UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
For the fiscal year ended December 28, 2019
Or
For the transition period from to
Commission file number: 000-50307
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
(Address of principal executive offices, including zip code)
(925 ) 290-4000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | |||||||||||||||
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of the Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act:
| ☒ | Accelerated filer ☐ | Non-accelerated filer ☐ | Smaller reporting company | Emerging growth company | |||||||||||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Aggregate market value of registrant's common stock held by non-affiliates of the registrant, based upon the closing price of a share of the registrant's common stock on June 29, 2019 (the last business day of the registrant's most recently completed second quarter) as reported by Nasdaq Global Market on that date: $546,284,970 .
The number of shares of the registrant's common stock, par value $0.001 per share, outstanding as of February 14, 2020 was 76,148,088 shares.
DOCUMENTS INCORPORATED BY REFERENCE
FORMFACTOR, INC.
Form 10-K for the Fiscal Year Ended December 28, 2019
Index
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| Part II | ||||||||
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Throughout this Annual Report on Form 10-K, we refer to FormFactor, Inc. and its consolidated subsidiaries as "the Company," "FormFactor," "we," "us," and "our." Our fiscal year ends on the last Saturday in December. Our last three fiscal years ended on December 28, 2019, December 29, 2018 and December 30, 2017.
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NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Securities Exchange Act of 1934 and the Securities Act of 1933, which are subject to known and unknown risks and uncertainties. The forward-looking statements include statements concerning, among other things, our business strategy (including the influence of anticipated trends and developments in our business and the markets in which we operate), financial results, operating results, revenues, gross margin, operating expenses, products, projected costs and capital expenditures, research and development programs, sales and marketing initiatives and competition. In some cases, you can identify these statements by our use of 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. Forward-looking statements are based on information available to us as of the filing date of this Annual Report on Form 10-K and our current expectations about future events, which are inherently subject to change and involve known and unknown risks and uncertainties. You should not place undue reliance on these forward-looking statements. We have no obligation to update any of these statements, and we assume no obligation to do so. Actual events or results may differ materially from those expressed or implied by these statements due to various factors, including but not limited to the matters discussed below in the section entitled "Item 1A: Risk Factors," and elsewhere in this Annual Report on Form 10-K.
Our operating results have fluctuated in the past and are likely to continue to fluctuate. You should not rely on period-to-period comparisons of our financial results as indicators of our future performance. Some of the important factors that could cause our revenues, operating results and outlook to fluctuate from period to period include:
◦customer demand for and adoption of our products;
◦market and competitive conditions in our industry, the semiconductor industry and the economy as a whole;
◦the timing and success of new technologies and product introductions by our competitors and by us;
◦our ability to work efficiently with our customers on their qualification of our new technologies and products;
◦our ability to deliver reliable, cost-effective products that meet our customers’ testing requirements in a timely manner;
◦our ability to transition to new product architectures to solve next-generation semiconductor test and measurement challenges, and to bring new products into volume production on time and at acceptable yields and cost;
◦our ability to implement measures for enabling efficiencies and supporting growth in our design, applications, manufacturing and other operational activities;
◦the reduction, rescheduling or cancellation of orders by our customers;
◦our ability to collect accounts receivables owed by our customers;
◦our product and customer sales mix and geographical sales mix;
◦a reduction in the price or the profitability of our products due to competitive pressures or other factors;
◦the timely availability or the cost of components and materials utilized in our products;
◦our ability to efficiently optimize manufacturing capacity and production yields as necessary to meet customer demand and ramp variable production volumes at our manufacturing facilities;
◦our ability to protect our intellectual property against infringement and continue our investment in research and development and design activities;
◦any disruption in the operation of our manufacturing facilities;
◦changes in trade, tariff or export regulations in the markets where we produce or sell our products;
◦factors impacting political and global economic stability, including natural disasters, epidemics (such as the current COVID-19, or coronavirus), military conflicts, climate change, and other factors acting alone or in combination; and
◦the timing of and return on our investments in research and development.
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PART I
Item 1: Business
General
FormFactor, Inc., headquartered in Livermore, California, is a leading provider of semiconductor test and measurement technologies. 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.
FormFactor, Inc. was incorporated in 1993, and we introduced our first product in 1995. In October 2012, we acquired Astria Semiconductor Holdings, Inc., including its subsidiary Micro-Probe Incorporated (together "MicroProbe"), in June 2016, we acquired Cascade Microtech, Inc. ("Cascade Microtech" or "CMI"), and in October 2019, we acquired FRT GmbH. These acquisitions helped transform our business into a broader semiconductor test and measurement market leader with greater scale, diversification and market opportunities.
As of December 28, 2019, 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.
Products
We design, manufacture and sell multiple product lines, including probe cards, analytical probes, probe stations, metrology systems, thermal sub-systems, and related services.
Probe cards. Our probe cards utilize a variety of technologies and product architectures, including micro-electromechanical systems (MEMS) technologies. We use advanced design and automation technologies to enable our rapid and cost-effective manufacturing of resilient composite contact elements with characteristic length scales of a few microns. These contact elements are designed to provide a specific range of forces on, and across, a chip’s bond pad, solder bump, or copper pillar, during the test process and maintain their shape and position over a range of compression levels. In addition, while maintaining these mechanical characteristics, the contact elements must achieve reliable and high-fidelity electrical contact through wafer surfaces that are generally oxidized or otherwise contaminated, and must maintain these attributes over hundreds of thousands, and even millions, of compression cycles. Our range of capabilities enable us to rapidly produce customer-design specific probe cards that deliver leading precision, reliability, and electro-mechanical performance.
Our probe cards are customized for our customers’ unique wafer and chip designs by modifying and adapting our standard product architectures to meet an individual customer’s design layout and electrical test requirements. We offer probe cards to test a variety of semiconductor device types, including systems on a chip, mobile application processors, microprocessors, microcontrollers, graphic processors, radio frequency, analog, mixed signal, image sensors, electro-optical, DRAM memory, NAND flash memory and NOR flash memory devices.
For many advanced applications, our products must maintain tens of thousands of simultaneous high-fidelity low-impedance electrical contacts with the corresponding chip contacts on the wafer. Our present technologies enable probe cards with over 100,000 contact elements with spacings as small as 40 microns over geometries as large as 300mm. In addition, for high signal-fidelity devices such as wireless radio frequency transceivers and automotive radar chips, our probe card technologies are capable of testing at millimeter-wave frequencies range, currently up to 81 GHz.
We have invested, and intend to continue to invest, considerable resources in proprietary probe card design tools and processes. These tools and processes are intended to enable the rapid and accurate customization of products required to meet customer requirements, including automated routing and trace length adjustment within our probe cards, to rapidly design complex structures.
In addition, some of our customers test certain chips over a large range of operating temperatures, such as for automotive applications. We design probe cards to provide for a precise match with the thermal expansion characteristics of the wafer under test across the range of test operating temperatures. For many of our products, our customers can use the same probe card for both low and high temperature testing. We also design probe cards for customers that require extreme positional accuracy at a specific temperature.
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Through ongoing investments in both our technology and operations, we continue to innovate and improve so that our products will meet customers’ future technical roadmap performance, quality, and commercial requirements. We also focus upon leveraging these ongoing investments across all advanced probe card markets to realize synergies and economies of scale to benefit our competitiveness, time-to-market and overall profitability.
Analytical Probes. We offer over 50 different analytical probe models for engineering and production testing. Analytical probes are used for a diverse set of applications, including device characterization, electrical simulation model development, failure analysis, and prototype design debugging. Our customers for analytical probes include universities, research institutions, semiconductor integrated device manufacturers, semiconductor foundries, and fabless semiconductor companies. We continue to add new models of analytical probes that address measurements with higher complexities and at higher frequencies.
Probe Stations. Probe stations, also referred to as probing systems, are a critical tool for the development of new generations of semiconductor and electro-optical processes and designs. Probe stations are highly configurable for the required measurements, the size and type of wafer under test, the characteristics of the device design to be tested, and the temperatures at which testing is to be performed. Process development and design complexities have continually increased with each new generation of semiconductor technology to accommodate smaller design geometries, complex 3-D architectures, new materials and more layers. Probing systems are a fundamental tool for characterizing and verifying electrical performance and reliability to enable new semiconductor technologies. We design our probing systems for semiconductor design engineers to capture and analyze more accurate data in a shorter amount of time.
We build upon our probe stations to create integrated measurement systems that provide complete solutions for our customers’ complex measurement requirements. These systems include test instrumentation, probe, cabling configurations, and software to enable fast, accurate, on-wafer data collection for complex application and measurement needs. We offer pre-configured and customized measurement systems for production testing, power device characterization, vacuum probing, cryogenic probing, high-pressure probing, photonics testing, and a variety of other specific applications.
Metrology Systems. As a result of our acquisition of FRT GmbH in October 2019, we began offering surface metrology systems for various applications including the development, production and quality control of semiconductor products. With resolution down to nanometer scales, these systems measure topography, structure, step height, roughness, wear, thickness variation, film thickness and other parameters. The modular architecture of the systems allows for exact sensor configuration to be customized for the application on a common platform. These systems integrate hybrid metrology capabilities and proprietary software to enable non-destructive and rapid measurement of multiple features and parameters simultaneously, which has multiple applications but is particularly useful in the growing space of advanced packaging and MEMS applications.
Thermal Subsystems. Our thermal subsystems produce thermal chucks and other test systems used in probe stations. Thermal chuck systems enable the testing of devices at precise temperatures or across a range of temperatures. These systems are both marketed externally and allow for vertical integration with our probe stations.
Services and Support. In addition to routine installation services at the time of sale, we offer services to enable our customers to maintain and more effectively utilize our products and to enhance our customer relationships. In addition to traditional maintenance services, our applications engineers assist our customers in test methodologies to make advanced measurements during process and product development, and during mass production.
Customers
Our customers include companies, universities and institutions that design or make semiconductor, and semiconductor related products in the Foundry & Logic, DRAM, Flash, Display and Sensor markets. Our customers use our products to test nearly all semiconductor device types, including mobile application processors, microprocessors, microcontrollers, graphic processors, radio frequency, analog, mixed signal, image sensors, opto-electrical, DRAM memory, NAND flash memory and NOR flash memory devices.
Fabless semiconductor suppliers do not manufacture their own semiconductors, but they purchase our analytical probes and probe stations for research and development, and device characterization. They also purchase, or direct their foundries or wafer test facilities to purchase, our probe cards to test wafers manufactured for them.
We believe our customers consider timely service and support to be an important aspect of our relationship as they are frequently associated with high-volume manufacturing and design-specific product ramps. Our probe stations are installed at customer sites either by us, our manufacturers’ representatives or our distributors, depending on the complexity of the installation and the customer’s geographic location. We assist our customers in the selection, integration and use of our products through application engineering support. We also provide worldwide on-site probe card maintenance and service
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training, seminars and telephone support. In certain geographic regions, and for selected products, our manufacturers’ representatives and distributors provide additional service and support.
Information concerning revenue by geographic region and by country based upon ship-to location appears under Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations - Revenues - Revenues by Geographic Region and Note 15 of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.
