FormFactor, Inc. 10-Q Summary
Business Context and Reporting Period
FormFactor designs, manufactures and sells advanced semiconductor wafer probe cards used for wafer sort and test. The filing covers the three months ended March 30, 2013, compared with March 31, 2012. Results include MicroProbe, acquired October 16, 2012; MicroProbe contributed $21.3 million of first-quarter 2013 revenue.
Key Financial Metrics
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Revenue | $52.6 million | $34.8 million | +51.2% |
| Gross profit | $9.1 million | $4.2 million | +118.4% |
| Gross margin | 17.2% | 11.9% | +5.3 points |
| Operating loss | $20.5 million | $18.0 million | Higher loss |
| Net loss | $19.8 million | $17.5 million | Higher loss |
| Net loss per share | $0.37 | $0.35 | Higher loss per share |
| Operating cash flow | $(9.7) million | $(15.0) million | Improved |
Operating margin was negative 39.1%, compared with negative 51.7% in the prior-year quarter. Research and development expense was $10.9 million, selling, general and administrative expense was $14.6 million, restructuring charges were $4.0 million, and impairment charges were $0.1 million. Depreciation and amortization totaled $7.4 million, including significant acquisition-related amortization.
Cash and cash equivalents were $77.4 million and marketable securities were $76.2 million at March 30, 2013, for total cash, cash equivalents and marketable securities of $153.6 million. Working capital was $184.9 million. The filing reports no material debt; capital lease obligations totaled $0.7 million, including current and long-term portions.
Total assets were $379.0 million and stockholders’ equity was $322.6 million. Accounts receivable were $33.5 million and inventories were $24.7 million. Cash flow from investing activities was $14.5 million, primarily reflecting marketable-security maturities, while capital expenditures were $2.7 million. Financing activities provided $1.0 million.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven primarily by the MicroProbe acquisition and substantially higher SoC sales. SoC revenue increased 238.3% to $26.4 million; DRAM revenue was essentially unchanged at $22.0 million; Flash revenue declined 16.6% to $4.2 million.
- Gross margin improved because of MicroProbe contribution, product mix, lower material and labor costs, improved factory utilization, and cost-reduction initiatives. These benefits were partly offset by acquisition-related amortization and a $1.3 million increase in net inventory provision charges.
- Net loss increased despite higher revenue and gross margin, primarily because of $4.0 million of restructuring charges, higher intangible amortization and other MicroProbe-related costs, including $0.9 million of acquisition and integration expenses.
- FormFactor reduced its global workforce by 31 employees and approximately 20 temporary positions, suspended next-generation DRAM Matrix development, and terminated certain SoC development activities.
- Accounts receivable increased to $33.5 million from $28.9 million, and inventory increased to $24.7 million from $23.6 million. Days sales outstanding improved to 45 days from 49 days.
Guidance, Outlook, Risks and Unusual Items
- Management expects quarterly savings of approximately $2.0 million to $2.5 million, excluding stock-based compensation, from the Q1 restructuring plan in subsequent quarters. Remaining restructuring cash payments were expected to be completed by the end of Q2 2013.
- Management believes existing cash, cash equivalents and marketable securities will satisfy working-capital requirements for the next twelve months, but cautions that liquidity will decline if revenue growth, operating efficiency and cash-cost reductions are not achieved.
- The business remains exposed to semiconductor-industry cyclicality, price erosion, rapid technological change, intense competition, customer concentration and reliance on limited or sole-source suppliers. Two customers represented 37.1% of first-quarter revenue, and three customers represented 42% of gross accounts receivable at quarter-end.
- Management stated that additional impairment charges could arise in fiscal 2013 if forecast operating results are not achieved. Inventory valuation, customer collectability, tax reserves, restructuring liabilities, intangible assets and goodwill require significant estimates.
- MicroProbe acquisition accounting remained subject to adjustment, particularly for acquired tangible and intangible assets and goodwill. Goodwill was $31.1 million at March 30, 2013, and no goodwill impairment had been recorded.
- A $10.1 million acquired in-process research and development project was completed and reclassified to a finite-lived intangible asset during the quarter, increasing amortization expense.
- Subsequent to quarter-end, the board approved the sale of a wholly owned subsidiary acquired in the MicroProbe transaction for $1.0 million, consisting of $0.2 million cash and an $0.8 million seven-year note receivable bearing 5% interest.
- The filing reports no material legal proceedings, no material changes to previously disclosed risk factors, and effective disclosure controls and procedures.
Investor Verification Checklist
- Verify whether the MicroProbe acquisition produces the expected revenue diversification and operating synergies, particularly in SoC markets.
- Track cash burn, operating cash flow and the decline in total liquidity while the company remains loss-making.
- Assess whether the projected $2.0 million to $2.5 million quarterly restructuring savings are realized.
- Review inventory levels, excess-and-obsolete provisions and potential additional impairment charges.
- Monitor customer concentration, semiconductor end-market demand, Flash recovery expectations and supplier availability.
- Reconcile acquisition-related amortization, integration costs and the final valuation of acquired intangible assets and goodwill.
- Evaluate the collectability and terms of the $0.8 million note receivable from the post-quarter-end subsidiary sale.