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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

     
(Mark one)
þ
  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
    For the quarterly period ended March 27, 2004
 
or
 
o
   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
    For the transition period from           to

Commission file number: 000-50307

FormFactor, Inc.

(Exact name of registrant as specified in its charter)
     
Delaware   13-3711155
(State or other jurisdiction of
incorporation or organization)		   (I.R.S. Employer
Identification No.)

2140 Research Drive, Livermore, California 94550

(Address of principal executive offices, including zip code)

(925) 294-4300

(Registrant’s telephone number, including area code)

     Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes þ          No o

          Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).     Yes o          No þ

          The number of shares of the registrant’s common stock, par value $0.001 per share, outstanding as of April 30, 2004 was 37,466,484 shares.

FORMFACTOR, INC.

FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 27, 2004

INDEX

             
Page
      2  
      2  
        2  
        3  
        4  
        5  
      10  
      30  
      31  
 
      32  
      32  
      32  
      33  
      33  
      33  
      33  
 Signature     34  
 Exhibit Index     35  
 EXHIBIT 31.01
 EXHIBIT 31.02
 EXHIBIT 32.01

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PART I.     FINANCIAL INFORMATION

 
Item 1. Unaudited Condensed Consolidated Financial Statements

FORMFACTOR, INC.

CONDENSED CONSOLIDATED INCOME STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
                       
Three Months Ended
March 29, 2003 March 27, 2004
Revenues
  $ 18,669     $ 37,118  
Cost of revenues(1)
    9,800       18,026  
     
     
 
Gross margin
    8,869       19,092  
     
     
 
Operating expenses:
               
 
Research and development(1)
    3,525       4,349  
 
Selling, general and administrative(1)
    4,013       5,874  
 
Stock-based compensation
    333       409  
     
     
 
     
Total operating expenses
    7,871       10,632  
     
     
 
Operating income
    998       8,460  
Interest income
    162       533  
Interest expense
    (14 )     —  
Other expense
    (19 )     (395 )
     
     
 
      129       138  
Income before income taxes
    1,127       8,598  
Provision for income taxes
    (428 )     (3,422 )
     
     
 
Net income
  $ 699     $ 5,176  
     
     
 
Net income per share:
               
 
Basic
  $ 0.15     $ 0.14  
     
     
 
 
Diluted
  $ 0.02     $ 0.13  
     
     
 
Weighted-average number of shares used in per share calculations:
               
 
Basic
    4,539       37,083  
     
     
 
 
Diluted
    29,266       40,042  
     
     
 
               
(1) Amounts exclude stock-based compensation expense, as follows:
               
   
Cost of revenues
  $ 55     $ 61  
   
Research and development
    69       127  
   
Selling, general and administrative
    209       221  
     
     
 
     
Total
  $ 333     $ 409  
     
     
 

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

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FORMFACTOR, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
(Unaudited)
                     
December 27, March 27,
2003 2004
ASSETS
Current assets:
               
 
Cash and cash equivalents
  $ 116,305     $ 99,232  
 
Marketable securities
    62,965       82,520  
 
Accounts receivable, net of allowance for doubtful accounts of $103 in 2003 and 2004
    19,698       26,375  
 
Inventories, net
    8,025       8,744  
 
Deferred tax assets
    2,575       2,523  
 
Prepaid expenses and other current assets
    2,744       2,756  
     
     
 
   
Total current assets
    212,312       222,150  
Restricted cash
    2,550       2,550  
Property and equipment, net
    20,495       27,374  
Deferred tax assets
    398       398  
Other assets
    356       349  
     
     
 
   
Total assets
  $ 236,111     $ 252,821  
     
     
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
               
 
Accounts payable
  $ 10,579     $ 15,334  
 
Accrued liabilities
    10,147       9,032  
 
Deferred revenue and customer advances
    1,005       1,278  
     
     
 
   
Total current liabilities
    21,731       25,644  
 
Deferred revenue and customer advances
    433       374  
     
     
 
   
Total liabilities
    22,164       26,018  
     
     
 
Stockholders’ equity:
               
 
Common stock, $0.001 par value
    37       38  
 
Additional paid-in capital
    226,630       232,950  
 
Notes receivable from stockholders
    (661 )     —  
 
Deferred stock-based compensation, net
    (11,249 )     (10,623 )
 
Accumulated other comprehensive income (loss)
    (4 )     68  
 
Retained earnings (accumulated deficit)
    (806 )     4,370  
     
     
 
   
Total stockholders’ equity
    213,947       226,803  
     
     
 
   
Total liabilities and stockholders’ equity
  $ 236,111     $ 252,821  
     
     
 

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

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FORMFACTOR, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)
(Unaudited)
                         
Three Months Ended
March 29, 2003 March 27, 2004
Cash flows from operating activities:
                
 
Net income
  $ 699     $ 5,176  
 
Adjustments to reconcile net income to net cash used in operating activities:
               
   
Depreciation and amortization
    1,281       1,380  
   
Stock-based compensation expense
    333       409  
   
Deferred tax assets
    —       52  
   
Tax benefit from employee stock option plans
    —       2,524  
   
Interest income from stockholders’ notes receivable
    (58 )     —  
   
Provision for doubtful accounts
    (50 )     —  
   
Provision for excess and obsolete inventories
    1,102       656  
   
Loss on disposal of property and equipment
    10       —  
   
Changes in assets and liabilities:
               
