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FORMFACTOR INC — Interim / Quarterly Report 2019
Aug 6, 2019
31438_10-q_2019-08-06_e711f885-b608-4097-b413-cb48f0a4b1e1.zip
Interim / Quarterly Report
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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 June 29, 2019
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 class | Trading Symbol(s) | Name of each exchange on which registered |
|---|---|---|
| Common stock, $0.001 par value | FORM | Nasdaq Global Select 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 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 ☒ 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 Filer | ☒ | Accelerated Filer | ☐ |
|---|---|---|---|
| Non-accelerated Filer | ☐ | Smaller Reporting Company | ☐ |
| (Do not check if a smaller 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 July 31, 2019 , 75,185,253 shares of the registrant’s common stock, par value $0.001 per share, were outstanding.
| FORMFACTOR, INC. FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 29, 2019 INDEX — Part I. | Financial Information | |
|---|---|---|
| Item 1. | Financial Statements (Unaudited): | |
| Condensed Consolidated Balance Sheets as of June 29, 2019 and December 29, 2018 | 3 | |
| Condensed Consolidated Statements of Income for the three and six months ended June 29, 2019 and June 30, 2018 | 4 | |
| Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 29, 2019 and June 30, 2018 | 5 | |
| Condensed Consolidated Statement of Stockholders' Equity for the three and six months ended June 29, 2019 and June 30, 2018 | 6 | |
| Condensed Consolidated Statements of Cash Flows for the six months ended June 29, 2019 and June 30, 2018 | 7 | |
| Notes to Condensed Consolidated Financial Statements | 8 | |
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 21 |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 30 |
| Item 4. | Controls and Procedures | 30 |
| Part II. | Other Information | 32 |
| Item 1A. | Risk Factors | 32 |
| Item 6. | Exhibits | 32 |
| Signatures | 33 |
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
| FORMFACTOR, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share amounts) (Unaudited) | June 29, 2019 | December 29, 2018 | ||
|---|---|---|---|---|
| ASSETS | ||||
| Current assets: | ||||
| Cash and cash equivalents | $ 124,810 | $ 98,472 | ||
| Marketable securities | 52,071 | 50,531 | ||
| Accounts receivable, net of allowance for doubtful accounts of $189 and $185 | 71,289 | 95,333 | ||
| Inventories, net | 83,852 | 77,706 | ||
| Restricted cash | 818 | 849 | ||
| Refundable income taxes | 524 | 1,260 | ||
| Prepaid expenses and other current assets | 14,282 | 13,669 | ||
| Total current assets | 347,646 | 337,820 | ||
| Restricted cash | 1,066 | 1,225 | ||
| Operating lease, right-of-use-assets | 33,274 | — | ||
| Property, plant and equipment, net of accumulated depreciation of $270,566 and $263,102 | 54,436 | 54,054 | ||
| Goodwill | 189,121 | 189,214 | ||
| Intangibles, net | 53,404 | 67,640 | ||
| Deferred tax assets | 77,279 | 77,301 | ||
| Other assets | 1,343 | 968 | ||
| Total assets | $ 757,569 | $ 728,222 | ||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||
| Current liabilities: | ||||
| Accounts payable | $ 26,252 | $ 40,006 | ||
| Accrued liabilities | 29,500 | 27,731 | ||
| Current portion of term loan, net of unamortized issuance cost of $93 and $160 | 33,657 | 29,840 | ||
| Deferred revenue | 7,198 | 4,941 | ||
| Operating lease liabilities | 6,203 | — | ||
| Total current liabilities | 102,810 | 102,518 | ||
| Term loan, less current portion, net of unamortized issuance cost of $0 and $29 | 12,500 | 34,971 | ||
| Deferred tax liabilities | 2,339 | 2,355 | ||
| Long-term operating lease liabilities | 31,173 | — | ||
| Other liabilities | 4,645 | 8,214 | ||
| Total liabilities | 153,467 | 148,058 | ||
| Stockholders’ equity: | ||||
| Preferred stock, $0.001 par value: | ||||
| 10,000,000 shares authorized; no shares issued and outstanding | — | — | ||
| Common stock, $0.001 par value: | ||||
| 250,000,000 shares authorized; 74,691,781 and 74,139,712 shares issued and outstanding | 75 | 74 | ||
| Additional paid-in capital | 875,024 | 862,897 | ||
| Accumulated other comprehensive income | 159 | 780 | ||
| Accumulated deficit | ( 271,156 | ) | ( 283,587 | ) |
| Total stockholders’ equity | 604,102 | 580,164 | ||
| Total liabilities and stockholders’ equity | $ 757,569 | $ 728,222 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
| FORMFACTOR, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share amounts) (Unaudited) | ||||||||
|---|---|---|---|---|---|---|---|---|
| Three Months Ended | Six Months Ended | |||||||
| June 29, 2019 | June 30, 2018 | June 29, 2019 | June 30, 2018 | |||||
| Revenues | $ 138,018 | $ 135,509 | $ 270,231 | $ 253,799 | ||||
| Cost of revenues | 82,666 | 79,291 | 162,358 | 152,452 | ||||
| Gross profit | 55,352 | 56,218 | 107,873 | 101,347 | ||||
| Operating expenses: | ||||||||
| Research and development | 20,074 | 19,675 | 39,797 | 37,721 | ||||
| Selling, general and administrative | 26,283 | 25,232 | 51,467 | 48,681 | ||||
| Total operating expenses | 46,357 | 44,907 | 91,264 | 86,402 | ||||
| Operating income | 8,995 | 11,311 | 16,609 | 14,945 | ||||
| Interest income | 684 | 326 | 1,264 | 583 | ||||
| Interest expense | ( 522 | ) | ( 910 | ) | ( 1,117 | ) | ( 1,877 | ) |
| Other income (expense), net | 81 | 50 | ( 3 | ) | ( 462 | ) | ||
| Income before income taxes | 9,238 | 10,777 | 16,753 | 13,189 | ||||
| Provision for income taxes | 2,290 | 1,654 | 4,322 | 1,941 | ||||
| Net income | $ 6,948 | $ 9,123 | $ 12,431 | $ 11,248 | ||||
| Net income per share: | ||||||||
| Basic | $ 0.09 | $ 0.12 | $ 0.17 | $ 0.15 | ||||
| Diluted | $ 0.09 | $ 0.12 | $ 0.16 | $ 0.15 | ||||
| Weighted-average number of shares used in per share calculations: | ||||||||
| Basic | 74,478 | 73,157 | 74,483 | 72,991 | ||||
| Diluted | 76,189 | 74,533 | 76,061 | 74,427 |
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 | Six Months Ended | |||||||
| June 29, 2019 | June 30, 2018 | June 29, 2019 | June 30, 2018 | |||||
| Net income | $ 6,948 | $ 9,123 | $ 12,431 | $ 11,248 | ||||
| Other comprehensive income (loss), net of tax: | ||||||||
| Translation adjustments and other | 689 | ( 3,449 | ) | ( 228 | ) | ( 1,283 | ) | |
| Unrealized gains (losses) on available-for-sale marketable securities | 142 | 40 | 293 | ( 134 | ) | |||
| Unrealized gains (losses) on derivative instruments | ( 73 | ) | ( 85 | ) | ( 686 | ) | 87 | |
| Other comprehensive income (loss), net of tax | 758 | ( 3,494 | ) | ( 621 | ) | ( 1,330 | ) | |
| Comprehensive income | $ 7,706 | $ 5,629 | $ 11,810 | $ 9,918 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
FORMFACTOR, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
(Unaudited)
| Shares | Common Stock | Additional Paid-in Capital | Accumulated Other Comprehensive Income | Accumulated Deficit | Total | |||||
|---|---|---|---|---|---|---|---|---|---|---|
| Six Months Ended June 29, 2019 | ||||||||||
| Balances, December 29, 2018 | 74,139,712 | $ 74 | $ 862,897 | $ 780 | $ ( 283,587 | ) | $ 580,164 | |||
| Issuance of common stock under the Employee Stock Purchase Plan | 301,497 | — | 3,670 | — | — | 3,670 | ||||
| Issuance of common stock pursuant to exercise of options for cash | 19,207 | — | 90 | — | — | 90 | ||||
| Issuance of common stock pursuant to vesting of restricted stock units, net of stock withheld for tax | 231,365 | 1 | ( 2,157 | ) | — | — | ( 2,156 | ) | ||
| Stock-based compensation | — | — | 10,524 | — | — | 10,524 | ||||
| Other comprehensive loss | — | — | — | ( 621 | ) | — | ( 621 | ) | ||
| Net income | — | — | — | — | 12,431 | 12,431 | ||||
| Balances, June 29, 2019 | 74,691,781 | $ 75 | $ 875,024 | $ 159 | $ ( 271,156 | ) | $ 604,102 | |||
| Three Months Ended June 29, 2019 | ||||||||||
| Balances, March 30, 2019 | 74,488,498 | $ 74 | $ 871,617 | $ ( 599 | ) | $ ( 278,104 | ) | $ 592,988 | ||
| Issuance of common stock pursuant to vesting of restricted stock units, net of stock withheld for tax | 203,283 | 1 | ( 1,855 | ) | — | — | ( 1,854 | ) | ||
| Stock-based compensation | — | — | 5,262 | — | — | 5,262 | ||||
| Other comprehensive income | — | — | — | 758 | — | 758 | ||||
| Net income | — | — | — | — | 6,948 | 6,948 | ||||
| Balances, June 29, 2019 | 74,691,781 | $ 75 | $ 875,024 | $ 159 | $ ( 271,156 | ) | $ 604,102 |
| Balances, December 30, 2017 | Six Months Ended June 30, 2018 — 72,532,176 | $ 73 | $ 843,116 | $ 3,021 | $ ( 387,573 | ) | $ 458,637 | |||
|---|---|---|---|---|---|---|---|---|---|---|
| Issuance of common stock under the Employee Stock Purchase Plan | 341,670 | 1 | 3,704 | — | — | 3,705 | ||||
| Issuance of common stock pursuant to exercise of options for cash | 105,610 | — | 1,049 | — | — | 1,049 | ||||
| Issuance of common stock pursuant to vesting of restricted stock units, net of stock withheld for tax | 378,652 | — | ( 2,453 | ) | — | — | ( 2,453 | ) | ||
| Stock-based compensation | — | — | 7,862 | — | — | 7,862 | ||||
| Adoption of ASU 2017-12 | — | — | — | — | ( 50 | ) | ( 50 | ) | ||
| Other comprehensive loss | — | — | — | ( 1,330 | ) | — | ( 1,330 | ) | ||
| Net income | — | — | — | — | 11,248 | 11,248 | ||||
