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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 Form 10-Q
 
(Mark one)
 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 28, 2020
Or 
 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)

Securities registered pursuant to Section12(b) of the Act:
Title of each classTrading Symbol(s) Name of each exchange on which registered
Common stock, $0.001 par valueFORM Nasdaq Global Market
 ______________________________________
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   No 
 
Indicate by check mark whether the registrant submitted electronically every Interactive Data File required to be submitted 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 such files).  Yes   No
 
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 FilerAccelerated Filer
Non-accelerated FilerSmaller Reporting Company
Emerging Growth Company
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.     

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

As of May 4, 2020, 76,161,842 shares of the registrant’s common stock, par value $0.001 per share, were outstanding.





FORMFACTOR, INC.
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 28, 2020
INDEX

 
   
 
   
 
   
  
 
  
 
  
  
  
  
  
  
 

2


PART I - FINANCIAL INFORMATION
 
Item 1. Financial Statements
 
FORMFACTOR, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
(Unaudited)
 March 28,
2020
December 28,
2019
ASSETS 
Current assets:  
Cash and cash equivalents$169,607  $144,545  
Marketable securities69,759  76,327  
Accounts receivable, net of allowance for doubtful accounts of $222 and $22290,100  97,868  
Inventories, net78,983  83,258  
Restricted cash2,107  1,981  
Prepaid expenses and other current assets15,699  15,064  
Total current assets426,255  419,043  
Restricted cash1,361  1,411  
Operating lease, right-of-use-assets36,212  31,420  
Property, plant and equipment, net of accumulated depreciation of $277,017 and $273,00163,745  58,747  
Goodwill200,378  199,196  
Intangibles, net50,139  57,610  
Deferred tax assets70,273  71,252  
Other assets1,016  1,203  
Total assets$849,379  $839,882  
LIABILITIES AND STOCKHOLDERS’ EQUITY 
Current liabilities: 
Accounts payable$40,139  $40,914  
Accrued liabilities29,175  36,439  
Current portion of term loans, net of unamortized issuance costs31,535  42,846  
Deferred revenue9,830  9,810  
Operating lease liabilities6,815  6,551  
Total current liabilities117,494  136,560  
Term loan, less current portion, net of unamortized issuance costs13,642  15,639  
Deferred tax liabilities6,095  6,986  
Long-term operating lease liabilities34,028  29,088  
Other liabilities11,703  10,612  
Total liabilities182,962  198,885  
 
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; 76,158,251 and 75,764,990 shares issued and outstanding77  76  
Additional paid-in capital895,600  885,821  
Accumulated other comprehensive loss(909) (659) 
Accumulated deficit(228,351) (244,241) 
Total stockholders’ equity666,417  640,997  
Total liabilities and stockholders’ equity$849,379  $839,882  
 
The accompanying notes are an integral part of these condensed consolidated financial statements. 
3



FORMFACTOR, INC.
 CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
 Three Months Ended
 March 28,
2020
March 30,
2019
Revenues$160,753  $132,213  
Cost of revenues93,363  79,692  
Gross profit67,390  52,521  
Operating expenses:  
Research and development21,267  19,723  
Selling, general and administrative27,693  25,184  
Total operating expenses48,960  44,907  
Operating income18,430  7,614  
Interest income685  580  
Interest expense(318) (595) 
Other expense, net(91) (84) 
Income before income taxes18,706  7,515  
Provision for income taxes2,816  2,032  
Net income$15,890  $5,483  
Net income per share: 
Basic $0.21  $0.07  
Diluted$0.20  $0.07  
Weighted-average number of shares used in per share calculations:  
Basic 76,005  74,362  
Diluted78,510  76,009  
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
4



FORMFACTOR, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
Three Months Ended
March 28,
2020
March 30,
2019
Net income $15,890  $5,483  
Other comprehensive loss, net of tax:
Translation adjustments and other(399) (917) 
Unrealized gains (losses) on available-for-sale marketable securities(27) 151  
Unrealized gains (losses) on derivative instruments176  (613) 
Other comprehensive loss, net of tax(250) (1,379) 
Comprehensive income$15,640  $4,104  

