Jason Cohen - VP and General Counsel Mike Slessor - President and CEO Michael Burger - President and CEO, Cascade Microtech Mike Ludwig - CFO Jeff Killian - VP, Finance and CFO, Cascade Microtech.

Edwin Mok - Needham & Company Craig Ellis - B. Riley Srini Sundar - Summit Research Patrick Ho - Stifel Christopher Longiaru - Sidoti Tom Diffely - D.A. Davidson.

Thank you and welcome everyone to FormFactor's and Cascade Microtech's Fourth Quarter 2015 Conference Call. Before we begin, here is Jason Cohen, the company's General Counsel to remind you of some important information..

Thank you, operator. Good morning. With me today are Mike Slessor, Chief Executive Officer of FormFactor; Michael Burger, Chief Executive Officer of Cascade Microtech; Michael Ludwig, Chief Financial Officer of FormFactor; and Jeff Killian, Chief Financial Officer of Cascade Microtech.

Today's discussion contains forward-looking statements within the meaning of the Federal Securities Laws.

Examples of such forward-looking statements include, the anticipated benefits and synergies of the proposed transaction with Cascade Microtech, the anticipated timeline and closing of the proposed transaction, projections of financial and business performance, future macroeconomic conditions, business momentum, business seasonality, the anticipated demand for our products, our future ability to produce and sell products, the development of products and technologies, and the assumptions upon which such statements are based.

These statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed during this call.

Information on risk factors and uncertainties is contained in our most recent filing on Form 10-K with the SEC for the fiscal year ended 2014 and our other SEC filings which are available on the SEC's website at www.sec.gov and in our press release issued today.

Forward-looking statements are made as of today, February 4, 2016 and we assume no obligation to update them. Information provided in the materials include non-GAAP gross margin, operating margin, net income, earnings per share and EBITDA, which are non-GAAP financial measures.

Please refer to the description and reconciliation of GAAP to non-GAAP financial measures included in the appendix to the presentation materials on FormFactor's website with respect to non-GAAP measures of FormFactor and the attachment to Cascade Microtech's press release financials entitled reconciliation of GAAP to non-GAAP financial measures as well as the supplemental information posted on the Investors page of its website with respect to non-GAAP measures of Cascade Microtech.

Also available on the FormFactor website is a presentation entitled Transaction Summary relating to the transaction between FormFactor and Cascade Microtech. With that, we will now turn the call over to FormFactor's CEO, Mike Slessor..

Good morning. I'd like to start by thanking all of you for joining us on short notice so we can share some exciting news. Earlier today, we announced the combination of FormFactor and Cascade Microtech.

As you can see from the materials posted on our website, this combination creates a unique set of benefits for both companies' customers, employees and shareholders, a set of benefits that neither company could achieve on its own.

By joining forces, we gain scale and diversification, we expand both our served and addressable markets and we unlock the significant financial synergies and earnings accretion shown on Page 13 of our posted slides. The efficiencies derived from scale are becoming essential for success in the maturing semiconductor industry.

As our customers ramp new technology nodes and chip designs, the winning suppliers consistently innovate to deliver ramp enabling products on ever shrinking timeline. To keep pace with the top semiconductor manufacturers, requires significant R&D investments that are guided by extensive and close customer collaboration.

Then as these new nodes and designs transition into volume production in the global manufacturing ecosystem, these same customers require coordinated supporting infrastructure and processes to deliver identical results around the globe.

As shown on Page 7, this customer channel has been central to the recent success of both FormFactor and Cascade and we plan to continue these investments. We also plan to realize costs and performance efficiencies from increased scale provided by our larger products and revenue platform.

It is also worth noting that we are creating scale from our respective leadership positions in closely related but different markets with minimal direct product overlap.

As many of you know FormFactor leads the $1 billion overall probe card market and Cascade owns a strong position in the high growth RF area of the advanced non-memory probe card space. As a result this combination adds to FormFactor's served market and application footprint inside our core probe card market.

Driven by growth in discrete SAW and BAW RF filters, the RF portion of the probe and test market has grown impressively over the past few years and with the continued band and filter proliferation shown on Slide 8 is positioned to continue that growth even as handset unit growth slows.

In addition, as evidenced by our recently announced joint venture between two of our larger mutual customers, there is an emerging coupling between these RF front-ends and the digital application processors and modem devices where FormFactor has a significant market position.

Although our initial post-closing integration plans are measured and cautious where they touch products, technology, and operations, we would expect the expanded application footprint of the combined company to allow us to benefit from these trends.

At a broader level, test, measurement and characterization, from the engineering to production phases of new node and device ramps is becoming a more important enabler of our customers' innovation. Our industry continues to advance with innovations such as FinFETs in logic and 3D NAND in memory, as well as 2.5D and 3D integration.

These innovations, however, create entirely new species of yield and reliability defects, demanding more of tests, measurements, and characterization to detect, analyze, and fix these new defects.

Cascade's strong engineering systems and probes business have been enabling leading customers to solve these problems and improve yields more quickly and cost effectively. This enables a faster transition to volume production, where devices are tested using FormFactor's production probe cards.

Over the longer term, we will be positioning the company to address these customer challenges, and will provide more details of these opportunities and plans as we move through the closing and integration phases. I'd also like to take this opportunity to extend a future welcome to Cascade's employees and shareholders.