| Balances, June 30, 2018 | 73,358,108 | $ 74 | $ 853,278 | $ 1,691 | $ ( 376,375 | ) | $ 478,668 | |||
| Three Months Ended June 30, 2018 | ||||||||||
| Balances, March 31, 2018 | 73,013,842 | $ 74 | $ 851,249 | $ 5,185 | $ ( 385,498 | ) | $ 471,010 | |||
| Issuance of common stock pursuant to vesting of restricted stock units, net of stock withheld for tax | 344,266 | — | ( 2,096 | ) | — | — | ( 2,096 | ) | ||
| Stock-based compensation | — | — | 4,125 | — | — | 4,125 | ||||
| Other comprehensive loss | — | — | — | ( 3,494 | ) | — | ( 3,494 | ) | ||
| Net income | — | — | — | — | 9,123 | 9,123 | ||||
| Balances, June 30, 2018 | 73,358,108 | $ 74 | $ 853,278 | $ 1,691 | $ ( 376,375 | ) | $ 478,668 |
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) | ||||
|---|---|---|---|---|
| Six Months Ended | ||||
| June 29, 2019 | June 30, 2018 | |||
| Cash flows from operating activities: | ||||
| Net income | $ 12,431 | $ 11,248 | ||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||
| Depreciation | 8,289 | 6,893 | ||
| Amortization | 14,169 | 14,364 | ||
| Amortization (accretion) of discount on investments | ( 180 | ) | 36 | |
| Amortization of operating lease, right-of-use assets | 2,620 | — | ||
| Stock-based compensation expense | 10,584 | 7,884 | ||
| Amortization of debt issuance costs | 96 | 235 | ||
| Deferred income tax provision | 38 | 70 | ||
| Provision for excess and obsolete inventories | 5,304 | 4,593 | ||
| Loss on disposal of long-lived assets | 262 | 48 | ||
| Loss on derivative instruments | 34 | — | ||
| Foreign currency transaction gains | ( 423 | ) | ( 109 | ) |
| Changes in assets and liabilities: | ||||
| Accounts receivable | 24,177 | ( 3,330 | ) | |
| Inventories | ( 11,574 | ) | ( 13,687 | ) |
| Prepaid expenses and other current assets | ( 872 | ) | ( 4,760 | ) |
| Refundable income taxes | 737 | 925 | ||
| Other assets | ( 572 | ) | 663 | |
| Accounts payable | ( 11,115 | ) | 6,239 | |
| Accrued liabilities | ( 309 | ) | ( 3,541 | ) |
| Income tax payable | 1,839 | ( 281 | ) | |
| Other liabilities | 41 | 2,540 | ||
| Deferred revenues | 2,216 | 28 | ||
| Operating lease liabilities | ( 2,416 | ) | — | |
| Net cash provided by operating activities | 55,376 | 30,058 | ||
| Cash flows from investing activities: | ||||
| Acquisition of property, plant and equipment | ( 11,460 | ) | ( 8,545 | ) |
| Proceeds from sale of a subsidiary | 56 | 41 | ||
| Purchases of marketable securities | ( 20,776 | ) | ( 10,715 | ) |
| Proceeds from maturities of marketable securities | 19,710 | 12,257 | ||
| Net cash used in investing activities | ( 12,470 | ) | ( 6,962 | ) |
| Cash flows from financing activities: | ||||
| Proceeds from issuances of common stock | 3,870 | 4,754 | ||
| Tax withholdings related to net share settlements of equity awards | ( 2,157 | ) | ( 2,453 | ) |
| Principal repayments on term loan | ( 18,750 | ) | ( 21,250 | ) |
| Net cash used in financing activities | ( 17,037 | ) | ( 18,949 | ) |
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | 279 | ( 58 | ) | |
| Net increase in cash, cash equivalents and restricted cash | 26,148 | 4,089 | ||
| Cash, cash equivalents and restricted cash, beginning of period | 100,546 | 92,726 | ||
| Cash, cash equivalents and restricted cash, end of period | $ 126,694 | $ 96,815 | ||
| Non-cash investing and financing activities: | ||||
| Change in accounts payable and accrued liabilities related to property, plant and equipment purchases | $ ( 2,497 | ) | $ 982 | |
| Operating lease, right-of-use assets obtained in exchange for lease obligations | 35,885 | — | ||
| Supplemental disclosure of cash flow information: | ||||
| Cash paid for income taxes, net | $ 1,700 | $ 1,182 | ||
| Cash paid for interest | 778 | 1,617 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
7
FORMFACTOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 — Basis of Presentation and New Accounting Pronouncements
Basis of Presentation
The accompanying condensed consolidated financial information of FormFactor, Inc. is unaudited and has been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission. However, such information reflects all adjustments, consisting only of normal recurring adjustments, which are, in the opinion of management, necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods. The financial information as of December 29, 2018 is derived from our 2018 Annual Report on Form 10-K. The condensed consolidated financial statements included herein should be read in conjunction with the consolidated financial statements and the notes thereto included in our 2018 Annual Report on Form 10-K. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the full year.
Fiscal Year
We operate on a 52 / 53 week fiscal year, whereby the fiscal year ends on the last Saturday of December. Fiscal 2019 and 2018 each contain 52 weeks and the six months ended June 29, 2019 and June 30, 2018 each contained 26 weeks. Fiscal 2019 will end on December 28, 2019 .
Reclassifications
Certain immaterial reclassifications were made to the prior period financial statements to conform to the current period presentation.
Critical Accounting Policies
Our critical accounting policies have not changed during the six months ended June 29, 2019 from those disclosed in our Annual Report on Form 10-K for the year ended December 29, 2018 .
New Accounting Pronouncements
ASU 2018-15
In August 2018, the Financial Accounting Standard Board ("FASB") issued Accounting Standards Update ("ASU") 2018-15, " Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. " The new guidance clarifies the accounting for implementation costs in cloud computing arrangements. ASU 2018-15 is effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. ASU 2018-15 should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. We have not yet determined the impact of this standard on our financial statements.
ASU 2016-02, ASU 2018-10, ASU 2018-11 and ASU 2019-01
In February 2016, the FASB issued ASU 2016-02, " Leases (Topic 842) ," which requires the recognition of right-of-use assets and lease liabilities for all long-term leases, including operating leases, on the balance sheet. ASU 2016-02 was amended in July 2018 by both ASU 2018-10, " Codification Improvements to Topic 842, Leases ," and ASU 2018-11, " Leases (Topic 842): Targeted Improvements " and in March 2019 by ASU 2019-01, " Leases (Topic 842): Codification Improvements. " ASU 2016-02 provides additional guidance on the measurement of the right-of-use assets and lease liabilities and requires enhanced disclosures about our leasing arrangements. We adopted Topic 842 and all related amendments on December 30, 2018, the first day of fiscal 2019, using the modified transition approach. The modified transition approach permits a company to use its effective date as the date of initial application to apply the standard to its leases, and, therefore, not restate comparative prior period financial information. Consequently, prior period financial information is not updated, and the disclosures required under the new standard will not be provided for dates and periods before December 30, 2018. The standard provides several optional practical expedients in transition. We elected the ‘package of practical expedients,’ which permits us to not reassess, under the new standard, our prior conclusions about lease identification, lease classification and initial direct costs. We did not elect the use-of-hindsight or the practical expedient pertaining to land easements; the latter not being applicable to us. The new standard also provides practical expedients for an entity’s ongoing accounting. We elected the short-term lease recognition exemption. This means, for those leases that qualify, we will not recognize a right-of-use asset or lease liability, and this includes not recognizing right-of-use assets or lease liabilities for existing short-term leases of those assets in transition. We also elected the practical expedient to not separate lease and non-lease components for all our leases. The adoption of the lease standard did not have any effect on our previously reported Condensed
8
Consolidated Statements of Income and did not result in a cumulative catch-up adjustment to opening equity. See Note 12 for additional information.
Note 2 — Concentration of Credit and Other Risks
Each of the following customers accounted for 10% or more of our revenues for the periods indicated:
| Three Months Ended — June 29, 2019 | June 30, 2018 | Six Months Ended — June 29, 2019 | June 30, 2018 | |
|---|---|---|---|---|
| Intel Corporation | 26.1 % | 15.1 % | 23.8 % | 14.6 % |
| Samsung Electronics., LTD. | 11.1 | * | 12.4 | * |
| Micron Technology, Inc. | 10.1 | * | * | * |
| SK Hynix Inc. | * | 11.5 | * | 10.9 |
| 47.3 % | 26.6 % | 36.2 % | 25.5 % |
*Represents less than 10% of total revenues.
At June 29, 2019 , two customers accounted for 17.3 % and 11.3 % of gross accounts receivable, respectively. At December 29, 2018 , two customers accounted for 27.8 % and 13.0 % of gross accounts receivable, respectively.
Note 3 — Inventories, net
Inventories are stated at the lower of cost (principally standard cost, which approximates actual cost on a first in, first out basis) or net realizable value.