Information concerning revenue concentration by customer appears under Note 2 of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K. The following customers represent 10% or more of our quarterly revenues:
| Fiscal Quarters Ended | |||||||||||||||||||||||||||||||||||||||||||||||
| Dec. 28, 2019 | Sep. 28, 2019 | June 29, 2019 | Mar. 30, 2019 | Dec. 29, 2018 | Sep. 29, 2018 | June 30, 2018 | Mar. 31, 2018 | ||||||||||||||||||||||||||||||||||||||||
| Intel Corporation | 28.6 | % | 23.9 | % | 26.1 | % | 21.3 | % | 21.9 | % | 24.4 | % | 15.1 | % | 14.0 | % | |||||||||||||||||||||||||||||||
| Samsung Electronics., LTD. | 14.8 | % | * | 11.1 | % | 13.8 | % | 13.8 | % | * | * | 10.1 | % | ||||||||||||||||||||||||||||||||||
| SK Hynix Inc. | * | 13.5 | % | * | * | * | * | 11.5 | % | * | |||||||||||||||||||||||||||||||||||||
| Micron Technology, Inc. | * | 11.9 | % | 10.1 | % | * | * | 12.0 | % | * | * | ||||||||||||||||||||||||||||||||||||
| Taiwan Semiconductor Manufacturing Co.,LTD. | * | * | * | * | 10.9 | % | * | * | * | ||||||||||||||||||||||||||||||||||||||
| 43.4 | % | 49.3 | % | 47.3 | % | 35.1 | % | 46.6 | % | 36.4 | % | 26.6 | % | 24.1 | % | ||||||||||||||||||||||||||||||||
* Less than 10% of revenues.
Segment and Enterprise-Wide Disclosures
See Note 15 of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for certain financial information related to our segments and our enterprise-wide disclosures.
Manufacturing
Our probe cards are designed for each of our customers' unique designs, by modifying and adapting our product architectures to meet an individual customer’s chip layout and test requirements. Our proprietary manufacturing processes for our probe cards include a complex interconnection system-level design process; a front-end process, which may include wire bonding, photolithography, plating and metallurgical processes, dry and electro-deposition, pick and place assembly; and a back-end process, which includes general assembly and test. Critical steps in our manufacturing process are performed in a variety of clean room environments as stringent as a Class 100, depending on the requirements of the specific manufacturing processes.
Our probe stations and metrology systems are designed to provide highly accurate electrical and optical measurements enabled by precise and reliable mechanical components and assemblies. We prototype and perform robust testing of our product designs and components to ensure high electrical signal integrity, mechanical accuracy and safety. We also monitor our product quality throughout the various stages of our manufacturing processes using a variety of process control methods and tests.
We depend on suppliers for materials and some critical components of our manufacturing processes, including ceramic and organic substrates and complex printed circuit boards. We also rely on suppliers to provide certain contact elements and interconnects that are incorporated into our products. Some of these components and materials are supplied by a single vendor, and some are subject to certain minimum order quantities. Generally, we rely on purchase orders rather than long-term contracts with our suppliers, which subjects us to risks, including price increases, manufacturing capacity constraints and component shortages. We continually assess and evaluate alternative sources of supply for all components and materials.
Our primary manufacturing facilities are located in Livermore, San Jose and Carlsbad, California, Beaverton, Oregon, United States, and in Thiendorf, Germany. We also perform manufacturing operations in our facilities in Munich and Bergisch Gladbach, Germany; Suzhou, China; and Yokohama, Japan.
We maintain repair and service capabilities in Livermore, San Jose, and Carlsbad, California and Beaverton, Oregon, United States; Thiendorf, Dresden and Munich, Germany; Montbonnot Saint Martin, France; Bundang, South Korea; Yokohama and Hiroshima, Japan; Suzhou and Shanghai, China; Hsinchu, Taiwan; and Singapore.
Research, Development and Engineering
The semiconductor industry is subject to rapid technological change and new product introductions and enhancements. We believe that our continued commitment to research and development and our timely introduction of new and enhanced products
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and technologies are integral to maintaining and enhancing our competitive position. We allocate significant resources to these efforts and prioritize those resources to prepare for our customers’ next generation electrical test and measurement challenges. We also increasingly seek to deploy our resources to solve fundamental challenges that are both common to, and provide competitive advantage across, our probe card and system product offerings and roadmaps.
Sales and Marketing
We sell our products worldwide through a global direct sales force and through a combination of manufacturers’ representatives and distributors.
Our direct sales and marketing staff is located in the United States, China, France, Germany, Italy, United Kingdom, Japan, Singapore, South Korea, and Taiwan. They work closely with customers in the effort to understand their businesses, anticipate trends and define products that will provide significant technical and economic advantages to our customers. We employ a highly skilled team of application and customer support engineers that support our customers as they integrate our products into their research, development and manufacturing processes. Through these customer relationships, we seek to develop a close understanding of customer and product requirements to align our capabilities with our customers’ roadmaps and production ramps.
We also have a network of representatives and distributors across the globe to broaden our reach. We engage sales representatives to act as independent third parties that agree to promote our products, at our prices and on terms set by us, in return for a commission based on sales. We typically use sales representatives in areas that we believe require greater levels of customer support than we can deliver from our own sales offices and where local language capabilities can offer an advantage. Our distributors purchase our products and resell them at prices and upon terms set by the particular distributor. We typically use distributors in particular geographies due to local regulations or business customs.
Environmental Matters
We are subject to U.S. federal, state, local, and foreign governmental laws and regulations relating to the protection of the environment, including those governing the discharge of pollutants into the air and water, the management and disposal of hazardous substances and wastes, the clean-up of contaminated sites and the maintenance of a safe workplace. We believe that we comply in all material respects with the environmental laws and regulations that apply to us as of December 28, 2019. We did not receive any notices of violations of environmental laws and regulations in fiscal 2019, 2018 or 2017. In the future, we may receive notices of violations of environmental regulations, or otherwise learn of such violations. Environmental contamination or violations may negatively impact our business.
Competition
The markets for our products are highly competitive and we anticipate that these markets will continually evolve and be subject to rapid technological change. Our current and potential competitors are as below:
Probe Card Market. The probe card market comprises of many domestic and foreign companies, and has historically been fragmented with many local suppliers servicing individual customers in often differentiated applications. Our primary competitors are Advantest Corporation, AMST Co., Ltd., Feinmetall GmbH, Japan Electronic Materials Corporation, Korea Instrument Co., Ltd., M2N Co., Ltd., Microfriend Inc., Micronics Japan Co., Ltd., MPI Corporation, Micro Square Technology Inc., NHK Spring Co., Ltd., Soulbrain Engineering, Nidec SV TCL, Synergie CAD, TechnoProbe S.p.A, TSE Co., Ltd., WinWay Technology Co., Ltd., WILL-Technology Co., Ltd., Yokowo and Unity SC, among others.
Probe card vendors such as Japan Electronic Materials Corporation, Micronics Japan Company, Ltd. and TechnoProbe, offer probe cards built using similar types of lithographic patterning as do we. The high capital investment and other costs associated with the development of lithographically defined probe cards and the time and high cost of the customer evaluation process represent significant barriers to entry for this type of technology.
We believe that the primary competitive factors in the production probe card market depend upon the type of integrated circuit being tested, but also include customer service, knowledge of measurement techniques, delivery time, price, probe card lifetime, chip damage prevention, probe tip touch-down accuracy, speed and frequency of the probe card, number of chips contacted in parallel, number of probe tips and their layout, signal integrity, and frequency and effectiveness of any required cleaning. As a result of our relative strengths in these areas, we believe that we compete favorably in the advanced probe card market, and in probe cards for parallel testing of chips with densely-packed bond pads, bumps or pillars, and in high signal integrity testing of wireless radio frequency devices that operate up to millimeter-wave frequencies, a capability needed for components used in 5G applications.
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Analytical Probes. Our primary competitor in the analytical probe market is GGB Industries Inc. Regional competitors include Yokowo and TechnoProbe Co Ltd. in Japan, and MPI/Allstron in Taiwan. We believe that the primary competitive factors in this market are breadth of probe types, probe frequency and electrical signal integrity, contact integrity and the related cleaning required, knowledge of measurement techniques, calibration support, delivery time and price. We believe that we compete favorably with respect to these factors.
Probe Stations. Our primary competitors in the probe station market are HiSOL, Inc., LTD/Accretech, The Micromanipulator Company Inc., MPI Corporation, Semiprobe, Signatone Corporation, Tokyo Electron (“TEL”), Tokyo Seimitsu Co., Vector Semiconductor Co. Ltd., and Wentworth Laboratories Inc. We believe that the primary competitive factors in the probe station market are measurement accuracy and versatility, measurement speed, automation features, knowledge of measurement techniques, completeness of the measurement solutions, delivery time and price. We believe that we compete favorably with respect to these factors.
Metrology Systems. Our primary competitors in the metrology system market are Filmetrics, Nova Measuring Instruments Ltd., Bruker Corporation, Camtek Ltd., Cohu, Inc., Nanometrics Incorporated (recently acquired by Rudolph Tehnologies, Inc.) and Unity SC. We believe that the primary competitive factors in this market are breadth of measurement types, measurement accuracy, measurement speed and throughput, ability apply algorithms to multiple sensor inputs to indirectly measure attributes not otherwise directly observable, knowledge of measurement techniques and applications, delivery time and price. We believe that we compete favorably with respect to these factors.
Thermal Subsystems. In the market for thermal subsystems, we compete principally against ERS Electronic GmbH, Espec Corp, and Temptronic Corporation. In addition, many of our probe station competitors develop and produce their own thermal subsystems for use in their products. We believe the primary competitive factors in this market are thermal performance, reliability, flexibility and completeness of product offerings. We believe that we compete favorably with respect to these factors.
Some of our competitors are also suppliers of other types of test and measurement equipment or other semiconductor equipment and may have greater financial and other resources than we do. Our competitors may enhance their current products and may introduce new products that will be competitive with ours. New alternatives to our products may also be introduced, by our current competitors or others, which may reduce the value of one or more of our products.
Semiconductor manufacturers may implement chip designs that include capabilities or use other methodologies that increase test throughput and reduce test content. This may reduce or eliminate some or all of our current products’ advantages. Semiconductor manufacturers may also increase their use of test strategies that include low performance semiconductor testers, less complex probe cards, or test procedures that do not involve our products. Our ability to compete favorably may also adversely affect the long-standing relationships between our competitors and certain semiconductor manufacturers.
Intellectual Property
Our success depends in part upon our ability to continue to innovate and invest in research and development to meet the testing requirements of our customers, to maintain and protect our proprietary technology, and to conduct our business without infringing on the proprietary rights of others. We rely on a combination of patents, trade secrets, trademarks and contractual restrictions on disclosure to protect our intellectual property rights. We have filed actions to enforce those rights against third parties in the past, and may pursue such actions in the future.
We have generated, and continue to generate and maintain, patents and other intellectual property rights covering innovations that are intended to create a competitive advantage, and to support the protection of our investments in research and development. We believe that we possess one of the most substantial patent portfolios relevant to our products.
Although we believe that our patents and other intellectual property rights have significant value for each of our segments, we do not believe that maintaining or growing our business is materially dependent on any single patent. Due to the rapid pace of innovation within the markets that we serve, it is possible that our protection through patents may be less important than factors such as our technological expertise, continuing development of new products and technologies, protection of trade secrets, market penetration, customer relationships, and our ability to provide comprehensive support and service to customers worldwide.
