TMCnet News
FORMFACTOR INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) Cautionary Statement Regarding Forward-Looking Statements This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Securities Exchange Act of 1934 and the Securities Act of 1933, which are subject to risks and uncertainties. The forward-looking statements include statements concerning, among other things, our business strategy (including anticipated trends and developments in, and management plans for, our business and the markets in which we operate), financial results, operating results, revenues, gross margin, operating expenses, products, projected costs and capital expenditures, research and development programs, sales and marketing initiatives and competition. In some cases, you can identify these statements by forward-looking words, such as "may," "might," "will," "could," "should," "expect," "plan," "anticipate," "believe," "estimate," "predict," "intend" and "continue," the negative or plural of these words and other comparable terminology. The forward-looking statements are only predictions based on our current expectations and our projections about future events. All forward-looking statements included in this Quarterly Report on Form 10-Q are based upon information available to us as of the filing date of this Quarterly Report on Form 10-Q. You should not place undue reliance on these forward-looking statements. We have no obligation to update any of these statements. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to differ materially from those expressed or implied by these statements. These factors include the matters discussed in the section titled "Risk Factors" in our Annual Report on Form 10-K for the year ended December 28, 2013 and elsewhere in this Quarterly Report on Form 10-Q. You should carefully consider the numerous risks and uncertainties described under these sections. The following discussion and analysis should be read in conjunction with our condensed consolidated financial statements and the accompanying notes contained in this Quarterly Report on Form 10-Q. Unless expressly stated or the context otherwise requires, the terms "we," "our," "us" and "FormFactor" refer to FormFactor, Inc. and its subsidiaries. Overview We design, develop, manufacture, sell and support precision, high performance advanced semiconductor wafer probe card products and solutions. We are the largest probe card manufacturer, and semiconductor manufacturers use our wafer probe cards to perform wafer sort and test on semiconductor die, or chips, prior to wafer singulation. During wafer sort and test, a wafer probe card is mounted on a prober and electrically connected to a semiconductor tester. The wafer probe card is used as an interface to connect electrically with and test individual chips on a wafer. Our customers can reduce their cost of test by identifying defective chips prior to incurring the time and costs of packaging defective chips. We work closely with our customers on product design, as each wafer probe card is a custom product that is specific to the chip and wafer designs of the customer. We operate in a single industry segment and have derived substantially all of our revenues from the sale of wafer probe cards incorporating our proprietary technology. Historically, sales for wafer probe cards for testing Dynamic Random Access Memory, or DRAM, devices have made up the majority of our revenues. In October 2012, we completed the acquisition of Astria Semiconductor Holdings, Inc., including its subsidiary Micro-Probe Incorporated (together "MicroProbe"). The majority of MicroProbe's revenue is made up of sales of wafer probe cards for testing System-on-Chip, or SoC, devices. We incurred a net loss of $17.3 million in the first-nine months of fiscal 2014 as compared to a net loss of $38.9 million in the first-nine months of fiscal 2013. The decrease in net loss is primarily attributable to our ongoing cost reduction and restructuring efforts as well as increased revenues. Our cash, cash equivalents and marketable securities and restricted cash totaled approximately $155 million as of September 27, 2014, as compared to approximately $152 million at December 28, 2013. The increase in our cash, cash equivalents and marketable securities balances was primarily due to improved operating results and reduced capital expenditures, net of investments in working capital to grow revenues. We generated $5.3 million of cash in the third fiscal quarter of 2014. We believe that we will be able to satisfy our working capital requirements for at least the next twelve months with the liquidity provided by our existing cash, cash equivalents and marketable securities. If we are unsuccessful in maintaining or growing our revenues, or maintaining or reducing our cost structure in an industry down-turn, or increasing our available cash through financing, our cash, cash equivalents and marketable securities will decline in future fiscal years. 