agreement”) with its former President and member of Office of Chief Executive, Joseph R. Bronson, who resigned from the Company effective January 5, 2007. Mr. Bronson also resigned from the Board of Directors of the Company effective January 5, 2007.

 

In the first quarter of fiscal 2007, in conjunction with the Separation Agreement, the Company recorded a charge of approximately $1.8 million consisting primarily of a $400,000 severance payment and approximately $1.4 million in stock-based compensation resulting from the accelerated vesting of a portion of his unvested stock options and all of his remaining unvested restricted stock units.

 

Note 5 — Inventories

 

Inventories are stated at the lower of cost (principally standard cost which approximates actual cost on a first-in, first-out basis) or market value. Adjustments for potential excess and obsolete inventory are made based on management’s analysis of inventory levels and future sales forecasts. Once the value is adjusted, the original cost of the Company’s inventory less the related inventory write-down represents the new cost basis of such products. Reversal of these write-downs is recognized only when the related inventory has been scrapped or sold.

 

Inventories consisted of the following:

 

 

 

June 30,
2007

 

December 30,
2006

 

 

 

As restated

 

 

 

(In thousands)

 

Raw materials

 

$

11,734

 

$

7,354

 

Work-in-progress

 

14,458

 

9,566

 

Finished goods

 

4,237

 

2,006

 

 

 

$

30,429

 

$

18,926

 

 

Note 6 — Warranty

 

The Company offers warranties on its products, other than certain evaluation and early adopter products that are sold without warranty, and records a liability for the estimated future costs associated with customer warranty claims, which is based upon historical experience and the Company’s estimate of the level of future costs. Warranty costs are reflected in the consolidated income statement as a cost of revenues. A reconciliation of the changes in the Company’s warranty liability (included in accrued liabilities) for the three and six months ended June 30, 2007 and July 1, 2006, respectively, follows:

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,
2007

 

July 1,
2006

 

June 30,
2007

 

July 1,
2006

 

 

 

(In thousands)

 

Warranty accrual beginning balance

 

$

822

 

$

498

 

$

778

 

$

511

 

Accrual for warranties issued during the period

 

1,795

 

824

 

2,634

 

1,050

 

Settlements made during the period

 

(1,477

)

(310

)

(2,272

)

(549

)

Warranty accrual ending balance

 

$

1,140

 

$

1,012

 

$

1,140

 

$

1,012

 

 

9



 

Note 7 — Stock-Based Compensation

 

The Company recorded stock-based compensation for the six months ended June 30, 2007 and July 1, 2006 as follows:

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,
2007

 

July 1,
2006

 

June 30,
2007

 

July 1,
2006

 

 

 

As
restated

 

As
restated

 

As
restated

 

As
restated

 

 

 

(In thousands, except per share data)

 

Stock-based compensation expense by type of award:

 

 

 

 

 

 

 

 

 

Employee stock options (1)

 

$

5,844

 

$

4,208

 

$

11,439

 

$

8,477

 

Employee stock purchase plan

 

713

 

469

 

1,603

 

940

 

Restricted stock units (2)

 

32

 

92

 

848

 

184

 

Net change in amounts capitalized as inventory

 

(127

)

(4

)

(50

)

(358

)

Total stock-based compensation

 

$

6,462

 

$

4,765

 

$

13,840

 

$

9,243

 

 


(1)          The six months ended June 30, 2007 includes approximately $575,000 in stock-based compensation resulting from the acceleration of the vesting of a portion of the Company’s former President’s stock options in conjunction with his Separation Agreement (See Note 4 - Departure of Executive Officer).

 

(2)          The six months ended June 30, 2007 includes approximately $798,000 in stock-based compensation resulting from the acceleration of the Company’s former President’s remaining unvested restricted stock units in conjunction with his Separation Agreement (See Note 4 - Departure of Executive Officer).