No assurance can be given that any patents will not be challenged, invalidated or circumvented, or that the rights granted thereunder will provide us with a sustained competitive advantage. In addition, there can be no assurance that we will be able to protect our technology, or that competitors will not be able to independently develop similar or functionally competitive
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technologies, design around our patents, or attempt to manufacture and sell infringing products in countries that do not strongly enforce intellectual property rights.
Employees
As of December 28, 2019, we had 1,836 regular full-time employees, including 1,067 in operations, 355 in research and development, 265 in sales and marketing and 149 in general and administrative functions. By region, 1,248 of our employees were in North America, 328 in Asia and 260 in Europe. No employees are currently covered by a collective bargaining agreement. However, certain employees at our manufacturing facility in Thiendorf, Germany, are represented by a works council. We believe that, overall, our relations with our employees are good.
Available Information
We maintain a website at http://www.formfactor.com. We make available free of charge on our website our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the United State Securities and Exchange Commission, or SEC. The reference to our website does not constitute incorporation by reference of the information contained at the site.
Directors and Executive Officers
The information required by this item is incorporated by reference to the proxy statement for our 2020 Annual Meeting of Stockholders.
Item 1A: Risk Factors
In addition to the other information in this Annual Report on Form 10-K, you should carefully consider the risk factors discussed in this Annual Report on Form 10-K in evaluating FormFactor and our business. If any of the identified risks actually occur, our business, financial condition and results of operations could be materially adversely affected, the trading price of our common stock could decline, and you may lose all or part of your investment in our common stock. The risks and uncertainties described in this Annual Report on Form 10-K are not the only ones we face. Additional risks that we currently do not know about, or that we currently believe to be sufficiently important to describe here, may also impair our business operations or the trading price of our common stock.
Risks Relating to the Nature and Operations of Our Business
The markets in which we participate are competitive, and if we do not compete effectively, our operating results could be harmed.
We have experienced increased competition in the markets in which we operate, and we expect competition to intensify in the future. Increased competition has resulted in, and in the future is likely to result in, price reductions, reduced gross margins or loss of market share. Competitors might introduce new competitive products for the same markets that our products currently serve. These products may have better performance, lower prices, shorter delivery times or broader acceptance than our products.
In addition, it is possible that new competitors, including test equipment manufacturers, may offer new technologies that reduce the value of our products. Also, semiconductor manufacturers may implement chip designs or methodologies that increase test throughput, reduce test content, or change their test procedures, thereby eliminating some or all of our current product advantages.
Our current or potential competitors may have larger customer bases, more established customer relationships or greater financial, technical, manufacturing, marketing and other resources than we do. As a result, they might be able to respond more quickly to new or emerging technologies and changes in customer requirements, devote greater resources to the development, promotion, sale and support of their products, and reduce prices to increase market share.
If we do not innovate and keep pace with technological developments in the semiconductor industry, our products might not be competitive, and our revenues and operating results could suffer.
We must continue to innovate and to invest in research and development to improve our competitive position and to meet the test and measurement requirements of our customers. Our future growth depends, in significant part, upon our ability to work effectively with and anticipate the future technical and operational needs of our customers and to develop and support new products and product enhancements to meet these needs on a timely and cost-effective basis. Our customers’ needs are becoming more challenging as the semiconductor industry continues to experience rapid technological change driven by the
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demand for complex circuits that are shrinking in size, are increasing in speed and functionality, and are produced on shorter cycle times and at reduced unit cost.
Successful product design, development and introduction on a timely basis require that we:
•collaborate with customers to understand their future requirements;
•design innovative and performance-enhancing product architectures, technologies and features that differentiate our products from those of our competitors;
•in some cases, engage with third parties who have particular expertise in order to complete one or more aspects of the design and manufacturing process;
•qualify with the customer(s) the new product, or an existing product incorporating new technology;
•transition our products to new manufacturing technologies;
•offer our products for sale at competitive price levels while maintaining our gross-margins within our financial model;
•identify emerging technological trends in our target markets;
•maintain effective marketing strategies;
•respond effectively to technological changes or product announcements by others; and
•adjust to changing market conditions quickly and cost-effectively.
Not only do we need the technical expertise to implement the changes necessary to keep our technologies current, but we must also rely heavily on the judgment of our management to anticipate future market trends. If we are unable to timely predict industry changes or industry trends, or if we are unable to modify our products or design, manufacture and deliver new products on a timely basis, or if a third party with which we engage does not timely deliver a component or service for one of our product modifications or new products, we might lose customers or market share. In addition, we might not be able to recover our research and development expenditures, which could harm our operating results.
We depend upon the sale of our probe card products for the substantial majority of our revenues.
We derive the majority of our revenues from the sale of our probe card products, primarily to manufacturers of microprocessor, foundry & logic and memory devices, despite progress in diversifying our product offerings. We anticipate that sales of probe cards will represent a substantial majority of our revenues for the foreseeable future. Our success depends in large part upon the continued acceptance of our products on the basis of a variety of factors including performance, quality, timely delivery and price, and depends upon our ability to continue to develop and introduce new products that meet our customers’ requirements. The degree to which we depend upon the sales of our probe card products for our revenues may increase our susceptibility to failures to satisfy the customers for such products, which may adversely affect our revenues and our ability to grow our business.
We derive a substantial portion of our revenues from a small number of customers.
A relatively small number of customers account for a significant portion of our revenues. Two customers represented a combined 37% of total revenues in fiscal 2019 and one customer represented 19 % and 26% of total revenues in fiscal 2018 and 2017, respectively. We anticipate that sales of our products to a relatively small number of customers will continue to account for a significant portion of our revenues and can, as demonstrated in fiscal 2019, drive material fluctuations in sales volume. Consolidation in the semiconductor industry may increase this concentration. In the future, the loss of any of these customers, or cancellation, reduction or deferral of even a small number of purchases of our products by these customers could significantly reduce our revenues. Cancellations, reductions, deferrals or non-payment of invoices, could result from another downturn in the semiconductor industry, manufacturing delays, quality or reliability issues with our products, or from interruptions to our customers’ operations due to fire, natural disasters or other events, or other issues with the financial stability of our customers. Furthermore, because our probe cards are custom products designed for our customers’ unique wafer designs, any cancellations, reductions or delays can result in significant, non-recoverable costs. In some situations, our customers might be able to cancel or reduce orders without a significant penalty.
If our relationships with our customers deteriorate, our product development activities could be harmed.
The success of our product development efforts depends upon our ability to anticipate market trends and to collaborate closely with our customers. Our relationships with these customers provide us with access to valuable information regarding manufacturing and process technology trends in the semiconductor industry, which enables us to better plan our product development activities. These relationships also provide us with opportunities to understand the performance and functionality requirements of our customers, which improves our ability to customize our products to fulfill their needs. Our relationships with our customers could deteriorate as a result of a variety of factors, such as if they become concerned about our ability to deliver quality products on a timely basis or to protect their intellectual property. Many of our customers are large companies that place significant orders with us, and the consequences of deterioration in our relationship with any of these companies
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could be significant due to the competitiveness of our industry and the significant influence that these companies exert in our market.
Consolidation in the semiconductor industry and within the semiconductor test equipment market could adversely affect the market for our products and negatively impact our ability to compete.
Consolidation in the semiconductor industry may reduce our customer base and could adversely affect the market for our products, which could cause a decline in our revenues. With consolidation, the number of actual and potential customers for our products has decreased in recent years. Consolidation may lead to relatively fewer opportunities to sell our products if we are not chosen as a supplier by any given prospective customer, and may lead to increased pricing pressures from customers that have greater volume purchasing power.
There has also been consolidation within the semiconductor test equipment market. This consolidation trend could change our interactions and relationships with complementary tester, instrument, and prober suppliers and negatively impact our revenue and operating results.
Changes in customers’ test strategies, equipment and processes could decrease customer demand for our products.
The demand for our products depends in large part upon the number of semiconductor designs, the pace of technology and architecture transitions in chip designs and overall semiconductor unit volume. The number of probe cards involved in a customer’s wafer testing can depend upon the number of devices being tested, the complexity of these devices, the test software program, the test equipment itself, and the utilization of chip designs featuring design-for-testability capabilities. Customers may demand fewer probe cards or probing systems if they use test strategies that reduce the technical requirements on test equipment, improve available data on device performance earlier in the manufacturing process, or test devices later in the manufacturing process. Changes in the effectiveness of test technologies and test strategies used by customers may cause us to lose sales and revenues.
We may also lose sales if new semiconductor technologies or designs are implemented which cannot be efficiently tested using the products that we offer, or if semiconductor manufacturers reduce the amount or degree of testing that they perform. We may also incur significant research and development expenses in order to introduce new product architectures and platforms to serve the testing needs of new semiconductor technologies.
Cyclicality in the semiconductor industry may adversely impact our sales.
The semiconductor industry has historically been cyclical and is characterized by wide fluctuations in product supply and demand. From time to time, this industry has experienced significant downturns, often in connection with, or in anticipation of, maturing product and technology cycles, excess inventories and declines in general economic conditions. The global economic and semiconductor downturns have caused and may in the future cause our operating results to decline dramatically from one period to the next. Global economic stability can be negatively affected by a variety of factors and interrelationships, including the potential impact of Brexit, epidemics (such as the current COVID-19), military conflicts, climate change, trade barriers and other factors acting alone or in combination. Some of these factors can also have a more direct adverse impact upon our operations to varying degrees. Our business depends heavily upon the development and manufacture of new semiconductors, the rate at which semiconductor manufacturers make transitions to smaller nanometer technology nodes and implement tooling cycles, the volume of production by semiconductor manufacturers and the overall financial strength of our customers, which, in turn, depend upon the current and anticipated market demand for semiconductors and products, such as servers, personal computers, automobiles and cell phones, that use semiconductors. During industry downturns, semiconductor manufacturers sharply curtail their spending, including their spending on our products, which may adversely impact our revenues, gross margins and results of operations. Further, a protracted downturn could cause one or more of our customers to become insolvent, resulting in a loss of revenue and impacting our ability to collect on accounts receivable. The timing, length and severity of these cyclical downturns are difficult to predict and our business depends on our ability to plan for and react to these cyclical changes.
Because we generally do not have a sufficient backlog of unfilled orders to meet our quarterly revenue targets, revenues in any quarter are substantially dependent upon customer orders received and fulfilled in that quarter.
Our revenues are difficult to forecast because we generally do not have sufficient backlog of unfilled orders to meet our quarterly revenue targets at the beginning of a quarter. Rather, a substantial percentage of our revenues in any quarter depend upon customer orders for our products that we receive and fulfill in that quarter. Because our expense levels are based in part on our expectations as to future revenues and to a large extent are fixed in the short term, we might be unable to adjust spending in time to compensate for any unexpected shortfall in revenues. Accordingly, any significant shortfall of revenues in relation to our expectations could hurt our operating results.
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If our ability to forecast demand for our products or the predictability of our manufacturing yields deteriorates, we could incur high inventory losses.
