FormFactor, Inc. 10-Q 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. Operations are reported through the Probe Cards and Systems segments. This unaudited filing covers the three and nine months ended September 25, 2021, compared with September 26, 2020. Fiscal 2021 ends December 25, 2021.
Financial performance and key metrics
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Revenue | $190.0 million | $178.0 million | $564.7 million | $496.6 million |
| Gross profit | $80.2 million | $76.7 million | $233.2 million | $210.3 million |
| Gross margin | 42.2% | 43.1% | 41.3% | 42.4% |
| Operating income | $23.3 million | $22.0 million | $66.2 million | $63.0 million |
| Net income | $20.5 million | $22.9 million | $58.0 million | $59.3 million |
| Diluted EPS | $0.26 | $0.29 | $0.73 | $0.75 |
| Net margin | 10.8% | 12.8% | 10.3% | 12.0% |
| Operating cash flow | Not separately provided | Not separately provided | $100.4 million | $124.2 million |
Q3 revenue increased 6.7% year over year, while nine-month revenue increased 13.7%. Nine-month revenue growth was led by DRAM probe cards, which increased 54.1%, Systems revenue, which increased 25.9%, and Flash probe cards, which increased 44.4%. Foundry and Logic revenue declined 0.5% for the nine-month period.
Research and development expense increased 13.8% in Q3 and 16.1% for nine months, primarily due to acquisitions, higher headcount, compensation, stock-based compensation, and restructuring costs. Nine-month selling, general and administrative expense increased 11.1%, while Q3 SG&A declined 2.8% due partly to lower information-technology security remediation costs.
The effective tax rate was 12.0% in Q3 and 12.5% for nine months, compared with a Q3 tax benefit of 2.2% and a nine-month rate of 7.0% in the prior year. The prior-year period benefited from significant one-time tax adjustments.
Liquidity, cash flow, debt, and balance sheet
- Cash and cash equivalents were $153.8 million at September 25, 2021, compared with $187.2 million at December 26, 2020.
- Marketable securities increased to $110.9 million from $67.8 million. Cash, cash equivalents, and marketable securities totaled approximately $264.7 million, compared with $255.0 million at year-end.
- Working capital was $346.5 million, compared with $332.5 million at December 26, 2020.
- Total debt was approximately $27.0 million, consisting of a $10.3 million FRT Term Loan and a $16.8 million Building Term Loan. The company made $7.0 million of principal repayments during the first nine months.
- Net cash used in investing activities was $95.0 million, including $51.4 million of capital expenditures and $43.6 million of net purchases of marketable securities.
- Net cash used in financing activities was $36.9 million, including $24.0 million of share repurchases, $12.6 million of tax withholding on equity awards, debt repayments, and a $3.9 million contingent-consideration payment.
- Inventory increased to $115.1 million from $99.2 million, reflecting anticipated customer demand; the company recorded $11.6 million of excess and obsolete inventory provisions.
- Management stated that existing liquidity and operating cash flow should satisfy working-capital needs and scheduled term-loan repayments for at least the next twelve months.
Material changes versus the prior comparable period
- Revenue increased, but gross margin declined by 0.9 percentage points in Q3 and 1.1 percentage points for nine months, primarily due to higher material costs and product mix.
- Net income decreased 10.5% in Q3 and 2.1% for nine months, despite higher revenue and operating income, primarily because of higher tax expense and lower margins.
- Systems revenue benefited from the High Precision Devices acquisition and increased sales of thermal and metrology systems.
- DRAM demand strengthened, while Foundry and Logic demand declined due to lower purchases from certain major customers.
- Property, plant and equipment increased to $140.1 million from $104.1 million, including higher construction in progress.
- The company repurchased 620,200 shares for $24.0 million; $26.0 million remained available under the $50.0 million authorization.
- Goodwill increased slightly to $213.3 million. No goodwill impairments were recorded during the nine months.
Guidance, outlook, risks, contingencies, and unusual items
The filing does not provide a specific quarterly or full-year revenue or earnings guidance range. Management expects to recognize approximately 27.9% of the $10.0 million of remaining performance obligations in the remainder of fiscal 2021, 55.8% in fiscal 2022, and 16.3% thereafter.
On September 25, 2021, the company adopted restructuring plans to consolidate or relocate manufacturing facilities and adjust capacity. Expected aggregate restructuring and other charges are approximately $8.0 million to $10.5 million, with completion largely expected by the end of December 2022, except for certain facility charges. The company recorded $5.3 million of restructuring charges during the first nine months and had a $3.7 million accrual at quarter-end.
COVID-19 disruptions had been somewhat limited at the filing date, and manufacturing sites were operating at production levels comparable to pre-pandemic levels, subject to safety constraints. Management identified continuing risks from COVID-19, supply-chain disruptions, export controls and trade barriers, customer concentration, semiconductor-market cyclicality, material costs, foreign exchange, acquisitions, and reliance on certain suppliers, including sole-source suppliers.
Customer concentration remained significant: Intel represented 20.8% of Q3 revenue and 21.7% of nine-month revenue; Samsung represented 12.9% and 10.5%, respectively. One customer represented 19.3% of gross accounts receivable at September 25, 2021. The filing states that there were no material legal proceedings and no material changes to the risk factors disclosed in the 2020 Form 10-K.
Important facts for investors to verify
- Whether restructuring costs remain within the estimated $8.0 million to $10.5 million range and whether facility consolidation affects capacity or margins.
- Whether higher material costs and product mix continue to pressure gross margins.
- The sustainability of DRAM and Systems growth and the recovery or further deterioration of Foundry and Logic demand.
- Exposure to major customers, particularly Intel and Samsung, and the concentration of accounts receivable.
- Inventory levels, excess and obsolete inventory provisions, and conversion of operating cash flow into free cash flow after capital expenditures.
- COVID-19, supply-chain, export-control, and geopolitical developments affecting production and customer demand.
- Future tax rates, given the comparison against significant one-time tax benefits recognized in 2020.
- Execution and financial effects of the Baldwin Park and High Precision Devices acquisitions.