FORM-2015.06.27-10Q
 
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 June 27, 2015
 
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, or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated filer o
 
Accelerated filer x
 
 
 
Non-accelerated filer o
 
Smaller reporting company o
(Do not check if a smaller reporting company)
 
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No ý
 
As of July 28, 2015, 58,068,157 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 JUNE 27, 2015

INDEX

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2



PART I. FINANCIAL INFORMATION
 
Item 1. Financial Statements (Unaudited)
 
FORMFACTOR, INC.
 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
 
Three Months Ended
 
Six Months Ended
 
June 27,
2015
 
June 28,
2014
 
June 27,
2015
 
June 28,
2014
Revenues
$
73,885

 
$
67,352

 
$
144,714

 
$
123,311

Cost of revenues
50,582

 
47,328

 
98,621

 
90,962

Gross profit
23,303

 
20,024

 
46,093

 
32,349

Operating expenses:
 

 
 

 
 

 
 
Research and development
11,217

 
11,074

 
22,302

 
20,821

Selling, general and administrative
11,381

 
13,191

 
23,265

 
25,445

Restructuring charges, net

 
59

 
503

 
2,056

Impairment of long-lived assets
8

 

 
8

 
743

Total operating expenses
22,606

 
24,324

 
46,078

 
49,065

Operating income (loss)
697

 
(4,300
)
 
15

 
(16,716
)
Interest income, net
65

 
79

 
149

 
158

Other income (expense), net
100

 
(156
)
 
1,602

 
(222
)
Income (loss) before income taxes
862

 
(4,377
)
 
1,766

 
(16,780
)
Provision (benefit) for income taxes
24

 
(51
)
 
145

 
257

Net income (loss)
$
838

 
$
(4,326
)
 
$
1,621

 
$
(17,037
)
Net income (loss) per share:
 

 
 

 
 
 
 
Basic
$
0.01

 
$
(0.08
)
 
$
0.03

 
$
(0.31
)
Diluted
$
0.01

 
$
(0.08
)
 
$
0.03

 
$
(0.31
)
Weighted-average number of shares used in per share calculations:
 

 
 

 
 
 
 
Basic
58,109

 
55,812

 
57,532

 
55,431

  Diluted
59,094

 
55,812

 
58,874

 
55,431

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

3



FORMFACTOR, INC.
 
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
(Unaudited)
 
Three Months Ended
 
Six Months Ended
 
June 27,
2015
 
June 28,
2014
 
June 27,
2015
 
June 28,
2014
Net income (loss)
$
838

 
$
(4,326
)
 
$
1,621

 
$
(17,037
)
Other comprehensive (loss) income, net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustments
(302
)
 
297

 
(248
)
 
438

Unrealized gains on available-for-sale marketable securities
1

 
22

 
11

 
24

Other comprehensive (loss) income, net of tax
(301
)
 
319

 
(237
)
 
462

Comprehensive income (loss)
$
537

 
$
(4,007
)
 
$
1,384

 
$
(16,575
)

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


4



FORMFACTOR, INC.
 
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
(Unaudited)
 
June 27,
2015
 
December 27,
2014
ASSETS
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
137,088

 
$
113,940

Marketable securities
41,668

 
49,897

Accounts receivable, net
43,979

 
45,152

Inventories, net
24,247

 
25,548

Deferred tax assets
2,030

 
2,036

Refundable income taxes

 
782

Prepaid expenses and other current assets
7,602

 
6,919

Total current assets
256,614

 
244,274

Restricted cash
435

 
435

Property, plant and equipment, net
24,485

 
25,498

Goodwill
30,731

 
30,731

Intangibles, net
32,187

 
38,689

Deferred tax assets
3,437

 
3,466

Other assets
864

 
1,150

Total assets
$
348,753

 
$
344,243

LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 


Current liabilities:
 

 


Accounts payable
$
21,449

 
$
20,274

Accrued liabilities
19,660

 
21,217

Income taxes payable
180

 
68

Deferred revenue
5,766

 
6,303

Total current liabilities
47,055

 
47,862

Long-term income taxes payable
902

 
1,094

Deferred tax liabilities
2,208

 
2,208

Deferred rent and other liabilities
3,580

 
3,643

Total liabilities
53,745

 
54,807

Commitments and contingencies (Note 16)


 


Stockholders’ equity:
 

 
 
Preferred stock, $0.001 par value:
 

 
 
10,000,000 shares authorized; no shares issued and outstanding at June 27, 2015 and December 27, 2014, respectively

 

Common stock, $0.001 par value:
 

 


250,000,000 shares authorized; 58,368,157 and 56,518,428 shares issued and outstanding at June 27, 2015 and December 27, 2014, respectively
58

 
57

Additional paid-in capital
715,863

 
711,676

Accumulated other comprehensive loss
(1,998
)
 
(1,761
)
Accumulated deficit
(418,915
)
 
(420,536
)
Total stockholders’ equity
295,008

 
289,436

Total liabilities and stockholders’ equity
$
348,753

 
$
344,243

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

5



FORMFACTOR, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
Six Months Ended
 
June 27,
2015
 
June 28,
2014
Cash flows from operating activities:
 

 
 

Net income (loss)
$
1,621

 
$
(17,037
)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
 

 
 

Depreciation and amortization
11,908

 
16,185

Amortization of discount on investments

 
168

Stock-based compensation expense
5,415

 
6,089

Deferred income tax provision (benefit)
7

 
(46
)
(Benefit) provision for doubtful accounts receivable
(11
)
 
1

Provision for excess and obsolete inventories
2,964

 
3,830

Loss on disposal and write-off of long-lived assets

 
2

Impairment of long-lived assets
8

 
743

Non-cash restructuring
500

 
600

Foreign currency transaction losses (gains)
681

 
(178
)
Changes in assets and liabilities:
 

 
 

Accounts receivable
1,077

 
(11,633
)
Inventories
(1,663
)
 
(5,170
)
Prepaid expenses and other current assets
(817
)
 
(436
)
Refundable income taxes
782

 

Other assets
259

 

Accounts payable
1,051

 
2,400

Accrued liabilities
(1,640
)
 
3,500

Income tax payable
(81
)
 
140

Deferred rent and other liabilities
148

 
112

Deferred revenues
(539
)
 
209

Net cash provided by (used in) operating activities
21,670

 
(521
)
Cash flows from investing activities:
 

 
 

Acquisition of property, plant and equipment
(4,245
)
 
(2,994
)
Proceeds from sale of subsidiary
35

 
54

Purchases of marketable securities
(23,761
)
 
(31,693
)
Proceeds from maturities of marketable securities
32,000

 
44,275

Net cash provided by investing activities
4,029

 
9,642

Cash flows from financing activities:
 

 
 

Proceeds from issuances of common stock
1,803

 
1,426

Purchase and retirement of common stock
(3,508
)
 

Payments made on capital leases

 
(271
)
Net cash (used in) provided by financing activities
(1,705
)
 
1,155

Effect of exchange rate changes on cash and cash equivalents
(846
)
 
387

Net increase in cash and cash equivalents
23,148

 
10,663

Cash and cash equivalents, beginning of period
113,940

 
59,196

Cash and cash equivalents, end of period
$
137,088

 
$
69,859

Supplemental cash flow disclosures:
 

 
 

Changes in accounts payable and accrued liabilities related to property, plant and equipment purchases
$
42

 
$
(394
)
Income and property taxes (refunded) paid, net
$
(819
)
 
$
123

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

6



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

Note 1 — Basis of Presentation and Summary of Significant Accounting Policies
 
Basis of presentation. The accompanying unaudited condensed consolidated interim financial statements of FormFactor, Inc. and our subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to the instructions to Form 10-Q and Article 10 of Regulation S-X of the U.S. Securities and Exchange Commission (the “SEC”). Our 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 to fairly present our financial position, results of operations and cash flows have been included. Operating results for the three and six months ended June 27, 2015 are not necessarily indicative of the results that may be expected for the year ending December 26, 2015, or for any other period. The balance sheet at December 27, 2014 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements. The condensed consolidated financial statements include our accounts as well as those of our wholly-owned subsidiaries after elimination of all inter-company balances and transactions.
 
The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in our condensed consolidated financial statements and accompanying notes. Actual results could differ from those estimates, and may result in material effects on our consolidated operating results and financial position. 

These financial statements and notes should be read with the consolidated financial statements and notes for the year ended December 27, 2014 included in our Annual Report on Form 10-K filed with the SEC on March 6, 2015.
 
Fiscal year. We operate on a 52/53 week fiscal year, whereby the fiscal year ends on the last Saturday of December. Fiscal 2015 and 2014 each contain 52 weeks and the three and six months ended June 27, 2015 and June 28, 2014 each contained 13 and 26 weeks, respectively. Fiscal 2015 will end on December 26, 2015.

Critical Accounting Policies. Our critical accounting policies have not changed during the three and six months ended June 27, 2015 from those disclosed in our Annual Report on Form 10-K for the year ended December 27, 2014.


