SEC Filing | FormFactor, Inc.

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form-20200627

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark one)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 27, 2020

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 000-50307

FormFactor, Inc.

(Exact name of registrant as specified in its charter)


Delaware						13-3711155
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification No.)

7005 Southfront Road, Livermore, California 94551

(Address of principal executive offices, including zip code)

(925) 290-4000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common stock, $0.001 par value

FORM

Nasdaq Global Market

______________________________________

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. (Check one):

Large Accelerated Filer

☒

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 ☒

As of July 31, 2020, 77,058,712 shares of the registrant’s common stock, par value $0.001 per share, were outstanding.

FORMFACTOR, INC.

FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 27, 2020

INDEX


Part I.	Financial Information

Item 1.	Financial Statements (Unaudited):

	Condensed Consolidated Balance Sheets as of June 2 7 , 2020 and December 28, 2019	3

	Condensed Consolidated Statements of Income for the three and six months ended June 2 7 , 2020 and June 29 , 2019	4

	Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 2 7 , 2020 and June 29 , 2019	5

	Condensed Consolidated Statement of Stockholders' Equity for the three and six months ended June 2 7 , 2020 and June 29 , 2019	6

	Condensed Consolidated Statements of Cash Flows for the three and six months ended June 2 7 , 2020 and June 29 , 2019	7

	Notes to Condensed Consolidated Financial Statements	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	35

Item 4.	Controls and Procedures	35

Part II.	Other Information	36



Item 1A.	Risk Factors	36









Item 6.	Exhibits	39

Signatures		40

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

FORMFACTOR, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

(Unaudited)


	June 27, 2020		December 28, 2019
ASSETS
Current assets:
Cash and cash equivalents	$	199,926	$	144,545
Marketable securities	61,177		76,327
Accounts receivable, net of allowance for doubtful accounts of $226 and $222	86,616		97,868
Inventories, net	87,813		83,258
Restricted cash	1,424		1,981
Prepaid expenses and other current assets	18,458		15,064
Total current assets	455,414		419,043
Restricted cash	1,375		1,411
Operating lease, right-of-use-assets	29,027		31,420
Property, plant and equipment, net of accumulated depreciation	83,662		58,747
Goodwill	200,293		199,196
Intangibles, net	43,785		57,610
Deferred tax assets	69,712		71,252
Other assets	966		1,203
Total assets	$	884,234	$	839,882

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	44,334	$	40,914
Accrued liabilities	37,620		36,439
Current portion of term loans, net of unamortized issuance costs	21,325		42,846
Deferred revenue	13,789		9,810
Operating lease liabilities	6,168		6,551
Total current liabilities	123,236		136,560
Term loans, less current portion, net of unamortized issuance costs	28,725		15,639
Deferred tax liabilities	6,343		6,986
Long-term operating lease liabilities	26,816		29,088
Other liabilities	8,392		10,612
Total liabilities	193,512		198,885

Stockholders’ equity:


Common stock, $0.001 par value:
250,000,000 shares authorized; 76,501,459 and 75,764,990 shares issued and outstanding	77		76
Additional paid-in capital	898,069		885,821
Accumulated other comprehensive loss	458		(659)
Accumulated deficit	(207,882)		(244,241)
Total stockholders’ equity	690,722		640,997
Total liabilities and stockholders’ equity	$	884,234	$	839,882

The accompanying notes are an integral part of these condensed consolidated financial statements.

FORMFACTOR, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share amounts)

(Unaudited)


	Three Months Ended						Six Months Ended
	June 27, 2020		June 29, 2019		June 27, 2020		June 29, 2019
Revenues	$	157,824	$	138,018	$	318,577	$	270,231
Cost of revenues	91,657		82,666		185,020		162,358
Gross profit	66,167		55,352		133,557		107,873
Operating expenses:
Research and development	20,919		20,074		42,186		39,797
Selling, general and administrative	22,755		26,283		50,448		51,467
Total operating expenses	43,674		46,357		92,634		91,264
Operating income	22,493		8,995		40,923		16,609
Interest income	376		684		1,061		1,264
Interest expense	(171)		(522)		(489)		(1,117)
Other income (expense), net	(67)		81		(158)		(3)
Income before income taxes	22,631		9,238		41,337		16,753
Provision for income taxes	2,162		2,290		4,978		4,322
Net income	$	20,469	$	6,948	$	36,359	$	12,431
Net income per share:
Basic	$	0.27	$	0.09	$	0.48	$	0.17
Diluted	$	0.26	$	0.09	$	0.46	$	0.16
Weighted-average number of shares used in per share calculations:
Basic	76,275		74,478		76,140		74,483
Diluted	78,861		76,189		78,710		76,061

The accompanying notes are an integral part of these condensed consolidated financial statements.

