FormFactor, Inc. 2019 Q2 SEC Filing Summary
Business Context and Reporting Period
FormFactor provides semiconductor test and measurement technologies, including probe cards, analytical probes, probe stations, and thermal subsystems. The company reports two segments: Probe Cards and Systems. This unaudited Form 10-Q covers the three and six months ended June 29, 2019, compared with the periods ended June 30, 2018. Fiscal 2019 ends December 28, 2019.
Financial Performance and Position
| Metric | Q2 2019 | Q2 2018 | Six Months 2019 | Six Months 2018 |
|---|---|---|---|---|
| Revenue | $138.0 million | $135.5 million | $270.2 million | $253.8 million |
| Gross profit | $55.4 million | $56.2 million | $107.9 million | $101.3 million |
| Gross margin | 40.1% | 41.5% | 39.9% | 39.9% |
| Operating income | $9.0 million | $11.3 million | $16.6 million | $14.9 million |
| Net income | $6.9 million | $9.1 million | $12.4 million | $11.2 million |
| Diluted EPS | $0.09 | $0.12 | $0.16 | $0.15 |
| Operating cash flow | Not separately provided | Not separately provided | $55.4 million | $30.1 million |
Q2 revenue increased 1.9% year over year, while six-month revenue increased 6.5%. Six-month net income rose 10.5%, despite a higher effective tax rate of 25.8% versus 14.7%. Q2 net margin was approximately 5.0%; six-month net margin was approximately 4.6%.
- Q2 segment revenue was $113.6 million for Probe Cards and $24.4 million for Systems. Probe Cards represented approximately 82% of total revenue.
- Six-month Probe Cards revenue increased 7.4% to $221.7 million, while Systems revenue increased 2.6% to $48.5 million.
- Six-month Foundry & Logic revenue increased 20.3% to $145.0 million. DRAM revenue declined 5.0% to $64.9 million, and Flash revenue declined 33.1% to $11.8 million.
- Cash, cash equivalents, and marketable securities totaled $176.9 million at June 29, 2019, compared with $149.0 million at December 29, 2018. Working capital was $244.8 million.
- Total debt was $46.2 million, consisting of $33.7 million current and $12.5 million long term. The company reported compliance with all credit agreement covenants.
- Capital expenditures were $11.5 million in the first six months, and financing cash outflows included $18.8 million of scheduled term-loan repayments.
- Total assets were $757.6 million and stockholders’ equity was $604.1 million at June 29, 2019.
Material Changes Versus the Prior Comparable Period
- Q2 gross profit decreased 1.5% and gross margin declined 140 basis points, primarily because of less favorable product mix. For the six-month period, gross profit increased 6.4% while gross margin was unchanged at 39.9%.
- Q2 operating income declined 20.5%, primarily reflecting lower gross profit and higher operating expenses. Six-month operating income increased 11.1%.
- Research and development expense increased 2.0% in Q2 and 5.5% for the first six months, primarily from compensation, benefits, stock-based compensation, and depreciation.
- Selling, general and administrative expense increased 4.2% in Q2 and 5.7% for the first six months, primarily due to higher stock-based compensation and compensation costs.
- Interest expense declined to $1.1 million for the first six months from $1.9 million, reflecting lower debt balances, partly offset by higher interest rates.
- Operating cash flow increased by $25.3 million, aided by a $24.2 million reduction in accounts receivable. Inventory increased $6.1 million, while accounts payable decreased $13.8 million.
- The company adopted the new lease accounting standard on December 30, 2018, recognizing $33.3 million of operating lease right-of-use assets and $37.4 million of operating lease liabilities at June 29, 2019. Comparative periods were not restated.
- Customer concentration increased: Intel represented 26.1% of Q2 revenue and 23.8% of six-month revenue, compared with 15.1% and 14.6%, respectively, in the prior-year periods. Samsung and Micron also each exceeded 10% of Q2 revenue.
Guidance, Outlook, Commentary, Risks, and Unusual Items
The filing does not provide a specific quantitative revenue or earnings forecast. Management stated that existing cash, marketable securities, and expected operating cash flow should satisfy working-capital needs and scheduled term-loan repayments for at least the next twelve months.
- Management attributed growth to higher Foundry & Logic demand, increased factory utilization, and stronger Systems sales, including a new 200mm platform.
- DRAM and Flash declines reflected lower customer demand. Management cautioned that future gross margins could be pressured by lower revenue, unfavorable mix, lower factory utilization, material costs, and additional inventory write-downs.
- Restructuring charges were $0.4 million in the first six months, related to employee termination benefits, asset abandonment, and inventory write-downs.
- Inventory provision expense was $5.3 million in the first six months, compared with $4.6 million in the prior-year period.
- Remaining performance obligations were $3.8 million at quarter-end; approximately 71% was expected to be recognized during the remainder of fiscal 2019.
- Key risks include semiconductor industry cyclicality, customer concentration, changes in customer demand and manufacturing strategies, product mix, sole-source suppliers, foreign-currency exposure, interest-rate exposure, inventory obsolescence, execution risk, and dependence on maintaining adequate liquidity.
- The company had no material legal proceedings, no material changes to previously disclosed risk factors, and no off-balance-sheet arrangements.
Important Facts for Investors to Verify
- Whether Foundry & Logic growth and elevated Intel concentration are sustainable, and whether DRAM and Flash demand recovers.
- Quarterly gross-margin trends, particularly the effects of product mix, factory utilization, pricing, and inventory provisions.
- Accounts receivable collection timing and inventory levels, which were significant drivers of first-half operating cash flow.
- The schedule and terms of the remaining $46.3 million term loan, including interest-rate and covenant exposure.
- The impact of operating lease obligations, with $45.7 million of future minimum payments disclosed at June 29, 2019.
- Future restructuring costs, stock-based compensation, and the $6.0 million remaining authorization under the share repurchase program.