Note 2 — Concentration of Credit and Other Risks
 
Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash equivalents, marketable securities and trade receivables. Our cash equivalents and marketable securities are held in safekeeping by large, credit worthy financial institutions. We invest our excess cash primarily in U.S. banks, government and agency bonds, money market funds and corporate obligations. We have established guidelines relative to credit ratings, diversification and maturities that seek to maintain safety and liquidity. Deposits in these banks may exceed the amounts of insurance provided on such deposits. To date, we have not experienced any losses on our deposits of cash and cash equivalents.
We market and sell our products to a narrow base of customers and generally do not require collateral. The following customers accounted for more than 10% of our revenues for the periods indicated:
 
Three Months Ended
 
Six Months Ended
 
June 27, 2015
 
June 28, 2014
 
June 27, 2015
 
June 28, 2014
Micron
17.8
%
 
12.2
%
 
14.3
%
 
13.5
%
Intel
17.1

 
19.5

 
17.8

 
18.0

Samsung
13.1

 
*

 
13.4

 
*

SK hynix
13.0

 
21.4

 
15.2

 
19.5

 
61.0
%
 
53.1
%
 
60.7
%
 
51.0
%
* Less than 10% of revenues.

7



At June 27, 2015, two customers accounted for 18% and 15% of gross accounts receivable. At December 27, 2014, two customers accounted for approximately 26% and 18% of gross accounts receivable. No other customers accounted for more than 10% of gross accounts receivable at either of these fiscal period ends. We operate in the intensely competitive semiconductor industry, including the Dynamic Random Access Memory, or DRAM, Flash memory, and System-on-Chip, or SoC markets, which have been characterized by price erosion, rapid technological change, short product life, cyclical market patterns and heightened foreign and domestic competition. Significant technological changes in the industry could adversely affect our operating results.
Certain components for our wafer probe card products that meet our requirements are available only from a limited number of suppliers. The rapid rate of technological change and the necessity of developing and manufacturing products with short life cycles may intensify our reliance on such suppliers. The inability to obtain components as required, or to develop alternative sources, if and as required in the future, could result in delays or reductions in product shipments, which in turn could have a material adverse effect on our business, financial condition, results of operations or cash flows.


Note 3 — Goodwill and Intangible Assets

Goodwill recorded from the acquisition of MicroProbe on October 16, 2012 was $30.7 million as of June 27, 2015 and remained unchanged from the amounts recorded as of December 27, 2014. The Company has not recorded any historical goodwill impairments as of June 27, 2015.

The changes in intangible assets during the six months ended June 27, 2015 and the net book value of intangible assets as of June 27, 2015 and December 27, 2014 were as follows (in thousands):
 
 
Intangible Assets, Gross Amount
 
Accumulated Amortization
 
Intangible Assets, Net
 
Weighted Average Useful Life
Other Intangible Assets (1)
 
December 27, 2014
 
Additions/Disposals
 
June 27, 2015
 
December 27, 2014
 
Expense, net
 
June 27, 2015
 
December 27, 2014
 
June 27, 2015
 
June 27, 2015
Existing developed technologies
 
$
51,248

 
$
2,400

 
$
53,648

 
$
35,045

 
$
5,176

 
$
40,221

 
$
16,203

 
$
13,427

 
2.1
Trade name
 
4,388

 

 
4,388

 
970

 
218

 
1,188

 
3,418

 
3,200

 
7.3
Customer relationships
 
17,000

 

 
17,000

 
4,832

 
1,108

 
5,940

 
12,168

 
11,060

 
5.3
Total finite-lived intangible assets
 
72,636

 
2,400

 
75,036

 
40,847

 
6,502

 
47,349

 
31,789

 
27,687

 
 
In-process research and development
 
6,900

 
(2,400
)
 
4,500

 

 

 

 
6,900

 
4,500

 
 
Total intangible assets
 
$
79,536

 
$

 
$
79,536

 
$
40,847

 
$
6,502

 
$
47,349

 
$
38,689

 
$
32,187

 
 
(1) Excludes fully amortized intangible assets

During the six months ended June 27, 2015, a purchased in-process research and development ("IPR&D") project with a carrying value of $2.4 million was completed and reclassified as a finite-lived intangible asset, and is currently being amortized over its estimated useful life.

The remaining IPR&D asset is classified as an indefinite lived intangible asset that is not currently subject to amortization but is reviewed for impairment annually or whenever events or changes in circumstances indicate that the carrying value of such asset may not be recoverable. The IPR&D asset will be subject to amortization upon completion of its respective research project and at the start of commercialization. The fair value assigned to the IPR&D asset was determined using the income approach based on estimates and judgments regarding risks inherent in the development process, including the likelihood of achieving technological success and market acceptance. If the IPR&D project is abandoned, the acquired technology attributable to the project will be expensed in the Condensed Consolidated Statements of Operations.
For the three and six months ended June 27, 2015, amortization expense of $2.6 million and $0.7 million, and $5.2 million and $1.3 million, respectively, was included in cost of revenues and selling, general and administrative expenses, respectively. For the three and six months ended June 28, 2014, amortization expense of $4.4 million and $0.7 million, and $8.8 million and $1.4 million, respectively, was included in cost of revenues and selling, general and administrative expenses, respectively.

8



Based on the carrying values of the finite-lived intangible assets recorded as of June 27, 2015 and assuming no subsequent additions to or impairment of the underlying assets, the remaining estimated annual amortization expense is expected to be as follows (in thousands):
Fiscal Year
 
Amount
2015
 
$
6,635

2016
 
9,511

2017
 
3,314

2018
 
2,949

2019
 
2,447

and thereafter
 
2,831

Total
 
$
27,687



Note 4 — Restructuring Charges
 
Restructuring charges include costs related to employee termination benefits, cost of long-lived assets abandoned or impaired, as well as contract termination costs. Restructuring charges are reflected separately as "Restructuring charges, net" in the Condensed Consolidated Statements of Operations. A summary of the actions we have taken during the three and six months ended June 27, 2015 and June 28, 2014, the purposes of which were to improve operating efficiency, streamline and simplify our operations and reduce our operating costs, are discussed below.

2015 Restructuring Activities

There were no restructuring activities during the three months ended June 27, 2015. During the three months ended March 28, 2015, we recorded stock-based compensation expense of approximately $0.5 million relating to the modification of certain equity-based awards of a full-time employee who was notified of his termination during the fourth quarter of fiscal 2014. The severance terms relating to the modification of his equity-based awards were finalized during the first quarter of fiscal 2015.

2014 Restructuring Activities

On January 27, 2014, we announced a global organizational restructuring and cost reduction plan. As part of the plan, we eliminated 52 full-time employees. In addition, we reduced our temporary workforce by 9 positions. We recorded $2.0 million of restructuring charges during the first quarter of fiscal 2014, which was comprised of $1.4 million in severance and related benefits and $0.6 million in impairment charges for certain equipment that would no longer be utilized. During the three months ended June 28, 2014, we eliminated an additional 2 full-time employees and recorded $59 thousand in severance charges. The activities comprising these restructuring activities and the related cash payments were completed and paid by June 28, 2014.

The activities in the restructuring accrual for the six months ended June 27, 2015 were as follows (in thousands):

 
Employee Severance and Benefits
 
Stock-based Compensation
 
Total
Accrual at December 27, 2014
$
584

 
$

 
$
584

Restructuring charges

 
500

 
500

Cash Payments
(569
)
 

 
(569
)
Adjustment to restructuring charges
3

 

 
3

Non-cash settlement

 
(500
)
 
(500
)
Accrual at June 27, 2015
$
18

 
$

 
$
18



9



The activities in the restructuring accrual for the three months ended June 28, 2014 were as follows (in thousands):
 
Employee Severance and Benefits
 
Property and Equipment Impairment
 
Total
Accrual at December 28, 2013
$
138

 
$

 
$
138

Restructuring charges
1,456

 
600

 
2,056

Cash payments
(1,592
)
 

 
(1,592
)
Asset impairments

 
(600
)
 
(600
)
Non-cash settlements
(2
)
 

 
(2
)
Accrual at June 28, 2014
$

 
$

 
$



Note 5 — Fair Value
Assets Measured at Fair Value on a Recurring Basis
 
We measure and report certain assets and liabilities at fair value on a recurring basis, including money market funds, U.S. Treasury securities, agency securities and foreign currency derivatives (see Note 17 to the Condensed Consolidated Financial Statements - Derivative Financial Instruments, for a discussion of fair value of foreign currency derivatives).

Assets measured at fair value on a recurring basis as of June 27, 2015 was as follows (in thousands): 
 
Level 1
 
Level 2
 
Total
Assets:
 
 
 
 
 
Cash equivalents
 
 
 
 
 
Money market funds
$
82,627

 
$

 
$
82,627

Marketable securities
 
 
 
 
 
U.S. Treasuries

 
27,414

 
27,414

Agency securities (Federal)

 
14,254

 
14,254

Total
$
82,627

 
$
41,668

 
$
124,295


Assets measured at fair value on a recurring basis as of December 27, 2014 was as follows (in thousands):

 
 
Level 1
 
Level 2
 
Total
Assets:
 
 
 
 
 
Cash equivalents
 
 
 
 
 
Money market funds
$
65,303

 
$

 
$
65,303

Marketable securities
 
 
 
 
 
U.S. Treasuries

 
42,395

 
42,395

Agency securities (Federal)

 
7,502

 
7,502

Total
$
65,303

 
$
49,897

 
$
115,200

 
The Level 1 assets consist of our money market fund deposits. The Level 2 assets consist of our available-for-sale investment portfolio, which are valued utilizing a market approach. Our investments are priced by pricing vendors who provided 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 values in the market in which the investment trades. Our broker-priced investments are labeled as Level 2 investments because fair values of these investments are 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 values used are appropriate for these investments.
We did not have any transfers of assets measured at fair value on a recurring basis to or from Level 1 and Level 2 during each of the three and six months ended June 27, 2015 and June 28, 2014.

