FormFactor, Inc. 10-Q 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 quarter and nine months ended September 30, 2017, compared primarily with the periods ended September 24, 2016. Results include Cascade Microtech, acquired June 24, 2016, making year-over-year comparisons less directly comparable.
The company reports two segments: Probe Cards and Systems. Intel represented 30.6% of third-quarter revenue and 27.4% of nine-month revenue. One customer represented 35.7% of gross accounts receivable at September 30, 2017.
Financial Performance and Key Metrics
| Metric | Three Months Ended September 30, 2017 | Three Months Ended September 24, 2016 | Nine Months Ended September 30, 2017 | Nine Months Ended September 24, 2016 |
|---|---|---|---|---|
| Revenue | $143.7 million | $123.3 million | $416.5 million | $260.0 million |
| Gross profit | $57.6 million | $27.2 million | $167.0 million | $62.4 million |
| Gross margin | 40.1% | 22.1% | 40.1% | 24.0% |
| Operating income (loss) | $14.3 million | $(13.2) million | $40.9 million | $(33.4) million |
| Net income (loss) | $12.6 million | $(14.2) million | $35.3 million | $8.9 million |
| Diluted EPS | $0.17 | $(0.20) | $0.48 | $0.14 |
- Third-quarter revenue increased 16.6% year over year; nine-month revenue increased 60.2%.
- Probe Cards revenue was $119.4 million in the third quarter and $347.6 million for the nine months. Systems revenue was $24.3 million and $69.0 million, respectively.
- Third-quarter operating expenses were $43.4 million, including $19.3 million of research and development, $24.0 million of selling, general and administrative expense, and $0.02 million of restructuring charges.
- Cash provided by operating activities was $59.9 million for the first nine months, versus $2.5 million in the prior-year period.
- Capital expenditures were $13.9 million for the first nine months. Net cash used in investing activities was $37.8 million.
- Cash and cash equivalents were $103.1 million, and marketable securities were $31.8 million, at September 30, 2017. Total cash, cash equivalents and marketable securities were approximately $134.9 million.
- Working capital was $209.5 million, compared with $172.0 million at December 31, 2016.
- Total term-loan debt was $114.3 million on the balance sheet, consisting of $22.2 million current and $92.1 million long term. Management reported an outstanding balance of approximately $115.0 million and compliance with all loan covenants.
- The effective tax rate was 7.6% for the quarter and 6.4% for the nine months. The company continues to maintain a full valuation allowance against its U.S. federal and state deferred tax assets.
Material Changes Versus the Prior Comparable Period
- Revenue growth reflected strong demand for Foundry & Logic and DRAM products, increased Systems sales, and the inclusion of Cascade Microtech operations. Nine-month Systems revenue increased 234.4% year over year, partly because the prior-year period included only approximately three months of acquired operations.
- Foundry & Logic revenue increased 9.1% in the quarter and 44.8% year to date; DRAM revenue increased 45.3% and 47.8%, respectively. Flash revenue declined 2.4% in the quarter but increased 31.9% year to date.
- Gross margin improved substantially due to favorable product mix, higher factory utilization and improved manufacturing efficiency. The prior-year periods were adversely affected by acquisition-related backlog and inventory step-up amortization.
- Operating results improved from a third-quarter operating loss of $13.2 million to operating income of $14.3 million. Nine-month operating results improved from a $33.4 million loss to $40.9 million of income.
- Restructuring charges declined to $0.3 million for the first nine months from $7.0 million, primarily reflecting completion of Cascade Microtech integration activities. The remaining restructuring accrual was $0.02 million at September 30, 2017.
- Net income comparisons are affected by the $43.7 million tax benefit recognized in the first nine months of 2016 from releasing a valuation allowance after the Cascade Microtech acquisition.
- The company repurchased and retired 867,620 shares for $11.0 million during the first nine months. Approximately $14.0 million remained available under the $25.0 million authorization.
Outlook, Risks, Contingencies and Unusual Items
- Management stated that existing cash, cash equivalents and marketable securities should satisfy working-capital requirements for at least the next twelve months. Future capital needs could vary, and additional debt or equity financing may be considered but may not be available on favorable terms.
- Future gross margins could be adversely affected by lower revenue, reduced factory utilization, unfavorable product mix, material costs, foreign-exchange movements or additional inventory write-downs.
- The company relies on a narrow customer base and certain sole-source suppliers. Customer concentration, semiconductor industry demand, technology transitions and shipment timing are significant operating risks.
- The term loan bears interest at one-month LIBOR plus 2.00%, is subject to quarterly amortization and is secured by substantially all assets of the company and its domestic subsidiaries. Interest-rate swaps hedge portions of the exposure.
- Foreign-exchange forward contracts had aggregate U.S.-dollar notional value of $28.3 million at September 30, 2017 and were scheduled to mature in the fourth quarter of fiscal 2017.
- A former-employee wage-and-hour class action was settled for $1.5 million, which had been paid to the settlement administrator as of September 30, 2017.
- No material changes were reported to the risk factors in the 2016 Form 10-K, and no material off-balance-sheet arrangements were identified.
- Revenue recognition guidance under ASC 606 was scheduled for adoption at the beginning of fiscal 2018. Management was still evaluating the impact and transition method as of the filing.
- Management stated that disclosure controls were effective. Internal-control processes continued to be updated and tested as part of the Cascade Microtech integration.
Important Facts for Investors to Verify
- Assess the sustainability of the 40.1% consolidated gross margin and the extent to which favorable product mix and factory utilization persist.
- Separate organic growth from revenue and cost contributions associated with the Cascade Microtech acquisition.
- Monitor Intel and other customer concentration, accounts receivable exposure and semiconductor end-market demand, particularly Foundry & Logic and DRAM.
- Review inventory growth to $68.7 million and the $6.9 million inventory valuation provision for potential future write-down risk.
- Track term-loan amortization, interest-rate exposure and compliance with financial covenants.
- Confirm the effect of ASC 606 adoption on revenue timing, deferred revenue and reported results beginning in fiscal 2018.
- Evaluate cash generation after capital expenditures, share repurchases, debt payments and employee-equity-related tax withholdings.