FormFactor, Inc. 2013 Q2 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 filing covers the three and six months ended June 29, 2013, compared with the corresponding periods ended June 30, 2012. Fiscal 2013 ends December 28, 2013.
The October 2012 acquisition of MicroProbe materially expanded FormFactor's system-on-chip (SoC) business and contributed $42.6 million of revenue during the first six months of 2013.
Key Financial Metrics
| Metric | Three Months Ended June 29, 2013 | Three Months Ended June 30, 2012 | Six Months Ended June 29, 2013 | Six Months Ended June 30, 2012 |
|---|---|---|---|---|
| Revenue | $62.7 million | $54.8 million | $115.4 million | $89.6 million |
| Gross profit | $16.4 million | $16.2 million | $25.5 million | $20.3 million |
| Gross margin | 26.2% | 29.5% | 22.1% | 22.7% |
| Operating loss | $8.5 million | $6.5 million | $29.0 million | $24.5 million |
| Net loss | $8.4 million | $4.2 million | $28.2 million | $21.7 million |
| Net loss per diluted share | $0.16 | $0.08 | $0.52 | $0.44 |
Revenue increased 14.4% year over year in the quarter and 28.7% year to date. The quarter's operating margin was negative 13.5%, compared with negative 11.7% in the prior-year quarter; the six-month operating margin improved to negative 25.2% from negative 27.3%.
- DRAM revenue declined 29.9% in the quarter and 18.9% year to date.
- Flash revenue declined 11.8% in the quarter and 13.5% year to date.
- SoC revenue increased 288.4% in the quarter and 261.8% year to date, primarily from MicroProbe.
- Research and development expense was $10.9 million for the quarter and $21.8 million year to date.
- Selling, general and administrative expense was $13.5 million for the quarter and $28.1 million year to date.
- Stock-based compensation was $3.1 million for the quarter and $6.2 million year to date.
Cash Flow, Liquidity, Debt, and Balance Sheet
- Cash and cash equivalents were $57.2 million at June 29, 2013, compared with $72.2 million at December 29, 2012.
- Marketable securities were $97.4 million, resulting in approximately $154.5 million of cash, cash equivalents, restricted cash, and marketable securities.
- Working capital was $186.5 million, down from $194.1 million at year-end 2012.
- Operating activities used $5.6 million of cash during the first six months, an improvement from $14.8 million used in the prior-year period.
- Investing activities used $9.5 million, including $5.1 million of capital expenditures and net purchases of marketable securities.
- Financing activities provided $1.0 million, primarily from common-stock issuances.
- Capital leases totaled $0.5 million current and $0.04 million long term. The filing does not report conventional bank debt.
Management believes existing liquidity will satisfy working-capital requirements for the next twelve months, but cautions that cash could decline further if revenue, operating efficiency, cash outlays, or financing availability do not improve.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven by the MicroProbe acquisition and higher SoC shipments, partially offset by weaker DRAM and Flash demand.
- Gross profit increased in dollars, but gross margin declined because of acquisition-related intangible amortization, inventory step-up and backlog amortization, and higher inventory provisions.
- Six-month net loss increased by $6.5 million, primarily due to $4.1 million of restructuring charges, higher MicroProbe-related amortization, and $1.2 million of acquisition and integration costs.
- Research and development spending was broadly stable despite the acquisition, reflecting cost reductions and the suspension of next-generation DRAM Matrix development and termination of certain SoC development activities.
- Accounts receivable increased to $39.0 million from $28.9 million at year-end, and inventories increased to $26.1 million from $23.6 million.
- Customer concentration remained significant: SK hynix represented 20.1% of quarterly revenue and Intel represented 14.6%; two customers represented 34.7% of quarterly revenue.
Guidance, Outlook, Risks, and Unusual Items
- The Q1 2013 restructuring plan reduced the workforce by 31 employees and temporary staffing by approximately 20 positions. Management expects quarterly savings of $2.0 million to $2.5 million, excluding stock-based compensation.
- Four additional employees were eliminated in the second quarter. Remaining restructuring cash payments are expected by the end of the first quarter of fiscal 2014.
- FormFactor sold MicroProbe subsidiary TMMC for $1.0 million of consideration, including $0.18 million in cash and an $0.82 million note receivable. A $0.3 million loss was recorded; the note's fair value was approximately $0.47 million.
- The company recorded $0.2 million of long-lived asset impairments year to date and stated that additional impairment charges are reasonably possible if forecasted operating results are not achieved.
- MicroProbe acquisition accounting remains preliminary and could be adjusted as valuation and working-capital information is finalized.
- Key risks include semiconductor cyclicality, price erosion, rapid technological change, customer concentration, dependence on limited or sole-source suppliers, inventory obsolescence, foreign-exchange exposure, tax uncertainties, intellectual-property litigation, and potential environmental liabilities.
- No material legal proceedings or material changes to previously disclosed risk factors were reported. Management stated that disclosure controls were effective and that no material change occurred in internal control over financial reporting.
Most Important Facts for Investors to Verify
- Whether MicroProbe integration produces the stated cost synergies and sustains SoC revenue growth.
- Whether DRAM and Flash demand recover or continue to pressure revenue and factory utilization.
- The impact of acquisition-related amortization, inventory provisions, restructuring costs, and possible future impairments on reported margins and cash flow.
- Whether operating cash flow turns positive and whether the approximately $154.5 million liquidity balance remains sufficient without new financing.
- Customer concentration and exposure to SK hynix, Intel, Samsung, and other major semiconductor manufacturers.
- Final purchase-accounting adjustments for MicroProbe, including goodwill, intangible assets, and deferred tax liabilities.