10



Assets 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. Refer to Note 3 to the Condensed Consolidated Financial Statements-Goodwill and Intangible Assets, for further details. There were no assets measured at fair value on a nonrecurring basis during the three and six months ended June 27, 2015 and June 28, 2014.


Note 6 — Marketable Securities
 
We classify our marketable securities as available-for-sale. All marketable securities represent the investment of funds available for current operations, notwithstanding their contractual maturities. Such marketable securities are recorded at fair value and unrealized gains and losses are recorded in accumulated other comprehensive income until realized.
 
Marketable securities at June 27, 2015 consisted of the following (in thousands):
 
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
U.S. Treasuries
$
27,393

 
$
21

 
$

 
$
27,414

Agency securities (Federal)
14,255

 

 
(1
)
 
14,254

 
$
41,648

 
$
21

 
$
(1
)
 
$
41,668

 

Marketable securities at December 27, 2014 consisted of the following (in thousands):
 
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
U.S. Treasuries
$
42,386

 
$
13

 
$
(4
)
 
$
42,395

Agency securities (Federal)
7,502

 

 

 
7,502

 
$
49,888

 
$
13

 
$
(4
)
 
$
49,897

 
The marketable securities with gross unrealized losses have been in a loss position for less than twelve months as of June 27, 2015 and December 27, 2014, respectively.
 
When evaluating the investments for other-than-temporary impairment, we review factors such as the length of time and extent to which fair value has been below the amortized cost basis, review of current market liquidity, interest rate risk, the financial condition of the issuer, as well as credit rating downgrades. We believe that the unrealized losses are not other-than-temporary. We do not have a foreseeable need to liquidate the portfolio and anticipate recovering the full cost of the securities either as market conditions improve or as the securities mature.
 
Contractual maturities of marketable securities as of June 27, 2015 were as follows (in thousands):

 
 
Amortized Cost
 
Fair Value
Due in one year or less
$
41,648

 
$
41,668

Due after one year to five years

 

 
$
41,648

 
$
41,668

 
There were no realized gains and losses on sales and maturities of marketable securities during the three and six months ended June 27, 2015 and June 28, 2014, respectively.






11



Note 7 — Allowance for Doubtful Accounts

A reconciliation of the changes in our allowance for doubtful accounts receivable for the six months ended June 27, 2015 and June 28, 2014, respectively, is as follows (in thousands):

 
 
June 27,
2015
 
June 28,
2014
Balance at beginning of period
$
266

 
$
265

Additions

 
5

Reductions
(11
)
 
(4
)
Balance at end of period
$
255

 
$
266



Note 8 — Inventories
 
Inventories consisted of the following (in thousands):
 
June 27,
2015
 
December 27,
2014
Raw materials
$
9,701

 
$
10,646

Work-in-progress
12,927

 
12,813

Finished goods
1,619

 
2,089

 
$
24,247

 
$
25,548



Note 9 — Warranty

A reconciliation of the changes in our warranty liability for the six months ended June 27, 2015 and June 28, 2014, respectively, is as follows (in thousands):
 
June 27,
2015
 
June 28,
2014
Balance at beginning of period
$
1,592

 
$
691

   Accruals
828

 
1,260

   Settlements
(1,338
)
 
(1,066
)
Balance at the end of period
$
1,082

 
$
885



Note 10 — Long-lived Assets
 
Impairment of long-lived assets
 
During the six months ended June 27, 2015, long-lived asset impairment charges recorded were insignificant. During the six months ended June 28, 2014, we recorded $0.7 million of impairments related to manufacturing assets we no longer utilized. These charges were included in "Impairment of long-lived assets" in the Condensed Consolidated Statements of Operations in their respective periods.



12



Long-lived Assets
 
Property, plant and equipment consisted of the following (in thousands):
 
 
June 27,
2015
 
December 27,
2014
Machinery and equipment
$
148,780

 
$
145,995

Computer equipment and software
28,898

 
28,953

Furniture and fixtures
5,401

 
5,402

Leasehold improvements
66,759

 
66,821

Sub total
249,838

 
247,171

Less: accumulated depreciation and amortization
(228,786
)
 
(224,135
)
Net long-lived assets
21,052

 
23,036

Construction-in-progress
3,433

 
2,462

Total
$
24,485

 
$
25,498


Assets held for sale

There were no assets held for sale as of June 27, 2015. During the six months ended June 28, 2014, we reclassified $0.6 million of building and $0.5 million of machinery and equipment from "Property, plant and equipment, net" to "Prepaid expenses and other current assets" in our balance sheet as these assets were identified as held for sale as of June 28, 2014. The sale of the building closed during the third quarter of fiscal 2014 and we recorded a gain of $0.2 million on the sale during the third quarter of fiscal 2014.

Refer to Note 3 to the Condensed Consolidated Financial Statements - Goodwill and Intangible Assets for further details relating to our intangible long-lived assets.


Note 11 — Accumulated Other Comprehensive Loss
 
Accumulated other comprehensive loss includes foreign currency translation adjustments and unrealized losses on available-for-sale securities, net of tax, the impact of which has been excluded from earnings and reflected as components of stockholders' equity as shown below (in thousands):
 
 
June 27,
2015
 
December 27,
2014
Unrealized loss on marketable securities, net of tax of $428 at June 27, 2015 and December 27, 2014, respectively
$
(408
)
 
$
(419
)
Cumulative translation adjustments
(1,590
)
 
(1,342
)
Accumulated other comprehensive loss
$
(1,998
)
 
$
(1,761
)


Note 12 — Stockholders’ Equity
 
Common Stock Repurchase Program

On April 16, 2015, our Board of Directors authorized a program to repurchase up to $25.0 million of outstanding common stock. Under the authorized stock repurchase program, we may repurchase shares from time to time on the open market. The pace of repurchase activity will depend on levels of cash generation, current stock price and other factors. The stock repurchase program was announced on April 16, 2015 and expires on April 15, 2016. The program may be modified or discontinued at any time. During the three months ended June 27, 2015, under this repurchase authorization, we repurchased 400,362 shares of common stock for approximately $3.5 million.
 
Repurchased shares are retired upon the settlement of the related trade transactions. Our policy related to repurchases of our common stock is to charge the excess of cost over par value to additional paid-in capital. All repurchases were made in compliance with Rule 10b-18 under the Securities Exchange Act of 1934, as amended.


13



Restricted Stock Units
 
Restricted stock unit (RSU) activity under our equity incentive plan during the six months ended June 27, 2015 is set forth below:
 
 
Units
 
Weighted Average Grant Date Fair Value
Restricted stock units at December 27, 2014
3,250,046

 
$
6.07

Awards granted
1,478,750

 
8.70

Awards vested
(1,922,779
)
 
6.04

Awards canceled
(138,619
)
 
6.18

Restricted stock units at June 27, 2015
2,667,398

 
$
7.54


On May 28, 2015, we issued 195,000 RSUs to seven senior executives of our company that will vest based on certain market performance criteria. The performance criteria are based on a metric called our Total Shareholder Return (TSR) for the period from April 1, 2015 to March 31, 2017 relative to the TSR of the companies identified as being part of the S&P Semiconductor Select Industry Index (FormFactor peer companies), as of April 1, 2015. The total stock-based compensation cost of approximately $1.5 million will be recognized ratably over the requisite service period.

On May 5, 2014, we issued 350,000 RSUs to seven senior executives of our company that will vest based on certain market performance criteria. The performance criteria are based on our TSR for the period from April 1, 2014 to March 31, 2016 relative to the TSR of the companies identified as being part of the S&P Semiconductor Select Industry Index (FormFactor peer companies), as of April 1, 2014. The total stock-based compensation cost of approximately $1.8 million will be recognized ratably over the requisite service period.

On May 6, 2013, we issued 355,000 RSUs to seven senior executives and one non-executive of our company that would vest based on certain market performance criteria. The performance criteria were based on our TSR for the period from April 1, 2013 to March 31, 2015 relative to the TSR of the companies identified as being part of the S&P Semiconductor Select Industry Index (FormFactor peer companies), as of April 1, 2013. On April 8, 2015, upon the review of the market performance criteria, our Compensation Committee certified a total earn out of 443,750 RSUs which immediately vested as of this date.

The total fair value of RSUs vested during the three and six months ended June 27, 2015 and June 28, 2014 was $10.0 million and $17.5 million, and $4.3 million and $7.1 million, respectively.

