FORMFACTOR, INC. Cautionary Statement Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Securities Exchange Act of 1934 and the Securities Act of 1933, which are subject to risks and uncertainties. The forward-looking statements include statements concerning, among other things, our business strategy, financial and operating results, gross margins, liquidity and capital expenditure requirements and impact of accounting standards. In some cases, you can identify these statements by forward-looking words, such as "may," "might," "will," "could," "should," "expect," "plan," "anticipate," "believe," "estimate," "predict," "intend" and "continue," the negative or plural of these words and other comparable terminology. The forward-looking statements are only predictions based on our current expectations and our projections about future events. All forward-looking statements included in this Quarterly Report on Form 10-Q are based upon information available to us as of the filing date of this Quarterly Report on Form 10-Q. You should not place undue reliance on these forward-looking statements. We have no obligation to update any of these statements. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to differ materially from those expressed or implied by these statements, including risks related to general market trends, uncertainties related to COVID-19 and the impact of our responses to it, the interpretation and impacts of changes in export controls and other trade barriers, our ability to execute our business strategy and other risks discussed in the section titled "Risk Factors" and elsewhere in our Annual Report on Form 10-K for the year endedDecember 28, 2019 and in this Quarterly Report on Form 10-Q. You should carefully consider the numerous risks and uncertainties described under these sections. The following discussion and analysis should be read in conjunction with our condensed consolidated financial statements and the accompanying notes contained in this Quarterly Report on Form 10-Q. Unless expressly stated or the context otherwise requires, the terms "we," "our," "us" and "FormFactor" refer toFormFactor, Inc. and its subsidiaries.
Overview
FormFactor, Inc. , headquartered inLivermore, California , is a leading provider of test and measurement solutions. We provide a broad range of high-performance probe cards, analytical probes, probe stations, metrology systems, and thermal sub-systems to both semiconductor companies and scientific institutions. Our products provide electrical and optical information from a variety of semiconductor and electro-optical devices and integrated circuits from research, through development to production. Customers use our products and services to lower production costs, improve yields, and enable development of their complex next-generation products. We operate in two reportable segments consisting of the Probe Cards segment and the Systems segment. Sales of our probe cards and analytical probes are included in the Probe Cards segment, while sales of our probe stations, metrology systems and thermal sub-systems are included in the Systems segment. We generated net income of$15.9 million in the first three months of fiscal 2020 as compared to$5.5 million in the first three months of fiscal 2019. The increase in net income was primarily due to higher revenues, partially offset by higher operating expenses, both generated by higher operating levels.
Impact of COVID-19
An outbreak of an illness caused by a novel coronavirus in 2019 ("COVID-19") has
resulted in millions of infections and well over one hundred thousand deaths
worldwide as of the date of filing this Quarterly Report. COVID-19 continues to
spread in many of the regions that we, our customers and our suppliers operate.
The COVID-19 pandemic has resulted in significant governmental measures being
implemented to control the spread of the virus, including the imposition of
stay-at-home and other orders in locations where we have manufacturing and other
activities. We experienced a significant disruption to our operations as a
result of the COVID-19 pandemic during the last two weeks of our first fiscal
quarter of 2020 which continues, although currently to a lessening extent.
We believe that we operate in a critical infrastructure industry, as defined by
the U.S. Department of Homeland Security . This reduces the current and
anticipated impacts of the COVID-19 pandemic on our major customers and
suppliers, and upon our operations, as compared to companies that are not part
of the critical infrastructure. After a temporary suspension of manufacturing to
implement safety measures in our California and Oregon locations, consistent
with federal guidelines and state and local orders, we recommenced
manufacturing. We currently continue to operate in all of our manufacturing
sites
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--------------------------------------------------------------------------------subject to certain safety and related constraints. Our other operations are similarly continuing with substantial work-from-home activities.
