Business Context and Reporting Period
FormFactor, Inc. designs and manufactures semiconductor test and measurement products, including probe cards, analytical probes, probe stations, thermal subsystems and related services. The filing is a Form 10-K for the 52-week fiscal year ended December 30, 2017; it is not a quarterly filing, although fourth-quarter data are disclosed. The company operates through Probe Cards and Systems segments. The June 2016 acquisition of Cascade Microtech materially expanded the Systems business and limits comparability with fiscal 2015 and, to a lesser extent, fiscal 2016.
Key Financial Metrics
| Metric | Fiscal 2017 | Fiscal 2016 | Change |
|---|---|---|---|
| Revenue | $548.4 million | $383.9 million | 42.9% increase |
| Gross profit | $215.6 million | $102.7 million | 110.0% increase |
| Gross margin | 39.3% | 26.7% | Up 12.6 percentage points |
| Operating income (loss) | $46.3 million | $(47.9) million | Improved by $94.2 million |
| Net income (loss) | $40.9 million | $(6.6) million | Returned to profitability |
| Diluted earnings (loss) per share | $0.55 | $(0.10) | Improved |
| Cash flow from operations | $86.3 million | $17.4 million | Increase of $68.9 million |
| Cash, equivalents and marketable securities | $140.2 million | $108.9 million | Increase of $31.3 million |
| Term loan, net of issuance costs | $105.7 million | $138.2 million | Reduced by $32.5 million |
Fiscal 2017 revenue comprised $454.8 million from Probe Cards and $93.6 million from Systems. Foundry & Logic revenue was $313.7 million, DRAM revenue was $124.7 million, Flash revenue was $16.4 million and Systems revenue was $93.6 million.
Operating expenses were $169.3 million, or 30.9% of revenue, compared with $150.6 million, or 39.2%, in fiscal 2016. Research and development expense was $73.8 million, and selling, general and administrative expense was $94.7 million. Restructuring and impairment charges declined to $0.8 million from $19.7 million.
Working capital was $213.7 million at year-end. Accounts receivable increased to $81.5 million and inventory increased to $67.8 million. Capital expenditures were $17.8 million. Cash used in investing activities was $59.7 million, while financing activities used $39.5 million, including $33.1 million of term-loan principal payments and $19.0 million of stock repurchases.
Material Changes Versus the Prior Comparable Period
- Revenue increased 42.9%, driven by Cascade Microtech contributions, higher demand for Foundry & Logic and DRAM products, increased unit sales and favorable Foundry & Logic product mix.
- Gross margin improved substantially because of higher factory utilization, favorable product mix and improved manufacturing efficiency. Fiscal 2016 margin had been reduced by acquisition-related intangible amortization and inventory step-up amortization.
- The company generated operating income and net income in fiscal 2017 compared with operating and net losses in fiscal 2016.
- Fiscal 2016 included a $44.0 million income tax benefit from releasing valuation allowances after the Cascade Microtech acquisition. Fiscal 2017 included a $1.3 million tax provision and therefore is not directly comparable on an after-tax basis.
- Restructuring and impairment charges fell sharply, from $19.7 million to $0.8 million. Fiscal 2016 also included a $12.4 million impairment of acquired in-process research and development.
- The company repurchased and retired 1,367,617 shares for $19.0 million; $6.0 million remained available under the authorization at year-end.
- One customer, Intel, represented 25.9% of fiscal 2017 revenue, down from 30.1% in fiscal 2016. International revenue represented 66% of total revenue, compared with 67% in fiscal 2016.
Guidance, Outlook, Commentary and Risks
The filing does not provide a specific fiscal 2018 revenue or earnings guidance range. Management states that it expects international sales, particularly in Japan, South Korea and Taiwan, to remain significant and expects probe cards to continue representing a substantial majority of revenue.
Management attributed fiscal 2017 improvement to strong demand across Foundry & Logic and DRAM markets, higher factory utilization and manufacturing efficiencies. The company expects to continue investing in research and development to address increasingly complex semiconductor testing requirements.
- Results remain exposed to semiconductor industry cyclicality, customer order timing, cancellations, pricing pressure, product mix and factory utilization.
- Customer concentration is significant, and custom probe cards may create non-recoverable costs if orders are delayed, reduced or canceled.
- The company relies on certain sole-source or limited-source suppliers and faces risks from shortages, pricing increases, quality problems and delivery delays.
- International operations expose the company to foreign-exchange, geopolitical, trade, regulatory and collection risks. The company recorded a $0.6 million net foreign-exchange loss in fiscal 2017 and uses hedging instruments.
- The senior secured term loan is subject to leverage and fixed-charge coverage covenants. The company was in compliance at year-end, but covenant breaches could accelerate repayment.
- Goodwill was $189.9 million and other intangible assets were $97.5 million at year-end. No goodwill or intangible impairment was recorded in fiscal 2017, but future adverse business conditions could lead to material charges.
- Inventory write-downs were $9.3 million in fiscal 2017, reflecting the forecasting difficulty associated with complex, custom products and volatile demand.
- The Tax Cuts and Jobs Act produced provisional tax accounting effects, including a $0.8 million benefit from refundable AMT credits. The company continued to maintain a full valuation allowance against U.S. federal and state deferred tax assets.
- Future minimum contractual commitments totaled $190.2 million, including $106.3 million of term-loan principal, $37.1 million of operating leases and $40.6 million of purchase obligations. Unrecognized tax benefits totaled $18.3 million and were excluded from the contractual-obligations table.
The fourth quarter of fiscal 2017 generated revenue of $131.9 million, gross profit of $48.6 million, operating income of $5.4 million and net income of $5.6 million. Fourth-quarter results included a $1.1 million income tax benefit.
Important Facts for Investors to Verify
- Assess the sustainability of fiscal 2017 revenue growth and gross-margin improvement after the non-comparable Cascade Microtech acquisition effects.
- Monitor Intel concentration, customer receivables, order cancellations and demand trends in Foundry & Logic, DRAM and Systems markets.
- Verify scheduled term-loan repayments, interest-rate swap coverage and compliance with the leverage and fixed-charge coverage covenants.
- Review inventory levels, the $9.3 million fiscal 2017 inventory write-down and the risk of additional provisions if semiconductor demand weakens.
- Evaluate the recoverability of $189.9 million of goodwill and $97.5 million of intangible assets.
- Consider the effect of the 2018 revenue-recognition standard adoption; management expected no material impact but was still finalizing implementation and disclosures.
- Review the provisional Tax Cuts and Jobs Act accounting, the $18.3 million of unrecognized tax benefits and the continued U.S. deferred-tax-asset valuation allowance.
- Note that the independent auditor, KPMG LLP, issued unqualified opinions on the consolidated financial statements and internal control over financial reporting.