You've built a great company that has consistently delivered top and bottom line growth over the past five years, and you will be key contributors to FormFactor's future success. As I am sure you will find, today's FormFactor team shares your commitment to satisfying customers, winning in the marketplace, and creating shareholder value.

And finally, before I turn the call over to Michael Burger, Cascade's President and CEO, I'd like to personally thank him for his leadership in guiding us to the transaction that unites Cascade and FormFactor.

Michael?.

Thanks, Mike. This is a very significant milestone for Cascade Microtech. We are extremely proud of our heritage, reputation and performance. As a result, we feel this combination between Cascade and FormFactor is the culmination of our hard work and commitment to our customers, employees and shareholders.

FormFactor's reputation as a technology leader in the markets that they serve fits extremely well with Cascade's legacy as well as our future. Our culture of supporting customers in their quest to solve very difficult technical challenges is aligned with FormFactor's history and vision.

Throughout our conversations with FormFactor's management team we have become comfortable that the two companies' cultures and practices are largely aligned. This is extremely important to our success and will continue to be, as we both value the knowledge based work force that we employ.

I want to thank Mike Slessor for the way this transaction has been handled to-date and I congratulate him and his team for FormFactor's success. I feel comfortable that Cascade Microtech will be in good hands. I will now turn the call over to Mike Ludwig, FormFactor's CFO..

Thank you Michael and good morning. I'm going to start with the transaction summary, which you can find on Slide 5.

FormFactor will acquire all of the outstanding shares of Cascade Microtech in a cash and stock transaction that values Cascade Microtech at approximately $352 million in equity value, or approximately $21.13 per share based upon FormFactor's closing stock price on February 3, 2016.

The deal provides that Cascade Microtech shareholders will receive, in exchange for each share, $16 in cash and 0.6534 of a share of FormFactor common stock as described in the merger agreement.

To finance the purchase, FormFactor will issue approximately 10.4 million new shares, borrow $150 million of new term debt and use approximately $120 million from its current cash and short term investments.

FormFactor will also issue approximately 1.2 million shares for assumed equity awards of Cascade Microtech employees, the new shares having vesting periods commensurate with the assumed equity instruments. At the transaction close, the combined company will have a cash balance of greater than $100 million with a strong cash flow generation profile.

We will prioritize deleveraging the company post transaction close with an objective to get below 2 times gross debt to EBITDA within 12 months. In addition to the strategic benefits of the business combination mentioned previously, the financial aspects of the transaction are equally compelling.

The transaction allows the company to leverage incremental scaling of its resources, accelerate the utilization of past net operating losses to minimize taxes on expected growing profits and leverage its strong balance sheet to achieve meaningful non-GAAP EPS accretion post close.

The company expects to realize $10 million to $12 million of annualized cost synergies within 18 to 24 months of the transaction close. These synergies will be realized in phases with early synergies coming from opportunities such as redundant field infrastructure and facilities and duplicate public company expenses.

FormFactor will realize meaningful tax savings as the combination of the two companies will benefit from the close to $300 million of NOL tax assets available to offset U.S. income.

As shown on Slide 13, when we combine the results of the two companies for 2015 on a pro forma basis and adjust for expected cost synergies, tax benefits, interest on the debt, and the incremental share count from the transaction, the expected non-GAAP EPS accretion is approximately $0.28 per share, a 76% increase on an approximate 18% increase in outstanding shares.

We will communicate a future financial model incorporating both businesses shortly after the close of the transaction. The combined company will retain the FormFactor name. Mike Slessor will lead the company as CEO and the leadership of the company will have strong representation from both companies across all functions. FormFactor's Chairman, Tom St.

Dennis will continue in his role and one Board member from Cascade Microtech will join the combined company Board. The Boards of both companies have unanimously approved the transaction. The transaction is subject to customary regulatory approvals and the approval of Cascade Microtech shareholders.

We currently estimate receiving all approvals on a timely basis and the transaction to be funded and closed by mid-2016. This is an exciting transaction that combines recognized technology leaders in their respective markets utilizing increased scale to deliver enhanced solutions for our customers.

The transaction is expected to drive profitable growth and facilitates the strategic use of FormFactor's strong balance sheet to deliver increased value to our customers, employees, and shareholders. I'll now turn my comments to FormFactor's fourth quarter results and provide guidance for our first quarter.

The financial performance of the company in Q4 was generally in line with our Q4 guidance.

Our revenues were seasonally strong, our non-GAAP gross margin was at the lower-end of our guidance as we prepare for a significant new node ramp at one of our large SoC customers, and our non-GAAP EPS was in line with our guidance due to continued OpEx spending discipline.

Revenues for Q4 of $71.8 million, increased $5.9 million or 9% compared to our third quarter of 2015. The increased Q4 revenues compared to the third quarter were driven primarily by a measurable increase in our SoC revenues and slight increases in both our DRAM and flash probe card revenues.

SoC revenues in Q4 of $41.4 million, increased $4.9 million or 13% compared to our third quarter. SoC revenues comprised 58% of our revenues in the fourth quarter compared to 55% in Q3.

