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 testing. The company operates in a single industry segment and derives substantially all revenue from wafer probe card sales. This unaudited filing covers the three and six months ended June 30, 2012, compared with June 25, 2011. The filing was signed August 1, 2012.
Key financial metrics
| Metric | Three months ended June 30, 2012 | Three months ended June 25, 2011 | Six months ended June 30, 2012 | Six months ended June 25, 2011 |
|---|---|---|---|---|
| Revenue | $54.8 million | $46.6 million | $89.6 million | $87.0 million |
| Gross profit | $16.2 million | $9.9 million | $20.3 million | $14.0 million |
| Gross margin | 29.5% | 21.2% | 22.7% | 16.1% |
| Operating loss | $(6.5) million | $(11.0) million | $(24.5) million | $(32.3) million |
| Net loss | $(4.2) million | $(7.7) million | $(21.7) million | $(29.1) million |
| Basic and diluted loss per share | $(0.08) | $(0.15) | $(0.44) | $(0.57) |
| Net cash used in operating activities | Not separately provided | Not separately provided | $(14.8) million | $(19.5) million |
Revenue was $54.8 million in the second quarter and $89.6 million year to date. Revenue by end market for the quarter was $38.0 million from DRAM, $9.7 million from Flash and $7.1 million from SoC. Gross margin benefited from product mix, lower inventory provision charges and cost initiatives.
As of June 30, 2012, cash and cash equivalents were $144.8 million and marketable securities were $132.9 million, for combined liquidity of approximately $277.7 million. Including restricted cash, total cash, cash equivalents and marketable securities were approximately $278.0 million. Working capital was $293.5 million. The balance sheet does not disclose outstanding borrowings or debt; no material debt is identified in the filing.
Six-month investing cash flow was $20.6 million, primarily reflecting $94.5 million of marketable-security maturities, partially offset by $69.9 million of purchases and $3.9 million of capital expenditures. Financing cash flow was $1.2 million, principally from employee stock purchase activity. Accounts receivable increased to $27.7 million from $12.7 million at December 31, 2011, while inventory increased to $20.5 million from $18.1 million.
Material changes versus the prior comparable period
- Second-quarter revenue increased 17.7%, or $8.3 million; first-half revenue increased 3.0%, or $2.6 million.
- Second-quarter revenue increased 12.1% in DRAM and 85.8% in Flash, while SoC revenue declined 4.5%. First-half DRAM revenue declined 1.4%, Flash increased 28.6% and SoC increased 1.2%.
- Gross margin expanded 8.3 percentage points in the quarter and 6.6 percentage points year to date, primarily due to product mix, lower inventory provisions and material-cost initiatives.
- The quarterly operating loss improved by $4.5 million and the first-half operating loss improved by $7.8 million. Operating expenses declined as a percentage of revenue, although second-quarter restructuring expense replaced a prior-year restructuring benefit.
- Operating cash use improved by $4.7 million year to date, but the company continued to consume cash because of net losses and increases in accounts receivable and inventory.
- Customer concentration increased: SK hynix represented 36.1% of second-quarter revenue and 36.4% of first-half revenue. Two customers represented 48.3% of first-half revenue.
- The company did not repurchase common stock during the first or second quarters of 2012. The repurchase authorization remained available through October 19, 2012, subject to a maximum of $40.5 million during the extended program period.
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 also warned that liquidity could decline further if operating efficiency does not improve, cash outlays are not reduced or additional financing is not obtained. The filing does not provide specific revenue or earnings guidance.
- Management expects continued investment in next-generation DRAM, SoC, MicroSpring and ATRE technologies and other wafer-test products.
- Quarterly savings of approximately $0.1 million, excluding stock-based compensation, are expected from the 2012 restructuring action. Remaining restructuring cash payments were expected to be completed by the end of the third quarter of fiscal 2012.
- The company recorded $0.1 million of second-quarter restructuring charges and $0.1 million of impairment charges related to a terminated construction-in-progress project. Total first-half impairment charges were $0.2 million for assets previously held for sale and $0.1 million for the project termination.
- The income tax benefit included a $1.6 million release of a reserve for uncertain U.S. tax positions following the expiration of a statute of limitations. U.S. federal and state deferred tax assets continued to carry a valuation allowance.
- The company accrued $1.0 million for potential customs and indirect-tax exposure and stated that additional material liabilities remain possible.
- In patent and trade-secret litigation against Micro-Probe, the court granted summary judgment against FormFactor on the non-patent claims in June 2012. Patent claims remained unresolved, and related patent-office reexaminations and foreign proceedings were ongoing. No liability was accrued because management did not believe a loss was probable.
- Key operating risks include semiconductor-industry cyclicality, price erosion, rapid technological change, customer concentration, dependence on a limited number of suppliers, inventory obsolescence, foreign-exchange exposure, litigation, tax uncertainties and potential additional asset impairments.
Investor verification points
- Verify whether the DRAM recovery and NAND Flash penetration continued after the reporting period and whether customer concentration remained elevated.
- Assess the sustainability of the 29.5% quarterly gross margin and the extent to which lower inventory provisions, product mix and one-time factors contributed.
- Monitor operating cash flow, accounts receivable and inventory growth, as the company remained loss-making and cash-flow negative.
- Review the outcome and financial impact of the Micro-Probe litigation, patent reexaminations and customs or indirect-tax inquiries.
- Confirm the status of the restructuring program, expected savings and any additional impairment charges.
- Evaluate liquidity after considering the absence of disclosed debt, continued cash consumption, foreign-held cash of $13.7 million and any need for future financing.