 

Equity Incentive Plans

 

The Company has four incentive plans: 1996 Stock Option Plan, Incentive Option Plan and Management Incentive Option Plan (collectively, the “Plans”) and 2002 Equity Incentive Plan (“2002 Plan”), which became effective in June 2002. As a result of the effectiveness of the 2002 Plan, the Company ceased granting any options under the Plans.

 

Stock Options

 

The following weighted average assumptions were used in the estimated grant-date fair value calculations using the Black-Scholes option pricing model for stock options for the three and six months ended June 30, 2007 and July 1, 2006, respectively:

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,
2007

 

July 1,
2006

 

June 30,
2007

 

July 1,
2006

 

Stock Options:

 

 

 

 

 

 

 

 

 

Dividend yield

 

 

 

 

 

Expected volatility

 

44.0

%

50.2

%

44.3

%

49.9

%

Risk-free interest rate

 

4.63

%

4.98

%

4.63

%

4.91

%

Expected life (in years)

 

4.70

 

4.70

 

4.71

 

4.82

 

 

Stock option activity under the Plans and the 2002 Plan is set forth below:

 

 

 

Shares
Available

 

Options
Outstanding

 

Weighted- Average
Exercise Price

 

Balances, December 30, 2006

 

3,390,293

 

7,118,946

 

$

24.39

 

Additional shares reserved

 

2,342,743

 

 

 

Options granted

 

(1,314,418

)

1,314,418

 

41.82

 

Options exercised

 

 

(987,182

)

17.21

 

Options forfeited

 

403,926

 

(403,926

)

31.02

 

Balances, June 30, 2007

 

4,822,544

 

7,042,256

 

$

28.27

 

 

10



 

Restricted Stock Units

 

Restricted stock units are converted into shares of the Company’s common stock upon vesting on a one-for-one basis. The vesting of restricted stock units is subject to the employee’s continuing service to the Company. The cost of these awards is determined using the fair value of the Company’s common stock on the date of the grant, and compensation cost is recognized over the vesting period. Restricted stock units generally vest over four years.

 

Activity of the restricted stock units under the 2002 Plan during the six months ended June 30, 2007 is set forth below:

 

 

 

Units

 

Weighted
Average Grant
Date Fair Value

 

Restricted stock units at December 30, 2006

 

37,324

 

$

25.46

 

Vested (1)

 

(28,824

)

26.02

 

Restricted stock units at June 30, 2007

 

8,500

 

$

23.56

 

 


(1)  In January 2007, 9,608 shares of the former President’s restricted stock units vested. The remaining 19,216 shares of restricted stock units vested on an accelerated basis under the Separation Agreement with the former President (See Note 4 - Departure of Executive Officer).

 

Employee Stock Purchase Plan

 

The 2002 Employee Stock Purchase Plan (the “ESPP”) provides that eligible employees may contribute up to 15% of their eligible earnings toward the semi-annual purchase of the Company’s common stock. Under the ESPP, employees may purchase the Company’s common stock through payroll deductions at a price equal to 85% of the lower of the fair market value at the beginning of the applicable offering period or at the end of each applicable purchase period. Each offering period has generally been two years in length, consisting of four six month purchase periods. Effective from February 1, 2007, the new offering periods under the ESPP are a 12 month fixed offering period commencing on February 1 of each calendar year and ending on January 31 of the subsequent calendar year, and a six month fixed offering period commencing on August 1 of each calendar year and ending on January 31 of the subsequent calendar year. The 12 month offering period consists of two six month purchase periods and the six month offering period consists of one six month purchase period. During the six months ended June 30, 2007 and July 1, 2006, 122,533 shares and 95,012 shares, respectively, were issued under the ESPP. As of June 30, 2007, the Company had $0.8 million of total unrecognized deferred stock-based compensation related to ESPP grants, which will be recognized over the weighted average period of 0.7 years. Compensation expense is calculated using the fair value of the employees’ purchase rights under the Black-Scholes model.

 

Note 8 — Net Income per Share

 

Basic net income per share is computed by dividing net income by the weighted-average number of common shares outstanding for the period. Diluted net income per share is computed giving effect to all potential dilutive common stock, including stock options, restricted stock units and common stock subject to repurchase.