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

5


FORMFACTOR, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except shares)
(Unaudited)
 SharesCommon StockAdditional Paid-in CapitalAccumulated Other Comprehensive LossAccumulated DeficitTotal
Three Months Ended March 28, 2020
Balances, December 28, 201975,764,990  $76  $885,821  $(659) $(244,241) $640,997  
Issuance of common stock under the Employee Stock Purchase Plan311,591  —  4,066  —  —  4,066  
Issuance of common stock pursuant to exercise of options55,769  1  446  —  —  447  
Issuance of common stock pursuant to vesting of restricted stock units, net of stock withheld for tax25,901  —  (385) —  —  (385) 
Stock-based compensation—  —  5,652  —  —  5,652  
Other comprehensive loss—  —  —  (250) —  (250) 
Net income—  —  —  —  15,890  15,890  
Balances, March 28, 202076,158,251  $77  $895,600  $(909) $(228,351) $666,417  

SharesCommon StockAdditional Paid-in CapitalAccumulated Other Comprehensive LossAccumulated DeficitTotal
Three Months Ended March 30, 2019
Balances, December 29, 201874,139,712  $74  $862,897  $780  $(283,587) $580,164  
Issuance of common stock under the Employee Stock Purchase Plan301,497    3,670  —  —  3,670  
Issuance of common stock pursuant to exercise of options for cash19,207  —  90  —  —  90  
Issuance of common stock pursuant to vesting of restricted stock units, net of stock withheld for tax28,082  —  (302) —  —  (302) 
Stock-based compensation—  —  5,262  —  —  5,262  
Other comprehensive loss—  —  —  (1,379) —  (1,379) 
Net income—  —  —  —  5,483  5,483  
Balances, March 30, 201974,488,498  $74  $871,617  $(599) $(278,104) $592,988  

The accompanying notes are an integral part of these condensed consolidated financial statements.
6



FORMFACTOR, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 Three Months Ended
 March 28,
2020
March 30,
2019
Cash flows from operating activities:  
Net income $15,890  $5,483  
Adjustments to reconcile net income to net cash provided by operating activities: 
Depreciation4,561  3,947  
Amortization7,263  7,090  
Accretion of discount on investments(28) (71) 
Reduction in the carrying amount of right-of-use assets1,511  1,277  
Stock-based compensation expense5,623  5,295  
Amortization of debt issuance costs19  51  
Deferred income tax benefit(198)   
Provision for excess and obsolete inventories3,287  2,725  
Loss on disposal of long-lived assets204  118  
Loss on derivative instruments676  59  
Foreign currency transaction (losses) gains(266) 121  
Changes in assets and liabilities:
Accounts receivable7,803  13,805  
Inventories928  (8,658) 
Prepaid expenses and other current assets(240) 2,167  
Other assets194  (564) 
Accounts payable763  (7,148) 
Accrued liabilities(6,970) (6,275) 
Other liabilities33  32  
Deferred revenues(123) 1,931  
Operating lease liabilities(1,591) (1,690) 
Net cash provided by operating activities39,339  20,638  
Cash flows from investing activities:    
Acquisition of property, plant and equipment(12,050) (6,028) 
Proceeds from sale of a subsidiary40  28  
Purchases of marketable securities(16,441) (12,382) 
Proceeds from maturities and sales of marketable securities23,009  9,050  
Net cash used in investing activities(5,442) (9,332) 
Cash flows from financing activities:    
Proceeds from issuances of common stock4,513  3,870  
Tax withholdings related to net share settlements of equity awards(385) (302) 
Principal repayments on term loans(13,199) (7,500) 
Net cash used in financing activities(9,071) (3,932) 
Effect of exchange rate changes on cash, cash equivalents and restricted cash312  (207) 
Net increase in cash, cash equivalents and restricted cash25,138  7,167  
Cash, cash equivalents and restricted cash, beginning of period147,937  100,546  
Cash, cash equivalents and restricted cash, end of period$173,075  $107,713  
Non-cash investing and financing activities:  
Change in accounts payable and accrued liabilities related to property, plant and equipment purchases$2,116  $(1,253) 
Operating lease, right-of-use assets obtained in exchange for lease obligations6,307  35,713  
Supplemental disclosure of cash flow information:
Cash paid for income taxes, net$2,419  $1,082  
Cash paid for interest291  302  
The accompanying notes are an integral part of these condensed consolidated financial statements.



