FORMFACTOR INC annual report, FY2020

FormFactor, Inc. Fiscal 2020 Form 10-K Summary

Business context and reporting period

FormFactor provides semiconductor test and measurement technologies, including probe cards, analytical probes, probe stations, metrology systems, thermal systems and cryogenic systems. The company operates through Probe Cards and Systems reportable segments. This filing covers the 52-week fiscal year ended December 26, 2020; the supplied metadata references 2020 Q4, but the filing is an annual Form 10-K.

Fiscal 2020 included the acquisitions of the Advantest probe card assets known as Baldwin Park on July 30, 2020, and High Precision Devices, Inc. on October 19, 2020. FRT GmbH, acquired in October 2019, contributed a full year of results in 2020.

Financial performance and key metrics

Metric	Fiscal 2020	Fiscal 2019	Change
Revenue	$693.6 million	$589.5 million	17.7% increase
Gross profit	$287.9 million	$237.5 million	21.2% increase
Gross margin	41.5%	40.3%	Up 1.2 percentage points
Operating income	$83.8 million	$49.7 million	68.7% increase
Operating margin	12.1%	8.5%	Up 3.6 percentage points
Net income	$78.5 million	$39.3 million	99.6% increase
Diluted earnings per share	$0.99	$0.51	Increase
Net cash from operating activities	$169.3 million	$121.0 million	39.8% increase

• Probe Cards revenue was $581.7 million, up from $491.4 million; Systems revenue was $111.9 million, up from $98.1 million.
• Foundry & Logic revenue increased 40.1% to $446.2 million and represented 64.3% of total revenue. DRAM revenue declined 25.5% to $109.7 million, while Flash revenue was essentially flat at $25.8 million.
• Probe Cards gross margin improved to 45.2% from 43.0%, driven by higher sales, factory utilization and product mix. Systems gross margin declined to 46.3% from 51.9% because of less favorable product mix.
• Research and development expense increased 9.2% to $89.0 million, while selling, general and administrative expense increased 8.2% to $115.1 million. Both declined as a percentage of revenue.
• The effective tax rate was 7.8%, compared with 22.9% in 2019. Fiscal 2018 included a $75.8 million tax benefit from releasing valuation allowances against certain U.S. deferred tax assets.
• Cash, cash equivalents and marketable securities totaled approximately $255.0 million at year-end, compared with $220.9 million at the prior year-end. Working capital increased to $332.5 million from $282.5 million.
• Year-end cash and cash equivalents were $187.2 million; marketable securities were $67.8 million. Accounts receivable were $107.6 million and inventory was $99.2 million.
• Capital expenditures were $55.9 million, including investment in a new Livermore production facility. Acquisitions of Baldwin Park and HPD used $51.9 million of cash, net of cash acquired.

Debt, liquidity and capital allocation

• Total term loans were $34.6 million before issuance costs at December 26, 2020, down from $58.5 million at the prior year-end. The CMI Term Loan was fully repaid on June 30, 2020.
• The remaining debt consisted primarily of the $17.1 million FRT Term Loan and the $17.5 million Building Term Loan. The company was in compliance with applicable debt covenants.
• Contractual term-loan principal payments totaled $34.6 million, with $9.5 million due in fiscal 2021. Operating lease commitments totaled $41.0 million.
• Management stated that existing liquidity and cash from operations should satisfy working capital requirements for at least the next twelve months.
• No dividends have been declared, and the company does not currently intend to pay dividends. A $50.0 million share repurchase authorization was approved in October 2020, but no shares were repurchased during fiscal 2020.

Material changes versus the prior comparable period

• Revenue growth was led by Foundry & Logic demand, including demand associated with 5G devices and infrastructure supporting work-from-home and distance-learning activity.
• DRAM demand declined following large customer purchases in fiscal 2019.
• China revenue increased to $174.9 million, or 25.2% of revenue, from $106.3 million, while Taiwan revenue increased to $150.8 million, or 21.7%. U.S. revenue declined to $127.6 million from $155.2 million.
• Profitability improved materially because revenue grew faster than operating expenses and gross margin expanded.
• Inventory increased $16.0 million to $99.2 million, despite a $13.1 million provision for excess and obsolete inventory. Inventory valuation was identified as the audit’s critical audit matter.
• Property, plant and equipment increased to $104.1 million from $58.7 million, primarily reflecting facility and production investments.
• Goodwill increased to $212.8 million from $199.2 million, primarily due to the 2020 acquisitions and foreign currency translation.

Outlook, management commentary, risks and unusual items

Management reported that manufacturing sites generally continued operating at production levels comparable to pre-pandemic levels, subject to safety constraints. COVID-19 caused temporary factory shutdowns at certain locations for almost two weeks during the first fiscal quarter and affected lead times. Management characterized the pandemic as a continuing threat with potentially significant effects on supply chains, workforce availability, customer demand, transportation, site access and financial markets, but did not quantify its ultimate impact.

• The business remains highly exposed to semiconductor industry cycles, customer purchasing patterns, product mix and changes in customer test strategies.
• Intel represented 31.5% of fiscal 2020 revenue; Samsung represented less than 10% for the year but exceeded 10% in certain quarters. Customer concentration creates material revenue and receivables risk.
• International sales represented 82% of revenue. Trade restrictions, export controls, tariffs, foreign exchange movements and geopolitical tensions, particularly involving the United States and China, could affect results.
• In June 2020, the company identified a malware-related data breach involving unauthorized access to information technology systems. Management stated that it did not believe the incident significantly affected production or ordinary-course operations, but cybersecurity and system implementation risks remain.
• The company relies on sole-source or limited-source suppliers for certain components and materials and generally uses purchase orders rather than long-term supply contracts.
• FRT contingent consideration was reduced to approximately $4.0 million based on actual 2020 performance, producing a $2.9 million gain recognized in fiscal 2020.
• Unrecognized tax benefits totaled $32.5 million, of which $15.8 million would affect the effective tax rate if recognized. The timing of any related payments cannot be estimated.
• No material legal proceedings, environmental violations or goodwill impairments were reported. Management and KPMG concluded that internal control over financial reporting was effective, although controls for Baldwin Park and HPD were excluded from the year-end assessment while integration continued.

Most important facts for investors to verify

• Whether Foundry & Logic growth, 5G-related demand and infrastructure spending remain durable after the pandemic-related demand effects.
• The sustainability of the 41.5% consolidated gross margin and the recovery of Systems segment margin, which declined significantly in 2020.
• Inventory quality and future write-down exposure, given the $13.1 million 2020 inventory provision and custom, demand-sensitive products.
• Revenue concentration and dependence on Intel and other large semiconductor customers.
• Potential effects of U.S.-China export controls, tariffs and customer preferences for local suppliers.
• Integration results and final purchase accounting for Baldwin Park and HPD, including the allocation of provisional goodwill and intangible assets.
• COVID-19, supplier, manufacturing, cybersecurity and international operating risks, including the consequences of any recurrence of facility disruptions.
• Future cash deployment among capital expenditures, acquisitions, debt repayment and the authorized but unused share repurchase program.