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. The filing covers the unaudited quarter and six months ended June 26, 2021, compared with the periods ended June 27, 2020. Fiscal 2021 contains 52 weeks and ends December 25, 2021.
The company operates through Probe Cards and Systems segments. Results include contributions from the Baldwin Park probe-card asset acquisition and the High Precision Devices acquisition, both completed in fiscal 2020.
Financial Highlights
| Metric | Q2 2021 | Q2 2020 | Six Months 2021 | Six Months 2020 |
|---|---|---|---|---|
| Revenue | $188.1 million | $157.8 million | $374.7 million | $318.6 million |
| Gross profit | $76.3 million | $66.2 million | $153.0 million | $133.6 million |
| Gross margin | 40.6% | 41.9% | 40.8% | 41.9% |
| Operating income | $20.4 million | $22.5 million | $43.0 million | $40.9 million |
| Net income | $17.9 million | $20.5 million | $37.5 million | $36.4 million |
| Diluted EPS | $0.23 | $0.26 | $0.47 | $0.46 |
- Q2 revenue increased 19.2%; six-month revenue increased 17.6%.
- Probe Cards revenue was $153.6 million in Q2 and $312.5 million for the first six months. Systems revenue was $34.4 million in Q2 and $62.2 million for the first six months.
- Q2 operating expenses increased to $55.9 million from $43.7 million, including research and development of $25.5 million and selling, general and administrative expense of $30.5 million.
- The six-month effective tax rate was 12.8%, compared with 12.0% in the prior-year period.
- Six-month stock-based compensation expense was $13.7 million, compared with $11.3 million in the prior-year period.
Cash Flow, Debt and Liquidity
- Six-month operating cash flow was $66.2 million, down from $82.4 million in the prior-year period.
- Investing cash use was $59.8 million, including $31.3 million of capital expenditures and $28.5 million of net purchases of marketable securities.
- Financing cash use was $31.9 million, including $24.0 million of share repurchases, $4.7 million of term-loan principal repayments, $5.3 million of equity-award tax withholdings and $3.9 million paid for contingent consideration.
- Cash, cash equivalents and restricted cash declined to $164.0 million from $191.1 million at fiscal year-end. Cash and cash equivalents were $160.3 million, and marketable securities were $96.0 million.
- Working capital was $343.6 million at June 26, 2021, compared with $332.5 million at December 26, 2020. Management stated that existing liquidity and operating cash flow should satisfy working-capital needs and scheduled debt repayments for at least the next twelve months.
- Total term loans were approximately $29.5 million: $12.5 million under the FRT Term Loan and $17.0 million under the Building Term Loan. The Building Term Loan is hedged through an interest-rate swap.
Material Changes Versus the Prior Comparable Period
- Revenue growth was led by DRAM probe-card revenue, which increased 120.9% in Q2 and 73.7% for the six-month period, and by Systems revenue, which increased 43.2% in Q2 and 24.2% year to date.
- Flash revenue increased 45.3% in Q2 and 101.0% for the six-month period, partly due to the Baldwin Park acquisition.
- Foundry and Logic revenue decreased 5.1% in Q2 because of lower demand from one major customer, but increased 1.0% for the six-month period.
- Gross margin declined because of a less favorable Probe Cards mix, with a lower proportion of higher-margin Foundry and Logic sales, a greater proportion of DRAM sales and higher material costs. Systems gross margin improved to 49.1% due primarily to product mix.
- Operating income declined 9.5% in Q2 despite higher revenue, reflecting increased operating expenses and lower gross margin. Six-month operating income increased 5.1%.
- R&D and SG&A increased primarily because of acquisition-related headcount and operating costs, salary increases and higher stock-based compensation. SG&A also reflected the absence of a prior-year benefit related to FRT contingent consideration.
- Inventories increased to $111.9 million from $99.2 million, reflecting anticipated customer demand; the company recorded $6.9 million of excess and obsolete inventory provisions during the first six months.
- The company repurchased 620,200 shares for $24.0 million during the first six months, with $26.0 million remaining under the authorized $50.0 million program at June 26, 2021.
Guidance, Outlook, Risks and Unusual Items
- The filing does not provide specific quarterly or full-year revenue, earnings or margin guidance.
- Management stated that manufacturing sites continued operating at production levels comparable to pre-pandemic levels, subject to safety constraints, and that COVID-19-related operational, supply-chain and customer-demand disruptions had been limited to date.
- COVID-19 remains a sustained risk that could cause facility shutdowns, manufacturing and supply-chain delays, reduced productivity, weaker customer demand and reduced liquidity.
- Other key risks include semiconductor-industry cyclicality, customer concentration, reliance on certain suppliers including sole-source suppliers, foreign exchange and interest-rate exposure, export controls and trade barriers, acquisitions, product quality and warranty obligations, and changing product mix.
- Intel represented 16.2% of Q2 revenue and 22.1% of six-month revenue. Samsung represented 14.7% of Q2 revenue, and Taiwan Semiconductor Manufacturing represented 11.0% of Q2 revenue and 11.2% of six-month revenue.
- Remaining performance obligations were $10.7 million at quarter-end; approximately 41.2% is expected to be recognized during the remainder of fiscal 2021, 43.6% in fiscal 2022 and 15.2% thereafter.
- The HPD purchase-accounting allocation remained open at quarter-end pending finalization of certain deferred tax items. No goodwill impairments were recorded during the first six months.
- No material legal proceedings, material changes in contractual obligations or off-balance-sheet arrangements were reported. Management concluded that disclosure controls were effective and that no material changes occurred in internal control over financial reporting.
Important Facts for Investors to Verify
- Whether DRAM and Flash growth can offset weaker or variable Foundry and Logic demand and sustain the current revenue mix.
- Whether lower Probe Cards gross margins, higher materials costs and elevated inventory provisions persist.
- The effect of customer concentration and any further changes in demand from Intel, Samsung and TSMC.
- Progress on integrating Baldwin Park and HPD and the ultimate impact of their acquisition-related amortization, expenses and goodwill.
- Cash conversion, capital-expenditure requirements, inventory levels and the pace of remaining share repurchases.
- Exposure to COVID-19 developments, supply-chain constraints, export restrictions, foreign exchange movements and interest-rate changes.