Stock Options
 
During the three months ended June 27, 2015, we did not grant any stock options. During the three months ended March 28, 2015, we granted 450,000 stock options to our Chief Executive Officer with a grant-date fair value of approximately $1.7 million which will be recognized as stock compensation expense ratably over the service period. The following weighted average assumptions were used in the estimated grant-date fair value calculations using the Black-Scholes option pricing model:
Stock Options:
 
Dividend yield
%
Expected volatility
47.5
%
Risk-free interest rate
1.57
%
Expected term (in years)
5.52


During the six months ended June 28, 2014, we did not grant any stock options.







14



Note 13 — Stock-Based Compensation
 
We account for all stock-based compensation to employees and directors, including grants of RSUs and stock options, as stock-based compensation costs based on the fair value measured as of the date of grant. These costs are recognized as an expense in the Condensed Consolidated Statements of Operations over the requisite service period.

The table below shows stock-based compensation charges included in the Condensed Consolidated Statements of Operations (in thousands):
 
 
Three Months Ended
 
Six Months Ended
 
June 27,
2015
 
June 28,
2014
 
June 27,
2015
 
June 28,
2014
Stock-based compensation included in:
 

 
 

 
 
 
 
Cost of revenues
$
602

 
$
661

 
$
1,185

 
$
1,155

Research and development
726

 
937

 
1,571

 
1,561

Selling, general and administrative
1,178

 
1,921

 
2,659

 
3,373

Total stock-based compensation
2,506

 
3,519

 
5,415

 
6,089

Tax effect of stock-based compensation

 

 

 

Total stock-based compensation, net of tax
$
2,506

 
$
3,519

 
$
5,415

 
$
6,089

 

During the six months ended June 27, 2015, we recorded stock-based compensation expense of approximately $0.5 million relating to a full-time employee who was impacted by our restructuring activities. Hence, we classified this stock-based compensation expense as a restructuring expense and the table above therefore does not include this expense. Refer to Note 4 to the Condensed Consolidated Financial Statements - Restructuring Charges for further details.

Employee Stock Purchase Plan
 
Under our 2012 Employee Stock Purchase Plan ("ESPP"), the offering periods are 12 months 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. The price of the common stock purchased is 85% of the lesser of the fair market value of the common stock on the first day of the applicable offering period or the last day of each purchase period.

During the three months ended June 27, 2015 and June 28, 2014, we did not issue any ESPP shares. During the six months ended June 27, 2015 and June 28, 2014, we issued 302,705 and 320,919 ESPP shares, respectively.

The following weighted-average assumptions were used in estimating the fair value of employees' purchase rights under our approved employee stock purchase plans:
 
Three Months Ended
 
Six Months Ended
 
June 27,
2015
 
June 28,
2014
 
June 27,
2015
 
June 28,
2014
ESPP:
 

 
 

 
 
 
 
Dividend yield
%
 
%
 
%
 
%
Expected volatility
54.7
%
 
42.5
%
 
51.7
%
 
40.9
%
Risk-free interest rate
0.07
%
 
0.07
%
 
0.08
%
 
0.11
%
Expected term (in years)
0.50

 
0.50

 
1.00

 
1.00

 


15



Unrecognized Compensation Costs
 
At June 27, 2015, the unrecognized stock-based compensation, adjusted for estimated forfeitures, was as follows (in thousands): 
 
Unrecognized Expense
 
Average Expected Recognition Period in years
Stock options
$
1,547

 
3.61
Restricted stock units
15,363

 
2.18
Employee stock purchase plan
80

 
0.10
Total unrecognized stock-based compensation expense
$
16,990

 
 


Note 14 — Net Income (Loss) per Share
 
Basic net income (loss) per share for the three and six months ended June 27, 2015 and June 28, 2014 was computed by dividing net income (loss) by the weighted-average number of common shares outstanding for the period. Diluted net income per share for the three and six months ended June 27, 2015 was computed by dividing net income by the diluted weighted-average number of shares outstanding during that period. Diluted net loss per share for the three and six months ended June 28, 2014 was computed by dividing net loss by the weighted-average number of common shares outstanding for the period as the inclusion of any common stock equivalents would have been anti-dilutive.
 
A reconciliation of the numerator and denominator used in the calculation of basic and diluted net income (loss) per share is as follows (in thousands):
 
 
Three Months Ended
 
Six Months Ended
 
June 27,
2015
 
June 28,
2014
 
June 27,
2015
 
June 28,
2014
Numerator:
 

 
 

 
 
 
 
Net income (loss) used in computing basic and diluted net loss per share
$
838

 
$
(4,326
)
 
$
1,621

 
$
(17,037
)
Denominator:
 
 
 
 
 
 
 
Weighted-average shares used in computing basic net income (loss) per share
58,109

 
55,812

 
57,532

 
55,431

Add potentially dilutive securities
985

 

 
1,342

 

Weighted-average shares used in computing basic and diluted net income (loss) per share
59,094

 
55,812

 
58,874

 
55,431


The following table sets forth the weighted-average number of all potentially dilutive securities excluded from the computation in the table above because their effect would have been anti-dilutive (in thousands):
 
 
Three Months Ended
 
Six Months Ended
 
June 27,
2015
 
June 28,
2014
 
June 27,
2015
 
June 28,
2014
Options to purchase common stock
1,948

 
2,981

 
2,059

 
3,133

Restricted stock units

 

 
197

 
3

Employee stock purchase plan

 
26

 

 
16

Total potentially dilutive securities
1,948

 
3,007

 
2,256

 
3,152



Note 15 — Income Taxes
 
We recorded an income tax provision of $24 thousand and $0.1 million, for the three and six months ended June 27, 2015, respectively. We recorded an income tax benefit of $51 thousand and a provision of $0.3 million for the three and six months ended June 28, 2014, respectively. Income tax provisions reflect the tax provision on our operations in the foreign and U.S

16



jurisdictions offsetting by tax benefit from lapsing of statute of limitations in foreign jurisdictions. We continue to maintain a valuation allowance for our U.S. Federal and State deferred tax assets.

Note 16 — Commitments and Contingencies
 
Contractual and purchase obligations
We lease facilities under non-cancellable operating leases with various expiration dates through 2021. The facilities generally require us to pay property taxes, insurance and maintenance costs. Further, several lease agreements contain rent escalation clauses or rent holidays. For purposes of recognizing minimum rental expenses on a straight-line basis over the terms of the leases, we use the date of initial possession to begin amortization. We have the option to extend or renew most of our leases, which may increase the future minimum lease commitments. Purchase obligations are primarily for purchases of inventory and manufacturing related service contracts. Purchase obligations are defined as agreements that are enforceable and legally binding and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Timing of payments and actual amounts paid may be different depending on the time of receipt of goods or services or changes to agreed-upon amounts for some obligations.
Our lease and purchase obligations have not materially changed as of June 27, 2015 from those disclosed in our Annual Report on Form 10-K for the year ended December 27, 2014.
Environmental Matters
 
We are 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. We believe that we comply in all material respects with the environmental laws and regulations that apply to us, including those of the California Department of Toxic Substances Control, the Bay Area Air Quality Management District, the City of Livermore Water Resources Division, County of Santa Clara Department of Environmental Health, County of San Diego Hazardous Materials Division and Encino Water District, and the California Division of Occupational Safety and Health. We did not receive any notices of violations of environmental laws and regulations during the six months ended June 27, 2015, or in our fiscal 2014. We do not believe that any loss from environmental remediation liabilities would have a material impact on our financial condition.
While we believe that we are in compliance in all material respects with the environmental laws and regulations that apply to us, in the future, we may receive environmental violation notices, and if received, final resolution of the violations identified by these notices could harm our operations, which may adversely impact our operating results and cash flows. New laws and regulations, amended enforcement practices around existing laws and regulations, the discovery of previously unknown contamination at our or others' sites or the imposition of new cleanup requirements could also harm our operations, thereby adversely impacting our operating results and cash flows.
Indemnification Arrangements
We have entered, and may from time to time in the ordinary course of our business enter, into contractual arrangements with third parties that include indemnification obligations. Under these contractual arrangements, we have agreed to defend, indemnify and/or hold the third party harmless from and against certain liabilities. These arrangements include indemnities in favor of customers in the event that our probe cards infringe a third party's intellectual property or cause property or other damages and indemnities in favor of our lessors in connection with facility leasehold liabilities that we may cause. In addition, we have entered into indemnification agreements with our directors and certain of our officers, and our bylaws contain indemnification obligations in favor of our directors, officers and agents. These indemnity arrangements may limit the type of the claim, the total amount that we can be required to be paid in connection with the indemnification obligation and the time within which an indemnification claim can be made. The duration of the indemnification obligation may vary, and for most arrangements, survives the agreement term and is indefinite. We believe that substantially all of our indemnity arrangements provide either for limitations on the maximum potential future payments we could be obligated to make, or for limitations on the types of claims and damages we could be obligated to indemnify, or both. However, 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, a lack of history of prior indemnification claims, the unique facts and circumstances involved in each particular contractual arrangement and in each potential future claim for indemnification, and the contingency of any potential liabilities upon the occurrence of events that are not reasonably determinable. We have not had any material requests for indemnification under these arrangements. Our management believes that any liability for these indemnity

17



arrangements would not be material to our accompanying consolidated financial statements. We have not recorded any liabilities for these indemnification arrangements on our consolidated balance sheet as of June 27, 2015.
Legal Matters
 
From time to time, we may be subject to legal proceedings and claims in the ordinary course of business. For the six months ended June 27, 2015, we were not involved in any material legal proceedings. We identify below in "Other Litigation", a proceeding filed in fiscal 2013, which, if not resolved amicably, either (i) includes allegations that could potentially result in a material legal proceeding, or (ii) the cost to defend the allegations through trial could be material. In the future we may become a party to additional legal proceedings that may require us to spend significant resources, including proceedings designed to protect our intellectual property rights. Litigation can be expensive and disruptive to normal business operations. Moreover, the results of legal proceedings are difficult to predict, and the costs incurred in litigation can be substantial, regardless of outcome.
Customs and Trade Matters
From time to time, we receive communications from certain jurisdictions regarding customs and indirect tax matters such as customs duties and value added taxes. For the six months ended June 27, 2015, we did not receive any communications from jurisdictions regarding any material customs duties or indirect tax matters.
 
