Business Context and Reporting Period
FormFactor, Inc. provides semiconductor test and measurement solutions, including probe cards, analytical probes, probe stations, metrology systems and thermal subsystems. The company reports two segments: Probe Cards and Systems. This unaudited Form 10-Q covers the three and six months ended June 27, 2020, compared with the corresponding periods ended June 29, 2019.
Key Financial Metrics
| Metric | Q2 2020 | Q2 2019 | Six Months 2020 | Six Months 2019 |
|---|---|---|---|---|
| Revenue | $157.8 million | $138.0 million | $318.6 million | $270.2 million |
| Gross profit | $66.2 million | $55.4 million | $133.6 million | $107.9 million |
| Gross margin | 41.9% | 40.1% | 41.9% | 39.9% |
| Operating income | $22.5 million | $9.0 million | $40.9 million | $16.6 million |
| Net income | $20.5 million | $6.9 million | $36.4 million | $12.4 million |
| Diluted EPS | $0.26 | $0.09 | $0.46 | $0.16 |
| Net margin | 12.9% | 5.0% | 11.4% | 4.6% |
- Q2 revenue increased 14.4% year over year; six-month revenue increased 17.9%.
- Q2 operating margin was 14.2%, compared with 6.5% in the prior-year quarter. Six-month operating margin was 12.9%, compared with 6.1%.
- Six-month revenue was led by Probe Cards revenue of $268.5 million, up 21.1%, while Systems revenue was $50.1 million, up 3.3%.
- Foundry and Logic revenue increased 48.9% in Q2 and 48.3% for the six-month period. DRAM revenue declined 47.1% in Q2 and 32.6% for the six-month period; Flash revenue increased 29.7% in Q2 but declined 18.1% year to date.
- Six-month research and development expense increased 6.0% to $42.2 million, while selling, general and administrative expense declined 2.0% to $50.4 million.
- The effective tax rate was 9.6% in Q2 and 12.0% for the six months, versus 24.8% and 25.8%, respectively, in the prior-year periods.
Cash Flow, Liquidity and Debt
- Six-month cash provided by operating activities was $82.4 million, compared with $55.4 million in the prior-year period.
- Investing cash outflow was $21.0 million, including $36.7 million of capital expenditures. Capital expenditures included $24.0 million for a building adjacent to the company’s Livermore facilities.
- Financing cash outflow was $7.3 million, reflecting $26.3 million of term-loan repayments, partially offset by $18.0 million of new building-loan proceeds and $4.9 million from employee stock and option issuances.
- Cash, cash equivalents and restricted cash totaled $202.7 million at June 27, 2020. Cash, cash equivalents and marketable securities totaled approximately $261.1 million, compared with $220.9 million at December 28, 2019.
- Working capital was $332.2 million at June 27, 2020, compared with $282.5 million at year-end 2019. Management stated that existing liquidity and operating cash flow should fund working capital and scheduled debt repayments for at least the next twelve months.
- Term loans totaled $50.1 million, net of issuance costs, at quarter-end. The company subsequently fully repaid the $12.5 million CMI Term Loan on June 30, 2020. Remaining debt included the $19.6 million FRT acquisition loan and the $18.0 million building loan.
Material Changes and Unusual Items
- Profitability improved substantially because of higher revenue, increased factory utilization, operating expense leverage and a more favorable product mix in Probe Cards.
- SG&A included a $3.7 million gain from remeasurement of contingent consideration related to the FRT GmbH acquisition. This gain reduced the year-over-year SG&A comparison and is a non-recurring or potentially non-comparable item.
- Systems gross margin declined to 44.6% in Q2 and 48.0% for the six months, compared with 52.0% and 53.0%, respectively, primarily because of lower sales and less favorable product mix.
- FormFactor acquired FRT GmbH in October 2019 for consideration of approximately $26.9 million, net of cash acquired, expanding its metrology capabilities. Purchase accounting remained subject to finalization at quarter-end.
- On July 30, 2020, after the reporting date, the company acquired probe-card assets from Advantest Corporation for $35.0 million. The company stated that the acquisition was not expected to be material to consolidated operations or financial position, although the initial purchase allocation was incomplete.
Guidance, Outlook and Risks
The filing does not provide a clear quantitative revenue or earnings outlook. Management stated that it may limit or refrain from providing financial guidance because of uncertainty surrounding COVID-19.
- COVID-19 caused temporary manufacturing shutdowns of nearly two weeks in the first quarter. Manufacturing resumed and was operating at levels comparable to pre-pandemic levels in Q2, subject to safety constraints, but further outbreaks, restrictions, supply-chain disruption or customer-site access limitations could adversely affect operations and demand.
- The company relies on certain sole-source or limited-source suppliers. Disruptions could cause material shortages, delays or quality issues.
- Customer concentration is significant: Intel represented 36.1% of Q2 revenue and 36.2% of six-month revenue. Samsung represented 11.1% of Q2 revenue, and Micron represented 10.1% of Q2 revenue.
- Increasing U.S. export controls, tariffs and other trade barriers involving China may restrict sales or require licenses that may not be obtained timely or at all.
- 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 remediation risks remain.
- Debt agreements contain customary covenants; the company reported compliance with all covenants at June 27, 2020. Interest-rate and foreign-exchange exposure is managed through derivatives, including a swap fixing the building-loan rate at 2.75%.
Investor Verification Items
- Verify whether Probe Cards demand, particularly Foundry and Logic demand, remained durable after the quarter and whether DRAM weakness persisted.
- Assess the continuing effects of COVID-19 on manufacturing capacity, suppliers, customer demand and the company’s ability to provide guidance.
- Review customer concentration and exposure to Intel, Samsung, Micron, China and other Asian markets.
- Reconcile reported operating improvement for the $3.7 million contingent-consideration gain and assess normalized SG&A.
- Monitor debt repayment, interest-rate exposure, capital expenditures and the financial impact of the July 2020 Advantest asset acquisition.
- Review subsequent disclosures regarding the June 2020 cybersecurity incident and any effects from export-control changes.