Each semiconductor chip design requires a custom probe card. Because our products are design-specific, demand for our products is difficult to forecast. Due to our customers’ short delivery time requirements, we often design and procure materials and, at times, produce our products in anticipation of demand for our products rather than in response to an order. Our manufacturing yields and inventory requirements, particularly for new probe card products or when we are operating at high output levels, have at times been unpredictable. If we do not obtain orders as we anticipate, if we suffer manufacturing errors, or if we build additional inventory to compensate for unpredictable manufacturing yields, we could have excess or obsolete inventory that we may not be able to sell, which would likely result in inventory write-offs or material charges for scrap.
If we are unable to efficiently manufacture our existing and new products, our business may be materially adversely affected.
We must continuously improve our manufacturing processes in an effort to increase yields and product performance, lower our costs and reduce the time required for us to design, manufacture and deliver our products in volume. If we cannot do these things, both our existing products and our new products may not be commercially successful, our revenues may be adversely affected, our customer relationships and our reputation may be harmed and our business may be materially adversely affected.
To improve our manufacturing processes, we have incurred, and may incur in the future, substantial costs in an effort to optimize capacity and yields, open new manufacturing facilities, implement new manufacturing technologies, methods and processes, purchase new equipment, upgrade existing equipment and train technical personnel. We have experienced, and may experience in the future, manufacturing delays and other inefficiencies in connection with implementation of these improvements and customer qualifications of new processes, which have caused and could cause in the future, our operating results to decline. These delays and other inefficiencies may arise from a variety of factors, including disruptions to or the unavailability of sufficient electrical power as a result of insufficient electrical power infrastructure in the regions where we have manufacturing facilities such as in California.
We have also experienced, and may experience in the future, difficulties in manufacturing our complex products in volume on time, and at acceptable yields and cost and installation issues in the field due to the complexity of customer design requirements, including integration of probe cards with varying customer test cell environments and testing of semiconductor devices over a wide temperature range.
If we are unable to continue to reduce the time it takes for us to design and produce products, our growth could be impeded.
Our customers continuously seek to reduce the time it takes them to introduce new products to market. The cyclicality of the semiconductor industry, coupled with changing demands for semiconductor products, requires our customers to be flexible and highly adaptable to changes in the design, volume and mix of products they must produce. We may be unable to design, configure and produce our products within the short cycle times required to respond to such rapid changes. We have lost sales in the past where we were unable to meet a customer’s required delivery schedules. If we are unable to continue to reduce the time it takes for us to design, manufacture and ship our products in response to the needs of our customers, our competitive position could be harmed and we could lose sales.
Products that do not meet specifications or that contain defects could damage our reputation, decrease market acceptance of our technology, cause us to lose customers and revenues, and result in liability to us.
The complexity and ongoing development of our product designs and manufacturing processes could lead to design or manufacturing problems. Problems might result from a number of factors, including design defects, materials failure, failure of components manufactured by our suppliers to meet our specifications, contamination in the manufacturing environment, impurities in the materials used, and unknown sensitivities to process conditions such as temperature and humidity, and equipment failures. Any errors or defects could:
•cause lower than anticipated yields and lengthen delivery schedules;
•cause delays in product shipments;
•cause delays in new product introductions;
•cause us to incur warranty expenses;
•result in increased costs and diversion of development resources;
•cause us to incur increased charges due to unusable inventory;
•require design modifications; or
•decrease market acceptance or customer satisfaction with these products.
The occurrence of any one or more of these events could adversely affect our business, reputation and operating results.
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As part of our sales process, we could incur substantial sales and engineering expenses that do not result in revenues.
Our customers generally expend significant efforts evaluating and qualifying our products prior to placing an order. While our customers are evaluating our products, we might incur substantial sales, marketing, and research and development expenses. For example, we typically expend significant resources educating our prospective customers regarding the uses and benefits of our products and customizing them to the potential customer’s needs, for which we might not be reimbursed. The substantial resources we commit to our sales efforts may not result in any revenues from a customer. For example, many semiconductor processes, architectures, and designs never reach production, including those for which we may have expended development effort and expense. In addition, prospective customers might decide not to use our products or use our products for a relatively small percentage of their requirements after we have expended significant effort and expense toward product design, development, and/or manufacture.
We obtain some of the components and materials we use in our products from a sole source or a limited group of suppliers, and the partial or complete loss of one of these suppliers could cause production delays.
We obtain some of the components and materials used in our products, such as printed circuit board assemblies, plating materials and ceramic substrates, from a sole source or a limited group of suppliers, and in some cases alternative sources are not currently available. Because we rely on purchase orders rather than long-term contracts with the majority of our suppliers, we cannot guarantee our ability to obtain components and materials in the long term. A sole or limited source supplier could increase prices, which could lead to a decline in our gross profit. Our dependence upon sole or limited source suppliers exposes us to several other risks, including inability to obtain an adequate supply of materials, late deliveries, poor component quality, and business disruptions while we seek to identify and qualify alternative suppliers. The occurrence of any of these risks could adversely impact our business, results of operations and financial condition.
Our operations, or those of our important suppliers, business partners and customers could be adversely affected by events outside of our control such as epidemics and natural disasters.
We may be affected by natural disasters, epidemics or other events outside of our control. These events may impact our operations directly, or may disrupt the operations of our important suppliers, business partners and customers, in ways that can adversely affect our results of operations or financial condition.
For example, there is a developing epidemic originating in China identified as COVID-19. The COVID-19 epidemic is resulting in restrictions on travel and business operations in China and elsewhere. We ship a significant percentage of our products into China, and some of our customers’ operations in China are currently being negatively affected by the COVID-19 epidemic. We have delayed or canceled certain planned events intended to promote our products and activities with businesses in China. Some of the multi-national companies which drive the demand for our products are reporting that the COVID-19 epidemic is expected to negatively impact their operations and sales. It remains unknown how severely global supply chains, including for parts and materials that we use to manufacture our products, have been or will be affected by this epidemic. Similarly, the impacts of this epidemic upon the demand for our products remain uncertain. We could experience shortages, increased costs or reduced demand for our products particularly as this epidemic continues or worsens. In addition, the circumstances which give rise to new or existing infectious diseases becoming epidemics or pandemics with similar impacts are expected to persist indefinitely.
Another example of events outside of our control relates to the fact that our manufacturing facilities and corporate headquarters in California are located in seismically active areas. The manufacturing equipment and processes that we use can be severely disrupted by seismic activity. A significant seismic event in the areas of our operations could have a materially negative impact on our operations, financial results or financial condition.
Because we conduct most of our business internationally, we are subject to operational, economic, financial and political risks abroad.
Sales of our products to customers outside of the United States represent a significant part of our past and anticipated revenues. Our international sales as a percentage of our revenues were 74%, 75% and 66% for fiscal 2019, 2018 and 2017, respectively. Certain of our non-U.S. based customers also purchase through their subsidiaries in the United States. In the future, we expect international sales, to continue to account for a significant percentage of our revenues. Accordingly, we will be subject to risks and challenges that we would not otherwise face if we conducted our business solely in the United States.
These risks and challenges include:
•compliance with a wide variety of foreign laws and regulations;
•legal uncertainties regarding taxes, tariffs, quotas, export controls, export licenses and other trade barriers;
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•political and economic instability or foreign conflicts, including trade wars, that involve or affect the countries of our customers;
•difficulties in collecting accounts receivable and longer accounts receivable payment cycles;
•difficulties in staffing and managing personnel, distributors and representatives;
•reduced protection for intellectual property rights in some countries;
•currency exchange rate fluctuations, which could affect the value of our assets denominated in local currency, as well as the price of our products relative to locally produced products;
•the impact of pandemics or other disruptions to trade and production;
•seasonal fluctuations in purchasing patterns in other countries; and
•fluctuations in freight rates and transportation disruptions.
Any of these factors could harm our existing international operations, impair our ability to continue expanding into international markets or materially adversely affect our operating results. Political developments in the United States and elsewhere may increase the risks and uncertainties associated with conducting international business, including the possibilities of greater tariffs and other trade barriers in the regions where we conduct business. In fiscal 2019, we observed a continuing trend of increasing risks and challenges in the conduct of our international business activities, including with ongoing expanded tariffs and trade controls affecting the United States and China. Additionally, we are required to comply with foreign import and export requirements, customs and value added tax standards that can be unclear or complex. Our failure to meet these requirements and standards could negatively impact our business operations.
Our foreign operations expose us to additional risks relating to currency fluctuations.
Our international operations are significant to our revenues and net income, and we plan to continue to grow internationally. We have significant business operations located in Germany. While we report our financial results in U.S. dollars, we incur certain costs in other currencies, and have certain foreign currency denominated assets and liabilities. We, therefore, face exposure to fluctuations in currency exchange rates. Significant fluctuations in exchange rates between the U.S. dollar and foreign currencies may adversely affect our revenues and earnings, despite our hedging of a portion of our international currency exposures. Additionally, hedging programs are inherently risky and could expose us to additional costs and risks that could adversely affect our financial condition and results of operations.
If we fail to protect our proprietary rights, our competitors might gain access to our technology, which could adversely affect our ability to compete successfully in our markets.
If we choose not to protect our proprietary rights or fail in our efforts to protect our proprietary rights, our competitors might gain access to our technology. Unauthorized parties might attempt to copy aspects of our products or to obtain and use information that we regard as proprietary. Others might independently develop similar or competing technologies or methods or design around our patents. In addition, the laws of many foreign countries in which we or our customers do business do not protect our intellectual property rights to the same extent as the laws of the United States. As a result, our proprietary rights could be compromised, our competitors might offer products similar to ours and we might not be able to compete successfully. We also cannot assure that:
•our means of protecting our proprietary rights will be adequate;
•patents will be issued from our pending or future applications;
•our existing or future patents will be sufficient in scope or strength to provide any meaningful protection or commercial advantage to us;
•our patents or other intellectual property will not be invalidated, circumvented or successfully challenged in the United States or foreign countries; or
•others will not misappropriate our proprietary technologies or independently develop similar technologies, duplicate our products or design around any of our patents or other intellectual property, or attempt to manufacture and sell infringing products in countries that do not strongly enforce intellectual property rights.
We have spent and may be required to spend in the future, significant resources to monitor and protect our intellectual property rights. Any litigation, whether or not resolved in our favor, and whether initiated by us or by a third party, could result in significant and possibly material expenses to us and divert the efforts of our management and technical personnel.
We might be subject to claims of infringement of other parties’ proprietary rights.
In the future, as we have in the past, we might receive claims that we are infringing intellectual property rights of others and inquiries about our interest in a license or assertions that we need a license to such intellectual property. The semiconductor industry is characterized by uncertain and conflicting intellectual property claims and vigorous protection and pursuit of these rights. The resolution of any claims of this nature, with or without merit, could be time consuming, result in costly litigation or cause product shipment delays. In the event of an adverse ruling or settlement, we might be required to pay substantial
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damages, cease the use or sale of infringing products, spend significant resources to develop non-infringing technology, discontinue the use of certain technology and/or enter into license agreements. License agreements, if required, might not be available on terms acceptable to us or at all. The loss of access to any of our intellectual property or the ability to use any of our technology could harm our business. Finally, certain of our customer contracts contain provisions that require us to defend or indemnify our customers for third party intellectual property infringement claims, which would increase the cost to us of an adverse ruling or settlement.
