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FORMFACTOR INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

May 6, 2014

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. 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. 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. Using our wafer probe cards to test at this stage of the manufacturing process, 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. Revenues for the three months ended March 29, 2014 increased 6%, or $3.3 million, as compared to the corresponding period in the prior year. For the three months ended March 29, 2014, our revenues increased approximately 13% in our SoC products, increased 1% in our DRAM products and decreased approximately 5% in our Flash memory products, as compared to the corresponding period in the prior year.



We incurred a net loss of $12.7 million in the first three months of fiscal 2014 as compared to a net loss of $19.8 million in the first three 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 $144 million as of March 29, 2014, as compared to approximately $152 million at December 28, 2013. The decrease in our cash, cash equivalents and marketable securities balances was primarily due to the use of cash for operating activities in the first fiscal quarter of

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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 increasing our revenues, improving our operating efficiency, reducing our cash outlays or increasing our available cash through financing, our cash, cash equivalents and marketable securities will decline in future fiscal years.

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 and the penetration of new markets. 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 and must be delivered on relatively short lead-times, 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 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:

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Three Months Ended March 29, March 30, 2014 2013 Revenues 100.0 % 100.0 % Cost of revenues 78.0 82.8 Gross profit 22.0 17.2 Operating expenses: Research and development 17.4 20.8 Selling, general and administrative 21.9 27.8 Restructuring charges, net 3.6 7.6 Impairment of long-lived assets 1.3 0.1 Total operating expenses 44.2 56.3 Operating loss (22.2 ) (39.1 ) Interest income, net 0.1 0.2 Other income (expense), net (0.1 ) 0.8 Loss before income taxes (22.2 ) (38.1 ) Provision (benefit) for income taxes 0.6 (0.4 ) Net loss (22.8 )% (37.7 )%



Three months ended March 29, 2014 and March 30, 2013:

Revenues Revenues by Market Three Months Ended March 29, March 30, 2014 2013 % Change (In thousands, except percentages) SoC $ 29,758$ 26,431 12.6 % DRAM 22,181 21,970 1.0 Flash 4,020 4,219 (4.7 )



Total revenues $ 55,959$ 52,620 6.3 %

Revenues for the three months ended March 29, 2014 increased 6%, or $3.3 million, as compared to the corresponding period in the prior year. For the three months ended March 29, 2014, our revenue increased approximately 13% in our SoC products, increased 1% in our DRAM products and decreased approximately 5% 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 the SoC wire bond product market. Smart phone and tablet DRAM demand increased in the three months ended March 29, 2014 compared to the corresponding period in 2013 and was partially offset by reduced demand for personal computing commodity DRAM. The slight decrease in Flash memory revenue was primarily in the NAND Flash memory area resulting from reduced demand for our TouchMatrix product in the three months ended March 29, 2014.

Revenues by Geographic Region

The following table sets forth our revenues by geographic region for the periods indicated:

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Three Months Ended March 29, % of March 30, % of 2014 Revenue 2013 Revenue (In thousands, except percentages) North America $ 15,742 28.1 % $ 14,266 27.1 % South Korea 12,620 22.6 10,134 19.3 Taiwan 9,625 17.2 14,351 27.3 Japan 7,690 13.7 5,062 9.6 Europe 6,096 10.9 2,912 5.5 Asia-Pacific (1) 4,186 7.5 5,895 11.2 Total revenues $ 55,959 100.0 % $ 52,620 100.0 %



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(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 months ended March 29, 2014, when compared to the same period 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 months ended March 29, 2014, when compared to the same period in 2013, was driven by a combination of decreased SoC product shipments and a decrease in mobile phone and tablet-based DRAM and Flash demand. The increase in South Korea revenues for the three months ended March 29, 2014 when compared to the same period in 2013 was primarily due to increased mobile processor-based SOC product shipments. The increase in Japan revenues was driven by higher demand for both SoC wire bond products and our SmartMatrix DRAM product.