If the provisions of governmental health orders or other safety requirements continue for an extended period of time, or if we have occurrences of COVID-19 in any of our facilities, we may experience further disruptions or delays in manufacturing, product design, product development, customer support, manufacturing and sales, and an overall loss of productivity and efficiency. The progression of the COVID-19 pandemic could also negatively impact our business or results of operations through new restrictions at our operating locations or at those of our customers or suppliers. Even with our continued operations, COVID-19 has had, and may have further, negative impacts on our supply chain, workforce and customers. As the COVID-19 pandemic is a widespread public health crisis, it is also adversely affecting major economies and financial markets world-wide. A resulting economic downturn can be expected to eventually negatively affect the demand for our products, and contribute to volatile demand and supply conditions affecting the markets for our products. Governments in several countries where we operate, includingthe United States , have enacted stabilization and stimulus measures in an effort to counteract some of the impacts of COVID-19. We may benefit from some of these measures, although we do not believe those benefits will have a material effect upon our financial results or financial condition. While to date the disruptions in our operations, supply chain and customer demand as a result of the COVID-19 pandemic have been somewhat limited, we believe that the COVID-19 pandemic represents a sustained threat that may eventually give rise to a variety of more significant adverse impacts on our business and financial results. We consider this as a near or longer term trend, although we cannot identify or quantify the specific impacts given current levels of uncertainty and the broad variety of effects that may arise from a pandemic of this magnitude. For a further description of the uncertainties and business risks associated with the COVID-19 pandemic, see the section entitled "Risk Factors" in this Quarterly Report.
Critical Accounting Policies and the Use of Estimates
Management's Discussion and Analysis and Note 2 to the Consolidated Financial Statements in our 2019 Annual Report on Form 10-K describe the significant accounting estimates and critical accounting policies used in preparation of the Consolidated Financial Statements. Actual results in these areas could differ from management's estimates. During the three months endedMarch 28, 2020 , there were no significant changes in our critical accounting policies or estimates from those reported in our Annual Report on Form 10-K for the year endedDecember 28, 2019 , which was filed with theSecurities and Exchange Commission onFebruary 21, 2020 . 22
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Results of Operations
The following table sets forth our operating results as a percentage of revenues
for the periods indicated:
Three Months Ended
March 28, March 30,
2020 2019
Revenues 100.0 % 100.0 %
Cost of revenues 58.1 60.3
Gross profit 41.9 39.7
Operating expenses:
Research and development 13.2 14.9
Selling, general and administrative 17.2 19.0
Total operating expenses 30.4 33.9
Operating income 11.5 5.8
Interest income 0.4 0.4
Interest expense (0.2) (0.5)
Other expense, net (0.1) (0.1)
Income before income taxes 11.6 5.6
Provision for income taxes 1.8 1.5
Net income 9.8 % 4.1 %
Revenues by Segment and Market
Three Months Ended
March 28, March 30,
2020 2019
(In thousands)
Probe Cards $ 134,715 $ 108,103
Systems 26,038 24,110
$ 160,753 $ 132,213
Three Months Ended
March 28, March 30,
2020 % of Revenues 2019 % of Revenues $ Change % Change
(Dollars in thousands)Probe Cards Markets: Foundry & Logic$ 105,745 65.8 %$ 71,580 54.1 %$ 34,165 47.7 % DRAM 24,696 15.4 28,886 21.9 (4,190) (14.5) Flash 4,274 2.7 7,637 5.8 (3,363) (44.0) Systems Market: Systems 26,038 16.1 24,110 18.2 1,928 8.0 Total revenues$ 160,753 100.0 %$ 132,213 100.0 %$ 28,540 21.6 % The increase in Foundry & Logic product revenue for the three months endedMarch 28, 2020 , compared to the three months endedMarch 30, 2019 , was driven principally by increased unit sales to large semiconductor foundries and integrated device manufacturers, as they increased manufacturing of new chip designs on leading-edge nodes. The decrease in DRAM product revenue for the three months endedMarch 28, 2020 , compared to the three months endedMarch 30, 2019 , was driven by decreased unit sales as a result of decreased customer demand. 23 -------------------------------------------------------------------------------- The decrease in Flash product revenue for the three months endedMarch 28, 2020 , compared to the three months endedMarch 30, 2019 , was driven by decreased unit sales as a result of decreased customer demand, as our revenue in this market continues to be highly variable. The increase in Systems product revenue for the three months endedMarch 28, 2020 , compared to the three months endedMarch 30, 2019 , was driven by increased sales of probe stations, which includes an increase in revenue from 300mm stations, partially offset by lower revenue from thermal sub-systems and 200mm stations. Due to COVID-19, there were various impacts across our segments due to governmental mandates of social distancing. This resulted in a temporary factory shut down for almost two weeks in certain locations, limiting our manufacturing capacity. These shutdowns negatively affected revenue, especially in our Probes segment.
