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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 September 30, 2017
 
Or 

o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from            to            
 
Commission file number: 000-50307
 
FormFactor, Inc.
(Exact name of registrant as specified in its charter)
Delaware
 
13-3711155
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
7005 Southfront Road, Livermore, California 94551
(Address of principal executive offices, including zip code)
 
(925) 290-4000
(Registrant’s telephone number, including area code)
 ______________________________________

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes ý  No o
 
Indicate by check mark whether the registrant submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of the Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ý  No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated filer o
 
Accelerated filer x
 
 
 
Non-accelerated filer o
 
Smaller reporting company o
(Do not check if a smaller reporting company)
 
 
Emerging growth company o
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  o   

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

As of November 2, 2017, 72,984,347 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 SEPTEMBER 30, 2017
INDEX

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2


PART I - FINANCIAL INFORMATION
 
Item 1. Financial Statements
 
FORMFACTOR, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
(Unaudited)
 
September 30,
2017
 
December 31, 2016
ASSETS
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
103,083

 
$
101,408

Marketable securities
31,809

 
7,497

Accounts receivable, net of allowances for doubtful accounts of $202 and $298
87,950

 
70,225

Inventories, net
68,667

 
59,806

Restricted cash
4

 
106

Refundable income taxes
1,837

 
1,391

Prepaid expenses and other current assets
13,385

 
14,276

Total current assets
306,735

 
254,709

Restricted cash
766

 
1,082

Property, plant and equipment, net of accumulated depreciation and amortization of $251,940 and $241,943
46,555

 
42,663

Goodwill
189,704

 
188,010

Intangibles, net
104,740

 
126,608

Deferred tax assets
3,299

 
3,310

Other assets
1,755

 
2,600

Total assets
$
653,554

 
$
618,982

LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 


Current liabilities:
 

 


Accounts payable
$
37,103

 
$
34,075

Accrued liabilities
30,747

 
30,184

Current portion of term loan
22,160

 
12,701

Income taxes payable
589

 
442

Deferred revenue
6,590

 
5,305

Total current liabilities
97,189

 
82,707

Long-term income taxes payable
1,076

 
1,315

Term loan, less current portion
92,123

 
125,475

Deferred tax liabilities
4,231

 
3,703

Deferred rent and other liabilities
4,085

 
4,726

Total liabilities
198,704

 
217,926

Commitments and contingencies (Note 11)


 


Stockholders’ equity:
 

 
 
Preferred stock, $0.001 par value:
 

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

 
—

Common stock, $0.001 par value:
 

 


250,000,000 shares authorized; 72,973,018 and 70,907,847 shares issued and outstanding
73

 
71

Additional paid-in capital
845,942

 
833,341

Accumulated other comprehensive income (loss)
1,996

 
(3,740
)
Accumulated deficit
(393,161
)
 
(428,616
)
Total stockholders’ equity
454,850

 
401,056

Total liabilities and stockholders’ equity
$
653,554

 
$
618,982

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

3


FORMFACTOR, INC.
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
 
Three Months Ended
 
Nine Months Ended
 
September 30,
2017
 
September 24,
2016
 
September 30,
2017
 
September 24,
2016
Revenues
$
143,735

 
$
123,299

 
$
416,540

 
$
259,993

Cost of revenues
86,105

 
96,111

 
249,572

 
197,586

Gross profit
57,630

 
27,188

 
166,968

 
62,407

Operating expenses:
 

 
 

 
 

 
 
Research and development
19,338

 
17,253

 
55,294

 
39,235

Selling, general and administrative
24,010

 
23,008

 
70,441

 
49,553

Restructuring and impairment charges, net
16

 
85

 
329

 
6,995

Total operating expenses
43,364

 
40,346

 
126,064

 
95,783

Operating income (loss)
14,266

 
(13,158
)
 
40,904

 
(33,376
)
Interest income
123

 
52

 
283

 
267

Interest expense
(1,109
)
 
(1,125
)
 
(3,446
)
 
(1,136
)
Other income (expense), net
311

 
83

 
19

 
(533
)
Income (loss) before income taxes
13,591

 
(14,148
)
 
37,760

 
(34,778
)
Provision (benefit) for income taxes
1,028

 
50

 
2,435

 
(43,665
)
Net income (loss)
$
12,563

 
$
(14,198
)
 
$
35,325

 
$
8,887

Net income (loss) per share:
 

 
 

 
 
 
 
Basic
$
0.17

 
$
(0.20
)
 
$
0.49

 
$
0.14

Diluted
$
0.17

 
$
(0.20
)
 
$
0.48

 
$
0.14

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

 
 

 
 
 
 
Basic
72,651

 
70,502

 
72,103

 
62,835

  Diluted
73,885

 
70,502

 
73,540

 
63,662

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

4


FORMFACTOR, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
 
Three Months Ended
 
Nine Months Ended
 
September 30,
2017
 
September 24,
2016
 
September 30,
2017
 
September 24,
2016
Net income (loss)
$
12,563

 
$
(14,198
)
 
$
35,325

 
$
8,887

Other comprehensive income, net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustments
1,540

 
989

 
5,769

 
2,508

Unrealized gains (losses) on available-for-sale marketable securities
(15
)
 
17

 
(38
)
 
58

Unrealized gains (losses) on derivative instruments
(36
)
 
(233
)
 
4

 
(233
)
Other comprehensive income, net of tax
1,489

 
773

 
5,735

 
2,333

Comprehensive income (loss)
$
14,052

 
$
(13,425
)
 
$
41,060

 
$
11,220


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)
 
Nine Months Ended
 
September 30,
2017
 
September 24,
2016
Cash flows from operating activities:
 

 
 

Net income
$
35,325

 
$
8,887

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

 
 

Depreciation
10,046

 
8,219

Amortization
23,509

 
25,355

Accretion of discount on investments
22

 
(31
)
Stock-based compensation expense
11,279

 
7,477

Amortization of debt issuance costs
482

 
116

Deferred income tax provision
122

 
(43,751
)
Provision (recovery) of doubtful accounts receivable
(97
)
 
23

Provision for excess and obsolete inventories
6,899

 
4,437

Acquired inventory step-up amortization
484

 
7,036

Loss on sale of long-lived assets
101

 
117

Gain on derivative instruments
(18
)
 
—

Non-cash restructuring
—

 
964

Foreign currency transaction gains
(1,955
)
 
(1,818
)
Changes in assets and liabilities:
 

 
 

Accounts receivable
(17,097
)
 
(12,963
)
Inventories
(14,270
)
 
(8,733
)
Prepaid expenses and other current assets
1,140

 
(1,310
)
Refundable income taxes
(440
)
 
126

Other assets
823

 
(256
)
Accounts payable
3,040

 
10,881

Accrued liabilities
(1,048
)
 
(492
)
Income tax payable
(97
)
 
(1,553
)
Deferred rent and other liabilities
101

 
293

Deferred revenues
1,517

 
(536
)
Net cash provided by operating activities
59,868

 
2,488

Cash flows from investing activities:
 

 
 

Acquisition of property, plant and equipment
(13,918
)
 
(8,217
)
Acquisition of Cascade Microtech, net of cash acquired
—

 
(228,031
)
Proceeds from sale of subsidiary
48

 
33

Proceeds from sale of property, plant and equipment
—

 
53

Purchases of marketable securities
(27,373
)
 
(10,587
)
Proceeds from maturities of marketable securities
3,000

 
44,500

Change in restricted cash
451

 
(112
)
Net cash used in investing activities
(37,792
)
 
(202,361
)
Cash flows from financing activities:
 

 
 

Proceeds from issuances of common stock
19,108

 
4,005

Purchase and retirement of common stock
(10,963
)
 
—

Tax withholdings related to net share settlements of equity awards
(6,617
)
 
—

Proceeds from term loan debt
—

 
150,000

Payments on term loan debt
(24,375
)
 
(1,875
)
Payment of term loan debt issuance costs
—

 
(1,506
)
Net cash (used in) provided by financing activities
(22,847
)
 
