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 six months ended July 1, 2017. Results include Cascade Microtech, acquired June 24, 2016, so comparisons with the prior-year periods are not fully comparable.
The company operates in two reportable segments: Probe Cards and Systems. Fiscal 2017 contains 52 weeks and ends December 30, 2017.
Financial Performance and Position
| Metric | Three Months Ended July 1, 2017 | Six Months Ended July 1, 2017 |
|---|---|---|
| Revenue | $144.0 million | $272.8 million |
| Gross profit | $61.8 million | $109.3 million |
| Gross margin | 42.9% | 40.1% |
| Operating income | $19.6 million | $26.6 million |
| Net income | $17.6 million | $22.8 million |
| Diluted earnings per share | $0.24 | $0.31 |
- Revenue increased 73.3% year over year in the quarter and 99.6% in the first six months. Growth reflected Cascade Microtech, higher demand for Foundry & Logic and DRAM products, Flash design wins, and customer orders accelerated from the third quarter into the second quarter.
- Quarterly Probe Cards revenue was $121.6 million, with a 46.8% segment gross margin. Systems revenue was $22.4 million, with a 51.5% segment gross margin. Six-month revenue was $228.1 million for Probe Cards and $44.7 million for Systems.
- Operating expenses were $42.2 million in the quarter and $82.7 million for the first six months, including research and development of $18.5 million and $36.0 million, respectively, and selling, general and administrative expense of $23.6 million and $46.4 million.
- Six-month operating cash flow was $42.3 million, compared with cash used in operations of $3.6 million in the prior-year period. Capital expenditures were $7.8 million, and purchases of marketable securities were $14.7 million.
- Cash, cash equivalents and marketable securities totaled approximately $130.0 million at July 1, 2017, including $47.6 million held by foreign subsidiaries. Working capital was $196.1 million.
- Total term-loan debt was $122.9 million on the balance sheet, while management reported an outstanding balance of $123.8 million under the facility. The loan bears interest at LIBOR plus 2.00%; the reported rate was 3.04%. The company was in compliance with its covenants.
- Total assets were $653.4 million and stockholders’ equity was $434.6 million at July 1, 2017. Accounts receivable were $91.7 million and inventories were $65.0 million.
Material Changes Versus the Prior Comparable Period
- Gross margin rose from 30.6% to 42.9% for the quarter and from 25.8% to 40.1% for the first six months, driven by favorable product mix, stronger revenue, Cascade Microtech contributions and improved manufacturing efficiency.
- Operating results improved from a $6.6 million quarterly operating loss and a $20.2 million six-month operating loss in the prior-year periods to operating income of $19.6 million and $26.6 million, respectively.
- Prior-year net income benefited from a nonrecurring $43.7 million income-tax benefit associated with the release of valuation allowances following the Cascade Microtech acquisition. Consequently, current-period six-month net income of $22.8 million was slightly below prior-year net income of $23.1 million despite substantially higher operating income.
- Interest expense increased to $1.2 million for the quarter and $2.3 million for the six months because the term loan used to finance the Cascade Microtech acquisition was outstanding for substantially all of 2017.
- Restructuring charges declined to $44,000 in the quarter and $313,000 for the first six months, versus $6.9 million in both prior-year periods. Remaining restructuring cash payments were expected to be completed by the end of the third quarter of fiscal 2017.
- Accounts receivable increased $21.5 million and inventories increased $5.1 million from December 31, 2016, reflecting higher revenue, shipment timing and inventory build. The company recorded a $4.6 million increase to its inventory valuation allowance.
- The company repurchased and retired 800,320 shares for approximately $10.1 million during the first six months. Approximately $14.9 million remained available under the $25 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. It cautioned that liquidity could decline if revenue growth slows, costs cannot be maintained or reduced, or additional financing is unavailable or unfavorable.
- Future gross margins could be pressured by lower revenue, reduced factory utilization, unfavorable product mix, material costs or additional inventory write-downs.
- Revenue is concentrated: Intel represented 24.9% of quarterly revenue and 25.8% of six-month revenue. At July 1, 2017, two customers represented approximately 31% and 11% of gross accounts receivable.
- The company relies on a limited number of suppliers, including some sole-source suppliers, creating potential supply-chain exposure.
- Foreign-exchange exposure is managed with derivative contracts. One foreign-exchange contract with approximately $33.8 million of U.S.-dollar notional exposure was outstanding at July 1, 2017 and was expected to mature in the third quarter.
- FormFactor maintained a full valuation allowance against its U.S. federal and state deferred tax assets. The filing does not provide a current U.S. deferred-tax-asset realization schedule.
- A former-employee wage-and-hour class action had a $1.5 million settlement accrued, subject to settlement conditions. The Cascade Microtech fiduciary-duty class action was dismissed with prejudice after final settlement approval in March 2017.
- Management expected to complete its evaluation and implementation planning for the new revenue-recognition standard by the end of the third quarter of fiscal 2017; adoption was scheduled for January 1, 2018. The filing states that the impact was still under evaluation.
- No material changes were reported to the risk factors in the 2016 Form 10-K. Disclosure controls were deemed effective, while integration of Cascade Microtech into internal controls remained in progress.
Facts Investors Should Verify
- Whether customer-order acceleration from the third quarter creates a subsequent-period revenue or demand comparison issue.
- Whether the acquired Cascade Microtech business continues to support revenue, Systems growth and gross-margin performance.
- Term-loan amortization, interest-rate exposure and continued compliance with financial covenants.
- Accounts-receivable concentration, inventory levels and the adequacy of the inventory valuation allowance.
- The eventual effect and transition method of the revenue-recognition standard adopted in 2018.
- The status and final cost of the $1.5 million wage-and-hour settlement and remaining restructuring obligations.
- The extent to which foreign earnings remain indefinitely reinvested and the potential U.S. tax cost of repatriation.