FORMFACTOR INC 10-Q

Item 1. Financial Statements FORMFACTOR, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share amounts) (Unaudited) September 25, 2021 December 26, 2020 ASSETS Current assets: Cash and cash equivalents $ 153,781 $ 187,225 Marketable securities 110,898 67,810 Accounts receivable, net of allowance for doubtful accounts of $ 214 and $ 248 105,807 107,603 Inventories, net 115,104 99,229 Restricted cash 2,019 1,904 Prepaid expenses and other current assets 18,892 23,303 Total current assets 506,501 487,074 Restricted cash 1,674 1,969 Operating lease, right-of-use-assets 36,669 30,756 Property, plant and equipment, net of accumulated depreciation 140,098 104,103 Goodwill 213,293 212,761 Intangibles, net 39,195 59,147 Deferred tax assets 67,231 66,242 Other assets 1,930 1,165 Total assets $ 1,006,591 $ 963,217 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 64,925 $ 62,045 Accrued liabilities 54,625 55,342 Current portion of term loans, net of unamortized issuance costs 9,213 9,516 Deferred revenue 23,275 20,964 Operating lease liabilities 7,962 6,704 Total current liabilities 160,000 154,571 Term loans, less current portion, net of unamortized issuance costs 17,742 24,978 Deferred tax liabilities 4,264 5,346 Long-term operating lease liabilities 32,401 27,996 Other liabilities 5,794 6,242 Total liabilities 220,201 219,133 Stockholders’ equity: Common stock, $ 0.001 par value: 250,000,000 shares authorized; 78,207,219 and 77,437,997 shares issued and outstanding 78 78 Additional paid-in capital 892,303 903,838 Accumulated other comprehensive income 1,700 5,886 Accumulated deficit ( 107,691 ) ( 165,718 ) Total stockholders’ equity 786,390 744,084 Total liabilities and stockholders’ equity $ 1,006,591 $ 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 Nine Months Ended September 25, 2021 September 26, 2020 September 25, 2021 September 26, 2020 Revenues $ 189,964 $ 177,996 $ 564,676 $ 496,573 Cost of revenues 109,745 101,247 331,468 286,267 Gross profit 80,219 76,749 233,208 210,306 Operating expenses: Research and development 26,026 22,878 75,526 65,064 Selling, general and administrative 30,940 31,834 91,434 82,282 Total operating expenses 56,966 54,712 166,960 147,346 Operating income 23,253 22,037 66,248 62,960 Interest income 121 249 463 1,310 Interest expense ( 151 ) ( 193 ) ( 447 ) ( 682 ) Other expense, net 58 299 36 141 Income before income taxes 23,281 22,392 66,300 63,729 Provision (benefit) for income taxes 2,784 ( 499 ) 8,273 4,479 Net income $ 20,497 $ 22,891 $ 58,027 $ 59,250 Net income per share: Basic $ 0.26 $ 0.30 $ 0.75 $ 0.78 Diluted $ 0.26 $ 0.29 $ 0.73 $ 0.75 Weighted-average number of shares used in per share calculations: Basic 77,869 77,029 77,643 76,436 Diluted 79,029 78,809 79,190 78,534 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 Nine Months Ended September 25, 2021 September 26, 2020 September 25, 2021 September 26, 2020 Net income $ 20,497 $ 22,891 $ 58,027 $ 59,250 Other comprehensive income (loss), net of tax: Translation adjustments and other ( 1,511 ) 1,867 ( 3,258 ) 2,231 Unrealized gains (losses) on available-for-sale marketable securities ( 62 ) ( 148 ) ( 290 ) 349 Unrealized gains (losses) on derivative instruments ( 323 ) 302 ( 638 ) 558 Other comprehensive income (loss), net of tax ( 1,896 ) 2,021 ( 4,186 ) 3,138 Comprehensive income $ 18,601 $ 24,912 $ 53,841 $ 62,388 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 Additional Paid-in Capital Accumulated Other Comprehensive Income (Loss) Accumulated Deficit Total Nine Months Ended September 25, 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 378,584 — 9,809 — — 9,809 Issuance of common stock pursuant to exercise of options 100,000 — 844 — — 844 Issuance of common stock pursuant to vesting of restricted stock units, net of stock withheld for tax 910,838 1 ( 19,602 ) — — ( 19,601 ) Purchase and retirement of common stock through repurchase program ( 620,200 ) ( 1 ) ( 23,950 ) — — ( 23,951 ) Stock-based compensation — — 21,364 — — 21,364 Other comprehensive loss — — — ( 4,186 ) — ( 4,186 ) Net income — — — — 58,027 58,027 Balances, September 25, 2021 78,207,219 $ 78 $ 892,303 $ 1,700 $ ( 107,691 ) $ 786,390 Three Months Ended September 25, 2021 Balances, June 26, 2021 77,454,800 $ 77 $ 894,062 $ 3,596 $ ( 128,188 ) $ 769,547 Issuance of common stock under the Employee Stock Purchase Plan 149,800 — 4,744 — — 4,744 Issuance of common stock pursuant to vesting of restricted stock units, net of stock withheld for tax 602,619 1 ( 14,341 ) — — ( 14,340 ) Stock-based compensation — — 7,838 — — 7,838 Other comprehensive loss — — — ( 1,896 ) — ( 1,896 ) Net income — — — — 20,497 20,497 Balances, September 25, 2021 78,207,219 $ 78 $ 892,303 $ 1,700 $ ( 107,691 ) $ 786,390 The accompanying notes are an integral part of these condensed consolidated financial statements. 6 FORMFACTOR, INC. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (In thousands, except shares) (Unaudited) Shares of Common Stock Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Income (Loss) Accumulated Deficit Total Nine Months Ended September 26, 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 485,566 — 7,875 — — 7,875 Issuance of common stock pursuant to exercise of options 205,769 1 1,712 — — 1,713 Issuance of common stock pursuant to vesting of restricted stock units, net of stock withheld for tax 927,169 1 ( 15,383 ) — — ( 15,382 ) Stock-based compensation — — 16,551 — — 16,551 Other comprehensive income — — — 3,138 — 3,138 Net income — — — — 59,250 59,250 Balances, September 26, 2020 77,383,494 $ 78 $ 896,576 $ 2,479 $ ( 184,991 ) $ 714,142 Three Months Ended September 26, 2020 Balances, June 27, 2020 76,501,459 $ 77 $ 898,069 $ 458 $ ( 207,882 ) $ 690,722 Issuance of common stock under the Employee Stock Purchase Plan 173,975 — 3,809 — — 3,809 Issuance of common stock pursuant to exercise of options 100,000 — 844 — — 844 Issuance of common stock pursuant to vesting of restricted stock units, net of stock withheld for tax 608,060 1 ( 11,583 ) — — ( 11,582 ) Stock-based compensation — — 5,437 — — 5,437 Other comprehensive income — — — 2,021 — 2,021 Net income — — — — 22,891 22,891 Balances, September 26, 2020 77,383,494 $ 78 $ 896,576 $ 2,479 $ ( 184,991 ) $ 714,142 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) Nine Months Ended September 25, 2021 September 26, 2020 Cash flows from operating activities: Net income $ 58,027 $ 59,250 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 19,256 14,491 Amortization 16,362 20,249 Reduction in the carrying amount of right-of-use assets 5,412 4,294 Stock-based compensation expense 21,585 16,774 Provision for excess and obsolete inventories 11,621 9,763 Non-cash restructuring charges 1,592 — Gain on contingent consideration ( 95 ) ( 3,771 ) Other adjustments to reconcile net income to net cash provided by operating activities 1,627 ( 977 ) Changes in assets and liabilities: Accounts receivable 1,157 5,712 Inventories ( 30,335 ) ( 18,566 ) Prepaid expenses and other current assets 3,631 ( 5,619 ) Other assets ( 333 ) 219 Accounts payable 1,488 18,054 Accrued liabilities ( 6,951 ) 4,754 Other liabilities 47 272 Deferred revenues 2,000 3,806 Operating lease liabilities ( 5,654 ) ( 4,496 ) Net cash provided by operating activities 100,437 124,209 Cash flows from investing activities: Acquisition of property, plant and equipment ( 51,353 ) ( 41,887 ) Acquisition of business, net of cash acquired — ( 34,999 ) Proceeds from sale of a subsidiary — 82 Purchases of marketable securities ( 114,898 ) ( 29,721 ) Proceeds from maturities and sales of marketable securities 71,275 50,330 Net cash used in investing activities ( 94,976 ) ( 56,195 ) Cash flows from financing activities: Proceeds from issuances of common stock 10,647 9,588 Purchase of common stock through stock repurchase program ( 23,951 ) — Tax withholdings related to net share settlements of equity awards ( 12,643 ) ( 15,382 ) Payment