150,624

Effect of exchange rate changes on cash and cash equivalents
2,446

 
2,893

Net increase (decrease) in cash and cash equivalents
1,675

 
(46,356
)
Cash and cash equivalents, beginning of period
101,408

 
146,264

Cash and cash equivalents, end of period
$
103,083

 
$
99,908

 
 
 
 
 
 
 
 
 
 
 
 

6


FORMFACTOR, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Non-cash investing and financing activities:
 

 
 

Fair value of stock issued in connection with the acquisition of Cascade Microtech
$
—

 
$
93,216

Fair value of stock options and restricted stock-based awards assumed in connection with acquisition of Cascade Microtech
—

 
7,776

Fair value of vested stock options and restricted stock-based awards paid in cash in connection with the acquisition of Cascade Microtech
—

 
12,815

Change in accounts payable and accrued liabilities related to property, plant and equipment purchases
(283
)
 
(987
)
 
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
Cash paid for income taxes, net
$
2,847

 
$
1,492

Cash paid for interest
2,974

 
355

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



7


FORMFACTOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) 
Note 1 — Basis of Presentation and New Accounting Pronouncements
 
Basis of Presentation
The condensed consolidated financial information included herein has been prepared by FormFactor, Inc. without audit, in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). However, such information reflects all adjustments, consisting only of normal recurring adjustments, which are, in the opinion of management, necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods. The financial information as of December 31, 2016 is derived from our 2016 Annual Report on Form 10-K. The condensed consolidated financial statements included herein should be read in conjunction with the consolidated financial statements and the notes thereto included in our 2016 Annual Report on Form 10-K. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the full year.
 
Fiscal Year 
We operate on a 52/53 week fiscal year, whereby the fiscal year ends on the last Saturday of December. Fiscal 2017 and 2016 contain 52 weeks and 53 weeks, respectively and the nine months ended September 30, 2017 and September 24, 2016 each contained 13 weeks. Fiscal 2017 will end on December 30, 2017.

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

Business Acquisition
On June 24, 2016, we completed the acquisition of Cascade Microtech, Inc. ("Cascade Microtech"), headquartered in Beaverton, Oregon and, accordingly, our Condensed Consolidated Statements of Operations include the results of operations of Cascade Microtech since that date.

Critical Accounting Policies
Our critical accounting policies have not changed during the nine months ended September 30, 2017 from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2016.

New Accounting Pronouncements

ASU 2017-12
In August 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities," which changes the recognition and presentation requirements of hedge accounting, including eliminating the requirement to separately measure and report hedge ineffectiveness and changing the presentation to include all items that affect earning in the same income statement line item as the hedged item. ASU 2017-12 also provides new alternatives for applying hedge accounting to additional hedging strategies; measuring the hedged item in fair value hedges of interest rate risk; reducing the cost and complexity of applying hedge accounting; and reducing the risk of material error correction if a company applies the shortcut method inappropriately. ASU 2017-12 is effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2018, on a prospective basis. Early adoption is permitted. We are currently evaluating the impact of ASU 2017-12 on our consolidated financial statements.

ASU 2017-09
In May 2017, the FASB issued ASU 2017-09, "Compensation - Stock Compensation (Topic 718) - Scope of Modification Accounting," which provides clarity and reduces both diversity in practice and the cost and complexity when accounting for a change to the terms of a stock-based award. ASU 2017-09 is effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2017, on a prospective basis. Early adoption is permitted. We do not expect the adoption of ASU 2017-09 to have a material effect on our financial position, results of operations or cash flows.

ASU 2017-04
In January 2017, the FASB issued ASU 2017-04, "Intangibles - Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment," which simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. An entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount, and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's

8


fair value, if applicable. The loss recognized should not exceed the total amount of goodwill allocated to the reporting unit. The same impairment test also applies to any reporting unit with a zero or negative carrying amount. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. ASU 2017-04 is effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2019, on a prospective basis. Early adoption is permitted for interim or annual goodwill impairment tests performed after January 1, 2017. We do not expect the adoption of ASU 2017-04 to have a material effect on our financial position, results of operations or cash flows.

ASU 2016-09
In March 2016, the FASB issued ASU 2016-09, "Improvements to Employee Share-Based Payment Accounting," which amends Accounting Standards Codification ("ASC") Topic 718, "Compensation - Stock Compensation." The ASU includes provisions intended to simplify various aspects related to how share-based payments are accounted for and presented in the financial statements including:

1) that excess tax benefits and tax deficiencies relating to share based payment awards will be recognized as income tax benefit or expense in the reporting period in which they occur (previously such amounts were recognized in additional paid-in capital);
2) that excess tax benefits will be classified as an operating activity in the statement of cash flows; and
3) companies have the option to elect to estimate forfeitures or to account for them when they occur.

We adopted ASU 2016-09 as of January 1, 2017, which is the first day of our fiscal 2017 and made an accounting policy election to account for forfeitures as incurred, resulting in a decrease of $0.1 million in our accumulated deficit on January 1, 2017. The adjustment was reflected in our Condensed Consolidated Balance Sheets as of this date.

Additionally, we determined that there was no other cumulative effect on accumulated deficit or other components of equity or net assets as of the beginning of the period of adoption of this guidance as the impact of recording cumulative excess tax benefits in income taxes in our Condensed Consolidated Statements of Operations was fully offset by a valuation allowance as of the date of adoption. Finally, we will follow the prospective transition method for the recognition of windfalls and shortfalls associated with excess tax benefits and tax deficiencies relating to share-based payment awards.

ASU 2016-10, ASU 2015-14 and ASU 2014-09
In April 2016, the FASB issued ASU 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing” and which was issued to clarify ASC Topic 606, “Revenue from Contracts with Customers” related to (i) identifying performance obligations; and (ii) the licensing implementation guidance. The effective date and transition of ASU 2016-10 is the same as the effective date and transition of ASU 2014-09, “Revenue from Contracts with Customers (Topic 606),”as discussed below.

In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers," and, in August 2015, the FASB issued ASU 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date,” which defers the effective date of ASU 2014-09 by one year. ASU 2014-09 requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which an entity expects to be entitled in exchange for those goods or services. The guidance also requires expanded disclosures relating to the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. Additionally, qualitative and quantitative disclosures are required about customer contracts, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. The standard permits the use of either the retrospective or cumulative effect transition methods. This guidance will replace most existing revenue recognition guidance in United States GAAP when it becomes effective, which for us will be at the beginning of the first quarter of fiscal year 2018 using one of the two prescribed transition methods. Early adoption of one year prior to the required effective date is permitted.

We do not plan to early adopt the guidance. We are currently evaluating the impact of these ASUs. Depending on the results of our review, there could be changes to the timing of recognition of revenues. We expect to complete our assessment process, including selecting a transition method for adoption, in the fourth quarter of fiscal 2017, along with our implementation process prior to the adoption of these ASUs effective at the beginning of fiscal year 2018.

ASU 2016-02
In February 2016, the FASB issued ASU 2016-02, "Leases," which requires that lease arrangements longer than twelve months result in an entity recognizing an asset and liability. The updated guidance is effective for interim and annual periods beginning after December 15, 2018, and early adoption is permitted. We are evaluating the impact of the updated guidance on our consolidated financial statements.

9


Note 2 — Concentration of Credit and Other Risks

We market and sell our products to a narrow base of customers and generally do not require collateral. Each of the following customers accounted for more than 10% of our revenues for the periods indicated:
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2017
 
September 24, 2016
 
September 30, 2017
 
September 24, 2016
Intel
30.6
%
 
28.9
%
 
27.4
%
 
34.8
%

At September 30, 2017, one customer accounted for 35.7% of gross accounts receivable. At December 31, 2016, one customer accounted for approximately 21% of gross accounts receivable. No other customers accounted for 10% or more of gross accounts receivable at either of these fiscal period ends.

Note 3 — Inventories

Inventories are valued at the lower of cost (principally standard cost, which approximates actual cost on a first in, first out basis) or net realizable value.
 
