FORMFACTOR INC 10-Q

Item 1. Financial Statements FORMFACTOR, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share amounts) (Unaudited) March 27, 2021 December 26, 2020 ASSETS Current assets: Cash and cash equivalents $ 173,616 $ 187,225 Marketable securities 94,093 67,810 Accounts receivable, net of allowance for doubtful accounts of $ 232 and $ 248 103,500 107,603 Inventories, net 104,727 99,229 Restricted cash 2,798 1,904 Prepaid expenses and other current assets 19,371 23,303 Total current assets 498,105 487,074 Restricted cash 1,894 1,969 Operating lease, right-of-use-assets 37,208 30,756 Property, plant and equipment, net of accumulated depreciation 112,312 104,103 Goodwill 214,218 212,761 Intangibles, net 48,786 59,147 Deferred tax assets 65,821 66,242 Other assets 1,867 1,165 Total assets $ 980,211 $ 963,217 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 67,720 $ 62,045 Accrued liabilities 43,468 55,342 Current portion of term loans, net of unamortized issuance costs 9,260 9,516 Deferred revenue 18,644 20,964 Operating lease liabilities 7,557 6,704 Total current liabilities 146,649 154,571 Term loans, less current portion, net of unamortized issuance costs 22,390 24,978 Deferred tax liabilities 4,965 5,346 Long-term operating lease liabilities 33,485 27,996 Other liabilities 6,189 6,242 Total liabilities 213,678 219,133 Stockholders’ equity: Common stock, $ 0.001 par value: 250,000,000 shares authorized; 77,758,530 and 77,437,997 shares issued and outstanding 78 78 Treasury stock, at cost, 136,402 and — shares ( 5,738 ) — Additional paid-in capital 915,136 903,838 Accumulated other comprehensive income 3,150 5,886 Accumulated deficit ( 146,093 ) ( 165,718 ) Total stockholders’ equity 766,533 744,084 Total liabilities and stockholders’ equity $ 980,211 $ 963,217 The accompanying notes are an integral part of these condensed consolidated financial statements. 3 FORMFACTOR, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share amounts) (Unaudited) Three Months Ended March 27, 2021 March 28, 2020 Revenues $ 186,636 $ 160,753 Cost of revenues 109,930 93,363 Gross profit 76,706 67,390 Operating expenses: Research and development 24,046 21,267 Selling, general and administrative 30,015 27,693 Total operating expenses 54,061 48,960 Operating income 22,645 18,430 Interest income 194 685 Interest expense ( 180 ) ( 318 ) Other income (expense), net 172 ( 91 ) Income before income taxes 22,831 18,706 Provision for income taxes 3,206 2,816 Net income $ 19,625 $ 15,890 Net income per share: Basic $ 0.25 $ 0.21 Diluted $ 0.25 $ 0.20 Weighted-average number of shares used in per share calculations: Basic 77,598 76,005 Diluted 79,988 78,510 The accompanying notes are an integral part of these condensed consolidated financial statements. 4 FORMFACTOR, INC. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In thousands) (Unaudited) Three Months Ended March 27, 2021 March 28, 2020 Net income $ 19,625 $ 15,890 Other comprehensive loss, net of tax: Translation adjustments and other ( 2,379 ) ( 399 ) Unrealized losses on available-for-sale marketable securities ( 131 ) ( 27 ) Unrealized gains (losses) on derivative instruments ( 226 ) 176 Other comprehensive loss, net of tax ( 2,736 ) ( 250 ) Comprehensive income $ 16,889 $ 15,640 The accompanying notes are an integral part of these condensed consolidated financial statements. 5 FORMFACTOR, INC. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (In thousands, except shares) (Unaudited) Shares of Common Stock Common Stock Shares of Treasury Stock Treasury Stock Additional Paid-in Capital Accumulated Other Comprehensive Income (Loss) Accumulated Deficit Total Three Months Ended March 27, 2021 Balances, December 26, 2020 77,437,997 $ 78 — $ — $ 903,838 $ 5,886 $ ( 165,718 ) $ 744,084 Issuance of common stock under the Employee Stock Purchase Plan 228,784 — — — 5,065 — — 5,065 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 41,749 — — — ( 1,141 ) — — ( 1,141 ) Purchase of common stock through repurchase program — — ( 136,402 ) ( 5,738 ) — — — ( 5,738 ) Stock-based compensation — — — — 6,952 — — 6,952 Other comprehensive loss — — — — — ( 2,736 ) — ( 2,736 ) Net income — — — — — — 19,625 19,625 Balances, March 27, 2021 77,758,530 $ 78 ( 136,402 ) $ ( 5,738 ) $ 915,136 $ 3,150 $ ( 146,093 ) $ 766,533 Shares of Common Stock Common Stock Shares of Treasury Stock Treasury Stock Additional Paid-in Capital Accumulated Other Comprehensive Loss Accumulated Deficit Total Three Months Ended March 28, 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 55,769 1 — — 446 — — 447 Issuance of common stock pursuant to vesting of restricted stock units, net of stock withheld for tax 25,901 — — — ( 385 ) — — ( 385 ) Stock-based compensation — — — — 5,652 — — 5,652 Other comprehensive loss — — — — — ( 250 ) — ( 250 ) Net income — — — — — — 15,890 15,890 Balances, March 28, 2020 76,158,251 $ 77 — — $ 895,600 $ ( 909 ) $ ( 228,351 ) $ 666,417 The accompanying notes are an integral part of these condensed consolidated financial statements. 