 

A reconciliation of the numerator and denominator used in the calculation of basic and diluted net income per share follows (in thousands):

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,
2007

 

July 1,
2006

 

June 30,
2007

 

July 1,
2006

 

 

 

As
restated

 

As
restated

 

As
restated

 

As
restated

 

Basic net income per share

 

 

 

 

 

 

 

 

 

Numerator:

 

 

 

 

 

 

 

 

 

Net income

 

$

21,105

 

$

14,557

 

$

36,316

 

$

24,633

 

Denominator:

 

 

 

 

 

 

 

 

 

Weighted-average common stock outstanding

 

47,893

 

45,920

 

47,639

 

43,730

 

Diluted net income per share

 

 

 

 

 

 

 

 

 

Numerator:

 

 

 

 

 

 

 

 

 

Net income

 

$

21,105

 

$

14,557

 

$

36,316

 

$

24,633

 

Denominator:

 

 

 

 

 

 

 

 

 

Weighted-average shares used in computing basic net income per share

 

47,893

 

45,920

 

47,639

 

43,730

 

Add: Dilutive potential common shares used in computing diluted net income per share

 

1,623

 

2,245

 

1,650

 

2,062

 

Weighted-average number of shares used in computing diluted net income per share

 

49,516

 

48,165

 

49,289

 

45,792

 

 

11



 

The following outstanding options to purchase common stock were excluded from the computation of diluted net income per share as they had an antidilutive effect (in thousands):

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,
2007

 

July 1,
2006

 

June 30,
2007

 

July 1,
2006

 

Options to purchase common stock

 

3,080

 

1,720

 

2,749

 

2,013

 

 

Note 9 — Income Taxes

 

On December 31, 2006, the Company adopted FIN 48. As a result of the implementation of FIN 48, the Company’s tax assets and liabilities did not differ from the assets and liabilities before adoption, therefore, the Company did not record any adjustments as of the adoption date. In addition, consistent with the provisions of FIN 48, the Company reclassified $9.8 million of income tax liabilities from current to non-current liabilities because payment of cash is not anticipated within one year of the balance sheet date and the Company is unable to make a reasonably reliable estimate when cash settlement with a taxing authority will occur. At the adoption date of December 31, 2006, the Company had $16.7 million of total gross unrecognized tax benefits. Of this total, $14.0 million (net of the federal benefit on state issues) of unrecognized tax benefits would impact our effective tax rate if recognized. At June 30, 2007, we added an additional $2.5 million gross unrecognized tax benefit of which $2.3 million of unrecognized tax benefits would impact our effective tax rate if recognized

 

The Company continues to recognize interest and penalties related to uncertain tax positions in income tax expense. Upon adoption the Company had approximately $545,000 of accrued interest and $0 of penalties related to uncertain tax positions. As of June 30, 2007, the Company had approximately $940,000 of accrued interest and $0 of penalties related to uncertain tax positions.

 

The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction, various states and non-U.S. jurisdictions. The Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years prior to 2001.

 

The Company does not expect that the amounts of unrecognized tax benefits will change significantly within the next 12 months. Changes to the estimate would be the result of audits or statute of limitation expirations, which are due to expire but not anticipated to occur because we are scheduled for or currently under audit by the relevant tax authorities in the U.S. and California.

 

Note 10 — 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 the Company. In fiscal 2006 and January 2007, the Company received a total of three notices from the City of Livermore regarding violation of certain applicable discharge limits. For each notice received, the Company promptly took appropriate steps to address the violations noted. The Company is also implementing certain corrective measures in consultation with the City of Livermore. In addition, the Company and the City of Livermore are discussing the Company’s purchase of additional waste water discharge capacity, which the Company requires as a result of its increased manufacturing capacity. No provision has been made for loss from environmental remediation liabilities associated with the Livermore sites, because the Company believes that it is not probable that a liability has been incurred as of June 30, 2007.