Intellectual Property Litigation
 
In the ordinary course of business, the Company has been, currently is, and may in the future be, involved in commercial litigation relating to intellectual property, as well as third party initiated patent office proceedings in the United States and foreign patent offices.

No provision has been made for intellectual property litigation because we believe that it is not probable that a liability had been incurred as of June 27, 2015. We could incur material attorneys' fees in prosecuting and defending actions related to intellectual property.

Other Litigation

In August 2013, a former employee (“Plaintiff”) filed a class action lawsuit against the Company in the Superior Court of California, alleging violations of California’s wage and hour laws and unfair business practices on behalf of himself and all other similarly situated current and former employees at the Company’s Livermore facilities from August 21, 2009 to the present. In February 2014, the Court granted the Company’s motion to strike portions of the Plaintiff’s first amended complaint, clarifying the scope of the putative class. A second amended complaint was filed. The parties have participated in two mediation sessions, the most recent of which took place during the second quarter of fiscal 2015 and which did not result in a settlement. Procedurally, the case is still in the early stages of litigation. A motion to certify a class has been entered but no defined class has been certified. The Company currently believes that any settlement reached would be in an amount that is not material to the Company's financial statements. The Company denies the allegations contained in the lawsuit and, based on available information, believes it has significant defenses to the allegations of the lawsuit. If the matter is not settled, the Company could incur material attorneys’ fees in defending the lawsuit.


Note 17 — Derivative Financial Instruments
 
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. Under this program, our strategy is to have increases or decreases in our foreign currency exposures offset by gains or losses on the foreign currency forward contracts 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. Our derivative instruments are not designated as hedging instruments. We record the fair value of these contracts as of the end of our reporting period to our Condensed Consolidated Balance Sheet with changes in fair value recorded within “Other income (expense), net” in our Condensed Consolidated Statements of Operations for both realized and unrealized gains and losses.
 

18



The following table provides information about our foreign currency forward contracts outstanding as of June 27, 2015 (in thousands): 
Currency
 
Contract Position
 
Contract Amount (Local Currency)
 
Contract Amount (U.S. Dollars)
Japanese Yen
 
Sell
 
3,132,118

 
$
25,267

Taiwan Dollar
 
Buy
 
(22,744
)
 
(736
)
Korean Won
 
Buy
 
(1,816,520
)
 
(1,648
)
Total USD notional amount of outstanding foreign exchange contracts
 
 
 
$
22,883

 
The contracts were entered into on June 26, 2015 and matured on July 24, 2015. 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. There was no change in the value of these contracts as of June 27, 2015. Additionally, no gains or losses relating to the outstanding derivative contracts were recorded in the three and six months ended June 27, 2015.

The location and amount of gains (losses) related to non-designated derivative instruments that matured in the three and six months ended June 27, 2015 and June 28, 2014 in the Condensed Consolidated Statements of Operations are as follows (in thousands):
 
 
 
 
 
Amount of Gain (Loss) Recognized on Derivatives
 
 
 
 
Three Months Ended
Six Months Ended
Derivatives Not Designated as Hedging Instruments
 
Location of Gain (Loss) Recognized on Derivatives
 
June 27, 2015
 
June 28, 2014
 
June 27, 2015
 
June 28, 2014
Foreign exchange forward contracts
 
Other income (expense), net
 
$
847

 
$
(101
)
 
$
685

 
$
(275
)


Note 18 — Business Interruption Insurance Claim Recovery

During the three months ended March 28, 2015, we received approximately $1.5 million as a result of a payment from our insurer arising from a business interruption insurance claim related to a factory fire at a customer during the second half of fiscal 2013. We recorded this cash receipt within “Other income (expense), net” in our Condensed Consolidated Statements of Operations.

Note 19 — Subsequent Event

In March 2014, we filed a lawsuit against MarTek, Inc., a company headquartered in Tempe, Arizona ("MarTek"), asserting breach of contract, copyright infringement and related claims arising out of a licensing agreement we entered into with MarTek for the use by MarTek of certain intellectual property assets (the “IP”) relating to probers that we acquired from the bankruptcy of Electroglas, Inc. MarTek asserted counterclaims against us for breach of contract and related claims regarding that license. On July 13, 2015 (the "closing date"), we entered into a settlement agreement with MarTek under which the parties agreed to dismiss the pending litigation and release each other from any and all claims relating to the license agreement or the IP through the closing date. As part of the settlement, we agreed to sell the IP to MarTek for $2 million, of which $1.2 million was received on July 17, 2015 and the remaining $0.8 million is in the form of a promissory note secured by the IP and scheduled to be repaid by MarTek in two equal tranches on the first and second anniversary of the closing date.


19



Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 

Cautionary Statement Regarding Forward-Looking Statements
 
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Securities Exchange Act of 1934 and the Securities Act of 1933, which are subject to risks and uncertainties. The forward-looking statements include statements concerning, among other things, our business strategy (including anticipated trends and developments in, and management plans for, our business and the markets in which we operate), financial results, operating results, revenues, gross margin, operating expenses, products, projected costs and capital expenditures, research and development programs, sales and marketing initiatives and competition. In some cases, you can identify these statements by forward-looking words, such as "may," "might," "will," "could," "should," "expect," "plan," "anticipate," "believe," "estimate," "predict," "intend" and "continue," the negative or plural of these words and other comparable terminology.
 
The forward-looking statements are only predictions based on our current expectations and our projections about future events. All forward-looking statements included in this Quarterly Report on Form 10-Q are based upon information available to us as of the filing date of this Quarterly Report on Form 10-Q. You should not place undue reliance on these forward-looking statements. We have no obligation to update any of these statements. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to differ materially from those expressed or implied by these statements. These factors include the matters discussed in the section titled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 27, 2014 and elsewhere in this Quarterly Report on Form 10-Q. You should carefully consider the numerous risks and uncertainties described under these sections.
 
The following discussion and analysis should be read in conjunction with our condensed consolidated financial statements and the accompanying notes contained in this Quarterly Report on Form 10-Q. Unless expressly stated or the context otherwise requires, the terms “we,” “our,” “us” and “FormFactor” refer to FormFactor, Inc. and its subsidiaries.

Overview
We design, develop, manufacture, sell and support advanced semiconductor probe card products, and are the largest supplier worldwide of those products. Semiconductor manufacturers use our probe cards to perform wafer test (also known as wafer sort), which is the testing of the semiconductor die, or chips, while those die are still constituted on the semiconductor wafer. Wafer test enables semiconductor manufacturers to determine whether chips will meet specifications and be saleable once the wafer is diced, and the die are singulated and individually packaged. Given the relatively high per-die costs of singulation and packaging processes, and the fact that semiconductor process yields are typically less than 100%, meaning that some of the die on a wafer are expected to be defective, there is often a compelling economic reason to perform wafer test. Probe cards are a critical element in enabling that wafer test process.
Historically, sales for probe cards for testing Dynamic Random Access Memory, or DRAM, devices have made up the majority of our revenues. In October 2012, we completed the acquisition of Astria Semiconductor Holdings, Inc., including its subsidiary Micro-Probe Incorporated (together "MicroProbe"). The majority of MicroProbe's revenue was made up of sales of probe cards for testing System-on-Chip, or SoC, devices.
We generated net income of $1.6 million in the first six months of fiscal 2015 as compared to a net loss of $(17.0) million in the first six months of fiscal 2014. The increase in net income is primarily attributable to our increased revenues and our ongoing cost reduction efforts.

Our cash, cash equivalents and marketable securities and restricted cash totaled approximately $179.2 million as of June 27, 2015, as compared to approximately $164.3 million at December 27, 2014. The increase in our cash, cash equivalents and marketable securities balances was primarily due to improved operating results, net of investments in working capital to grow revenues. We generated $7.1 million and $7.8 million of cash in the second and first fiscal quarters of 2015, respectively, as compared to generating $5.0 million and using $(7.1) million of cash in the second and first fiscal quarters of 2014, respectively. We believe that we will be able to satisfy our working capital requirements for at least the next twelve months with the liquidity provided by our existing cash, cash equivalents and marketable securities. If we are unsuccessful in maintaining or growing our revenues, or maintaining or reducing our cost structure in an industry downturn, or increasing our available cash through financing, our cash, cash equivalents and/or marketable securities could decline in future fiscal years.


