FormFactor, Inc. 10-Q Summary
Business context and reporting period
FormFactor provides semiconductor test and measurement solutions, including probe cards, analytical probes, probe stations, metrology systems, and thermal subsystems. It reports two segments: Probe Cards and Systems. The filing covers the 13 weeks ended March 28, 2020, compared with the 13 weeks ended March 30, 2019. Results are unaudited and fiscal 2020 ends December 26, 2020.
Key financial metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Revenue | $160.8 million | $132.2 million | 21.6% increase |
| Gross profit | $67.4 million | $52.5 million | 28.3% increase |
| Gross margin | 41.9% | 39.7% | 2.2 percentage-point increase |
| Operating income | $18.4 million | $7.6 million | Increase |
| Operating margin | 11.5% | 5.8% | 5.7 percentage-point increase |
| Net income | $15.9 million | $5.5 million | Increase |
| Diluted EPS | $0.20 | $0.07 | Increase |
| Cash flow from operations | $39.3 million | $20.6 million | Increase |
- Probe Cards revenue was $134.7 million, up from $108.1 million. Systems revenue was $26.0 million, up from $24.1 million.
- Foundry and Logic revenue increased 47.7% to $105.7 million, while DRAM revenue declined 14.5% to $24.7 million and Flash revenue declined 44.0% to $4.3 million.
- Research and development expense increased 7.8% to $21.3 million; selling, general and administrative expense increased 10.0% to $27.7 million. Both expenses declined as a percentage of revenue.
- The effective tax rate was 15.1%, compared with 27.0%, primarily reflecting tax credits, the FDII deduction, and use of prior net operating loss carryforwards.
- Cash, cash equivalents, and marketable securities totaled approximately $239.4 million at March 28, 2020, compared with $220.9 million at December 28, 2019. Working capital was $308.8 million.
- Total debt was approximately $45.1 million, consisting principally of $23.7 million outstanding under the CMI Term Loan and $21.4 million under the FRT Term Loan. The company reported compliance with all debt covenants.
- Net cash used in investing activities was $5.4 million, including $12.1 million of capital expenditures. Net cash used in financing activities was $9.1 million, including $13.2 million of term-loan repayments.
- Operating lease liabilities totaled $40.8 million on a present-value basis, including $6.8 million current and $34.0 million long term.
Material changes versus the prior comparable period
- Revenue growth was driven primarily by increased Foundry and Logic demand from leading-edge semiconductor foundries and integrated device manufacturers, higher Probe Cards sales, and increased probe-station sales.
- DRAM and Flash revenue declined because of lower customer demand, with Flash remaining highly variable.
- Overall gross margin improved because of higher sales and factory utilization. Systems gross margin declined from 54.0% to 51.2% due primarily to product mix and the contribution of acquired FRT GmbH.
- Net income benefited from higher revenue, improved gross margin, lower interest expense from reduced debt, and a lower effective tax rate, partially offset by higher operating expenses.
- Cash flow from operations nearly doubled, while debt repayments increased compared with the prior-year quarter.
- The company completed its October 2019 acquisition of FRT GmbH, a German provider of 3D hybrid surface metrology equipment. Purchase accounting remained open, and contingent consideration was valued at $6.5 million at quarter-end.
Guidance, outlook, risks, and unusual items
- The filing does not provide a clear quantitative revenue or earnings forecast. Management stated that it may limit or refrain from providing financial guidance because of COVID-19 uncertainty.
- COVID-19 caused a temporary shutdown of certain California and Oregon manufacturing operations for nearly two weeks during the quarter. Manufacturing subsequently resumed with safety constraints, while other activities continued substantially on a work-from-home basis.
- Management identified continuing risks to manufacturing capacity, supply chains, workforce availability, customer demand, product delivery and support, productivity, and financial markets. The ultimate impact of the pandemic could not be quantified.
- Limited- and sole-source suppliers create additional exposure to pandemic-related shortages, delays, and quality issues.
- Increasing U.S. export controls, tariffs, and other trade barriers affecting China could restrict sales or require licenses that may not be obtained timely or at all.
- Customer concentration increased: Intel represented 36.2% of revenue versus 21.3% in the prior-year quarter. Samsung represented less than 10% in Q1 2020 versus 13.8% in Q1 2019.
- The company expects to meet working-capital needs and scheduled debt repayments for at least the next twelve months using existing liquidity and operating cash flow, but noted that an extended downturn could reduce cash and access to financing.
- There were no material legal proceedings, no goodwill impairments, and no material changes to contractual obligations other than disclosed lease commitments.
- Adoption of current expected credit loss and cloud-computing implementation-cost accounting standards had no material impact.
Important facts for investors to verify
- Whether COVID-19-related disruptions subsequently affected production, supply availability, customer demand, or full-year results more materially than reflected in Q1.
- The sustainability of Foundry and Logic growth and the recovery or continued weakness of DRAM and Flash demand.
- Customer concentration and dependence on Intel, major foundries, and limited- or sole-source suppliers.
- Future effects of U.S.-China export controls, tariffs, and required export licenses.
- Repayment timing and interest-rate exposure for the CMI and FRT term loans, including the scheduled final CMI Term Loan payment in Q3 2020.
- Final purchase accounting for FRT GmbH and the amount ultimately payable under its performance-based contingent consideration.
- Potential inventory write-downs, margin pressure, impairment charges, or liquidity effects if demand or factory utilization deteriorates.