 

12



 

While the Company believes it is in compliance in all material respects with the environmental laws and regulations that apply to the Company, in the future the Company may receive additional environmental violation notices, and if received, final resolution of the violations identified by these notices could impact the Company’s operations, which may adversely impact the Company’s operating results and cash flows. New laws and regulations, stricter enforcement of existing laws and regulations, the discovery of previously unknown contamination at the Company’s or others’ sites or the imposition of new cleanup requirements could also adversely impact the Company’s operations, which may adversely impact 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. The Company was not involved in any material legal proceedings, other than the patent litigation 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.

 

The Company is currently involved in certain patent-related litigation as part of its ongoing efforts to protect the intellectual property embodied in its proprietary technology, including its MicroSpring interconnect technology. These litigations include two actions the Company filed in 2004 in Seoul Southern District Court, located in Seoul, South Korea, against Phicom Corporation, a Korean corporation, alleging infringement of the Company’s 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 the Company’s Korean Patent No. 252,457, entitled “Method of Fabricating Interconnections Using Cantilever Elements and Sacrificial Substrates.”  These actions are all pending, except that the Seoul Central District Court has denied the Company’s request for the issuance of preliminary injunctive relief in the Company’s 2006 injunction action.

 

In response to the Company’s infringement actions Phicom filed in the Korean Intellectual Property Office, or KIPO, invalidity actions challenging the validity of some or all of the claims of each of the Company’s four patents at issue in the Seoul infringement actions. KIPO dismissed Phicom’s challenges against all four of the patents-at-issue. Phicom appealed the dismissals of the challenges to the Korean Patent Court. The Korean Patent Court has issued rulings holding invalid certain claims of the Company’s Korean Patent Nos. 278,342, 399,210, and 324,064, and also issued a ruling upholding the validity of the Company’s Korean Patent No. 252,457. The Company has appealed the Patent Court invalidity rulings to the Korea Supreme Court and Phicom has appealed the Patent Court ruling upholding Korean Patent No. 252,457 patent to the Korea Supreme Court.

 

The Company has also initiated patent infringement litigation in the United States against certain third parties. 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 Company’s wafer probe cards—U.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 action that adds two additional patents to the litigation against Phicom—U.S. Patent Nos. 7,073,254, entitled “Method for Mounting a Plurality of Spring Contact Elements,” and 6,615,485, entitled “Probe Card Assembly and Kit, And Methods of Making Same.” Phicom has answered the complaint and the amended complaint by denying infringement, alleging defenses and asserting counterclaims seeking adjudications on the validity and enforceability of the Company’s patents and whether Phicom is infringing the patents-in-issue. 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 Co., Ltd. charging that it is willfully infringing four U.S. patents that cover key aspects of the Company’s wafer probe cards—U.S. Patent Nos. 6,246,247, entitled “Probe Card Assembly and Kit, and Methods of Using Same”, 6,509,751, entitled “Planarizer for a Semiconductor Contactor”, 6,624,648, entitled “Probe Card Assembly” and 7,073,254, entitled “Method for Mounting a Plurality of Spring Contact Elements.” Micronics Japan has answered the complaint by denying infringement, alleging defenses and asserting counterclaims seeking adjudications on the validity and enforceability of the Company’s patents and whether Micronics Japan is infringing those patents.

 

Additionally, one or more third parties have initiated challenges in foreign patent offices against other of the Company’s patents. These actions include proceedings filed in Korea against two of the Company’s Korean patents and proceedings filed

 

13



 

in Taiwan against four of the Company’s Taiwan patents.

 

While the Company believes that it does not have a material monetary damages exposure in these various proceedings, it is possible the Company will incur material attorneys’ fees in defending its intellectual property at issue in these challenges.

 

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 30, 2007.