We have recorded restructuring, inventory write-offs and asset impairment charges in the past and may do so again in the future, which could have a material negative impact on our business.
We recorded restructuring charges in fiscal 2019, 2018 and 2017. We may implement restructuring plans in the future, which would require us to take additional, potentially material, restructuring charges related to employee terminations, asset disposal or exit costs. We may also be required to write off additional inventory if our product build plans or usage of inventory experience declines, and such additional write-offs could constitute material charges. In addition, significant adverse changes in market conditions could require us to take additional material impairment charges related to our long-lived assets if the changes impact the critical assumptions or estimates that we use in our assessment of the recoverability of our long-lived assets. Any such additional charges, whether related to restructuring, asset impairment or factory underutilization may have a material negative impact on our operating results and related financial statements.
We rely on the security and integrity of our electronic data systems and our business could be damaged by a disruption, security breach or other compromise of these systems.
We rely on electronic data systems to operate and manage our business and to process, maintain, and safeguard information, including information belonging to our customers, partners, and personnel. These systems may be subject to failures or disruptions as a result of, among other things, natural disasters, accidents, power disruptions, telecommunications failures, new system implementations, acts of terrorism or war, physical security breaches, computer viruses, or other cyber security attacks. Such system failures or disruptions could subject us to downtimes and delays, compromise or loss of sensitive or confidential information or intellectual property, destruction or corruption of data, financial losses from remedial actions, liabilities to customers or other third parties such as under privacy laws, or damage to our reputation or customer relationships. Any of the foregoing could have a material adverse effect on our business, operating results and financial condition.
We may not be able to recruit or retain qualified personnel.
We believe our ability to manage successfully and grow our business and to develop new products depends, in large part, on our ability to recruit and retain qualified employees, particularly highly skilled technical, sales, management, and key staff personnel. Competition for qualified resources is intense and other companies may have greater resources available to provide substantial inducements to lure key personnel away from us or to offer more competitive compensation packages to individuals we are trying to hire.
Our failure to comply with environmental laws and regulations could subject us to significant fines and liabilities, and new laws and regulations or changes in regulatory interpretation or enforcement could make compliance more difficult and costly.
We are subject to various U.S. federal, state and local, and foreign governmental laws and regulations relating to the protection of the environment, including those governing the discharge of pollutants into the air and water, the management and disposal of hazardous substances and wastes, the cleanup of contaminated sites and the maintenance of a safe workplace. We could incur substantial costs, including cleanup costs, civil or criminal fines or sanctions and third-party claims for property damage or personal injury, as a result of violations of or liabilities under environmental laws and regulations or non-compliance with the environmental permits required at our facilities.
These laws, regulations and permits also could require the installation of costly pollution control equipment or operational changes to limit pollution emissions or decrease the likelihood of accidental releases of hazardous substances. In addition, changing laws and regulations, new laws and regulations, stricter enforcement of existing laws and regulations, the discovery of previously unknown contamination at our or others’ sites or the imposition of new cleanup requirements could require us to curtail our operations, restrict our future expansion, subject us to liability and cause us to incur future costs that could harm our operations, thereby adversely impacting our operating results and cash flow.
Natural and man-made disasters may negatively impact our business.
Our business is vulnerable to the direct and indirect impact of natural and man-made disasters, such as floods, earthquakes, volcanic eruptions, nuclear accidents, and acts of terrorism, epidemics (such as the current COVID-19), military conflicts, climate change, and other factors acting alone or in combination. Material parts of our manufacturing and research and development operations are located in areas of California and Oregon that are prone to earthquakes and could be substantially disrupted in the event of an earthquake. It is also possible that future natural and man-made disasters could negatively impact
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the sales of our products as a result of impacts upon our customers' ability to make or sell their products, or impacts upon our suppliers’ ability to supply components to us on a timely basis.
Risks Relating to Our Acquisitions
We may make additional acquisitions and investments in the future, which could put a strain on our resources, cause ownership dilution to our stockholders and adversely affect our financial results.
We may in the future make other acquisitions or investments, which may subject us to new or heightened risks. Integrating any newly acquired businesses, products or technologies into our company could put a strain on our resources, could be expensive and time consuming, could substantially reduce our cash reserves, could cause delays in product delivery and might not be successful. Future acquisitions and investments could divert management’s attention from other business concerns and expose our business to unforeseen liabilities or risks associated with entering new markets. In addition, we might lose key employees while integrating new organizations. We might not be successful in integrating any acquired businesses, products or technologies, and might not achieve anticipated revenues and cost benefits. Investments that we make may not result in a return consistent with our projections upon which such investments are made, or may require additional investment that we did not originally anticipate. In addition, future acquisitions could result in customer dissatisfaction, performance problems with an acquired company, potentially dilutive issuances of equity securities or the incurrence of debt and restrictive debt covenants, contingent liabilities, possible impairment charges related to goodwill or other intangible assets or other unanticipated events or circumstances. If any of these risks were to come about, our business, financial results and stock price could be materially and adversely affected.
If goodwill or other intangible assets that we recorded in connection with our past acquisitions become impaired, we could be required to take significant charges against earnings.
In connection with our accounting for business that we acquired, we have recorded a significant amount of goodwill and other intangible assets. Under U.S. generally accepted accounting principles, or GAAP, we must assess, at least annually and potentially more frequently, whether the value of goodwill and other indefinite-lived intangible assets have been impaired. Finite-lived intangible assets will be assessed for impairment in the event of an impairment indicator. Any reduction or impairment of the value of goodwill or other intangible assets will result in a charge against earnings, which could materially adversely affect our results of operations and stockholders’ equity in future periods. Refer to Note 2 to Notes to Consolidated Financial Statements for further details relating to our annual goodwill impairment assessment.
Risks Relating to Owning Our Stock
If we fail to maintain an effective system of internal and disclosure controls and procedures, we may not be able to accurately report our financial results or prevent fraud.
Effective internal and disclosure controls and procedures are necessary for us to provide reliable financial reports, to prevent fraud and to operate successfully as a public company. If we cannot provide reliable financial reports or prevent fraud, our business and reputation may be harmed. We regularly review and assess our internal controls over financial reporting and our disclosure controls and procedures. As part of that process, we may discover material weaknesses in our internal controls. If we fail to maintain effective controls or timely effect any necessary improvement of our internal and disclosure controls, we may not have accurate information to make management decisions, our operating results could be harmed or we may fail to meet our reporting obligations. Ineffective internal and disclosure controls could also cause stockholders to lose confidence in our reported financial information and our ability to manage our business, which would likely have a negative effect on the trading price of our securities.
The trading price of our common stock has been and is likely to continue to be volatile, and you might not be able to sell your shares at or above the price that you paid for them.
The trading prices of the securities of technology companies have been highly volatile. During fiscal 2019, our stock price (Nasdaq Global Market close price) ranged from $12.88 per share to $26.14 per share. The trading price of our common stock is likely to continue to be subject to wide fluctuations. Factors affecting the trading price of our common stock could include:
•variations in our operating results;
•our forecasts and financial guidance for future periods;
•announcements of technological innovations, new products or product enhancements, new product adoptions at semiconductor customers or significant agreements by us or by our competitors;
•reports regarding our ability to bring new products into volume production efficiently;
•the gain or loss of significant orders or customers;
•changes in the estimates of our operating results or changes in recommendations by any securities analysts that elect to follow our common stock;
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•rulings on litigation and proceedings;
•seasonality, principally due to our customers' purchasing cycles;
•market and competitive conditions in our industry, the entire semiconductor industry and the economy as a whole;
•recruitment or departure of key personnel; and
•announcements of mergers and acquisition transactions and the ability to successfully integrate the business activities of the acquired/merged company; and
•political and global economic instability, including as a result of trade barriers, natural disasters, epidemics (such as the current COVID-19), military conflicts, climate change, and other factors acting alone or in combination.
In addition, if the market for technology stocks or the stock market in general experiences loss of investor confidence, the trading price of our common stock could decline for reasons unrelated to our business, operating results or financial condition. The trading price of our common stock also might decline in reaction to events that affect other companies in our industry even if these events do not directly affect us.
Provisions of our certificate of incorporation and bylaws or Delaware law might discourage, delay or prevent a change of control of our company or changes in our management and, therefore, depress the trading price of our common stock.
Delaware corporate law and our certificate of incorporation and bylaws contain provisions that could discourage, delay or prevent a change in control of our company or changes in our management that the stockholders of our company may deem advantageous. These provisions:
•establish a classified board of directors so that not all members of our board are elected at one time;
•provide that directors may only be removed “for cause” and only with the approval of 66.7% of our stockholders;
•require super-majority voting to amend some provisions in our certificate of incorporation and bylaws;
•authorize the issuance of “blank check” preferred stock that our board could issue to increase the number of outstanding shares and to discourage a takeover attempt;
•limit the ability of our stockholders to call special meetings of stockholders;
•prohibit stockholder action by written consent, which requires all stockholder actions to be taken at a meeting of our stockholders;
•provide that the board of directors is expressly authorized to make, alter or repeal our bylaws; and
•establish advance notice requirements for nominations for election to our board or for proposing matters that can be acted upon by stockholders at stockholder meetings.
In addition, Section 203 of the Delaware General Corporation Law may discourage, delay or prevent a change in control of our company. In addition, each of our named executive officers and certain other executives of the company have entered into change of control severance agreements, which were approved by our Compensation Committee, which could increase the costs associated with a change of control and thus, potentially deter such a transaction.
Item 1B: Unresolved Staff Comments
None.
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Item 2: Properties
Our corporate headquarters, which includes sales, marketing, administration, manufacturing, engineering, and research and development facilities, is located in Livermore, California, United States. Our corporate headquarters comprises a campus of four buildings totaling approximately 213,000 square feet. We presently lease those four buildings. In addition, we lease office, repair and service, manufacturing and/or research and development space both inside and outside of the United States. The leases expire at various times through 2034. We believe that our existing and planned facilities are suitable for our current needs. We entered into a long-term lease agreement for 44,000 square feet of manufacturing space co-located with our existing facilities in Livermore, California, with the lease term beginning January 1, 2020, which is included in the table below.