Inventories consisted of the following (in thousands):
 
September 30,
2017
 
December 31,
2016
Raw materials
$
32,378

 
$
27,402

Work-in-progress
22,474

 
20,390

Finished goods
13,815

 
12,014

 
$
68,667

 
$
59,806


Note 4 — Goodwill and Intangible Assets

Goodwill by reportable segment was as follows (in thousands):
 
 
Probe Cards
 
Systems
 
Total
Goodwill, gross, as of December 26, 2015
 
$
30,731

 
$
—

 
$
30,731

Additions - Cascade Microtech acquisition
 
141,751

 
16,390

 
158,141

Foreign currency translation
 
—

 
(862
)
 
(862
)
Goodwill, gross, as of December 31, 2016
 
172,482

 
15,528

 
188,010

Foreign currency translation
 
—

 
1,694

 
1,694

Goodwill, gross, as of September 30, 2017
 
$
172,482

 
$
17,222

 
$
189,704


We have not recorded any goodwill impairments as of September 30, 2017.

Intangible assets were as follows (in thousands):
 
 
September 30, 2017
 
December 31, 2016
Other Intangible Assets
 
Gross
 
Accumulated Amortization
 
Net
 
Gross
 
Accumulated Amortization
 
Net
Existing developed technologies 
 
$
143,995

 
$
71,786

 
$
72,209

 
$
142,701

 
$
56,131

 
$
86,570

Trade name
 
12,066

 
5,047

 
7,019

 
11,921

 
2,989

 
8,932

Customer relationships
 
40,262

 
14,950

 
25,312

 
39,869

 
10,854

 
29,015

Backlog
 
15,769

 
15,569

 
200

 
15,581

 
13,489

 
2,092


 
$
212,092

 
$
107,352

 
$
104,740

 
$
210,072

 
$
83,463

 
$
126,609


10


Amortization expense was included in our Condensed Consolidated Statements of Operations as follows (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
2017
 
September 24,
2016
 
September 30,
2017
 
September 24,
2016
Cost of revenues
$
5,473

 
$
17,846

 
$
17,411

 
$
22,003

Selling, general and administrative
2,043

 
2,050

 
6,098

 
3,352

 
$
7,516

 
$
19,896

 
$
23,509

 
$
25,355

The estimated amortization of intangible assets over the next five years is as follows (in thousands):
Fiscal Year
 
Amount
Remainder of 2017
 
$
7,432

2018
 
28,650

2019
 
25,986

2020
 
23,917

2021
 
13,128

Thereafter
 
5,627


 
$
104,740


Note 5 — Restructuring Charges
 
Restructuring charges are comprised of costs related to employee termination benefits, including stock-based compensation, cost of long-lived assets abandoned or impaired, as well as contract termination costs.

Restructuring charges in the fiscal 2017 and fiscal 2016 periods were related to the consolidation of Cascade Microtech into our operations. Restructuring charges in the fiscal 2016 periods also included costs related to the consolidation of our sales operations.

The activities in the restructuring accrual for the nine months ended September 30, 2017 were as follows (in thousands):
 
Employee Severance and Benefits
 
Contract Termination and Other Costs
 
Total
Accrual at December 31, 2016
$
330

 
$
104

 
$
434

Restructuring charges
318

 
11

 
329

Cash payments
(681
)
 
(94
)
 
(775
)
Adjustment to restructuring charges
33

 
(5
)
 
28

Accrual at September 30, 2017
$
—

 
$
16

 
$
16


The cash payments associated with these restructuring activities are expected to be completed by the end of fiscal 2017.

11


Note 6 — Fair Value and Derivative Instruments

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

We did not have any transfers of assets or liabilities measured at fair value on a recurring basis to or from Level 1, Level 2 or Level 3 during the nine months ended September 30, 2017 or the year ended December 31, 2016.

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

No changes were made to our valuation techniques during the first nine months of fiscal 2017.

Assets and Liabilities Measured at Fair Value on a Recurring Basis
Assets and (liabilities) measured at fair value on a recurring basis were as follows (in thousands): 
September 30, 2017
 
Level 1
 
Level 2
 
Total
Assets:
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
Money market funds
 
$
9,067

 
$
—

 
$
9,067

Marketable securities:
 
 
 
 
 
 
 Certificates of deposit
 
—

 
958

 
958

 Agency securities
 
—

 
9,495

 
9,495

 Corporate bonds
 
—

 
19,355

 
19,355

 Commercial paper
 
—

 
2,001

 
2,001

 
 
—

 
31,809

 
31,809

Interest rate swap derivative contracts
 
—

 
848

 
848

Total assets
 
$
9,067

 
$
32,657

 
$
41,724

Liabilities:
 
 
 
 
 
 
Foreign exchange derivative contracts
 
$
—

 
$
(656
)
 
$
(656
)

December 31, 2016
 
Level 1
 
Level 2
 
Total
Assets:
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
Money market funds
 
$
19,350

 
$
—

 
$
19,350

Marketable securities:
 
 
 
 
 
 
U.S. Treasuries
 
—

 
7,497

 
7,497

Foreign exchange derivative contracts
 
—

 
1,137

 
1,137

Interest rate swap derivative contracts
 
—

 
838

 
838

Total
 
$
19,350

 
$
9,472

 
$
28,822

 

We did not have any liabilities measured at fair value on a recurring basis at December 31, 2016.


12


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

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

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

Interest Rate Swaps
The fair value of our interest rate swap contracts is determined based on valuation models that use interest rate yield curves as inputs. For accounting purposes, our interest rate swap contracts qualify for, and are designated as, cash flow hedges. The cash flows associated with the interest rate swaps are reported in Net cash provided by operating activities in our Condensed Consolidated Statements of Cash Flows.

The estimated fair value of the interest rate swaps as of September 30, 2017 and December 31, 2016 was reported as a derivative asset of approximately $0.8 million and $0.8 million, respectively, within Prepaid expenses and other current assets and Other assets in our Condensed Consolidated Balance Sheets.

The impact of the cash flow hedges on our Condensed Consolidated Statements of Operations was as follows (in thousands):
Three Months Ended
 
 
Amount of Gain or (Loss) Recognized in OCI on Derivative (Effective Portion)
 
Location of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
 
Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
 
Location of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion )
 
Amount of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion )
 
 
 
 
Derivatives in Cash Flow Hedging Relationships
 
 
 
 
 
 
 
September 30, 2017
September 24, 2016
 
September 30, 2017
September 24, 2016
 
September 30, 2017
September 24, 2016
Interest rate swap contracts
 
$
18

$
233

 
Interest expense
 
$
54

$
—

 
Interest expense
 
$
4

$
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended
 
 
Amount of Gain or (Loss) Recognized in OCI on Derivative (Effective Portion)
 
Location of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
 
Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
 
Location of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion )
 
Amount of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion )
 
 
 
 
Derivatives in Cash Flow Hedging Relationships
 
 
 
 
 
 
 
September 30, 2017
September 24, 2016
 
September 30, 2017
September 24, 2016
 
September 30, 2017
September 24, 2016
Interest rate swap contracts
 
$
27

$
233

 
Interest expense
 
$
23

$
—

 
Interest expense
 
$
27

$
—


Foreign Exchange Derivative Contracts
The fair value of our foreign exchange derivative contracts was determined based on current foreign currency exchange rates and forward points. We recorded the net unrealized gain or loss in our Condensed Consolidated Statements of Operations as a component of Other income (expense), net each period as incurred. All of our foreign exchange derivative contracts outstanding at September 30, 2017 will mature in the fourth quarter of fiscal 2017.


13


The following table provides information about our foreign currency forward contracts outstanding as of September 30, 2017 (in thousands):
Currency
 
Contract Position
 
Contract Amount (Local Currency)
 
Contract Amount (U.S. Dollars)
Japanese Yen
 
Sell
 
1,396,398

 
$
12,408

Taiwan Dollar
 
Buy
 
(47,111
)
 
(1,555
)
Korean Won
 
Buy
 
(3,076,638
)
 
(2,717
)
Euro Dollar
 
Sell
 
17,617

 
20,156

Total USD notional amount of outstanding foreign exchange contracts
 
$
28,292


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.