7


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


Note 1 — Basis of Presentation and New Accounting Pronouncements
 
Basis of Presentation
The accompanying condensed consolidated financial information of FormFactor, Inc. is unaudited and has been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission ("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 28, 2019 is derived from our 2019 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 2019 Annual Report on Form 10-K filed with the SEC on February 21, 2020. 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 2020 and 2019 each contain 52 weeks and the three months ended March 28, 2020 and March 30, 2019 each contained 13 weeks. Fiscal 2020 will end on December 26, 2020.

Critical Accounting Policies
Our critical accounting policies have not changed during the three months ended March 28, 2020 from those disclosed in our Annual Report on Form 10-K for the year ended December 28, 2019.

New Accounting Pronouncements
ASU 2016-13
In June 2016, the Financial Accounting Standard Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-13, "Measurement of Credit Losses on Financial Instruments (Topic 326)." The provisions of this standard require financial assets measured at amortized cost to be presented at the net amount expected to be collected. An allowance account would be established to present the net carrying value at the amount expected to be collected. ASU 2016-13 also provides that credit losses relating to available-for-sale debt securities should be recorded through an allowance for credit losses. The guidance was amended through various ASU's subsequent to ASU 2016-13, all of which was effective for us beginning fiscal 2020. We adopted ASU 2016-13 on a prospective basis on December 29, 2019, the first day of fiscal 2020. The adoption did not have a material effect on our financial position, results of operations or cash flows.

ASU 2018-15
In August 2018, the FASB issued ASU 2018-15, "Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract." The new guidance clarifies the accounting for implementation costs in cloud computing arrangements. ASU 2018-15 is effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2019. We adopted ASU 2018-15 on a prospective basis on December 29, 2019, the first day of fiscal 2020. The adoption did not have a material effect on our financial position, results of operations or cash flows.

ASU 2019-12
In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740),” which simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption of the amendments is permitted, including adoption in any interim period for which financial statements have not yet been issued. Depending on the amendment, adoption may be applied on the retrospective, modified retrospective or prospective basis. We have not yet determined the impact of this standard on our financial position, results of operations or cash flows.


8


Note 2 — Concentration of Credit and Other Risks

Each of the following customers accounted for 10% or more of our revenues for the periods indicated:
Three Months Ended
March 28,
2020
March 30,
2019
Intel Corporation36.2 %21.3 %
Samsung Electronics., LTD. 13.8  
36.2 %35.1 %
*Represents less than 10% of total revenues.

At March 28, 2020, two customers accounted for 27.7% and 15.3% of gross accounts receivable, respectively. At December 28, 2019, three customers accounted for 25.7%, 15.1% and 11.5% of gross accounts receivable, respectively.

Note 3 — Inventories, net

Inventories are stated at the lower of cost (principally standard cost, which approximates actual cost on a first in, first out basis) or net realizable value.
 
Inventories, net, consisted of the following (in thousands):
March 28,
2020
December 28,
2019
Raw materials$36,468  $38,528  
Work-in-progress27,927  29,720  
Finished goods14,588  15,010  
$78,983  $83,258  


9


Note 4 Acquisition

On October 9, 2019, we acquired 100% of the shares of FRT GmbH ("FRT"), a German-based company, for total consideration of $26.9 million, net of cash acquired of $1.7 million. The fair value of the purchase consideration was comprised of a $22.2 million cash payment and $6.5 million of contingent consideration.