20



We believe the following information is important to understanding our business, our financial statements and the remainder of this discussion and analysis of our financial condition and results of operations:

Revenues. We derive substantially all of our revenues from product sales of probe cards. Revenues from our customers are subject to fluctuations due to factors including, but not limited to, design cycles, technology adoption rates, competitive pressure to reduce prices, cyclicality of the different end markets into which our customers' products are sold and market conditions in the semiconductor industry. Historically, increases in revenues have resulted from increased demand for our existing products, the introduction of new, more complex products, the penetration of new markets and through acquisition. We expect that revenues from the sale of probe cards will continue to account for substantially all of our revenues for the foreseeable future.

Cost of Revenues. Cost of revenues consists primarily of manufacturing materials, payroll, shipping and handling costs, manufacturing-related overhead and amortization of certain intangible assets. Our manufacturing operations rely upon a limited number of suppliers to provide key components and materials for our products, some of which are a sole source. We order materials and supplies based on backlog and forecasted customer orders. Tooling and setup costs related to changing manufacturing lots at our suppliers are also included in the cost of revenues. We expense all warranty costs, inventory provisions and amortization of certain intangible assets as cost of revenues.

We design, manufacture and sell custom advanced probe cards into the semiconductor test market, which is subject to significant variability and demand fluctuations. Our probe cards are complex products that are custom to a specific chip design of a customer and must be delivered on relatively short lead-times as compared to our overall manufacturing process. As our advanced probe cards are manufactured in low volumes, 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 probe cards. We record an adjustment to our inventory valuation for estimated excess, obsolete and non-sellable inventories based on assumptions about future demand, past usage, changes to manufacturing processes and overall market conditions.
Research and Development. Research and development expenses include expenses related to product development, engineering and material costs. Research and development costs are expensed as incurred. We plan to continue to invest in research and development activities to improve and enhance existing product technologies and to develop new technologies for current and new products and for new applications.

Selling, General and Administrative. Selling, general and administrative expenses include expenses related to sales, marketing, administrative personnel, internal and outside sales representatives' commissions, market research and consulting, and other sales, marketing, administrative activities, amortization of certain intangible assets, and provision for doubtful accounts. These expenses also include costs for protecting and enforcing our intellectual property rights and regulatory compliance costs.

Restructuring Charges. Restructuring charges include costs related to employee termination benefits, cost of long-lived assets abandoned or impaired, as well as contract termination costs.

Impairment of Long-Lived Assets. Asset impairment charges include charges associated with the write-down of assets that have no future expected benefit or for assets that have been determined to be impaired as well as adjustments to the carrying amount of our assets held for sale.



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

21



 
 
Three Months Ended
 
Six Months Ended
 
June 27,
2015
 
June 28,
2014
 
June 27,
2015
 
June 28,
2014
Revenues
100.0
%
 
100.0
 %
 
100.0
%
 
100.0
 %
Cost of revenues
68.5

 
70.3

 
68.1

 
73.8

Gross profit
31.5

 
29.7

 
31.9

 
26.2

Operating expenses:
 
 
 
 
 

 
 
Research and development
15.2

 
16.4

 
15.4

 
16.9

Selling, general and administrative
15.4

 
19.6

 
16.1

 
20.6

Restructuring charges, net

 
0.1

 
0.4

 
1.7

Impairment of long-lived assets

 

 

 
0.6

Total operating expenses
30.6

 
36.1

 
31.9

 
39.8

Operating income (loss)
0.9

 
(6.4
)
 

 
(13.6
)
Interest income, net
0.1

 
0.1

 
0.1

 
0.1

Other income (expense), net
0.1

 
(0.2
)
 
1.1

 
(0.2
)
Income (loss) before income taxes
1.1

 
(6.5
)
 
1.2

 
(13.7
)
Provision (benefit) for income taxes

 
(0.1
)
 
0.1

 
0.2

Net income (loss)
1.1
%
 
(6.4
)%
 
1.1
%
 
(13.9
)%
 

Three and six months ended June 27, 2015 and June 28, 2014:
 
Revenues
 
Revenues by Market

 
Three Months Ended
 
Six Months Ended
 
June 27,
2015
 
June 28,
2014
 
% Change
 
June 27,
2015
 
June 28,
2014
 
% Change
 
(In thousands, except percentages)
SoC
$
34,573

 
$
36,508

 
(5.3
)%
 
$
67,982

 
$
66,266

 
2.6
 %
DRAM
35,251

 
26,421

 
33.4

 
69,825

 
48,602

 
43.7

Flash
4,061

 
4,423

 
(8.2
)
 
6,907

 
8,443

 
(18.2
)
Total revenues
$
73,885

 
$
67,352

 
9.7
 %
 
$
144,714

 
$
123,311

 
17.4
 %
 
Revenues for the three and six months ended June 27, 2015 increased 10%, or approximately $6.5 million, and 17% or approximately $21.4 million, respectively, as compared to the corresponding periods in the prior year. For the three months ended June 27, 2015, our revenue decreased 5% in our SoC products, increased 33% in our DRAM products and decreased 8% in our Flash memory products, as compared to the corresponding period in the prior year. For the six months ended June 27, 2015, our revenue increased 3% in our SoC products, increased 44% in our DRAM products and decreased 18% in our Flash memory products, as compared to the corresponding period in the prior year.

The overall increase in revenues was primarily due to higher unit volume in the DRAM market. The DRAM revenue increase was driven by a combination of strong mobile, server and commodity DRAM market demand and market share increases at a major South Korean memory producer, based on the adoption of our SmartMatrix product.

The decrease in SoC revenue for the three months ended June 27, 2015 as compared to the corresponding period in the prior year was due to softening personal computer processor and gaming system processor demand. The increase in SoC revenue for the six months ended June 27, 2015 as compared to the corresponding period in the prior year was primarily due to relatively strong demand across both personal computer and mobile processor markets in the first quarter of 2015 as compared to the first quarter of 2014.

22



The decrease in Flash memory revenue was primarily due to a combination of a weakening NOR Flash memory market and pricing pressure for our NAND Flash products, offset by increased demand for our TouchMatrix product (which is used to test Solid State Drive NAND Flash devices), at a South Korean memory producer.

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

 
Three Months Ended
 
Six Months Ended
 
June 27,
2015
 
% of
Revenue
 
June 28,
2014
 
% of
Revenue
 
June 27,
2015
 
% of
Revenue
 
June 28,
2014
 
% of
Revenue
 
(In thousands, except percentages)
North America
$
17,325

 
23.4
%
 
$
17,095

 
25.4
%
 
$
35,852

 
24.8
%
 
$
32,837

 
26.6
%
South Korea
15,600

 
21.1

 
14,662

 
21.8

 
32,459

 
22.4

 
27,282

 
22.1

Taiwan
15,444

 
20.9

 
11,343

 
16.8

 
31,586

 
21.8

 
20,968

 
17.0

Asia-Pacific (1)
10,034

 
13.6

 
10,101

 
15.0

 
18,427

 
12.8

 
14,287

 
11.7

Japan
9,581

 
13.0

 
5,066

 
7.5

 
14,956

 
10.3

 
12,756

 
10.3

Europe
5,901

 
8.0

 
9,085

 
13.5

 
11,434

 
7.9

 
15,181

 
12.3

Total revenues
$
73,885

 
100.0
%
 
$
67,352

 
100.0
%
 
$
144,714

 
100.0
%
 
$
123,311

 
100.0
%
_________________________________________________________________________________________________
(1)
Asia-Pacific includes all countries in the region except Taiwan, South Korea, and Japan, which are disclosed separately.
 
Geographic revenue information is based on the location to which we ship the customer product. For example, if a certain South Korean customer purchases through their North American subsidiary and requests the products to be shipped to an address in Asia-Pacific, this sale will be reflected in the revenue for Asia-Pacific rather than North America.
 
The increases or decreases in revenues from our geographical regions for the three and six months ended June 27, 2015, when compared to the same periods in fiscal 2014, were as follows:

the increase in North America revenues for the three and six month period was driven by increased SoC product shipments for personal computer processors. Revenues were relatively flat quarter to quarter for the three month period;

the increases in South Korea revenues, for both the three and six month periods, were primarily due to increased DRAM demand and the adoption of our SmartMatrix product at a major South Korean memory producer;

the increase in Taiwan revenues, for both the three and six month periods, were driven by a combination of increased SoC product shipments and an increase in commodity or personal computer DRAM demand;

the overall increase in Asia-Pacific revenues, for the six month period, was primarily driven by sales of our SmartMatrix DRAM products in that region. Revenues were relatively flat quarter to quarter for the three month period;

the increase in Japan revenues, for both the three and six months periods, was driven by higher mobile DRAM demand served by our SmartMatrix product; and

The decrease in Europe revenues for both the three and six months periods was driven by reduced SoC product shipments related to mobile processor and automotive microcontroller demand.