We achieved higher PC server-based revenues from node overlap and a transition to new nodes as well as increased mobile processor revenues driven primarily by new designs in Q4. Fourth quarter revenues for DRAM products were $28.2 million, an increase of 3% compared to the third quarter.

DRAM revenues comprised 39% of our revenues in the quarter compared to 42% in Q3. DRAM probe card revenues were positively impacted by the continued conversion to DDR4. Flash revenues were $2.2 million in the fourth quarter, a slight increase from the third quarter.

Fourth quarter GAAP gross margin was $21.2 million or 29.5% of revenues compared to $18.5 million or 28% of revenues for the third quarter. On a non-GAAP basis, gross margin for the fourth quarter was $24.6 million or 34.3% of revenues compared to $22 million or 33.4% of revenues for the third quarter.

The increase in the fourth quarter non-GAAP gross margin resulted from a more favorable product mix, but also included increased costs to ramp manufacturing for a new product to address increased demand from a node transition at one of our largest SoC customers in the first half of 2016.

Our GAAP operating expenses were $22 million for the fourth quarter, an increase of $0.2 million compared to Q3. Non-GAAP operating expenses for the fourth quarter were $18.9 million, 26% of revenues, an increase of $0.4 million compared to the third quarter. Variable compensation costs were higher in the fourth quarter due to increased profitability.

GAAP net loss was $0.6 million or $0.01 per share for the fourth quarter compared to a GAAP net loss of $2.5 million or $0.04 per share for Q3. Non-GAAP net income was $5.8 million or $0.10 per fully diluted share for Q4 compared to $3.3 million or $0.06 per fully diluted share for Q3.

Cash comprised of cash, short-term investments, and restricted cash ended the fourth quarter at $188 million, $3.8 million higher than Q3. Excluding cash used for stock buybacks, the company generated $5 million of cash in the quarter. The company used $1.2 million to repurchase 140,000 shares in the fourth quarter.

With respect to the first quarter, we see a continued strong SoC environment, but weakness in the DRAM demand environment due to lower device pricing and oversupply, which will negatively impact our revenues. We expect first quarter revenues to be in the range of $65 million to $70 million.

We expect non-GAAP gross margin to be in the range of 31% to 35% with non-GAAP fully diluted earnings in the range of $0.03 to $0.07 per share. We expect cash flow to be positive $2 million to $5 million. I will now turn the call over to Jeff Killian, who will cover Cascade Microtech's results and guidance..

Thanks, Mike. I'll begin with a review of the income statement for both the fourth quarter and year ended December 31, 2015. As a brief reminder, Cascade reports revenue and gross margins in two segments; our Systems segment and our Probe segment. The Systems segment includes our Probe stations, thermal subsystems and reliability test products.

The Probe segment includes our analytical probes and production probes. Total revenue for the fourth quarter of 2015 was a record $40.4 million, an increase of 12.9% compared to $35.8 million in the third quarter of 2015, and an increase of 10.4% compared to the $36.6 million in the fourth quarter of 2014.

We exceeded the high end of our revenue guidance for the fourth quarter which was $37 million to $40 million. Total revenue for the year was $144 million, an increase of 5.8% compared to $136 million in 2014.

Revenue for our Systems segment for the fourth quarter of 2015 totaled $21.7 million, an increase of 13.3% compared to $19.1 million in the third quarter of 2015, and an increase of 1.5% compared to $21.4 million in the fourth quarter of 2014. Systems revenue for the year was $77.9 million, a decrease of 6% compared to $82.9 million in 2014.

The annual revenue for Systems was down primarily due to a soft first half of 2015 and has improved in the second half of the year based primarily on the strength of 300 millimeter systems and SourceOne revenue and is further supported with a book-to-bill ratio for Systems in Q4 2015 of over 1.

Due to the capital purchasing cycle of our customers, the fourth quarter of each year tends to be the strongest for our Systems segment.

Revenue for our Probe segment of the fourth quarter of 2015 totaled a record $18.7 million, an increase of 12.5% compared to $16.6 million for the third quarter of 2015, and an increase of 22.9% compared to $15.2 million for the fourth quarter of 2014.

Probes revenue for the year was a record $66.1 million, an increase of 24.4% compared to the $53.2 million in 2014. Our Probes segment continues to benefit from demand in the both the RF and parametric markets. Bookings in the fourth quarter were a record $48.7 million, which resulted in a book-to-bill ratio of 1.21 to 1.

Both reporting segments posted positive book-to-bill ratios for the quarter. Our Systems bookings posted an increase of 29%, compared to the third quarter of 2015 and an 8% increase over the fourth quarter of 2014.

After setting an all-time revenue record in Q4, Probes bookings posted an increase of 130% compared to the third quarter of 2015 and a 2% increase over the fourth quarter of 2014. Our overall gross margin for the fourth quarter of 2015 was 56.3% compared to 56.7% in the third quarter of 2015 and 53.4% in the fourth quarter of 2014.

Overall gross margins for the year was a record 55.6%, up from 51.7% in 2014.

Our gross margins in 2015 benefited from overall increases in production volume and yield, shifts in product mix, favorable foreign currency exchange rates, product and facility integration, and continued focus on operational improvements in the areas such as service and inventory management.