of contingent consideration ( 3,873 ) — Proceeds from term loan — 18,000 Principal repayments on term loans ( 7,049 ) ( 41,098 ) Payment of term loan debt issuance costs — ( 78 ) Net cash used in financing activities ( 36,869 ) ( 28,970 ) Effect of exchange rate changes on cash, cash equivalents and restricted cash ( 2,216 ) 1,262 Net increase (decrease) in cash, cash equivalents and restricted cash ( 33,624 ) 40,306 Cash, cash equivalents and restricted cash, beginning of period 191,098 147,937 Cash, cash equivalents and restricted cash, end of period $ 157,474 $ 188,243 The accompanying notes are an integral part of these condensed consolidated financial statements. 8 FORMFACTOR, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) Nine Months Ended September 25, 2021 September 26, 2020 Non-cash investing and financing activities: Increase in accounts payable and accrued liabilities related to property, plant and equipment purchases $ 4,684 $ 3,041 Increase in accrued liabilities related to tax withholdings related to net share settlements of equity awards 6,952 — Operating lease, right-of-use assets obtained in exchange for lease obligations 11,699 1,549 Supplemental disclosure of cash flow information: Cash paid for income taxes, net $ 6,795 $ 7,475 Cash paid for interest 496 683 Operating cash outflows from operating leases 6,420 5,566 Reconciliation of cash, cash equivalents and restricted cash: Cash and cash equivalents $ 153,781 $ 185,368 Restricted cash, current 2,019 1,477 Restricted cash, non-current 1,674 1,398 Total cash, cash equivalents and restricted cash $ 157,474 $ 188,243 The accompanying notes are an integral part of these condensed consolidated financial statements. 9 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 nine months ended September 25, 2021 and September 26, 2020 each contained 39 weeks. Fiscal 2021 will end on December 25, 2021. Significant Accounting Policies Our significant accounting policies have not changed during the nine months ended September 25, 2021 from those disclosed in our Annual Report on Form 10-K for the year ended December 26, 2020. 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. 10 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 Nine Months Ended September 25, 2021 September 26, 2020 September 25, 2021 September 26, 2020 Intel Corporation 20.8 % 25.6 % 21.7 % 32.4 % Samsung Electronics., LTD. 12.9 % 10.6 % 10.5 % * Taiwan Semiconductor Manufacturing Co., LTD. * 10.6 % * * Micron Technology, Inc. * 10.1 % * * 33.7 % 56.9 % 32.2 % 32.4 % *Represents less than 10% of total revenues. At September 25, 2021, one customer accounted for 19.3 % 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): September 25, 2021 December 26, 2020 Raw materials $ 55,352 $ 48,122 Work-in-progress 41,638 30,806 Finished goods 18,114 20,301 $ 115,104 $ 99,229 Note 4 — Acquisitions High Precision Devices, Inc. Acquisition On October 19, 2020, we acquired HPD for total consideration of $ 16.9 million, net of cash acquired of $ 1.7 million, which included an adjustment for changes in working capital. The acquisition was accounted for using the acquisition method of accounting. 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, including an amount for goodwill representing the difference between the acquisition consideration and the fair value of the identifiable net assets. The fair values assigned to the assets acquired and liabilities assumed were based on management’s assumptions as of the acquisition date. 