FormFactor, Inc. Fiscal 2013 Form 10-K Summary
Business context and reporting period
FormFactor designs, manufactures and supports advanced semiconductor wafer probe cards used to test semiconductor die before packaging. The filing covers the 52-week fiscal year ended December 28, 2013, with comparison to the 52-week fiscal year ended December 29, 2012. The company operates in one reportable segment and serves DRAM, Flash and System-on-Chip markets. Fiscal 2013 included a full year of operations from the October 2012 MicroProbe acquisition.
Financial performance and key metrics
| Metric | Fiscal 2013 | Fiscal 2012 | Change |
|---|---|---|---|
| Revenue | $231.5 million | $178.5 million | +29.7% |
| Gross profit | $42.3 million | $25.3 million | +$17.0 million |
| Gross margin | 18.3% | 14.2% | +4.1 percentage points |
| Operating loss | $58.8 million | $64.1 million | Improved by $5.3 million |
| Net loss | $57.7 million | $35.5 million | Loss increased by $22.1 million |
| Net loss per share | $1.06 | $0.70 | Loss per share increased |
| Cash flow from operations | $(5.8) million | $(26.2) million | Use of cash decreased |
- SoC revenue increased 148.1% to $115.6 million, representing 49.9% of revenue, primarily from MicroProbe.
- DRAM revenue declined 9.7% to $92.6 million, and Flash revenue declined 20.8% to $23.3 million.
- Research and development expense was $42.1 million, or 18.2% of revenue, compared with $40.1 million, or 22.5%, in fiscal 2012.
- Selling, general and administrative expense was $53.2 million, or 23.0% of revenue, compared with $49.2 million, or 27.6%.
- Restructuring charges were $4.7 million; long-lived asset impairment charges were $0.8 million; and the loss on sale of a subsidiary was $0.3 million.
- Inventory write-downs were $10.5 million, compared with $7.2 million in fiscal 2012.
- Cash, cash equivalents and marketable securities totaled $151.1 million at year-end, down from $165.8 million. Including restricted cash, liquidity was approximately $151.5 million.
- Working capital was $173.9 million, down from $194.1 million. Accounts receivable days sales outstanding increased to 52 days from 49 days.
- The company reported no conventional long-term debt. Capital lease obligations totaled $0.3 million, all classified as current at year-end.
- Total assets were $340.7 million and stockholders’ equity was $294.1 million at December 28, 2013.
Fiscal 2013 fourth-quarter results
| Metric | Q4 fiscal 2013 | Q3 fiscal 2013 |
|---|---|---|
| Revenue | $48.5 million | $67.6 million |
| Gross profit | $4.3 million | $12.5 million |
| Gross margin | 8.8% | 18.6% |
| Operating loss | $18.9 million | $10.9 million |
| Net loss | $18.8 million | $10.7 million |
| Net loss per share | $0.34 | $0.20 |
Fourth-quarter revenue declined sharply sequentially, while gross margin fell to 8.8%. Management attributed the deterioration to lower customer orders, manufacturing overcapacity, supply-chain and manufacturing execution challenges, lost orders from a Japan customer, a fire at a major customer’s China facility, lower utilization, warranty and service costs, and excess inventory charges.
Material changes versus the prior comparable period
- The MicroProbe acquisition materially changed the revenue mix toward SoC products and contributed $93.2 million of fiscal 2013 revenue versus $19.8 million in the partial fiscal 2012 period.
- Revenue growth and cost-reduction initiatives improved gross margin and reduced the operating loss, but the company remained substantially unprofitable.
- Fiscal 2012 net loss benefited from a nonrecurring $25.5 million tax benefit related to the release of deferred tax asset valuation allowances and a $3.3 million litigation settlement benefit. These benefits did not recur in fiscal 2013.
- MicroProbe-related amortization, integration and other acquisition costs totaled $18.4 million in fiscal 2013, compared with $12.1 million in fiscal 2012.
- The workforce declined by 48 full-time employees during fiscal 2013. A further January 2014 restructuring eliminated 51 full-time employees and nine temporary positions.
- Backlog declined to $25.0 million at year-end from $27.0 million. Management cautioned that backlog is subject to customer delays and cancellations and is not necessarily indicative of future sales.
Guidance, outlook, commentary, risks and unusual items
The filing does not provide clear quantitative revenue or earnings guidance for fiscal 2014. Management stated that existing cash, cash equivalents and marketable securities should fund working-capital requirements for at least the next twelve months, but warned that liquidity could decline if revenue does not improve, operating efficiency does not increase, cost outlays are not reduced or additional financing is unavailable.
- The January 2014 restructuring was expected to generate approximately $1 million of quarterly savings in the first quarter of fiscal 2014 and approximately $2 million per quarter beginning in the second quarter, excluding approximately $1.2 million of restructuring charges.
- Management suspended development of the next-generation Matrix platform, consolidated efforts around the current Matrix platform, scaled back a next-generation vertical probe technology and increased investment in a new NAND Flash architecture.
- Principal risks include semiconductor cyclicality, weak commodity DRAM and Flash demand, customer concentration, pricing pressure, product qualification delays, manufacturing and yield problems, supply-chain dependence, excess inventory, international exposure and intellectual-property disputes.
- Three customers represented 45.9% of fiscal 2013 revenue; the ten largest customers represented 75%. Intel accounted for 17.7%, SK hynix 16.5% and Micron 11.7%.
- International sales represented 73% of fiscal 2013 revenue, with Taiwan, North America and South Korea the largest ship-to markets.
- Goodwill of $30.7 million was not impaired, although the company identified material sensitivity to future operating performance and market conditions. Net intangible assets were $57.5 million, with estimated fiscal 2014 amortization of $18.8 million.
- A former employee filed a California wage-and-hour class action. The case was in early stages, and the company could not estimate the likelihood or amount of potential liability.
- Patent challenges remained pending in the United States and Taiwan. No liability provision was recorded because management did not consider a loss probable.
- The company maintained a valuation allowance against U.S. deferred tax assets and reported $17.0 million of unrecognized tax benefits.
- Management reported effective disclosure controls and effective internal control over financial reporting; KPMG issued an unqualified audit opinion on the financial statements and internal controls.
Important facts for investors to verify
- Whether SoC growth from MicroProbe can offset continued weakness in DRAM and Flash markets.
- Whether the January 2014 restructuring delivers the stated savings without harming product delivery, quality or customer relationships.
- Whether operating cash flow can reach break-even before the company’s $151.1 million cash and marketable securities balance materially declines.
- The sustainability of the 18.3% annual gross margin and the severe 8.8% fourth-quarter gross margin.
- Potential additional inventory write-downs, impairment charges, warranty costs or restructuring charges.
- Progress on NAND Flash product development and customer qualification, including the two customer engagements described in the filing.
- Customer concentration, backlog conversion and the effect of further semiconductor-industry consolidation.
- Future tax consequences of deferred tax assets, uncertain tax positions and possible repatriation of foreign earnings.
- Potential exposure from the wage-and-hour lawsuit, patent challenges, indemnification obligations and environmental or customs matters.