The following customers accounted for more than 10% of our revenues for the periods indicated:

Three Months Ended March 29, March 30, 2014 2013 SK Hynix 17.1 % 19.1 % Intel 16.2 % 18.0 % Micron 15.0 % * 48.3 % 37.1 % * Less than 10% of revenues. Gross Profit Three Months Ended March 29, 2014 March 30, 2013 (In thousands, except percentages) Gross profit $ 12,325 $ 9,075 % of revenues 22.0 % 17.2 %



Gross profit fluctuates with revenue levels, product mix, selling prices, factory loading, and material costs. For the three months ended March 29, 2014, the amount of gross profit increased compared to the same period 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. Our net inventory provision charges remained relatively flat between the three months ended

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March 29, 2014 and the corresponding period in the prior year. For the three months ended March 29, 2014, the value of previously reserved materials that were used in manufacturing and shipped was $0.8 million.

Gross profit included stock-based compensation expense of $0.5 million for the three months ended March 29, 2014 and March 30, 2013, respectively.

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 March 29, March 30, 2014 2013 (In thousands, except percentages) R&D $ 9,747 $ 10,929 % of revenues 17.4 % 20.8 %



Research and development expenses for the three months ended March 29, 2014 decreased by $1.2 million compared to the same period in the prior year as a result of our ongoing cost reduction and restructuring efforts which were primarily comprised of a reduction in our headcount and stock compensation expense of approximately $0.6 million and $0.4 million, respectively. As a percent of revenues, research and development expenses decreased 3.4% during the three months ended March 29, 2014 from the comparable period of the prior year.

Stock-based compensation expense included in research and development expenses was $0.6 million for the three months ended March 29, 2014 compared to $1.0 million for the three months ended March 30, 2013.

Selling, General and Administrative

Three Months Ended March 29, 2014 March 30, 2013 (In thousands, except percentages) Selling, general and administrative $ 12,254 $ 14,618 % of revenues 21.9 % 27.8 %



Selling, general and administrative expenses for the three months ended March 29, 2014 decreased by $2.4 million compared to the same period in the prior year as a result of our ongoing cost reduction and restructuring efforts which were primarily comprised of a reduction in our integration and headcount expense of approximately $1.0 million and $0.7 million, respectively. Additionally, our overall travel and general operating expenses decreased by approximately $0.6 million compared to the same period in the prior year. As a percent of revenues, selling, general and administrative expenses decreased approximately 5.9% during the three months ended March 29, 2014 from the comparable period of the prior year.

Stock-based compensation expense included within selling, general and administrative expenses was $1.5 million for the three months ended March 29, 2014 compared to $1.5 million for the same period in the prior year.

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Restructuring Charges, net Three Months Ended March 29, March 30, 2014 2013 (In thousands, except percentages) Restructuring charges, net $ 1,997 $ 3,980 % of revenues 3.6 % 7.6 %



For the three months ended March 29, 2014, restructuring charges decreased by $2.0 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. We expect to realize about $2 million in savings per quarter beginning in the second quarter of fiscal 2014.

The liabilities we accrued represent our best estimate of the obligations we expect to incur and could be subject to adjustment as market conditions change. The remaining cash payments associated with our various reductions in workforce are expected to be paid by the end of the second fiscal quarter of fiscal 2014. As such, the restructuring accrual is recorded as a current liability within 'Accrued liabilities' in the Condensed Consolidated Balance Sheets.

2013 Restructuring Activities

In the first fiscal 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 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 fiscal 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. The activities comprising this restructuring activity were completed in fiscal 2013.

Impairment of Long-lived Assets

Three Months Ended March 29, March 30, 2014 2013 (In thousands, except percentages) Impairment of long-lived assets $ 743 $ 58 % of revenues 1.3 % 0.1 %



During the three months ended March 29, 2014, we recorded an impairment charge of $0.7 million related to certain manufacturing assets which will no longer be utilized.

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 if we are unable to achieve cash flows anticipated by our forecasted financial plan.