FORMFACTOR, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)


	Three Months Ended						Six Months Ended
	June 27, 2020		June 29, 2019		June 27, 2020		June 29, 2019
Net income	$	20,469	$	6,948	$	36,359	$	12,431
Other comprehensive income (loss), net of tax:
Translation adjustments and other	763		689		364		(228)
Unrealized gains on available-for-sale marketable securities	524		142		497		293
Unrealized gains (losses) on derivative instruments	80		(73)		256		(686)
Other comprehensive income (loss), net of tax	1,367		758		1,117		(621)
Comprehensive income	$	21,836	$	7,706	$	37,476	$	11,810

The accompanying notes are an integral part of these condensed consolidated financial statements.

FORMFACTOR, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(In thousands, except shares)

(Unaudited)


	Shares	Common Stock		Additional Paid-in Capital		Accumulated Other Comprehensive Loss		Accumulated Deficit		Total
	Six Months Ended June 27, 2020
Balances, December 28, 2019	75,764,990	$	76	$	885,821	$	(659)	$	(244,241)	$	640,997
Issuance of common stock under the Employee Stock Purchase Plan	311,591	—		4,066		—		—		4,066
Issuance of common stock pursuant to exercise of options	105,769	1		868		—		—		869
Issuance of common stock pursuant to vesting of restricted stock units, net of stock withheld for tax	319,109	—		(3,800)		—		—		(3,800)

Stock-based compensation	—	—		11,114		—		—		11,114
Other comprehensive income	—	—		—		1,117		—		1,117
Net income	—	—		—		—		36,359		36,359
Balances, June 27, 2020	76,501,459	$	77	$	898,069	$	458	$	(207,882)	$	690,722
	Three Months Ended June 27, 2020
Balances, March 28, 2020	76,158,251	$	77	$	895,600	$	(909)	$	(228,351)	$	666,417

Issuance of common stock pursuant to exercise of options	50,000	—		422		—		—		422
Issuance of common stock pursuant to vesting of restricted stock units, net of stock withheld for tax	293,208	—		(3,415)		—		—		(3,415)

Stock-based compensation	—	—		5,462		—		—		5,462
Other comprehensive income	—	—		—		1,367		—		1,367
Net income	—	—		—		—		20,469		20,469
Balances, June 27, 2020	76,501,459	$	77	$	898,069	$	458	$	(207,882)	$	690,722



	Six Months Ended June 29, 2019
Balances, December 29, 2018	74,139,712	$	74	$	862,897	$	780	$	(283,587)	$	580,164
Issuance of common stock under the Employee Stock Purchase Plan	301,497	—		3,670		—		—		3,670
Issuance of common stock pursuant to exercise of options	19,207	—		90		—		—		90
Issuance of common stock pursuant to vesting of restricted stock units, net of stock withheld for tax	231,365	1		(2,157)		—		—		(2,156)

Stock-based compensation	—	—		10,524		—		—		10,524

Other comprehensive loss	—	—		—		(621)		—		(621)
Net income	—	—		—		—		12,431		12,431
Balances, June 29, 2019	74,691,781	$	75	$	875,024	$	159	$	(271,156)	$	604,102
	Three Months Ended June 29, 2019
Balances, March 30, 2019	74,488,498	$	74	$	871,617	$	(599)	$	(278,104)	$	592,988


Issuance of common stock pursuant to vesting of restricted stock units, net of stock withheld for tax	203,283	1		(1,855)		—		—		(1,854)

Stock-based compensation	—	—		5,262		—		—		5,262

Other comprehensive income	—	—		—		758		—		758
Net income	—	—		—		—		6,948		6,948
Balances, June 29, 2019	74,691,781	$	75	$	875,024	$	159	$	(271,156)	$	604,102

The accompanying notes are an integral part of these condensed consolidated financial statements.

FORMFACTOR, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)


	Six Months Ended
	June 27, 2020		June 29, 2019
Cash flows from operating activities:
Net income	$	36,359	$	12,431
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	9,240		8,289
Amortization	13,717		14,169

Reduction in the carrying amount of right-of-use assets	2,419		2,620

Stock-based compensation expense	11,265		10,584


Provision for excess and obsolete inventories	6,407		5,304



Gain on contingent consideration	(3,700)		—

Other adjustments to reconcile net income to net cash provided by operating activities	1,327		(173)
Changes in assets and liabilities:
Accounts receivable	11,364		24,177
Inventories	(11,089)		(11,574)
Prepaid expenses and other current assets	(3,271)		1,838