Gross margin for our Systems segment in the fourth quarter of 2015 was 49.8% compared to 50.3% in the third quarter of 2015 and 48.1% in the fourth quarter of 2014. Systems' gross margin for the year was a record 48.9% up from 45.6% in 2014 driven in part by the integration of our ATT thermal systems into our product portfolio.

Gross margins for our Probes segment in the fourth quarter of 2015 was 63.9%, consistent with 63.9% in the third quarter of 2015, but improved from the 60.8% in the fourth quarter of 2014. Probes margin for the year was a record 63.5%, up from 61.2% in 2014.

Operating expenses for the fourth quarter was $16.2 million, an increase of $0.5 million compared to the third quarter of 2015 and an increase of $0.8 million compared to the fourth quarter of 2014. Operating expenses for the year increased to $62.2 million from $57 million in 2014.

The overall year-on-year increase in operating expenses was driven by increased investment in research and development, headcount, incentives and selling expenses.

Income from operations in the fourth quarter set another record of $6.5 million, an increase of $2 million compared to $4.5 million in the third quarter of 2015 and an increase of $2.4 million compared to $4.1 million in the fourth quarter of 2014.

Income from operations for the year was a record $17.9 million compared to $13.3 million in 2014, representing a 34.7% improvement.

Total depreciation, amortization and stock-based compensation expenses were $2.3 million, an increase of $0.1 million compared to $2.2 million in the third quarter of 2015 and an increase of $0.2 million compared to $2.1 million in the fourth quarter of 2014.

For further details, please see the attachment to our press release financials entitled reconciliation of GAAP to non-GAAP financial measures as well as the supplemental information posted on the Investors page of our website.

Our adjusted EBITDA for the fourth quarter of 2015 totaled $8.8 million or 21.8% of revenue, which compares favorably to our stated success model target of 22%. This level of financial performance was achieved while investing in our R&D roadmap for new product development to further expand our served to available markets.

Our tax expense for the year was $5.5 million resulting in an effective tax rate of 31% compared to an expense of $2.7 million for 2014 and an effective tax rate of 22%.

GAAP net income for the fourth quarter of 2015 was $4.2 million or $0.25 per diluted share compared to $3.2 million or $0.19 per diluted share in the third quarter of 2015 and $4.3 million or $0.25 per diluted share in the fourth quarter of 2014.

Non-GAAP earnings per share for the fourth quarter of 2015 was at the upper end of guidance and a record at $0.28 per diluted share compared to $0.20 per diluted share in the third quarter of 2015 and $0.26 per diluted share in the fourth quarter of 2014.

Turning to the balance sheet, cash, restricted cash, and investments, at December 31, 2015 totaled $35.8 million, a decrease of $5.3 million compared to $41.1 million at September 30, 2015 and a decrease of $4 million compared to $39.8 million at December 31, 2014.

The decrease in cash is primarily related to our share repurchase activities and capital purchases, offset by cash flows generated from operations. During the fourth quarter of 2015, we purchased 514,300 shares for $7.5 million.

The current repurchase program was originally authorized for $15 million, and to-date we have repurchased 859,465 shares for a total of $12.3 million. Capital expenditures were $2.7 million in the fourth quarter of 2015 and $6.4 million for the year. These expenditures consist primarily of manufacturing equipment and research and development tools.

Cash flows generated by operations were $5.4 million in the fourth quarter of 2015 and $14.7 million for the year. For the first quarter of 2016, we are projecting revenue in a range of $33 million to $37 million.

This projection is based upon Cascade's historical seasonality whereby Q1 revenue is typically 10% to 15% lower than the previous fourth quarter. We are projecting diluted GAAP earnings per share in the range of $0.08 to $0.14, and non-GAAP earnings per share in the range of $0.10 to $0.16 per share.

Our Q1 guidance assumes continued investment in R&D for new product development, the expense associated with our worldwide sales conference and an effective tax rate of 32%, consistent foreign currency rates, and no significant one-time charges. As you know, Cascade does not provide annual guidance.

However, based upon the momentum created in 2015, we believe we will outgrow the markets we serve in 2016 and financially outperform our 2015 results. I will now return the call to Mike Slessor..

Thanks, Jeff. The combination of FormFactor and Cascade unites two leaders in their respective markets, creating scale and diversification across a wide breadth of complementary test and measurement applications from engineering through production.

Yet, these complementary markets are closely related, enabling us to generate leverage and efficiencies from our R&D and channel investments. We also expect to generate significant EPS accretion, from realizing overhead efficiencies, changing our capitalization, and by monetizing our NOLs.

As a result, this transaction rapidly advances FormFactor strategically, operationally, and financially, and we are extremely excited about the future ahead. With that, we will open the call for Q&A..

Thank you. [Operator Instructions]. And our first question comes from the line of Edwin Mok with Needham & Company. Your line is now open..

Hey, thanks for taking my question and congrats for the transaction. So, first question I guess for Mike, my question is actually on calling the technical synergy there between the two companies, I think historically Cascade has this Pyramid Probe technology and FormFactor has strong technology in MEMS.

Is there some opportunity down the road to integrate those two and is that valuable to do that? And then I have two follow-ups..

So, Edwin, I'm assuming -- we've got a lot of Mikes on the call.

I am assuming that question was addressed to Mike Slessor, is that right?.