6 FORMFACTOR, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) Three Months Ended March 27, 2021 March 28, 2020 Cash flows from operating activities: Net income $ 19,625 $ 15,890 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 6,130 4,561 Amortization 6,805 7,263 Reduction in the carrying amount of right-of-use assets 1,811 1,511 Stock-based compensation expense 7,077 5,623 Provision for excess and obsolete inventories 3,394 3,287 Other adjustments to reconcile net income to net cash provided by operating activities 2,140 407 Changes in assets and liabilities: Accounts receivable 3,576 7,803 Inventories ( 9,911 ) 928 Prepaid expenses and other current assets 3,011 ( 240 ) Other assets ( 50 ) 194 Accounts payable 5,722 763 Accrued liabilities ( 12,732 ) ( 6,970 ) Other liabilities 114 33 Deferred revenues ( 2,411 ) ( 123 ) Operating lease liabilities ( 1,945 ) ( 1,591 ) Net cash provided by operating activities 32,356 39,339 Cash flows from investing activities: Acquisition of property, plant and equipment ( 13,470 ) ( 12,050 ) Proceeds from sale of a subsidiary — 40 Purchases of marketable securities ( 41,062 ) ( 16,441 ) Proceeds from maturities and sales of marketable securities 14,610 23,009 Net cash used in investing activities ( 39,922 ) ( 5,442 ) Cash flows from financing activities: Proceeds from issuances of common stock 5,487 4,513 Purchase of common stock through stock repurchase program ( 5,738 ) — Tax withholdings related to net share settlements of equity awards ( 1,141 ) ( 385 ) Principal repayments on term loans ( 2,376 ) ( 13,199 ) Net cash used in financing activities ( 3,768 ) ( 9,071 ) Effect of exchange rate changes on cash, cash equivalents and restricted cash ( 1,456 ) 312 Net increase (decrease) in cash, cash equivalents and restricted cash ( 12,790 ) 25,138 Cash, cash equivalents and restricted cash, beginning of period 191,098 147,937 Cash, cash equivalents and restricted cash, end of period $ 178,308 $ 173,075 The accompanying notes are an integral part of these condensed consolidated financial statements. 7 FORMFACTOR, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) Three Months Ended March 27, 2021 March 28, 2020 Non-cash investing and financing activities: Change in accounts payable and accrued liabilities related to property, plant and equipment purchases $ 1,087 $ ( 2,116 ) Operating lease, right-of-use assets obtained in exchange for lease obligations 8,572 6,307 Supplemental disclosure of cash flow information: Cash paid for income taxes, net $ 1,034 $ 2,419 Cash paid for interest 173 291 Reconciliation of cash, cash equivalents and restricted cash: Cash and cash equivalents $ 173,616 $ 169,607 Restricted cash, current 2,798 2,107 Restricted cash 1,894 1,361 Total cash, cash equivalents and restricted cash $ 178,308 $ 173,075 The accompanying notes are an integral part of these condensed consolidated financial statements. 8 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 condensed consolidated financial statements included herein should be read in conjunction with the consolidated financial statements and the notes thereto included in our 2020 Annual Report on Form 10-K filed with the SEC on February 22, 2021. 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 2021 and 2020 each contain 52 weeks and the three months ended March 27, 2021 and March 28, 2020 each contained 13 weeks. Fiscal 2021 will end on December 25, 2021. Significant Accounting Policies Our significant accounting policies have not changed during the three months ended March 27, 2021 from those disclosed in our Annual Report on Form 10-K for the year ended December 26, 2020. Reclassifications Certain immaterial reclassifications were made to the prior year financial statements to conform to the current year presentation. New Accounting Pronouncements ASU 2019-12 In December 2019, the Financial Accounting Standard Board (“FASB”) issued Accounting Standards Update (“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. We adopted ASU 2019-12 on a prospective basis on December 27, 2020, the first day of fiscal 2021. The adoption did not have a material effect on our consolidated 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 ASU provides temporary optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference the London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued. In January 2021, the FASB issued ASU 2021-01, “Reference Rate Reform (Topic 848),” which permits entities to apply optional expedients in Topic 848 to derivative instruments modified because of discounting transition resulting from reference rate reform. ASU 2020-04 became effective upon issuance and may be applied prospectively to contract modifications made on or before December 31, 2022. ASU 2021-01 became effective upon issuance and may be applied on a full retrospective basis as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020 or prospectively for contract modifications made on or before December 31, 2022. The Company has not yet applied the relief afforded by these standard amendments and is currently assessing contracts that will require modification due to reference rate reform to which these standard amendments may be applied. 9 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 March 27, 2021 March 28, 2020 Intel Corporation 28.1 % 36.2 % Taiwan Semiconductor Manufacturing Co., LTD. 11.5 % * 39.6 % 36.2 % *Represents less than 10% of total revenues. At March 27, 2021, one customer accounted for 22.8 % of gross accounts receivable. At December 26, 2020, two customers accounted for 15.3 % and 13.7 % 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): March 27, 2021 December 26, 2020 Raw materials $ 52,320 $ 48,122 Work-in-progress 35,466 30,806 Finished goods 16,941 20,301 $ 104,727 $ 99,229 Note 4 — Acquisition High Precision Devices, Inc. Acquisition On October 19, 2020, we acquired 100 % of the shares of HPD for total consideration of $ 16.9 million, net of cash acquired of $ 1.7 million, which included an estimated adjustment for changes in working capital, which is not yet finalized. This acquisition brings highly specialized skills and know-how to address the unique test challenges within the emerging quantum computing, superconducting computing, and ultra-sensitive sensor markets which operate at temperatures as low as 30 millikelvin. The acquisition was accounted for using the acquisition method of accounting, with FormFactor treated as the acquirer. The acquired assets and liabilities of HPD were recorded at their respective fair values including an amount for goodwill representing the difference