Revenues by
Three Months Ended
March 28, % of March 30, % of
2020 Revenue 2019 Revenue
(Dollars in thousands)
China $ 43,642 27.1 % $ 21,843 16.5 %
United States 31,916 19.9 % 34,263 25.9 %
Taiwan 31,780 19.8 % 22,387 16.9 %
Europe 21,043 13.1 % 9,493 7.2 %
South Korea 14,088 8.8 % 26,723 20.2 %
Japan 8,370 5.2 % 10,432 7.9 %
Asia-Pacific1 7,863 4.9 % 3,263 2.5 %
Rest of the world 2,051 1.2 % 3,809 2.9 %
Total revenues $ 160,753 100.0 % $ 132,213 100.0 %
1 Asia-Pacific includes all countries in the region except
Geographic revenue information is based on the location to which we ship the product. For example, if a certain South Korean customer purchases through theirU.S. subsidiary and requests the products to be shipped to an address inSouth Korea , this sale will be reflected in the revenue forSouth Korea rather than theU.S.
Changes in revenue by geographic region for the three months ended
Cost of Revenues and Gross Margins
Cost of revenues consists primarily of manufacturing materials, compensation and benefits, shipping and handling costs, manufacturing-related overhead and amortization of certain intangible assets. Our manufacturing operations rely on a limited number of suppliers to provide key components and materials for our products, some of which are a sole source. We order materials and supplies based on backlog and forecasted customer orders. Tooling and setup costs related to changing manufacturing lots at our suppliers are also included in the cost of revenues. We expense all warranty costs, inventory provisions and amortization of certain intangible assets as cost of revenues.
Our gross profit and gross margin were as follows (dollars in thousands):
Three Months Ended
March 28, March 30,
2020 2019 $ Change % Change
Gross profit $ 67,390 $ 52,521 $ 14,869 28.3 %
Gross margin 41.9 % 39.7 %
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Our gross profit and gross margin by segment were as follows (dollars in
thousands):
Three Months Ended
March 28, 2020 March 30, 2019
Corporate and Corporate and
Probe Cards Systems Other Total Probe Cards Systems Other Total
Gross profit $ 60,743 $ 13,334 $ (6,687) $ 67,390 $ 45,294 $ 13,016 $ (5,789) $ 52,521
Gross margin 45.1 % 51.2 % - % 41.9 % 41.9 % 54.0 % - % 39.7 %
Probe Cards
For the three months ended March 28, 2020 , gross profit and gross margins
increased compared to the three months ended March 30, 2019 , primarily due to
increased sales and higher factory utilization.
Systems
For the three months endedMarch 28, 2020 , gross profit increased while gross margin decreased compared to the three months endedMarch 30, 2019 , primarily as a result of product mix and additional contribution from our acquisition ofFRT GmbH . Corporate and Other Corporate and Other includes unallocated expenses relating to amortization of intangible assets, share-based compensation, and restructuring charges, net, which are not used in evaluating the results of, or in allocating resources to, our reportable segments.
Overall
Gross profit and gross margin fluctuate with revenue levels, product mix, selling prices, factory loading and material costs. For the three months endedMarch 28, 2020 , compared to the three months endedMarch 30, 2019 , gross profit and gross margins have improved, primarily on higher sales.
Cost of revenues included stock-based compensation expense as follows (in thousands):
Three Months Ended
March 28, March 30,
2020 2019
Stock-based compensation $ 937 $ 950
Future gross margins may be adversely impacted by lower revenues, unfavorable
product mix and lower factory utilization. Our gross margins may also be
adversely affected if we are required to record additional inventory write-downs
for estimated average selling prices that are below cost or because of a
decrease in demand.