Yes..

Yes. Okay. Sorry for the confusion..

The technical synergies although perhaps available down the road are certainly not a short-term priority or focus for us. One of the reasons you see the respective companies leading in different markets is they've developed and optimized their technology to serve these individual applications in a very efficient and differentiated way.

Certainly FormFactor historically has attempted to enter the RF space, obviously we have not been that successful and Cascade's grown pretty significantly there. So I think in the short-term, we're really going to focus on executing to get the synergies out of the areas that Mike Ludwig talked about.

We will certainly be working to get the channel synergies, but when it comes to product, operations, and R&D, I draw you back to the example of the integration of FormFactor and MicroProbe where we were very measured with bringing product roadmaps and engineering teams together and let those things happen from the ground up as our teams began to work together.

So in the short-term, call it 18 months to two years, I don't see any technical or product synergies that jump right out.

Certainly over the long-term, if I draw your attention to -- for example, the convergence of RF and digital, I would expect we'll be able to take the strengths of the two companies technically from a product perspective and do a better job of competing and serving as our customers start to converge things like RF and digital..

Okay, great, that's helpful actually.

And then on the cost savings, I noticed that you guys provided pro forma initial 2015 savings around $7 million, I was wondering what is included in that cost estimate and then what else needs to happen for you guys to get to your target saving of $10 million to $12 million?.

Yes Edwin, so on the $7 million, again what we've really kind of thought there about is some synergies relating to some field operations with respect to maybe overlapping facilities, any other infrastructure in the field that are overlapping, we think we'll try and address relatively quickly.

And in addition, we have -- on the G&A side we have a duplicate public company expenses, Board expenses, those types of things where we think we can get synergies very early. So that's the $7 million.

In order to get to the $10 million to $12 million, again I think as Mike said, over the 18 months to 24 months will be measured, but I think we'll end up having some natural synergies similar to what we saw a couple of years back when we combined FormFactor and MicroProbe.

So and again, I think we'll look at maybe deeper in the organizations and I think what we really want to do is look at processes in all areas, take the best processes and where there is some overlap, we'll again try and recognize some synergies there..

Okay, that's helpful. And then lastly, on I guess guidance for both companies along two-in-one, I'll try to ask a two-in-one question. On the FormFactor guidance, you mentioned that you expect some weakness in the DRAM space. Last quarter really didn't rebound that much from the, what we will consider trough in the September quarter.

How do you kind of think about your DRAM business this year? Do you expect it to go even lower than low 1Q level as you go through the year or how do you kind of think about that part of the business? And then for Cascade just quickly based on the guidance, you kind of imply gross margin will come in a little bit on this quarter.

I was wondering what's contributed to that?.

So Edwin, it's Mike Slessor, I'll start with the FormFactor guidance question around DRAM. Certainly, we are seeing weakness in demand for DRAM probe cards, which I don't think is a surprise to anyone who operates in the DRAM supply chain. The capital equipment guys are feeling it is well. The way we look at 2016 is the tale of two halves.

So the first half in DRAM, we do expect to be weak. The demand that probably from a Q1 standpoint will be at a low. We do see some new design activity as Mike Ludwig said continued DDR4 transition and some strong projects primarily around DDR server -- DDR4 server, excuse me.

I do want to draw your attention though to the fact that our SoC results are extremely strong as we see new nodes ramping while older nodes are still going on. 10-nanometer obviously has big activity for us right now and we see that at least partially offsetting, if not fully offsetting the weakness in DRAM associated with our first quarter guidance.

Again to tie this together, that's part of the reason we told you we want to and this transaction accomplishes our continued diversification into new markets with new customers and if you like reducing our dependence on DRAM in any given period. We're still going to participate in DRAM.

We're still going to invest in DRAM, but the continued diversification is a big part of this transaction. With that, maybe I'll turn it over to either Michael Burger or Jeff Killian for the comments on the Cascade Q1 guidance..

Yes, Edwin, this is Michael Burger. As you know, we don't really give guidance on gross margin, but if you pick the midpoint of our guidance $33 million to $37 million for Q1 of 2016, we expect to be up over 10% of the same quarter a year ago.

A couple of weeks ago, we gave some kind of color around what we expected in Q1, which is a seasonal down from Q4 and in the script, we talked about that. So, we don't see anything unusual. We do see the growth trajectory from Q1 throughout the balance of the year, very traditional, which we've seen kind of year-in, year-out..

Our next question comes from the line of Craig Ellis with B. Riley. Your line is now open..

Thanks for taking the questions and congratulations to both of the management teams on this deal. My first question is for Mike Slessor.

Mike, when you look at the combined company and look at the growth rate of the combined company, do you think that the growth rate is the average what we would see just looking at the pro forma contributions that you've outlined or is there something about the way these two companies together in the end markets that they serve that would cause growth of the combined company to be either above or below, just a simple weighted average growth rate?.

Yes. So Craig the question I think comes down to are there near-term available revenue synergies or can we increase our growth rate just by bringing these companies together. I think the simple answer and the honest answer is, no.

Longer-term, as we discussed in the answer to Edwin's question and in some of the prepared marks in the script, we do view there being a potential for such things.