between the acquisition consideration and the fair value of the identifiable net assets. Our Condensed Consolidated Statements of Income include the financial results of HPD subsequent to the acquisition date of October 19, 2020. Revenue in fiscal 2020 related to HPD subsequent to the acquisition date that was included in our Condensed Consolidated Statements of Income was not material. The acquisition price was allocated to the tangible and identified intangible assets acquired and liabilities assumed as of the closing date of the acquisition based upon their respective fair values. The fair values assigned to assets acquired and liabilities assumed were based on management’s assumptions as of the reporting date. We estimated the acquisition price and the allocation of fair value to assets acquired and liabilities assumed as of the acquisition date, October 19, 2020. We subsequently made certain immaterial adjustments within the measurement period to the preliminary acquisition price allocation. See Note 5, Goodwill and Intangible Assets , for changes in identified intangible values and goodwill. Our purchase accounting remains open at March 27, 2021, subject to finalization of the fair value of 10 consideration and certain deferred tax items. The estimated fair value of assets acquired, including goodwill and intangibles, and liabilities assumed is as follows (in thousands): Amount Cash and cash equivalents $ 1,680 Accounts receivable 1,017 Inventory 3,047 Property, plant and equipment 669 Operating lease, right of use assets 2,554 Prepaid expenses and other current assets 599 Tangible assets acquired 9,566 Deferred revenue ( 2,529 ) Accounts payable and accrued liabilities ( 1,268 ) Operating lease liabilities ( 2,554 ) Deferred tax liabilities ( 2,840 ) Total tangible assets acquired and liabilities assumed 375 Intangible assets 11,520 Goodwill 6,665 Net Assets Acquired $ 18,560 The intangible assets as of the closing date of the acquisition included (in thousands): Amount Weighted Average Useful Life (in years) Developed technologies $ 7,500 10.0 Customer relationships 3,600 5.0 Order backlog 200 0.5 Trade names 220 5.0 Total intangible assets $ 11,520 8.2 The fair value of the intangible assets acquired in connection with the acquisition was 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. Identifiable Intangible Assets Valuation of intangible assets involves multiple assumptions. The key assumptions are described below. Developed technology acquired primarily consists of existing technology related to cryogenic probe stations, Adiabatic Demagnetization Refrigerator (“ADR”), and continuous ADR cryostats and similar tools, and technology related to other cryogenic applications. We valued the developed technology 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. The value of customer relationships represents the fair value of future projected revenues that will be derived from the sale of products to HPD'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. Order backlog represents the value of future sales under existing contracts as of the acquisition date. Expected cash flow from order backlog was valued on a discounted direct cash flow basis, net of returns on contributory assets such as working capital, property and equipment, trade name and assembled workforce. 11 The identified trade names intangibles relate to the estimated fair value of future cash flows related to the HPD brand. We valued trade names by applying the relief-from-royalty method under the income approach. This method is based on the application of a royalty rate to forecasted revenue under the trade name. Goodwill The excess of purchase price over the fair value assigned to the assets acquired and liabilities assumed represents the amount of goodwill resulting from the acquisition. We believe the factors that contributed to goodwill include synergies that are specific to our consolidated business, such as cost savings and operational efficiencies, and the acquisition of a talented workforce that expands our expertise in business development and commercializing semiconductor test products, none of which qualify for recognition as a separate intangible asset. We do not expect any portion of this goodwill to be deductible for tax purposes. The goodwill attributable to the acquisition was recorded as a non-current asset and is not amortized, but is subject to an annual review for impairment. The goodwill arising from the acquisition was allocated to the HPD reporting unit within the Systems reportable segment. We have not presented unaudited combined pro forma financial information as the HPD acquisition was not significant to our consolidated results of operations and financial position. Baldwin Park Acquisition On July 30, 2020, we acquired the probe card assets of Advantest Corporation for total cash consideration of $ 35.0 million. This acquisition brings important enabling technologies and capabilities for designing and manufacturing advanced probe cards, and adds a complementary 3D-NAND Flash probe-card product that is qualified and in production at one of the world's leading NAND Flash manufacturers. The acquisition was accounted for using the acquisition method of accounting, with FormFactor treated as the acquirer. The acquired assets and liabilities of Baldwin Park were recorded at their respective fair values including an amount for goodwill representing the difference between the acquisition consideration and the fair value of the identifiable net assets. Our Condensed Consolidated Statements of Income include the financial results of Baldwin Park subsequent to the acquisition date of July 30, 2020. Revenue related to Baldwin Park since the acquisition date that was included in our Condensed Consolidated Statements of Income for fiscal 2020 was not