FormFactor, Inc. 2018 Q3 SEC Filing Summary
Business context and reporting period
FormFactor provides semiconductor electrical test and measurement solutions, including probe cards, analytical probes, probe stations and thermal subsystems. The company reports two segments: Probe Cards and Systems. This unaudited Form 10-Q covers the three and nine months ended September 29, 2018, compared with September 30, 2017. Each nine-month period comprised 39 weeks.
Financial performance and liquidity
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Revenue | $135.0 million | $143.7 million | $388.8 million | $416.5 million |
| Gross profit | $53.0 million | $57.6 million | $154.3 million | $167.0 million |
| Gross margin | 39.2% | 40.1% | 39.7% | 40.1% |
| Operating income | $9.4 million | $14.3 million | $24.3 million | $40.9 million |
| Net income | $7.7 million | $12.6 million | $18.9 million | $35.3 million |
| Diluted EPS | $0.10 | $0.17 | $0.25 | $0.48 |
- Q3 revenue declined 6.1%; nine-month revenue declined 6.7%. Q3 operating margin was 6.9%, versus 9.9% in the prior-year quarter; nine-month operating margin was 6.2%, versus 9.8%.
- Probe Cards revenue declined 6.6% in Q3 and 8.5% for the first nine months, primarily because of lower Foundry and Logic demand from one major customer. Systems revenue declined 3.8% in Q3 but increased 2.4% for the nine-month period.
- Q3 revenue mix was 45.4% Foundry and Logic, 27.7% DRAM, 9.6% Flash and 17.3% Systems. DRAM and Flash revenue increased year over year, driven by design wins, unit sales and customer demand.
- Gross margin pressure reflected unfavorable product mix, lower factory utilization and foreign currency effects, partially offset by lower amortization.
- Research and development expense was $18.9 million in Q3 and $56.6 million for nine months. Selling, general and administrative expense was $24.7 million and $73.4 million, respectively. Higher nine-month operating expenses included increased project materials, information-systems consulting and stock-based compensation.
- Operating cash flow was $46.1 million for the first nine months, down from $59.9 million. Cash use included increases of $7.4 million in accounts receivable and $13.7 million in inventories.
- Capital expenditures were $12.3 million. Investing cash use was $13.5 million, while financing cash use was $31.7 million, including $33.8 million of term-loan principal repayments.
- Cash, cash equivalents and marketable securities totaled approximately $142.1 million at September 29, 2018, compared with $140.2 million at December 30, 2017. Working capital was $224.3 million.
- Term-loan balance was $72.5 million at September 29, 2018, bearing interest at 4.25%. The company was in compliance with all debt covenants. The filing states that existing liquidity and operating cash flow should satisfy working-capital needs and scheduled repayments for at least the next twelve months.
Material changes versus the prior comparable period
- Net income fell 46.4% for the first nine months, primarily due to lower Probe Cards revenue and higher operating expenses.
- Foundry and Logic revenue decreased 25.2% in Q3 and 25.8% for nine months, while DRAM revenue increased 15.4% and 13.9%, respectively, and Flash revenue increased 151.9% and 211.8%.
- Interest expense decreased because of lower debt balances, despite higher interest rates. Interest income increased due to higher investment yields and average balances.
- There were no restructuring charges in 2018, compared with $329,000 during the first nine months of 2017.
- Inventories increased 20.2% from year-end 2017 to $81.5 million, partly to shorten lead times, improve pricing and anticipate demand.
- The company repaid $33.8 million of term-loan principal during the first nine months and made no share repurchases. The repurchase program had $6.0 million remaining authorization.
- Accumulated deficit improved to $368.7 million from $387.6 million at December 30, 2017, while stockholders’ equity increased to $490.1 million from $458.6 million.
Guidance, outlook, commentary, risks and unusual items
- The filing does not provide a clear quantitative revenue or earnings forecast for future periods.
- Management cautions that future gross margins may be adversely affected by lower revenue, unfavorable product mix, lower factory utilization and potential inventory write-downs.
- One major customer represented 24.5% of Q3 revenue and 18.0% of nine-month revenue. Intel represented 24.5% of Q3 revenue; Micron represented 12.0%. Two customers accounted for 25.4% and 10.2% of gross accounts receivable at quarter-end.
- The company relies on a limited number of suppliers for key components and materials, including some sole-source suppliers.
- U.S. federal and state deferred tax assets remain subject to a full valuation allowance. Management stated that it was reasonably possible that sustained U.S. profitability could lead to a significant noncash tax benefit in Q4 from reversing part of the $109.8 million valuation allowance recorded at December 30, 2017.
- Remaining performance obligations were $3.5 million at September 29, 2018; approximately 54.4% was expected to be recognized in fiscal 2019 and 13.2% in fiscal 2020 and thereafter.
- Operating lease commitments totaled $48.7 million, including $24.7 million due thereafter. The company extended leases for facilities in Beaverton, Oregon and Livermore, California.
- The company early adopted certain accounting standards during 2018, including ASC 606 and ASU 2017-12; management reported no material effect on the financial statements. Lease accounting adoption was expected beginning December 30, 2018, primarily through recognition of right-of-use assets and lease liabilities.
- No material legal proceedings, material changes in previously disclosed risk factors, or off-balance-sheet arrangements were reported.
Important facts for investors to verify
- Whether demand from the major Foundry and Logic customer stabilizes and how customer concentration affects future revenue.
- Whether DRAM and Flash growth offsets continued weakness or cyclicality in Foundry and Logic markets.
- Inventory levels, utilization and potential excess-and-obsolete inventory charges.
- Progress on term-loan repayments, interest-rate exposure and compliance with debt covenants.
- Whether U.S. profitability supports reversal of the deferred-tax valuation allowance and the timing and size of any resulting noncash tax benefit.
- The effect of the upcoming lease-accounting adoption on reported assets, liabilities and leverage metrics.