The location and amount of gains and losses related to non-designated derivative instruments that matured were as follows (in thousands):
 
 
 
 
Amount of Gain (Loss) Recognized on Derivatives
 
 
 
 
Three Months Ended
Nine Months Ended
Derivatives Not Designated as Hedging Instruments
 
Location of Gain (Loss) Recognized on Derivatives
 
September 30, 2017
 
September 24, 2016
 
September 30, 2017
 
September 24, 2016
Foreign exchange forward contracts
 
Other income (expense), net
 
$
(933
)
 
$
(224
)
 
$
(571
)
 
$
(1,927
)

Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis
We measure and report goodwill and intangible assets at fair value on a non-recurring basis if we determine these assets to be impaired or in the period when we make a business acquisition. Refer to Note 4 to the Condensed Consolidated Financial Statements-Goodwill and Intangible Assets, for further details. There were no assets or liabilities measured at fair value on a nonrecurring basis during the nine months ended September 30, 2017 and September 24, 2016.

Note 7 — Warranty
 
A reconciliation of the changes in our warranty liability is as follows (in thousands):
 
Nine Months Ended
 
September 30,
2017
 
September 24,
2016
Balance at beginning of period
$
2,972

 
$
1,116

Warranty reserve from acquisition of Cascade Microtech
—

 
795

Accruals
4,888

 
3,106

Settlements
(5,009
)
 
(2,730
)
Balance at end of period
$
2,851

 
$
2,287


Note 8 — Stockholders’ Equity
 
Common Stock Repurchase Program
In February 2017, our Board of Directors authorized a program to repurchase up to $25 million of outstanding common stock to offset potential dilution from issuances of common stock under our stock-based compensation plans. The share repurchase program will expire on February 1, 2020. During the nine months ended September 30, 2017, we repurchased and retired 867,620 shares of common stock for $11.0 million and, as of September 30, 2017, $14.0 million remained available for future repurchases.

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

Restricted Stock Units

14


Restricted stock unit ("RSU") activity under our equity incentive plan was as follows:
 
 
Units
 
Weighted Average Grant Date Fair Value
RSUs at December 31, 2016
3,108,560

 
$
8.61

Awards granted
1,615,982

 
13.19

Awards vested
(1,331,116
)
 
7.94

Awards canceled
(203,653
)
 
8.91

RSUs at September 30, 2017
3,189,773

 
$
11.15


The total fair value of RSUs vested during the nine months ended September 30, 2017 was $17.8 million.

Stock Options
Stock option activity under our equity incentive plan was as follows:
 
 
Options Outstanding
 
Weighted Average Exercise Price
 
Weighted Average Remaining Contractual Life in Years
 
Aggregate Intrinsic Value (in thousands)
Outstanding at December 31, 2016
 
2,198,031

 
$
9.13

 
 
 
 
Options exercised
 
(1,431,767
)
 
9.37

 
 
 
 
Options canceled
 
(65,308
)
 
13.60

 
 
 
 
Outstanding at September 30, 2017
 
700,956
 
$
8.21

 
3.85
 
$
6,056

Vested and expected to vest at September 30, 2017
 
700,956

 
$
8.21

 
3.85
 
$
6,056

Exercisable at September 30, 2017
 
420,022

 
$
8.52

 
3.17
 
$
3,497


Stock-Based Compensation
Stock-based compensation was included in our Condensed Consolidated Statements of Operations as follows (in thousands):
 
 
Three Months Ended
 
Nine Months Ended
 
September 30,
2017
 
September 24,
2016
 
September 30,
2017
 
September 24,
2016
Cost of revenues
$
894

 
$
674

 
$
2,540

 
$
1,712

Research and development
1,437

 
913

 
3,768

 
2,251

Selling, general and administrative
2,255

 
1,615

 
4,971

 
3,514

Total stock-based compensation
$
4,586

 
$
3,202

 
$
11,279

 
$
7,477

 

Employee Stock Purchase Plan ("ESPP")
Information related to activity under our ESPP was as follows:
 
 
Nine Months Ended
 
 
September 30, 2017
Shares issued
 
655,961

Weighted average per share purchase price
 
$
8.68

Weighted average per share discount from the fair value of our common stock on the date of issuance
 
$
4.03



15


Unrecognized Compensation Costs
 At September 30, 2017, the unrecognized stock-based compensation was as follows (in thousands): 
 
Unrecognized Expense
 
Average Expected Recognition Period in Years
Stock options
$
667

 
1.33
Restricted stock units
30,975

 
2.30
Employee stock purchase plan
1,105

 
0.34
Total unrecognized stock-based compensation expense
$
32,747

 
2.21

Note 9 — Income Taxes

Information regarding our income tax provision (benefit) was as follows (dollars in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
2017
 
September 24,
2016
 
September 30,
2017
 
September 24,
2016
Provision (benefit) for income taxes
$
1,028

 
$
50

 
$
2,435

 
$
(43,665
)
Effective income tax rate
7.6
%
 
(0.4
)%
 
6.4
%
 
125.6
%

Income tax provision (benefit) reflects the tax provision on our operations in foreign and U.S. jurisdictions, offset by tax benefits from lapsing of statute of limitations related to uncertain tax positions in foreign jurisdictions. We continue to maintain a full valuation allowance against our U.S. Federal and State deferred tax assets. The change in provision for taxes primarily relates to higher profits in foreign jurisdictions.

The income tax benefit in nine month period ended September 24, 2016 was primarily due to the release of valuation allowance on our deferred tax assets ("DTAs") in connection with our acquisition of Cascade Microtech as a result of the establishment of deferred tax liabilities ("DTLs") on the acquired identifiable intangible assets. These DTLs exceeded the acquired DTAs by approximately $43.9 million and created additional sources of income to realize a tax benefit for our previously-existing DTAs. Accordingly, the valuation allowance on a portion of our DTAs was released and resulted in an income tax benefit of approximately $43.9 million during the nine months ended September 24, 2016.

Note 10 — Net Income (Loss) per Share

The following table reconciles the shares used in calculating basic net income (loss) per share and diluted net income (loss) per share (in thousands):
 
 
Three Months Ended
 
Nine Months Ended
 
September 30,
2017
 
September 24,
2016
 
September 30,
2017
 
September 24,
2016
Weighted-average shares used in computing basic net income (loss) per share
72,651

 
70,502

 
72,103

 
62,835

Add potentially dilutive securities
1,234

 
—

 
1,437

 
827

Weighted-average shares used in computing basic and diluted net income (loss) per share
73,885

 
70,502

 
73,540

 
63,662

 
 
 
 
 
 
 
 
Securities not included as they would have been antidilutive
—

 
5,504

 
77

 
1,959



16


Note 11 — Commitments and Contingencies

Contractual Commitments and Purchase Obligations
Our lease commitments, purchase obligations and other contractual obligations have not materially changed as of September 30, 2017 from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2016.

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. We have not recorded any liabilities for these indemnification arrangements on our Condensed Consolidated Balance Sheet as of September 30, 2017 or December 31, 2016.

Legal Matters
From time to time, we may be subject to legal proceedings and claims in the ordinary course of business. As of September 30, 2017, and as of the filing of this Quarterly Report on Form 10-Q, we were not involved in any material legal proceedings other than the proceedings summarized below. In the future, we may become a party to additional legal proceedings that may require us to spend significant resources. Litigation can be expensive and disruptive to normal business operations. The results of legal proceedings are difficult to predict, and the costs incurred in litigation can be substantial, regardless of outcome.

In August 2013, a former employee filed a class action lawsuit against us in the Superior Court of California for the County of Alameda alleging violations of California’s wage and hour laws and other claims on behalf of himself and all similarly situated current and former employees at our Livermore facilities. On August 25, 2017, the court granted final approval of the parties’ agreement to settle the lawsuit. The settlement provides for payment by us of $1.5 million in settlement of the lawsuit. As of September 30, 2017, we had paid to the settlement administrator $1.5 million in accordance with the settlement agreement.