Information concerning our properties as of December 28, 2019 is set forth below:
| Location | Principal Use | Square Footage | Ownership | |||||||||||||||||
| Livermore, California, United States | Corporate headquarters, sales, marketing, administration, product design, manufacturing, service and repair, distribution, research and development | 212,835 | Leased | |||||||||||||||||
| Beaverton, Oregon, United States | Sales, marketing, administration, product design, manufacturing, service and repair, distribution, research and development | 98,946 | Leased | |||||||||||||||||
| Carlsbad, California, United States | Sales, product design, administration, manufacturing, service and repair, distribution, research and development | 30,876 | Leased | |||||||||||||||||
| San Jose, California, United States | Administration, product design, manufacturing, service and repair, distribution, research and development | 24,700 | Leased | |||||||||||||||||
| Thiendorf, Germany | Sales, marketing, administration, manufacturing, service and repair, distribution, research and development | 54,361 | Leased | |||||||||||||||||
| Munich, Germany | Sales, manufacturing, service and repair, distribution, research and development | 10,656 | Leased | |||||||||||||||||
| Dresden, Germany | Sales and service | 2,960 | Leased | |||||||||||||||||
| Bergisch Gladbach, Germany | Manufacturing, service and repair, distribution, research and development | 13,075 | Leased | |||||||||||||||||
| Singapore | Sales, administration, product design, service, and field service | 24,413 | Leased | |||||||||||||||||
| Jubei City, Hsinchu, Taiwan | Sales, administration, product design, field service and repair center | 18,568 | Leased | |||||||||||||||||
| Bundang, South Korea | Sales, administration, product design, field service, and repair center | 17,161 | Leased | |||||||||||||||||
| Yokohama City, Japan | Sales, marketing, administration, product design, manufacturing, service and repair, distribution, research and development | 13,309 | Leased | |||||||||||||||||
| Hiroshima, Japan | Repair center | 1,007 | Leased | |||||||||||||||||
| Suzhou, China | Sales, marketing, administration, product design, manufacturing, service and repair, distribution, research and development | 15,177 | Leased | |||||||||||||||||
| Shanghai, China | Sales and service | 4,101 | Leased | |||||||||||||||||
| Montbonnot Saint Martin, France | Sales and service | 4,736 | Leased | |||||||||||||||||
| Legnano, Italy | Sales office | 215 | Leased | |||||||||||||||||
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Item 3: Legal Proceedings
From time to time, we may be subject to legal proceedings and claims in the ordinary course of business. As of December 28, 2019, and as of the filing of this Annual Report on Form 10-K, we were not involved in any material legal proceedings. In the future, we may become a party to additional legal proceedings that may require us to spend significant resources, including proceedings designed to protect our intellectual property rights. Litigation can be expensive and disruptive to normal business operations. Moreover, the results of legal proceedings are difficult to predict, and the costs incurred in litigation can be substantial, regardless of outcome.
Item 4: Mine Safety Disclosures
Not applicable.
PART II
Item 5: Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our common stock is listed on the Nasdaq Global Market under the symbol "FORM." As of February 14, 2020, there were 158 registered holders of record of our common stock.
Dividends
No cash dividends have been declared on shares of our common stock, and the Company currently does not intend to pay dividends in the future.
Repurchase of Common Stock
In February 2017, our Board of Directors authorized a program to repurchase up to $25 million of outstanding common stock to offset potential dilution from issuances of common stock under our employee stock purchase plan and equity incentive plan. The share repurchase program expired on February 1, 2020. During fiscal 2019 and 2018, we did not repurchase any shares. During fiscal 2017, we repurchased 1,367,617 shares of common stock for $19.0 million.
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Stock Price Performance Graph
The following graph shows the total stockholder return of an investment of $100 in cash on December 27, 2014 through December 28, 2019 for (1) our common stock, (2) the S&P 500 Index and (3) the RDG Semiconductor Composite Index. All values assume reinvestment of the full amount of all dividends. Stockholder returns over the indicated period are based on historical data and are not necessarily indicative of future stockholder returns.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among FormFactor, Inc., the S&P 500 Index, and the RDG Semiconductor Composite Index
*$100 invested on December 27, 2014 in stock or index, including reinvestment of dividends.
| Cumulative Total Return | |||||||||||||||||||||||||||||||||||
| December 27, 2014 | December 26, 2015 | December 31, 2016 | December 30, 2017 | December 29, 2018 | December 28, 2019 | ||||||||||||||||||||||||||||||
| FormFactor, Inc. | $ | 100.00 | $ | 105.32 | $ | 129.48 | $ | 180.92 | $ | 161.97 | $ | 301.04 | |||||||||||||||||||||||
| S&P 500 | 100.00 | 101.38 | 113.51 | 138.29 | 132.23 | 173.86 | |||||||||||||||||||||||||||||
| RDG Semiconductor Composite | 100.00 | 91.76 | 122.76 | 169.41 | 153.35 | 234.06 | |||||||||||||||||||||||||||||
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Item 6: Selected Financial Data
The following selected consolidated financial data is derived from our consolidated financial statements. This data should be read in conjunction with our consolidated financial statements and the related notes, and Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations contained elsewhere in this Annual Report on Form 10-K.
| Fiscal 2019 (2) | Fiscal 2018 (1)(2) | Fiscal 2017 (2) | Fiscal 2016 (2)(3)(5) | Fiscal 2015 (2)(4) | |||||||||||||||||||||||||
| (Dollars in thousands, except per share data) | |||||||||||||||||||||||||||||
| Consolidated Statements of Operations Data: | |||||||||||||||||||||||||||||
| Revenues | $ | 589,464 | $ | 529,675 | $ | 548,441 | $ | 383,881 | $ | 282,358 | |||||||||||||||||||
| Gross profit | 237,496 | 210,339 | 215,597 | 102,682 | 85,738 | ||||||||||||||||||||||||
| Net income (loss) | 39,346 | 104,036 | 40,913 | (6,557) | (1,523) | ||||||||||||||||||||||||
| Basic net income (loss) per share | 0.52 | 1.42 | 0.57 | (0.10) | (0.03) | ||||||||||||||||||||||||
| Diluted net income (loss) per share | 0.51 | 1.38 | 0.55 | (0.10) | (0.03) | ||||||||||||||||||||||||
| Consolidated Balance Sheets Data: | |||||||||||||||||||||||||||||
| Cash, cash equivalents and marketable securities | $ | 220,872 | $ | 149,003 | $ | 140,172 | $ | 108,905 | $ | 187,589 | |||||||||||||||||||
| Working capital | 282,483 | 235,302 | 213,693 | 172,002 | 214,437 | ||||||||||||||||||||||||
| Total assets | 839,882 | 728,222 | 646,574 | 618,982 | 342,723 | ||||||||||||||||||||||||
| Term loan, net of current portion | 15,639 | 34,971 | 87,228 | 125,475 | — | ||||||||||||||||||||||||
| Total stockholders' equity | 640,997 | 580,164 | 458,637 | 401,056 | 294,681 | ||||||||||||||||||||||||
| Number of employees | 1,836 | 1,676 | 1,685 | 1,571 | 958 | ||||||||||||||||||||||||
(1)Fiscal 2018 net income includes an income tax benefit of $75.8 million from a valuation allowance release against certain U.S. deferred tax assets. See Note 13 of Notes to Consolidated Financial Statements.
(2)Fiscal 2019, 2018, 2017, 2016, and 2015 net income (loss) includes restructuring charges, net, of $0.5 million, $0.2 million, $0.8 million, $7.3 million and $0.6 million, respectively.
(3)Fiscal 2016 net loss includes impairment charges of $12.4 million.
(4)Fiscal 2015 net loss includes the following: i) a $1.5 million gain from a business interruption insurance claim relating to a factory fire at a customer's facility; and ii) a $1.0 million net gain from the sale of intellectual property.
(5)Fiscal 2016 includes the following as a result of the Cascade Microtech acquisition: i) $82.6 million in revenue; ii) $27.8 million of intangible amortization expense; and iii) a $7.6 million charge for inventory-related step-up amortization.
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Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes included elsewhere in this Annual Report on Form 10-K. In addition to historical consolidated financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions as described under the "Note Regarding Forward-Looking Statements" that appears earlier in this Annual Report on Form 10-K. Our actual results could differ materially from those anticipated by these forward-looking statements as a result of many factors, including those discussed under "Item 1A: Risk Factors" and elsewhere in this Annual Report on Form 10-K.
Overview
FormFactor, Inc., headquartered in Livermore, California, is a leading provider of electrical 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 development to production. Customers use our products and services to lower production costs, improve yields, and enable development of complex next-generation products.
On October 9, 2019, we acquired 100% of the shares of FRT GmbH ("FRT"), a German-based company, for total consideration of $25.9 million, net of cash acquired of $1.7 million. The fair value of the purchase consideration was comprised of a $22.2 million cash payment and $5.4 million of contingent consideration. This acquisition strengthens our leadership in test and measurement by expanding our addressable market into 3D hybrid surface metrology and extending the optical applications scope of our existing Systems segment. We also entered into a term loan with a lender for an aggregate amount of $23.4 million to finance the acquisition. See Notes 4 and 5 of Notes to Consolidated Financial Statements for additional information.
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 and thermal sub-systems are included in the Systems segment.
We generated net income of $39.3 million in fiscal 2019 compared to net income of $104.0 million in fiscal 2018 and net income of $40.9 million in fiscal 2017. The decrease in net income in fiscal 2019 compared to fiscal 2018 was primarily due to a $75.8 million income tax benefit recognized in fiscal 2018 related to the release of valuation allowances against certain U.S. deferred tax assets and the increase in provision for income taxes due to the recognition of deferred tax expense. The increase in net income in fiscal 2018 compared to fiscal 2017 was primarily due to a $75.8 million income tax benefit recognized in fiscal 2018 related to the release of valuation allowances against certain U.S. deferred tax assets, partially offset by lower revenues and higher operating expenses.
Fiscal Year
We operate on a 52/53 week fiscal year, whereby the fiscal year ends on the last Saturday of December. The fiscal years ended December 28, 2019, December 29, 2018 and December 30, 2017 each included 52 weeks.
Use of Estimates
Preparation of our financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Management bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles ("GAAP"). The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of net revenue and expenses in the reporting period. Our accounting policies are fundamental to understanding our financial condition and results of operations reported in our
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financial statements and related disclosures. We have identified the following accounting policies as being critical because they require our management to make particularly difficult, subjective and/or complex judgments about the effect of matters that are inherently uncertain. Our management has discussed the development, selection, application and disclosure of these critical accounting policies with the Audit Committee of our Board of Directors.
Inventory Valuation
We state our inventories at the lower of cost (principally standard cost which approximates actual cost on a first in, first out basis) or net realizable value. We continually assess the value of our inventory and will periodically write down its value for estimated excess inventory and product obsolescence based upon an analysis of existing inventory quantities compared to estimated future consumption. Future consumption is estimated based upon assumptions about how past consumption, recent purchases, backlog and other factors indicate future consumption. On a quarterly basis, we review existing inventory quantities in comparison to our past consumption, recent purchases, backlog and other factors to determine what inventory quantities, if any, may not be sellable. Based on this analysis, we record an adjustment to the cost basis of inventory when evidence exists that the net realizable value of inventory is lower than its cost, which occurs when we have excess and/or obsolete inventory.
At the point of loss recognition, a new, lower cost basis for that inventory is established, and subsequent changes in facts and circumstances do not result in the restoration or increase in that newly established cost basis. Market conditions are subject to change, and demand for our products can fluctuate significantly. Actual consumption of inventories could differ from forecasted demand, and this difference could have a material impact on our gross profit and inventory balances based on additional provisions for excess or obsolete inventories or a benefit from the sale of inventories previously written down.
Revenue Recognition
We recognize revenue upon transferring control of products and services, and the amounts recognized reflect the consideration we expect to be entitled to receive in exchange for these products and services. An arrangement may include some or all of the following products and services: probe cards, systems, accessories, installation services, service contracts and extended warranty contracts.
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer. In contracts with multiple performance obligations, we identify each performance obligation and evaluate whether the performance obligation is distinct within the context of the contract at contract inception. Performance obligations that are not distinct at contract inception are combined and accounted for as one unit. Generally, the performance obligations in a contract are considered distinct within the context of the contract and are accounted for as separate units.