material. We estimated the acquisition price and the allocation of fair value to assets acquired and liabilities assumed as of the acquisition date, July 30, 2020. We subsequently made certain immaterial adjustments within the measurement period to the acquisition price allocation as a result of finalization of our valuation of identifiable assets and liabilities. See Note 5, Goodwill and Intangible Assets, for changes in identified intangible values and goodwill. In the current quarter ended March 27, 2021, we finalized our allocation of the assets acquired, including goodwill and intangibles, and liabilities assumed for the purchase as follows (in thousands): Amount Accounts receivable $ 4,365 Inventory 2,727 Property, plant and equipment 9,053 Operating lease, right of use assets 519 Prepaid expenses and other current assets 56 Tangible assets acquired 16,720 Accounts payable and accrued liabilities ( 743 ) Operating lease liabilities ( 519 ) Total net tangible assets acquired and liabilities assumed 15,458 Intangible assets 13,600 Goodwill 5,942 Net assets acquired $ 35,000 12 The intangible assets as of July 30, 2020 included (in thousands): Amount Weighted Average Useful Life (in years) Developed technologies $ 8,800 10.0 Customer relationships 4,400 3.0 In-process research and development 400 N/A Total intangible assets $ 13,600 7.7 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. Identifiable Intangible Assets Valuation of intangible assets involves multiple assumptions. The key assumptions are described below. Developed technology acquired consists of existing technology related to 3D NAND Flash probe cards and the value expected to be derived from interconnect technology. We valued the developed technology related to 3D NAND Flash 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. We valued the interconnect developed technology asset using the incremental cash flow method. This method estimates value based on the incremental cash flow afforded by having the interconnect capability in place on the acquisition date versus having no capability in place and needing to replicate or replace that capability. The incremental cash flows are then discounted to a present value to arrive at an estimate of fair value for this asset class. In-process research and development (“IPR&D”) acquired primarily consists of research and development projects that were in process at the time of acquisition related to technologies used in DRAM probe cards. Once these projects are complete they will be amortized over their useful life. We valued the IPR&D 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. The value of customer relationships represents the fair value of future projected revenues that will be derived from the sale of products to Baldwin Park'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. Goodwill The excess of purchase price over the fair value assigned to the assets acquired and liabilities assumed represents the amount of goodwill resulting from the acquisition. We believe the factors that contributed to goodwill include synergies that are specific to our consolidated business, such as cost savings and operational efficiencies, and the acquisition of a talented workforce that expands our expertise in business development, none of which qualify for recognition as a separate intangible asset. We expect this goodwill to be deductible for tax purposes. The goodwill attributable to the acquisition was recorded as a non-current asset and is not amortized, but is subject to an annual review for impairment. The goodwill arising from the acquisition was allocated to the Probe Cards reporting unit within the Probe Cards reportable segment. We have not presented unaudited combined pro forma financial information as the Baldwin Park acquisition was not significant to our consolidated results of operations and financial position. 13 Note 5 — Goodwill and Intangible Assets Goodwill by reportable segment was as follows (in thousands): Probe Cards Systems Total Goodwill, gross, as of December 28, 2019 $ 172,482 $ 26,714 $ 199,196 Addition - FRT GmbH Acquisition — 975 975 Addition - Baldwin Park Acquisition 5,590 — 5,590 Addition - HPD Acquisition — 4,654 4,654 Foreign currency translation — 2,346 2,346 Goodwill, gross, as of December 26, 2020 178,072 34,689 212,761 Addition - Baldwin Park Acquisition 352 352 Addition - HPD Acquisition — 2,011 2,011 Foreign currency translation — ( 906 ) ( 906 ) Goodwill, gross, as of March 27, 2021 $ 178,424 $ 35,794 $ 214,218 We have no t recorded goodwill impairments for the three months ended March 27, 2021. Intangible assets were as follows (in thousands): March 27, 2021 December 26, 2020 Intangible Assets Gross Accumulated Amortization Net Gross Accumulated Amortization Net Developed technologies $ 173,318 $ 142,344 $ 30,974 $ 176,265 $ 137,754 $ 38,511 Trade names 8,100 7,418 682 8,162 7,363 799 Customer relationships 51,557 34,899 16,658 52,488 33,378 19,110 Backlog 1,969 1,897 72 2,227 1,900 327 In-process research and development 400 — 400 400 — 400 $ 235,344 $ 186,558 $ 48,786 $ 239,542 $ 180,395 $ 59,147 Amortization expense was included in our Condensed Consolidated Statements of Income as follows (in thousands): Three Months Ended March 27, 2021 March 28, 2020 Cost of revenues $ 5,090 $ 5,750 Selling, general and administrative 1,715 1,513 $ 6,805 $ 7,263 The estimated future amortization of definite-lived intangible assets, excluding in-process research and development, is as follows (in thousands): Fiscal Year Amount Remainder of 2021 $ 11,933 2022 9,591 2023 7,240 2024 4,625 2025 4,364 Thereafter 10,633 $ 48,386 14 Note 6 — Accrued Liabilities Accrued liabilities consisted of the following (in thousands): March 27, 2021 December 26, 2020 Accrued compensation and benefits $ 28,092 $ 33,110 Accrued income