17


Note 12 — Operating Segments

Our chief operating decision maker ("CODM") is our Chief Executive Officer, who reviews operating results to make decisions about allocating resources and assessing performance for the entire company. We operate in two reportable segments consisting of the Probe Cards Segment and Systems Segment.

The following table summarizes the operating results by reportable segment (dollars in thousands):
 
Three Months Ended
 
September 30, 2017
 
September 24, 2016
 
Probe Cards
 
Systems
 
Corporate and Other
 
Total
 
Probe Cards
 
Systems
 
Corporate and Other
 
Total
Revenues
$
119,439

 
$
24,296

 
$
—

 
$
143,735

 
$
102,670

 
$
20,629

 
$
—

 
$
123,299

Gross profit
$
51,438

 
$
12,571

 
$
(6,379
)
 
$
57,630

 
$
41,653

 
$
11,090

 
$
(25,555
)
 
$
27,188

Gross margin
43.1
%
 
51.7
%
 
—
%
 
40.1
%
 
40.6
%
 
53.8
%
 
—
%
 
22.1
%
Operating income (loss)
$
17,894

 
$
5,277

 
$
(8,905
)
 
$
14,266

 
$
20,805

 
$
3,988

 
$
(37,951
)
 
$
(13,158
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended
 
September 30, 2017
 
September 24, 2016
 
Probe Cards
 
Systems
 
Corporate and Other
 
Total
 
Probe Cards
 
Systems
 
Corporate and Other
 
Total
Revenues
$
347,559

 
$
68,981

 
$
—

 
$
416,540

 
$
239,364

 
$
20,629

 
$
—

 
$
259,993

Gross profit
$
151,204

 
$
36,176

 
$
(20,412
)
 
$
166,968

 
$
82,138

 
$
11,090

 
$
(30,821
)
 
$
62,407

Gross margin
43.5
%
 
52.4
%
 
—
%
 
40.1
%
 
34.3
%
 
53.8
%
 
—
%
 
24.0
%
Operating income (loss)
$
54,289

 
$
14,363

 
$
(27,748
)
 
$
40,904

 
$
31,411

 
$
3,988

 
$
(68,775
)
 
$
(33,376
)

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

Corporate and Other includes unallocated expenses relating to amortization of intangible assets, share-based compensation expense, acquisition-related costs, including charges related to inventory stepped up to fair value, and other costs, which are not used in evaluating the results of, or in allocating resources to, our reportable segments. Acquisition-related costs include transaction costs and any costs directly related to the acquisition and integration of acquired businesses.

Note 13 — Acquisition

On June 24, 2016, we acquired Cascade Microtech, which was accounted for using the acquisition method of accounting. The acquired assets and liabilities of Cascade Microtech were recorded at their respective fair values including an amount for goodwill, representing the difference between the acquisition consideration and the fair value of the identifiable net assets. During the second quarter of 2017, we finalized our purchase price allocation, with no changes made to our allocation as of December 31, 2016.


18


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

The forward-looking statements are only predictions based on our current expectations and our projections about future events. All forward-looking statements included in this Quarterly Report on Form 10-Q are based upon information available to us as of the filing date of this Quarterly Report on Form 10-Q. You should not place undue reliance on these forward-looking statements. We have no obligation to update any of these statements. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to differ materially from those expressed or implied by these statements, including risks related to general market trends, our ability to execute our business strategy, our ability to integrate Cascade Microtech and other risks discussed in the section titled “Risk Factors” and elsewhere in our Annual Report on Form 10-K for the year ended December 31, 2016 and in this Quarterly Report on Form 10-Q. You should carefully consider the numerous risks and uncertainties described under these sections.
 
The following discussion and analysis should be read in conjunction with our condensed consolidated financial statements and the accompanying notes contained in this Quarterly Report on Form 10-Q. Unless expressly stated or the context otherwise requires, the terms “we,” “our,” “us” and “FormFactor” refer to FormFactor, Inc. and its subsidiaries.

Overview

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

On June 24, 2016, we completed the acquisition of Cascade Microtech, Inc. ("Cascade Microtech"), headquartered in Beaverton, Oregon and, accordingly, our Condensed Consolidated Statements of Operations include the results of operations of Cascade Microtech since that date. Therefore, our condensed consolidated financial results for the three and nine months ended September 30, 2017 may not be directly comparable to our condensed consolidated financial results for the three and nine months ended September 24, 2016.

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

We generated net income of $35.3 million in the first nine months of fiscal 2017 as compared to $8.9 million in the first nine months of fiscal 2016. The increase in net income was primarily due to increased revenues generated by the acquisition of Cascade Microtech at the end of the second quarter of fiscal 2016, as well as strong demand across our legacy products, and lower restructuring charges, partially offset by increased operating expenses and a $43.7 million income tax benefit recognized in the first nine months of fiscal 2016 related to the release of valuation allowances on our deferred tax assets in connection with our acquisition of Cascade Microtech.

Critical Accounting Policies and the Use of Estimates

Management’s Discussion and Analysis and Note 1 to the Consolidated Financial Statements in our 2016 Annual Report on Form 10-K describe the significant accounting estimates and critical accounting policies used in preparation of the Consolidated Financial Statements. Actual results in these areas could differ from management’s estimates. During the nine months September 30, 2017, there were no significant changes in our critical accounting policies or estimates from those reported in our Annual Report on Form 10-K for the year ended December 31, 2016, which was filed with the Securities and Exchange Commission on March 15, 2017.

19



Results of Operations
 
The following table sets forth our operating results as a percentage of revenues for the periods indicated:
 
 
Three Months Ended
 
Nine Months Ended
 
September 30,
2017
 
September 24,
2016
 
September 30,
2017
 
September 24,
2016
Revenues
100.0
 %
 
100.0
 %
 
100.0
 %
 
100.0
 %
Cost of revenues
59.9

 
77.9

 
59.9

 
76.0

Gross profit
40.1

 
22.1

 
40.1

 
24.0

Operating expenses:
 
 
 
 
 
 
 
Research and development
13.5

 
14.0

 
13.3

 
15.1

Selling, general and administrative
16.7

 
18.7

 
16.9

 
19.1

Restructuring and impairment charges, net
—

 
0.1

 
0.1

 
2.7

Total operating expenses
30.2

 
32.8

 
30.3

 
36.9

Operating income (loss)
9.9

 
(10.7
)
 
9.8

 
(12.9
)
Interest income
0.1

 
—

 
0.1

 
0.1

Interest expense
(0.8
)
 
(0.9
)
 
(0.8
)
 
(0.4
)
Other income (expense), net
0.2

 
0.1

 
—

 
(0.2
)
Income (loss) before income taxes
9.4

 
(11.5
)
 
9.1

 
(13.4
)
Provision (benefit) for income taxes
0.7

 
—

 
0.6

 
(16.8
)
Net income (loss)
8.7
 %
 
(11.5
)%
 
8.5
 %
 
3.4
 %

Revenues by Segment
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2017
 
September 24, 2016
 
September 30, 2017
 
September 24, 2016
 
(In thousands)
Probe Cards
$
119,439

 
$
102,670

 
$
347,559

 
$
239,364

Systems
24,296

 
20,629

 
68,981

 
20,629

 
$
143,735

 
$
123,299

 
$
416,540

 
$
259,993


The increases in Probe Cards Segment revenue for the three and nine months ended September 30, 2017, compared to the three and nine months ended September 24, 2016 were the result of increases in unit sales, driven by higher demand for both of our Foundry & Logic and DRAM products. The increase for the nine months ended September 30, 2017 compared to the corresponding period of 2016 was also due to acquisition of Cascade Microtech. 

The increase in Systems Segment revenue for the three months ended September 30, 2017 compared to the three months ended September 24, 2016 was the result of increases in both volume of station sales and service revenues. The increase for the nine months ended September 30, 2017 compared to the nine months ended September 24, 2016 was the result of the acquisition of Cascade Microtech at the end of June 2016, as well as the increases in fiscal 2017 Systems Segment revenue as discussed. Prior to the acquisition, we did not operate in the Systems Segment.