Research and Development
Three Months Ended
March 28, March 30,
2020 2019 $ Change % Change
(Dollars in thousands)
Research and development $ 21,267 $ 19,723 $ 1,544 7.8 %
% of revenues 13.2 % 14.9 %
The increase in research and development expenses in the three months ended
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--------------------------------------------------------------------------------A detail of the changes is as follows (in thousands):
Three Months
Ended March
28, 2020
compared to
Three Months
Ended March
30, 2019
Employee compensation costs $ 1,649
Depreciation 88
Stock-based compensation (80)
Project material costs (65)
Other general operations (48)
$ 1,544
Research and development included stock-based compensation expense as follows
(in thousands):
Three Months Ended
March 28, March 30,
2020 2019
Stock-based compensation $ 1,439 $ 1,519 Selling, General and Administrative
Three Months Ended
March 28, March 30,
2020 2019 $ Change % Change
(Dollars in thousands)
Selling, general and administrative
17.2 % 19.0 %
The increase in selling, general and administrative in the three months ended
March 28, 2020 when compared to the corresponding period in the prior year was
primarily due to increased headcount combined with higher variable compensation,
higher stock-based compensation related to the timing of annual grants, and
higher costs from acquisition of FRT GmbH , offset partially by a decrease in the
amortization of intangible assets.
A detail of the changes is as follows (in thousands):
Three Months
Ended March
28, 2020
compared to
Three Months
Ended March
30, 2019
Employee compensation 1,942
Amortization of intangibles (858)
Consulting fees 566
Stock-based compensation 421
General operating expenses 438
$ 2,509
Selling, general and administrative included stock-based compensation expense as
follows (in thousands):
Three Months Ended
March 28, March 30,
2020 2019
Stock-based compensation $ 3,247 $ 2,826
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Interest Income and Interest Expense
Three Months Ended
March 28, March 30,
2020 2019
(Dollars in thousands)
Interest Income $ 685 $ 580
Weighted average balance of cash and investments
1.68 % 2.03 %
Interest Expense $ 318 $ 595
Average debt outstanding $ 42,854 $ 64,835
Weighted average interest rate on debt 2.50 % 4.51 %
Interest income is earned on our cash, cash equivalents, restricted cash and marketable securities. The increase in interest income for the three months endedMarch 28, 2020 compared with the corresponding period of the prior year was attributable to higher invested balances and sustained investment yields, related in part to longer duration investments. Interest expense primarily includes interest on our term loans, partially offset by income from our interest-rate swap derivative contracts, as well as term loan issuance costs amortization charges. The decrease in interest expense for the three months endedMarch 28, 2020 compared to the same period of the prior year was primarily due to lower outstanding debt balances related to the acquisition of Cascade Microtech in fiscal 2016 as a result of principal payments made, partially offset by additional interest expense related to the term loan originated to finance the acquisition ofFRT GmbH in the fourth quarter of 2019. Other Expense, Net Other expense, net, primarily includes the effects of foreign currency impact and various other gains and losses.
Provision for Income Taxes
Three Months Ended
March 28, March 30,
2020 2019
(In thousands, except percentages)
Provision for income taxes $ 2,816 $ 2,032
Effective tax rate 15.1 % 27.0 %
Provision for income taxes reflects the tax provision on our operations in
foreign and U.S. jurisdictions, offset by tax benefits from tax credits and the
foreign-derived intangible income ("FDII") deduction. We expect the FDII
deduction and corresponding benefit to be available after utilizing our previous
net operating loss carryforwards, resulting in a decrease in our effective tax
rate for the three months ended March 28, 2020 , compared to the three months
ended March 30, 2019 . Our effective tax rate may vary from period to period
based on changes in estimated taxable income or loss by jurisdiction, changes to
the valuation allowance, changes to U.S. federal, state or foreign tax laws,
future expansion into areas with varying country, state, and local income tax
rates, deductibility of certain costs and expenses by jurisdiction.