and other taxes 3,008 6,976 Accrued warranty 3,719 3,918 Employee stock purchase plan contributions withheld 2,109 4,240 Accrued contingent consideration 3,884 4,012 Other accrued expenses 2,656 3,086 $ 43,468 $ 55,342 Note 7 — Fair Value and Derivative Instruments Whenever possible, the fair values of our financial assets and liabilities are determined using quoted market prices of identical securities or quoted market prices of similar securities from active markets. The three levels of inputs that may be used to measure fair value are as follows: • Level 1 valuations are obtained from real-time quotes for transactions in active exchange markets involving identical securities; • Level 2 valuations utilize significant observable inputs, such as quoted prices for similar assets or liabilities, quoted prices near the reporting date in markets that are less active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and • Level 3 valuations utilize unobservable inputs to the valuation methodology and include our own data about assumptions market participants would use in pricing the asset or liability based on the best information available under the circumstances. We did not have any transfers of assets or liabilities measured at fair value on a recurring basis to or from Level 1, Level 2 or Level 3 during the three months ended March 27, 2021 or the year ended December 26, 2020. The carrying values of Cash, Accounts receivable, net, Restricted cash, Prepaid expenses and other current assets, Accounts payable, Accrued liabilities, and term loans, net of unamortized issuance costs, approximate fair value due to their short maturities. No changes were made to our valuation techniques during the first three months of fiscal 2021. 15 Assets and Liabilities Measured at Fair Value on a Recurring Basis Assets and liabilities measured at fair value on a recurring basis were as follows (in thousands): March 27, 2021 Level 1 Level 2 Level 3 Total Assets: Cash equivalents: Money market funds $ 34,254 $ — $ — $ 34,254 Commercial paper 5,500 — — 5,500 39,754 — — 39,754 Marketable securities: U.S. treasuries 32,669 — — 32,669 Certificates of deposit — 1,212 — 1,212 U.S. agency securities — 575 — 575 Corporate bonds — 44,146 — 44,146 Commercial paper — 15,491 — 15,491 32,669 61,424 — 94,093 Foreign exchange derivative contracts (Designated) — 144 — 144 Interest rate swap derivative contracts — 745 — 745 Total assets $ 72,423 $ 62,313 $ — $ 134,736 Liabilities: Foreign exchange derivative contracts (Designated) $ — $ ( 100 ) $ — $ ( 100 ) Interest rate swap derivative contracts — ( 113 ) — ( 113 ) Contingent consideration — — ( 3,884 ) ( 3,884 ) Total liabilities $ — $ ( 213 ) $ ( 3,884 ) $ ( 4,097 ) December 26, 2020 Level 1 Level 2 Level 3 Total Assets: Cash equivalents: Money market funds $ 43,019 $ — $ — $ 43,019 Marketable securities: U.S. treasuries 40,726 — — 40,726 Certificates of deposit — 2,179 — 2,179 U.S. agency securities — 575 — 575 Corporate bonds — 24,330 — 24,330 40,726 27,084 — 67,810 Foreign exchange derivative contracts — 1,057 — 1,057 Interest rate swap derivative contracts — 57 — 57 Total assets $ 83,745 $ 28,198 $ — $ 111,943 Liabilities: Interest rate swap derivative contracts $ — $ ( 87 ) $ — $ ( 87 ) Contingent consideration — — ( 4,012 ) ( 4,012 ) Total liabilities $ — $ ( 87 ) $ ( 4,012 ) $ ( 4,099 ) Cash Equivalents The fair value of our cash equivalents is determined based on quoted market prices for similar or identical securities. Marketable Securities We classify our marketable securities as available-for-sale and value them utilizing a market approach. Our investments are priced by pricing vendors who provide observable inputs for their pricing without applying significant judgment. Broker pricing is used mainly when a quoted price is not available, the investment is not priced by our pricing vendors or when a broker price 16 is more reflective of fair value. Our broker-priced investments are categorized as Level 2 investments because fair value is based on similar assets without applying significant judgments. In addition, all investments have a sufficient trading volume to demonstrate that the fair value is appropriate. Unrealized gains and losses were immaterial and were recorded as a component of Accumulated other comprehensive income in our Condensed Consolidated Balance Sheets. We did not have any other-than-temporary unrealized gains or losses at either period end included in these financial statements. Contingent Consideration Contingent consideration, arising from the acquisition of FRT, is a cash amount equal to 1.5 x EBIT as defined in the purchase agreement, up to a maximum of € 10.3 million, payable subject to the performance of the acquired business in calendar 2020. We estimated the fair value of contingent consideration using a probability weighted approach. Key assumptions in determining the fair value of contingent consideration included estimating EBIT levels that we believed as of the acquisition date were likely to be achieved during the performance period and discounting at an appropriate discount rate. Contingent consideration as of March 27, 2021 was estimated to be $ 3.9 million, with the change from December 26, 2020 resulting from foreign currency translation. Interest Rate Swaps The fair value of our interest rate swap contracts is determined at the end of each reporting period based on valuation models that use interest rate yield curves as inputs. For accounting purposes, our interest rate swap contracts qualify for, and are designated as, cash flow hedges. The cash flows associated with the interest rate swaps are reported in Net cash provided by operating activities in our Condensed Consolidated Statements of Cash Flows and the fair value of the interest rate swap contracts are recorded within Accrued