FormFactor, Inc. 2019 Q1 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 operates through Probe Cards and Systems segments. The filing covers the 13 weeks ended March 30, 2019, compared with the 13 weeks ended March 31, 2018. Fiscal 2019 ends December 28, 2019. Results are unaudited.
Financial performance and liquidity
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $132.2 million | $118.3 million | Up 11.8% |
| Gross profit | $52.5 million | $45.1 million | Up 16.4% |
| Gross margin | 39.7% | 38.2% | Up 150 basis points |
| Operating income | $7.6 million | $3.6 million | Up $4.0 million |
| Operating margin | 5.8% | 3.1% | Up 270 basis points |
| Net income | $5.5 million | $2.1 million | Up $3.4 million |
| Diluted EPS | $0.07 | $0.03 | Improved |
| Operating cash flow | $20.6 million | $9.3 million | Up $11.3 million |
Probe Cards revenue was $108.1 million, up 13.9%, driven primarily by Foundry & Logic revenue growth of 22.5% and Flash growth of 22.7%, partly offset by a 4.6% decline in DRAM. Systems revenue increased 3.2% to $24.1 million. Probe Cards gross margin was 41.9%, compared with 42.2% in the prior-year quarter; Systems gross margin was 54.0%, compared with 47.7%.
Cash, cash equivalents, restricted cash, and marketable securities totaled approximately $159.8 million at March 30, 2019, compared with $149.0 million at December 29, 2018. Working capital was $237.7 million, compared with $235.3 million at year-end 2018. Management stated that existing liquidity and operating cash flow should fund working capital needs and scheduled term-loan repayments for at least the next twelve months.
Total term-loan debt was $57.5 million at March 30, 2019, including $33.6 million classified as current and $23.7 million classified as long-term, net of issuance costs. The company made a scheduled $7.5 million principal repayment during the quarter and was in compliance with its debt covenants. The term loan carried an interest rate of approximately 4.5%.
Investing cash outflows were $9.3 million, including $6.0 million of capital expenditures and $3.3 million of net marketable-securities purchases. Financing cash outflows were $3.9 million, principally from debt repayment, partially offset by $3.9 million of common-stock issuance proceeds. Cash, cash equivalents, and restricted cash increased by $7.2 million to $107.7 million.
Material changes versus the prior comparable period
- Revenue growth reflected stronger Probe Cards demand, particularly in Foundry & Logic and Flash markets. Management attributed Foundry & Logic growth partly to a prior-year customer delay in node transitions.
- DRAM revenue declined because of lower unit sales.
- Gross margin improved due to higher volume and factory utilization, although Probe Cards mix was less favorable.
- Research and development expense increased 9.3% to $19.7 million, and selling, general and administrative expense increased 7.4% to $25.2 million, primarily due to higher employee incentive compensation and stock-based compensation.
- Interest expense declined to $0.6 million from $1.0 million as average debt decreased, despite higher interest rates.
- The effective tax rate increased to 27.0% from 11.9%, primarily because the company released a valuation allowance against certain U.S. deferred tax assets in the fourth quarter of 2018.
- Stock-based compensation increased to $5.3 million from $3.8 million.
- The company adopted the lease accounting standard on December 30, 2018, recognizing $34.4 million of operating lease right-of-use assets and $38.3 million of operating lease liabilities at March 30, 2019. The adoption did not affect previously reported operating results or opening equity.
Guidance, outlook, commentary, risks, and unusual items
The filing does not provide a clear quantitative revenue, earnings, or margin guidance range. Management expects available liquidity to meet near-term operating and scheduled debt obligations, but cautions that cash could decline if revenue growth, cost reductions, or access to additional financing are insufficient.
Key operating risks include semiconductor-industry demand fluctuations, unfavorable product mix, lower factory utilization, inventory write-downs, dependence on a limited number of suppliers including some sole-source suppliers, foreign-exchange exposure, and customer concentration. Intel represented 21.3% of Q1 2019 revenue and Samsung represented 13.8%; two customers represented 16.7% and 10.7% of gross accounts receivable at quarter-end.
The company recorded $0.2 million of restructuring charges, consisting of employee termination benefits, long-lived-asset abandonment costs, and inventory write-downs. No goodwill impairment or material legal proceedings were reported. The company had $3.9 million of remaining performance obligations, of which approximately 74% was expected to be recognized during the remainder of fiscal 2019.
Foreign-exchange forward contracts had a total U.S.-dollar notional amount of $8.9 million and mature in the fourth quarter of fiscal 2019. The company also maintained interest-rate swaps covering a $45.0 million loan notional amount. No material change in market-risk exposure or risk factors from the 2018 Form 10-K was reported.
Important facts for investors to verify
- Whether Foundry & Logic and Flash demand remains strong and whether DRAM weakness persists.
- The sustainability of the 39.7% gross margin amid product-mix, utilization, pricing, and inventory risks.
- Customer concentration, particularly Intel and Samsung revenue exposure and accounts-receivable concentration.
- Inventory growth to $83.2 million and the adequacy of reserves, including the $2.7 million quarterly provision for excess and obsolete inventory.
- Progress on the $57.5 million term-loan balance, scheduled repayments, interest-rate exposure, and covenant compliance.
- The effect of higher tax rates following the U.S. deferred-tax valuation allowance release.
- Future stock-based compensation, restructuring costs, lease obligations, and the remaining $6.0 million authorization under the share-repurchase program.
- Management’s future quantitative guidance, which is not clearly provided in this filing.