FormFactor, Inc. Fiscal 2016 10-K Summary
Business context and reporting period
FormFactor provides semiconductor test and measurement solutions, including probe cards, analytical probes, probe stations, thermal subsystems and reliability test systems. The filing covers the 53-week fiscal year ended December 31, 2016, compared with the 52-week fiscal year ended December 26, 2015.
FormFactor acquired Cascade Microtech on June 24, 2016. Fiscal 2016 results include Cascade’s operating results only for the third and fourth quarters, while the year-end balance sheet includes Cascade’s assets and liabilities. Accordingly, full-year comparisons are not directly comparable.
Financial performance and liquidity
| Metric | Fiscal 2016 | Fiscal 2015 |
|---|---|---|
| Revenue | $383.9 million | $282.4 million |
| Gross profit | $102.7 million | $85.7 million |
| Gross margin | 26.7% | 30.4% |
| Operating loss | $47.9 million | $4.1 million |
| Net loss | $6.6 million | $1.5 million |
| Net loss per share | $0.10 | $0.03 |
| Cash flow from operations | $17.4 million | $36.1 million |
Revenue increased 36.0%, primarily from the Cascade acquisition and stronger Foundry & Logic demand. Probe Cards revenue was $338.0 million and Systems revenue was $45.9 million. Foundry & Logic revenue rose to $237.6 million, while DRAM revenue declined to $86.9 million; Flash revenue increased to $13.5 million.
Operating expenses increased substantially, including research and development of $57.5 million, selling, general and administrative expense of $73.4 million, and restructuring and impairment charges of $19.7 million. The company recorded $45.5 million of acquisition-related amortization, $7.5 million of acquisition and integration costs, and $19.7 million of restructuring and impairment charges.
Cash, cash equivalents and marketable securities totaled $108.9 million at year-end, down from $187.6 million. Working capital was $172.0 million, compared with $214.4 million. Operating cash flow was positive but declined year over year, partly due to inventory investment and higher accounts receivable.
Capital expenditures were $11.5 million. Investing cash flow was negative $206.3 million, mainly due to the $228.0 million net cash consideration paid for Cascade Microtech. Financing cash flow was positive $143.6 million, including $150.0 million of term-loan proceeds.
Material changes versus the prior comparable period
- Revenue rose $101.5 million, or 36.0%, but gross margin declined 370 basis points to 26.7%.
- The company transitioned from one reportable segment to Probe Cards and Systems following the Cascade acquisition.
- Debt increased from none reported at year-end 2015 to $138.2 million net of issuance costs, consisting of a senior secured term loan.
- Goodwill increased to $188.0 million from $30.7 million, and net intangible assets increased to $126.6 million from $25.6 million, primarily due to the acquisition.
- Accounts receivable increased to $70.2 million from $36.7 million, and inventories increased to $59.8 million from $27.2 million. Days sales outstanding increased to 58 days from 45 days.
- Customer concentration changed materially: Intel represented 30.1% of fiscal 2016 revenue, versus 19.6% in fiscal 2015; customers exceeding 10% of revenue represented 30.1% versus 60.2%.
Guidance, outlook, risks and unusual items
The filing does not provide specific fiscal 2017 revenue, margin or earnings guidance. Management states that existing cash, cash equivalents and marketable securities should satisfy working-capital requirements for at least the next twelve months, but cautions that liquidity could decline if revenue weakens or costs cannot be reduced during a semiconductor downturn.
The acquisition was financed with cash, stock and a $150.0 million senior secured term loan. Year-end debt was $139.4 million before issuance costs. The facility includes leverage and fixed-charge coverage covenants, restrictions on additional debt, liens, dividends, investments and asset dispositions; the company reported compliance at December 31, 2016. An interest-rate swap hedges the term loan’s LIBOR exposure.
Unusual fiscal 2016 items included a $43.6 million income-tax benefit, primarily from releasing deferred-tax-asset valuation allowances following the Cascade acquisition; a $12.4 million impairment of acquired in-process research and development after a customer abandoned the related project; $7.3 million of restructuring charges; $10.0 million of acquired-inventory step-up amortization; and $6.5 million of acquisition transaction costs.
Principal risks include semiconductor cyclicality, customer concentration, dependence on probe-card sales, pricing pressure and competition, manufacturing yields and product qualification, limited-source suppliers, international operations and foreign exchange, acquisition integration, goodwill and intangible-asset impairment, debt covenant compliance, intellectual-property claims, cybersecurity, and natural disasters.
Pending matters include a proposed settlement of a Cascade shareholder class action subject to final court approval and a proposed $1.5 million settlement of a California wage-and-hour class action, which was accrued at year-end. The company also reported approximately $18.0 million of unrecognized tax benefits and $225.5 million of contractual payments for leases, purchase obligations and term-loan principal and interest.
Important facts for investors to verify
- Assess the sustainability of revenue growth excluding the partial-year Cascade contribution and quantify the combined company’s organic growth.
- Review whether gross margins can recover from 26.7% as acquisition amortization, factory utilization and product mix normalize.
- Evaluate debt repayment capacity, covenant headroom and the effect of interest expense despite the interest-rate swap.
- Examine customer concentration, particularly Intel’s 30.1% revenue contribution and the related accounts-receivable exposure.
- Reconcile the reported net loss with the $43.6 million tax benefit and other acquisition-related, restructuring and impairment items.
- Monitor integration progress, final purchase-price accounting, goodwill impairment sensitivity and remaining intangible amortization of $126.6 million.
- Verify the status and ultimate cost of the disclosed shareholder and wage-and-hour legal settlements.