Inventories, net, consisted of the following (in thousands):
| June 29, 2019 | December 29, 2018 | |
|---|---|---|
| Raw materials | $ 43,143 | $ 43,380 |
| Work-in-progress | 26,022 | 20,431 |
| Finished goods | 14,687 | 13,895 |
| $ 83,852 | $ 77,706 |
Note 4 — Goodwill and Intangible Assets
Goodwill by reportable segment was as follows (in thousands):
| Goodwill, gross, as of December 30, 2017 | Probe Cards — $ 172,482 | Systems — $ 17,438 | Total — $ 189,920 | ||
|---|---|---|---|---|---|
| Foreign currency translation | — | ( 706 | ) | ( 706 | ) |
| Goodwill, gross, as of December 29, 2018 | 172,482 | 16,732 | 189,214 | ||
| Foreign currency translation | — | ( 93 | ) | ( 93 | ) |
| Goodwill, gross, as of June 29, 2019 | $ 172,482 | $ 16,639 | $ 189,121 |
We have not recorded any goodwill impairments as of June 29, 2019 .
9
Intangible assets were as follows (in thousands):
| Other Intangible Assets | June 29, 2019 — Gross | Accumulated Amortization | Net | December 29, 2018 — Gross | Accumulated Amortization | Net |
|---|---|---|---|---|---|---|
| Existing developed technologies | $ 143,334 | $ 106,513 | $ 36,821 | $ 143,408 | $ 97,111 | $ 46,297 |
| Trade name | 12,014 | 11,256 | 758 | 12,023 | 9,173 | 2,850 |
| Customer relationships | 40,123 | 24,298 | 15,825 | 40,146 | 21,653 | 18,493 |
| $ 195,471 | $ 142,067 | $ 53,404 | $ 195,577 | $ 127,937 | $ 67,640 |
Amortization expense was included in our Condensed Consolidated Statements of Income as follows (in thousands):
| Three Months Ended — June 29, 2019 | June 30, 2018 | Six Months Ended — June 29, 2019 | June 30, 2018 | |
|---|---|---|---|---|
| Cost of revenues | $ 4,711 | $ 5,138 | $ 9,430 | $ 10,295 |
| Selling, general and administrative | 2,368 | 2,032 | 4,739 | 4,069 |
| $ 7,079 | $ 7,170 | $ 14,169 | $ 14,364 |
The estimated future amortization of intangible assets is as follows (in thousands):
| Fiscal Year | Amount |
|---|---|
| Remainder of 2019 | $ 12,189 |
| 2020 | 23,358 |
| 2021 | 12,616 |
| 2022 | 3,493 |
| 2023 | 1,748 |
| $ 53,404 |
Note 5 — Accrued Liabilities
Accrued liabilities consisted of the following (in thousands):
| June 29, 2019 | December 29, 2018 | |
|---|---|---|
| Accrued compensation and benefits | $ 16,374 | $ 15,600 |
| Accrued employee stock purchase plan contributions withheld | 3,210 | 3,174 |
| Accrued warranty | 1,827 | 2,102 |
| Accrued income and other taxes | 5,080 | 4,222 |
| Other accrued expenses | 3,009 | 2,633 |
| $ 29,500 | $ 27,731 |
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Note 6 — Restructuring Charges
Restructuring charges in the first two quarters of fiscal 2019 consisted of costs related to employee termination benefits, cost of long-lived asset abandonment and inventory write downs.
Restructuring charges were included in our Consolidated Statement of Income as follows (in thousands):
| Three Months Ended — June 29, 2019 | June 30, 2018 | Six Months Ended — June 29, 2019 | June 30, 2018 | |
|---|---|---|---|---|
| Cost of revenues | $ 138 | $ — | $ 257 | $ — |
| Selling, general and administrative | 88 | — | 175 | — |
| $ 226 | $ — | $ 432 | $ — |
Changes to the restructuring accrual in the six months ended June 29, 2019 were as follows (in thousands):
| December 29, 2018 | Employee Severance and Benefits — $ 20 | Other Costs — $ — | Total Accrual — $ 20 | |||
|---|---|---|---|---|---|---|
| Restructuring charges | 162 | 270 | 432 | |||
| Cash payments | ( 73 | ) | — | ( 73 | ) | |
| Non-cash settlement | — | ( 270 | ) | ( 270 | ) | |
| June 29, 2019 | $ 109 | $ — | $ 109 |
Note 7 — Fair Value and Derivative Instruments
Whenever possible, the fair values of our financial assets and liabilities are determined using quoted market prices of identical securities or quoted market prices of similar securities from active markets. The three levels of inputs that may be used to measure fair value are as follows:
• Level 1 valuations are obtained from real-time quotes for transactions in active exchange markets involving identical securities;
• Level 2 valuations utilize significant observable inputs, such as quoted prices for similar assets or liabilities, quoted prices near the reporting date in markets that are less active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and
• Level 3 valuations utilize unobservable inputs to the valuation methodology and include our own data about assumptions market participants would use in pricing the asset or liability based on the best information available under the circumstances.
We did not have any transfers of assets or liabilities measured at fair value on a recurring basis to or from Level 1, Level 2 or Level 3 during the three and six months ended June 29, 2019 or the year ended December 29, 2018 .
The carrying values of Cash, Accounts receivable, net, Restricted cash, Prepaid expenses and other current assets, Accounts payable, Accrued liabilities, and Term loan approximate fair value due to their short maturities.
No changes were made to our valuation techniques during the first three and six months of fiscal 2019 .
11
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Assets and liabilities measured at fair value on a recurring basis were as follows (in thousands):
| June 29, 2019 | Level 1 | Level 2 | Total |
|---|---|---|---|
| Assets: | |||
| Cash equivalents: | |||
| Money market funds | $ 5,248 | $ — | $ 5,248 |
| Commercial paper | 324 | — | 324 |
| 5,572 | — | 5,572 | |
| Marketable securities: | |||
| U.S. treasuries | 17,072 | — | 17,072 |
| Certificates of deposit | — | 540 | 540 |
| U.S. agency securities | — | 14,299 | 14,299 |
| Corporate bonds | — | 19,667 | 19,667 |
| Commercial paper | — | 493 | 493 |
| 17,072 | 34,999 | 52,071 | |
| Foreign exchange derivative contracts | — | 5 | 5 |
| Interest rate swap derivative contracts | — | 189 | 189 |
| Total assets | $ 22,644 | $ 35,193 | $ 57,837 |
| Liabilities: | |||
| Foreign exchange derivative contracts | $ — | $ 216 | $ 216 |
| December 29, 2018 | Level 1 | Level 2 | Total |
|---|---|---|---|
| Assets: | |||
| Cash equivalents: | |||
| Money market funds | $ 1,184 | $ — | $ 1,184 |
| Marketable securities: | |||
| U.S. treasuries | 7,997 | — | 7,997 |
| Certificates of deposit | — | 957 | 957 |
| U.S. agency securities | — | 8,608 | 8,608 |
| Corporate bonds | — | 30,674 | 30,674 |
| Commercial paper | — | 2,295 | 2,295 |
| 7,997 | 42,534 | 50,531 | |
| Interest rate swap derivative contracts | — | 871 | 871 |
| Total assets | $ 9,181 | $ 43,405 | $ 52,586 |
We did not have any liabilities measured at fair value on a recurring basis at December 29, 2018 .
Cash Equivalents
The fair value of our cash equivalents is determined based on quoted market prices for similar or identical securities.
Marketable Securities
We classify our marketable securities as available-for-sale and value them utilizing a market approach. Our investments are priced by pricing vendors who provide observable inputs for their pricing without applying significant judgment. Broker pricing is used mainly when a quoted price is not available, the investment is not priced by our pricing vendors or when a broker price is more reflective of fair value. Our broker-priced investments are categorized as Level 2 investments because fair value is based on similar assets without applying significant judgments. In addition, all investments have a sufficient trading volume to demonstrate that the fair value is appropriate.
Unrealized gains and losses were immaterial and were recorded as a component of Accumulated other comprehensive income in our Condensed Consolidated Balance Sheets. We did not have any other-than-temporary unrealized gains or losses at either period end included in these financial statements.
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Interest Rate Swaps
The fair value of our interest rate swap contracts are determined at the end of each reporting period based on valuation models that use interest rate yield curves as inputs. For accounting purposes, our interest rate swap contracts qualify for, and are designated as, cash flow hedges. The cash flows associated with the interest rate swaps are reported in Net cash provided by operating activities in our Condensed Consolidated Statements of Cash Flows and the fair value of the interest rate swap contracts are recorded within Prepaid expenses and other current assets and Other assets in our Condensed Consolidated Balance Sheets.
The impact of the interest rate swaps on our Condensed Consolidated Statements of Income was as follows (in thousands):
| Amount of Gain or (Loss) Recognized in Accumulated OCI on Derivative | Location of Gain or (Loss) Reclassified from Accumulated OCI into Income | Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income | Location of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion) | Amount of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion ) | ||
|---|---|---|---|---|---|---|
| Three Months Ended June 29, 2019 | $ ( 62 | ) | Interest expense | $ 175 | Interest expense | $ — |
| Three Months Ended June 30, 2018 | $ 101 | Interest expense | $ 186 | Interest expense | $ — | |
| Six Months Ended June 29, 2019 | $ ( 90 | ) | Interest expense | $ 383 | Interest expense | $ — |
| Six Months Ended June 30, 2018 | $ 356 | Interest expense | $ 318 | Interest expense | $ — |
Foreign Exchange Derivative Contracts
We operate and sell our products in various global markets. As a result, we are exposed to changes in foreign currency exchange rates. We utilize foreign currency forward contracts to hedge against future movements in foreign exchange rates that affect certain existing foreign currency denominated assets and liabilities and forecasted foreign currency revenue and expense transactions. Under this program, our strategy is to have increases or decreases in our foreign currency exposures mitigated by gains or losses on the foreign currency forward contracts in order to mitigate the risks and volatility associated with foreign currency transaction gains or losses.