But if you look at the company's businesses and how we're executing in our respective markets, I think the right way to think about our top line growth is as the super position of the two existing businesses growth rates. If we work our way down the P&L and you can see this reflected in the pro forma.

However, there's some significant efficiencies that unlock. And so if you look at -- in particular, an EPS growth rate as we execute towards the synergies, take advantage of the NOLs, there is a significant acceleration of growth rate there, as we bring together the cost savings and different financial synergies associated with the deal..

That's helpful. The follow-up question is to Tom. Tom, I missed it if you provided it.

Earnings accretion guidance, but can you comment on that both on a near-term basis and a longer-term basis?.

Yes. This is Mike. So, we did look at -- we haven't provided any guidance on accretion.

We just looked at our 2015 sort of on a pro forma basis as if this had happened as of the beginning and when you look at that, we're basically saying, hey, FormFactor had on a non-GAAP basis $0.37, on the stand-alone right you put them together, you get $0.28 of additional accretion for the year.

So, again that's about 75%, 76% better than FormFactor on a standalone basis. However, that just is an illustrative example how we think this makes a lot of financial sense. That being said, we haven't provided any forward-looking guidance with respect to accretion on the transaction..

Okay. And then two details.

One, are there break ups and if so what are they? And two, how should we factor in the cost of debt that will be used to fund the transaction?.

I'm sorry, what was the first question Craig?.

Break-up fees?.

So, yes there are break-up fees. We refer you to the merger agreement to look for the details of those. I'll ask Mike Ludwig to talk about the funding..

I'm sorry, are you asking me about funding or you're asking about -- you said, costs, can you elaborate Craig on the question?.

Yes.

Just the cost of the debt funding that you used on the deal?.

Okay. So, the cost of the debt funding. In the example we used a little over 3.25% is what we have. We do have committed terms and conditions and in essence for you, it's what we've used in our assumption was LIBOR plus 200 basis points..

Our next question comes from the line of Patrick Ho with Stifel Nicolas. Your line is now open..

Thank you, and first I also want to send my congratulations to both companies. First, for Mike Slessor. Given some of the overlap of customers and as you mentioned you kind of combine both now the engineering as well as the production capabilities of both companies.

Do you see this longer-term as a potential one-stop-shop for many of your customers both from the engineering side as well as on the production end?.

Thanks for the question, Pat. I think it's a great question because as we longer-term, clearly one of the things we're looking forward to creating is you could call it a one-stop-shop but maybe looking at it more broadly, a more complete provider of solutions to help people both measure their yield, but also improve their yield.

Obviously, as we move upstream into the engineering and characterization space; one of the things we're able to do is not just tell people what their yield is, which is one of the fundamental things a probe card does, but we're able to help people fix yield.

And I think the insight that we gain from the upstream engineering activities is going to really help inform both our product decisions downstream, but also help customers as they ramp things aggressively and be in the right position to offer them a complete engineering to production solution as they ramp new nodes and new devices.

So longer-term, that's definitely one of the strategic benefits we see from the combination..

Great, that's helpful. And then maybe just as a follow-up for you again, Mike, in terms of just the business environment on the probe card and for you guys as you look to 2016. You mentioned the continued strength in your SoC business.

As you look at the year as a whole, given a lot of the mix data points in the overall semiconductor industry, do you see the SoC strength coming primarily from one core customer or do you see the mobile application processor market also picking up strength particularly as you get to the more seasonally stronger period of the year?.

So we do see -- there are many moving parts in not just the SoC business, but the overall probe card business during 2016 as we currently see it. The strength in SoC does have multiple dimensions to it.

Certainly the current activity that we've indicated is associated with 10-nanometer ramp at one of our key customers, it is a very strong momentum and we expect that to be persistent throughout the year.

However, if we look at new design activity from other customers on some of the foundry FinFET nodes, there's some very strong initial design activity there as well, which as you say we, typically find seasonal strength in the middle part and latter part of the year associated with those designs.

And so the simple answer to your question is we see both components of that strength in SoC as we move through 2016..

Our next question comes from the line of Srini Sundar with Summit Research. Your line is now open..

Hi, guys, thanks for taking my call.

My first question is why now, what factors made you think that this is the best time for the merger?.

Srini it's Mike Slessor. I'll answer that one or start to answer that one.

With any combination certainly you're looking to satisfy several different objectives and as we've motivated for you in the conference call and in the support materials this one allows us to check the boxes on strategic, operational and financial rationale in a very compelling way in each of them. So the fundamental deal made sense.

Given Cascade's performance over the past year and the continued trajectory of that momentum you can infer from Jeff's guidance and comments, we felt like it was the right time to capture some of that growth. But the other piece of this is certainly associated with two companies finding the right ingredients and the right time to decide the deal.

Simply put, it takes two to tango. The companies obviously know each other well. This is a small neighborhood and we've been interacting for a long time.

We found the right ingredients from a Board perspective, from a valuation perspective, and from just an overall timing perspective when we looked at availability of debt, FormFactor's track record now of putting up seven consecutive quarters of cash generation.

We felt like all these things came together at the right time and we're able fortunately to put this deal together at this time. I'd actually like to ask Michael Burger to also talk about the timing from the Cascade side of this is well because as I said, it takes two to tango..