20


Revenues by Market
 
Three Months Ended
 
September 30, 2017
 
September 24, 2016
 
$ Change
 
% Change
 
(Dollars in thousands)
Probe Cards Markets:
 
 
 
 
 
 
 
Foundry & Logic
$
81,914

 
$
75,114

 
$
6,800

 
9.1
 %
DRAM
32,373

 
22,278

 
10,095

 
45.3

Flash
5,151

 
5,278

 
(127
)
 
(2.4
)
Systems Market:
 
 
 
 
 
 
 
Systems
24,297

 
20,629

 
3,668

 
17.8
 %
Total revenues
$
143,735

 
$
123,299

 
$
20,436

 
16.6
 %
 
 
 
 
 
 
 
 
 
Nine Months Ended
 
September 30, 2017
 
September 24, 2016
 
$ Change
 
% Change
 
(Dollars in thousands)
Probe Cards Markets:
 
 
 
 
 
 
 
Foundry & Logic
$
244,952

 
$
169,137

 
$
75,815

 
44.8
 %
DRAM
92,798

 
62,788

 
30,010

 
47.8

Flash
9,809

 
7,439

 
2,370

 
31.9

Systems Market:
 
 
 
 
 
 
 
Systems
68,981

 
20,629

 
48,352

 
234.4
 %
Total revenues
$
416,540

 
$
259,993

 
$
156,547

 
60.2
 %

The increases in Foundry & Logic product revenue for the three and nine months ended September 30, 2017, compared to the three and nine months ended September 24, 2016 were primarily the result of strong customer demand across all end markets, including data center, mobile and automotive. The increase for the nine month period was also due to the 2016 acquisition of Cascade Microtech.

The increases in DRAM product revenue for the three and nine months ended September 30, 2017, compared to the three and nine months ended September 24, 2016, were the result of increased customer demand in the DRAM market, as DRAM manufacturers continue their technology node transitions and new design releases. 

Flash product revenue for the three months ended September 30, 2017 is consistent when compared with corresponding period in prior year. The increase in Flash revenue for nine months ended September 30, 2017, compared to nine months ended September 24, 2016 was the result of design wins. 

The increases in Systems product revenue for the three and nine months ended September 30, 2017 compared to three and nine months ended September 24, 2016 were driven by increased unit sales, including new 200mm and 300mm platforms. The increase in revenue for the nine months ended September 30, 2017, compared to the nine months ended September 24, 2016 was also the result of the acquisition of Cascade Microtech at the end of June 2016. Prior to the acquisition, we did not operate in the Systems market.


21


Revenues by Geographic Region
 
Three Months Ended
 
Nine Months Ended
 
September 30,
2017
 
% of
Revenue
 
September 24,
2016
 
% of
Revenue
 
September 30,
2017
 
% of
Revenue
 
September 24,
2016
 
% of
Revenue
 
(Dollars in thousands)
United States
$
57,256

 
39.8
%
 
$
39,625

 
32.1
%
 
$
147,494

 
35.4
%
 
$
88,779

 
34.1
%
Taiwan
17,814

 
12.4

 
17,714

 
14.4

 
67,161

 
16.1

 
43,264

 
16.6

South Korea
21,762

 
15.1

 
17,584

 
14.3

 
63,215

 
15.2

 
44,042

 
16.9

Asia-Pacific(1)
23,800

 
16.6

 
17,501

 
14.2

 
70,226

 
16.9

 
25,479

 
9.8

Europe
12,094

 
8.4

 
16,499

 
13.4

 
31,472

 
7.6

 
36,384

 
14.0

Japan
10,456

 
7.3

 
14,057

 
11.4

 
35,066

 
8.4

 
21,726

 
8.4

Rest of the world
553

 
0.4

 
319

 
0.3

 
1,906

 
0.5

 
319

 
0.1

Total revenues
$
143,735

 
100.0
%
 
$
123,299

 
100.0
%
 
$
416,540

 
100.0
%
 
$
259,993

 
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 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 South Korea, this sale will be reflected in the revenue for South Korea rather than North America.

The increases in geographical revenues across the regions were primarily attributable to additional revenues generated as a result of our acquisition of Cascade Microtech and strong demand for our legacy products across the board. The decrease in Japan for the three months ended September 30, 2017 compared to corresponding period of fiscal 2016 was due to a reduction in sales to one customer. The decreases in Europe were driven by decreases in legacy product revenue at our three main European customers, partially offset by increases throughout Europe in sales of products related to our Cascade Microtech acquisition.

Cost of Revenues and Gross Margins

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

Corporate and Other includes unallocated expenses relating to amortization of intangible assets, share-based compensation expense, acquisition-related costs, including charges related to inventory stepped up to fair value, and other costs, which are not used in evaluating the results of, or in allocating resources to, our reportable segments. Acquisition-related costs include transaction costs and any costs directly related to the acquisition and integration of acquired businesses.

Our gross profit and gross margin were as follows (dollars in thousands):
 
Three Months Ended
 
September 30, 2017
 
September 24, 2016
 
$ Change
 
% Change
 
(Dollars in thousands)
Gross profit
$
57,630

 
$
27,188

 
$
30,442

 
112.0
%
Gross margin
40.1
%
 
22.1
%
 
 
 
 
 
Nine Months Ended
 
September 30, 2017
 
September 24, 2016
 
$ Change
 
% Change
 
(Dollars in thousands)
Gross profit
$
166,968

 
$
62,407

 
$
104,561

 
167.5
%
Gross margin
40.1
%
 
24.0
%
 
 
 
 

22



Our gross profit and gross margin by segment were as follows (dollars in thousands):
 
Three Months Ended
 
September 30, 2017
 
September 24, 2016
 
Probe Cards
 
Systems
 
Corporate and Other
 
Total
 
Probe Cards
 
Systems
 
Corporate and Other
 
Total
Gross profit
$
51,438

 
$
12,571

 
$
(6,379
)
 
$
57,630

 
$
41,653

 
$
11,090

 
$
(25,555
)
 
$
27,188

Gross margin
43.1
%
 
51.7
%
 
—
%
 
40.1
%
 
40.6
%
 
53.8
%
 
—
%
 
22.1
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended
 
September 30, 2017
 
September 24, 2016
 
Probe Cards
 
Systems
 
Corporate and Other
 
Total
 
Probe Cards
 
Systems
 
Corporate and Other
 
Total
Gross profit
$151,204
 
$
36,176

 
$
(20,412
)
 
$
166,968

 
$82,138
 
$
11,090

 
$
(30,821
)
 
$
62,407

Gross margin
43.5
%
 
52.4
%
 
—
%
 
40.1
%
 
34.3
%
 
53.8
%
 
—
%
 
24.0
%

Probe Cards
For the three and nine months ended September 30, 2017, gross margins in the Probe Cards Segment increased as a result of increased sales to several major customers, favorable product mix, higher factory utilization and improved manufacturing efficiency.

Systems
For the three and nine months ended September 30, 2017, decreases in gross margins in the Systems Segment was attributed to changes in foreign currency exchange rates and unfavorable product mix. For the nine months ended September 30, 2017, increase in gross profit was due to inclusion of the results of operations of Cascade Microtech for three months in 2016. Prior to the acquisition, we operated in the Probe Cards Segment only and did not generate any Systems Segment revenue.

Overall
Gross profit and gross margin fluctuate with revenue levels, product mix, selling prices, factory loading and material costs. For the three and nine months ended September 30, 2017 compared to the three and nine months ended September 24, 2016, gross margins increased due to strong revenues, favorable product mix and higher factor utilization in our DRAM and Foundry & Logic products. The increases in gross margin were also driven by improved manufacturing efficiency. The three and nine month 2016 gross margin also included the impact of higher amortization of backlog and inventory step up which reduced gross margin.