We do not use derivative financial instruments for speculative or trading purposes. For accounting purposes, certain of our foreign currency forward contracts are not designated as hedging instruments and, accordingly, we record the fair value of these contracts as of the end of our reporting period in our Condensed Consolidated Balance Sheets with changes in fair value recorded within Other income (expense), net in our Condensed Consolidated Statement of Income for both realized and unrealized gains and losses. Certain of our foreign currency forward contracts are designated as cash flow hedges, and, accordingly, we record the fair value of these contracts as of the end of our reporting period in our Condensed Consolidated Balance Sheets with changes in fair value recorded as a component of accumulated other comprehensive income and reclassified into earnings in the same period in which the hedged transaction affects earnings, and in the same line item on the Condensed Consolidated Statements of Income as the impact of the hedge transaction. At June 29, 2019 , we expect to reclassify $ 0.2 million of the amount accumulated in other comprehensive income (loss) to earnings during the next 12 months, due to the recognition in earnings of the hedged forecasted transactions.
The fair value of our foreign exchange derivative contracts was determined based on current foreign currency exchange rates and forward points. All of our foreign exchange derivative contracts outstanding at June 29, 2019 will mature in the first quarter of fiscal 2020.
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The following table provides information about our foreign currency forward contracts outstanding as of June 29, 2019 (in thousands):
| Currency | Contract Position | Contract Amount (Local Currency) | Contract Amount (U.S. Dollars) | ||
|---|---|---|---|---|---|
| Euro Dollar | Buy | ( 1,339 | ) | $ ( 1,262 | ) |
| Japanese Yen | Sell | 2,279,204 | 21,163 | ||
| Korean Won | Buy | ( 2,531,829 | ) | ( 2,192 | ) |
| Total USD notional amount of outstanding foreign exchange contracts | $ 17,709 |
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 impact of foreign exchange derivative contracts not designated as cash flow hedges on our Condensed Consolidated Statements of Income was as follows (in thousands):
| Amount of Gain Recognized on Derivatives | |||||
|---|---|---|---|---|---|
| Three Months Ended | Six Months Ended | ||||
| Derivatives Not Designated as Hedging Instruments | Location of Gain Recognized on Derivatives | June 29, 2019 | June 30, 2018 | June 29, 2019 | June 30, 2018 |
| Foreign exchange forward contracts | Other expense, net | $ 587 | $ 1,079 | $ 273 | $ 217 |
The impact of foreign exchange derivative contracts designated as cash flow hedges on our Condensed Consolidated Statements of Income was as follows (in thousands):
| Amount of Loss Recognized in Accumulated OCI on Derivative | Location of Loss Reclassified from Accumulated OCI into Income | Amount of Loss Reclassified from Accumulated OCI into Income | |
|---|---|---|---|
| Three Months Ended June 29, 2019 | $ 213 | Cost of revenues | $ 139 |
| Research and development | 12 | ||
| Selling, general and administrative | 32 | ||
| $ 183 | |||
| Three Months Ended June 30, 2018 | $ — | $ — | |
| Six Months Ended June 29, 2019 | $ 213 | Cost of revenues | $ 171 |
| Research and development | 19 | ||
| Selling, general and administrative | 51 | ||
| $ 241 | |||
| Six Months Ended June 30, 2018 | $ — | $ — |
Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis
We measure and report goodwill and intangible assets at fair value on a non-recurring basis if we determine these assets to be impaired or in the period when we make a business acquisition. There were no assets or liabilities measured at fair value on a nonrecurring basis during the three and six months ended June 29, 2019 or June 30, 2018 .
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Note 8 — Warranty
We offer warranties on certain products and record a liability for the estimated future costs associated with warranty claims at the time revenue is recognized. The warranty liability is based upon historical experience and our estimate of the level of future costs. While we engage in product quality programs and processes, our warranty obligation is affected by product failure rates, material usage and service delivery costs. We continuously monitor product returns for warranty and maintain a reserve for the related expenses based upon our historical experience and any specifically identified failures. As we sell new products to our customers, we must exercise considerable judgment in estimating the expected failure rates. This estimating process is based on historical experience of similar products, as well as various other assumptions that we believe to be reasonable under the circumstances.
We provide for the estimated cost of product warranties at the time revenue is recognized as a component of Cost of revenues in our Condensed Consolidated Statement of Income.
Changes in our warranty liability were as follows (in thousands):
| Six Months Ended — June 29, 2019 | June 30, 2018 | |||
|---|---|---|---|---|
| Balance at beginning of period | $ 2,102 | $ 3,662 | ||
| Accruals | 1,648 | 2,868 | ||
| Settlements | ( 1,923 | ) | ( 3,681 | ) |
| Balance at end of period | $ 1,827 | $ 2,849 |
Note 9 — Stockholders’ Equity and Stock-Based Compensation
Common Stock Repurchase Program
In February 2017, our Board of Directors authorized a program to repurchase up to $ 25 million of outstanding common stock to offset potential dilution from issuances of common stock under our employee stock purchase plan and equity incentive plan. The share repurchase program will expire on February 1, 2020. Repurchased shares are retired upon the settlement of the related transactions with the excess of cost over par value charged to additional paid-in capital. All repurchases are made in compliance with Rule 10b-18 under the Securities Exchange Act of 1934, as amended.
During the six months ended June 29, 2019 , we did not repurchase any shares. As of June 29, 2019 , $ 6.0 million remained available for future repurchases.
Restricted Stock Units
Restricted stock unit ("RSU") activity under our equity incentive plan was as follows:
| RSUs at December 29, 2018 | Units — 3,102,226 | Weighted Average Grant Date Fair Value — $ 12.79 | |
|---|---|---|---|
| Awards granted | 1,461,055 | 14.98 | |
| Awards vested | ( 355,768 | ) | 9.91 |
| Awards forfeited | ( 82,370 | ) | 12.91 |
| RSUs at June 29, 2019 | 4,125,143 | 13.81 |
The total fair value of RSUs vested during the six months ended June 29, 2019 was $ 6.0 million .
Performance Restricted Stock Units
We may grant Performance RSUs ("PRSUs") to certain executives, which vest based upon us achieving certain market performance criteria.
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On June 4, 2019, we granted a total of 273,000 PRSUs to certain senior executives for a total grant date fair value of $ 4.4 million , which will be recognized ratably over the requisite service period. The performance criteria are based on a metric called Total Shareholder Return ("TSR") for the period from July 1, 2019 to June 30, 2022, relative to the TSR of the companies identified as being part of the S&P Semiconductor Select Industry Index (FormFactor peer companies) as of June 29, 2019.
There were no other PRSUs granted during the six months ending June 29, 2019. PRSUs are included as part of the RSU activity above.
Stock Options
Stock option activity under our equity incentive plan was as follows:
| Options Outstanding | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life in Years | Aggregate Intrinsic Value | ||
|---|---|---|---|---|---|
| Outstanding at December 29, 2018 | 524,725 | $ 8.00 | |||
| Options exercised | ( 19,207 | ) | 4.69 | ||
| Outstanding at June 29, 2019 | 505,518 | $ 8.12 | 2.63 | $ 3,815,874 | |
| Vested and expected to vest at June 29, 2019 | 505,518 | $ 8.12 | 2.63 | $ 3,815,874 | |
| Exercisable at June 29, 2019 | 505,518 | $ 8.12 | 2.63 | $ 3,815,874 |
Employee Stock Purchase Plan
Information related to activity under our Employee Stock Purchase Plan ("ESPP") was as follows:
| Six Months Ended | |
|---|---|
| June 29, 2019 | |
| Shares issued | 301,497 |
| Weighted average per share purchase price | $ 12.18 |
| Weighted average per share discount from the fair value of our common stock on the date of issuance | $ 4.85 |
Stock-Based Compensation
Stock-based compensation was included in our Condensed Consolidated Statements of Income as follows (in thousands):
| Three Months Ended — June 29, 2019 | June 30, 2018 | Six Months Ended — June 29, 2019 | June 30, 2018 | |
|---|---|---|---|---|
| Cost of revenues | $ 964 | $ 813 | $ 1,914 | $ 1,733 |
| Research and development | 1,582 | 1,256 | 3,101 | 2,558 |
| Selling, general and administrative | 2,743 | 2,059 | 5,569 | 3,593 |
| Total stock-based compensation | $ 5,289 | $ 4,128 | $ 10,584 | $ 7,884 |
Unrecognized Compensation Costs
At June 29, 2019 , the unrecognized stock-based compensation was as follows (dollars in thousands):
| Unrecognized Expense | Average Expected Recognition Period in Years | |
|---|---|---|
| Restricted stock units | $ 32,804 | 2.27 |
| Performance restricted stock units | 8,623 | 2.38 |
| Employee stock purchase plan | 244 | 0.59 |
| Total unrecognized stock-based compensation expense | $ 41,671 | 2.29 |
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Note 10 — Net Income per Share
The following table reconciles the shares used in calculating basic net income per share and diluted net income per share (in thousands):
| Three Months Ended — June 29, 2019 | June 30, 2018 | Six Months Ended — June 29, 2019 | June 30, 2018 | |
|---|---|---|---|---|
| Weighted-average shares used in computing basic net income per share | 74,478 | 73,157 | 74,483 | 72,991 |
| Add potentially dilutive securities | 1,711 | 1,376 | 1,578 | 1,436 |
| Weighted-average shares used in computing diluted net income per share | 76,189 | 74,533 | 76,061 | 74,427 |
| Securities not included as they would have been antidilutive | 263 | 76 | 252 | 49 |
Note 11 — Commitments and Contingencies
Leases
See Note 12.