21 -------------------------------------------------------------------------------- We believe the following information is important to understanding our business, our financial statements and the remainder of this discussion and analysis of our financial condition and results of operations: Revenues. We derive substantially all of our revenues from product sales of wafer probe cards. Revenues from our customers are subject to fluctuations due to factors including, but not limited to, design cycles, technology adoption rates, competitive pressure to reduce prices, cyclicality of the different end markets into which our customers' products are sold and market conditions in the semiconductor industry. Historically, increases in revenues have resulted from increased demand for our existing products, the introduction of new, more complex products, the penetration of new markets and through acquisition. We expect that revenues from the sale of wafer probe cards will continue to account for substantially all of our revenues for the foreseeable future. Cost of Revenues. Cost of revenues consists primarily of manufacturing materials, payroll, shipping and handling costs, manufacturing-related overhead and amortization of certain intangible assets. Our manufacturing operations rely upon a limited number of suppliers to provide key components and materials for our products, some of which are a sole source. We order materials and supplies based on backlog and forecasted customer orders. Tooling and setup costs related to changing manufacturing lots at our suppliers are also included in the cost of revenues. We expense all warranty costs and inventory provisions as cost of revenues. We design, manufacture and sell custom advanced wafer probe cards into the semiconductor test market, which is subject to significant variability and demand fluctuations. Our wafer probe cards are complex products that are custom to a specific chip design of a customer and must be delivered on relatively short lead-times as compared to our overall manufacturing process. As our advanced wafer probe cards are manufactured in low volumes, it is not uncommon for us to acquire production materials and start certain production activities based on estimated production yields and forecasted demand prior to or in excess of actual demand for our wafer probe cards. We record an adjustment to our inventory valuation for estimated excess, obsolete and non-sellable inventories based on assumptions about future demand, past usage, changes to manufacturing processes and overall market conditions. Research and Development. Research and development expenses include expenses related to product development, engineering and material costs. Research and development costs are expensed as incurred. We plan to continue to invest in research and development activities to improve and enhance existing product technologies and to develop new technologies for current and new products and for new applications. Selling, General and Administrative. Selling, general and administrative expenses include expenses related to sales, marketing, administrative personnel, internal and outside sales representatives' commissions, market research and consulting, and other sales, marketing, administrative activities, amortization of certain intangible assets, and provision for doubtful accounts. These expenses also include costs for protecting and enforcing our intellectual property rights and regulatory compliance costs. Restructuring Charges. Restructuring charges include costs related to employee termination benefits, cost of long-lived assets abandoned or impaired, as well as contract termination costs. Impairment of Long-Lived Assets. Asset impairment charges include charges associated with the write-down of assets that have no future expected benefit or for assets that have been determined to be impaired as well as adjustments to the carrying amount of our assets held for sale. Results of Operations The following table sets forth our operating results as a percentage of revenues for the periods indicated: 22 -------------------------------------------------------------------------------- Three Months Ended Nine Months Ended September 27, September 28, September 27, September 28, 2014 2013 2014 2013 Revenues 100.0 % 100.0 % 100.0 % 100.0 % Cost of revenues 67.3 81.5 71.4 79.2 Gross profit 32.7 18.5 28.6 20.8 Operating expenses: Research and development 15.2 15.2 16.2 17.6 Selling, general and administrative 18.0 19.2 19.6 22.4 Restructuring charges, net - 0.2 1.1 2.3 Loss on sale of subsidiary - - - 0.2 Impairment of long-lived assets 0.1 - 0.4 0.1 Total operating expenses 33.3 34.6 37.3 42.6 Operating loss (0.7 ) (16.1 ) (8.7 ) (21.8 ) Interest income, net 0.1 0.1 0.1 0.2 Other income (expense), net 0.3 (0.1 ) - 0.3 Loss before income taxes (0.3 ) (16.1 ) (8.6 ) (21.3 ) Provision (benefit) for income taxes 0.1 (0.2 ) 0.2 (0.1 ) Net loss (0.4 )% (15.9 )% (8.8 )% (21.2 )% Three and nine months ended September 27, 2014 and September 28, 2013: Revenues Revenues by Market Three Months Ended Nine Months Ended September 27, September 28, 2014 2013 % Change September 27, 2014 September 28, 2013 % Change (In thousands, except percentages) SoC $ 39,386 $ 31,700 24.2 % $ 105,653 $ 85,646 23.4 % DRAM 31,383 28,852 8.8 79,985 77,501 3.2 Flash 3,164 7,082 (55.3 ) 11,607 19,840 (41.5 ) Total revenues $ 73,933 $ 67,634 9.3 % $ 197,245 $ 182,987 7.8 % Revenues for the three and