FormFactor, Inc. 2011 Q3 10-Q Summary
Business Context and Reporting Period
FormFactor designs, manufactures, sells and supports advanced semiconductor wafer probe cards used for wafer sort and test. The company operates in one industry segment and derives substantially all revenue from wafer probe card sales, including products using MicroSpring and ATRE technologies.
The unaudited filing covers the three and nine months ended September 24, 2011, compared with September 25, 2010. Fiscal 2011 includes 53 weeks and ends December 31, 2011. FormFactor had 50.5 million common shares outstanding as of October 20, 2011.
Key Financial Metrics
| Metric | Q3 2011 | Q3 2010 | 9M 2011 | 9M 2010 |
|---|---|---|---|---|
| Revenue | $52.1 million | $47.3 million | $139.1 million | $144.7 million |
| Gross profit (loss) | $12.0 million | $(7.2) million | $25.9 million | $(5.6) million |
| Gross margin | 23.0% | (15.2)% | 18.6% | (3.9)% |
| Operating loss | $(10.0) million | $(100.2) million | $(42.3) million | $(173.3) million |
| Net loss | $(9.9) million | $(95.8) million | $(39.0) million | $(167.9) million |
| Basic and diluted loss per share | $(0.20) | $(1.90) | $(0.77) | $(3.35) |
| Operating cash flow | Not separately provided | Not separately provided | $(21.8) million | $(58.3) million |
Q3 revenue increased 10.1% year over year, while nine-month revenue declined 3.8%. DRAM revenue increased 21.4% in Q3 but declined 6.7% for the first nine months. Flash revenue declined 18.8% in Q3 and 10.2% for the nine months. SOC revenue was essentially flat in Q3 and increased 18.0% for the nine months.
Q3 operating expenses were $22.0 million, or 42.2% of revenue, compared with $93.0 million, or 196.4%, in the prior-year quarter. Research and development expense declined to $10.4 million from $12.8 million, and selling, general and administrative expense declined to $11.2 million from $16.2 million.
At September 24, 2011, cash and cash equivalents were $140.9 million and marketable securities were $175.1 million, for combined liquidity of approximately $316.0 million. Working capital was $339.1 million. Total liabilities were $46.6 million and stockholders’ equity was $377.3 million. The filing does not identify outstanding conventional debt; disclosed liabilities primarily comprise operating and tax-related obligations.
Capital expenditures were $4.9 million during the first nine months. Investing activities provided $46.3 million, primarily reflecting net marketable-security maturities and purchases. Financing activities used $5.0 million, including $8.5 million for share repurchases. DSO improved to 49 days from 66 days at December 25, 2010.
Material Changes Versus Prior Comparable Period
- Gross margin improved substantially because of favorable product mix, better production yields, lower inventory provisions, reduced depreciation and lower overhead.
- Inventory provision charges declined by approximately $4.9 million in Q3 and $6.6 million for the nine-month period, excluding a prior-year favorable inventory revaluation.
- Depreciation expense declined by approximately $3.3 million in Q3 and $10.4 million for the nine months, principally following the 2010 enterprise-wide impairment and manufacturing restructuring.
- Restructuring charges fell to $0.3 million in Q3 and $0.2 million for the nine months, compared with $8.5 million and $14.6 million, respectively, in the comparable 2010 periods.
- Prior-year results included $55.4 million of Q3 impairment charges and $56.4 million for the nine months, including a $52.0 million enterprise-wide impairment. Current-year impairment charges were $0.1 million in Q3 and $0.5 million for the nine months.
- Workforce reductions continued in 2011: 13 positions in Q1, 13 in Q2 and four in Q3. Management expects approximately $1.2 million of aggregate quarterly savings from these 2011 actions, excluding stock-based compensation.
- The company repurchased and retired 1.1 million shares for $8.5 million during the first nine months. The repurchase authorization was extended through October 19, 2012, with up to $40.5 million remaining available under the program.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide formal quarterly or annual revenue, margin or earnings guidance. Management stated that it expects existing cash, cash equivalents and marketable securities to satisfy working-capital requirements for the next twelve months, but warned that liquidity could decline further if operating efficiency does not improve, cash outlays are not reduced or additional financing is unavailable.
Management remains focused on cost reductions, achieving break-even operating cash flow, limiting capital spending and investing in next-generation parallelism, fine-pitch, MicroSpring, ATRE and other process technologies. Revenue remains exposed to semiconductor-industry cyclicality, product qualification timing, changing customer order patterns, pricing pressure and demand fluctuations.
- Customer concentration is significant. Three customers represented approximately 59% of Q3 revenue and 46% of nine-month revenue; three customers represented approximately 53% and 36% of gross accounts receivable, respectively.
- Extended SmartMatrix qualification periods reduced nine-month revenue, while NAND Flash order timing and weaker short-term demand reduced Flash revenue.
- Inventory is exposed to excess and obsolescence risk. Management recorded $4.9 million of excess and obsolete inventory provisions during the first nine months.
- Management stated that additional impairment charges are reasonably possible during the remainder of 2011 if anticipated operating results are not achieved.
- An indirect tax and customs inquiry could result in additional liabilities or response costs. FormFactor had accrued $1.0 million, but stated that additional material exposure was possible.
- Patent litigation and patent-office challenges remain active, although management had not recorded a liability because it did not believe a loss was probable as of September 24, 2011.
- Unrecognized tax benefits increased to $18.5 million. Approximately $14.5 million could reduce future tax expense if recognized, before changes in valuation allowances.
- A subsequent October 2011 separation agreement with a former senior vice president is expected to result in a $0.8 million charge in the fourth quarter and full year 2011, including $0.5 million of payroll-related expense and $0.3 million of stock-based compensation.
Most Important Facts for Investors to Verify
- Whether SmartMatrix qualification progress and DRAM demand can offset continued weakness or order volatility in NAND Flash.
- Whether gross-margin improvement is sustainable without relying on unusually low inventory provisions, reduced depreciation and restructuring-related savings.
- The pace of operating cash burn and the company’s ability to reach break-even operating cash flow.
- Customer concentration, accounts-receivable collectability and the effect of customer procurement or payment delays on liquidity.
- Potential additional long-lived-asset impairments if operating results remain below plan.
- The ultimate exposure from the customs and indirect-tax inquiry, patent matters and unrecognized tax positions.
- The remaining authorization and actual activity under the extended share-repurchase program relative to the company’s continuing operating losses and cash usage.