FormFactor, Inc. 10-Q Summary
Business Context and Reporting Period
FormFactor designs, manufactures, sells and supports advanced semiconductor wafer probe cards used in wafer sort and test. The company operates in one industry segment and derives substantially all revenue from wafer probe card sales. This unaudited report covers the three months ended March 31, 2012, compared with the three months ended March 26, 2011. Fiscal 2012 ends December 29, 2012.
Financial Performance and Liquidity
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Revenue | $34.8 million | $40.4 million | Down 13.9% |
| Gross profit | $4.2 million | $4.1 million | Up $0.1 million |
| Gross margin | 11.9% | 10.1% | Up 1.8 percentage points |
| Operating loss | $(18.0) million | $(21.3) million | Improved $3.3 million |
| Net loss | $(17.5) million | $(21.4) million | Improved $4.0 million |
| Net loss per share | $(0.35) | $(0.42) | Improved $0.07 |
| Net cash used in operations | $(15.0) million | $(12.3) million | Use increased $2.7 million |
Revenue by market was $21.9 million from DRAM, $5.1 million from Flash and $7.8 million from SoC. DRAM revenue declined 18.4%, Flash declined 19.0%, and SoC increased 6.9% year over year.
Cash and cash equivalents were $135.5 million at March 31, 2012, compared with $139.0 million at December 31, 2011. Marketable securities were $144.8 million, resulting in cash, cash equivalents and marketable securities of approximately $280.3 million, down from $296.7 million at year-end. Working capital was $296.4 million, compared with $308.4 million at December 31, 2011.
The company reported no debt borrowings in the condensed consolidated balance sheets. Total liabilities were $43.3 million and stockholders’ equity was $332.9 million at March 31, 2012. Capital expenditures were $1.8 million. Investing activities generated $10.9 million, primarily from marketable-security maturities exceeding purchases.
Operating loss margin was 51.7% negative and net loss margin was 50.2% negative. Research and development expense was $10.8 million, or 31.2% of revenue, and selling, general and administrative expense was $11.1 million, or 32.0% of revenue. Stock-based compensation was $3.0 million.
Material Changes Versus the Prior Comparable Period
- Revenue decreased $5.6 million, principally because of weaker DRAM and NOR Flash demand, semiconductor oversupply, reduced customer production and technology investment, pricing pressure, qualification delays and changing NAND Flash order patterns.
- SoC revenue increased as customers adopted more complex devices, MEMS applications and new products, including increased penetration of a Japanese customer.
- Gross margin improved despite lower revenue, primarily because of product mix and lower excess and obsolete inventory provisions. Inventory provisions declined by approximately $0.9 million.
- Research and development expense declined 6% and SG&A expense declined 10%, reflecting lower personnel, discretionary, legal and outside-service costs.
- Restructuring expense decreased from $1.0 million to a net benefit of $33,000. No new restructuring actions were undertaken in Q1 2012.
- Impairment charges declined from $0.4 million to $0.2 million. The 2012 charge related to assets previously held for sale that were determined to be no longer saleable and would be used internally.
- Operating cash use increased because of the larger net working-capital investment, including an $8.7 million increase in accounts receivable and a $3.4 million increase in inventory.
- The company did not repurchase common stock during the quarter. Its repurchase authorization remained available through October 19, 2012, subject to its stated limits and conditions.
Guidance, Outlook, Risks and Unusual Items
Management stated that existing cash, cash equivalents and marketable securities should satisfy working-capital requirements for the next twelve months. However, management warned that liquidity will continue to decline if operating efficiency is not improved, cash outlays are not reduced, or additional financing is not obtained. The company is pursuing expense reductions, lower or deferred capital spending, selected reductions in research and development projects and longer vendor payment terms, while targeting break-even operating cash flow.
No quantitative revenue or earnings guidance was provided in the filing. Management expects continued investment in next-generation wafer test architectures, MicroSpring interconnect technology, ATRE test technology and products for DRAM, SoC and other applications.
- Semiconductor markets remain cyclical and exposed to oversupply, rapid technological change, price erosion, short product lifecycles and intense competition.
- Customer concentration is significant: two customers represented 37% and 15% of Q1 2012 revenue; two customers represented approximately 31% and 11% of gross accounts receivable.
- Elpida, a customer, filed for bankruptcy during Q1 2012. The company recorded a $30,000 doubtful-account provision related to a customer bankruptcy and faces potential additional credit losses if customers experience financial distress.
- Key components are available from a limited number of suppliers, creating supply-chain and shipment risks.
- Management stated that additional impairment charges could arise in fiscal 2012 if anticipated operating results are not achieved.
- The company accrued $1.0 million for potential customs and indirect-tax exposure and noted that additional material liabilities remain possible.
- Patent litigation and patent re-examination proceedings remain active, including an August 2012 trial date for certain trade-secret and related claims. No patent-litigation liability was accrued, but material legal fees are expected.
- Unrecognized tax benefits increased to $17.9 million. The filing states that $2.3 million could reduce future income-tax expense if recognized, before valuation-allowance effects.
- Foreign-currency forward contracts had a total U.S.-dollar notional amount of $3.9 million at March 31, 2012 and matured April 27, 2012.
Important Facts for Investors to Verify
- Whether demand in DRAM, NOR Flash and broader semiconductor markets recovers sufficiently to stabilize revenue and factory utilization.
- Whether the company can achieve break-even operating cash flow before its substantial cash and investment balances materially decline.
- The collectability of receivables, particularly those associated with financially stressed or bankrupt customers.
- Inventory utilization, future excess-and-obsolete provisions and the sustainability of the improved 11.9% gross margin.
- Potential additional impairment charges and the outcome and cost of customs, tax and patent matters.
- The effect of customer concentration, supplier constraints, pricing pressure and qualification delays on future orders.
- Future share dilution from approximately 5.8 million potentially dilutive securities excluded from Q1 loss-per-share calculations because they were anti-dilutive.