We estimated the acquisition price and the allocation of fair value to assets acquired and liabilities assumed as of the acquisition date, October 9, 2019. We subsequently made certain immaterial adjustments to the acquisition price allocation related to acquired assets and assumed liabilities, including to intangibles assets. Our purchase accounting remains open at March 28, 2020, subject to finalization of the fair value of certain acquired assets and liabilities. The estimated fair value of assets acquired, including goodwill and intangibles, and liabilities assumed is as follows (in thousands):

Amount
Cash and cash equivalents$1,683  
Accounts receivable3,057  
Inventory2,643  
Property, plant and equipment696  
Operating lease, right of use assets 335  
Prepaid expenses and other current assets838  
Tangible assets acquired9,252  
Customer deposits (2,093) 
Accounts payable and accrued liabilities(1,179) 
Operating lease liabilities(335) 
Deferred tax liabilities(5,843) 
Total tangible assets acquired and liabilities assumed (198) 
Intangible assets17,429  
Goodwill11,392  
Net Assets Acquired $28,623  


The intangible assets as of the closing date of the acquisition included (in thousands):

AmountWeighted Average Useful Life (in years)
Developed technologies$12,505  8.0
Customer relationships3,071  6.0
Backlog1,645  0.5
Trade names208  2.0
Total intangible assets$17,429  7.0

Indications of fair value of the intangible assets acquired in connection with the acquisition were determined using either the income, market or replacement cost methodologies. The intangible assets are being amortized over periods which reflect the pattern in which economic benefits of the assets are expected to be realized.

The contingent consideration is a cash amount equal to 1.5x Earnings Before Interest and Tax ("EBIT") as defined in the purchase agreement, from a minimum of zero up to a maximum of €10.3 million, payable subject to the performance of the acquired business in calendar 2020. We estimated the fair value of contingent consideration using a probability weighted approach. Key assumptions in determining the fair value of contingent consideration include estimating the probability of achieving certain EBIT levels and discounting at an appropriate discount rate.

This acquisition strengthens our leadership in test and measurement by expanding our addressable market into 3D hybrid surface metrology and extending the optical applications scope of our existing Systems segment.
10



Separate from the purchase agreement, on October 25, 2019, we entered into a term loan agreement with a lender for an aggregate amount of $23.4 million to finance the acquisition. The term loan agreement has not changed during the three months ended March 28, 2020 from that disclosed in our Annual Report on Form 10-K for the year ended December 28, 2019.

Identifiable Intangible Assets

Valuation of intangible assets involves multiple assumptions. The key assumptions are described below.

Developed technologies acquired primarily consists of existing technology related to hybrid 3D surface metrology measurement equipment. We valued the developed technologies using the multi-period excess earnings method under the income approach. Using this approach, the estimated fair values were calculated using expected future cash flows from specific products discounted to their net present values at an appropriate risk-adjusted rate of return.

Customer relationships represent the fair value of future projected revenues that will be derived from the sale of products to FRT's existing customers. We valued customer relationships using the incremental cash flow method. This method estimates value based on the incremental cash flow afforded by having the customers relationships in place on the acquisition date versus having no relationships in place and needing to replicate or replace those relationships. The incremental cash flows are then discounted to a present value to arrive at an estimate of fair value for this asset class.

Backlog represents business under existing contractual obligations. Expected cash flow from backlog was valued on a direct cash flow basis.

The identified trade names intangibles relate to the estimated fair value of future cash flows related to the FRT brand. We valued trade names by applying the relief-from-royalty method under the income approach. This method is based on the application of a royalty rate to forecasted revenue under the trade name.

Goodwill

The excess of purchase price over the fair value assigned to the assets acquired and liabilities assumed represents the amount of goodwill resulting from the acquisition. We believe the factors that contributed to goodwill include synergies that are specific to our consolidated business, such as cost savings and operational efficiencies, and the acquisition of a talented workforce that expands our expertise in business development and commercializing semiconductor test products, none of which qualify for recognition as a separate intangible asset. We do not expect any portion of this goodwill to be deductible for tax purposes. The goodwill attributable to the acquisition was recorded as a non-current asset and is not amortized, but is subject to an annual review for impairment.

The goodwill arising from the acquisition was allocated to the FRT reporting unit within the Systems reportable segment.