     
Accounts receivable
    1,731       (6,678 )
     
Inventories
    (1,901 )     (1,376 )
     
Prepaid and other current assets
    (356 )     (3 )
     
Accounts payable
    (1,641 )     (1,951 )
     
Accrued liabilities
    (2,339 )     (1,141 )
     
Deferred revenues
    (157 )     213  
     
     
 
       
Net cash used in operating activities
    (1,346 )     (739 )
     
     
 
Cash flows from investing activities:
                
 
Acquisition of property and equipment
    (960 )     (1,560 )
 
Purchase of marketable securities
    (2,810 )     (31,060 )
 
Proceeds from maturities of marketable securities
    6,030       11,597  
 
Restricted cash
    2,835       —  
 
Other assets
    10       —  
     
     
 
       
Net cash provided by (used in) investing activities
    5,105       (21,023 )
     
     
 
Cash flows from financing activities:
                
 
Proceeds from issuance of common stock, net
    67       4,013  
 
Repayment of notes receivable from stockholders
    10       661  
 
Repayment of notes payable
    (125 )     —  
     
     
 
       
Net cash provided by (used in) financing activities
    (48 )     4,674  
     
     
 
 
Effect of exchange rate changes on cash and cash equivalents
    12       15  
       
Net increase (decrease) in cash and cash equivalents
    3,723       (17,073 )
 
Cash and cash equivalents, beginning of the period
    26,786       116,305  
     
     
 
 
Cash and cash equivalents, end of the period
  $ 30,509     $ 99,232  
     
     
 
 
Supplemental disclosure of significant non-cash investing activities:
                
 
Purchases of property and equipment through accounts payable and accrued liabilities
  $ —     $ 6,700  

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

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FORMFACTOR, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Three Months Ended March 27, 2004

Note 1 — Basis of Presentation

      The accompanying unaudited condensed consolidated financial statements of FormFactor, Inc. and its subsidiaries (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and pursuant to the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission. Accordingly, the interim financial statements do not include all of the information and footnotes required by generally accepted accounting principles for annual financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three months ended March 27, 2004 are not necessarily indicative of the results that may be expected for the year ending December 25, 2004, or for any other period. The balance sheet at December 27, 2003 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. These financial statements and notes should be read with the financial statements and notes thereto for the year ended December 27, 2003 included in the Company’s annual report on Form 10-K for the year ended December 27, 2003 filed with the Securities and Exchange Commission.

Note 2 — Significant Accounting Policies

      The Company’s significant accounting policies are disclosed in the Company’s annual report on Form 10-K for the year ended December 27, 2003 filed with the Securities and Exchange Commission. The Company’s significant accounting policies have not materially changed during the three months ended March 27, 2004.

Note 3 — Inventories

      Inventories are stated at the lower of cost (principally standard cost which approximates actual cost on a first-in, first-out basis) or market value. Reserves for potentially excess and obsolete inventory are made based on inventory levels and future sales forecasts.

      Inventories, net of reserves, consisted of the following (in thousands):

                 
December 27, March 27,
2003 2004
Raw materials
  $ 3,128     $ 3,915  
Work-in-progress
    4,628       4,829  
Finished goods
    269       —  
     
     
 
    $ 8,025     $ 8,744  
     
     
 

Note 4 — Warranty

      The Company offers warranties on certain products and records a liability for the estimated future costs associated with customer claims, which is based upon historical experience and the Company’s estimate of the level of future costs. Warranty costs are reflected in the income statement as a cost of revenues. A

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FORMFACTOR, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)

reconciliation of the changes in the Company’s warranty liability for the three months ended March 27, 2004 follows (in thousands):

                 
Three Months Ended
March 29, March 27,
2003 2004
Beginning balance
  $ 679     $ 446  
Reserve for warranties issued during the period
    197       196  
Settlements made during the period
    (340 )     (196 )
     
     
 
Ending balance
  $ 536     $ 446  
     
     
 

      Management believes that the accrual balance at March 27, 2004 is adequate to cover estimated future costs associated with warranty claims.

Note 5 — Stock-Based Compensation

      The Company uses the intrinsic value method of Accounting Principles Board Opinion No. 25 (“APB No. 25”), “Accounting for Stock Issued to Employees,” in accounting for its employee stock options, and presents disclosure of the pro forma information required under SFAS No. 123 (“SFAS No. 123”), “Accounting for Stock-Based Compensation” as amended by SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure.” The Company uses the Black-Scholes option pricing model to compute its pro forma option expense.

      Had compensation cost for the Company’s stock option grants to employees been determined based on the fair values of the stock option at the date of grant consistent with the provisions of SFAS No. 123, the Company’s net income would have been changed to the pro-forma amounts as follows:

                   
Three Months Ended
March 29, March 27,
2003 2004
(In thousands, except
per share amounts)
Net income, as reported
  $ 699     $ 5,176  
Add: Stock-based employee compensation expense included in reported net income, net of tax
    206       246  
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of tax
    (265 )     (532 )
     
     
 
Pro forma net income
  $ 640     $ 4,890  
     
     
 
Net income per share
               
Basic:
               
 
As reported
  $ 0.15     $ 0.14  
     
     
 
 
Pro forma
  $ 0.14     $ 0.13  
     
     
 
Diluted:
               
 
As reported
  $ 0.02     $ 0.13