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Interest Income, Net and Other Income, Net

Three Months Ended March 29, March 30, 2014 2013 (In thousands, except percentages) Interest income, net $ 79 $ 107 % of revenue 0.1 % 0.2 % Other income (expense), net $ (66 ) $ 423 % of revenues (0.1 )% 0.8 %



Interest income is primarily earned on our cash, cash equivalents and marketable securities. The decrease in interest income for the three months ended March 29, 2014 as compared with the same period of the prior year was primarily the result of lower average balances. Cash, cash equivalents, restricted cash and marketable securities were $144.4 million at March 29, 2014 compared to $151.5 million at December 28, 2013, and $154.0 million at March 30, 2013. The weighted-average yield on our cash, cash equivalents and marketable securities for the three months ended March 29, 2014 and March 30, 2013 was 0.17% and 0.31%, 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 months ended March 29, 2014 compared to March 30, 2013 was due primarily to foreign currency exchange losses and a patent litigation settlement paid in the three months ended March 30, 2013. Provision for (Benefit From) Income Taxes

Three Months Ended March 29, March 30, 2014 2013 (In thousands, except percentages) Provision for (benefit from) income taxes $ 308 $ (207 ) Effective tax rate (2.5 )% 1.0 %



We recorded an income tax provision of $0.3 million for the three months ended March 29, 2014 as compared to an income tax benefit of $0.2 million for the three months ended March 30, 2013. Income tax provisions reflect the tax provision on our non-U.S. operations in foreign jurisdictions and the tax benefit from the lapsing of the statute of limitations in US and foreign jurisdictions. We continue to maintain a valuation allowance for our U.S. Federal and state deferred tax assets.

We classify interest and penalties related to uncertain tax positions as part of the income tax provision. For the three months ended March 30, 2013, we recognized an interest and penalty benefit of approximately $0.1 million. As of March 29, 2014 and March 30, 2013, we have accrued total interest and penalties of $0.2 million and $0.2 million for each of the respective periods related to the uncertain tax positions.

We anticipate that we will continue to record a valuation allowance against our U.S. and certain non U.S. deferred tax assets. We expect our future tax provisions, during the time such valuation allowances are recorded, will consist primarily of the tax provision of our profitable non-U.S. jurisdictions.

Our effective tax rate may vary from period to period based on changes in estimated taxable income or loss by jurisdiction, changes to the valuation allowance, changes to Federal, state or foreign tax laws, future expansion into areas with varying country, state, and local income tax rates, deductibility of certain costs and expenses by jurisdiction.

Liquidity and Capital Resources

Capital Resources: Our working capital was $175.5 million at March 29, 2014 and $173.9 million at December 28, 2013. The increase in working capital in the three months ended March 29, 2014 was primarily due to an increase in accounts receivable due to increased sales as compared to the three months ended December 28, 2013 and the reclassification of our long-lived assets to current assets as assets held for sale.

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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 $144.0 million at March 29, 2014, as compared to $151.1 million at December 28, 2013. The decrease in our cash, cash equivalents and marketable securities balances was primarily due to the use of cash for operating activities and cash used to acquire property, plant and equipment in the three months ended March 29, 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 increasing revenue, improving our operating efficiency, reducing our cash outlays or increasing our available cash through financing, our cash, cash equivalents and marketable securities will further 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 through debt. 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 59 days at March 29, 2014 compared with 52 days at December 28, 2013. Our DSO calculation is determined using the count back method and is based on 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 three months ended March 29, 2014 as compared to the three months ended December 28, 2013.

Three Months Ended March 29, 2014 March 30, 2013 (In thousands) Net cash used in operating activities $ (6,876 )$ (9,667 ) Net cash (used in) provided by investing activities (4,629 ) 14,472 Net cash provided by financing activities $ 1,294 $ 1,000