nine months ended September 27, 2014 increased 9%, or approximately $6.3 million, and 8%, or approximately $14.3 million, respectively, as compared to the corresponding periods in the prior year. For the three months ended September 27, 2014, our revenue increased 24% in our SoC products, increased 9% in our DRAM products and decreased 55% in our Flash memory products, as compared to the corresponding period in the prior year. For the nine months ended September 27, 2014, our revenues increased 23% in our SoC products, increased 3% in our DRAM products and decreased 41% in our Flash memory products, as compared to the corresponding period in the prior year. The overall increase in revenues was primarily driven by higher unit volume in both the SoC and DRAM markets. The SoC revenue increase was driven by a combination of strong mobile application processor, personal computer processor, and automotive microcontroller demand. DRAM demand and revenue increased primarily due to the adoption of our SmartMatrix product at a major South Korean memory producer. The decrease in Flash memory revenue was due to a weakening NOR Flash memory market and reduced demand for our TouchMatrix product at South Korean and Taiwanese NAND Flash memory producers. Revenues by Geographic Region 23 -------------------------------------------------------------------------------- The following table sets forth our revenues by geographic region for the periods indicated: Three Months Ended Nine Months Ended September 27, % of September 28, % of September 27, % of September 28, % of 2014 Revenue 2013 Revenue 2014 Revenue 2013 Revenue (In thousands, except percentages) North America $ 19,569 26.5 % $ 17,252 25.5 % $ 52,406 26.6 % $ 46,868 25.6 % South Korea 14,502 19.6 12,562 18.6 41,784 21.2 37,769 20.6 Taiwan 12,398 16.8 22,953 33.9 33,366 16.9 54,128 29.6 Asia-Pacific (1) 12,090 16.4 4,470 6.6 26,377 13.5 16,732 9.2 Europe 8,231 11.1 4,325 6.4 23,413 11.9 12,991 7.1 Japan 7,143 9.7 6,072 9.0 19,899 10.1 14,499 7.9 Total revenues $ 73,933 100.0 % $ 67,634 100.0 % $ 197,245 100.0 % $ 182,987 100.0 % _________________________________________________________________________________________________ (1) Asia-Pacific includes all countries in the region except Taiwan, South Korea, and Japan, which are disclosed separately. Geographic revenue information is based on the location to which we ship the customer product. For example, if a certain South Korean customer purchases through their North American subsidiary and requests the products to be shipped to an address in Asia-Pacific, this sale will be reflected in the revenue for Asia-Pacific rather than North America. The increases in North America and Europe revenues for the three and nine months ended September 27, 2014, when compared to the same periods in 2013, were driven by increased SoC product shipments for both flip chip and wire bond applications. The decrease in Taiwan revenues for the three and nine months ended September 27, 2014, when compared to the same periods in 2013, was driven by a combination of decreased SoC product shipments, a decrease in commodity or personal computer based DRAM demand, and reduced NAND Flash memory demand. The increase in South Korea revenues for the three and nine months ended September 27, 2014 when compared to the same periods in 2013 was primarily due to increased DRAM demand and the adoption of our SmartMatrix product at a major South Korean memory producer. The increase in Japan revenues for the three and nine months ended September 27, 2014 was driven by a combination of higher demand for SoC wire bond and mobile DRAM products. Revenues in Asia-Pacific for the three and nine month periods increased, primarily driven by sales of our SmartMatrix DRAM products in that region. The following customers accounted for more than 10% of our revenues for the periods indicated: Three Months Ended Nine Months Ended September 27, September 2014 28, 2013 September 27, 2014 September 28, 2013 Intel 18.9 % 15.5 % 18.3 % 15.8 % Micron 16.6 19.0 14.6 10.2 SK hynix 15.6 12.4 18.0 17.0 Samsung 10.8 * * * 61.9 % 46.9 % 50.9 % 43.0 % * Less than 10% of revenues. 24 -------------------------------------------------------------------------------- Gross Profit Three Months Ended Nine Months Ended September 27, 2014 September 28, 2013 September 27, 2014 September 28, 2013 (In thousands, except percentages) Gross profit $ 24,142 $ 12,546 $ 56,491 $ 38,026 % of revenues 32.7 % 18.5 % 28.6 % 20.8 % Gross profit fluctuates with revenue levels, product mix, selling prices, factory loading, and material costs. For the three and nine months ended September 27, 2014, the amount of gross profit increased compared to the same periods in the prior year, primarily due to lower material costs, lower labor expenses and overhead charges as a result of our cost reduction initiatives and favorable production yields. Gross profit also benefited from higher production volume driven by higher sales. This led to higher factory utilization on a relatively fixed base of overhead costs and resulted in improvements to our gross profits for all product markets. Our net inventory provision charges declined by $1.3 million and $2.3 million between