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 the changes 11 in identified intangible values and goodwill. The final allocation of the assets acquired, including goodwill and intangibles, and liabilities assumed for the purchase is as follows (in thousands): Amount Cash and cash equivalents $ 1,680 Accounts receivable 1,017 Inventories 3,047 Property, plant and equipment 669 Operating lease, right of use assets 2,554 Prepaid expenses and other current assets 916 Tangible assets acquired 9,883 Deferred revenue ( 2,529 ) Accounts payable and accrued liabilities ( 1,268 ) Operating lease liabilities ( 2,554 ) Deferred tax liabilities ( 2,400 ) Total tangible assets acquired and liabilities assumed 1,132 Intangible assets 11,520 Goodwill 5,908 Net Assets Acquired $ 18,560 The intangible assets as 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 Baldwin Park Acquisition On July 30, 2020, we acquired the probe card assets of Advantest Corporation for total consideration of $ 35.0 million. The acquisition was accounted for using the acquisition method of accounting. 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 including an amount for goodwill representing the difference between the acquisition consideration and the fair value of the identifiable net assets. The fair values assigned to assets acquired and liabilities assumed were based on management's assumptions as of the acquisition date. 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 the changes in identified intangible values and goodwill. The final 12 allocation of the assets acquired, including goodwill and intangibles, and liabilities assumed for the purchase as follows (in thousands): Amount Accounts receivable $ 4,365 Inventories 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 tangible assets acquired and liabilities assumed 15,458 Intangible assets 13,600 Goodwill 5,942 Net assets acquired $ 35,000 The intangible assets as of the acquisition date 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 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 — 1,254 1,254 Foreign currency translation — ( 1,074 ) ( 1,074 ) Goodwill, gross, as of September 25, 2021 $ 178,424 $ 34,869 $ 213,293 We have no t recorded goodwill impairments for the nine months ended September 25, 2021. 13 Intangible assets were as follows (in thousands): September 25, 2021 December 26, 2020 Intangible Assets Gross Accumulated Amortization Net Gross Accumulated Amortization Net Developed technologies $ 173,160 $ 148,518 $ 24,642 $ 176,265 $ 137,754 $ 38,511 Customer relationships 51,514 37,885 13,629 52,488 33,378 19,110 Trade names 8,110 7,586 524 8,162 7,363 799 Order backlog 1,958 1,958 — 2,227 1,900 327 In-process research and development 400 — 400 400 — 400 $ 235,142 $ 195,947 $ 39,195 $ 239,542 $ 180,395 $ 59,147 Amortization expense was included in our Condensed Consolidated Statements of Income as follows (in thousands): Three Months Ended Nine Months Ended September 25, 2021 September 26, 2020 September 25, 2021 September 26, 2020 Cost of revenues $ 858 $ 4,985 $ 11,453 $ 15,661 Selling, general and administrative 1,604 1,547 4,909 4,588 $ 2,462 $ 6,532 $ 16,362 $ 20,249 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 $ 2,401 2022 9,592 2023 7,224 2024 4,611 2025 4,351 Thereafter 10,616 $ 38,795 Note 6 — Accrued Liabilities Accrued liabilities consisted of the following (in thousands): September 25, 2021 December 26, 2020 Accrued compensation and benefits $ 37,913 $ 33,110 Accrued income and other taxes 5,466 6,976 Accrued warranty 2,803 3,918 Employee stock purchase plan contributions withheld 1,924 4,240 Accrued contingent consideration — 4,012 Accrued restructuring charges 3,675 — Other accrued expenses 2,844 3,086 $ 54,625 $ 55,342 14 Note 7 — Restructuring Charges On September 25, 2021, we adopted restructuring plans to improve our business effectiveness and streamline our operations by consolidating certain manufacturing facilities for both the Probe Cards segment and the Systems segment. This includes plans to consolidate or relocate certain leased locations in the United States to other locations in the United States, Germany and Asia. As a result of these changes to certain work locations, we have incurred, and expect to incur, personnel related costs to sever, relocate, or retain select employees. Additionally, we are undertaking actions to adjust capacity for certain product offerings. As a result of these