Our products may be customized to our customers’ specifications, however, control of our product is typically transferred to the
customer at the point in time the product is either shipped or delivered, depending on the terms of the arrangement, as the criteria for over time recognition are not met. In limited circumstances, substantive acceptance by the customer exists, which results in the deferral of revenue until acceptance is formally received from the customer. Judgment may be required in determining if the acceptance clause is substantive.
Installation services are routinely provided to customers purchasing our systems. Installation services are a distinct performance obligation apart from the systems and are recognized in the period they are performed. Service contracts, which include repair and maintenance service contracts, and extended warranty contracts are also distinct performance obligations and are recognized over the contractual service period, which ranges from one to three years. For service contracts recognized over time, we use a days-elapsed input to measure progress.
A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. In determining the transaction price, we evaluate whether the price is subject to refund or adjustment to determine the net consideration to which we expect to be entitled. We generally do not grant return privileges, except for defective products during the warranty period. Sales incentives and other programs that we may make available to customers are considered to be a form of variable consideration, which is estimated in determining the contract’s transaction price to be allocated to the performance obligations.
For contracts with multiple performance obligations, we allocate the contract’s transaction price to each performance obligation
based on its relative stand-alone selling price. The stand-alone selling prices are determined based on observable prices, which are the prices at which we separately sell the products. For items which do not have observable prices, we use our best estimate of the stand-alone selling prices.
We account for tax assessed by a governmental authority that is directly imposed on a revenue-producing transaction (i.e., sales, use, value added) on a net (excluded from revenue) basis.
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Results of Operations
In this section, we discuss the results of our operations for the year ended December 28, 2019 compared to the year ended December 29, 2018. For a discussion of the year ended December 29, 2018 compared to the year ended December 30, 2017, please refer to Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 29, 2018.
The following table sets forth our operating results as a percentage of revenues:
| Fiscal 2019 | Fiscal 2018 | Fiscal 2017 | |||||||||||||||
| Revenues | 100.0 | % | 100.0 | % | 100.0 | % | |||||||||||
| Cost of revenues | 59.7 | 60.3 | 60.7 | ||||||||||||||
| Gross profit | 40.3 | 39.7 | 39.3 | ||||||||||||||
| Operating expenses: | |||||||||||||||||
| Research and development | 13.8 | 14.2 | 13.5 | ||||||||||||||
| Selling, general and administrative | 18.0 | 18.7 | 17.4 | ||||||||||||||
| Total operating expenses | 31.8 | 32.9 | 30.9 | ||||||||||||||
| Operating income | 8.5 | 6.8 | 8.4 | ||||||||||||||
| Interest income | 0.5 | 0.3 | 0.1 | ||||||||||||||
| Interest expense | (0.3) | (0.6) | (0.8) | ||||||||||||||
| Other income (expense), net | * | * | * | ||||||||||||||
| Income before income taxes | 8.7 | 6.5 | 7.7 | ||||||||||||||
| Provision (benefit) for income taxes | 2.0 | (13.2) | 0.2 | ||||||||||||||
| Net income | 6.7 | % | 19.7 | % | 7.5 | % | |||||||||||
* Amounts insignificant and not greater than 0.1%.
Revenues by Segment
| Fiscal 2019 | Fiscal 2018 | Fiscal 2017 | |||||||||||||||
| (In thousands) | |||||||||||||||||
| Probe Cards | $ | 491,363 | $ | 434,269 | $ | 454,794 | |||||||||||
| Systems | 98,101 | 95,406 | 93,647 | ||||||||||||||
| Total | $ | 589,464 | $ | 529,675 | $ | 548,441 | |||||||||||
Revenues by Market
| Fiscal | % of | Fiscal | % of | Change | |||||||||||||||||||||||||||||||
| 2019 | Revenues | 2018 | Revenues | $ | % | ||||||||||||||||||||||||||||||
| (In thousands, except percentages) | |||||||||||||||||||||||||||||||||||
| Probe Cards Markets: | |||||||||||||||||||||||||||||||||||
| Foundry & Logic | $ | 318,552 | 54.0 | % | $ | 258,459 | 48.8 | % | $ | 60,093 | 23.3 | % | |||||||||||||||||||||||
| DRAM | 147,257 | 25.0 | 135,333 | 25.6 | 11,924 | 8.8 | |||||||||||||||||||||||||||||
| Flash | 25,554 | 4.3 | 40,477 | 7.6 | (14,923) | (36.9) | |||||||||||||||||||||||||||||
| Systems Market: | |||||||||||||||||||||||||||||||||||
| Systems | 98,101 | 16.7 | 95,406 | 18.0 | 2,695 | 2.8 | |||||||||||||||||||||||||||||
| Total revenues | $ | 589,464 | 100.0 | % | $ | 529,675 | 100.0 | % | $ | 59,789 | 11.3 | % | |||||||||||||||||||||||
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| Fiscal | % of | Fiscal | % of | Change | |||||||||||||||||||||||||||||||
| 2018 | Revenues | 2017 | Revenues | $ | % | ||||||||||||||||||||||||||||||
| (In thousands, except percentages) | |||||||||||||||||||||||||||||||||||
| Probe Cards Markets: | |||||||||||||||||||||||||||||||||||
| Foundry & Logic | $ | 258,459 | 48.8 | % | $ | 313,714 | 57.2 | % | $ | (55,255) | (17.6) | % | |||||||||||||||||||||||
| DRAM | 135,333 | 25.6 | 124,685 | 22.7 | 10,648 | 8.5 | |||||||||||||||||||||||||||||
| Flash | 40,477 | 7.6 | 16,395 | 3.0 | 24,082 | 146.9 | |||||||||||||||||||||||||||||
| Systems Market: | |||||||||||||||||||||||||||||||||||
| Systems | 95,406 | 18.0 | 93,647 | 17.1 | 1,759 | 1.9 | |||||||||||||||||||||||||||||
| Total revenues | $ | 529,675 | 100.0 | % | $ | 548,441 | 100.0 | % | $ | (18,766) | (3.4) | % | |||||||||||||||||||||||
The increase in Foundry & Logic product revenue in fiscal 2019 compared to fiscal 2018 was primarily driven by higher demand in 2019 from two major customers, resulting primarily from increased demand in traditional server and end-user computing, as well as growth in new market applications, including 5G. The relative increase with respect to fiscal 2018 was compounded by lower 2018 revenues from one larger customer resulting from node transitions. These major customers accounted for 25.3% and 11.5% of total revenues for fiscal 2019, compared to 19.0% and less than 10%, respectively for fiscal 2018.
The increase in DRAM and decrease in Flash product revenues in fiscal 2019 compared to fiscal 2018 were driven by changes in unit sales that we believe were driven in part by increased market share, designs that require new probe cards and node transitions.
The increase in Systems product revenue in fiscal 2019 compared to fiscal 2018 was driven by increased sales of probe stations, which includes a new 200mm platform, and the additional revenue from the newly acquired FRT GmbH, partially offset by lower revenue from thermal sub-systems.
Revenues by Geographic Region
| Fiscal 2019 | % of Revenues | Fiscal 2018 | % of Revenues | Fiscal 2017 | % of Revenues | ||||||||||||||||||||||||||||||
| (In thousands, except percentages) | |||||||||||||||||||||||||||||||||||
| United States | $ | 155,202 | 26.3 | % | $ | 133,648 | 25.2 | % | $ | 186,654 | 34.0 | % | |||||||||||||||||||||||
| South Korea | 116,882 | 19.8 | 91,247 | 17.2 | 81,727 | 14.9 | |||||||||||||||||||||||||||||
| China | 106,256 | 18.0 | 77,851 | 14.7 | 61,100 | 11.1 | |||||||||||||||||||||||||||||
| Taiwan | 86,539 | 14.7 | 107,476 | 20.3 | 96,903 | 17.7 | |||||||||||||||||||||||||||||
| Japan | 52,584 | 8.9 | 49,814 | 9.4 | 44,559 | 8.1 | |||||||||||||||||||||||||||||
| Europe | 41,473 | 7.0 | 39,671 | 7.5 | 45,086 | 8.2 | |||||||||||||||||||||||||||||
Asia-Pacific (1) | 21,468 | 3.7 | 25,980 | 4.9 | 29,902 | 5.5 | |||||||||||||||||||||||||||||
| Rest of the world | 9,060 | 1.6 | 3,988 | 0.8 | 2,510 | 0.5 | |||||||||||||||||||||||||||||
| Total Revenues | $ | 589,464 | 100.0 | % | $ | 529,675 | 100.0 | % | $ | 548,441 | 100.0 | % | |||||||||||||||||||||||
(1) Asia-Pacific includes all countries in the region except Taiwan, South Korea, China and Japan, which are disclosed separately.
Geographic revenue information is based on the location to which we ship the product. For example, if a certain South Korean customer purchases through their U.S. subsidiary and requests the products to be shipped to an address in South Korea, this sale will be reflected in the revenue for South Korea rather than U.S.
Changes in revenue by geographic region in fiscal 2019 compared to fiscal 2018 were primarily attributable to changes in customer demand, shifts in customer regional manufacturing strategies, and product sales mix with the increase in the United States, South Korea and China relating primarily to increased sales to two customers in 2019 that also comprised greater than 10% of consolidated sales as further described in Note 2 of Notes to Consolidated Financial Statements.
Cost of Revenues and Gross Margins
Cost of revenues consists primarily of manufacturing materials, payroll, 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
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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.
Gross profit and gross margin by segment were as follows (dollars in thousands):
| Fiscal 2019 | |||||||||||||||||||||||
| Probe Cards | Systems | Corporate and Other | Total | ||||||||||||||||||||
| Gross profit | $ | 211,382 | $ | 50,927 | $ | (24,813) | $ | 237,496 | |||||||||||||||
| Gross margin | 43.0 | % | 51.9 | % | — | % | 40.3 | % | |||||||||||||||
| Fiscal 2018 | |||||||||||||||||||||||
| Probe Cards | Systems | Corporate and Other | Total | ||||||||||||||||||||
| Gross profit | $ | 187,320 | $ | 47,074 | $ | (24,055) | $ | 210,339 | |||||||||||||||
| Gross margin | 43.1 | % | 49.3 | % | — | % | 39.7 | % | |||||||||||||||
| Fiscal 2017 | |||||||||||||||||||||||
| Probe Cards | Systems | Corporate and Other | Total | ||||||||||||||||||||
| Gross profit | $ | 195,903 | $ | 46,647 | $ | (26,953) | $ | 215,597 | |||||||||||||||
| Gross margin | 43.1 | % | 49.8 | % | — | % | 39.3 | % | |||||||||||||||
Probe Cards
Gross profit in the Probe Cards segment increased in fiscal 2019 compared to fiscal 2018 primarily due to increased sales, offset by higher variable costs and by less favorable product mix.
Systems
Gross profit and gross margin in the Systems segment increased in fiscal 2019 compared to fiscal 2018 due to increased sales.
Corporate and Other
Corporate and Other includes unallocated expenses relating to amortization of intangible assets, share-based compensation, restructuring charges, net, and acquisition-related costs, including charges related to inventory stepped up to fair value and other costs, 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 fiscal 2019 compared to fiscal 2018, gross profit increased due to increased sales while gross margins remained relatively consistent with fluctuations in product mix.
