FormFactor, Inc. 10-Q Summary
Business Context and Reporting Period
FormFactor provides semiconductor test and measurement technologies, including probe cards, analytical probes, probe stations, metrology, thermal, and cryogenic systems. The company operates through Probe Cards and Systems segments. This unaudited report covers the 13 weeks ended April 1, 2023, compared with the 13 weeks ended March 26, 2022.
Key Financial Metrics
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $167.4 million | $197.2 million | Down 15.1% |
| Gross profit | $61.1 million | $94.2 million | Down 35.2% |
| Gross margin | 36.5% | 47.8% | Down 11.3 percentage points |
| Operating income | $0.1 million | $34.2 million | Down materially |
| Net income | $1.3 million | $29.9 million | Down 95.5% |
| Diluted EPS | $0.02 | $0.38 | Down $0.36 |
| Cash flow from operations | $12.3 million | $44.2 million | Down $31.8 million |
Revenue was $167.4 million, consisting of $127.3 million from Probe Cards and $40.1 million from Systems. Probe Cards revenue declined 20.4%, while Systems revenue increased 7.9%. Research and development expense increased 4.1% to $28.2 million, and selling, general and administrative expense decreased 0.5% to $32.7 million.
At April 1, 2023, cash and cash equivalents were $112.4 million and marketable securities were $123.9 million. Including restricted cash, total cash, cash equivalents, and restricted cash were $115.9 million. Working capital was $352.8 million. Debt consisted primarily of a $15.2 million outstanding Building Term Loan, net of current maturities of approximately $15.2 million on a gross basis. Total liabilities were $195.4 million and stockholders’ equity was $824.4 million.
Capital expenditures were $19.7 million. Net cash used in investing activities was $13.5 million, while financing activities provided $4.4 million, primarily from employee stock purchase plan issuances. The company reported no share repurchases during the quarter and had $18.6 million remaining under its repurchase authorization.
Material Changes Versus the Prior Comparable Period
- Revenue decreased $29.7 million, driven primarily by weaker semiconductor industry demand.
- Foundry and Logic revenue decreased 11.0%, DRAM revenue decreased 42.2%, and Flash revenue decreased 48.6%.
- Gross margin declined because of lower production volumes, unfavorable cost absorption, greater inventory excess and obsolescence reserves, and less favorable Systems product mix.
- Operating expenses remained broadly stable in absolute dollars, but increased substantially as a percentage of revenue.
- Interest income increased because of higher investment yields, while interest expense declined with lower outstanding debt.
- The effective tax rate declined to 3.5% from 13.0%, primarily due to utilization of net operating loss carryforwards, the FDII deduction, and higher research and development tax credits.
- Operating cash flow declined due to lower earnings and working-capital uses, partially offset by receipt of an $18.0 million California Competes Grant.
Guidance, Outlook, Commentary, Risks, and Unusual Items
The filing does not provide a clear quantitative revenue, margin, or earnings forecast for the remainder of fiscal 2023. Management stated that semiconductor industry demand weakened beginning in the third quarter of fiscal 2022 and continued through the reported quarter, affecting major customers and memory markets.
The $18.0 million California Competes Grant is recorded as deferred grant liability and will be recognized when earned as an offset to cost of revenues and operating expenses. FormFactor must create and maintain full-time jobs and make significant California infrastructure investments over five years; failure to meet the requirements could require repayment of all or part of the grant.
The company completed substantially the expected actions under its 2022 and 2021 restructuring plans and does not expect additional material costs. Restructuring charges in the quarter totaled $1.2 million. The company also recorded $5.0 million of provision for excess and obsolete inventories in operating cash flow adjustments.
Principal risks include semiconductor demand weakness, customer concentration, exposure to DRAM and Flash markets, export controls affecting China, reliance on limited or sole-source suppliers, inventory obsolescence, foreign exchange and interest-rate exposure, tax-law changes, and execution of the California grant requirements. Intel represented 20.0% of quarterly revenue, and TSMC represented 10.7%. Management reported no material legal proceedings, no material changes to previously disclosed risk factors, and no off-balance-sheet arrangements.
Important Facts for Investors to Verify
- Whether semiconductor demand, particularly DRAM and Flash demand, stabilizes or improves in subsequent quarters.
- Whether Probe Cards gross margin recovers from the 34.3% reported for the quarter.
- The timing and amount of recognition of the $18.0 million California Competes Grant and compliance with its five-year conditions.
- Inventory levels, excess and obsolescence reserves, and production utilization.
- Customer concentration and the effect of export controls and regional manufacturing shifts on China-related revenue.
- Capital expenditure requirements and whether operating cash flow is sufficient to fund planned investments.
- Repayment requirements and interest-rate treatment for the Building Term Loan, as well as the remaining $18.6 million share repurchase authorization.
- Approximately $9.8 million of remaining performance obligations, of which management expects to recognize 67.6% during the remainder of fiscal 2023.