adjustments, contract termination costs include charges to satisfy contract obligations. The liability was recognized using our best estimate and it is reasonably possible that the final amount will differ from the amount estimated in the near term. We expect the actions defined under these plans will be largely completed by the end of December 2022, except facilities charges which may extend beyond that time. This plan is expected to result in FormFactor recording restructuring and other charges in the aggregate amount of approximately $ 8.0 million to $ 10.5 million, estimated to be comprised primarily of $ 1.0 million to $ 2.0 million of severance and employee-related costs, $ 3.5 million to 4.5 million in contract and lease termination costs, $ 1.0 million to $ 1.5 million in inventory impairments, and $ 2.0 million to $ 2.5 million of cost related to impairment of leasehold improvements, facility exits, and other costs. Approximately $ 5.0 million to $ 6.0 million and $ 3.0 million to $ 4.5 million is expected within the Probe Cards segment and Systems segment, respectively. Restructuring charges by reportable segment included in our Condensed Consolidated Statements of Income were as follows (in thousands): Three Months Ended Nine Months Ended September 25, 2021 September 25, 2021 Probe Cards Systems Total Probe Cards Systems Total Cost of revenues $ 4,070 $ 252 $ 4,322 $ 4,070 $ 420 $ 4,490 Research and development — 289 289 — 694 694 Selling, general and administrative — 22 22 — 83 83 $ 4,070 $ 563 $ 4,633 $ 4,070 $ 1,197 $ 5,267 Changes to the restructuring accrual in the nine months ended September 25, 2021 were as follows (in thousands): Employee Severance and Benefits Inventory Impairments Property and Equipment Impairments Contract Termination Costs Total December 26, 2020 $ — $ — $ — $ — $ — Restructuring charges 875 1,322 270 2,800 5,267 Non-cash settlement — ( 1,322 ) ( 270 ) — ( 1,592 ) September 25, 2021 $ 875 $ — $ — $ 2,800 $ 3,675 Note 8 — 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 and nine months ended September 25, 2021 or the year ended December 26, 2020. 15 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 nine months of fiscal 2021. 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): September 25, 2021 Level 1 Level 2 Level 3 Total Assets: Cash equivalents: Money market funds $ 12,621 $ — $ — $ 12,621 U.S. treasuries 5,300 — — 5,300 17,921 — — 17,921 Marketable securities: U.S. treasuries 37,135 — — 37,135 Certificates of deposit — 723 — 723 U.S. agency securities — 575 — 575 Corporate bonds — 27,336 — 27,336 Commercial paper — 45,129 — 45,129 37,135 73,763 — 110,898 Interest rate swap derivative contracts — 548 — 548 Total assets $ 55,056 $ 74,311 $ — $ 129,367 Liabilities: Foreign exchange derivative contracts (Designated) $ — $ ( 258 ) $ — $ ( 258 ) Interest rate swap derivative contracts — ( 100 ) — ( 100 ) Total liabilities $ — $ ( 358 ) $ — $ ( 358 ) 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 16 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 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 GmbH, was 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. We settled our contingent consideration in the second quarter of fiscal 2021 for $ 3.9 million, resulting in a $ 0.1 million credit to Selling, general and administrative expense with the remaining 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 assets in our Condensed Consolidated Balance Sheets. 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 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 September 25, 2021 will mature by the third quarter of fiscal 2022. 17 The following table provides information about our foreign currency forward contracts outstanding as of September 25, 2021 (in thousands): Currency Contract Position Contract Amount (Local Currency) Contract Amount (U.S. Dollars) Euro Dollar Buy ( 11,900 ) $ ( 14,245 ) Euro Dollar Sell 2,520 2,953 Japanese Yen Sell 1,992,865 17,994 Korean Won Buy ( 2,513,139 ) ( 2,138 ) Taiwan Dollar Sell 7,440 269 Total USD notional amount of outstanding foreign exchange contracts $ 4,833 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. 