 

Indemnification Obligations

 

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 hold the third party harmless from and against certain losses. These arrangements may limit the time within which an indemnification claim can be made, the type of the claim and the total amount that the Company can be required to pay in connection with the indemnification obligation. In addition, the Company has entered into indemnification agreements with its directors and certain of its officers, and the Company’s bylaws contain indemnification obligations in favor of the Company’s directors, officers and agents. It is not possible to determine or reasonably estimate the maximum potential amount of future payments under these indemnification obligations due to the varying terms of such obligations, the history of prior indemnification claims and the unique facts and circumstances involved in each particular contractual arrangement and in each potential future claim for indemnification. The Company has not had any requests for indemnification under these arrangements. The Company has not recorded any liabilities for these indemnification arrangements on the Company’s condensed consolidated balance sheet as of June 30, 2007.

 

Note 11 — Stockholders’ Equity

 

Comprehensive Income (Loss)

 

Comprehensive income (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 income were as follows:

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,
2007

 

July 1,
2006

 

June 30,
2007

 

July 1,
2006

 

 

 

As
restated

 

As
restated

 

As
restated

 

As
restated

 

 

 

(In thousands)

 

Net income

 

$

21,105

 

$

14,557

 

$

36,316

 

$

24,633

 

Change in unrealized gain (loss) on marketable securities

 

(534

)

(240

)

(437

)

(523

)

Cumulative translation adjustments

 

(66

)

113

 

(63

)

75

 

Comprehensive income

 

$

20,505

 

$

14,430

 

$

35,816

 

$

24,185

 

 

Components of accumulated other comprehensive loss were as follows:

 

 

 

June 30,
2007

 

December 30,
2006

 

 

 

(In thousands)

 

Unrealized loss on marketable securities

 

$

(719

)

$

(282

)

Foreign currency translation adjustments

 

(25

)

38

 

Accumulated other comprehensive loss

 

$

(744

)

$

(244

)

 

Note 12 — Derivative Financial Instruments

 

The Company purchases forward exchange contracts to hedge certain existing foreign currency exposures. These hedges do not qualify for hedge accounting treatment in accordance with the provisions of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” The Company recognizes gains or losses from the fluctuation in foreign

 

14



 

exchange rates and the valuation of these hedge contracts in other expense. The Company does not use derivative financial instruments for trading or speculative purposes. As of June 30, 2007, the Company had one outstanding foreign exchange forward contract to sell 5,675,000,000 Japanese Yen on July 31, 2007 for $46,059,573 with a contract rate of 123.21. There were no unrealized gains or losses recorded at June 30, 2007.

 

Note 13 — Recent Accounting Pronouncements

 

In May 2007, the FASB issued FASB Staff Position (“FSP”) FIN No. 48-1, “Definition of “Settlement” in FASB Interpretation No. 48” (“FSP FIN No. 48-1”). FSP FIN No. 48-1 provides guidance on how a company should determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits. FSP FIN No. 48-1 is effective upon initial adoption of FIN No. 48, which the Company adopted in the first quarter of fiscal 2007.

 

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115” which is effective for fiscal years beginning after November 15, 2007. This statement permits an entity to choose to measure many financial instruments and certain other items at fair value at specified election dates. Subsequent unrealized gains and losses on items for which the fair value option has been elected will be reported in earnings. The Company is currently evaluating the potential impact of this statement.

 

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for measuring fair value in accordance with U.S. generally accepted accounting principles, and expands disclosures about fair value measurements. The changes to current practice resulting from the application of this statement relate to the definition of fair value, the methods used to measure fair value, and the expanded disclosures about fair value measurements. The provisions of this statement are to be applied prospectively as of the beginning of the fiscal year in which this statement is initially applied, with any transition adjustment recognized as a cumulative-effect adjustment to the opening balance of retained earnings. The provisions of SFAS No. 157 are effective for fiscal years beginning after November 15, 2007; therefore, the Company anticipates adopting this standard as of January 1, 2008.

 

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/A 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/A for the year ended December 30, 2006, 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.

 

15



 

Overview

 

The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes thereto included elsewhere in this amended quarterly report on Form 10-Q/A, and gives effect to the restatement of our consolidated financial statements as discussed in Note 2 “Restatement of Financial Statements” to the consolidated financial statements.