 


23



The following customers accounted for more than 10% of our revenues for the periods indicated:
 
Three Months Ended
 
Six Months Ended
 
June 27, 2015
 
June 28, 2014
 
June 27, 2015
 
June 28, 2014
Micron
17.8
%
 
12.2
%
 
14.3
%
 
13.5
%
Intel
17.1

 
19.5

 
17.8

 
18.0

Samsung
13.1

 
*

 
13.4

 
*

SK hynix
13.0

 
21.4

 
15.2

 
19.5

 
61.0
%
 
53.1
%
 
60.7
%
 
51.0
%
* Less than 10% of revenues.

Gross Profit
 
 
Three Months Ended
 
Six Months Ended
 
June 27,
2015
 
June 28,
2014
 
June 27,
2015
 
June 28,
2014
 
(In thousands, except percentages)
Gross profit
$
23,303

 
$
20,024

 
$
46,093

 
$
32,349

% of revenues
31.5
%
 
29.7
%
 
31.9
%
 
26.2
%
 
Gross profit fluctuates with revenue levels, product mix, selling prices, factory loading, and material costs. For the three and six months ended June 27, 2015, the amount of gross profit increased compared to the same periods in the prior year, primarily due to higher production volume driven by higher sales. Factory utilization, execution and operating efficiency improved significantly with modest increases in overhead and direct labor costs, which resulted in higher gross profits. We also improved production yields and reduced intangible amortization expense from our acquisitions.

Our inventory reserve charges increased by $0.3 million and declined by $0.9 million for the three and six months ended June 27, 2015 when compared to the corresponding period in the prior year. For the three and six months ended June 27, 2015, the value of previously reserved materials that were used in manufacturing and shipped was $0.7 million and $1.6 million, respectively.

Gross profit included stock-based compensation expense of $0.6 million and $1.2 million, respectively, for the three and six months ended June 27, 2015, compared to $0.7 million and $1.2 million, respectively, for the three and six months ended June 28, 2014.

Future gross margins may be adversely impacted by lower levels of product revenues, even though we have taken significant steps to reduce our operating cost structure. Our gross margins may also be adversely affected if we are required to record additional inventory provision charges and inventory write-downs if estimated average selling prices of products held in finished goods and work in process inventories are below the manufacturing cost of those products.

Research and Development
 
 
Three Months Ended
 
Six Months Ended
 
June 27,
2015
 
June 28,
2014
 
June 27,
2015
 
June 28,
2014
 
(In thousands, except percentages)
Research and development
$
11,217

 
$
11,074

 
$
22,302

 
$
20,821

% of revenues
15.2
%
 
16.4
%
 
15.4
%
 
16.9
%
 
Research and development expenses for the three and six months ended June 27, 2015 increased by $0.1 million and $1.5 million, respectively, compared to the same periods in the prior year.


24



The increase in the three months ended June 27, 2015 compared to the same period in the prior year was primarily due to an increase of $0.2 million in personnel-related costs and $0.2 million in incentive compensation offset by a reduction of $0.2 million in stock compensation expense and $0.1 million in overall general operating expenses.

The increase in the six months ended June 27, 2015 compared to the same period in the prior year was primarily due to an increase of $0.8 million in project and material costs and $0.8 million in incentive compensation offset by a reduction of $0.1 million in overall general operating expenses.

Stock-based compensation expense included in research and development expenses was $0.7 million and $1.6 million respectively, for the three and six months ended June 27, 2015, compared to $0.9 million and $1.6 million, respectively, for the three and six months ended June 28, 2014.

Selling, General and Administrative
 
 
Three Months Ended
 
Six Months Ended
 
June 27,
2015
 
June 28,
2014
 
June 27,
2015
 
June 28,
2014
 
(In thousands, except percentages)
Selling, general and administrative
$
11,381

 
$
13,191

 
$
23,265

 
$
25,445

% of revenues
15.4
%
 
19.6
%
 
16.1
%
 
20.6
%

Selling, general and administrative expenses for the three and six months ended June 27, 2015 decreased by $1.8 million and $2.2 million, respectively, compared to the same periods in the prior year.

The decrease in the three months ended June 27, 2015 compared to the same period in the prior year was primarily due to a decrease of $0.7 million in stock compensation expense, $0.3 million in payroll taxes and $0.2 million each in legal expenses, incentive compensation, personnel-related costs and overall general operating expenses as a result of our cost reduction initiatives.

The decrease in the six months ended June 27, 2015 compared to the same period in the prior year was primarily due to a decrease of $0.7 million in stock compensation expense and $0.7 million in personnel-related costs, $0.4 million in legal expenses, $0.3 million in payroll taxes and $0.5 million in overall general operating expenses as a result of our cost reduction initiatives, which was partially offset by an increase of $0.4 million in incentive compensation.

Stock-based compensation expense included within selling, general and administrative expenses was $1.2 million and $2.7 million, respectively, for the three and six months ended June 27, 2015, compared to $1.9 million and $3.4 million, respectively, for the three and six months ended June 28, 2014.

Restructuring Charges, net 

 
Three Months Ended
 
Six Months Ended
 
June 27,
2015
 
June 28,
2014
 
June 27,
2015
 
June 28,
2014
 
(In thousands, except percentages)
Restructuring charges, net
$

 
$
59

 
$
503

 
$
2,056

% of revenues
%
 
0.1
%
 
0.4
%
 
1.7
%
 
For the three and six months ended June 27, 2015, restructuring charges decreased by $0.1 million and $1.6 million, respectively, from the comparable periods of the prior year. Our restructuring activities are discussed below.

2015 Restructuring Activities

There were no restructuring activities during the three months ended June 27, 2015. During the three months ended March 28, 2015, we recorded stock-based compensation expense of approximately $0.5 million relating to the modification of certain equity-based awards of a full-time employee who was notified of his termination during the fourth quarter of fiscal

25



2014. The severance terms relating to the modification of his equity-based awards were finalized during the first quarter of fiscal 2015.

2014 Restructuring Activities

On January 27, 2014, we announced a global organizational restructuring and cost reduction plan. As part of the plan, we eliminated 52 full-time employees. In addition, we reduced our temporary workforce by 9 positions. We recorded $2.0 million of restructuring charges during the first quarter of fiscal 2014, which was comprised of $1.4 million in severance and related benefits and $0.6 million in impairment charges for certain equipment that would no longer be utilized. During the three months ended June 28, 2014, we eliminated an additional 2 full-time employees and recorded $59 thousand in severance charges. The activities comprising these restructuring activities and the related cash payments were completed and paid by June 28, 2014.

Impairment of Long-lived Assets

 
 
Three Months Ended
 
Six Months Ended
 
June 27,
2015
 
June 28,
2014
 
June 27,
2015
 
June 28,
2014
 
(In thousands, except percentages)
Impairment of long-lived assets
$
8

 
$

 
$
8

 
$
743

% of revenues
%
 
%
 
%
 
0.6
%
 
We test long-lived assets or asset groups for recoverability when events or changes in circumstances indicate that their carrying amounts may not be recoverable. During the six months ended June 27, 2015, long-lived asset impairment charges recorded were insignificant. During the six months ended June 28, 2014, we recorded $0.7 million of impairments related to manufacturing assets we no longer utilized.

Interest Income, Net and Other Income (Expense), Net 

 
Three Months Ended
 
Six Months Ended
 
June 27,
2015
 
June 28,
2014
 
June 27,
2015
 
June 28,
2014
 
(In thousands, except percentages)
Interest income, net
$
65

 
$
79

 
$
149

 
$
158

% of revenue
0.1
%
 
0.1
 %
 
0.1
%
 
0.1
 %
Other income (expense), net
$
100

 
$
(156
)
 
$
1,602

 
$
(222
)
% of revenues
0.1
%
 
(0.2
)%
 
1.1
%
 
(0.2
)%
 
Interest income is primarily earned on our cash, cash equivalents and marketable securities. The decrease in interest income for the three and six months ended June 27, 2015 as compared with the same periods of the prior year was primarily the result of lower yields. Cash, cash equivalents, restricted cash and marketable securities were $179.2 million at June 27, 2015 compared to $149.5 million at June 28, 2014. The weighted-average yield on our cash, cash equivalents and marketable securities for the three months ended June 27, 2015 and June 28, 2014 was 0.12% and 0.18%, respectively. The weighted-average yield on our cash, cash equivalents and marketable securities for the six months ended June 27, 2015 and June 28, 2014 was 0.12% and 0.17%, respectively.

Other income (expense), net is comprised primarily of foreign currency impact and various other gains and losses. The increase in other income (expense), net for the six months ended June 27, 2015 as compared with the same period of the prior year was primarily due to approximately $1.5 million cash received as a result of a payment from our insurer arising from a business interruption insurance claim related to a factory fire at a customer during the second half of fiscal 2013.