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 , and Note 7, Restructuring, there were no assets or liabilities measured at fair value on a nonrecurring basis during the three and nine months ended September 25, 2021 or September 26, 2020. Note 9 — 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, 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): Nine Months Ended September 25, 2021 September 26, 2020 Balance at beginning of period $ 3,918 $ 1,942 Accruals 4,688 2,771 Settlements ( 5,803 ) ( 2,838 ) Balance at end of period $ 2,803 $ 1,875 18 Note 10 — Property, Plant and Equipment, net Property, plant and equipment, net consisted of the following (in thousands): September 25, 2021 December 26, 2020 Land $ 4,751 $ 4,751 Machinery and equipment 243,729 226,185 Computer equipment and software 44,241 36,361 Furniture and fixtures 6,930 6,894 Leasehold improvements 82,072 79,144 Sub-total 381,723 353,335 Less: Accumulated depreciation and amortization ( 309,592 ) ( 294,468 ) Net, property, plant and equipment 72,131 58,867 Construction-in-process 67,967 45,236 Total $ 140,098 $ 104,103 Note 11 — 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 nine months ended September 25, 2021, we repurchased and retired 620,200 shares of common stock for $ 24.0 million and, as of September 25, 2021, $ 26.0 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. 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 1,030,085 36.09 Awards vested ( 1,457,554 ) 16.95 Awards forfeited ( 38,128 ) 23.82 RSUs at September 25, 2021 2,375,325 28.55 Performance Restricted Stock Units We may grant Performance RSUs (“PRSUs”) to certain executives, which vest based upon us achieving certain market performance criteria. On August 2, 2021, we granted 197,128 PRSUs to certain senior executives for a total grant date fair value of $ 8.6 million, which will be recognized ratably over the requisite service period. The performance criteria are based on Total Shareholder Returns ("TSR") for the period of July 1, 2021 - June 30, 2024, relative to the TSR of the companies identified as being part of the S&P semiconductor Select Industry Index (FormFactor peer companies) as of the grant date. All 318,100 PRSUs granted in fiscal 2018 vested during the nine months ended September 25, 2021. These shares achieved TSR performance that resulted in an additional 124,600 shares issued during the nine months ended September 25, 2021 related to the 2018 PRSU grant. 19 There were no other PRSUs granted during the nine months ended September 25, 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 (in thousands) Outstanding at December 26, 2020 106,000 $ 8.35 Options exercised ( 100,000 ) 8.44 Outstanding at September 25, 2021 6,000 $ 6.93 0.86 $ 201 Vested and expected to vest at September 25, 2021 6,000 $ 6.93 0.86 $ 201 Exercisable at September 25, 2021 6,000 $ 6.93 0.86 $ 201 Employee Stock Purchase Plan Information related to activity under our Employee Stock Purchase Plan (“ESPP”) was as follows: Nine Months Ended September 25, 2021 Shares issued 378,584 Weighted average per share purchase price $ 25.91 Weighted average per share discount from the fair value of our common stock on the date of issuance $ ( 13.53 ) Stock-Based Compensation Stock-based compensation was included in our Condensed Consolidated Statements of Income as follows (in thousands): Three Months Ended Nine Months Ended September 25, 2021 September 26, 2020 September 25, 2021 September 26, 2020 Cost of revenues $ 1,392 $ 962 $ 3,806 $ 2,800 Research and development 2,010 1,326 5,362 4,154 Selling, general and administrative 4,518 3,221 12,417 9,820 Total stock-based compensation $ 7,920 $ 5,509 $ 21,585 $ 16,774 Unrecognized Compensation Costs At September 25, 2021, the unrecognized