Other assets	248		(572)
Accounts payable	5,247		(11,115)
Accrued liabilities	1,529		(309)

Other liabilities	292		(93)
Deferred revenues	3,855		2,216
Operating lease liabilities	(2,762)		(2,416)

Net cash provided by operating activities	82,447		55,376
Cash flows from investing activities:
Acquisition of property, plant and equipment	(36,743)		(11,460)
Proceeds from sale of a subsidiary	82		56

Purchases of marketable securities	(19,726)		(20,776)
Proceeds from maturities and sales of marketable securities	35,410		19,710

Net cash used in investing activities	(20,977)		(12,470)
Cash flows from financing activities:
Proceeds from issuances of common stock	4,935		3,870

Tax withholdings related to net share settlements of equity awards	(3,800)		(2,157)
Proceeds from term loan debt	18,000		—
Principal repayments on term loans	(26,322)		(18,750)
Payment of term loan debt issuance costs	(78)		—
Net cash used in financing activities	(7,265)		(17,037)
Effect of exchange rate changes on cash, cash equivalents and restricted cash	583		279
Net increase in cash, cash equivalents and restricted cash	54,788		26,148
Cash, cash equivalents and restricted cash, beginning of period	147,937		100,546
Cash, cash equivalents and restricted cash, end of period	$	202,725	$	126,694
Non-cash investing and financing activities:



Change in accounts payable and accrued liabilities related to property, plant and equipment purchases	$	2,274	$	(2,497)
Operating lease, right-of-use assets obtained in exchange for lease obligations	428		35,885
Supplemental disclosure of cash flow information:
Cash paid for income taxes, net	$	4,133	$	1,700
Cash paid for interest	473		778

The accompanying notes are an integral part of these condensed consolidated financial statements.

FORMFACTOR, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1 — Basis of Presentation and New Accounting Pronouncements

Basis of Presentation

The accompanying condensed consolidated financial information of FormFactor, Inc. is unaudited and has been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). However, such information reflects all adjustments, consisting only of normal recurring adjustments, which are, in the opinion of management, necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods. The financial information as of December 28, 2019 is derived from our 2019 Annual Report on Form 10-K. The condensed consolidated financial statements included herein should be read in conjunction with the consolidated financial statements and the notes thereto included in our 2019 Annual Report on Form 10-K filed with the SEC on February 21, 2020. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the full year.

Fiscal Year

We operate on a 52/53 week fiscal year, whereby the fiscal year ends on the last Saturday of December. Fiscal 2020 and 2019 each contain 52 weeks and the six months ended June 27, 2020 and June 29, 2019 each contained 26 weeks. Fiscal 2020 will end on December 26, 2020.

Significant Accounting Policies

Our significant accounting policies have not changed during the six months ended June 27, 2020 from those disclosed in our Annual Report on Form 10-K for the year ended December 28, 2019.

Reclassifications

Certain immaterial reclassifications were made to the prior year financial statements to conform to the current year presentation.

New Accounting Pronouncements

ASU 2016-13

In June 2016, the Financial Accounting Standard Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-13, "Measurement of Credit Losses on Financial Instruments (Topic 326)." The provisions of this standard require financial assets measured at amortized cost to be presented at the net amount expected to be collected. An allowance account would be established to present the net carrying value at the amount expected to be collected. ASU 2016-13 also provides that credit losses relating to available-for-sale debt securities should be recorded through an allowance for credit losses. The guidance was amended through various ASU's subsequent to ASU 2016-13, all of which was effective for us beginning fiscal 2020. We adopted ASU 2016-13 on a prospective basis on December 29, 2019, the first day of fiscal 2020. The adoption did not have a material effect on our financial position, results of operations or cash flows.

ASU 2018-15

In August 2018, the FASB issued ASU 2018-15, "Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract." The new guidance clarifies the accounting for implementation costs in cloud computing arrangements. ASU 2018-15 is effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2019. We adopted ASU 2018-15 on a prospective basis on December 29, 2019, the first day of fiscal 2020. The adoption did not have a material effect on our financial position, results of operations or cash flows.

ASU 2019-12

In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740),” which simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption of the amendments is permitted, including adoption in any interim period for which financial statements have not yet been issued. Depending on the amendment, adoption may be applied on the retrospective, modified retrospective or prospective basis. We have not yet determined the impact of this standard on our financial position, results of operations or cash flows.

ASU 2020-04

In March 2020, the FASB issued ASU 2020-04, "Referenced Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting." The amendments in this update apply only to contracts and hedging relationships that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform. The expedients and exceptions provided by the amendments do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022. The amendments in this update are elective and are effective upon issuance for all entities. We have not yet evaluated the transition approach for our LIBOR indexed contracts and have not determined whether we will be electing such expedients and exceptions.