 

We design, develop, manufacture, sell and support precision, high performance advanced semiconductor wafer probe cards. Semiconductor manufacturers use our wafer probe cards to perform wafer sort and test on the semiconductor die, or chips, on the whole semiconductor wafer, prior to singulation of the wafer into individual chips. During wafer probe test, a wafer probe card is mounted in a prober, which is in turn connected to a semiconductor tester, and the wafer probe card is used as an interface to connect electronically with and test individual chips on a wafer. Our wafer probe cards are used by our customers in the front end of the semiconductor manufacturing process, as are our parametric or in-line probe cards, which are used in the front-end manufacturing process. At the core of our product offering are our proprietary technologies, including our MicroSpring interconnect technology and design processes. Our MicroSpring interconnect technology includes a resilient contact element manufactured at our production facilities in Livermore, California. We operate in a single industry segment and have derived our revenues primarily from the sale of wafer probe cards incorporating our MicroSpring interconnect technology.

 

We work closely with our customers to design, develop and manufacture custom wafer probe cards. Each wafer probe card is a custom product that is specific to the chip and wafer designs of the customer. Our customers, in turn, operate in the highly cyclical semiconductor industry and are subject to fluctuations in the demand for their products. Because of the nature of our customers and our business, our revenue growth is driven in significant part by the number of new semiconductor designs that our customers develop, the technology transitions involved in these designs and our customers’ production volumes. In the past, this has resulted in our being subject to demand fluctuations that have resulted in significant variations of revenues, expenses and results of operations. We expect these fluctuations, and the resulting variations in our financial results, to continue in future periods.

 

Revenues.  We derive substantially all of our revenues from product sales of wafer probe cards. Wafer probe card sales, including service and non-recurring engineering revenue associated with wafer probe card sales, accounted for virtually all of our revenues in the first six months of fiscal 2007 and 2006. Revenues from licensing of our design and manufacturing technologies have historically been insignificant. Increases in revenues have resulted from increased demand for our existing products, the introduction of new, more complex products and the penetration of new markets. Revenues from our customers are subject to both quarterly, annual and other fluctuations due to design cycles, technology adoption rates and cyclicality of the different end markets into which our customers’ products are sold.

 

Cost of Revenues. Cost of revenues consists primarily of manufacturing materials, compensation and manufacturing-related overhead. In addition, cost of revenues also includes costs related to the start up of our new manufacturing facility, which we completed in early 2006. Our manufacturing operations rely upon a limited number of suppliers to provide key components and materials for our products, some of which are sole source. We order materials and supplies based on backlog and forecasted customer orders. Tooling and setup costs related to changing manufacturing lots at our suppliers are also included in the cost of revenues. We expense all warranty costs and inventory write-downs or write-offs as cost of revenues.

 

We design, manufacture and sell a fully custom product into the semiconductor test market, which is subject to significant variability and demand fluctuations. Our wafer probe cards are complex products that are custom to a specific chip design and must be delivered on relatively short lead-times as compared to our overall manufacturing process. As our advanced wafer probe cards are manufactured in low volumes and must be delivered on relatively short lead-times, it is not uncommon for us to acquire production materials and start certain production activities based on estimated production yields and forecasted demand prior to or in excess of actual demand for our wafer probe cards. We record an adjustment to our inventory valuation for estimated obsolete and non-saleable inventories equal to the difference between the cost of inventories and the estimated market value based upon assumptions about future demand. If actual market conditions are less favorable than those projected by management, additional inventory write downs would be required. Once established, the original cost of our inventory less the related inventory reserve represents the new cost basis of such products. Reversal of these write downs is recognized only when the related inventory has been scrapped or sold.

 

Research and Development.   Research and development expenses include expenses related to product development and design, engineering and material costs. Almost all research and development costs are expensed as incurred. We plan to continue to invest a significant amount in research and development activities to develop new technologies for current and new markets and new applications in the future, and to improve or advance existing technologies. We expect these expenses to scale with revenue growth.