the three and nine months ended September 27, 2014 and the corresponding period in the prior year. For the three and nine months ended September 27, 2014, the value of previously reserved materials that were used in manufacturing and shipped was $0.5 million and $2.0 million, respectively. Gross profit included stock-based compensation expense of $0.7 million and $1.9 million for the three and nine months ended September 27, 2014, respectively, compared to $0.5 million and $1.7 million, respectively, for the three and nine months ended September 28, 2013. Future gross margins may be adversely impacted by lower levels of product revenues, even though we have taken significant steps to reduce our operating cost structure. Our gross margins may also be adversely affected if we are required to record additional inventory provision charges and inventory write-downs if estimated average selling prices of products held in finished goods and work in process inventories are below the manufacturing cost of those products. Research and Development Three Months Ended Nine Months Ended September 27, September 28, September 27, September 28, 2014 2013 2014 2013 (In thousands, except percentages) Research and development $ 11,198 $ 10,301 $ 32,019 $ 32,145 % of revenues 15.2 % 15.2 % 16.2 % 17.6 % Research and development expenses for the three and nine months ended September 27, 2014 increased by $0.9 million and decreased by $0.1 million, respectively, compared to the same periods in the prior year. The increase in the three months ended September 27, 2014 compared to the same period in the prior year was primarily due to an increase of $0.7 million in incentive compensation, $0.5 million in project and material costs and $0.3 million in stock compensation expense offset by a reduction of $0.5 million in personnel related costs as a result of our ongoing restructuring efforts. The decrease in the nine months ended September 27, 2014 compared to the same period in the prior year was due to reduction of $1.9 million in personnel related costs as a result of our ongoing restructuring efforts offset by an increase of $1.1 million of incentive compensation and $0.9 million in project and material costs. Stock-based compensation expense included in research and development expenses was $1.1 million and $2.6 million, respectively, for the three and nine months ended September 27, 2014, compared to $0.8 million and $2.7 million, respectively, for the three and nine months ended September 28, 2013. 25 -------------------------------------------------------------------------------- Selling, General and Administrative Three Months Ended Nine Months Ended September 27, 2014 September 28, 2013 September 27, 2014 September 28, 2013 (In thousands, except percentages) Selling, general and administrative $ 13,309 $ 12,952 $ 38,754 $ 41,057 % of revenues 18.0 % 19.2 % 19.6 % 22.4 % Selling, general and administrative expenses for the three and nine months ended September 27, 2014 increased by $0.4 million and decreased by $2.3 million, respectively, compared to the same periods in the prior year. The increase in the three months ended September 27, 2014 compared to the same period in the prior year was due to an increase of $0.9 million in incentive compensation, $0.6 million in stock based compensation and $0.3 million in loss contingency reserve offset by a reduction of $0.6 million in personnel related costs as a result of our ongoing restructuring efforts, $0.5 million in sales commissions and $0.3 million in general operating expenses. The decrease in the nine months ended September 27, 2014 compared to the same period in the prior year was primarily due to a reduction of $1.9 million in personnel related costs as a result of our ongoing restructuring efforts, $1.1 million in acquisition and integration related costs, $0.9 million in general operating expenses as a result of our ongoing cost reduction efforts, $0.7 million in sales commissions, $0.4 million in expensed equipment and supplies, $0.3 million in travel costs and $0.2 million in project materials cost offset by an increase of $1.5 in incentive compensation, $0.8 million in stock based compensation, $0.7 million in loss contingency reserve and $0.3 million in foreign payroll taxes. Stock-based compensation expense included within selling, general and administrative expenses was $2.2 million and $5.5 million, respectively, for the three and nine months ended September 27, 2014, compared to $1.6 million and $4.8 million, respectively, for the three and nine months ended September 28, 2013. Restructuring Charges, net Three Months Ended Nine Months Ended September 27, September 28, September 27, September 28, 2014 2013 2014 2013 (In thousands, except percentages)Restructuring charges, net $ 28 $ 143 $ 2,084 $ 4,215 % of revenues - % 0.2 % 1.1 % 2.3 % For the three months ended September 27, 2014, restructuring charges decreased by $0.1 million from the comparable period of the prior year. For the nine months ended September 27, 2014, restructuring charges decreased by $2.1 million from the comparable period of the prior year. Our restructuring activities are discussed below. 