liabilities and Other liabilities in our Condensed Consolidated Balance Sheets. The impact of the interest rate swaps on our Condensed Consolidated Statements of Income was as follows (in thousands): Amount of Gain or (Loss) Recognized in OCI on Derivative (Effective Portion) Location of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) Location of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion) Amount of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion) Three Months Ended March 27, 2021 $ 624 Interest expense $ ( 38 ) Interest expense $ — Three Months Ended March 28, 2020 $ ( 96 ) Interest expense $ 22 Interest expense $ — Foreign Exchange Derivative Contracts We operate and sell our products in various global markets. As a result, we are exposed to changes in foreign currency exchange rates. We utilize foreign currency forward contracts to hedge against future movements in foreign exchange rates that affect certain existing foreign currency denominated assets and liabilities and forecasted foreign currency revenue and expense transactions. Under this program, our strategy is to have increases or decreases in our foreign currency exposures mitigated by gains or losses on the foreign currency forward contracts in order to mitigate the risks and volatility associated with foreign currency transaction gains or losses. We do not use derivative financial instruments for speculative or trading purposes. For accounting purposes, certain of our foreign currency forward contracts are not designated as hedging instruments and, accordingly, we record the fair value of these contracts as of the end of our reporting period in our Condensed Consolidated Balance Sheets with changes in fair value recorded within Other income (expense), net in our Condensed Consolidated Statement of Income for both realized and unrealized gains and losses. Certain of our foreign currency forward contracts are designated as cash flow hedges, and, accordingly, we record the fair value of these contracts as of the end of our reporting period in our Condensed Consolidated Balance Sheets with changes in fair value recorded as a component of Accumulated other comprehensive income and reclassified into earnings in the same period in which the hedged transaction affects earnings, and in the same line item on the Condensed Consolidated Statements of Income as the impact of the hedge transaction. The fair value of our foreign exchange derivative contracts was determined based on current foreign currency exchange rates and forward points. All of our foreign exchange derivative contracts outstanding at March 27, 2021 will mature by the first quarter of fiscal 2022. 17 The following table provides information about our foreign currency forward contracts outstanding as of March 27, 2021 (in thousands): Currency Contract Position Contract Amount (Local Currency) Contract Amount (U.S. Dollars) Euro Dollar Buy ( 10,141 ) $ ( 12,025 ) Euro Dollar Sell 11,043 13,026 Japanese Yen Buy ( 1,971,765 ) ( 17,977 ) Korean Won Sell 3,129,743 2,767 Taiwan Dollar Sell 7,972 279 Total USD notional amount of outstanding foreign exchange contracts $ ( 13,930 ) Our foreign currency contracts are classified within Level 2 of the fair value hierarchy as they are valued using pricing models that utilize observable market inputs. The impact of foreign exchange derivative contracts not designated as cash flow hedges on our Condensed Consolidated Statements of Income was as follows (in thousands): Amount of Gain (Loss) Recognized on Derivatives Three Months Ended Derivatives Not Designated as Hedging Instruments Location of Gain (Loss) Recognized on Derivatives March 27, 2021 March 28, 2020 Foreign exchange forward contracts Other income (expense), net $ 1,288 $ ( 115 ) The impact of foreign exchange derivative contracts designated as cash flow hedges on our Condensed Consolidated Statements of Income was as follows (in thousands): Amount of Gain (Loss) Recognized in Accumulated OCI on Derivative Location of Gain (Loss) Reclassified from Accumulated OCI into Income Amount of Gain (Loss) Reclassified from Accumulated OCI into Income Three Months Ended March 27, 2021 $ ( 526 ) Cost of revenues $ 250 Research and development 30 Selling, general and administrative 82 $ 362 Three Months Ended March 28, 2020 $ ( 3 ) Cost of revenues $ ( 120 ) Research and development ( 18 ) Selling, general and administrative ( 43 ) $ ( 181 ) Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis We measure and report our non-financial assets such as Property, plant and equipment, Goodwill and Intangible assets at fair value on a non-recurring basis if we determine these assets to be impaired or in the period when we make a business acquisition. Other than as discussed in Note 4, Acquisition , there were no assets or liabilities measured at fair value on a nonrecurring basis during the three months ended March 27, 2021 or March 28, 2020. Note 8 — Warranty We offer warranties on certain products and record a liability for the estimated future costs associated with warranty claims at the time revenue is recognized. The warranty liability is based upon historical experience and our estimate of the level of future costs. While we engage in product quality programs and processes, our warranty obligation is affected by product failure rates, 18 material usage and service delivery costs. We continuously monitor product returns for warranty and maintain a reserve for the related expenses based upon our historical experience and any specifically identified failures. As we sell new products to our customers, we must exercise considerable judgment in estimating the expected failure rates. This estimating process is based on historical experience of similar products, as well as various other assumptions that we believe to be reasonable under