Yes, thank you, Mike. The only thing I would add to what you've said is that I think trajectory of the market is another factor. I think there was a great deal of uncertainty at the beginning of 2015 about what the market would hold and I think that obviously makes for nervous Boards and conversations around what the future looks like.

I think we have a pretty good feel for 2016 and feel like it is very positive and I think that's a great environment in which to put two companies together. So I agree with everything Mike said and I think the market had something to play with that as well..

Okay.

And my next question is who are the key customers of Cascade? I know that you have like 1,000 customers, but is there like one, two, three, top three customers?.

This is Mike Slessor. I am going to answer that generally and then I'm going to ask the Cascade guys to comment. Again, part of this is about diversification. And one of the interesting things about Cascade's customer concentration and mix and then the combined companies' customer concentration and mix is it is very diverse.

In fact, Cascade has no 10% customers and so they don't publicly disclose who their top customers are. Having said that, I can tell you it is the who is who of the semiconductor industry. As Patrick inferred from his question, we do have a lot of the same customers.

I want to emphasize that we're selling these customers different products, but there is a great deal of customer overlap with the top customers in the semiconductor industry.

Michael, do you want to address that all?.

Yes, thank you. We don't really have any customer that is over 10% and so we don't really give a lot of great detail. Obviously, we have two different markets or segments that we report. The Systems market really represents the who is who of the semiconductor space.

We've got roughly over 10,000 systems installed in the field and it literally is almost everyone who does any sort of semiconductor manufacturing, research, et cetera.

And then on the Probe segment that is dominated primarily, as Mike Slessor said in his script, around the RF front-end market segment, which is again in our investor presentation, we talk about the big guys, Avago, Skyworks, Broadcom, et cetera. So, we really touch a lot of the same customers, FormFactor and Cascade.

It's just the level of emphasis or concentration of each of our businesses is different. And I think putting these two companies together will really kind of maximize that and I think that's the real exciting opportunity I think for certainly our customers and our shareholders..

Okay.

Just to clarify, would you say that all the foundries are kind of your customers?.

Are you asking Michael or Mike Burger you're asking?.

Either one..

Go ahead, Mike..

Yes. All the foundries are our customers, particularly on the Systems side. They represent a large concentration of our current installed base and our future funnel, so yes..

Our next question comes from the line of Christopher Longiaru with Sidoti & Company. Your line is now open..

I'll add my congratulations. I was wondering, if you could give us a little more clarity into the synergies.

I mean, is this more going to be kind of -- you're selling to the same customers and are going to recognize benefits from that, is it wafer pricing? Could you just give us a little more granularity into what that $10 million to $12 million looks like and how it progresses over the time frame that you laid out?.

Yes. So, I think what we're looking at, again, is as we get into the initial steps, as we've discussed earlier, I think we'll find some facility overlaps, some field overlaps, some public company expense overlap, right. So, I think those again are the easy items.

As we get into deeper planning we look at the processes that are being done by both companies. I think we'll find some synergies that will develop probably throughout the organization, whether that be in G&A, whether that be in sales and marketing.

And as Mike said, we'll take a very measured approach to anything that touches R&D or the manufacturing and operations of it. But again, I think over time we'll find some synergies there as well. I think it's just -- it's not going to happen in the first 12 to 18 months. It's going to take some time to get deeper into the organization to do that.

Also, I think one of the things that we talked about that's pretty significant for us that will get immediately like our tax synergies is the ability to utilize the FormFactor NOLs that were created in literally like the 2009 through 2013 time frame. Those will carry on for a number of years.

So, I think while we haven't touched on those too much with respect to Q&A, I certainly want to point those out to be very significant synergies and benefits on a go-forward basis as well, Chris..

And can you lay out some of your expectations for how cash flow looks over the next few quarters as you move into this? I know that you mentioned that one of the uses of cash is going to be to delever the balance sheet.

Just give us an idea of kind of what the combined company cash flow might look like?.

Okay. Well, again, we will publish a model shortly after we -- after post close, but if you just sort of look at probably 2015.

If that's a decent example, right, FormFactor prior to any stock repurchases generated some more in the ballpark of $32 million and as Jeff pointed out, if you do the math there, I think their free cash flow is somewhere around $8 million or $9 million once you exclude stock repurchases.

So if that's an indication, then I would suggest that going forward the two companies together should be able to generate somewhere north of $40 million of cash flow on an annual basis.

And again with expected increasing revenues, synergies and particularly tax synergies, I would expect that number to go further north as we move along into next 2016 and 2017..

Do you have a goal for how much of that goes to paying down debt?.

Well for us, again we're going to really, again, focus on delevering. We don't have -- we haven't established a policy that suggests that a certain percentage of excess cash flow will go to pay down the debt. But from our perspective, again we want to look at what the alternative uses of cash are.

But to the extent we don't see any other transactions on the horizon and that sort of thing, we definitely will focus on paying down the debt with any excess cash that we have..

Great. That's all I have guys. Thank you for taking my questions..

Our next question comes from the line of Tom Diffely with D.A. Davidson. Your line is now open..

First a question on the deal structure.

Why did you decide to use stock as well as debt and not just debts alone?.

Look, I think the one thing that from a company's standpoint, we knew we would have to use some debt. At the same point in time there is certainly a limited appetite for everybody's -- limited appetite for the amount of debt.