Note 2 — Concentration of Credit and Other Risks

Each of the following customers accounted for 10% or more of our revenues for the periods indicated:


	Three Months Ended						Six Months Ended
	June 27, 2020		June 29, 2019		June 27, 2020		June 29, 2019


Intel Corporation	36.1	%	26.1	%	36.2	%	23.8	%
Samsung Electronics., LTD.	*		11.1	%	*		12.4	%
Micron Technology, Inc.	*		10.1	%	*		*
	36.1	%	47.3	%	36.2	%	36.2	%

*Represents less than 10% of total revenues.

At June 27, 2020, two customers accounted for 15.8% and 18.1% of gross accounts receivable, respectively. At December 28, 2019, three customers accounted for 25.7%, 15.1% and 11.5% of gross accounts receivable, respectively.

Note 3 — Inventories, net

Inventories are stated at the lower of cost (principally standard cost, which approximates actual cost on a first in, first out basis) or net realizable value.

Inventories, net, consisted of the following (in thousands):


	June 27, 2020		December 28, 2019
Raw materials	$	39,743	$	38,528
Work-in-progress	31,530		29,720
Finished goods	16,540		15,010
	$	87,813	$	83,258

Note 4 — Acquisition

On October 9, 2019, we acquired 100% of the shares of FRT GmbH ("FRT"), a German-based company, for total consideration of $26.9 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 $6.5 million of contingent consideration as of October 9, 2019.

We estimated the acquisition price and the allocation of fair value to assets acquired and liabilities assumed as of the acquisition date, October 9, 2019. We subsequently made certain immaterial adjustments to the acquisition price allocation related to acquired assets and assumed liabilities, including to intangibles assets. Our purchase accounting remains open at June 27, 2020, subject to finalization of the fair value of certain acquired assets and liabilities. The estimated fair value of assets acquired, including goodwill and intangibles, and liabilities assumed is as follows (in thousands):


	Amount
Cash and cash equivalents	$	1,687
Accounts receivable	3,079
Inventory	2,643
Property, plant and equipment	696
Operating lease, right of use assets	335
Prepaid expenses and other current assets	838
Tangible assets acquired	9,278
Customer deposits	(1,933)
Accounts payable and accrued liabilities	(1,182)
Operating lease liabilities	(335)
Deferred tax liabilities	(5,757)
Total tangible assets acquired and liabilities assumed	71
Intangible assets	17,429
Goodwill	11,123
Net Assets Acquired	$	28,623

The intangible assets as of the closing date of the acquisition included (in thousands):


	Amount		Weighted Average Useful Life (in years)
Developed technologies	$	12,505	8.0
Customer relationships	3,071		6.0
Backlog	1,645		0.5
Trade names	208		2.0
Total intangible assets	$	17,429	7.0

Indications of fair value of the intangible assets acquired in connection with the acquisition were determined using either the income, market or replacement cost methodologies. The intangible assets are being amortized over periods which reflect the pattern in which economic benefits of the assets are expected to be realized.

The contingent consideration is a cash amount equal to 1.5x Earnings Before Interest and Tax ("EBIT") as defined in the purchase agreement, from a minimum of zero up to a maximum of €10.3 million, payable subject to the performance of the acquired business in calendar 2020. For purchase accounting, we estimated the fair value of contingent consideration using a probability weighted approach. Key assumptions in determining the fair value of contingent consideration include estimating the probability of achieving certain EBIT levels and discounting at an appropriate discount rate. See Note 8, Fair Value and Derivative Instruments, for further discussion on the fair value 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.

Separate from the purchase agreement, on October 25, 2019, we entered into a term loan agreement with a lender for an aggregate amount of $23.4 million to finance the acquisition. See Note 6, Debt, for further discussion of the term loan agreement.

Identifiable Intangible Assets

Valuation of intangible assets involves multiple assumptions. The key assumptions are described below.

Developed technologies acquired primarily consists of existing technology related to hybrid 3D surface metrology measurement equipment. We valued the developed technologies using the multi-period excess earnings method under the income approach. Using this approach, the estimated fair values were calculated using expected future cash flows from specific products discounted to their net present values at an appropriate risk-adjusted rate of return.

Customer relationships represent the fair value of future projected revenues that will be derived from the sale of products to FRT's existing customers. We valued customer relationships using the incremental cash flow method. This method estimates value based on the incremental cash flow afforded by having the customers relationships in place on the acquisition date versus having no relationships in place and needing to replicate or replace those relationships. The incremental cash flows are then discounted to a present value to arrive at an estimate of fair value for this asset class.

Backlog represents business under exis