Contractual Commitments and Purchase Obligations
Our purchase obligations and other contractual obligations have not materially changed as of June 29, 2019 from those disclosed in our Annual Report on Form 10-K for the year ended December 29, 2018 .
Legal Matters
From time to time, we may be subject to legal proceedings and claims in the ordinary course of business. As of June 29, 2019 , and as of the filing of this Quarterly Report on Form 10-Q, we were not involved in any material legal proceedings.
Note 12 — Leases
We lease real estate space under non-cancelable operating lease agreements for commercial and industrial space, as well as our corporate headquarters located in Livermore, California. Our leases have remaining terms of 1 to 9 years , and some leases include options to extend up to 20 years . We also have operating leases for automobiles with remaining lease terms of 1 to 4 years . We did not include any of our renewal options in our lease terms for calculating our lease liability as the renewal options allow us to maintain operational flexibility and we are not reasonably certain we will exercise these options at this time. The weighted-average remaining lease term for our operating leases was 8 years at June 29, 2019 and the weighted-average discount rate was 4.7 % .
The components of lease expense were as follows (in thousands):
| Three Months Ended — June 29, 2019 | June 30, 2018 | Six Months Ended — June 29, 2019 | June 30, 2018 | |
|---|---|---|---|---|
| Lease expense: | ||||
| Operating lease expense | $ 1,734 | $ — | $ 3,479 | $ — |
| Short-term lease expense | 31 | — | 48 | — |
| Variable lease expense | 249 | — | 668 | — |
| $ 2,014 | $ — | $ 4,195 | $ — |
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Future minimum payments under our non-cancelable operating leases were as follows as of June 29, 2019 (in thousands):
| Fiscal Year | Amount |
|---|---|
| Remainder of 2019 | $ 3,327 |
| 2020 | 6,717 |
| 2021 | 5,902 |
| 2022 | 4,897 |
| 2023 | 4,435 |
| Thereafter | 20,407 |
| $ 45,685 |
Note 13 — Revenue
Transaction price allocated to the remaining performance obligations: On June 29, 2019 , we had $ 3.8 million of remaining performance obligations, which were comprised of deferred service contracts and extended warranty contracts not yet delivered. We expect to recognize approximately 71 % of our remaining performance obligations as revenue in the remainder of fiscal 2019, and approximately 29 % in fiscal 2020 and thereafter. The foregoing excludes the value of other remaining performance obligations as they have original durations of one year or less, and also excludes information about variable consideration allocated entirely to a wholly unsatisfied performance obligation.
Contract balances: The timing of revenue recognition may differ from the timing of invoicing to customers. Accounts receivable is recorded at the invoiced amount, net of an allowance for doubtful accounts. A receivable is recognized in the period we deliver goods or provide services or when our right to consideration is unconditional. A contract asset is recorded when we have performed under the contract but our right to consideration is conditional on something other than the passage of time. Contract assets as of June 29, 2019 and December 29, 2018 were $ 0.9 million and $ 0.3 million , respectively, and are reported on the Condensed Consolidated Balance Sheets as a component of Prepaid expenses and other current assets.
Contract liabilities include payments received in advance of performance under a contract and are satisfied as the associated revenue is recognized. Contract liabilities are reported on the Condensed Consolidated Balance Sheets on a contract-by-contract basis at the end of each reporting period as a component of Deferred revenue and Other liabilities. Contract liabilities as of June 29, 2019 and December 29, 2018 were $ 7.9 million and $ 5.7 million , respectively. During the three and six months ended June 29, 2019 , we recognized $ 0.9 million and $ 2.9 million of revenue, respectively, that was included in contract liabilities as of December 29, 2018 .
Costs to obtain a contract: We generally expense sales commissions when incurred as a component of Selling, general and administrative expense as the amortization period is typically less than one year.
Revenue by Category: Refer to Note 14 of Notes to Consolidated Financial Statements for further details.
Note 14 — Operating Segments and Enterprise-Wide Information
Our chief operating decision maker ("CODM") is our Chief Executive Officer, who reviews operating results to make decisions about allocating resources and assessing performance for the entire company. We operate in two reportable segments consisting of the Probe Cards segment and the Systems segment. The following table summarizes the operating results by reportable segment (dollars in thousands):
| Three Months Ended | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| June 29, 2019 | June 30, 2018 | |||||||||
| Probe Cards | Systems | Corporate and Other | Total | Probe Cards | Systems | Corporate and Other | Total | |||
| Revenues | $ 113,637 | $ 24,381 | $ — | $ 138,018 | $ 111,586 | $ 23,923 | $ — | $ 135,509 | ||
| Gross profit | $ 48,492 | $ 12,672 | $ ( 5,812 | ) | $ 55,352 | $ 50,543 | $ 11,626 | $ ( 5,951 | ) | $ 56,218 |
| Gross margin | 42.7 % | 52.0 % | — | % | 40.1 % | 45.3 % | 48.6 % | — | % | 41.5 % |
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| Six Months Ended | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| June 29, 2019 | June 30, 2018 | |||||||||
| Probe Cards | Systems | Corporate and Other | Total | Probe Cards | Systems | Corporate and Other | Total | |||
| Revenues | $ 221,740 | $ 48,491 | $ — | $ 270,231 | $ 206,514 | $ 47,285 | $ — | $ 253,799 | ||
| Gross profit | $ 93,785 | $ 25,688 | $ ( 11,600 | ) | $ 107,873 | $ 90,614 | $ 22,761 | $ ( 12,028 | ) | $ 101,347 |
| Gross margin | 42.3 % | 53.0 % | — | % | 39.9 % | 43.9 % | 48.1 % | — | % | 39.9 % |
Operating results provide useful information to our management for assessment of our performance and results of operations. Certain components of our operating results are utilized to determine executive compensation along with other measures.
Corporate and Other includes unallocated expenses relating to amortization of intangible assets, share-based compensation, and restructuring charges, net, which are not used in evaluating the results of, or in allocating resources to, our reportable segments.
Certain revenue category information by reportable segment was as follows (in thousands):
| Three Months Ended | ||||||
|---|---|---|---|---|---|---|
| June 29, 2019 | June 30, 2018 | |||||
| Probe Cards | Systems | Total | Probe Cards | Systems | Total | |
| Market: | ||||||
| Foundry & Logic | $ 73,442 | $ — | $ 73,442 | $ 62,111 | $ — | $ 62,111 |
| DRAM | 36,044 | — | 36,044 | 38,090 | — | 38,090 |
| Flash | 4,151 | — | 4,151 | 11,385 | — | 11,385 |
| Systems | — | 24,381 | 24,381 | — | 23,923 | 23,923 |
| Total | $ 113,637 | $ 24,381 | $ 138,018 | $ 111,586 | $ 23,923 | $ 135,509 |
| Timing of revenue recognition: | ||||||
| Products transferred at a point in time | $ 113,028 | $ 23,339 | $ 136,367 | $ 111,041 | $ 22,966 | $ 134,007 |
| Services transferred over time | 609 | 1,042 | 1,651 | 545 | 957 | 1,502 |
| Total | $ 113,637 | $ 24,381 | $ 138,018 | $ 111,586 | $ 23,923 | $ 135,509 |
| Geographical region: | ||||||
| United States | $ 32,072 | $ 6,297 | $ 38,369 | $ 28,473 | $ 4,757 | $ 33,230 |
| South Korea | 27,360 | 811 | 28,171 | 24,187 | 1,805 | 25,992 |
| China | 16,304 | 4,051 | 20,355 | 11,035 | 3,578 | 14,613 |
| Japan | 12,867 | 3,226 | 16,093 | 10,833 | 2,710 | 13,543 |
| Taiwan | 12,826 | 2,046 | 14,872 | 26,858 | 3,152 | 30,010 |
| Europe | 4,474 | 6,174 | 10,648 | 4,109 | 5,410 | 9,519 |
| Asia-Pacific 1 | 6,262 | 1,421 | 7,683 | 5,666 | 1,288 | 6,954 |
| Rest of the world | 1,472 | 355 | 1,827 | 425 | 1,223 | 1,648 |
| Total | $ 113,637 | $ 24,381 | $ 138,018 | $ 111,586 | $ 23,923 | $ 135,509 |
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| Six Months Ended | ||||||
|---|---|---|---|---|---|---|
| June 29, 2019 | June 30, 2018 | |||||
| Probe Cards | Systems | Total | Probe Cards | Systems | Total | |
| Market: | ||||||
| Foundry & Logic | $ 145,022 | $ — | $ 145,022 | $ 120,549 | $ — | $ 120,549 |
| DRAM | 64,930 | — | 64,930 | 68,357 | — | 68,357 |
| Flash | 11,788 | — | 11,788 | 17,608 | — | 17,608 |
| Systems | — | 48,491 | 48,491 | — | 47,285 | 47,285 |
| Total | $ 221,740 | $ 48,491 | $ 270,231 | $ 206,514 | $ 47,285 | $ 253,799 |
| Timing of revenue recognition: | ||||||
| Products transferred at a point in time | $ 220,519 | $ 46,481 | $ 267,000 | $ 205,475 | $ 45,372 | $ 250,847 |
| Services transferred over time | 1,221 | 2,010 | 3,231 | $ 1,039 | $ 1,913 | 2,952 |
| Total | $ 221,740 | $ 48,491 | $ 270,231 | $ 206,514 | $ 47,285 | $ 253,799 |
| Geographical region: | ||||||
| United States | $ 59,727 | $ 12,905 | $ 72,632 | $ 54,961 | $ 11,132 | $ 66,093 |
| South Korea | 52,378 | 2,516 | 54,894 | $ 38,103 | $ 2,879 | 40,982 |
| China | 34,455 | 7,743 | 42,198 | 20,062 | 6,825 | 26,887 |
| Taiwan | 34,083 | 3,176 | 37,259 | $ 52,829 | $ 4,903 | 57,732 |
| Japan | 18,167 | 8,358 | 26,525 | $ 20,965 | $ 6,250 | 27,215 |
| Europe | 9,847 | 10,294 | 20,141 | $ 9,682 | $ 11,339 | 21,021 |
| Asia-Pacific 1 | 9,052 | 1,894 | 10,946 | $ 9,156 | $ 2,613 | 11,769 |
| Rest of the world | 4,031 | 1,605 | 5,636 | $ 756 | $ 1,344 | 2,100 |
| Total | $ 221,740 | $ 48,491 | $ 270,231 | $ 206,514 | $ 47,285 | $ 253,799 |
1 Asia-Pacific includes all countries in the region except China, Japan, South Korea, and Taiwan, which are disclosed separately .
