FormFactor, Inc. Fiscal 2019 Form 10-K Summary
Business Context and Reporting Period
FormFactor provides semiconductor test and measurement products, including probe cards, analytical probes, probe stations, metrology systems and thermal subsystems. The company operates through Probe Cards and Systems segments. The filing covers the 52-week fiscal year ended December 28, 2019, compared with fiscal years ended December 29, 2018 and December 30, 2017. The fourth quarter ended December 28, 2019 is also presented in unaudited quarterly data.
On October 9, 2019, FormFactor acquired FRT GmbH, a German surface-metrology company, for estimated consideration of $25.9 million, including $22.2 million of cash and $5.4 million of contingent consideration. FRT contributed approximately $3.9 million of fiscal 2019 revenue.
Key Financial Metrics
| Metric | Fiscal 2019 | Fiscal 2018 | Change |
|---|---|---|---|
| Revenue | $589.5 million | $529.7 million | Up 11.3% |
| Gross profit | $237.5 million | $210.3 million | Up 12.9% |
| Gross margin | 40.3% | 39.7% | Up 60 basis points |
| Operating income | $49.7 million | $36.1 million | Up 37.5% |
| Operating margin | 8.5% | 6.8% | Up 170 basis points |
| Net income | $39.3 million | $104.0 million | Down 62.2% |
| Diluted earnings per share | $0.51 | $1.38 | Down $0.87 |
| Operating cash flow | $121.0 million | $68.7 million | Up $52.3 million |
Fiscal 2019 net margin was 6.7%, compared with 19.7% in fiscal 2018. The prior-year result included a $75.8 million income-tax benefit from releasing valuation allowances on certain U.S. deferred tax assets. Fiscal 2019 included an $11.7 million tax provision and a 22.9% effective tax rate.
- Probe Cards revenue was $491.4 million, up from $434.3 million; Systems revenue was $98.1 million, up from $95.4 million.
- Foundry and Logic revenue increased 23.3% to $318.6 million, DRAM revenue increased 8.8% to $147.3 million, and Flash revenue decreased 36.9% to $25.6 million.
- Probe Cards gross margin was 43.0%, compared with 43.1%; Systems gross margin improved to 51.9% from 49.3%.
- Research and development expense increased 8.7% to $81.5 million; selling, general and administrative expense increased 7.1% to $106.3 million.
- Cash, cash equivalents and marketable securities totaled $220.9 million at year-end, compared with $149.0 million in the prior year. Working capital was $282.5 million.
- Total term loans were $58.5 million, including $42.8 million classified as current. The company expects the CMI term loan to be paid off in the third quarter of fiscal 2020 and began repayments on the $23.4 million FRT term loan in January 2020.
- Capital expenditures were $20.8 million. Cash used for the FRT acquisition was $20.5 million, net of cash acquired.
- Net inventories increased to $83.3 million, after a $10.4 million provision for excess and obsolete inventory.
Fourth-Quarter Results
| Metric | Q4 Fiscal 2019 | Q4 Fiscal 2018 |
|---|---|---|
| Revenue | $178.6 million | $140.9 million |
| Gross profit | $74.3 million | $56.0 million |
| Operating income | $23.7 million | $11.8 million |
| Net income | $18.6 million | $85.1 million |
| Diluted earnings per share | $0.24 | $1.13 |
The fourth-quarter fiscal 2018 net income included the $75.8 million tax benefit; therefore, year-over-year earnings comparisons are significantly distorted.
Material Changes, Outlook and Risks
- Growth in fiscal 2019 was led by Foundry and Logic demand, higher DRAM sales, new probe-card designs, node transitions, increased market share and applications such as 5G. Flash demand declined materially.
- The FRT acquisition expands the Systems segment into 3D hybrid surface metrology and adds goodwill of $10.1 million and identified intangible assets of $17.6 million. Purchase accounting remained preliminary at year-end.
- Management stated that existing cash, investments and operating cash flow should satisfy working-capital needs for at least the next twelve months. No formal revenue or earnings guidance is provided in the filing.
- Two customers represented 37% of fiscal 2019 revenue; Intel represented 25.3% and Samsung represented 11.5%. Customer concentration, order cancellations and semiconductor-industry cyclicality are material risks.
- International sales represented 74% of fiscal 2019 revenue, with South Korea, China, Taiwan and Japan collectively representing 61.4%. The company faces foreign-exchange, tariff, export-control, geopolitical and supply-chain risks.
- The filing identifies COVID-19, which was emerging at the filing date, as a potential risk to customer demand, manufacturing, suppliers and logistics, particularly in China. The ultimate impact was not determinable.
- Additional risks include competition and pricing pressure, rapid technology changes, reliance on sole- or limited-source suppliers, manufacturing yields, inventory obsolescence, intellectual-property claims, cybersecurity, earthquakes and other disruptions.
- No material legal proceedings were pending at year-end, no material environmental violations were reported, and management and the auditor concluded that internal control over financial reporting was effective. FRT’s controls were excluded from the year-end assessment while integration continued.
- The company pays no cash dividend and does not currently intend to initiate one. The share-repurchase program expired February 1, 2020; no shares were repurchased in fiscal 2019 or 2018.
Investor Verification Checklist
- Verify whether Foundry and Logic and DRAM demand remains durable and whether the sharp Flash decline reverses.
- Assess customer concentration, including the effect of Intel and Samsung purchasing decisions and any order reductions or deferrals.
- Review FRT integration, final purchase accounting, contingent consideration of up to €10.3 million and the acquisition’s contribution to Systems growth.
- Monitor inventory levels, the $10.4 million fiscal 2019 write-down and future demand assumptions for custom probe cards.
- Confirm the timing and financing impact of approximately $42.8 million of term-loan principal payments due in fiscal 2020.
- Evaluate the sustainability of the 22.9% fiscal 2019 effective tax rate and the $36.6 million remaining valuation allowance on deferred tax assets.
- Track COVID-19, tariff, export-control, foreign-exchange and supply-chain effects on international operations and customer demand.