FormFactor, Inc. 2014 Q3 10-Q 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 industry segment, with revenue primarily from wafer probe cards for System-on-Chip (SoC), DRAM, and Flash applications. The filing covers the 13-week quarter and 39-week year-to-date period ended September 27, 2014, compared with September 28, 2013.
Financial performance and liquidity
| Metric | Q3 2014 | Q3 2013 | 9M 2014 | 9M 2013 |
|---|---|---|---|---|
| Revenue | $73.9 million | $67.6 million | $197.2 million | $183.0 million |
| Gross profit | $24.1 million | $12.5 million | $56.5 million | $38.0 million |
| Gross margin | 32.7% | 18.5% | 28.6% | 20.8% |
| Operating loss | $0.5 million | $10.9 million | $17.2 million | $39.9 million |
| Net loss | $0.3 million | $10.7 million | $17.3 million | $38.9 million |
| Net loss per share | $0.00 | $0.20 loss | $0.31 loss | $0.72 loss |
Q3 revenue increased 9.3% year over year, while nine-month revenue increased 7.8%. The company remained unprofitable, but losses narrowed substantially. Gross-margin improvement reflected lower material, labor, and overhead costs, favorable production yields, higher volume, and better factory utilization.
- Q3 revenue by market: SoC $39.4 million, DRAM $31.4 million, and Flash $3.2 million.
- Year-to-date revenue by market: SoC $105.7 million, DRAM $80.0 million, and Flash $11.6 million.
- Q3 operating expenses were $24.6 million, including $11.2 million of research and development and $13.3 million of selling, general and administrative expense.
- Year-to-date operating expenses were $73.7 million, including $2.1 million of restructuring charges and $0.8 million of long-lived-asset impairment charges.
- Year-to-date cash provided by operating activities was $5.4 million, compared with $2.6 million of cash used in the prior-year period.
- Year-to-date cash provided by investing activities was $23.0 million, primarily reflecting net maturities of marketable securities.
- Capital expenditures were $4.5 million year to date, compared with $7.4 million in the prior-year period.
- Cash and cash equivalents were $89.3 million at September 27, 2014; marketable securities were $65.1 million. Including restricted cash, total cash, cash equivalents, and marketable securities were approximately $154.8 million.
- Working capital was $192.9 million, compared with $173.9 million at December 28, 2013. The filing presents no material long-term debt; capital leases were effectively eliminated from the balance sheet.
Material changes versus the prior comparable period
- SoC revenue increased 24.2% in Q3 and 23.4% year to date, driven by mobile application processor, personal computer processor, and automotive microcontroller demand.
- DRAM revenue increased 8.8% in Q3 and 3.2% year to date, supported by adoption of the SmartMatrix product at a major South Korean memory producer.
- Flash revenue declined 55.3% in Q3 and 41.5% year to date because of a weaker NOR Flash market and lower TouchMatrix demand.
- Gross margin expanded by 14.2 percentage points in Q3 and 7.8 percentage points year to date.
- Year-to-date restructuring charges declined to $2.1 million from $4.2 million. The 2014 restructuring plan eliminated 52 full-time employees, reduced nine temporary positions, and included additional subsequent employee reductions. Related activities were substantially completed by September 27, 2014.
- Research and development declined slightly year to date, while SG&A declined 5.6% year to date, reflecting cost reductions and lower personnel, acquisition-related, commission, and general operating costs.
- Accounts receivable increased to $47.8 million from $30.2 million, and inventories increased to $25.9 million from $20.7 million, reflecting higher sales and inventory buildup. Days sales outstanding increased to 53 days from 52 days.
- Property, plant, and equipment declined to $26.6 million from $35.2 million, partly because assets were sold or reclassified as held for sale. A building sale generated a $0.2 million gain.
Guidance, 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 twelve months. No specific revenue, margin, or earnings guidance was provided in the filing.
- Management expects wafer probe card sales to remain substantially all of revenue, but results may fluctuate with semiconductor design cycles, technology adoption, pricing pressure, end-market cyclicality, and customer demand.
- Future gross margins could be negatively affected by lower revenue, unfavorable product mix, price erosion, factory utilization, material costs, or additional inventory provisions and write-downs.
- The company recorded $5.5 million of inventory provisions during the first nine months and stated that additional impairment charges on property, plant, and equipment or intangible assets were reasonably possible during fiscal 2014.
- Customer concentration is significant: Intel, Micron, SK hynix, and Samsung represented 61.9% of Q3 revenue and 50.9% of year-to-date revenue. Two customers represented 25% and 22% of gross accounts receivable at quarter end.
- The company relies on a limited number of suppliers, including sole-source suppliers for certain components. Supply interruptions could delay shipments or reduce revenue.
- A former employee’s California wage-and-hour class action remained in the early stages with no certified class. Mediation in Q3 did not produce a settlement; management believed a potential settlement would not be material but noted that defense costs could be material.
- Foreign-currency forward contracts had aggregate U.S.-dollar notional value of $10.4 million at quarter end and matured October 24, 2014. The contracts were not designated as hedges.
- The company maintains a valuation allowance against U.S. federal and state deferred tax assets. It recorded a $0.4 million year-to-date tax provision despite the year-to-date pretax loss.
- New revenue-recognition and going-concern accounting standards were issued and are expected to apply beginning in fiscal 2017; the company was evaluating their effects.
Important facts for investors to verify
- Whether the sharp gross-margin improvement is sustainable after favorable yields, cost reductions, and higher factory utilization normalize.
- Whether SoC and DRAM growth can offset continuing weakness in Flash revenue.
- Customer concentration, particularly reliance on Intel, Micron, SK hynix, and Samsung.
- Inventory levels, inventory provisions, accounts receivable growth, and the sustainability of positive operating cash flow.
- Potential additional asset impairments and the remaining amortization burden from acquired intangible assets.
- Progress and potential costs of the wage-and-hour litigation and any other intellectual-property or indemnification claims.
- The company’s ability to maintain revenue and cost reductions during a semiconductor industry downturn.