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Statement Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Securities Exchange Act of 1934 and the Securities Act of 1933, which are subject to risks and uncertainties. The forward-looking statements include statements concerning, among other things, our business strategy, financial and operating results, gross margins, liquidity and capital expenditure requirements, impact of accounting standards and our share repurchase plan. In some cases, you can identify these statements by forward-looking words, such as "may," "might," "will," "could," "should," "expect," "plan," "anticipate," "believe," "estimate," "predict," "intend" and "continue," the negative or plural of these words and other comparable terminology.
The forward-looking statements are only predictions based on our current expectations and our projections about future events. All forward-looking statements included in this Quarterly Report on Form 10-Q are based upon information available to us as of the filing date of this Quarterly Report on Form 10-Q. You should not place undue reliance on these forward-looking statements. We have no obligation to update any of these statements. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to differ materially from those expressed or implied by these statements, including risks related to general market trends, our ability to execute our business strategy and other risks discussed in the section titled “Risk Factors” and elsewhere in our Annual Report on Form 10-K for the year ended December 29, 2018 and in this Quarterly Report on Form 10-Q. You should carefully consider the numerous risks and uncertainties described under these sections.
The following discussion and analysis should be read in conjunction with our condensed consolidated financial statements and the accompanying notes contained in this Quarterly Report on Form 10-Q. Unless expressly stated or the context otherwise requires, the terms “we,” “our,” “us” and “FormFactor” refer to FormFactor, Inc. and its subsidiaries.
Overview
FormFactor, Inc., headquartered in Livermore, California, is a leading provider of electrical test and measurement technologies. We provide a broad range of high-performance probe cards, analytical probes, probe stations and thermal sub-systems to both semiconductor companies and scientific institutions. Our products provide electrical information from a variety of semiconductor and electro-optical devices and integrated circuits from research, to development through production. Customers use our products and services to lower production costs, improve yields, and enable development of their complex next-generation products.
We operate in two reportable segments consisting of the Probe Cards segment and the Systems segment. Sales of our probe cards and analytical probes are included in the Probe Cards segment, while sales of our probe stations and thermal sub-systems are included in the Systems segment.
We generated net income of $12.4 million in the first six months of fiscal 2019 as compared to $11.2 million in the first six months of fiscal 2018 . The increase in net income was primarily due to higher revenues, partially offset by higher operating expenses and a higher effective income tax rate.
Critical Accounting Policies and the Use of Estimates
Management’s Discussion and Analysis and Note 2 to the Consolidated Financial Statements in our 2018 Annual Report on Form 10-K describe the significant accounting estimates and critical accounting policies used in preparation of the Consolidated Financial Statements. Actual results in these areas could differ from management’s estimates. During the three and six months ended June 29, 2019 , there were no significant changes in our critical accounting policies or estimates from those reported in our Annual Report on Form 10-K for the year ended December 29, 2018 , which was filed with the Securities and Exchange Commission on February 26, 2019.
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Results of Operations
The following table sets forth our operating results as a percentage of revenues for the periods indicated:
| Three Months Ended — June 29, 2019 | June 30, 2018 | Six Months Ended — June 29, 2019 | June 30, 2018 | |||||
|---|---|---|---|---|---|---|---|---|
| Revenues | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % |
| Cost of revenues | 59.9 | 58.5 | 60.1 | 60.1 | ||||
| Gross profit | 40.1 | 41.5 | 39.9 | 39.9 | ||||
| Operating expenses: | ||||||||
| Research and development | 14.6 | 14.5 | 14.7 | 14.9 | ||||
| Selling, general and administrative | 19.0 | 18.6 | 19.1 | 19.2 | ||||
| Total operating expenses | 33.6 | 33.1 | 33.8 | 34.1 | ||||
| Operating income | 6.5 | 8.4 | 6.1 | 5.8 | ||||
| Interest income | 0.5 | 0.2 | 0.5 | 0.2 | ||||
| Interest expense | (0.4 | ) | (0.7 | ) | (0.4 | ) | (0.7 | ) |
| Other income (expense), net | 0.1 | 0.1 | — | (0.3 | ) | |||
| Income before income taxes | 6.7 | 8.0 | 6.2 | 5.0 | ||||
| Provision for income taxes | 1.7 | 1.3 | 1.6 | 0.8 | ||||
| Net income | 5.0 | % | 6.7 | % | 4.6 | % | 4.2 | % |
Revenues by Segment and Market
| Three Months Ended — June 29, 2019 | June 30, 2018 | Six Months Ended — June 29, 2019 | June 30, 2018 | |
|---|---|---|---|---|
| (In thousands) | ||||
| Probe Cards | $ 113,637 | $ 111,586 | $ 221,740 | $ 206,514 |
| Systems | 24,381 | 23,923 | 48,491 | 47,285 |
| $ 138,018 | $ 135,509 | $ 270,231 | $ 253,799 |
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| Three Months Ended — June 29, 2019 | % of Revenues | June 30, 2018 | % of Revenues | $ Change | % Change | |||
|---|---|---|---|---|---|---|---|---|
| (Dollars in thousands) | ||||||||
| Probe Cards Markets: | ||||||||
| Foundry & Logic | $ 73,442 | 53.2 % | $ 62,111 | 45.8 % | $ 11,331 | 18.2 | % | |
| DRAM | 36,044 | 26.1 | 38,090 | 28.1 | (2,046 | ) | (5.4 | ) |
| Flash | 4,151 | 3.0 | 11,385 | 8.4 | (7,234 | ) | (63.5 | ) |
| Systems Market: | ||||||||
| Systems | 24,381 | 17.7 | 23,923 | 17.7 | 458 | 1.9 | ||
| Total revenues | $ 138,018 | 100.0 % | $ 135,509 | 100.0 % | $ 2,509 | 1.9 | % | |
| Six Months Ended | ||||||||
| June 29, 2019 | % of Revenues | June 30, 2018 | % of Revenues | $ Change | % Change | |||
| (Dollars in thousands) | ||||||||
| Probe Cards Markets: | ||||||||
| Foundry & Logic | $ 145,022 | 53.7 % | $ 120,549 | 47.5 % | $ 24,473 | 20.3 | % | |
| DRAM | 64,930 | 24.0 | 68,357 | 26.9 | (3,427 | ) | (5.0 | ) |
| Flash | 11,788 | 4.4 | 17,608 | 7.0 | (5,820 | ) | (33.1 | ) |
| Systems Market: | ||||||||
| Systems | 48,491 | 17.9 | 47,285 | 18.6 | 1,206 | 2.6 | ||
| Total revenues | $ 270,231 | 100.0 % | $ 253,799 | 100.0 % | $ 16,432 | 6.5 | % |
The increases in Foundry & Logic product revenue for the three and six months ended June 29, 2019 , compared to the three and six months ended June 30, 2018 , were primarily the result of lower demand in the prior year from one major customer as a result of delays in its node transitions. This major customer accounted for 26.1% and 23.8% , respectively, of total revenues for the three and six months ended June 29, 2019 , compared to 15.1% and 14.6% , respectively, for the three and six months ended June 30, 2018 .
The decreases in DRAM and Flash product revenue for the three and six months ended June 29, 2019 , compared to the three and six months ended June 30, 2018 , were driven by decreased unit sales as a result of decreased customer demand.
The increases in Systems product revenue for the three and six months ended June 29, 2019 , compared to the three and six months ended June 30, 2018 , were driven by increased sales of probe stations, which includes a new 200mm platform, partially offset by lower revenue from thermal sub-systems.
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Revenues by Geographic Region
| Three Months Ended — June 29, 2019 | % of Revenue | June 30, 2018 | % of Revenue | Six Months Ended — June 29, 2019 | % of Revenue | June 30, 2018 | % of Revenue | |
|---|---|---|---|---|---|---|---|---|
| (Dollars in thousands) | ||||||||
| United States | $ 38,369 | 27.8 % | $ 33,230 | 24.5 % | $ 72,632 | 26.9 % | $ 66,093 | 26.0 % |
| South Korea | 28,171 | 20.4 | 25,992 | 19.2 | 54,894 | 20.3 | 40,982 | 16.1 |
| China | 20,355 | 14.7 | 14,613 | 10.8 | 42,198 | 15.6 | 26,887 | 10.6 |
| Japan | 16,093 | 11.7 | 13,543 | 10.0 | 26,525 | 9.8 | 27,215 | 10.7 |
| Taiwan | 14,872 | 10.8 | 30,010 | 22.1 | 37,259 | 13.8 | 57,732 | 22.7 |
| Europe | 10,648 | 7.7 | 9,519 | 7.0 | 20,141 | 7.5 | 21,021 | 8.3 |
| Asia-Pacific 1 | 7,683 | 5.6 | 6,954 | 5.1 | 10,946 | 4.1 | 11,769 | 4.6 |
| Rest of the world | 1,827 | 1.3 | 1,648 | 1.2 | 5,636 | 2.1 | 2,100 | 0.8 |
| Total revenues | $ 138,018 | 100.0 % | $ 135,509 | 100.0 % | $ 270,231 | 100.0 % | $ 253,799 | 100.0 % |
1 Asia-Pacific includes all countries in the region except China, Japan, South Korea and Taiwan, which are disclosed separately.
