FormFactor, Inc. 10-Q Summary: Fiscal Q2 2018
Business context and reporting period
FormFactor provides semiconductor test and measurement solutions, including probe cards, analytical probes, probe stations and thermal subsystems. The company reports two segments: Probe Cards and Systems. This unaudited report covers the three and six months ended June 30, 2018, compared with the periods ended July 1, 2017. Fiscal 2018 ends December 29, 2018.
Key financial metrics
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $135.5 million | $144.0 million | $253.8 million | $272.8 million |
| Gross profit | $56.2 million | $61.8 million | $101.3 million | $109.3 million |
| Gross margin | 41.5% | 42.9% | 39.9% | 40.1% |
| Operating income | $11.3 million | $19.6 million | $14.9 million | $26.6 million |
| Net income | $9.1 million | $17.6 million | $11.2 million | $22.8 million |
| Diluted EPS | $0.12 | $0.24 | $0.15 | $0.31 |
| Operating cash flow | Not separately provided | Not separately provided | $30.1 million | $42.3 million |
Q2 revenue declined 5.9% year over year, while six-month revenue declined 7.0%. Q2 operating margin was 8.4%, compared with 13.6% in the prior-year quarter; the six-month operating margin was 5.8%, compared with 9.8%. Q2 net margin was 6.7%, compared with 12.3%, and the six-month net margin was 4.2%, compared with 8.4%.
- Probe Cards revenue was $111.6 million in Q2 and $206.5 million for the six-month period, down from $121.6 million and $228.1 million, respectively.
- Systems revenue was $23.9 million in Q2 and $47.3 million for the six-month period, up from $22.4 million and $44.7 million, respectively.
- Q2 revenue by market was $62.1 million from Foundry and Logic, $38.1 million from DRAM, $11.4 million from Flash and $23.9 million from Systems.
- Cash, cash equivalents and marketable securities totaled approximately $142.9 million at June 30, 2018, compared with $140.2 million at December 30, 2017. Working capital was $214.0 million.
- Total cash, cash equivalents and restricted cash increased to $96.8 million at June 30, 2018 from $92.7 million at year-end 2017.
- Capital expenditures were $8.5 million during the first six months.
- The term loan balance was $85.0 million at June 30, 2018, including $21.3 million of principal repayments during the first six months. The stated interest rate was 4.1%, and the company was in compliance with its covenants.
Material changes versus the prior comparable period
- Foundry and Logic revenue declined 30.0% in Q2 and 26.1% for the six-month period, primarily because of lower demand from one major customer.
- DRAM revenue increased 21.0% in Q2 and 13.1% for the six-month period; Flash revenue increased 697.3% and 278.0%, respectively, from relatively low prior-year levels.
- Systems revenue increased 7.0% in Q2 and 5.8% for the six-month period, driven mainly by stronger thermal-subsystem demand.
- Gross margin declined because of unfavorable product mix and lower factory utilization, partly offset by lower amortization expense.
- Research and development expense increased 6.1% in Q2 and 4.9% for the six-month period, primarily from project materials and personnel-related costs.
- Selling, general and administrative expense increased 6.9% in Q2 and 4.8% for the six-month period, driven by information-systems consulting, stock-based compensation and other operating costs.
- No restructuring charges were recorded in 2018, compared with $313,000 for the first six months of 2017.
- Interest expense decreased as a result of lower debt balances, while interest income increased due to higher investment yields and average balances.
- Net income declined primarily because of lower Probe Cards revenue and higher operating expenses.
Outlook, commentary, risks and unusual items
Management states that existing cash, investments and expected operating cash flow should fund working-capital needs and scheduled term-loan repayments for at least the next twelve months. No specific revenue, earnings or margin guidance is provided in the filing.
- Future margins may be pressured by lower revenue, unfavorable mix, reduced factory utilization and potential inventory write-downs if estimated selling prices fall below cost.
- The company relies on a limited number of suppliers for certain key, and in some cases sole-source, components.
- Customer concentration remains material: Intel represented 15.1% of Q2 revenue and 14.6% of six-month revenue; SK Hynix represented 11.5% and 10.9%, respectively.
- Two customers represented 18.3% and 13.3% of gross accounts receivable at June 30, 2018.
- Foreign exchange exposure is managed with forward contracts; the U.S.-dollar notional amount outstanding at quarter-end was $31.0 million, with contracts maturing in Q3 2018.
- The company adopted ASC 606 using the modified retrospective method; management reported no material adoption impact.
- Operating lease commitments totaled $47.6 million, including $21.9 million due after 2022. The company extended its Beaverton, Oregon lease through 2027.
- The company had no material legal proceedings, no off-balance-sheet arrangements and no material changes to previously disclosed risk factors.
- The company had not completed its accounting analysis of the Tax Cuts and Jobs Act, although no material changes to estimated amounts had been recorded.
- A $25 million share-repurchase authorization remained in place, with $6.0 million available at June 30, 2018; no shares were repurchased during the first six months.
Important facts for investors to verify
- Whether Foundry and Logic demand, particularly from the major customer identified by management, recovers in the second half of 2018.
- Whether DRAM and Flash growth offsets continued weakness or volatility in Foundry and Logic.
- Gross-margin trends, factory utilization and the adequacy of inventory reserves; inventories increased to $76.4 million from $67.8 million at year-end.
- Customer and supplier concentration, including the effect of any order changes or supply interruptions.
- Cash generation relative to scheduled debt repayments and the remaining $85.0 million term-loan balance.
- The effect of foreign exchange movements, interest rates and the company’s hedging activities.
- The eventual balance-sheet impact of adopting the lease standard beginning in 2019.