2014 Restructuring Activities On January 27, 2014, we announced a global organizational restructuring and cost reduction plan (the "Q1 2014 Restructuring Plan"). As part of the plan, the Company eliminated 52 full-time employees. In addition, we reduced our temporary workforce by 9 positions. We recorded $2.0 million of restructuring charges during the first fiscal quarter of fiscal 2014, which was comprised of $1.4 million in severance and related benefits and $0.6 million in impairment charges for certain equipment that would no longer be utilized. During the three months ended June 28, 2014, we eliminated an additional 2 full-time employees and recorded $59 thousand in severance charges. During the three months ended September 27, 2014, we eliminated an additional full-time position and recorded $28 thousand in severance charges. 2013 Restructuring Activities In the first quarter of fiscal 2013, we implemented a restructuring plan (the "Q1 2013 Restructuring Plan") which resulted in the reduction of our global workforce by 31 employees across the organization. In addition we reduced our temporary workforce by approximately 20 positions. We also suspended development activities and engineering efforts for our next 26 -------------------------------------------------------------------------------- generation DRAM Matrix platform and terminated development activities for a certain SoC product platform. We recorded $4.0 million of restructuring charges during the first quarter of fiscal 2013, which was comprised of $1.3 million in severance and related benefits and $2.7 million in impairment charges for certain equipment that would no longer be utilized. In the second quarter of fiscal 2013, we recorded $0.1 million of severance and related benefits due to the reduction of 4 employees across the organization. The activities comprising these restructuring activities were completed in fiscal 2013. Loss on Sale of Subsidiary Three Months Ended Nine Months Ended September 27, 2014 September 28, 2013 September 27, 2014 September 28, 2013 (In thousands, except percentages) Loss on sale of subsidiary - $ - - $ 300 % of revenues - % - % - % 0.2 % On June 29, 2013, we sold TMMC, a wholly owned subsidiary of MicroProbe based in Carson City, Nevada. TMMC's assets were sold to its management team for a purchase consideration of $1.0 million. FormFactor received approximately $0.2 million in cash upon the sale in the second fiscal quarter of 2013 and an approximately $0.8 million note to be repaid over 7 years at a 5% interest rate. The fair value of the note was discounted to approximately $0.5 million as of June 29, 2013. We included goodwill of approximately $0.2 million and a trademark intangible asset, net of accumulated amortization, of approximately $0.1 million in the loss on disposal of a subsidiary. We recorded a net loss on the sale of TMMC's assets of $0.3 million for the nine months ended September 28, 2013. Impairment of Long-lived Assets Three Months Ended Nine Months Ended September 27, September 28, September 27, September 28, 2014 2013 2014 2013 (In thousands, except percentages) Impairment of long-lived assets $ 86 $ 15 $ 829 $ 194 % of revenues 0.1 % - % 0.4 % 0.1 % During the three and nine months ended September 27, 2014, we recorded $86 thousand and $0.8 million of impairments related to manufacturing assets we no longer utilize. During the three and nine months ended September 28, 2013, we recorded $15 thousand and $0.2 million, respectively, of impairments related to manufacturing assets we no longer utilize. These charges are included in "Impairment of long-lived assets" in the Condensed Consolidated Statements of Operations in their respective periods. Management believes it is reasonably possible that additional impairment charges that would further reduce the carrying amounts of our property, plant and equipment and intangible assets may arise in fiscal 2014. Interest Income, Net and Other Income (Expense), Net Three Months Ended Nine Months Ended September 27, September 28, September 27, September 28, 2014 2013 2014 2013 (In thousands, except percentages) Interest income, net $ 75 $ 95 $ 233 $ 298 % of revenue 0.1 % 0.1 % 0.1 % 0.2 % Other income (expense), net $ 228 $ (91 ) $ 6 $ 541 % of revenues 0.3 % (0.1 )% - % 0.3 % 27-------------------------------------------------------------------------------- Interest income is primarily earned on our cash, cash equivalents and marketable securities. The decrease in interest income for the three and nine months ended September 27, 2014 as compared with the same period of the prior year was primarily the result of lower average balances and yields. Cash, cash equivalents, restricted cash and marketable securities were $154.8 million at September 27, 2014 compared to $156.8 million at September 28, 2013. The weighted-average yield on our cash, cash equivalents and marketable securities for the three months ended September 27, 2014 and September 28, 2013 was 0.16% and 0.21%, respectively and the weighted average yield for the nine months ended September 27, 2014 and September 28, 2013 was 0.17% and 0.27%, respectively. Other income (expense), net is comprised primarily of foreign currency impact and various other gains and losses. The change in other