FormFactor, Inc. 2023 Q3 SEC Filing Summary
Business Context and Reporting Period
FormFactor provides semiconductor test and measurement technologies, including probe cards, analytical probes, probe stations, metrology systems, thermal systems and cryogenic systems. The company operates through two reportable segments: Probe Cards and Systems.
This unaudited Form 10-Q covers the three and nine months ended September 30, 2023, compared with the three and nine months ended September 24, 2022. Fiscal 2023 ends December 30, 2023.
Key Financial Metrics
| Metric | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 |
|---|---|---|---|---|
| Revenue | $171.6 million | $180.9 million | $494.9 million | $582.0 million |
| Gross profit | $69.3 million | $62.2 million | $190.6 million | $250.8 million |
| Gross margin | 40.4% | 34.4% | 38.5% | 43.1% |
| Operating income | $2.7 million | $4.0 million | $1.5 million | $70.9 million |
| Net income | $4.4 million | $4.4 million | $6.5 million | $64.5 million |
| Diluted EPS | $0.06 | $0.06 | $0.08 | $0.82 |
| Operating cash flow | Not separately provided | Not separately provided | $55.4 million | $111.0 million |
Q3 revenue declined 5.1% year over year, while nine-month revenue declined 15.0%. Nine-month net income fell approximately 89.8%, primarily because of lower revenue and gross margins and higher operating expenses.
- Segment revenue: Q3 Probe Cards revenue was $128.3 million, down 7.9%; Systems revenue was $43.2 million, up 4.2%. For nine months, Probe Cards revenue was $371.0 million, down 20.8%, while Systems revenue was $124.0 million, up 7.9%.
- Market trends: Nine-month Probe Cards revenue declined 14.4% in Foundry & Logic, 26.7% in DRAM and 60.8% in Flash. Q3 Foundry & Logic revenue increased 6.4%, partly offsetting declines in DRAM and Flash.
- Operating expenses: Q3 research and development expense increased 16.8% to $31.0 million, and selling, general and administrative expense increased 12.4% to $35.6 million. Nine-month operating expenses increased 5.1% to $189.2 million.
- Liquidity: Cash and cash equivalents were $108.7 million and marketable securities were $135.7 million at September 30, 2023, for total cash, cash equivalents and marketable securities of approximately $244.4 million. Working capital was $377.1 million.
- Debt: The Building Term Loan had an outstanding balance of $14.7 million and a stated interest rate of 7.19% at September 30, 2023. An interest-rate swap converts the floating-rate exposure to a fixed rate of 2.75%.
- Capital expenditures: Purchases of property, plant and equipment were $46.1 million during the first nine months, compared with $39.0 million in the prior-year period.
- Stock-based compensation: Expense was $10.8 million in Q3 and $29.3 million for the first nine months, compared with $8.0 million and $21.9 million, respectively, in the prior-year periods.
Material Changes Versus the Prior Comparable Period
- Management attributed the nine-month revenue decline to semiconductor industry weakness that began in the third quarter of fiscal 2022, lower demand in personal computer and mobile markets, excess DRAM and Flash supply, and lower customer production activity.
- Q3 gross margin improved to 40.4% from 34.4%, primarily due to favorable product mix and lower inventory excess and obsolescence reserves. Nine-month gross margin decreased to 38.5% from 43.1%, principally because of lower production volumes and unfavorable cost absorption.
- Research and development spending increased as the company continued investing in technology and added headcount. SG&A increased primarily because of divestiture-related consulting fees, stock-based compensation and general operating costs.
- The company received an $18.0 million California Competes Grant in January 2023. The grant requires job creation, retention and infrastructure investments over five years; failure to satisfy the requirements could require repayment of some or all of the grant.
- On September 18, 2023, FormFactor agreed to sell its FRT Metrology business to Camtek for $100 million in cash, subject to adjustments. The sale closed on November 1, 2023, after the reporting period, for preliminary cash proceeds of $103.8 million. FRT assets and liabilities were classified as held for sale at September 30, 2023.
- No shares were repurchased during the first nine months of 2023. The company had $18.6 million remaining under its existing repurchase authorization at September 30, 2023 and authorized a new $75 million program on October 30, 2023.
Guidance, Outlook, Commentary, Risks and Unusual Items
The filing does not provide a clear quantitative earnings or revenue forecast for the remainder of fiscal 2023. Management stated that available cash, marketable securities and expected operating cash flow are currently expected to fund short- and long-term liquidity needs, including research and development, capital expenditures, working capital and existing commitments.
- Key demand risks include continued semiconductor industry weakness, excess DRAM and Flash inventory, changes in customer production levels and product mix, and dependence on semiconductor capital spending.
- Customer concentration remains material. Intel represented 17.1% of Q3 revenue and 17.2% of nine-month revenue; Samsung represented 11.2% of Q3 revenue. One customer represented 23.5% of gross accounts receivable at September 30, 2023.
- China revenue was affected by weaker demand and expanded U.S. export-license requirements for advanced semiconductor technology.
- The company relies on a limited number of suppliers, including some sole-source suppliers, creating supply-chain and component availability risks.
- Foreign exchange, interest-rate, legal, tax and geopolitical risks could materially affect results. The filing states that no material changes occurred in the risk factors reported in the 2022 Form 10-K.
- Restructuring charges were $1.8 million in the first nine months of 2023, compared with $7.1 million in the prior-year period. The company does not expect additional material costs under the 2021 and 2022 restructuring plans.
- Remaining performance obligations were $13.8 million at September 30, 2023; approximately 23.2% was expected to be recognized in the remainder of fiscal 2023 and 66.7% in fiscal 2024.
Important Facts for Investors to Verify
- Whether semiconductor demand, particularly in DRAM and Flash, improves and whether the Q3 Foundry & Logic recovery continues.
- The final purchase-price adjustments and accounting impact of the completed FRT divestiture, including use of the $103.8 million proceeds.
- Compliance with the California Competes Grant requirements and the potential repayment exposure.
- Operating cash flow conversion, inventory levels, warranty and obsolescence reserves, and the effect of elevated capital expenditures.
- Customer concentration, export-control developments affecting China, and exposure to sole-source suppliers.
- Future share repurchases, dilution from equity compensation and the impact of the new $75 million repurchase authorization.