How Is That Turnaround Coming Along?

It's been six months since last I checked up on FormFactor (Nasdaq: FORM  ) in depth. Has anything changed?

In October, CEO Tom St. Dennis was brand new to the job but already bold enough to set some ambitious goals. By mid-2011, the maker of semiconductor testing tools should be able to show:

• $65 million in quarterly revenue, up from $47 million in the third quarter of 2010.
• Operating expenses under $20 million, down from $29 million.
• Break-even non-GAAP earnings, up from a negative $0.55 per diluted share.
• Positive free cash flow, or break-even at $50 million in revenue -- up from a negative $28.5 million.

Do that, and FormFactor should be in great shape for a long and healthy future.

We're not quite at the middle of 2011 yet, but here's where the company stands as of the just-reported first quarter:

• $40.4 million in sales, up 2% year-over-year.
• $20.8 million of non-GAAP operating expenses.
• Adjusted net loss: $0.32 per share.
• ... and no official word yet on FormFactor's first-quarter cash flows, but the company burned $14 million of cash, including $2 million spent on share buybacks. Given FormFactor's uncomplicated cash flow situation, that probably means $12 million of negative free cash flows.

So there's good progress being made, though some of the targets remain out of reach by that second-quarter deadline.

The cost controls are happening ahead of schedule, and the company was putting together a fine string of double-digit revenue gains before disaster struck Japan, which happens to be a major market for FormFactor.

Management expects sales between $42 million and $46 million in the second quarter along with operating costs tucking in below the $20 million mark, which means hitting two out of four mid-year targets. Under the circumstances, that's not half bad.

FormFactor is doing a very good job on what it can control. But despite the marked improvements so far, the stock has largely moved sideways alongside sector peers Cohu (Nasdaq: COHU  ) and Advantest (NYSE: ATE  ) , and it's far below the 60% six-month gains of larger semiconductor equipment peer Teradyne (NYSE: TER  ) . I don't think that's fair.

I liked the early gumption St. Dennis showed two quarters ago, I like the improvements he's making to the company, and I totally get why FormFactor is a five-star CAPS stock today. This turnaround story is on track. I'm off to slap an "outperform" label on this stock right now, and you can follow along by clicking here.