FormFactor, Inc. 2016 Q1 SEC Filing Summary
Business Context and Reporting Period
FormFactor designs, manufactures, sells and supports semiconductor probe cards used in wafer testing. The company describes itself as the largest worldwide supplier of probe cards. This unaudited Form 10-Q covers the 13 weeks ended March 26, 2016, compared with the 13 weeks ended March 28, 2015.
Financial Performance and Position
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Revenue | $53.6 million | $70.8 million | Down 24.3% |
| Gross profit | $9.8 million | $22.8 million | Down 57.0% |
| Gross margin | 18.3% | 32.2% | Down 13.9 percentage points |
| Operating loss | $13.6 million | $0.7 million | Material deterioration |
| Net income (loss) | $(13.8) million | $0.8 million | Turned to loss |
| Diluted EPS | $(0.24) | $0.01 | Declined |
| Operating cash flow | $(3.0) million | $7.4 million | Declined $10.4 million |
- Revenue by market was $36.1 million from SoC, $16.3 million from DRAM and $1.2 million from Flash. SoC revenue increased 8.2%, while DRAM declined 52.9% and Flash declined 58.3% year over year.
- Research and development expense was $10.8 million, or 20.3% of revenue, compared with $11.1 million, or 15.6%, in the prior-year quarter. SG&A was $12.5 million, or 23.3% of revenue, compared with $11.9 million, or 16.8%.
- Other income declined to a net expense of $0.3 million from income of $1.5 million. The prior-year period included approximately $1.5 million of business-interruption insurance proceeds; current-period foreign-exchange losses also increased.
- Cash and cash equivalents were $151.9 million at March 26, 2016, and marketable securities were $35.3 million. Including restricted cash, total cash, cash equivalents, marketable securities and restricted cash was approximately $187.6 million.
- Working capital was $208.7 million, compared with $214.4 million at December 26, 2015. Accounts receivable were $35.7 million and inventories were $31.0 million, up from $27.2 million at year-end.
- The filing reports no outstanding debt on the March 26, 2016 balance sheet. Total liabilities were $54.3 million and stockholders’ equity was $286.2 million.
- Capital expenditures were $1.1 million. Investing activities generated $5.0 million, primarily from net marketable-security maturities. Financing activities generated $2.0 million, primarily from employee stock purchases.
Material Changes Versus the Prior Comparable Period
- The net loss resulted primarily from lower revenue caused by a slower-than-planned capacity ramp for SoC probe cards at a key customer and customer push-outs of DRAM deliveries from Q1 into Q2 2016.
- Lower revenue reduced factory utilization and gross margin. The company also incurred late-delivery fees, invested in additional San Jose production capacity and recorded approximately $2.0 million of excess and obsolete inventory provisions.
- SG&A increased despite lower revenue, primarily because of approximately $2.1 million of consulting and acquisition costs related to the proposed Cascade Microtech acquisition.
- There were no restructuring charges in Q1 2016, compared with $0.5 million in the prior-year period.
- Customer concentration remained significant: Intel represented 34.3% of Q1 2016 revenue and Samsung represented 10.4%. One customer represented approximately 38% of gross accounts receivable at quarter-end.
Outlook, Commentary, Risks and Unusual Items
- Management stated that existing cash, cash equivalents and marketable securities should satisfy working-capital requirements for at least the next 12 months, but warned that liquidity could decline if revenue does not recover or costs are not controlled during an industry downturn.
- The proposed Cascade Microtech acquisition was announced on February 3, 2016. Consideration was to include $16.00 in cash and 0.6534 FormFactor shares for each Cascade Microtech share. FormFactor expected closing in mid-2016 after expiration of the HSR waiting period, subject to remaining closing conditions and Cascade shareholder approval.
- FormFactor obtained a commitment for a $150 million senior secured term loan to finance part of the acquisition. The merger agreement has no financing condition, and the term-loan funding remains subject to customary conditions, including definitive documentation, consummation of the merger and a minimum-liquidity condition.
- Putative shareholder class actions were filed in Oregon relating to the proposed Cascade Microtech transaction. FormFactor stated that the claims were without merit. A separate California wage-and-hour class action had been certified; the company believed any settlement would not be material but could incur material legal fees if the matter proceeded.
- Key operating risks include semiconductor-industry cyclicality, price erosion, rapid technological change, customer concentration, reliance on limited or sole-source suppliers, inventory obsolescence, foreign-currency exposure and execution of the proposed acquisition.
- The company reported no material changes to the risk factors in its 2015 Form 10-K, no material changes to internal control over financial reporting and no material off-balance-sheet arrangements.
Important Facts for Investors to Verify
- Whether DRAM order push-outs were recovered in Q2 2016 and whether SoC capacity investments converted into sustained revenue growth.
- The trajectory of gross margin, factory utilization, inventory provisions and late-delivery costs following the sharp Q1 decline.
- The final terms, financing, closing status and integration costs of the Cascade Microtech acquisition, including the $150 million proposed term loan.
- Customer concentration and collection risk, particularly the customer representing approximately 38% of gross accounts receivable.
- Cash burn and liquidity after acquisition-related payments, debt financing and any subsequent operating losses.
- The status and potential cost of the Cascade shareholder lawsuits and the certified wage-and-hour litigation.