FormFactor, Inc. — Fiscal 2014 First Quarter Summary
Business Context and Reporting Period
FormFactor designs, manufactures, sells, and supports advanced semiconductor wafer probe cards used for wafer sort and test. The company operates in a single segment, with revenue primarily from DRAM, Flash memory, and System-on-Chip products. The filing covers the 13 weeks ended March 29, 2014, compared with the 13 weeks ended March 30, 2013.
Key Financial Metrics
| Metric | Q1 FY2014 | Q1 FY2013 | Change |
|---|---|---|---|
| Revenue | $56.0 million | $52.6 million | Up 6.3% |
| Gross profit | $12.3 million | $9.1 million | Up $3.3 million |
| Gross margin | 22.0% | 17.2% | Up 4.8 percentage points |
| Operating loss | $12.4 million | $20.5 million | Improved $8.1 million |
| Net loss | $12.7 million | $19.8 million | Improved $7.1 million |
| Basic and diluted loss per share | $0.23 | $0.37 | Improved $0.14 |
| Net cash used in operating activities | $6.9 million | $9.7 million | Improved $2.8 million |
Operating expenses were $24.7 million, or 44.2% of revenue, compared with $29.6 million, or 56.3%, in the prior-year quarter. R&D declined to $9.7 million from $10.9 million, and selling, general and administrative expense declined to $12.3 million from $14.6 million.
At March 29, 2014, cash and cash equivalents were $49.2 million and marketable securities were $94.8 million. Including restricted cash of $0.4 million, total cash, cash equivalents, marketable securities, and restricted cash were approximately $144.4 million. Working capital was $175.5 million. The filing reports no material debt other than capital lease obligations, including $0.1 million classified as current.
Total assets were $332.2 million and stockholders’ equity was $285.5 million. Accounts receivable increased to $37.1 million from $30.2 million at fiscal year-end, while inventory increased to $21.3 million from $20.7 million. Days sales outstanding increased to 59 days from 52 days.
Material Changes Versus the Prior Comparable Period
- Revenue increased 6.3%, driven primarily by higher SoC shipments. SoC revenue rose 12.6% to $29.8 million, DRAM revenue rose 1.0% to $22.2 million, and Flash revenue declined 4.7% to $4.0 million.
- Gross margin expanded to 22.0%, reflecting lower material, labor, and overhead costs and favorable production yields.
- R&D and SG&A declined due primarily to headcount reductions, lower stock-based compensation, reduced integration costs, and lower travel and general operating expenses.
- The company recorded $2.0 million of restructuring charges, compared with $4.0 million in the prior-year quarter. The 2014 plan eliminated 52 full-time positions and reduced the temporary workforce by nine positions.
- Impairment of long-lived assets increased to $0.7 million from $0.1 million, related to manufacturing assets no longer expected to be used.
- Cash and cash equivalents declined by $10.0 million during the quarter. Cash usage included $6.9 million from operations and $1.6 million for capital expenditures, partially offset by $1.3 million of financing cash inflows.
- Customer concentration remained significant. SK Hynix, Intel, and Micron represented approximately 48.3% of quarterly revenue collectively.
Guidance, Outlook, Risks, and Unusual Items
Management expects the Q1 2014 restructuring plan to generate approximately $2 million of savings per quarter beginning in the second quarter of fiscal 2014. The filing does not provide clear revenue or earnings guidance. Management expects existing cash, cash equivalents, and marketable securities to satisfy working capital requirements for at least the next twelve months, but cautions that liquidity could decline if revenue does not increase, operating efficiency does not improve, or cost reductions are unsuccessful.
Management identified potential for additional impairment charges in fiscal 2014 if anticipated cash flows are not achieved. The company also recorded $2.6 million of excess and obsolete inventory provisions and $2.6 million of stock-based compensation expense during the quarter.
Key risks include semiconductor industry cyclicality, price erosion, rapid technological change, customer concentration, reliance on a limited number of suppliers for certain components, inventory obsolescence, foreign currency exposure, and the need to improve operating cash flow. The company maintains a valuation allowance against U.S. federal and state deferred tax assets and reported $17.0 million of unrecognized tax benefits.
Pending matters include patent challenges in Taiwan and a California wage-and-hour class action filed by a former employee. The company believes it has significant defenses and does not expect a potential mediation settlement to be material, but litigation could result in material legal fees. No material legal proceedings were reported otherwise, and the filing states that risk factors were not materially changed from the 2013 Form 10-K.
Important Facts for Investors to Verify
- Whether the planned approximately $2 million of quarterly restructuring savings beginning in Q2 FY2014 were realized.
- Whether revenue growth, particularly in SoC and mobile-related DRAM products, continued sufficiently to reduce operating losses.
- Whether gross-margin improvement was sustainable or primarily attributable to temporary production yields, product mix, or cost reductions.
- Trends in operating cash burn, accounts receivable, DSO, inventory, and total liquidity.
- Potential additional impairment or inventory charges if forecasted cash flows or demand assumptions weaken.
- Customer and supplier concentration, including dependence on SK Hynix, Intel, Micron, and limited-source component suppliers.
- Developments in the Taiwan patent matters, the California wage-and-hour litigation, and the company’s $17.0 million of unrecognized tax benefits.