FormFactor's CEO Presents at MicroProbe Acquisition Conference (Transcript)

| About: FormFactor, Inc. (FORM)

FormFactor, Inc. (NASDAQ:FORM)

MicroProbe Acquisition Conference Call

September 04, 2012 9:00 am ET

Executives

Thomas St. Dennis – Chief Executive Officer

Michael M. Ludwig – Chief Financial Officer

Mike Slessor – Chief Executive Officer - MicroProbe, Inc.

Analysts

C.J. Muse – Barclays Capital

James Covello – Goldman Sachs

Patrick Ho – Stifel Nicolaus & Company, Inc.

Operator

Thank you and welcome everyone to the FormFactor’s Conference Call to discuss the merger of FormFactor and Astria Semiconductor Holdings, the parent company of MicroProbe. On this morning’s call, our FormFactor’s Chief Executive Officer, Tom St. Dennis; MicroProbe’s Chief Executive Officer, Mike Slessor; and FormFactor’s Chief Financial Officer, Mike Ludwig.

Before we begin, let me remind you that the company will be discussing GAAP P&L results and some key non-GAAP results to supplement understanding of the announced merger transaction. Yesterday, we issued a press release, announcing the merger agreement between FormFactor and Astria Semiconductor Holdings; the press release and our presentation outlining details of the merger are on the Investor section of FormFactor’s website.

Also as a reminder for everyone, today’s discussion contains forward-looking statements within the meaning of Federal Securities Laws. Such forward-looking statements include, but are not limited to our ability to consummate acquisition of Astria Semiconductor Holdings, including MicroProbe, our ability to successfully integrate and realize the anticipated benefits of the acquisition. Statements of our own customers’ engagement with newly combined entities, our ability to deliver technology innovation for the advanced probe card industry.

Projections including statements regarding business momentum, improved financial performance, including immediately accretive earnings, macroeconomic conditions, demand for our products and future growth, and statements that contain words like expects, anticipates, believes, possibly, should and assumptions upon which such statements are based. These forward-looking statements are based on the current information, expectations that are inherently subject to change and involve a number of risks and uncertainties. FormFactor’s actual results could differ materially from those projected in the forward-looking statements.

Our companies assume no obligation to update the information provided during today’s conference call. To revise any forward-looking statements or to update the reasons, actual results could differ materially from those anticipated in the forward-looking statements. For more information, please refer to the Risk Factor discussions in the company’s Form 10-K for the fiscal year 2011, as filed with the SEC.

With that, we’ll turn the call over to FormFactor’s CEO, Tom St. Dennis. Please begin.

Thomas St. Dennis

Good morning. Yesterday, we announced that FormFactor and MicroProbe has signed an agreement to merge. This is a significant event for both companies and brings together the leaders from two different parts to the probe cards market. MicroProbe is the leading supplier for advanced probe cards for the SOC market, while FormFactor is the leading supplier of advanced probe cards for the memory market.

While together, we become the largest advanced probe card supplier in the semiconductor industry. The winners here will be FormFactor and MicroProbe customers. The combined company will have the technology and resources to address semiconductor test requirements across the entire advanced probe cards space.

The combined resources of the two companies create a leader in the areas of MEMS, probe technology, advanced probe cards design manufacturing and global customer support. The advanced SOC probe card market is the fastest growing portion of the entire probe card market today. MicroProbe is the leading supplier of advanced SOC probe cards and is well positioned to continue delivering significant growth.

Mike Slessor, the CEO of MicroProbe has done an outstanding job of leading the MicroProbe team over the past four years to be the industry leader it is today. Mike’s industry experience, technical background and clear thinking business judgment and are key assets for MicroProbe, and I’m happy to say we’ll continue to be in the combined company. Mike will continue to lead the MicroProbe business after the merger. Mike is here this morning. I would like to share some thoughts about this transaction. Mike?

Mike Slessor

Thank you, Tom and good morning everyone. I’m very excited to be part of this transformational event in the two companies’ histories, as we join forces to build the preeminent global probe cards supplier. As Tom has mentioned, the MicroProbe team is very focused on the advanced SOC segment of the probe card market. Our recent growth has been the result of both share gains, as well as significant growth in this SOC market. The key market driver is the recent proliferation of complex processors like devices in the semiconductor supply chain, powering not just PCs, but also smartphones, tablets, and other mobile connectivity devices.