We have not presented unaudited combined pro forma financial information as the FRT acquisition was not significant to our consolidated results of operations and financial position.

Note 5 Goodwill and Intangible Assets

Goodwill by reportable segment was as follows (in thousands):
Probe CardsSystemsTotal
Goodwill, gross, as of December 29, 2018$172,482  $16,732  $189,214  
Addition - FRT GmbH Acquisition  10,148  10,148  
Foreign currency translation  (166) (166) 
Goodwill, gross, as of December 28, 2019172,482  26,714  199,196  
Addition - FRT GmbH Acquisition  1,264  1,264  
Foreign currency translation  (82) (82) 
Goodwill, gross, as of March 28, 2020$172,482  $27,896  $200,378  

No goodwill impairments have been recorded as of March 28, 2020 and December 28, 2019.
11



Intangible assets were as follows (in thousands):
March 28, 2020December 28, 2019
Intangible Assets GrossAccumulated AmortizationNetGrossAccumulated AmortizationNet
Developed technologies $155,792  $121,091  $34,701  $154,951  $116,138  $38,813  
Trade names7,809  7,046  763  7,816  6,976  840  
Customer relationships43,170  28,495  14,675  44,229  27,057  17,172  
Backlog1,670  1,670    1,676  891  785  
$208,441  $158,302  $50,139  $208,672  $151,062  $57,610  

Amortization expense was included in our Condensed Consolidated Statements of Income as follows (in thousands):
 Three Months Ended
 March 28,
2020
March 30,
2019
Cost of revenues$5,750  $4,719  
Selling, general and administrative1,513  2,371  
$7,263  $7,090  

The estimated future amortization of intangible assets is as follows (in thousands):
Fiscal YearAmount
Remainder of 2020  $19,021  
2021  14,767  
2022  5,585  
2023  3,846  
20242,107  
Thereafter4,813  
$50,139  


Note 6 Accrued Liabilities

Accrued liabilities consisted of the following (in thousands):
March 28,
2020
December 28,
2019
Accrued compensation and benefits$18,435  $21,329  
Accrued income and other taxes4,519  6,846  
Accrued warranty1,918  1,942  
Accrued employee stock purchase plan contributions withheld1,585  3,331  
Other accrued expenses2,718  2,991  
$29,175  $36,439  

Note 7 — Fair Value and Derivative Instruments

Whenever possible, the fair values of our financial assets and liabilities are determined using quoted market prices of identical securities or quoted market prices of similar securities from active markets. The three levels of inputs that may be used to measure fair value are as follows:
Level 1 valuations are obtained from real-time quotes for transactions in active exchange markets involving identical securities;
Level 2 valuations utilize significant observable inputs, such as quoted prices for similar assets or liabilities, quoted prices near the reporting date in markets that are less active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and
12


Level 3 valuations utilize unobservable inputs to the valuation methodology and include our own data about assumptions market participants would use in pricing the asset or liability based on the best information available under the circumstances.

We did not have any transfers of assets or liabilities measured at fair value on a recurring basis to or from Level 1, Level 2 or Level 3 during the three months ended March 28, 2020 or the year ended December 28, 2019.

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

No changes were made to our valuation techniques during the first three months of fiscal 2020.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

Assets and liabilities measured at fair value on a recurring basis were as follows (in thousands): 
March 28, 2020Level 1Level 2Level 3Total
Assets:
Cash equivalents:
Money market funds$74,992  $  $—  $74,992  
Marketable securities:
 U.S. treasuries30,873    —  30,873  
 Certificates of deposit  3,841  —  3,841  
 U.S. agency securities  3,751  —  3,751  
 Corporate bonds  28,657  —  28,657  
 Commercial paper  2,637  —  2,637  
30,873  38,886  —  69,759  
Foreign exchange derivative contracts  4  —  4  
Total assets$105,865  $38,890  $—  $144,755  
Liabilities:
Foreign exchange derivative contracts$—  $(154) $—  $(154) 
Interest rate swap derivative contracts—  (93) —  (93) 
Contingent consideration—  —  (6,515) (6,515) 
Total liabilities$—