Cash flows from operating activities: Net cash used in operating activities for the three months ended March 29, 2014 was primarily attributable to the net change in operating assets and liabilities. The Company had a net loss of $12.7 million which was offset by non-cash expenses of $14.6 million, including $8.1 million of depreciation and amortization, $2.6 million of provision for excess and obsolete inventories, $2.6 million of stock-based compensation, $0.7 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 three months ended March 29, 2014 resulted in a net use of cash of $8.8 million and which was comprised of cash used of $6.8 million in accounts receivable due to higher sales, $3.2 million of cash used for inventory due to inventory build and an increase of prepaid expenses and other current assets of $0.3 million. The above use of cash was offset in part by an increase of $0.6 million in accounts payable driven by the timing of our payments on vendor obligations, an increase of $0.4 million in deferred revenues due to shipments to customers for which our revenue recognition criteria have not yet been met, an increase in income tax payable of $0.3 million and an increase of $0.2 million in accrued liabilities due to accrued payroll. Net cash used in operating activities for the three months ended March 30, 2013 was primarily attributable to our net loss of $19.8 million offset in part by $16.4 million of non-cash charges consisting primarily of $3.0 million of stock-based compensation, $7.4 million of depreciation and amortization, $2.7 million of assets written-off as part of our restructuring plan and $2.7 million of provision for excess and obsolete inventories. The net change in operating assets and liabilities for the three months ended March 30, 2013 was a use of cash of $6.3 million comprising an increase in our accounts receivable of $4.8 million due to an increase in sales transactions closer to our quarter end, an increase in inventory of $3.8 million as we built more inventory to support higher forecasted demand in future quarters and a reduction of $3.0 million in accrued liabilities.

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Working capital sources of cash were primarily an increase of $3.6 million in accounts payable driven by the timing of invoice receipts and payments to vendors. Cash flows from investing activities: Net cash used in investing activities for the three months ended March 29, 2014 was primarily related to purchases of marketable securities totaling $31.7 million and cash used in the acquisition of property and equipment of $1.6 million, offset by $28.7 million of proceeds from maturities of marketable securities. 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 provided by investing activities for the three months ended March 30, 2013 was primarily related to $34.5 million of proceeds from maturities of marketable securities, offset by purchases of marketable securities totaling $17.2 million, and $2.7 million cash used in the acquisition of property and equipment. Cash flows from financing activities: Net cash provided by financing activities for the three months ended March 29, 2014 and March 30, 2013 included $1.4 million and $1.2 million, respectively, 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 declined in the three months ended March 29, 2014. We continue to focus on improving our operating efficiency to increase operating cash flows. Our actions have included implementing operational expense reduction initiatives, delaying or eliminating certain capital spending and research and development projects, focusing on timely customer collections and re-negotiating longer payment terms with our vendors. 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 equivalents and marketable securities. To the extent necessary, we may also consider establishing manufacturing and technology partnerships, or to seek short and long-term debt obligations, 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 increasing revenues, improving our operating efficiency, executing our cost reduction plan, reducing our cash outlays or increasing our available cash through financing, our cash, cash equivalents and marketable securities will 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 March 29, 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 three months ended March 29, 2014.

Furthermore, the preparation of consolidated financial statements in conformity with generally accepted accounting principles in the United States of America ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Our management believes that we consistently apply these judgments and estimates and the consolidated financial statements and accompanying notes fairly represent all periods presented. However, any differences between these judgments and estimates and actual results could have a material impact on our consolidated statements of income and financial position.

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Critical accounting estimates, as defined by the U.S. Securities and Exchange Commission, are those that are most important to the portrayal of our consolidated financial condition and results of operations and require our management's most difficult and subjective judgments and estimates of matters that are inherently uncertain. Our critical accounting estimates include those regarding (1) revenue recognition and the fair value of revenue elements, (2) fair value of marketable securities, (3) accruals for liabilities, including restructuring charges, (4) warranty accruals, (5) valuation of inventories, including obsolete and slow moving inventory, (6) allowance for doubtful accounts, (7) valuation of our long-lived assets including goodwill as well as the assessment of recoverability of such long-lived assets, (8) provision for income taxes, tax liabilities and valuation allowance for deferred tax assets, and (9) valuation and recognition of stock-based compensation. For a discussion of our critical accounting estimates, see Item 7: "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates" in our Annual Report on Form 10-K for the year ended December 28, 2013.

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