the circumstances. We provide for the estimated cost of product warranties at the time revenue is recognized as a component of Cost of revenues in our Condensed Consolidated Statement of Income. Changes in our warranty liability were as follows (in thousands): Three Months Ended March 27, 2021 March 28, 2020 Balance at beginning of period $ 3,918 $ 1,942 Accruals 1,374 660 Settlements ( 1,573 ) ( 684 ) Balance at end of period $ 3,719 $ 1,918 Note 9 — Property, Plant and Equipment, net Property, plant and equipment, net consisted of the following (in thousands): March 27, 2021 December 26, 2020 Land $ 4,751 $ 4,751 Machinery and equipment 233,357 226,185 Computer equipment and software 43,839 36,361 Furniture and fixtures 6,925 6,894 Leasehold improvements 80,011 79,144 Sub-total 368,883 353,335 Less: Accumulated depreciation and amortization ( 298,865 ) ( 294,468 ) Net, property, plant and equipment 70,018 58,867 Construction-in-process 42,294 45,236 Total $ 112,312 $ 104,103 Note 10 — Stockholders’ Equity and Stock-Based Compensation Common Stock Repurchase Program On October 26, 2020, our Board of Directors authorized a program to repurchase up to $ 50 million of outstanding common stock to offset potential dilution from issuances of common stock under our stock-based compensation plans. The share repurchase program will expire on October 28, 2022. During the three months ended March 27, 2021, we repurchased 136,402 shares of common stock for $ 5.7 million and, as of March 27, 2021, $ 44.3 million remained available for future repurchases. Our policy related to repurchases of our common stock is to charge the excess of cost over par value to additional paid-in capital once the shares are retired. All repurchases were made in compliance with Rule 10b-18 under the Securities Exchange Act of 1934, as amended. 19 Restricted Stock Units Restricted stock unit (“RSU”) activity under our equity incentive plan was as follows: Units Weighted Average Grant Date Fair Value RSUs at December 26, 2020 2,840,922 $ 19.80 Awards granted 8,765 46.25 Awards vested ( 67,635 ) 16.38 Awards forfeited ( 11,140 ) 21.21 RSUs at March 27, 2021 2,770,912 19.96 Performance Restricted Stock Units We may grant Performance RSUs (“PRSUs”) to certain executives, which vest based upon us achieving certain market performance criteria. There were no PRSUs granted during the three months ended March 27, 2021. PRSUs are included as part of the RSU activity above. Stock Options Stock option activity under our equity incentive plan was as follows: Options Outstanding Weighted Average Exercise Price Weighted Average Remaining Contractual Life in Years Aggregate Intrinsic Value Outstanding at December 26, 2020 106,000 $ 8.35 Options exercised ( 50,000 ) 8.44 Outstanding at March 27, 2021 56,000 $ 8.28 0.92 $ 2,078,820 Vested and expected to vest at March 27, 2021 56,000 $ 8.28 0.92 $ 2,078,820 Exercisable at March 27, 2021 56,000 $ 8.28 0.92 $ 2,078,820 Employee Stock Purchase Plan Information related to activity under our Employee Stock Purchase Plan (“ESPP”) was as follows: Three Months Ended March 27, 2021 Shares issued 228,784 Weighted average per share purchase price $ 22.14 Weighted average per share discount from the fair value of our common stock on the date of issuance $ ( 18.73 ) Stock-Based Compensation Stock-based compensation was included in our Condensed Consolidated Statements of Income as follows (in thousands): Three Months Ended March 27, 2021 March 28, 2020 Cost of revenues $ 1,335 $ 937 Research and development 1,689 1,439 Selling, general and administrative 4,053 3,247 Total stock-based compensation $ 7,077 $ 5,623 20 Unrecognized Compensation Costs At March 27, 2021, the unrecognized stock-based compensation was as follows (dollars in thousands): Unrecognized Expense Average Expected Recognition Period in Years Restricted stock units $ 27,429 2.03 Performance restricted stock units 7,719 1.93 Employee stock purchase plan 973 0.86 Total unrecognized stock-based compensation expense $ 36,121 1.99 Note 11 — Net Income per Share The following table reconciles the shares used in calculating basic net income per share and diluted net income per share (in thousands): Three Months Ended March 27, 2021 March 28, 2020 Weighted-average shares used in computing basic net income per share 77,598 76,005 Add potentially dilutive securities 2,390 2,505 Weighted-average shares used in computing diluted net income per share 79,988 78,510 Securities not included as they would have been antidilutive 3 9 Note 12 — Commitments and Contingencies Leases See Note 13, Leases . Contractual Obligations and Commitments Our contractual obligations and commitments have not materially changed as of March 27, 2021 from those disclosed in our Annual Report on Form 10-K for the year ended December 26, 2020. Legal Matters From time to time, we may be subject to legal proceedings and claims in the ordinary course of business. As of March 27, 2021, and as of the filing of this Quarterly Report on Form 10-Q, we were not involved in any material legal proceedings. Note 13 — Leases We lease real estate space under non-cancelable operating lease agreements for commercial and industrial space, as well as for our corporate headquarters located in Livermore, California. Our leases have remaining terms of 1 to 8 years, and some leases include options to extend up to 20 years. We also have operating leases for automobiles with remaining lease terms of 1 to 4 years. We did not include any of our renewal options in our lease terms for calculating our lease liability as the renewal options allow us to maintain operational flexibility and we are not reasonably certain we will exercise these options at this time. The weighted-average remaining lease term for our operating leases was 6 years as of March 27, 2021 and the weighted-average discount rate was 3.85 %. 