FormFactor, Inc. 2011 Second-Quarter Form 10-Q Summary
Business Context and Reporting Period
FormFactor designs, manufactures, sells and supports advanced semiconductor wafer probe cards used for wafer sort and test. The company operates in one industry segment and derives substantially all revenue from wafer probe card products incorporating MicroSpring and ATRE technologies.
The filing covers the three and six months ended June 25, 2011, compared with the comparable periods ended June 26, 2010. Fiscal 2011 consists of 53 weeks and ends December 31, 2011. The financial statements are unaudited.
Key Financial Metrics
| Metric | Three Months Ended June 25, 2011 | Three Months Ended June 26, 2010 | Six Months Ended June 25, 2011 | Six Months Ended June 26, 2010 |
|---|---|---|---|---|
| Revenue | $46.6 million | $57.6 million | $87.0 million | $97.3 million |
| Gross profit | $9.9 million | $3.9 million | $14.0 million | $1.6 million |
| Gross margin | 21.2% | 6.8% | 16.1% | 1.6% |
| Operating loss | $(11.0) million | $(34.3) million | $(32.3) million | $(73.1) million |
| Net loss | $(7.7) million | $(33.9) million | $(29.1) million | $(72.0) million |
| Basic and diluted loss per share | $(0.15) | $(0.68) | $(0.57) | $(1.44) |
- Revenue declined 19.2% year over year in the second quarter and 10.6% in the first half.
- Second-quarter revenue by market was $33.9 million from DRAM, $5.2 million from Flash and $7.4 million from system-on-chip products. DRAM revenue decreased 20.0%, Flash revenue decreased 38.2%, and SOC revenue increased 8.8% year over year.
- Six-month revenue changes were DRAM down 18.0%, Flash down 3.6% and SOC up 30.9%.
- Operating expenses were $20.9 million in the second quarter and $46.3 million in the first half, versus $38.2 million and $74.7 million, respectively, in the prior-year periods.
- Research and development expense decreased to $10.9 million in the quarter and $22.4 million year to date. Selling, general and administrative expense decreased to $11.2 million and $23.5 million, respectively.
- Cash and cash equivalents were $130.1 million at June 25, 2011. Marketable securities were $194.1 million, producing cash, cash equivalents and marketable securities of $324.2 million, down from $347.2 million at December 25, 2010.
- Working capital was $347.8 million at June 25, 2011, compared with $370.8 million at year-end 2010. Total liabilities were $44.3 million, and the filing does not report outstanding debt borrowings.
- Net cash used in operating activities was $19.5 million for the first half, compared with $35.8 million used in the prior-year period. Investing activities provided $29.3 million, principally from net marketable-security maturities. Financing activities used $1.4 million, including $3.0 million for share repurchases.
- Days sales outstanding improved to 53 days from 66 days at December 25, 2010.
Material Changes Versus the Prior Comparable Period
- Revenue weakness reflected reduced DRAM and Flash shipments, an extended qualification period for the SmartMatrix platform at certain customers, lost opportunities related to quoted lead times, and changing NAND Flash order patterns. SOC demand partially offset these declines.
- Gross margin improved substantially because of favorable product mix, higher production yields, lower inventory provisions, lower depreciation following 2010 impairments, and lower general overhead.
- Cost reductions and restructuring lowered research and development and SG&A expenses. The company also reported lower depreciation, facilities costs, personnel costs, incentive compensation and legal and outside-service fees.
- The second-quarter 2011 results included a $1.5 million restructuring benefit from the Singapore lease amendment and a $2.5 million income-tax benefit from releasing a deferred-tax valuation allowance in a non-U.S. jurisdiction.
- The prior-year second quarter included $2.5 million of restructuring charges, $0.6 million of executive-management severance costs and $1.0 million of long-lived-asset impairment charges.
- FormFactor reduced its workforce by 13 employees under each of its first- and second-quarter 2011 restructuring plans. Expected quarterly savings, excluding stock-based compensation, were approximately $0.6 million from the first plan and $0.4 million from the second plan.
- The company repurchased and retired 380,149 shares for approximately $3.0 million during the first half. Approximately $46.0 million remained available under the $50.0 million authorization at June 25, 2011.
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, continued operating losses, customer procurement and payment delays, or failure to improve efficiency could cause liquidity to decline further.
- Management is focused on achieving break-even operating cash flow through expense reductions, lower or deferred capital spending and research and development projects, vendor-payment negotiations, and other cost-control measures. The filing provides no specific revenue, margin or earnings guidance.
- Revenue remains exposed to semiconductor cyclicality, product qualification timing, customer order patterns, competitive pricing, technology adoption and concentration among major customers. Four customers represented 17%, 15%, 12% and 10% of second-quarter revenue; two customers represented approximately 23% and 15% of gross accounts receivable.
- Inventory valuation depends on demand forecasts and product yields. The company recorded $3.5 million of excess and obsolete inventory provisions in the first half and warned that additional provisions may be required if demand is weaker than expected.
- Management stated that additional long-lived-asset impairment charges are reasonably possible during the remainder of 2011 if anticipated operating results are not achieved.
- Unrecognized tax benefits increased to $18.2 million. Approximately $14.3 million, net of the U.S. federal benefit, would reduce future tax expense if recognized. The company continues to maintain a valuation allowance against U.S. federal and state deferred-tax assets.
- In July 2011, the company received an inquiry from a foreign tax authority regarding indirect-tax matters related to prior shipping processes. It accrued $1.0 million but stated that additional material liabilities and response costs are possible.
- FormFactor is involved in patent litigation and patent re-examination proceedings, including actions involving Micro-Probe and TSC MEMSYS. No patent-litigation liability was accrued because management did not believe a loss was probable, but material legal fees are expected.
- The company had no material environmental liability accruals, no off-balance-sheet arrangements, and stated that its disclosure controls were effective with no material changes in internal control over financial reporting.
Important Facts for Investors to Verify
- Whether SmartMatrix qualification timing and DRAM and NAND Flash order weakness improve sufficiently to stabilize revenue.
- Whether the improved 21.2% quarterly gross margin is sustainable without further restructuring benefits, inventory releases or lower depreciation.
- The pace of cash usage and progress toward break-even operating cash flow, given first-half operating cash outflow of $19.5 million.
- Customer concentration, accounts-receivable collectability and the potential effect of semiconductor-industry weakness on payment timing.
- Potential additional inventory provisions, long-lived-asset impairments, restructuring costs and tax valuation-allowance reversals or charges.
- The outcome and cost of the foreign indirect-tax inquiry and ongoing patent litigation and re-examination proceedings.
- Whether the company will need external financing, debt, manufacturing partnerships or other liquidity measures if operating losses continue.