income (expense), net for the three and nine months ended September 27, 2014 compared to the three and nine months ended September 28, 2013 was due primarily to foreign currency exchange gains (losses). Provision for (Benefit From) Income Taxes Three Months Ended Nine Months Ended September 27, September 28, September 27, September 28, 2014 2013 2014 2013 (In thousands, except percentages) Provision for (benefit from) income taxes $ 101 $ (147 ) $ 358 (152 ) Effective tax rate (57.4 )% 1.4 % (2.1 )% 0.4 % We recorded an income tax provision of $0.1 million and $0.4 million for the three and nine months ended September 27, 2014, respectively, and an income tax benefit of $0.1 million and $0.2 million, respectively, for the three and nine months ended September 28, 2013. Income tax provisions reflect the tax provision on our operations in the US and foreign jurisdictions and the tax benefit from the lapsing of the statute of limitations in foreign jurisdictions. We continue to maintain a valuation allowance for our U.S. Federal and state deferred tax assets. Liquidity and Capital Resources Capital Resources: Our working capital was $192.9 million at September 27, 2014 and $173.9 million at December 28, 2013. The increase in working capital in the nine months ended September 27, 2014 was primarily due to an increase in accounts receivable due to increased sales, inventory build in anticipation of higher sales and the reclassification of our long-lived assets to current assets as assets held for sale. Cash and cash equivalents consist of deposits held at banks, money market funds, U.S. government securities and commercial paper that at the time of purchase had maturities of 90 days or less. Marketable securities consist of U.S. government and agency securities and commercial paper. 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 $154.4 million at September 27, 2014, as compared to $151.1 million at December 28, 2013. The increase in our cash, cash equivalents and marketable securities balances was primarily due to improved operating results and reduced capital expenditures, net of investments in working capital to grow revenues. We believe that we will be able to satisfy our working capital requirements for at least the next twelve months with the liquidity provided by our existing cash, cash equivalents and marketable securities. If we are unsuccessful in maintaining or growing our revenues, or maintaining or reducing our cost structure in an industry down-turn, or increasing our available cash through financing, our cash, cash equivalents and marketable securities may decline in fiscal 2014. We utilize a variety of tax planning and financing strategies in an effort to manage our worldwide cash and deploy funds to locations where they are needed. As part of these strategies, we indefinitely reinvest a significant portion of our foreign earnings and our current plans do not demonstrate a need to repatriate these earnings. Should we require additional capital in the United States, we may elect to repatriate indefinitely reinvested foreign funds or raise capital in the United States. If we were to repatriate indefinitely reinvested foreign funds, we would be required to accrue and pay additional United States taxes less applicable foreign tax credits. Days Sales Outstanding: Days sales outstanding from receivables, or DSO, were 53 days at September 27, 2014 compared with 52 days at December 28, 2013. Our DSO calculation is determined using the count back method and is based on 28 -------------------------------------------------------------------------------- gross accounts receivable (including accounts receivable for amounts in deferred revenue). The increase in DSO is primarily due to higher sales to customers on 60-day payment terms during the nine months ended September 27, 2014 as compared to the year ended December 28, 2013. Nine Months Ended September 27, 2014 September 28, 2013 (In thousands) Net cash provided by (used in) operating activities $ 5,415 $ (2,554 ) Net cash provided by (used in) investing activities 22,996 (11,460 ) Net cash provided by financing activities $ 2,542 $ 2,129 Cash flows from operating activities: Net cash provided by operating activities for the nine months ended September 27, 2014 was primarily attributable to improved operating results from increased revenues and decreased costs offset by increase in working capital necessary to support the increased revenues. The Company had a net loss of $17.3 million which was offset by non-cash expenses of $42.2 million, including $24.2 million of depreciation and amortization, $10.0 million of stock-based compensation, $5.5 million of provision for excess and obsolete inventories, $0.9 million of foreign currency transaction losses, $0.8 million of impairment of long-lived assets and $0.6 million of assets written-off as part of our restructuring activities. The net change in operating assets and liabilities for the nine months ended September 27, 2014 resulted in a net use of cash of $19.5 million and which was comprised of cash used of $17.9 million in accounts receivable due to higher sales, $10.7 million of cash used for inventory due to inventory build, $1.6 million decrease