Cost of revenues included stock-based compensation expense as follows (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
2017
 
September 24,
2016
 
September 30,
2017
 
September 24,
2016
Stock-based compensation
$
894

 
$
674

 
$
2,540

 
$
1,712


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


23


Research and Development
 
Three Months Ended
 
September 30, 2017
 
September 24, 2016
 
$ Change
 
% Change
 
(Dollars in thousands)
Research and development
$
19,338

 
$
17,253

 
$
2,085

 
12.1
%
% of revenues
13.5
%
 
14.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended
 
September 30, 2017
 
September 24, 2016
 
$ Change
 
% Change
 
(Dollars in thousands)
Research and development
$
55,294

 
$
39,235

 
$
16,059

 
40.9
%
% of revenues
13.3
%
 
15.1
%
 
 
 
 

The increase in the three months ended September 30, 2017 when compared to corresponding period in the prior year was primarily due to higher bonus payments as a result of improved performance. The increase in the nine months ended September 30, 2017 when compared to the corresponding period in the prior year was primarily due to our acquisition of Cascade Microtech. A detail of the changes is as follows (in millions):
 
Three Months Ended September 30, 2017 compared to Three Months Ended September 24, 2016
 
Nine Months Ended September 30, 2017 compared to Nine Months Ended September 24, 2016
 
 
Employee compensation costs
$
2.0

 
$
11.9

Stock-based compensation
0.5

 
1.5

Project material costs
(0.3
)
 
0.4

General operating expenses
(0.2
)
 
1.6

Depreciation
0.1

 
0.6

 
$
2.1

 
$
16.0


Research and development included stock-based compensation expense as follows (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
2017
 
September 24,
2016
 
September 30,
2017
 
September 24,
2016
Stock-based compensation
$
1,437

 
$
913

 
$
3,768

 
$
2,251



24


Selling, General and Administrative
 
Three Months Ended
 
September 30, 2017
 
September 24, 2016
 
$ Change
 
% Change
 
(Dollars in thousands)
Selling, general and administrative
$
24,010

 
$
23,008

 
$
1,002

 
4.4
%
% of revenues
16.7
%
 
18.7
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended
 
September 30, 2017
 
September 24, 2016
 
$ Change
 
% Change
 
(Dollars in thousands)
Selling, general and administrative
$
70,526

 
$
49,553

 
$
20,973

 
42.3
%
% of revenues
16.9
%
 
19.1
%
 
 
 
 

The increase in the three months ended September 30, 2017 when compared to the corresponding period in the prior year was primarily due to higher bonus payments as a result of improved performance. The increase in the nine months ended September 30, 2017 when compared to the corresponding period in the prior year was primarily due to our acquisition of Cascade Microtech. A detail of the changes is as follows (in millions):
 
Three Months Ended September 30, 2017 compared to Three Months Ended September 24, 2016
 
Nine Months Ended September 30, 2017 compared to Nine Months Ended September 24, 2016
 
 
Employee compensation costs
$
1.0

 
$
14.4

Consulting fees
(0.2
)
 
3.0

Depreciation and amortization
—

 
2.7

Travel related costs
(0.1
)
 
2.0

General operating costs
(0.1
)
 
2.5

Stock-based compensation
0.6

 
1.5

Acquisition related
(0.2
)
 
(5.1
)
 
$
1.0

 
$
21.0


Selling, general and administrative included stock-based compensation expense as follows (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
2017
 
September 24,
2016
 
September 30,
2017
 
September 24,
2016
Stock-based compensation
$
2,255

 
$
1,615

 
$
4,971

 
$
3,514


Restructuring Charges, net 
 
Three Months Ended
 
Nine Months Ended
 
September 30,
2017
 
September 24,
2016
 
September 30,
2017
 
September 24,
2016
 
(Dollars in thousands)
Restructuring charges, net
$
16

 
$
85

 
$
329

 
$
6,995

% of revenues
—
%
 
0.1
%
 
0.1
%
 
2.7
%

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


25


Restructuring charges in the fiscal 2017 and fiscal 2016 periods were related to the consolidation of Cascade Microtech into our operations. Restructuring charges in the fiscal 2016 periods also included costs related to the consolidation of our sales operations.

Interest Income and Interest Expense
 
Three Months Ended
 
Nine Months Ended
 
September 30,
2017
 
September 24,
2016
 
September 30,
2017
 
September 24,
2016
 
(Dollars in thousands)
Interest income
$
123

 
$
52

 
$
283

 
$
267

Weighted average balance of cash and investments
$
125,675

 
$
87,119

 
$
120,134

 
$
142,404

Weighted average yield on cash and investments
0.91
%
 
0.31
%
 
0.72
%
 
0.30
%
 
 
 
 
 
 
 
 
Interest expense
$
(1,109
)
 
$
(1,125
)
 
$
(3,446
)
 
$
(1,136
)
Average debt outstanding
123,655

 
148,247

 
131,813

 
50,702

Weighted average interest rate on debt
3.23
%
 
2.31
%
 
3.01
%
 
0.79
%
 
Interest income is earned on our cash, cash equivalents and marketable securities. The increase in interest income for the three and nine months ended September 30, 2017 compared with corresponding period of prior year is attributable to increase in investment securities and higher investment yields.

Interest expense primarily includes interest on our term loan and interest-rate swap derivative contracts and term loan issuance costs amortization charges. The decrease in interest expense for the three months ended September 30, 2017 compared to three months ended September 24, 2016 was due to a lower outstanding debt balance as a result of principal payments made and income from interest rate swap contracts as the interest rate goes up. The increase in interest expense for the nine months ended September 30, 2017 when compared to the corresponding period in the prior year was primarily due to the fact that our term loan was entered into at the end of June 2016 in connection with our acquisition of Cascade Microtech and, accordingly, was not outstanding for the first six months of fiscal 2016.

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

Income Taxes
 
Three Months Ended
 
Nine Months Ended
 
September 30,
2017
 
September 24,
2016
 
September 30,
2017
 
September 24,
2016
 
(Dollars in thousands)
Provision (benefit) for income taxes
$
1,028

 
$
50

 
$
2,435

 
$
(43,665
)
Effective income tax rate
7.6
%
 
(0.4
)%
 
6.4
%
 
125.6
%

Income tax provision (benefit) reflects the tax provision on our operations in foreign and U.S. jurisdictions, offset by tax benefits from lapsing of statute of limitations related to uncertain tax positions in foreign jurisdictions. We continue to maintain a full valuation allowance against our U.S. Federal and State deferred tax assets. The change in provision for taxes primarily relates to higher profits in foreign jurisdictions.

The income tax benefit in nine month period ended September 24, 2016 was primarily due to the release of valuation allowance on our deferred tax assets ("DTAs") in connection with our acquisition of Cascade Microtech as a result of the establishment of deferred tax liabilities ("DTLs") on the acquired identifiable intangible assets. These DTLs exceeded the acquired DTAs by approximately $43.9 million and created additional sources of income to realize a tax benefit for our previously-existing DTAs. Accordingly, the valuation allowance on a portion of our DTAs was released and resulted in an income tax benefit of approximately $43.9 million during the nine months ended September 24, 2016.



26


Liquidity and Capital Resources

Capital Resources
Our working capital was $209.5 million at September 30, 2017 and $172.0 million at December 31, 2016. The increase in working capital in the nine months ended September 30, 2017 was primarily due to cash generated from operations as a result of higher revenues.

Our cash, cash equivalents and marketable securities totaled approximately $134.9 million at September 30, 2017, as compared to $108.9 million at December 31, 2016. Cash and cash equivalents and marketable securities included $24.7 million held by our foreign subsidiaries as of September 30, 2017. 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. To the extent necessary, we may consider entering into short and long-term debt obligations, raising cash through a stock issuance, or obtaining new financing facilities, which may not be available on terms favorable to us. Our future capital requirements may vary materially from those now planned.

If we are unsuccessful in maintaining or growing our revenues, maintaining or reducing our cost structure (in response to an industry demand downturn or other event), or increasing our available cash through debt or equity financings, our cash, cash equivalents and marketable securities may decline in fiscal 2017.

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.