Stock-based compensation expense included in gross profit for fiscal 2019 and 2018 was $4.1 million and $3.5 million, respectively.
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Research and Development
| Fiscal Year Ended | |||||||||||||||||||||||
| December 28, 2019 | December 29, 2018 | $ Change | % Change | ||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||
| Research and development | $ | 81,499 | $ | 74,976 | $ | 6,523 | 8.7 | % | |||||||||||||||
| % of revenues | 13.8 | % | 14.2 | % | |||||||||||||||||||
| Fiscal Year Ended | |||||||||||||||||||||||
| December 29, 2018 | December 30, 2017 | $ Change | % Change | ||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||
| Research and development | $ | 74,976 | $ | 73,807 | $ | 1,169 | 1.6 | % | |||||||||||||||
| % of revenues | 14.2 | % | 13.5 | % | |||||||||||||||||||
The increase in research and development expenses in fiscal 2019 compared to fiscal 2018 was primarily driven by an increase in employee compensation costs caused by increases in headcount, annual compensation and benefit adjustments and employee performance-based compensation, partially offset by a decrease in project material costs. The components of this increase were as follows (in millions):
| Fiscal 2019 compared to Fiscal 2018 | |||||
| Employee compensation costs | $ | 4.6 | |||
| Stock-based compensation | 1.0 | ||||
| Project material costs | (0.5) | ||||
| Depreciation | 0.5 | ||||
| Other | 0.9 | ||||
| $ | 6.5 | ||||
Stock-based compensation expense included within research and development in fiscal 2019 and 2018 was $6.4 million and $5.4 million, respectively.
Selling, General and Administrative
| Fiscal Year Ended | |||||||||||||||||||||||
| December 28, 2019 | December 29, 2018 | $ Change | % Change | ||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||
| Selling, general and administrative | $ | 106,335 | $ | 99,254 | $ | 7,081 | 7.1 | % | |||||||||||||||
| % of revenues | 18.0 | % | 18.7 | % | |||||||||||||||||||
| Fiscal Year Ended | |||||||||||||||||||||||
| December 29, 2018 | December 30, 2017 | $ Change | % Change | ||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||
| Selling, general and administrative | $ | 99,254 | $ | 95,489 | $ | 3,765 | 3.9 | % | |||||||||||||||
| % of revenues | 18.7 | % | 17.4 | % | |||||||||||||||||||
The increase in selling, general and administrative in fiscal 2019 compared to fiscal 2018 was primarily due to higher variable costs on increased sales volumes, primarily related to increases in headcount costs and employee incentive compensation, as well as additional costs from the FRT acquisition, offset partially by a decrease in the amortization of intangible assets.
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The components of this increase were as follows (in millions):
| Fiscal 2019 compared to Fiscal 2018 | |||||
| Employee compensation costs | $ | 4.1 | |||
| Stock-based compensation | 3.9 | ||||
| Depreciation and amortization | (1.2) | ||||
| Consulting fees | (0.8) | ||||
| Other | 1.1 | ||||
| $ | 7.1 | ||||
Stock-based compensation expense included within selling, general and administrative in fiscal 2019 and 2018 was $12.8 million, and $8.9 million, respectively.
Interest Income and Interest Expense
| Fiscal Year Ended | |||||||||||||||||
| December 28, 2019 | December 29, 2018 | December 30, 2017 | |||||||||||||||
| (Dollars in thousands) | |||||||||||||||||
| Interest income | $ | 2,714 | $ | 1,356 | $ | 548 | |||||||||||
| Weighted average balance of cash and investments | $ | 179,526 | $ | 138,467 | $ | 124,637 | |||||||||||
| Weighted average yield on cash and investments | 2.05 | % | 1.51 | % | 0.84 | % | |||||||||||
| Interest expense | $ | 1,915 | $ | 3,314 | $ | 4,491 | |||||||||||
| Average debt outstanding | $ | 56,776 | $ | 90,086 | $ | 127,598 | |||||||||||
| Weighted average interest rate on debt | 4.09 | % | 3.98 | % | 3.07 | % | |||||||||||
Interest income is earned on our cash, cash equivalents, restricted cash and marketable securities. The increase in interest income in fiscal 2019 compared to fiscal 2018 was attributable to higher investment yields, related in part to longer duration investments, as well as higher average investment balances.
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 in fiscal 2019 compared to fiscal 2018 was primarily due to lower outstanding debt balances related to the CMI acquisition as a result of principal payments made, partially offset by additional interest expense related to the term loan originated to finance the acquisition of FRT.
Other Income (Expense), Net
Other income (expense), net primarily includes the effects of foreign currency impact and various other gains and losses.
Provision (Benefit) For Income Taxes
| Fiscal Year Ended | |||||||||||||||||
| December 28, 2019 | December 29, 2018 | December 30, 2017 | |||||||||||||||
| (Dollars in thousands) | |||||||||||||||||
| Provision (benefit) for income taxes | $ | 11,717 | $ | (70,109) | $ | 1,293 | |||||||||||
| Effective tax rate | 22.9 | % | (206.6) | % | 3.1 | % | |||||||||||
Provision for income taxes reflects the tax provision on our operations in foreign and U.S. jurisdictions, offset by tax benefits from a partial release of valuation allowance against U.S. federal and state deferred tax assets ("DTAs") and from lapsing of statute of limitations related to uncertain tax positions in foreign jurisdictions. As of December 28, 2019, we maintain a valuation allowance of $36.6 million primarily against our California deferred tax assets and foreign tax credits, due to uncertainty about the future realization of these assets.
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The benefit for income taxes in fiscal 2018 includes a $75.8 million reduction to our valuation allowance on our U.S. deferred tax assets as sufficient positive evidence existed to support the realization of such DTAs. The effective tax rate in fiscal 2018 also benefited from a lower statutory tax rate in the U.S., partially offset by higher profits in foreign jurisdictions.
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 increased to $282.5 million at December 28, 2019 compared to $235.3 million at December 29, 2018 primarily due to higher cash, cash equivalents and investment balances resulting from cash generated from operations on higher sales and strong collections, partially offset by higher accrued liabilities on higher volumes and higher current debt balance due to timing of debt payments.
Cash and cash equivalents primarily consist of deposits held at banks and money market funds. Marketable securities primarily consist of 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 $220.9 million at December 28, 2019 compared to $149.0 million at December 29, 2018. We believe that we will be able to satisfy our working capital requirements for at least the next twelve months with the liquidity provided by our existing cash, cash 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.
We utilize a variety of tax planning and financing strategies in an effort to manage our worldwide cash and deploy funds to locations where they are needed. As part of these strategies, we indefinitely reinvest a portion of our foreign earnings. Should we require additional capital in the U.S., we may elect to repatriate indefinitely-reinvested foreign funds or raise capital in the U.S.
Cash Flows
| Fiscal Year Ended | |||||||||||||||||
| December 28, 2019 | December 29, 2018 | December 30, 2017 | |||||||||||||||
| (Dollars in thousands) | |||||||||||||||||
| Net cash provided by operating activities | $ | 121,048 | $ | 68,700 | $ | 86,323 | |||||||||||
| Net cash used in investing activities | (66,352) | (21,295) | (59,425) | ||||||||||||||
| Net cash used in financing activities | $ | (6,578) | $ | (39,329) | $ | (39,470) | |||||||||||
Operating Activities
Net cash provided by operating activities in fiscal 2019 was primarily attributable to net income of $39.3 million, which included $89.9 million of net non-cash items, offset by changes in operating assets and liabilities using $8.2 million of cash as discussed in more detail below.
Accounts receivable increased $2.6 million to $97.9 million at December 28, 2019 compared to $95.3 million at December 29, 2018 as a result of strong collections despite increased revenues and changes in payment terms related to customer mix.
Inventories, net, increased $5.6 million to $83.3 million at December 28, 2019 compared to $77.7 million at December 29, 2018 as a result of higher sales volumes, partially offset by a $10.4 million increase to our provision for excess and obsolete inventories.
Accrued liabilities increased $8.7 million to $36.4 million at December 28, 2019 compared to $27.7 million at December 29, 2018, as a result of an increase in employee performance-based compensation and benefits and an increase in accrued income taxes due to timing of payments.
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Accounts payable increased $0.9 million to $40.9 million at December 28, 2019 compared to $40.0 million at December 29, 2018, as a result of higher volumes mostly offset by the impact of timing of vendor payments.
Investing Activities
Net cash used in investing activities in fiscal 2019 primarily related to $20.8 million of cash used in the acquisition of property, plant and equipment, $20.5 million paid (net of cash acquired) as part of the consideration for the acquisition of FRT, and $25.1 million used for the purchase of marketable securities, net of maturities.
Financing Activities
Net cash used in financing activities in fiscal 2019 primarily related to $30.0 million of principal payments made towards the repayment of our term loan and $8.0 million related to tax withholdings associated with the net share settlements of our equity awards, largely offset by $23.4 million of proceeds from a term loan to fund the acquisition of FRT and $8.1 million of proceeds received from issuances of common stock under our stock incentive plans.
Debt
CMI Term Loan
On June 24, 2016, we entered into a credit agreement (the “Credit Agreement”) with HSBC Bank USA, National Association ("HSBC"). Pursuant to the Credit Agreement, the lenders 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 acquisition of Cascade Microtech in fiscal 2016. As of December 28, 2019, the balance outstanding was $35 million.
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. As of December 28, 2019, the interest rate pursuant to the CMI Term Loan was 3.71%.
On July 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%. As of December 28, 2019, the notional amount of the loan that is subject to this interest rate swap is $22.5 million. See Note 7 of Notes to Condensed Consolidated Financial Statements for additional information.
The CMI Term Loan amortizes in equal quarterly installments, which began June 30, 2016, in annual amounts equal to 5% for year one, 10% for year two, 20% for year three, 30% for year four and 35% for year five. The Credit Agreement allows voluntary prepayment to be made at any time to prepay the CMI Term Loan in whole or in part without penalty or premium. As of December 28, 2019 and December 29, 2018, we have made prepayments of $40.0 million with no prepayments made during fiscal 2019. The planned final payment on the CMI Term Loan is scheduled for the third quarter of fiscal 2020.
The obligations under the CMI 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 of December 28, 2019, we were in compliance with all covenants under the Credit Agreement.
FRT Term Loan
On October 25, 2019, we entered into a $23.4 million three-year term loan agreement (the "FRT Term Loan") with HSBC Trinkaus & Burkhardt AG, Germany to fund the acquisition of FRT GmbH, which we acquired on October 9, 2019. See Note 4 of Notes to Consolidated Financial Statements 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 beginning January 25, 2020.
See Note 5 of Notes to Consolidated Financial Statements for additional information relating to the term loans.
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Stock Repurchase Program
In February 2017, our Board of Directors authorized a program to repurchase up to $25 million of outstanding common stock to offset potential dilution from issuances of common stock under our stock-based incentive plans. The share repurchase program expired on February 1, 2020. During fiscal 2019 and 2018, we did not repurchase any shares. During fiscal 2017, we repurchased 1,367,617 shares of common stock for $19.0 million.
Contractual Obligations and Commitments