FormFactor, Inc. 2018 Form 10-K Summary
Business Context and Reporting Period
FormFactor provides semiconductor electrical test and measurement products, including probe cards, analytical probes, probe stations and thermal subsystems. Operations are reported in two segments: Probe Cards and Systems. The fiscal year ended December 29, 2018, comprised 52 weeks; the comparable fiscal year ended December 30, 2017, also comprised 52 weeks.
The filing includes fourth-quarter results for the quarter ended December 29, 2018. FormFactor adopted ASC 606 revenue recognition and ASC 2016-18 restricted-cash presentation in fiscal 2018; management states that adoption did not materially affect the financial statements.
Key Financial Metrics
| Metric | Fiscal 2018 | Fiscal 2017 | Change |
|---|---|---|---|
| Revenue | $529.7 million | $548.4 million | Down 3.4% |
| Gross profit | $210.3 million | $215.6 million | Down 2.4% |
| Gross margin | 39.7% | 39.3% | Up 40 basis points |
| Operating income | $36.1 million | $46.3 million | Down 22.0% |
| Operating margin | 6.8% | 8.4% | Down 160 basis points |
| Net income | $104.0 million | $40.9 million | Up 154.3% |
| Diluted earnings per share | $1.38 | $0.55 | Up $0.83 |
| Cash flow from operations | $68.7 million | $86.3 million | Down 20.4% |
| Capital expenditures | $19.9 million | $17.8 million | Up $2.1 million |
Fiscal 2018 net income was substantially affected by a $75.8 million income-tax benefit from releasing valuation allowances against certain U.S. deferred tax assets. Excluding the tax benefit, reported earnings growth was materially lower than the headline increase suggests.
Fourth-Quarter 2018 Highlights
| Metric | Q4 2018 | Q4 2017 |
|---|---|---|
| Revenue | $140.9 million | $131.9 million |
| Gross profit | $56.0 million | $48.6 million |
| Operating income | $11.8 million | $5.4 million |
| Net income | $85.1 million | $5.6 million |
| Diluted EPS | $1.13 | $0.07 |
Fourth-quarter net income included the $75.8 million deferred-tax valuation allowance release. Consequently, Q4 reported profitability and EPS are not representative of recurring operating performance.
Revenue, Segment and Margin Trends
- Probe Cards revenue was $434.3 million, down from $454.8 million. The decline was primarily driven by lower Foundry & Logic demand from a major customer whose node transitions were delayed.
- Systems revenue increased to $95.4 million from $93.6 million, driven by higher thermal-subsystem unit sales, partly offset by lower probe-station revenue and product mix.
- Foundry & Logic revenue declined 17.6% to $258.5 million; DRAM revenue increased 8.5% to $135.3 million; Flash revenue increased 146.9% to $40.5 million.
- Probe Cards gross margin was 43.1% in both fiscal years. Systems gross margin declined to 49.3% from 49.8%.
- Research and development expense increased 1.6% to $75.0 million, while selling, general and administrative expense increased 4.7% to $99.1 million. Operating expenses therefore increased as a percentage of revenue.
- International sales represented 75% of fiscal 2018 revenue, compared with 66% in fiscal 2017. Taiwan, South Korea and China together represented 52.2% of revenue based on ship-to location.
Liquidity, Cash Flow and Debt
- Cash and cash equivalents were $98.5 million, and marketable securities were $50.5 million, for combined cash and securities of $149.0 million at year-end, up from $140.2 million.
- Working capital was $235.3 million, compared with $213.7 million in the prior year.
- Accounts receivable increased to $95.3 million from $81.5 million, and inventories increased to $77.7 million from $67.8 million. The company recorded a $10.5 million inventory excess and obsolescence provision during fiscal 2018.
- Term-loan principal outstanding was $65.0 million, or $64.8 million net of issuance costs, versus $106.3 million gross at the prior year-end. FormFactor made $41.3 million of principal payments during fiscal 2018, including $15.0 million of voluntary prepayments.
- The term loan carried a 4.35% interest rate at year-end. An interest-rate swap hedged $60.0 million of notional debt exposure.
- Management stated that existing liquidity and operating cash flow should satisfy working-capital requirements for at least the next twelve months. The company was in compliance with all debt covenants at year-end.
- Contractual commitments included $65.0 million of remaining term-loan principal, $2.7 million of estimated interest and $48.0 million of operating-lease payments.
Material Changes, Outlook and Risks
- Revenue declined despite growth in DRAM, Flash and Systems because Foundry & Logic revenue weakened and one major customer represented 19.0% of annual revenue, down from 25.9% in fiscal 2017.
- Intel represented 19.0% of fiscal 2018 revenue. In Q4, Intel, Samsung and Taiwan Semiconductor Manufacturing Company each exceeded 10% of quarterly revenue; the three customers together represented 46.6% of Q4 revenue.
- Management did not provide formal fiscal 2019 revenue or earnings guidance in the filing. It indicated expectations for continued positive U.S. operating performance, which supported the deferred-tax valuation allowance release.
- Key risks include semiconductor cyclicality, customer concentration, changes in customer test strategies, pricing pressure, rapid technological change, manufacturing yield and utilization volatility, inventory obsolescence, sole- or limited-source suppliers, tariffs and export controls, foreign-exchange exposure, cybersecurity, intellectual-property claims and potential goodwill or intangible-asset impairment.
- Fiscal 2018 restructuring charges were $0.2 million, compared with $0.8 million in fiscal 2017; no goodwill or long-lived-asset impairment was recorded in fiscal 2018.
- The company had $25.2 million of unrecognized tax benefits, of which $12.3 million would affect the effective tax rate if recognized. It retained a $34.0 million valuation allowance, primarily against California deferred tax assets and foreign tax credits.
- FormFactor expected adoption of the new lease standard beginning December 30, 2018, to add approximately $30.3 million to $35.5 million of right-of-use assets and $35.8 million to $40.9 million of lease liabilities.
Most Important Facts for Investors to Verify
- Assess recurring earnings and cash generation excluding the $75.8 million tax benefit.
- Monitor Foundry & Logic demand, node-transition timing and the purchasing behavior of the largest customers.
- Track customer concentration and accounts-receivable exposure, including two customers representing 27.8% and 13.0% of gross receivables at year-end.
- Verify progress on debt repayment and compliance with leverage and fixed-charge coverage covenants.
- Review inventory growth and the $10.5 million excess-and-obsolescence provision for evidence of demand or yield pressure.
- Evaluate the effect of international exposure, tariffs, export controls and currency movements on revenue and margins.
- Confirm the fiscal 2019 impact of lease accounting, remaining intangible amortization of $67.6 million and the sustainability of the company’s U.S. deferred-tax assets.