And we really sort of felt as well that'd be good in terms of when you put these companies together if they had a continuing interest in the combined success of the company, that wouldn't be a bad thing either. So I think that's kind of why we decided to use some stock as well..

Okay, all right. And then when you look at the NOLs that FormFactor has, what percentage of Cascade's business is in the U.S.

and would be -- well, would benefit from the NOLs?.

Right. We understand that somewhere in the 70% to 80% of their income is generated within the U.S. So again, I think our NOLs will provide a nice synergy around that..

Okay. And then, you had some nice slides on the diversification that the combination provides.

I'm curious, so when you look at the relative seasonality or the relative cyclicality of the two companies, is it -- does the diversification help you there or is it really just customer specific diversification that benefits you?.

This is Mike Slessor, Tom. There is a couple of different components to the diversification. The first, as you've noted in the slides is really associated with customers and lowering the combined company's dependence on any one customer or any one set of customers.

If you look at the seasonality profiles of the business, interestingly enough, Cascade's Q4, calendar Q4, ends up being one of the very strong quarters of the year. And although it hasn't happened recently for FormFactor that was often one of the weaker seasonal quarters for FormFactor.

So to the extent there is this historical seasonal pattern that still imposes on both of our business, we actually diversify or damp out some of that calendar seasonality as well as we put these two businesses together..

Okay. I was actually surprised to hear Mike Ludwig say that they came off of a seasonally strong fourth quarter. I've never heard you guys say that before..

That's right..

All right. So when you look at -- well, just maybe a couple of quick FormFactor questions here. First on the Flash, it seems like the Flash is running a little below where we would have thought several quarters ago.

I'm curious how you see the traction with your new product there and how you view it on a go-forward basis?.

Right. So the new product Vector, as we've talked to you in the past, we spent much of 2015 working our way through the production qualifications of two customers and really focusing on making sure our internal yields, quality, cycle times and costs were within a window where we were prepared to ramp it.

With some of the investments our customers are making in 3D NAND, we are beginning to see the initial parts of that ramp. Certainly they were not evident in Q4 results as you can see from Flash. And in the first part of the year they are going to be slow and steady.

I think the guidance or the expectations we've set before that Vector will be sort of the call it $2 million-ish on a quarterly run rate, as we come through 2016, continues to be our expectation, continues to be what we're planning for.

And as we begin to ramp these designs for volume 3D NAND production here in the first part of the year, we're tracking to that..

Okay. And then finally, Mike Burger, in your comments you talked about how the timing of this acquisition merger was partly driven by the uncertainty in the marketplace a year ago in 2015, implying that the uncertainty in the marketplace is less this year.

I'm curious if you could just expand on that thought?.

Yes. I actually believe it's less for certainly for Cascade in the context of our current customer base. As we talked about our bookings for Q4 were exceptional, over 1.2 to 1. So, we felt really good about kind of the trajectory going forward and actually in all segments, not just the RF side of it.

So, I think that builds a lot of confidence on both sides of the transaction about our ability to deliver what we say we're going to do, and I think that does have some bearing on timing..

Okay, great. Thanks to all of you..

Thank you..

We have a follow-up question from Craig Ellis with B. Riley. Your line is now open..

Asked and answered, but thank you..

We have another follow-up question from Srini Sundar with Summit Research. Your line is now open..

My current question is, I know that China does not become a worry for FormFactor because of the end market profile, but does China potentially affect Cascade given its weakness?.

Well, Srini, China is an important market for both companies and we have -- when we talk about footprints and customers, both companies have pretty significant market presence in China.

So as China continues to grow, as China continues to internalize more of the semiconductor manufacturing, we certainly at FormFactor have done more and more inside of China with our local team and partnering with key customers and other suppliers inside of China.

So China remains, for the semiconductor industry overall, a key area where you need to be present to win, where you need to be engaged in a material way with a local team that's embedded there.

And we're going to continue on that theme as we move forward with closing and take advantage of this expanded product profile and footprint from engineering through production, all of those activities happen in China as well..

Actually my question was, is the current weakness in China, is that going to affect Form or Cascade..

So from a macroeconomic or a demand perspective?.

Correct, macroeconomic, yes and how it will affect?.

Certainly, the overall demand dynamics associated with, just take handsets for example, I think well understood by everybody.

Both companies are certainly linked to the overall handset demand, whether it's Cascade's RF filter business or FormFactor's application process or their memory businesses, there are certain components of those businesses that are driven by handset unit demand. I think the interesting thing for both companies' businesses.

And I'll use an example of it, in our slide deck there's a particular interest for the Cascade RF business, is even as handset unit growth slows, the number of discrete RF filters that are going into each of these units is expanding pretty rapidly as the bands proliferate.

And so even with the end market weakness on the unit front, we do see some growth trajectories inside as, if you like, the two companies take a bigger chunk of the share of the bond inside these things. So, macro economy certainly a concern, but we think there are some underlying structural dynamics that help us out there as well..

And we have no further questions. I would like to turn the conference back to management for closing comments..

Thanks again for joining us today on a very important day in both companies' history. We look forward to continuing to executive in our respective businesses, closing this transaction, and delivering on the combined results and potential we've shared with you today. Thanks again..