 

Selling, General and Administrative.   Selling, general and administrative expenses include expenses related to sales, marketing, and administrative personnel, internal and outside sales representatives’ commissions, market research and consulting, and other sales, marketing, and administrative activities. These expenses also include costs for enforcing our patent rights and regulatory compliance costs. We expect that selling expenses will increase as our revenues increase, and we

 

16



 

expect that general and administrative expenses will increase in absolute dollars to support future revenue growth and our worldwide expansion.

 

Use of Estimates. Our discussion and analysis of our financial condition and results of operations are based upon our unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to uncollectible receivables, inventories, marketable securities, intangible assets, income taxes, warranty obligations, excess component and order cancellation costs, contingencies and litigation, and stock-based compensation. Our estimates, which are based on historical experience and on various other assumptions believed to be reasonable under the circumstances, allow us to make judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.

 

Results of Operations

 

The following table sets forth our operating results as a percentage of revenues for the periods indicated:

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,
2007

 

July 1,
2006

 

June 30,
2007

 

July 1,
2006

 

 

 

As restated

 

As restated

 

As restated

 

As restated

 

Revenues

 

100.0

%

100.0

%

100.0

%

100.0

%

Cost of revenues

 

43.8

 

48.5

 

45.3

 

49.7

 

Gross margin

 

56.2

 

51.5

 

54.7

 

50.3

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Research and development

 

12.6

 

12.6

 

13.2

 

12.3

 

Selling, general and administrative

 

20.2

 

19.4

 

21.2

 

19.4

 

Total operating expenses

 

32.8

 

32.0

 

34.4

 

31.7

 

Operating income

 

23.4

 

19.5

 

20.3

 

18.6

 

Interest income

 

4.9

 

4.2

 

5.1

 

3.3

 

Other income (expense), net

 

(0.1

)

0.4

 

(0.1

)

(0.0

)

Income before income taxes

 

28.2

 

24.1

 

25.3

 

21.9

 

Provision for income taxes

 

9.7

 

8.4

 

8.5

 

7.7

 

Net income

 

18.5

%

15.7

%

16.8

%

14.2

%

 

Three and Six Months Ended June 30, 2007 and July 1, 2006

 

Revenues

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,
2007

 

July 1,
2006

 

% Change

 

June 30,
2007

 

July 1,
2006

 

% Change

 

 

 

(In thousands, except percentages)

 

Revenues by Market:

 

 

 

 

 

 

 

 

 

 

 

 

 

DRAM

 

$

80,120

 

$

67,269

 

19.1

%

155,608

 

133,245

 

16.8

%

Flash

 

20,171

 

17,565

 

14.8

 

36,872

 

24,572

 

50.1

 

Logic

 

13,833

 

7,599

 

82.0

 

23,915

 

15,946

 

50.0

 

Total revenues

 

$

114,124

 

$

92,433

 

23.5

%

216,395

 

173,763

 

24.5

%

 

Revenues increased 23.5% and 24.5% in the three and six months ended June 30, 2007 compared with the three and six months ended July 1, 2006. Volume increases resulting from strong market demand for our advanced wafer probe cards continued in the second quarter of fiscal 2007 due to a variety of factors, including bit and design growth as semiconductor manufacturers transition to 70 nanometer nodes and 1 Gb devices, combined with strong growth in the demand for NOR flash memory by mobile device manufacturers.

 

Our revenues for the three and six months ended June 30, 2007 were primarily generated by sales of wafer probe cards to manufacturers of DRAM devices. The increase was driven by accelerated tooling cycles for probe cards as a result of our customers’ continued migration to 70 nanometer nodes to reduce their cost of test and improve productivity, and by demand for 1 Gb devices. The increase in DRAM revenues was also attributable to seasonal strength in the mobile DRAM business

 

17



 

due to increased demand for mobile and consumer applications. Approximately 76% and 66% of our DRAM revenues for the three and six months ended June 30, 2007 were derived from 80 nanometer and below technology products compared to 8% and 6% for the three and six months ended July 1, 2006.

