FormFactor, Inc. 10-Q Summary
Business context and reporting period
FormFactor designs, manufactures, sells and supports semiconductor probe cards used in wafer testing. The filing covers the 13 weeks ended March 28, 2015, compared with the 13 weeks ended March 29, 2014. Fiscal 2015 ends December 26, 2015.
Financial performance and liquidity
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Revenue | $70.8 million | $56.0 million | 26.6% increase |
| Gross profit | $22.8 million | $12.3 million | 85.0% increase |
| Gross margin | 32.2% | 22.0% | Up 10.2 percentage points |
| Operating loss | $0.7 million | $12.4 million | Loss reduced |
| Net income (loss) | $0.8 million | $(12.7) million | Returned to profitability |
| Diluted EPS | $0.01 | $(0.23) | Improved |
| Operating cash flow | $7.4 million | $(6.9) million | Improved by $14.3 million |
Revenue by market was $34.6 million from DRAM, $33.4 million from SoC and $2.8 million from Flash. DRAM revenue increased 55.9%, SoC revenue increased 12.3% and Flash revenue declined 29.2% year over year.
Cash and cash equivalents were $126.0 million, marketable securities were $45.7 million and restricted cash was $0.4 million at March 28, 2015. Working capital was $206.2 million. The filing reports no material change in lease and purchase obligations and no off-balance-sheet arrangements. No borrowings or debt balances are reported on the condensed balance sheet.
Total assets were $341.5 million and total liabilities were $46.2 million. Accounts receivable declined to $41.1 million from $45.2 million, inventories declined to $24.6 million from $25.5 million, and days sales outstanding improved to 48 days from 59 days at December 27, 2014.
Material changes versus the prior comparable period
- Revenue growth and higher factory utilization, favorable production yields, lower material and labor costs, and prior cost-reduction initiatives increased gross margin to 32.2% from 22.0%.
- Research and development expense increased 13.7% to $11.1 million, while selling, general and administrative expense declined 3.0% to $11.9 million.
- Restructuring charges declined to $0.5 million from $2.0 million. The 2015 charge primarily reflected modified equity awards for a terminated employee; the prior-year restructuring involved workforce reductions and equipment impairment.
- No long-lived-asset impairment was recorded in 2015, compared with $0.7 million in 2014.
- Other income was $1.5 million versus expense of $0.1 million, primarily due to a $1.5 million business-interruption insurance recovery related to a customer factory fire.
- Cash generated from operations improved substantially, while investing cash flow turned positive primarily because marketable-security maturities exceeded purchases.
Outlook, commentary, risks and unusual items
Management believes existing cash, cash equivalents and marketable securities will satisfy working-capital requirements for at least the next twelve months. The filing does not provide formal quantitative revenue, margin or earnings guidance.
Management expects probe-card sales to remain substantially all of revenue and plans to continue investing in research and development. Results remain sensitive to semiconductor industry cyclicality, product mix, pricing pressure, technology changes, customer design cycles and demand fluctuations.
- Customer concentration is significant: Intel, SK hynix, Samsung and Micron represented 60.4% of revenue in Q1 2015. Two customers represented 27% and 15% of gross accounts receivable.
- Key components are available from a limited number of suppliers, including some sole-source suppliers, creating potential supply and shipment risks.
- Inventory reserves, product obsolescence, pricing erosion and lower factory utilization could pressure future gross margins.
- The company maintains a valuation allowance for U.S. federal and state deferred tax assets.
- A California wage-and-hour class-action lawsuit remains in early stages; no class has been certified. Management believes any settlement would not be material, but defense costs could be material.
- The company is exposed to foreign-currency movements and had forward contracts with total U.S.-dollar notional value of $18.1 million at March 28, 2015.
- Management reported effective disclosure controls and no material changes to internal control over financial reporting.
Investor verification points
- Verify whether the $1.5 million insurance recovery is nonrecurring and adjust normalized earnings accordingly.
- Assess the sustainability of the 32.2% gross margin after the favorable volume, yield and cost-reduction effects.
- Monitor DRAM and SoC demand, Flash weakness and customer concentration.
- Review inventory reserves and the remaining finite-lived intangible-asset amortization, reported at $28.6 million after March 28, 2015.
- Confirm liquidity, contractual obligations and the absence of reported debt in subsequent filings.
- Follow developments in the wage-and-hour litigation, supplier concentration and foreign-currency exposure.