FormFactor, Inc. 2018 Q1 10-Q Summary
Business context and reporting period
FormFactor provides semiconductor test and measurement solutions, including probe cards, analytical probes, probe stations, and thermal subsystems. The company operates through Probe Cards and Systems segments. This unaudited report covers the 13 weeks ended March 31, 2018, compared with the 13 weeks ended April 1, 2017.
Key financial metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Revenue | $118.3 million | $128.8 million | Down 8.2% |
| Gross profit | $45.1 million | $47.6 million | Down 5.1% |
| Gross margin | 38.2% | 36.9% | Up 130 basis points |
| Operating income | $3.6 million | $7.1 million | Down 48.5% |
| Operating margin | 3.1% | 5.5% | Down 240 basis points |
| Net income | $2.1 million | $5.2 million | Down 59.0% |
| Diluted earnings per share | $0.03 | $0.07 | Down $0.04 |
| Operating cash flow | $9.3 million | $17.8 million | Down $8.5 million |
Probe Cards revenue was $94.9 million, down from $106.5 million, primarily because of lower Foundry and Logic demand. Systems revenue increased to $23.4 million from $22.3 million, driven by higher thermal-subsystem demand. Foundry and Logic revenue declined 21.4%, while DRAM revenue increased 4.5% and Flash revenue increased 92.7%.
Cash, cash equivalents, and marketable securities totaled approximately $142.1 million at March 31, 2018. Including restricted cash, cash, cash equivalents, and restricted cash totaled $95.4 million. Working capital was $215.2 million. Total assets were $646.2 million and stockholders' equity was $471.0 million.
The term loan had a reported balance of $97.5 million and an interest rate of 3.65% at quarter-end. The company made $8.8 million of principal repayments during the quarter, including a $5.0 million voluntary prepayment, and remained in compliance with its debt covenants. The company stated that existing liquidity and operating cash flow should satisfy working-capital needs for at least the next 12 months.
Material changes versus the prior comparable period
- Revenue declined $10.5 million, primarily due to lower Probe Cards sales and weaker Foundry and Logic demand from one major customer.
- Gross margin improved to 38.2% from 36.9%, reflecting favorable product mix, lower intangible amortization, and lower inventory reserves, partly offset by lower factory utilization.
- Research and development expense increased 3.6% to $18.0 million, and selling, general and administrative expense increased 2.7% to $23.4 million. Higher project costs, integration costs, and consulting fees contributed to the increases.
- Operating margin and net income declined despite the gross-margin improvement because of lower revenue and higher operating expenses.
- Operating cash flow fell to $9.3 million from $17.8 million. Inventory increased $5.9 million to $73.8 million, partly due to a build for anticipated future revenue growth.
- There were no restructuring charges in Q1 2018, compared with $0.3 million in Q1 2017.
- The company adopted ASC 606 using the modified retrospective method and reported no material adoption impact. It also adopted updated restricted-cash and derivative-accounting guidance; reported impacts were immaterial or primarily presentation-related.
- No shares were repurchased during the quarter. Approximately $6.0 million remained available under the repurchase authorization.
Guidance, outlook, commentary, risks, and unusual items
The filing does not provide specific quarterly or annual revenue, earnings, or margin guidance. Management indicated that future gross margins could be adversely affected by lower revenue, lower factory utilization, product mix, material costs, and additional inventory write-downs.
- Customer concentration remained significant: Intel represented 14.0% of Q1 revenue, SK Hynix 10.1%, and customers representing at least 10% individually accounted for 24.1% in aggregate.
- The company relies on a limited number of suppliers for key components and materials, including some sole-source suppliers.
- Foreign exchange exposure is managed with forward contracts. Outstanding foreign-exchange contract notional value was $26.7 million, and the contracts were scheduled to mature in Q2 2018.
- Interest-rate exposure remains relevant because the term loan bears interest based on LIBOR or the applicable base rate, partly mitigated by interest-rate swaps.
- Goodwill was $190.4 million and no goodwill impairment was recorded. Net intangible assets were $90.6 million, with estimated future amortization of $21.6 million for the remainder of 2018.
- Contractual commitments were not materially changed from the 2017 Form 10-K, and the company reported no material legal proceedings or off-balance-sheet arrangements.
- Management reported effective disclosure controls and no material changes to the risk factors previously disclosed in the 2017 Form 10-K.
Important facts for investors to verify
- Whether Foundry and Logic demand, particularly from the major customer cited by management, recovers or remains a drag on Probe Cards revenue.
- Whether higher DRAM, Flash, and Systems demand offsets weakness in Foundry and Logic markets.
- Inventory growth, inventory reserves, factory utilization, and their effects on future gross margins and cash flow.
- The pace of term-loan repayments, future interest costs, and compliance with debt covenants.
- Customer and supplier concentration, foreign-exchange movements, and exposure to sole-source components.
- The company’s execution of its integration activities and the potential for additional consulting, restructuring, or impairment costs.
- The impact of future lease-accounting adoption and whether the company’s liquidity outlook changes with operating performance.