Geographic revenue information is based on the location to which we ship the product. For example, if a certain South Korean customer purchases through their U.S. subsidiary and requests the products to be shipped to an address in South Korea, this sale will be reflected in the revenue for South Korea rather than the U.S.
Changes in revenue by geographic region for the three and six months ended June 29, 2019 compared to the three and six months ended June 30, 2018 were primarily attributable to changes in customer demand, shifts in customer regional manufacturing strategies, and product sales mix.
Cost of Revenues and Gross Margins
Cost of revenues consists primarily of manufacturing materials, compensation and benefits, shipping and handling costs, manufacturing-related overhead and amortization of certain intangible assets. Our manufacturing operations rely on a limited number of suppliers to provide key components and materials for our products, some of which are a sole source. We order materials and supplies based on backlog and forecasted customer orders. Tooling and setup costs related to changing manufacturing lots at our suppliers are also included in the cost of revenues. We expense all warranty costs, inventory provisions and amortization of certain intangible assets as cost of revenues.
Our gross profit and gross margin were as follows (dollars in thousands):
| Three Months Ended — June 29, 2019 | June 30, 2018 | $ Change | % Change | |||
|---|---|---|---|---|---|---|
| Gross profit | $ 55,352 | $ 56,218 | $ (866 | ) | (1.5 | )% |
| Gross margin | 40.1 % | 41.5 % | ||||
| Six Months Ended | ||||||
| June 29, 2019 | June 30, 2018 | $ Change | % Change | |||
| Gross profit | $ 107,873 | $ 101,347 | $ 6,526 | 6.4 | % | |
| Gross margin | 39.9 % | 39.9 % |
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Our gross profit and gross margin by segment were as follows (dollars in thousands):
| Three Months Ended | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| June 29, 2019 | June 30, 2018 | |||||||||
| Probe Cards | Systems | Corporate and Other | Total | Probe Cards | Systems | Corporate and Other | Total | |||
| Gross profit | $ 48,492 | $ 12,672 | $ (5,812 | ) | $ 55,352 | $ 50,543 | $ 11,626 | $ (5,951 | ) | $ 56,218 |
| Gross margin | 42.7 % | 52.0 % | — | % | 40.1 % | 45.3 % | 48.6 % | — | % | 41.5 % |
| Six Months Ended | ||||||||||
| June 29, 2019 | June 30, 2018 | |||||||||
| Probe Cards | Systems | Corporate and Other | Total | Probe Cards | Systems | Corporate and Other | Total | |||
| Gross profit | $93,785 | $ 25,688 | $ (11,600 | ) | $ 107,873 | $90,614 | $ 22,761 | $ (12,028 | ) | $ 101,347 |
| Gross margin | 42.3 % | 53.0 % | — | % | 39.9 % | 43.9 % | 48.1 % | — | % | 39.9 % |
Probe Cards
For the three months ended June 29, 2019 , gross profit decreased compared to the three months ended June 30, 2018 primarily due to less favorable product mix, offset by increased sales and higher factory utilization. For the six months ended June 29, 2019 , gross profit increased compared to the six months ended June 30, 2018 primarily due to increased sales and factory utilization. Gross margins decreased due to less favorable product mix.
Systems
For the three and six months ended June 29, 2019 , gross profit and gross margin increased compared to the three and six months ended June 30, 2018 due to increased sales and a favorable product mix.
Corporate and Other
Corporate and Other includes unallocated expenses relating to amortization of intangible assets, share-based compensation expense, and restructuring charges, net, which are not used in evaluating the results of, or in allocating resources to, our reportable segments.
Overall
Gross profit and gross margin fluctuate with revenue levels, product mix, selling prices, factory loading and material costs. For the three months ended June 29, 2019 , compared to the three months ended June 30, 2018 , gross profit and gross margin decreased due to product mix, offset by increased sales. For the three and six months ended June 29, 2019 , compared to the three and six months ended June 30, 2018 , gross profit increased due to higher unit sales and favorable product mix, primarily within our Systems segment.
Cost of revenues included stock-based compensation expense as follows (in thousands):
| Three Months Ended — June 29, 2019 | June 30, 2018 | Six Months Ended — June 29, 2019 | June 30, 2018 | |
|---|---|---|---|---|
| Stock-based compensation | $ 964 | $ 813 | $ 1,914 | $ 1,733 |
Future gross margins may be adversely impacted by lower revenues, unfavorable product mix and lower factory utilization even though we have taken significant steps to reduce our operating cost structure. Our gross margins may also be adversely affected if we are required to record additional inventory write-downs for estimated average selling prices that are below cost.
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Research and Development
| Three Months Ended — June 29, 2019 | June 30, 2018 | $ Change | % Change | |
|---|---|---|---|---|
| (Dollars in thousands) | ||||
| Research and development | $ 20,074 | $ 19,675 | $ 399 | 2.0 % |
| % of revenues | 14.6 % | 14.5 % | ||
| Six Months Ended | ||||
| June 29, 2019 | June 30, 2018 | $ Change | % Change | |
| (Dollars in thousands) | ||||
| Research and development | $ 39,797 | $ 37,721 | $ 2,076 | 5.5 % |
| % of revenues | 14.7 % | 14.9 % |
The increases in research and development expenses in the three and six months ended June 29, 2019 when compared to the corresponding periods in the prior year were primarily driven by annual compensation and benefit adjustments, partially offset by a decrease in project material costs. The increase for the three months ended June 29, 2019 when compared to the corresponding period in the prior year was partially offset by a decrease in employee incentive compensation and benefit adjustments.
A detail of the change is as follows (in millions):
| Employee compensation costs | Three Months Ended June 29, 2019 compared to Three Months Ended June 30, 2018 — $ 0.2 | Six Months Ended June 29, 2019 compared to Six Months Ended June 30, 2018 — $ 1.5 | ||
|---|---|---|---|---|
| Stock-based compensation | 0.3 | 0.5 | ||
| Project material costs | (0.4 | ) | (0.5 | ) |
| Depreciation | 0.1 | 0.3 | ||
| Other general operations | 0.2 | 0.3 | ||
| $ 0.4 | $ 2.1 |
Research and development included stock-based compensation expense as follows (in thousands):
| Three Months Ended — June 29, 2019 | June 30, 2018 | Six Months Ended — June 29, 2019 | June 30, 2018 | |
|---|---|---|---|---|
| Stock-based compensation | $ 1,582 | $ 1,256 | $ 3,101 | $ 2,558 |
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Selling, General and Administrative
| Three Months Ended — June 29, 2019 | June 30, 2018 | $ Change | % Change | |
|---|---|---|---|---|
| (Dollars in thousands) | ||||
| Selling, general and administrative | $ 26,283 | $ 25,232 | $ 1,051 | 4.2 % |
| % of revenues | 19.0 % | 18.6 % | ||
| Six Months Ended | ||||
| June 29, 2019 | June 30, 2018 | $ Change | % Change | |
| (Dollars in thousands) | ||||
| Selling, general and administrative | $ 51,467 | $ 48,681 | $ 2,786 | 5.7% |
| % of revenues | 19.1 % | 19.2 % |
The increases in selling, general and administrative in the three and six months ended June 29, 2019 when compared to the corresponding periods in the prior year were primarily due to higher stock-based compensation related to the timing of annual grants, and annual compensation and benefit adjustments. The increase for the three months ended June 29, 2019 when compared to the corresponding periods in the prior year was offset partially by a decrease in employee incentive compensation and a reduction in consulting fees.
A detail of the change is as follows (in millions):
| Stock-based compensation | Three Months Ended June 29, 2019 compared to Three Months Ended June 30, 2018 — $ 0.7 | Six Months Ended June 29, 2019 compared to Six Months Ended June 30, 2018 — $ 2.0 | ||
|---|---|---|---|---|
| Consulting fees | (0.3 | ) | (1.3 | ) |
| Employee compensation | — | 1.1 | ||
| Amortization of intangibles | 0.3 | 0.7 | ||
| General operating expenses | 0.3 | 0.3 | ||
| $ 1.0 | $ 2.8 |
Selling, general and administrative included stock-based compensation expense as follows (in thousands):
| Three Months Ended — June 29, 2019 | June 30, 2018 | Six Months Ended — June 29, 2019 | June 30, 2018 | |
|---|---|---|---|---|
| Stock-based compensation | $ 2,743 | $ 2,059 | $ 5,569 | $ 3,593 |
Interest Income and Interest Expense
| Three Months Ended — June 29, 2019 | June 30, 2018 | Six Months Ended — June 29, 2019 | June 30, 2018 | |
|---|---|---|---|---|
| (Dollars in thousands) | ||||
| Interest Income | $ 684 | $ 326 | $ 1,264 | $ 583 |
| Weighted average balance of cash and investments | $ 177,380 | $ 142,807 | $ 164,416 | $ 138,221 |
| Weighted average yield on cash and investments | 2.11 % | 1.34 % | 2.07 % | 1.42 % |
| Interest Expense | $ 522 | $ 910 | $ 1,117 | $ 1,877 |
| Average debt outstanding | $ 57,253 | $ 97,225 | $ 61,044 | $ 101,641 |
| Weighted average interest rate on debt | 4.49 % | 3.93 % | 4.50 % | 3.77 % |
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Interest income is earned on our cash, cash equivalents, restricted cash and marketable securities. The increases in interest income for the three and six months ended June 29, 2019 compared with the corresponding periods of the prior year were attributable to higher investment yields, as well as higher average investment balances.
Interest expense primarily includes interest on our term loan and interest-rate swap derivative contracts, as well as term loan issuance costs amortization charges. The decreases in interest expense for the three and six months ended June 29, 2019 compared to the same periods of the prior year were primarily due to lower outstanding debt balances as a result of principal payments made, partially offset by higher interest rates.
