FormFactor, Inc. 2014 Second-Quarter 10-Q Summary
Business Context and Reporting Period
FormFactor designs, manufactures and sells advanced semiconductor wafer probe cards used for wafer sort and test. The company operates in one industry segment, with substantially all revenue from wafer probe card sales. The filing covers the three and six months ended June 28, 2014, compared with the corresponding periods ended June 29, 2013.
Key Financial Metrics
| Metric | Q2 2014 | Q2 2013 | Six Months 2014 | Six Months 2013 |
|---|---|---|---|---|
| Revenue | $67.4 million | $62.7 million | $123.3 million | $115.4 million |
| Gross profit | $20.0 million | $16.4 million | $32.3 million | $25.5 million |
| Gross margin | 29.7% | 26.2% | 26.2% | 22.1% |
| Operating loss | $4.3 million | $8.5 million | $16.7 million | $29.0 million |
| Net loss | $4.3 million | $8.4 million | $17.0 million | $28.2 million |
| Net loss per share | $0.08 | $0.16 | $0.31 | $0.52 |
Six-month operating cash flow was a use of $0.5 million, an improvement from a $5.6 million use in the prior-year period. Investing activities provided $9.6 million, primarily because marketable-security maturities exceeded purchases. Capital expenditures were $3.0 million. Financing activities provided $1.2 million.
At June 28, 2014, cash and cash equivalents were $69.9 million, marketable securities were $79.2 million, and restricted cash was $0.4 million. Total cash, cash equivalents and marketable securities were approximately $149.0 million excluding restricted cash. Working capital was $180.8 million. The filing shows no material funded debt; capital leases were eliminated from current liabilities during the period.
Total assets were $337.1 million and total liabilities were $52.1 million. Accounts receivable increased to $42.0 million from $30.2 million at year-end, and inventories increased to $22.1 million from $20.7 million. Days sales outstanding rose to 56 days from 52 days.
Material Changes Versus the Prior Comparable Period
- Revenue increased 7.4% in the quarter and 6.9% year to date. SoC revenue increased 32.7% in the quarter and 22.8% year to date; DRAM revenue was essentially flat; Flash revenue declined 48.2% in the quarter and 33.8% year to date.
- Gross margin expanded by 3.5 percentage points in the quarter and 4.1 percentage points year to date, reflecting lower material, labor and overhead costs, favorable yields, higher factory utilization and cost-reduction actions.
- Gross profit included approximately $1.3 million of margin from a non-recurring service transaction in the second quarter.
- Research and development expense declined 4.7% year to date, while selling, general and administrative expense declined 9.5%, primarily because of restructuring and cost-reduction efforts.
- Restructuring charges declined to $2.1 million year to date from $4.1 million. The 2014 plan eliminated 52 full-time employees, reduced the temporary workforce by nine positions and incurred an additional $59,000 of severance in the second quarter. Related activities and cash payments were completed by June 28, 2014.
- The company recorded $0.7 million of long-lived-asset impairments year to date, compared with $0.2 million in the prior-year period, but no impairment charge in the second quarter.
- Customer concentration increased: SK Hynix, Intel and Micron represented 53.1% of quarterly revenue and 51.0% of year-to-date revenue, compared with 34.7% and 35.8%, respectively, in the prior-year periods.
Guidance, Outlook, Risks and Unusual Items
No specific quantitative revenue or earnings guidance is provided. Management expects existing cash, cash equivalents and marketable securities to satisfy working-capital requirements for at least the next twelve months, while warning that continued revenue weakness, unsuccessful cost reductions, higher cash outlays or an inability to obtain financing could reduce liquidity.
- Demand is exposed to semiconductor cyclicality, pricing pressure, rapid technological change, short product life cycles and competition. Flash demand, particularly NOR and a major South Korean NAND customer, weakened during the period.
- Key components are available from a limited number of suppliers, including some sole-source suppliers, creating potential supply and shipment risks.
- Management stated that additional impairment charges could arise in fiscal 2014 if forecast cash flows are not achieved.
- A California wage-and-hour class action remains in early litigation; no class has been certified. Mediation did not produce a settlement. The company believes any settlement would not be material, but defense costs could be material.
- The company has broad intellectual-property indemnification obligations and may incur material legal fees, although no liability was recorded because management did not consider a loss probable.
- Foreign-exchange exposure is managed with non-designated forward contracts. Outstanding contracts had an aggregate U.S.-dollar notional amount of $8.0 million at quarter-end and matured July 25, 2014.
- FASB revenue-recognition guidance issued in May 2014 will become effective for the company in fiscal 2017. The company was evaluating the impact and had not selected a transition method.
Important Facts for Investors to Verify
- Whether improved gross margins remain sustainable after excluding the $1.3 million non-recurring service transaction.
- Whether SoC growth offsets continuing weakness in Flash and stabilizes total revenue.
- Customer concentration, receivable collections and the increase in DSO and inventory.
- Progress toward positive and consistently improving operating cash flow.
- Potential future impairment charges, inventory provisions and warranty costs.
- Developments in the wage-and-hour litigation and any material intellectual-property claims.
- The effect of the 2017 revenue-recognition standard on reported revenue and disclosures.