 

Revenues from sales to flash memory device manufacturers increased mainly due to increased demand for our NOR flash wafer probe cards by a significant customer whose high-volume ramp resulted from the growing demand for consumer applications which utilize multi-chip packages. Semiconductors that are integrated into multi-chip packages often benefit from increased wafer level testing to validate device performance before packaging.

 

Revenues from manufacturers of logic devices increased primarily due to a key customer’s ongoing transition to advanced technology nodes in both chipset application and high performance flip chip microprocessors which are used in personal computer, gaming and graphics applications.

 

Revenue by Geographic Region

 

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

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,
2007

 

% of
Revenues

 

July 1,
2006

 

% of
Revenues

 

June 30,
2007

 

% of
Revenues

 

July 1,
2006

 

% of
Revenues

 

 

 

(In thousands, except percentages)

 

Japan

 

$

49,129

 

43.0

%

$

24,748

 

26.8

%

$

77,220

 

35.7

%

$

49,376

 

28.4

%

Asia Pacific

 

36,949

 

32.4

 

33,081

 

35.8

 

71,960

 

33.2

 

60,878

 

35.0

 

North America

 

23,865

 

20.9

 

27,712

 

30.0

 

51,245

 

23.7

 

50,062

 

28.8

 

Europe

 

4,181

 

3.7

 

6,892

 

7.4

 

15,970

 

7.4

 

13,447

 

7.8

 

Total revenues

 

$

114,124

 

100.0

%

$

92,433

 

100.0

%

$

216,395

 

100.0

%

$

173,763

 

100.0

%

 

Geographic revenue information is based on the location to which we send the customer invoices. For example, certain Korean customers purchase through their North American subsidiaries and accordingly, revenues derived from sales to such customers are reflected in North America revenues.

 

The increase in Japan revenues for the three and six months ended June 30, 2007 as compared to the same period in the prior year was primarily due to increased mobile RAM demand directly related to implementation of 70 nanometer tooling cycles combined with increased growth in our customer base in our NOR flash and logic business. The increase in Asia Pacific was primarily due to growth in our business with Taiwan and Korean customers and their continued push for advanced probe card technology. The decrease in revenues in North America for the three months ended June 30, 2007 compared to the same period in the prior year was primarily driven by decreased demand for NAND flash partially offset by increased demand for wafer probe cards used to test chips for consumer and mobile products. North American revenues increased slightly for the six months ended June 30, 2007 as compared to the same periods in the prior year as a result of demand for wafer probe cards used to test chips for consumer and mobile products. The decrease in revenues in Europe for the three months ended June 30, 2007 was primarily due to the decreased demand for one manufacturer’s DRAM devices while the increase for the six months ended June 30, 2007 resulted from increased sales to a manufacturer of DRAM devices in this region.

 

The following customers accounted for more than 10% of our revenues for the three and six months ended June 30, 2007 and July 1, 2006:

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,
2007

 

July 1,
2006

 

June 30,
2007

 

July 1,
2006

 

Elpida Memory

 

29.8

%

18.8

%

24.7

%

22.5

%

Hynix Semiconductor

 

10.2

 

*

 

12.1

 

*

 

Intel Corporation

 

13.4

 

10.4

 

12.6

 

10.6

 

PowerChip Semiconductor

 

11.7

 

15.2

 

*

 

17.3

 

Spansion

 

12.4

 

*

 

*

 

*

 

Micron Technologies

 

*

 

11.1

%

*

 

*

 

 


* Less than 10% of revenues.

 

18



 

Gross Margin

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,
2007

 

July 1,
2006

 

June 30,
2007

 

July 1,
2006

 

 

 

As Restated

 

As Restated

 

As Restated

 

As Restated

 

 

 

(In thousands, except percentages)

 

Gross margin

 

$

64,158

 

$

47,611

 

$

118,441

 

$

87,384

 

% of revenues

 

56.2