FormFactor, Inc. Fiscal 2011 Form 10-K Summary
Business context and reporting period
FormFactor designs, manufactures and supports advanced semiconductor wafer probe cards used for wafer-level sort and test. The company operates in one segment and serves DRAM, Flash memory and system-on-chip markets. Fiscal 2011 ended December 31, 2011 and included 53 weeks, compared with 52 weeks in fiscal 2010.
Fiscal 2011 remained challenging because of semiconductor-market cyclicality, oversupply and pricing pressure in memory devices, delayed customer qualifications, and product-transition execution issues. The company continued shifting customers from its legacy Harmony platform to SmartMatrix and TouchMatrix products.
Financial performance and liquidity
| Metric | Fiscal 2011 | Fiscal 2010 | Change |
|---|---|---|---|
| Revenue | $169.3 million | $188.6 million | Down 10.2% |
| Gross profit (loss) | $21.0 million | $(2.3) million | Improved |
| Gross margin | 12.4% | (1.2)% | Improved 13.6 points |
| Operating loss | $(70.4) million | $(197.2) million | Improved |
| Net loss | $(66.0) million | $(188.3) million | Improved |
| Basic and diluted loss per share | $(1.31) | $(3.75) | Improved |
| Cash flow from operations | $(29.3) million | $(73.1) million | Improved |
| Capital expenditures | $7.7 million | $30.9 million | Down substantially |
| Cash, cash equivalents and marketable securities | $296.7 million | $347.2 million | Down $50.5 million |
| Working capital | $308.4 million | $370.8 million | Down $62.4 million |
Revenue by market was $115.7 million from DRAM, $24.6 million from Flash and $29.1 million from SoC. DRAM represented 68.3% of revenue, Flash 14.5% and SoC 17.2%. Four customers represented 55.9% of fiscal 2011 revenue, and the ten largest customers represented 82%.
Operating expenses declined to $91.3 million from $194.9 million. Research and development expense was $43.5 million, selling, general and administrative expense was $46.7 million, restructuring charges were $0.5 million and long-lived asset impairment charges were $0.5 million.
The company had $36.4 million of total liabilities and $346.7 million of stockholders’ equity at year-end. The filing does not report outstanding borrowings or traditional debt; liquidity primarily consisted of cash, cash equivalents and marketable securities. Contractual obligations totaled $31.9 million, including $27.7 million of operating leases and $4.2 million of purchase obligations.
Days sales outstanding improved to 42 days from 66 days. Fiscal 2011 investing cash flow was positive $60.7 million, principally because proceeds from maturities and sales of marketable securities exceeded purchases. Financing cash flow was negative $12.9 million, including $16.4 million used for share repurchases.
Material changes versus the prior comparable period
- Revenue declined $19.2 million, primarily because DRAM and NOR Flash demand weakened sharply in the second half of the year. DRAM revenue declined 11.8% and Flash revenue declined 18.2%, while SoC revenue increased 6.4%.
- Gross margin returned to positive territory because of lower overhead, reduced depreciation, lower inventory provisions, improved yields and a more favorable product mix.
- Research and development expense declined 21%, and selling, general and administrative expense declined 31%, reflecting workforce reductions and other cost controls.
- Net loss improved substantially, mainly because fiscal 2010 included a $52.0 million enterprise-wide impairment, $15.9 million of restructuring charges and higher operating expenses.
- Operating cash use improved by $43.8 million, but the company remained cash-flow negative.
- Backlog fell to $14.6 million at December 31, 2011 from $37.5 million at December 25, 2010, limiting its usefulness as a near-term revenue indicator.
- FormFactor repurchased and retired 2.3 million shares for $16.4 million during fiscal 2011. The repurchase authorization was extended through October 19, 2012.
- The workforce declined to 709 employees from 729 at the prior year-end. Fiscal 2011 restructuring actions reduced the workforce by approximately 5% and were expected to generate approximately $1.5 million of quarterly savings, excluding stock-based compensation. Management also expected approximately $5.5 million of quarterly savings from the broader 2009-2011 restructuring program.
Outlook, commentary, risks and unusual items
Management did not provide a specific revenue or earnings forecast in the filing. Its stated priorities were to improve operating efficiency, reduce cash outlays and achieve operating cash-flow break-even. Management believed existing liquidity would satisfy working-capital requirements for the next twelve months, but warned that cash could decline further if efficiency improvements, cost reductions or financing efforts were unsuccessful.
Management reported that SmartMatrix 100 and TouchMatrix had shipped more than 900 units since introduction and were in production use at the five largest memory manufacturers worldwide. However, delayed qualifications, lost market share, pricing pressure and customer adoption timing remained significant risks.
- Semiconductor cyclicality, memory-device oversupply, falling average selling prices and customer production cuts may reduce probe-card demand.
- Customer concentration is significant, and cancellations, delays, nonpayment or customer bankruptcy could materially affect revenue and liquidity.
- Products are highly customized, creating exposure to excess or obsolete inventory. Inventory write-downs were $7.9 million in fiscal 2011.
- Competition, price pressure, short customer lead times and qualification delays could reduce market share and margins.
- Manufacturing depends on Livermore and, to a lesser extent, Japan, as well as sole-source or limited-source suppliers. Natural disasters, including the 2011 Japan earthquake and Thailand flooding, demonstrated supply-chain and end-market exposure.
- The company recorded a $2.5 million tax benefit from releasing a valuation allowance for a non-U.S. jurisdiction, while continuing to maintain a valuation allowance against U.S. deferred tax assets.
- Unrecognized tax benefits totaled approximately $17.8 million. The company also accrued $1.0 million for potential customs and indirect-tax exposure relating to prior shipping and repair-center activities.
- FormFactor was pursuing patent litigation against Micro-Probe and faced patent re-examination and foreign patent challenges. No provision was recorded for patent litigation because management did not believe a loss was probable.
- Fiscal 2011 included $0.8 million of charges related to the separation of a former senior vice president and $0.5 million of impairment charges related to terminated projects.
- The company stated that additional impairment charges were reasonably possible in fiscal 2012 if planned operating results were not achieved.
Important facts for investors to verify
- Whether revenue stabilizes or recovers in DRAM and Flash markets, and whether SoC growth continues.
- Qualification and volume-production progress for SmartMatrix, TouchMatrix and next-generation products.
- Whether restructuring savings are realized and whether operating cash flow reaches break-even before liquidity declines materially.
- Backlog trends, order cancellations and customer concentration, particularly among Elpida, Hynix, Samsung and Micron.
- Future inventory provisions, gross-margin performance, manufacturing yields and pricing pressure.
- Potential additional impairment, restructuring, tax, environmental and litigation-related charges.
- Cash usage after share repurchases, the remaining repurchase authorization and the absence of reported traditional debt.
- The status and potential financial impact of the Micro-Probe patent litigation, patent re-examinations and customs or indirect-tax inquiry.