in deferred revenues due to recognition of previously deferred revenues for which the revenue recognition criteria have been met and an increase of prepaid expenses and other current assets of $1.1 million primarily from assets held for sale. The above use of cash was offset in part by an increase of $6.0 million in accounts payable driven by the timing of our payments on vendor obligations, an increase of $5.5 million in accrued liabilities due to incentive compensation, accrued payroll and warranty, $0.2 million increase in deferred rent and other liabilities due to additional operating lease obligations and an increase in income tax payable of $0.2 million. Net cash used in operating activities for the nine months ended September 28, 2013 was primarily attributable to our net loss of $38.9 million offset in part by $43.1 million of non-cash charges consisting primarily of $21.9 million of depreciation and amortization, $9.1 million of stock-based compensation, $7.8 million of provision for excess and obsolete inventories and $2.7 million of assets written-off as part of our restructuring plan. The net change in operating assets and liabilities for the nine months ended September 28, 2013 was attributable to a use of cash of $6.7 million comprising an increase in our accounts receivable of $18.0 million due to an increase in sales transactions closer to our quarter end, an increase in inventory of $6.7 million as we built more inventory to support higher forecasted demand in future quarters and a reduction of $1.1 million in accrued liabilities. Working capital sources of cash were primarily an increase of $10.7 million in accounts payable driven by the timing of invoice receipts and payments to vendors, receipt of refundable taxes of $5.1 million and decrease of prepaid expenses and other current assets of $1.9 million. Cash flows from investing activities: Net cash provided by investing activities for the nine months ended September 27, 2014 was primarily related to $58.3 million of proceeds from maturities of marketable securities and $0.8 million of proceeds from sales of property, plant and equipment offset by purchases of marketable securities totaling $31.7 million and cash used in the acquisition of property and equipment of $4.5 million. We carefully monitor our investments to minimize risks and have not experienced other than temporary investment losses. Except for experiencing declining yields, our investment portfolio has not been negatively impacted by the economic turmoil in the credit markets in the recent past. Net cash used in investing activities for the nine months ended September 28, 2013 was primarily related to purchases of marketable securities totaling $69.2 million offset by $63.5 million of proceeds from maturities of marketable securities and $7.4 million cash used in the acquisition of property and equipment. Cash flows from financing activities: Net cash provided by financing activities for the nine months ended September 27, 2014 and September 28, 2013 included $2.8 million and $2.6 million, respectively, from proceeds received from purchases under our 2012 Employee Stock Purchase Plan, offset by stock withheld in lieu of payment of employee taxes related to the release of restricted stock units. Our cash, cash equivalents and marketable securities increased by $3.3 million in the nine months ended September 27, 2014. We continue to focus on improving our operating efficiency to increase operating cash flows. We believe that we will be able to satisfy our cash requirements for at least the next twelve months with the liquidity provided by our existing cash, cash 29 -------------------------------------------------------------------------------- equivalents and marketable securities. To the extent necessary, we may also consider entering into short and long-term debt obligations, raise cash through a stock issuance, or to obtain new financing facilities which may not be available on terms favorable to us or at all. Our future capital requirements may vary materially from those now planned. However, if we are unsuccessful in maintaining or growing our revenues, or maintaining or reducing our cost structure in an industry down-turn, or increasing our available cash through financing, our cash, cash equivalents and marketable securities could decline in future fiscal quarters. Off-Balance Sheet Arrangements Historically, we have not participated in transactions that have generated relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As of September 27, 2014, we were not involved in any such off-balance sheet arrangements. Critical Accounting Policies and Estimates Our critical accounting policies are disclosed in our Annual Report on Form 10-K for the year ended December 28, 2013. Our critical accounting policies have not changed during the nine months ended September 27, 2014. Recent Accounting Pronouncements Please refer to the discussion of our recent accounting pronouncements in Note 2-Recent Accounting Pronouncements of the Notes to Condensed Consolidated Financial Statements under Part I, Item 1 in this Quarterly Report on Form 10-Q. 30-------------------------------------------------------------------------------- |