Our share gains have been driven by a series of major design wins. These wins are the results of focused technology and support investments that helped our customers to meet the challenging wafer test requirements of high performance 28 nanometre and 22 nanometer devices. With the complexity and time to market challenges, our SOC, MPU and GPU customer space. We see this overall trend continuing and even accelerating. We will continue to focus our resources on helping customers successfully meet these challenges and look forward to continued growth as part of the FormFactor team.

Thomas St. Dennis

Thanks Mike. This transaction is the transformational event for FormFactor. It expands the company’s capabilities significantly while diversifying the revenue base to the high growth SOC market. It’s an outstanding opportunity and I’m really pleased, we were able to make it happen. Mike Ludwig will now go over the details of the transaction and some background in MicroProbe’s financial performance. Mike?

Michael M. Ludwig

Thank you, Tom and good morning. The transaction summary is as follows. FormFactor will pay a purchase price of $116.8 million for Astria Semiconductor Holdings, the parent company of MicroProbe, a consideration will consistent of $100 million and just over 3 million shares of FormFactor stock.

Astria Semiconductor Holdings is being acquired on the debt free basis. The transaction is expected to close in the first half of the quarter ending December 29, 2012. The transaction is expected to be accretive immediately. MicroProbe has the strong history of revenue and EBITDA growth. In calendar 2011, MicroProbe generated $87.3 million of revenues, a 46% increase compared to calendar 2010. The company produced $17.3 million of EBITDA or 20% of revenues in 2011, an increase of $4.8 million or 38% compared to 2010.

For the first six months of calendar 2012, MicroProbe’s revenues of $52.2 million have grown 26% compared to the first half of calendar 2011. As Tom and Mike discussed, this transaction adds additional customers in the high growth SOC market as well as additional technical capabilities to support industry leading MEMS probe technology. Transaction results and increased scale for the combined company and allows it to take advantage of resulting synergies in our channels and operations in the near-term.

We will not discuss specific savings expectation on this call. We will provide greater insight into potential synergies post-close. FormFactor will use its current cash and investments to fund the transaction. Post-close FormFactor will have approximately $170 million of cash and no debt.

With that, operator, we will now open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) First question is from C.J. Muse of Barclays. Your line is open.

C.J. Muse – Barclays Capital

Yeah. Good morning, thank you for taking my question. I guess just first for some details around the transaction. Can you comment on the share count, is that set at a fixed price or based on closing price, and also in terms of MicroProbe’s assets and liabilities? How should we think about that, will it be coming on to balance sheet of FormFactor?

Michael M. Ludwig

The share price is fixed at $5.54 per share that’s how – just over 3 million shares has been calculated.

C.J. Muse – Barclays Capital

And on assets and liabilities that will be coming over?

Thomas St. Dennis

Let me get back to you on that answer.

C.J. Muse – Barclays Capital

Okay. And I guess as a focus again on MicroProbe, can you comment on whether that business has been cash flow positive, last year, this year et cetera any color there would be helpful.

Thomas St. Dennis

Yes, the business has been cash flow positive. If you look at it, they basically have a cash flow break-even on revenues of about $20 million a quarter. Obviously, they have been cash flow positive. The one thing is they actually have because of the good growth that they’ve had, they are investing in the balance sheet, so they do have consume cash from the standpoint of inventories and accounts receivables, but they are still cash flow positive.

C.J. Muse – Barclays Capital

Helpful; and then last question, can you talk about sustainability of the SOC business, clearly we’re seeing quite a bit of investments throughout the supply chain as you highlighted at 28 and 22, and soon 14 and 20. I’m curious, how we should think about the cyclicality of the spend on probe cards and the sustainability of the growth that MicroProbe has seen over the last six quarters?

Mike Slessor

C.J., its Mike Slessor. Let me try and address that. I think there is some fundamental underlying trends has a lot of the world’s silicon production continues to funnel towards complex SOC devices. Again it’s the computational engines for a lot of the devices now in the consumer electronics space. Some of those trends continue to move towards our technology differentiation in the space, primarily as more and more chips get package using advanced flip chip packages. This is an overall trend that benefits for us.

The other piece of course is the design diversity in the SOC space continues to go up and given the probe cards fundamentally are a design specific consumable. This is helping as the secular market driver as well. So in terms of cyclicality, we see a lot more of the timing driven by product releases to some of the major consumer devices, and less so the sort of capacity driven stops and starts that you might have seen classically in the semiconductor industry.