Cash Flows
The following table sets forth our net cash flows from operating, investing and financing activities:
 
Nine Months Ended
 
September 30, 2017
 
September 24, 2016
 
(In thousands)
Net cash provided by operating activities
$
59,868

 
$
2,488

Net cash used in investing activities
(37,792
)
 
(202,361
)
Net cash (used in) provided by financing activities
(22,847
)
 
150,624


Operating Activities 
Net cash provided by operating activities for the nine months ended September 30, 2017 was primarily attributable to our operations generating $86.2 million of cash (a net income of $35.3 million which included $50.9 million of net non-cash expenses), offset by operating assets and liabilities using $26.3 million of cash as discussed in more detail below.

Accounts receivable increased $17.7 million to $88.0 million at September 30, 2017 compared to $70.2 million at December 31, 2016 as a result of increased revenues, timing of customer shipments and contractual payment terms.

Inventories, net increased $8.9 million to $68.7 million at September 30, 2017 compared to $59.8 million at December 31, 2016 as a result of inventory build, partially offset by higher revenues and a $6.9 million increase to our inventory valuation allowance.

Accounts payable increased $3.0 million to $37.1 million at September 30, 2017 compared to $34.1 million at December 31, 2016 as a result of an increase in operating expenses, inventory purchases and timing of payments.

Investing Activities
Net cash used in investing activities for the nine months ended September 30, 2017 was primarily related to $13.9 million of cash used in the acquisition of property, plant and equipment and $24.4 million used for the purchase of marketable securities.

Financing Activities
Net cash used in financing activities for the nine months ended September 30, 2017 primarily related to $24.4 million of principal payments made towards the repayment of our term loan, $11.0 million related to the repurchase of our common stock and $6.6

27


million related to tax withholdings associated with the net share settlements of our equity awards, partially offset by $19.1 million of proceeds received from issuances of common stock under our stock incentive plans.

Debt Facility

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

The Term Loan bears interest at a rate equal to, at our option, (i) the applicable London Interbank Offered Rate ("LIBOR") rate plus 2.00% per annum or (ii) Base Rate (as defined in the Credit Agreement) plus 1.00% per annum. We have currently elected to pay interest at 2.00% over the one-month LIBOR rate. Interest payments are payable in quarterly installments over a five-year period. The Term Loan will amortize in equal quarterly installments, beginning June 30, 2016, in an annual amount equal to 5% for year one, 10% for year two, 20% for year three, 30% for year four and 35% for year five.

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

The Credit Agreement contains negative covenants customary for financing of this type, as well as certain financial maintenance covenants. As of September 30, 2017, the balance outstanding pursuant to the term loan was $115.0 million at an interest rate of 3.23% and we were in compliance with all covenants under the Credit Agreement.

Stock Repurchase Program

In February 2017, our Board of Directors authorized a program to repurchase up to $25 million of outstanding common stock to offset potential dilution from issuances of common stock under our stock-based compensation plans. The share repurchase program will expire on February 1, 2020. During the nine months ended September 30, 2017, we repurchased and retired 867,620 shares of common stock for $11.0 million and, as of September 30, 2017, $14.0 million remained available for future repurchases.

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

Contractual Obligations and Commitments

Our contractual obligations and commitments have not materially changed as of September 30, 2017 from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2016.

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 September 30, 2017, we were not involved in any such off-balance sheet arrangements.

Recent Accounting Pronouncements

See Note 1 of Notes to Condensed Consolidated Financial Statements.

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 31, 2016. Our exposure to market risk has not changed materially since December 31, 2016.


28


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), except as described below, 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.

On June 24, 2016, we completed the acquisition of Cascade Microtech, headquartered in Beaverton, Oregon, and are integrating the acquired business into our overall internal control over financial reporting process. As of September 30, 2017, we have updated our internal control over financial reporting as necessary and are currently testing its effectiveness.

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. 


29


PART II - OTHER INFORMATION
 
Item 1. Legal Proceedings
 
The information relating to “Legal Matters” set forth under Note 11 - Commitments and Contingencies of the Notes to 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 nine months ended September 30, 2017 to the risk factors discussed in our Annual Report on Form 10-K for the year ended December 31, 2016. If any of the identified risks actually occur, our business, financial condition and results of operations could suffer. The trading price of our common stock could decline and you may lose all or part of your investment in our common stock. The risks and uncertainties described in our Annual Report on Form 10-K for the year ended December 31, 2016 are not the only ones we face. Additional risks that we currently do not know about or that we currently believe to be immaterial may also impair our business operations.
 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Repurchase of Common Stock

The following table summarizes our repurchases of outstanding common stock for the three months ended September 30, 2017:
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(1)
July 2, 2017-July 31, 2017
 
67,300

 
$
12.33

 
67,300

 
$
14,037,043

August 1, 2017-August 31, 2017
 
—

 
—

 
—

 
$
14,037,043

September 1, 2017-September 30, 2017
 
—

 
—

 
—

 
$
14,037,043

 
 
67,300

 
$
12.33

 
67,300

 
 

(1) In February 2017, our Board of Directors authorized a program to repurchase up to $25.0 million of outstanding common stock to offset potential dilution from issuances of our common stock under our stock-based compensation plans. 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 program may be modified or discontinued at any time. The share repurchase program will expire on February 1, 2020.


30


Item 6. Exhibits

The following exhibits are filed herewith and this list constitutes the exhibit index.
Exhibit
 
 
 
Incorporated by Reference
 
Filed
Number
 
Exhibit Description
 
Form
 
Date
 
Number
 
Herewith
31.01
 
 
 
 
 
 
 
 
X
31.02
 
 
 
 
 
 
 
 
X
32.01
 
 
 
 
 
 
 
 
*
101.INS
 
XBRL Instance Document
 
 
 
 
 
 
 
X
101.SCH
 
XBRL Taxonomy Extension Schema Document
 
 
 
 
 
 
 
X
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
 
 
 
 
 
X
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document
 
 
 
 
 
 
 
X
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document
 
 
 
 
 
 
 
X
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
 ______________________________________
*
This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the date hereof and irrespective of any general incorporation language in any filings.

31


SIGNATURE
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
FormFactor, Inc.
 
 
 
 
Date:
November 7, 2017
By:
/s/ Michael M. Ludwig
 
 
 
 
 
 
 
Michael M. Ludwig
 
 
 
Chief Financial Officer
 
 
 
(Duly Authorized Officer, Principal Financial Officer, and Principal Accounting Officer)


32
Exhibit


Exhibit 31.01

CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO 15 U.S.C. SECTION 7241, AS
ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002


I, Michael D. Slessor, certify that:
 
1.
I have reviewed the quarterly report on Form 10-Q of FormFactor, Inc.;

2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
a.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b.
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c.
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d.
Disclosed in the quarterly report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.
 
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
a.
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b.
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:
November 7, 2017
/s/ MICHAEL D. SLESSOR
 
 
Michael D. Slessor
Chief Executive Officer
(Principal Executive Officer and Director)



Exhibit


Exhibit 31.02

CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO 15 U.S.C. SECTION 7241,
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Michael M. Ludwig, certify that:
 
1.
I have reviewed the quarterly report on Form 10-Q of FormFactor, Inc.;

2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b.
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c.
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d.
Disclosed in the quarterly report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.
 
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
a.
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b.
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:
November 7, 2017
/s/ MICHAEL M. LUDWIG
 
 
Michael M. Ludwig
Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)



Exhibit


Exhibit 32.01


CERTIFICATION OF
CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of FormFactor, Inc., a Delaware corporation, for the period ended September 30, 2017, as filed with the Securities and Exchange Commission, each of the undersigned officers of FormFactor, Inc. certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to his respective knowledge:
 
1.
The quarterly report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

2.
The information contained in the quarterly report fairly presents, in all material respects, the financial condition and results of operations of FormFactor, Inc. for the periods presented therein.

Date:
November 7, 2017
/s/ MICHAEL D. SLESSOR
 
 
Michael D. Slessor
Chief Executive Officer
(Principal Executive Officer and Director)
Date:
November 7, 2017
/s/ MICHAEL M. LUDWIG
 
 
Michael M. Ludwig
Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)