Liquidity and Capital Resources
Capital Resources Our working capital was$308.8 million atMarch 28, 2020 , compared to$282.5 million atDecember 28, 2019 . Cash and cash equivalents primarily consist of deposits held at banks and money market funds. Marketable securities primarily consist ofU.S. treasuries,U.S. agency securities and corporate bonds. We typically invest in highly-rated securities with low probabilities of default. Our investment policy requires investments to be rated single A or better, and limits the types of acceptable investments, issuer concentration and duration of the investment. Our cash, cash equivalents and marketable securities totaled approximately$239.4 million atMarch 28, 2020 , compared to$220.9 million atDecember 28, 2019 . We believe that we will be able to satisfy our working capital requirements and scheduled term loan repayments for at least the next twelve months with the liquidity provided by our existing cash, cash 27 --------------------------------------------------------------------------------
equivalents, marketable securities and cash provided by operations. To the extent necessary, we may consider entering into short and long-term debt obligations, raising cash through a stock issuance, or obtaining new financing facilities, which may not be available on terms favorable to us. Our future capital requirements may vary materially from those now planned.
The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains and created significant volatility and disruption of financial markets. An extended period of global supply chain and economic disruption could materially affect our business, results of operations, access to sources of liquidity and financial condition. As a result of the current and uncertain future impact of COVID-19, we have taken actions to preserve and improve our liquidity primarily by limiting our exposures to volatile markets and investments, as well as actively working to minimize counterparty risk. If we are unsuccessful in maintaining or growing our revenues, maintaining or reducing our cost structure (in response to a potential reduction in demand due to an industry downturn, COVID-19, or other event), or increasing our available cash through debt or equity financings, our cash, cash equivalents and marketable securities may decline in fiscal 2020. We utilize a variety of tax planning and financing strategies to manage our worldwide cash and deploy funds to locations where needed. As part of these strategies, we indefinitely reinvest a portion of our foreign earnings. Should we require additional capital inthe United States , we may elect to repatriate indefinitely-reinvested foreign funds or raise capital inthe United States . Cash Flows The following table sets forth our net cash flows from operating, investing and financing activities: Three Months EndedMarch 28 ,March 30, 2020 2019 (In thousands)
Net cash provided by operating activities
Operating Activities Net cash provided by operating activities for the three months endedMarch 28, 2020 was primarily attributable to net income of$15.9 million and$22.7 million of net non-cash expenses, offset by changes in operating assets and liabilities, as explained below. Accounts receivable, net, decreased$7.8 million to$90.1 million atMarch 28, 2020 , compared to$97.9 million atDecember 28, 2019 , as a result of changes in customer sales mix, timing of customer shipments and timing of customer payments. Inventories, net, decreased$4.3 million to$79.0 million atMarch 28, 2020 , compared to$83.3 million atDecember 28, 2019 , as a result of shipping prior quarter backlog, lower inventory production, and less inventory receipts at the end of the quarter primarily due to reduced operating levels under COVID-19 restrictions, as previously described.
