FormFactor, Inc. — Fiscal 2012 Third-Quarter Form 10-Q
Reporting period: Three and nine months ended September 29, 2012, compared with September 24, 2011. The filing was dated November 2, 2012. FormFactor designs and sells advanced semiconductor wafer probe cards, with revenue concentrated in DRAM, Flash, and SoC markets.
Financial performance and position
| Metric | Q3 2012 | Q3 2011 | 9M 2012 | 9M 2011 |
|---|---|---|---|---|
| Revenue | $41.3 million | $52.1 million | $130.9 million | $139.1 million |
| Gross profit | $8.2 million | $12.0 million | $28.5 million | $25.9 million |
| Gross margin | 19.8% | 23.0% | 21.8% | 18.6% |
| Operating loss | $14.6 million | $10.0 million | $39.1 million | $42.3 million |
| Net loss | $14.5 million | $9.9 million | $36.1 million | $39.0 million |
| Net loss per share | $0.29 | $0.20 | $0.73 | $0.77 |
| Cash flow from operations | Not separately provided | Not separately provided | $(15.5) million | $(21.8) million |
- Q3 operating margin was negative 35.4%, compared with negative 19.2% in the prior-year quarter. The nine-month operating margin improved to negative 29.9% from negative 30.4%.
- Q3 operating expenses were $22.8 million, including $2.5 million of restructuring charges and $0.1 million of long-lived-asset impairment. Nine-month operating expenses were $67.6 million.
- Research and development expense declined to $8.6 million in Q3 and $30.4 million for nine months. Selling, general and administrative expense was $11.6 million in Q3 and $34.3 million for nine months.
- Cash and cash equivalents were $162.1 million at September 29, 2012, and marketable securities were $114.1 million, for combined liquidity of approximately $276.2 million. Restricted cash was $0.3 million.
- Total assets were $362.8 million and total liabilities were $40.4 million. The filing does not report outstanding debt; disclosed liabilities primarily comprised operating and tax-related obligations.
- Working capital was $285.4 million, down from $308.4 million at December 31, 2011. Management stated that existing cash, cash equivalents, and marketable securities were expected to satisfy working-capital needs for the next twelve months.
- Capital expenditures were $6.1 million during the first nine months, compared with $4.9 million in the prior-year period. Investing activities provided $37.3 million, mainly from maturities and sales of marketable securities.
Material changes versus the prior comparable period
- Q3 revenue decreased 20.8%, primarily because of weaker DRAM demand and lower SoC demand. Nine-month revenue declined 5.9%.
- Q3 DRAM revenue decreased 28.8% to $26.0 million, SoC revenue decreased 16.8% to $6.9 million, and Flash revenue increased 14.3% to $8.4 million. For nine months, DRAM declined 11.6%, SoC declined 5.3%, and Flash increased 22.9%.
- Q3 gross margin declined to 19.8% from 23.0%, reflecting lower production volume, higher inventory provisions, and higher warranty costs. Nine-month gross margin improved because of product mix, lower material costs, and lower inventory reserve charges.
- Q3 net loss increased by $4.6 million, driven by lower revenue and gross margin, $2.5 million of restructuring charges, and $1.2 million of Astria acquisition costs, partly offset by a $0.6 million release of a customs and VAT accrual.
- The company reduced its global workforce by 44 employees and began ceasing manufacturing operations in Japan. It recorded $2.6 million of restructuring charges during the first nine months, with approximately $1.9 million remaining in the restructuring accrual at quarter-end.
- Q3 customer concentration increased: SK hynix represented 30.1% of revenue, Samsung 15.6%, Tera Probe 14.3%, and Elpida 14.7%; these four customers represented 60.4% in aggregate.
Outlook, unusual items, and risks
- Management expected the Japan manufacturing shutdown and related workforce actions to be substantially completed by the end of fiscal 2012 and projected approximately $1.6 million of quarterly savings, excluding stock-based compensation, in subsequent periods.
- Management remained focused on reducing operating costs, limiting capital spending, renegotiating vendor terms, and reaching break-even operating cash flow. No specific revenue or earnings guidance was provided.
- On October 16, 2012, after quarter-end, FormFactor acquired Astria Semiconductor Holdings, including Micro-Probe, for total consideration of $116.8 million: $100.0 million in cash and 3,021,066 FormFactor shares. The initial purchase-price allocation and pro forma combined results were not yet available.
- The acquisition reduced available cash by approximately $100 million and introduced integration, retention, execution, liability, dilution, and potential impairment risks.
- Key operating risks include semiconductor cyclicality, price erosion, rapid technological change, customer concentration, dependence on limited or sole-source suppliers, excess and obsolete inventory, warranty costs, and potential additional asset impairments.
- The company reported no material environmental or patent-litigation accruals because management did not believe a loss was probable. A foreign customs and indirect-tax matter was resolved at approximately $0.3 million, below the previously accrued $1.0 million.
- The company maintained a valuation allowance against U.S. deferred tax assets. The nine-month tax benefit included a $1.6 million release of a reserve for uncertain tax positions.
- Management stated that disclosure controls were effective and that there were no material changes to internal control over financial reporting.
Important facts for investors to verify
- Whether DRAM and SoC demand recovered and whether Flash growth offset weakness in the other markets.
- The effect of the Astria/Micro-Probe acquisition on revenue, margins, cash balances, share count, goodwill, intangible assets, and integration costs.
- Whether the Japan shutdown achieved the projected quarterly savings and whether additional restructuring or impairment charges were incurred.
- Operating cash flow, inventory levels, warranty provisions, and liquidity after the $100 million acquisition cash payment.
- Customer concentration and exposure to SK hynix, Samsung, Tera Probe, Elpida, and other major semiconductor manufacturers.
- Any changes in deferred-tax valuation allowances, uncertain tax positions, patent proceedings, environmental matters, or indemnification exposure.