FormFactor, Inc. — Fiscal 2012 Form 10-K Summary
Reporting period: Fiscal year ended December 29, 2012, comprising 52 weeks. The filing includes fourth-quarter results and comparisons with the 53-week fiscal year ended December 31, 2011. FormFactor designs, manufactures and supports advanced semiconductor wafer probe cards used for wafer-level testing of DRAM, Flash and system-on-chip devices.
Business context and strategic developments
- The semiconductor industry remained cyclical, with particularly weak PC demand, declining DRAM pricing and lower DRAM production.
- FormFactor completed its acquisition of Astria Semiconductor Holdings, including MicroProbe, on October 16, 2012, for total consideration of $113.8 million, including $100.0 million of cash, 3,020,944 FormFactor shares and a $3.3 million patent-litigation settlement.
- The acquisition added advanced SoC probe-card products and increased diversification toward mobile processors, graphics processors, RF, analog and mixed-signal applications.
- MicroProbe contributed $19.8 million of revenue and $6.4 million of net loss from the acquisition date through fiscal year-end.
Key financial metrics
| Metric | Fiscal 2012 | Fiscal 2011 | Change |
|---|---|---|---|
| Revenue | $178.5 million | $169.3 million | Up 5.4% |
| Gross profit | $25.3 million | $21.0 million | Up $4.4 million |
| Gross margin | 14.2% | 12.4% | Up 1.8 percentage points |
| Operating loss | $64.1 million | $70.4 million | Improved $6.2 million |
| Net loss | $35.5 million | $66.0 million | Improved $30.4 million |
| Basic and diluted loss per share | $0.70 loss | $1.31 loss | Improved |
| Net cash used in operating activities | $26.2 million | $29.3 million | Improved $3.1 million |
| Cash, cash equivalents and marketable securities | $165.8 million | $296.7 million | Down $130.9 million |
| Working capital | $194.1 million | $308.4 million | Down $114.3 million |
Revenue mix and operating performance
- DRAM: $102.5 million, or 57.4% of revenue, down 11.4% year over year.
- SoC: $46.6 million, or 26.1% of revenue, up 60.4%, primarily reflecting the MicroProbe acquisition and adoption of advanced SoC probe technologies.
- Flash: $29.5 million, or 16.5% of revenue, up 19.7%, driven partly by market-share gains in NAND Flash.
- Revenue increased despite a $13.2 million decline in DRAM revenue because SoC revenue increased $17.5 million and Flash revenue increased $4.9 million. MicroProbe contributed $19.8 million of the total revenue increase.
- Research and development expense declined to $40.1 million from $43.5 million, or 22.5% of revenue versus 25.7%.
- Selling, general and administrative expense increased to $49.2 million from $46.7 million, primarily due to $3.0 million of acquisition and integration costs, increased sales activity and higher bad-debt expense.
- Fiscal 2012 included $2.9 million of restructuring charges, $0.4 million of long-lived-asset impairment charges and a $3.3 million gain from the MicroProbe patent settlement.
- Gross margin benefited from improved product mix, lower material costs, reduced manufacturing overhead and lower inventory provisions, but was adversely affected by $8.5 million of additional depreciation and amortization associated with the acquisition.
Cash flow, liquidity and capital structure
- Operating cash flow remained negative at $26.2 million. Cash used in investing activities was $40.7 million, including $96.7 million for the MicroProbe acquisition, $8.0 million of capital expenditures and net investment purchases.
- Cash and cash equivalents declined to $72.2 million from $139.0 million. Marketable securities were $93.5 million versus $157.6 million.
- The company stated that existing cash, cash equivalents and marketable securities should satisfy working-capital requirements for the next 12 months, but warned that liquidity would decline further if operating efficiency and cash outlays did not improve.
- Debt was limited. Capital lease obligations totaled $0.9 million, including $0.6 million due within one year. The filing does not identify material conventional borrowings.
- Contractual obligations totaled $42.8 million, comprising $24.4 million of operating leases, $17.4 million of purchase obligations and $0.9 million of capital leases. Unrecognized tax benefits of $17.2 million were excluded because payment timing could not be estimated.
- Backlog increased to $27.0 million at year-end from $14.6 million, although customers could delay or cancel orders and backlog was not necessarily indicative of future revenue.
- No shares were repurchased in fiscal 2012. The repurchase program expired October 19, 2012, and the company had never paid cash dividends.
Material changes versus the prior comparable period
- Revenue rose 5.4%, but the underlying business remained exposed to declining commodity DRAM demand; much of the growth reflected the late-year MicroProbe acquisition.
- Gross margin improved from 12.4% to 14.2%, while operating losses remained substantial.
- Net loss improved primarily because of lower operating expenses, restructuring benefits and a $25.5 million deferred-tax valuation-allowance release associated with acquisition-related deferred tax liabilities.
- Reported fourth-quarter net income of $0.6 million was heavily affected by the $25.5 million tax benefit and $3.3 million litigation-settlement benefit; fourth-quarter operating loss was $25.0 million.
- Total assets increased to $395.7 million from $383.1 million, principally due to $31.0 million of goodwill and $74.3 million of net intangible assets recorded in the acquisition.
- Shares outstanding increased to 53.3 million from 49.3 million, largely because 3.0 million shares were issued to MicroProbe sellers.
Guidance, outlook, commentary and risks
- Management emphasized the need to reach operating-cash-flow break-even through cost reduction, manufacturing consolidation and tighter spending.
- In the first quarter of fiscal 2013, the company suspended development specific to its next-generation Matrix platform and consolidated development around the current Matrix platform, reflecting lower commodity DRAM demand. Mobile DRAM and advanced vertical SoC technologies remained development priorities.
- Management expected approximately $2.7 million of quarterly savings from fiscal 2012 restructuring actions, excluding stock-based compensation.
- A subsequent Q1 2013 restructuring reduced the workforce by 32 employees and was expected to generate $2.6 million to $3.2 million of restructuring charges.
- Principal risks include semiconductor cyclicality, continued DRAM weakness, customer concentration, pricing pressure, order cancellations, product qualification delays, manufacturing yields, sole-source suppliers, international operations, foreign exchange, intellectual-property disputes and integration of MicroProbe.
- Two customers accounted for 41.8% of fiscal 2012 revenue; SK hynix alone accounted for 29.4%. International sales represented 85% of revenue.
- The company carried $30.994 million of goodwill and $21.1 million of indefinite-lived in-process research and development from the acquisition; impairment could materially reduce future earnings.
- The company reported no material legal proceedings requiring a provision, but patent challenges and related legal expenses remained ongoing. Environmental liabilities were not considered probable as of year-end.
Most important facts for investors to verify
- Whether the MicroProbe acquisition produces sustainable SoC growth and operating synergies after removing acquisition-related and tax benefits.
- Whether FormFactor can achieve operating-cash-flow break-even before its cash and securities balance declines materially.
- The trajectory of DRAM demand, pricing and customer capital spending, particularly at SK hynix and Samsung.
- The sustainability of the 14.2% gross margin after acquisition-related amortization, restructuring effects and potential inventory write-downs.
- The impairment sensitivity of the $31.0 million goodwill balance, $74.3 million intangible-asset balance and $21.1 million in-process research and development.
- The collectability and payment terms of receivables, including the 49-day DSO and concentration of receivables with major customers.
- The status and potential cost of patent reexaminations, foreign patent proceedings and customer indemnification obligations.