21 The components of lease expense were as follows (in thousands): Three Months Ended March 27, 2021 March 28, 2020 Lease expense: Operating lease expense $ 2,123 $ 1,924 Short-term lease expense 37 40 Variable lease expense 537 383 $ 2,697 $ 2,347 Future minimum payments under our non-cancelable operating leases were as follows as of March 27, 2021 (in thousands): Fiscal Year Amount Remainder of 2021 $ 6,747 2022 8,040 2023 6,710 2024 6,297 2025 7,814 Thereafter 14,416 Total minimum lease payments 50,024 Less: interest ( 8,982 ) Present value of net minimum lease payments 41,042 Less: current portion ( 7,557 ) Total long-term operating lease liabilities $ 33,485 Note 14 — Revenue Transaction price allocated to the remaining performance obligations: On March 27, 2021, we had $ 6.3 million of remaining performance obligations, which were comprised of deferred service contracts and extended warranty contracts and contracts with overtime revenue recognition that are not yet delivered. We expect to recognize approximately 74.5 % of our remaining performance obligations as revenue in the remainder of fiscal 2021, approximately 16.6 % in fiscal 2022, and approximately 8.9 % in fiscal 2023 and thereafter. The foregoing excludes the value of other remaining performance obligations as they have original durations of one year or less, and also excludes information about variable consideration allocated entirely to a wholly unsatisfied performance obligation. Contract balances: The timing of revenue recognition may differ from the timing of invoicing to customers. Accounts receivable is recorded at the invoiced amount, net of an allowance for doubtful accounts. A receivable is recognized in the period we deliver goods or provide services or when our right to consideration is unconditional. A contract asset is recorded when we have performed under the contract but our right to consideration is conditional on something other than the passage of time. Contract assets as of March 27, 2021 and December 26, 2020 were $ 4.8 million and $ 3.7 million, respectively, and are reported on the Condensed Consolidated Balance Sheets as a component of Prepaid expenses and other current assets. Contract liabilities include payments received in advance of performance under a contract and are satisfied as the associated revenue is recognized. Contract liabilities are reported on the Condensed Consolidated Balance Sheets at the end of each reporting period as a component of Deferred revenue and Other liabilities. Contract liabilities as of March 27, 2021 and December 26, 2020 were $ 19.9 million and $ 22.2 million, respectively. During the three months ended March 27, 2021, we recognized $ 9.3 million of revenue, that was included in contract liabilities as of December 26, 2020. Costs to obtain a contract: We generally expense sales commissions when incurred as a component of Selling, general and administrative expense, as the amortization period is typically less than one year. Revenue by Category: Refer to Note 15, Operating Segments and Enterprise-Wide Information , for further details. 22 Note 15 — Operating Segments and Enterprise-Wide Information Our chief operating decision maker (“CODM”) is our Chief Executive Officer, who reviews operating results to make decisions about allocating resources and assessing performance for the entire company. We operate in two reportable segments consisting of the Probe Cards segment and the Systems segment. The following table summarizes the operating results by reportable segment (dollars in thousands): Three Months Ended March 27, 2021 March 28, 2020 Probe Cards Systems Corporate and Other Total Probe Cards Systems Corporate and Other Total Revenues $ 158,898 $ 27,738 $ — $ 186,636 $ 134,715 $ 26,038 $ — $ 160,753 Gross profit $ 70,315 $ 13,599 $ ( 7,208 ) $ 76,706 $ 60,743 $ 13,334 $ ( 6,687 ) $ 67,390 Gross margin 44.3 % 49.0 % — % 41.1 % 45.1 % 51.2 % — % 41.9 % Operating results provide useful information to our management for assessment of our performance and results of operations. Certain components of our operating results are utilized to determine executive compensation along with other measures. Corporate and Other includes unallocated expenses relating to amortization of intangible assets, inventory and fixed asset fair value adjustments due to acquisitions and share-based compensation, which are not used in evaluating the results of, or in allocating resources to, our reportable segments. Certain revenue category information by reportable segment was as follows (in thousands): Three Months Ended March 27, 2021 March 28, 2020 Probe Cards Systems Total Probe Cards Systems Total Market: Foundry & Logic $ 113,410 $ — $ 113,410 $ 105,745 $ — $ 105,745 DRAM 33,898 — 33,898 24,696 — 24,696 Flash 11,590 — 11,590 4,274 — 4,274 Systems — 27,738 27,738 — 26,038 26,038 Total $ 158,898 $ 27,738 $ 186,636 $ 134,715 $ 26,038 $ 160,753 Timing of revenue recognition: Products transferred at a point in time $ 158,476 $ 24,671 $ 183,147 $ 134,069 $ 24,858 $ 158,927 Products and services transferred over time 422 3,067 3,489 646 1,180 1,826 Total $ 158,898 $ 27,738 $ 186,636 $ 134,715 $ 26,038 $ 160,753 Geographical region: Taiwan $ 44,734 $ 846 $ 45,580 $ 30,439 $ 1,341 $ 31,780 China 37,831 4,794 42,625 37,280 6,362 43,642 United States 21,308 8,178 29,486 25,611 6,305 31,916 Asia-Pacific 1 27,878 1,080 28,958 4,455 3,408 7,863 South Korea 18,001 1,084 19,085 13,692 396 14,088 Europe 2,833 7,166 9,999 16,210 4,833 21,043 Japan 5,249 4,072 9,321 5,535 2,835 8,370 Rest of the world 1,064 518 1,582 1,493 558 2,051 Total $ 158,898 $ 27,738 $ 186,636 $ 134,715 $ 26,038 $ 160,753 1 Asia-Pacific includes all countries in the region except China, Japan, South Korea, and Taiwan, which are disclosed separately. 23