C.J. Muse – Barclays Capital

Very helpful. Thank you.

Michael M. Ludwig

Yes, C.J., this is Mike again. Just to get back to you, assets for MicroProbe at June were about $57 million and if you look at the working capital, they had somewhere around $17 million of working capital.

Operator

Thank you. Our next question is from James Covello of Goldman Sachs. Your line is open.

James Covello – Goldman Sachs

Great guys, thanks so much for taking my question, I appreciate it. I guess my first question is just the compatibility of the manufacturing platforms. Obviously, FormFactor has had a very, very unique manufacturing differentiation over time and I just wondered how the two platforms will come together from a manufacturing standpoint?

Thomas St. Dennis

Well, I think we’ve got some leverage over there over the longer-term at the MEMS technologies that the two companies use are different and we’ll look over time to see opportunities there to kind of bring those two technologies together. The difference between the full-wafer contactors that are used in the memory space and the nature of the vertical technologies that MicroProbe manufactures are different enough that that I think at least in the short-term we don’t expect substantial manufacturing synergies there.

James Covello – Goldman Sachs

So for the time being, pretty much two separate manufacturing operations?

Thomas St. Dennis

Yes, I think that will be our path here for the near-term.

James Covello – Goldman Sachs

Okay. And then just so I can get an understanding and presumably MicroProbe is one of the companies that FormFactor would have competed against or would go against in customer discussions as FormFactor try to penetrate the SOC market over the years. What is that specifically that MicroProbe was able to do that FormFactor wasn’t able to do in the several years’ worth of attempts to try to penetrate the SOC market?

Thomas St. Dennis

It’s a broad set of capabilities. It’s everything from the design characteristics of SOC probe cards are substantially different than those around memory. That the portfolio of technologies that MicroProbe has is – it’s really spans the entire space for SOC that the technologies of FormFactor has pursued in the SOC space have been limited, maybe covering only a small, relatively small portion of the markets say 20% of the market.

We continue to develop some technologies for the vertical part of the market. And I think that over time, these technologies will benefit really the combined company. But the breadth of the portfolio I think is a significant asset for MicroProbe and really knowing how to do the business and how to do the designs in the space is a lot of know-how and real organizational capability on their part.

James Covello – Goldman Sachs

Thanks so much. Good luck.

Operator

Thank you again. (Operator Instructions) Our next question is from Patrick Ho of Stifel Nicolaus. Your line is open.

Patrick Ho – Stifel Nicolaus & Company, Inc.

Thanks a lot. Maybe just a question in terms of the technology in IP, given that you guys obviously had strengths in different areas, FORM on the memory side and MicroProbe on the SOC side. How leverageable is the technology and the IP; I guess doing your due diligence during this time. How much can you leverage off of that in terms of next-generation product developments for both market segments?

Thomas St. Dennis

I think there is a lot opportunities for us to leverage the combined IP of the two companies. There is very complimentary capabilities on both sides that will make sure that the company can stay on a pretty demanding roadmap for beyond 22 nanometers in the SOC space. So, I think lots of technical synergies.

Patrick Ho – Stifel Nicolaus & Company, Inc.

Great; Mike, you mentioned earlier about the complexities in the consumer devices and some of the challenges in that on a going forward basis. Can you give a little more specific in terms of what type of devices your probe cards are targeting? And what I mean by that is historically you’ve had a strong presence in MPU and GPU space? What are some of the specific consumer devices that you guys are targeting and gaining share in?

Mike Slessor

Yeah, so good question Patrick. So from a wafer test perspective and then obviously a probe card perspective, some of the application processors that are going into phones, tablets and other devices. Again from a wafer test perspective, looking awful lot like the microprocessors of just a few generations ago. And in fact some of the ones that were beginning to ramp right now look an awful lot like the microprocessors of today.

So from a wafer test perspective, there is a real sort of consolidation of the requirements in customer demands that make a microprocessor and a graphics processor look an awful lot like an application processor, and that’s where we’re seeing some of the key both current and future growth opportunities in the advanced SOC business.

Patrick Ho – Stifel Nicolaus & Company, Inc.

Great, thank you very much.

Operator

Thank you. Ladies and gentlemen, this concludes today’s conference call. Thank you.

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