Other Expense, Net
Other expense, net, primarily includes the effects of foreign currency impact and various other gains and losses.
Provision for Income Taxes
| Three Months Ended — June 29, 2019 | June 30, 2018 | Six Months Ended — June 29, 2019 | June 30, 2018 | |
|---|---|---|---|---|
| (In thousands, except percentages) | ||||
| Provision for income taxes | $ 2,290 | $ 1,654 | $ 4,322 | $ 1,941 |
| Effective tax rate | 24.8 % | 15.3 % | 25.8 % | 14.7 % |
Provision for income taxes reflects the tax provision on our operations in foreign and U.S. jurisdictions, offset by tax benefits from lapsing of statute of limitations related to uncertain tax positions in foreign jurisdictions. In the fourth quarter of fiscal 2018, we released our valuation allowance against certain U.S. deferred tax assets as sufficient positive evidence existed to support the realization of such deferred tax assets, resulting in an increase in our effective tax rate for the three and six months ended June 29, 2019 compared to the three and six months ended June 30, 2018 .
Liquidity and Capital Resources
Capital Resources
Our working capital was $244.8 million at June 29, 2019 , compared to $235.3 million at December 29, 2018 .
Cash and cash equivalents primarily consist of deposits held at banks and money market funds. Marketable securities primarily consist of U.S. treasuries, U.S. agency securities and corporate bonds. We typically invest in highly-rated securities with low probabilities of default. Our investment policy requires investments to be rated single A or better, and limits the types of acceptable investments, issuer concentration and duration of the investment.
Our cash, cash equivalents and marketable securities totaled approximately $176.9 million at June 29, 2019 , compared to $149.0 million at December 29, 2018 . We believe that we will be able to satisfy our working capital requirements and scheduled term loan repayments for at least the next twelve months with the liquidity provided by our existing cash, cash equivalents, marketable securities and cash provided by operations. To the extent necessary, we may consider entering into short and long-term debt obligations, raising cash through a stock issuance, or obtaining new financing facilities, which may not be available on terms favorable to us. Our future capital requirements may vary materially from those now planned.
If we are unsuccessful in maintaining or growing our revenues, maintaining or reducing our cost structure (in response to an industry demand downturn or other event), or increasing our available cash through debt or equity financings, our cash, cash equivalents and marketable securities may decline in fiscal 2019 .
We utilize a variety of tax planning and financing strategies to manage our worldwide cash and deploy funds to locations where needed. As part of these strategies, we indefinitely reinvest a portion of our foreign earnings. Should we require additional capital in the United States, we may elect to repatriate indefinitely-reinvested foreign funds or raise capital in the United States.
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Cash Flows
The following table sets forth our net cash flows from operating, investing and financing activities:
| Six Months Ended — June 29, 2019 | June 30, 2018 | |||
|---|---|---|---|---|
| (In thousands) | ||||
| Net cash provided by operating activities | $ 55,376 | $ 30,058 | ||
| Net cash used in investing activities | (12,470 | ) | (6,962 | ) |
| Net cash used in financing activities | (17,037 | ) | (18,949 | ) |
Operating Activities
Net cash provided by operating activities for the six months ended June 29, 2019 was primarily attributable to net income of $12.4 million and $40.8 million of net non-cash expenses, offset by operating assets and liabilities using $2.2 million of cash as discussed in more detail below.
Accounts receivable, net, decreased $24.0 million to $71.3 million at June 29, 2019 , compared to $95.3 million at December 29, 2018 , as a result of changes in customer sales mix, timing of customer shipments and timing of customer payments.
Inventories, net, increased $6.1 million to $83.9 million at June 29, 2019 , compared to $77.7 million at December 29, 2018 , as a result of increased inventory purchases to shorten lead time and improve pricing, and timing of customer demand.
Accounts payable decreased $13.8 million to $26.3 million at June 29, 2019 , compared to $40.0 million at December 29, 2018 , as a result of timing of vendor payments.
Investing Activities
Net cash used in investing activities for the six months ended June 29, 2019 was primarily related to $11.5 million of cash used in the acquisition of property, plant and equipment, as well as $1.1 million of net purchases of marketable securities.
Financing Activities
Net cash used in financing activities for the six months ended June 29, 2019 primarily related to $18.8 million of principal payments made towards the repayment of our term loan and $2.2 million related to tax withholdings associated with the net share settlements of our equity awards, partially offset by $3.9 million of proceeds received from issuances of common stock under our employee stock purchase plan and stock option plans.
Debt Facility
On June 24, 2016, we entered into a credit agreement (the “Credit Agreement”) with HSBC Bank USA, National Association ("HSBC"). Pursuant to the Credit Agreement, the lenders provided us with a senior secured term loan facility of $150 million (the “Term Loan”). The proceeds of the Term Loan were used to finance a portion of the purchase price paid in connection with the acquisition of Cascade Microtech.
The Term Loan bears interest at a rate equal to, at our option, (i) the applicable London Interbank Offered Rate ("LIBOR") rate plus 2.00% per annum or (ii) Base Rate (as defined in the Credit Agreement) plus 1.00% per annum. We have currently elected to pay interest at 2.00% over the one-month LIBOR rate. Interest payments are payable in monthly installments over a five-year period.
On July 25, 2016, we entered into an interest rate swap agreement with HSBC and other lenders to hedge the interest payments on the Term Loan for the notional amount of $95.6 million. As future levels of LIBOR over the life of the loan are uncertain, we entered into these interest-rate swap agreements to hedge the exposure in interest rate risks associated with movement in LIBOR rates. By entering into the agreements, we convert a floating rate interest at one-month LIBOR plus 2% into a fixed rate interest at 2.939%. As of June 29, 2019 , the notional amount of the loan that is subject to this interest rate swap is $33.8 million. See Note 7 of Notes to Condensed Consolidated Financial Statements for additional information.
The Term Loan amortizes in equal quarterly installments, which began June 30, 2016, in annual amounts equal to 5% for year one, 10% for year two, 20% for year three, 30% for year four and 35% for year five. The Credit Agreement allows voluntary prepayment to be made at any time to prepay the Term Loan in whole or in part without penalty or premium. As of June 29, 2019 , we have made prepayments of $40.0 million in addition to scheduled installments per the Credit Agreement. For the three and six months ended June 29, 2019 , we did not make any prepayments in addition to scheduled installments.
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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 June 29, 2019 , the balance outstanding pursuant to the Term Loan was $46.3 million at an interest rate of 4.1% 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 six months ended June 29, 2019 , we did not repurchase any shares of common stock. As of June 29, 2019 , $6.0 million remained available for future repurchases.
Repurchased shares are retired upon the settlement of the related trade transactions with the excess of cost over par value charged to additional paid-in capital. All repurchases were made in compliance with Rule 10b-18 under the Securities Exchange Act of 1934, as amended.
Contractual Obligations and Commitments
Other than our operating lease commitments as disclosed in Note 12 of Notes to Condensed Consolidated Financial Statements, our contractual obligations and commitments have not materially changed as of June 29, 2019 from those disclosed in our Annual Report on Form 10-K for the year ended December 29, 2018 .
Off-Balance Sheet Arrangements
Historically, we have not participated in transactions that have generated relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As of June 29, 2019 , we were not involved in any such off-balance sheet arrangements.
Recent Accounting Pronouncements
See Note 1 of Notes to Condensed Consolidated Financial Statements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
For financial market risks related to changes in interest rates and foreign currency exchange rates, reference is made to Item 7A “Quantitative and Qualitative Disclosures about Market Risk” contained in Part II of our Annual Report on Form 10-K for the fiscal year ended December 29, 2018 . Our exposure to market risk has not changed materially since December 29, 2018 .
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Based on our management’s evaluation (with the participation of our principal executive officer and principal financial officer), as of the end of the period covered by this report, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”)) are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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Limitations on the Effectiveness of Controls
Control systems, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control systems’ objectives are being met. Further, the design of any control systems must reflect the fact that there are resource constraints, and the benefits of all controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected. These inherent limitations include the realities that judgments in decision making can be faulty and that breakdowns can occur because of a simple error or mistake. Control systems can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based, in part, on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.
CEO and CFO Certifications
We have attached as exhibits to this Quarterly Report on Form 10-Q the certifications of our Chief Executive Officer and Chief Financial Officer, which are required in accordance with the Exchange Act. We recommend that this Item 4 be read in conjunction with the certifications for a more complete understanding of the subject matter presented.
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PART II - OTHER INFORMATION
Item 1A. Risk Factors
There have been no material changes during the six months ended June 29, 2019 to the risk factors discussed in our Annual Report on Form 10-K for the year ended December 29, 2018 . If any of the identified risks actually occur, our business, financial condition and results of operations could suffer. The trading price of our common stock could decline and you may lose all or part of your investment in our common stock. The risks and uncertainties described in our Annual Report on Form 10-K for the year ended December 29, 2018 are not the only ones we face. Additional risks that we currently do not know about or that we currently believe to be immaterial may also impair our business operations.
Item 6. Exhibits
The following exhibits are filed herewith and this list constitutes the exhibit index.
| Exhibit — Number | Exhibit Description | Incorporated by Reference — Form | Date | Number | Filed — Herewith |
|---|---|---|---|---|---|
| 3.1 | Amended and Restated Certificate of Incorporation of the Registrant as filed with the Delaware Secretary of State on June 17, 2003 | S-1 | October 20, 2003 | 3.01 | |
| 3.2 | Amended and Restated Bylaws of the Registrant | 8-K | July 22, 2016 | 3.2 | |
| 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 | X | |||
| 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 | X | |||
| 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 | * | |||
| 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.
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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.
| /s/ SHAI SHAHAR |
|---|
| Shai Shahar |
| Chief Financial Officer |
| (Duly Authorized Officer, Principal Financial Officer, and Principal Accounting Officer) |
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