Accrued liabilities decreased
Investing Activities Net cash used in investing activities for the three months endedMarch 28, 2020 was primarily related to$12.1 million of cash used in the acquisition of property, plant and equipment partially offset by$6.6 million of net proceeds from sales of marketable securities. Financing Activities Net cash used in financing activities for the three months endedMarch 28, 2020 primarily related to$13.2 million of principal payments made towards the repayment of our term loans and$0.4 million related to tax withholding associated with the net share settlements of our equity awards, partially offset by$4.5 million of proceeds received from issuances of common stock under our employee stock purchase plan and stock option plans. 28 --------------------------------------------------------------------------------
Debt
CMI Term Loan OnJune 24, 2016 , we entered into a Credit Agreement (the "Credit Agreement") withHSBC Bank USA, National Association ("HSBC"), as administrative agent, co-lead arranger, sole bookrunner and syndication agent, other lenders that may from time-to-time be a party to the Credit Agreement, and certain guarantors. Pursuant to the Credit Agreement, the lenders have provided us with a senior secured term loan facility of$150 million (the "CMI Term Loan"). The proceeds of the CMI Term Loan were used to finance a portion of the purchase price paid in connection with the Cascade Microtech acquisition in fiscal 2016 and to pay related bank fees and expenses. The CMI Term Loan bears interest at a rate equal to, at our option, (i) the applicable London Interbank Offered Rate ("LIBOR") rate plus 2.00% per annum or (ii) Base Rate (as defined in the Credit Agreement) plus 1.00% per annum. We have currently elected to pay interest at 2.00% over the one-month LIBOR rate. Interest payments are payable in monthly installments over a five-year period. The interest rate atMarch 28, 2020 was 3.61%. The principal payments on the CMI Term Loan are paid in equal quarterly installments that beganJune 30, 2016 , in an annual amount equal to 5% for year one, 10% for year two, 20% for year three, 30% for year four and 35% for year five. The planned final payment on the CMI Term Loan is scheduled for the third quarter of fiscal 2020. OnJuly 25, 2016 , we entered into an interest rate swap agreement with HSBC and other lenders to hedge the interest payments on the CMI Term Loan for the notional amount of$95.6 million . As future levels of LIBOR over the life of the loan are uncertain, we entered into these interest-rate swap agreements to hedge the exposure in interest rate risks associated with movement in LIBOR rates. By entering into the agreements, we convert a floating rate interest at one-month LIBOR plus 2% into a fixed rate interest at 2.939%. The interest rate swap agreement ended as ofMarch 28, 2020 . The obligations under the Term Loan are guaranteed by substantially all of our assets and the assets of our domestic subsidiaries, subject to certain customary exceptions. The Credit Agreement contains negative covenants customary for financing of this type, as well as certain financial maintenance covenants. As ofMarch 28, 2020 , the balance outstanding pursuant to the CMI Term Loan was$23.7 million and we were in compliance with all covenants under the Credit Agreement. FRT Term Loan OnOctober 25, 2019 , we entered into a$23.4 million three-year credit facility loan agreement (the "FRT Term Loan") with HSBC Trinkaus & Burkhardt AG,Germany , to fund the acquisition ofFRT GmbH , which we acquired onOctober 9, 2019 . See Note 4 for further details of the acquisition. The FRT Term Loan bears interest at a rate equal to the Euro Interbank Offered Rate ("EURIBOR") plus 1.75 % per annum and will be repaid in quarterly installments of approximately$1.9 million plus interest beginningJanuary 25, 2020 . The obligations under the FRT Term Loan are fully and unconditionally guaranteed byFormFactor, Inc. The Credit Facility contains negative covenants customary for financing of this type, including covenants that place limitations on the incurrence of additional indebtedness, the creation of liens, the payment of dividends; dispositions; fundamental changes, including mergers and acquisitions; loans and investments; sale leasebacks; negative pledges; transactions with affiliates; changes in fiscal year; sanctions and anti-bribery laws and regulations, and modifications to charter documents in a manner materially adverse to the Lenders. The FRT Term Loan also contains affirmative covenants and representations and warranties customary for financing of this type. As ofMarch 28, 2020 , the balance outstanding pursuant to the FRT term loan was$21.4 million and we were in compliance with all covenants.
Contractual Obligations and Commitments
Other than our operating lease commitments as disclosed in Note 12 of Notes to Condensed Consolidated Financial Statements, our contractual obligations and commitments have not materially changed as ofMarch 28, 2020 from those disclosed in our Annual Report on Form 10-K for the year endedDecember 28, 2019 .
Off-Balance Sheet Arrangements
Historically, we have not participated in transactions that have generated
relationships with unconsolidated entities or financial partnerships, such as
entities often referred to as structured finance or special purpose entities,
which would have been
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established for the purpose of facilitating off-balance sheet arrangements or
other contractually narrow or limited purposes. As of March 28, 2020 , we were
not involved in any such off-balance sheet arrangements.
Recent Accounting Pronouncements
See Note 1 of Notes to Condensed Consolidated Financial Statements.
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