Business Context and Reporting Period
FormFactor, Inc. designs, manufactures and sells semiconductor probe cards used in wafer testing, serving DRAM, Flash and system-on-chip markets. This unaudited Form 10-Q covers the three and six months ended June 27, 2015, compared with June 28, 2014. Fiscal 2015 is a 52-week year ending December 26, 2015.
Financial Performance and Position
| Metric | Q2 2015 | Q2 2014 | Six Months 2015 | Six Months 2014 |
|---|---|---|---|---|
| Revenue | $73.9 million | $67.4 million | $144.7 million | $123.3 million |
| Gross profit | $23.3 million | $20.0 million | $46.1 million | $32.3 million |
| Gross margin | 31.5% | 29.7% | 31.9% | 26.2% |
| Operating income (loss) | $0.7 million | $(4.3) million | $0.015 million | $(16.7) million |
| Net income (loss) | $0.8 million | $(4.3) million | $1.6 million | $(17.0) million |
| Diluted EPS | $0.01 | $(0.08) | $0.03 | $(0.31) |
- Six-month operating cash flow was $21.7 million, compared with cash used of $0.5 million in the prior-year period.
- Six-month investing cash flow was $4.0 million, including $4.2 million of capital expenditures and net proceeds from marketable securities activity.
- Six-month financing cash flow was $(1.7) million, including $3.5 million for share repurchases, partly offset by $1.8 million from employee stock purchases and option exercises.
- Cash and cash equivalents were $137.1 million at June 27, 2015, and marketable securities were $41.7 million. Including restricted cash, total cash, cash equivalents, marketable securities and restricted cash were approximately $179 million.
- Working capital was $209.6 million. Management stated that existing liquidity should satisfy working-capital requirements for at least the next twelve months.
- The filing does not disclose outstanding borrowings or material debt. Total liabilities were $53.7 million, compared with stockholders’ equity of $295.0 million.
Material Changes Versus the Prior Comparable Period
- Revenue increased 9.7% in Q2 and 17.4% for the first six months, primarily due to higher DRAM volumes, strong mobile, server and commodity DRAM demand, and adoption of the SmartMatrix product by a major South Korean memory producer.
- Six-month DRAM revenue increased 43.7%, while SoC revenue increased 2.6% and Flash revenue declined 18.2%. Q2 SoC revenue declined 5.3% and Flash revenue declined 8.2%.
- Gross margin improved substantially due to higher production volume, factory utilization, execution and yields, lower intangible amortization, and operating-efficiency improvements.
- Q2 selling, general and administrative expense declined $1.8 million, and six-month expense declined $2.2 million, reflecting cost-reduction initiatives and lower stock-based compensation and personnel-related costs.
- Restructuring charges declined to $0.5 million for the first six months from $2.1 million; Q2 2015 had no restructuring charges. Prior-year restructuring activities included workforce reductions and equipment impairments.
- Other income included approximately $1.5 million received during the first quarter from a business-interruption insurance claim related to a customer factory fire.
- On April 16, 2015, the company authorized a $25.0 million share-repurchase program. During Q2, it repurchased and retired 400,362 shares for approximately $3.5 million, leaving $21.5 million authorized for future repurchases at quarter-end.
Guidance, Outlook, Risks and Unusual Items
- No specific quantitative revenue, margin or earnings guidance is provided in the filing. Management expects probe-card sales to remain substantially all of revenue and plans continued research and development investment.
- Management cautions that results are exposed to semiconductor-industry cyclicality, product-mix changes, pricing pressure, rapid technology changes, short product life cycles and competitive conditions.
- Four customers represented approximately 61% of Q2 revenue and 61% of six-month revenue: Micron, Intel, Samsung and SK hynix. Customer concentration and dependence on semiconductor demand are significant risks.
- Key components are available from a limited number of suppliers, in some cases sole sources. Supply interruptions could delay shipments or reduce revenue.
- Gross margins may decline with lower revenue, weaker factory utilization, pricing pressure or additional inventory provisions. The company recorded $3.0 million of excess-and-obsolete inventory provisions in the first six months.
- A former employee’s California wage-and-hour class action remains in the early stages; no class has been certified. The company believes any settlement would be immaterial but could incur material legal-defense costs if the matter proceeds.
- On July 13, 2015, after quarter-end, FormFactor settled litigation with MarTek, dismissed related claims, and agreed to sell intellectual property for $2.0 million. It received $1.2 million in cash and recorded a secured $0.8 million promissory note payable in two annual installments.
- Foreign-currency exposure is managed with forward contracts. Outstanding contracts at quarter-end had total U.S.-dollar notional value of $22.9 million and matured July 24, 2015.
Important Facts for Investors to Verify
- Whether DRAM strength and SmartMatrix adoption continue to offset weakness in SoC and Flash markets.
- Customer concentration, demand variability and pricing pressure across semiconductor end markets.
- Sustainability of the improved 31.9% six-month gross margin and near break-even operating performance.
- Inventory reserves, production yields, intangible-asset amortization and potential impairment charges.
- Future use of the remaining $21.5 million share-repurchase authorization and its effect on share count and liquidity.
- Progress and potential costs of the wage-and-hour litigation and collection of the MarTek promissory note.