26



Provision for Income Taxes

 
Three Months Ended
 
Six Months Ended
 
June 27,
2015
 
June 28,
2014
 
June 27,
2015
 
June 28,
2014
 
(In thousands, except percentages)
Provision (benefit) for income taxes
$
24

 
$
(51
)
 
$
145

 
$
257

Effective tax rate
2.8
%
 
1.2
%
 
8.2
%
 
(1.5
)%
 
We recorded an income tax provision of $24 thousand and $0.1 million, for the three and six months ended June 27, 2015, respectively. We recorded an income tax benefit of $51 thousand and a provision of $0.3 million for the three and six months ended June 28, 2014, respectively. Income tax provisions reflect the tax provision on our operations in the foreign and U.S jurisdictions offsetting by tax benefit from lapsing of statute of limitations in foreign jurisdictions. We continue to maintain a valuation allowance for our U.S. Federal and State deferred tax assets.



Liquidity and Capital Resources

 Capital Resources: Our working capital was $209.6 million at June 27, 2015 and $196.4 million at December 27, 2014. The increase in working capital in the six months ended June 27, 2015 was primarily due to an increase in cash due to improved operating results and decreased current liabilities.
 
Cash and cash equivalents consist of deposits held at banks, money market funds and U.S. government agency securities that at the time of purchase had maturities of 90 days or less. Marketable securities consist of U.S. government and agency securities. 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 $178.8 million at June 27, 2015, as compared to $163.8 million at December 27, 2014. The increase in our cash, cash equivalents and marketable securities balances was primarily due to improved operating results and lower use of cash to support working capital. We believe that we will be able to satisfy our working capital requirements for at least the next twelve months with the liquidity provided by our existing cash, cash equivalents and marketable securities. If we are unsuccessful in maintaining or growing our revenues, or maintaining or reducing our cost structure in an industry down-turn, or increasing our available cash through financing, our cash, cash equivalents and marketable securities may decline in fiscal 2015.
We utilize a variety of tax planning and financing strategies in an effort to manage our worldwide cash and deploy funds to locations where they are needed. As part of these strategies, we indefinitely reinvest a significant portion of our foreign earnings and our current plans do not demonstrate a need to repatriate these 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. If we were to repatriate indefinitely reinvested foreign funds, we would be required to accrue and pay additional United States taxes less applicable foreign tax credits.

Days Sales Outstanding: Days sales outstanding from receivables, or DSO, were 52 days at June 27, 2015 compared with 59 days at December 27, 2014. Our DSO calculation is determined using the count back method and is based on gross accounts receivable (including accounts receivable for amounts in deferred revenue). The decrease in DSO is primarily due to changes in customer mix as compared to the year ended December 27, 2014.
 
Six Months Ended
 
June 27, 2015
 
June 28, 2014
 
(In thousands)
Net cash provided by (used in) operating activities
$
21,670

 
$
(521
)
Net cash provided by investing activities
4,029

 
9,642

Net cash (used in) provided by financing activities
$
(1,705
)
 
$
1,155



27



Cash flows from operating activities: Net cash provided by operating activities for the six months ended June 27, 2015 was primarily attributable to improved operating results from increased revenues and decreased costs, offset by increase in working capital necessary to support the increased revenues. We had net income of $1.6 million and non-cash expenses of $21.5 million, including $11.9 million of depreciation and amortization, $5.4 million of stock-based compensation, $3.0 million of provision for excess and obsolete inventories, $0.7 million of foreign currency transaction losses and $0.5 million of restructuring activities.

The net change in operating assets and liabilities for the six months ended June 27, 2015 resulted in a net use of cash of $1.4 million, which was primarily comprised of cash used of $1.6 million in accrued liabilities due to payment of incentive compensation, $1.7 million of cash used for inventory build, an increase of $0.8 million in prepaid expenses and other current assets and a decrease of $0.5 million in deferred revenues due to recognition of previously deferred revenues for which the revenue recognition criteria have been met. The above use of cash was offset by cash generation of $1.1 million in accounts receivable from strong collections, $1.1 million in accounts payable driven by payments on vendor obligations and $0.8 million in income tax refunds.

The net change in operating assets and liabilities for the six months ended June 28, 2014 resulted in a net use of cash of $10.9 million and which was comprised of cash used of $11.6 million in accounts receivable due to higher sales, $5.2 million of cash used for inventory due to inventory build and an increase of prepaid expenses and other current assets of $0.4 million. The above use of cash was offset in part by an increase of $3.5 million in accrued liabilities due to accrued payroll and warranty, an increase of $2.4 million in accounts payable driven by the timing of our payments on vendor obligations, an increase of $0.2 million in deferred revenues due to shipments to customers for which our revenue recognition criteria have not yet been met and an increase in income taxes payable of $0.1 million.

Cash flows from investing activities: Net cash provided by investing activities for the six months ended June 27, 2015 was primarily related to $32.0 million of proceeds from maturities of marketable securities offset by purchases of marketable securities totaling $23.8 million and cash used in the acquisition of property and equipment of $4.2 million. We carefully monitor our investments to minimize risks and have not experienced other than temporary investment losses.

Net cash provided by investing activities for the six months ended June 28, 2014 was primarily related to $44.3 million of proceeds from maturities of marketable securities offset by purchases of marketable securities totaling $31.7 million and cash used in the acquisition of property and equipment of $3.0 million.

Cash flows from financing activities: Net cash used in financing activities for the six months ended June 27, 2015 included $3.5 million used for the repurchase and retirement of our common stock partially offset by $1.8 million from proceeds received from purchases under our 2012 Employee Stock Purchase Plan and stock option exercises. Net cash provided by financing activities for the six months ended June 28, 2014 included $1.4 million from proceeds received from purchases under our 2012 Employee Stock Purchase Plan.

Our cash, cash equivalents and marketable securities increased by $14.9 million in the six months ended June 27, 2015. We continue to focus on improving our operating efficiency to increase operating cash flows. We believe that we will be able to satisfy our cash requirements for at least the next twelve months with the liquidity provided by our existing cash, cash equivalents and marketable securities. To the extent necessary, we may also consider entering into short and long-term debt obligations, raise cash through a stock issuance, or to obtain new financing facilities which may not be available on terms favorable to us. Our future capital requirements may vary materially from those now planned. However, if we are unsuccessful in maintaining or growing our revenues, or maintaining or reducing our cost structure in an industry down-turn, or increasing our available cash through financing, our cash, cash equivalents and marketable securities could decline in future fiscal quarters.
Off-Balance Sheet Arrangements
 
Historically, we have not participated in transactions that have generated relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As of June 27, 2015, we were not involved in any such off-balance sheet arrangements.

Critical Accounting Policies and Estimates
 
Our critical accounting policies are disclosed in our Annual Report on Form 10-K for the year ended December 27, 2014. Our critical accounting policies have not changed during the six months ended June 27, 2015.

28



 
Item 3. Quantitative and Qualitative Disclosures about Market Risk
 
For financial market risks related to changes in interest rates and foreign currency exchange rates, reference is made to Item 7A: “Quantitative and Qualitative Disclosures about Market Risk” contained in Part II of our Annual Report on Form 10-K for the fiscal year ended December 27, 2014. Our exposure to market risk has not changed materially since December 27, 2014.
 
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
 
There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
Limitations on the Effectiveness of Controls
 
Control systems, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control systems’ objectives are being met. Further, the design of any control systems must reflect the fact that there are resource constraints, and the benefits of all controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected. These inherent limitations include the realities that judgments in decision making can be faulty and that breakdowns can occur because of simple error or mistake. Control systems can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based, in part, on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.
 
CEO and CFO Certifications
 
We have attached as exhibits to this 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. 


PART II. OTHER INFORMATION
 
Item 1. Legal Proceedings
 
The information relating to “Legal Matters” set forth under Note 16 - Commitments and Contingencies of the Notes to Condensed Consolidated Financial Statements of this Quarterly Report on Form 10-Q is incorporated herein by reference.

Item 1A. Risk Factors
 
There have been no material changes during the six months ended June 27, 2015 to the risk factors discussed in our Annual Report on Form 10-K for the year ended December 27, 2014. If any of the identified risks actually occur, our business,

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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 27, 2014 are not the only ones we face. Additional risks that we currently do not know about or that we currently believe to be immaterial may also impair our business operations. We may make acquisitions and investments, which could put a strain on our resources, cause ownership dilution to our stockholders and adversely affect our financial results.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Repurchase of Common Stock

On April 16, 2015, our Board of Directors authorized a program to repurchase up to $25.0 million of outstanding common stock. Under the authorized stock repurchase program, we may repurchase shares from time to time on the open market. The pace of repurchase activity will depend on levels of cash generation, current stock price and other factors. The stock repurchase program was announced on April 16, 2015 and expires on April 15, 2016. The program may be modified or discontinued at any time. During the three months ended June 27, 2015, under this repurchase authorization, we repurchased and retired 400,362 shares of common stock for approximately $3.5 million.

The following table summarizes our repurchases of outstanding common stock for the fiscal quarter ended June 27, 2015:

Period (Fiscal months)
 
Total Number of Shares Purchased
 
Average Price Paid per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 
Maximum Amount that May Yet Be Purchased Under the Plans or Programs
April 16, 2015-April 25, 2015