stock-based compensation was as follows (dollars in thousands): Unrecognized Expense Average Expected Recognition Period in Years Restricted stock units $ 43,364 2.33 Performance restricted stock units 13,523 2.28 Employee stock purchase plan 1,806 0.36 Total unrecognized stock-based compensation expense $ 58,693 2.26 20 Note 12 — 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 Nine Months Ended September 25, 2021 September 26, 2020 September 25, 2021 September 26, 2020 Weighted-average shares used in computing basic net income per share 77,869 77,029 77,643 76,436 Add potentially dilutive securities 1,160 1,780 1,547 2,098 Weighted-average shares used in computing diluted net income per share 79,029 78,809 79,190 78,534 Securities not included as they would have been antidilutive 121 264 109 354 Note 13 — Commitments and Contingencies Leases See Note 14, Leases . Contractual Obligations and Commitments Our contractual obligations and commitments have not materially changed as of September 25, 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 September 25, 2021, and as of the filing of this Quarterly Report on Form 10-Q, we were not involved in any material legal proceedings. Note 14 — 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 7 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 September 25, 2021 and the weighted-average discount rate was 3.72 %. The components of lease expense were as follows (in thousands): Three Months Ended Nine Months Ended September 25, 2021 September 26, 2020 September 25, 2021 September 26, 2020 Lease expense: Operating lease expense $ 2,167 $ 1,818 $ 6,338 $ 5,536 Short-term lease expense 51 32 133 94 Variable lease expense 461 372 1,424 1,159 $ 2,679 $ 2,222 $ 7,895 $ 6,789 21 Future minimum payments under our non-cancelable operating leases were as follows as of September 25, 2021 (in thousands): Fiscal Year Amount Remainder of 2021 $ 2,116 2022 8,536 2023 7,167 2024 6,744 2025 6,726 Thereafter 14,815 Total minimum lease payments 46,104 Less: interest ( 5,741 ) Present value of net minimum lease payments 40,363 Less: current portion ( 7,962 ) Total long-term operating lease liabilities $ 32,401 Note 15 — Revenue Transaction price allocated to the remaining performance obligations: On September 25, 2021, we had $ 10.0 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 27.9 % of our remaining performance obligations as revenue in the remainder of fiscal 2021, approximately 55.8 % in fiscal 2022, and approximately 16.3 % 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 September 25, 2021 and December 26, 2020 were $ 2.4 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 September 25, 2021 and December 26, 2020 were $ 24.3 million and $ 22.2 million, respectively. During the nine months ended September 25, 2021, we recognized $ 15.0 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 16, Operating Segments and Enterprise-Wide Information , for further details. Note 16 — 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 22 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 September 25, 2021 September 26, 2020 Probe Cards Systems Corporate and Other Total Probe Cards Systems Corporate and Other Total Revenues $ 154,850 $ 35,114 $ — $ 189,964 $ 150,773 $ 27,223 $ — $ 177,996 Gross profit $ 69,868 $ 17,553 $ ( 7,202 ) $ 80,219 $ 69,641 $ 13,565 $ ( 6,457 ) $ 76,749 Gross margin 45.1 % 50.0 % 42.2 % 46.2 % 49.8 % 43.1 % Nine Months Ended September 25, 2021 September 26, 2020 Probe Cards Systems Corporate and Other Total Probe Cards Systems Corporate and Other Total Revenues $ 467,389 $ 97,287 $ — $ 564,676 $ 419,272 $ 77,301 $ — $ 496,573 Gross profit $ 206,783 $ 48,059 $ ( 21,634 ) $ 233,208 $ 191,907 $ 37,618 $ ( 19,219 ) $ 210,306 Gross margin 44.2 % 49.4 % 41.3 % 45.8 % 48.7 % 42.4 % 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, share-based compensation, and restructuring charges 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 September 25, 2021 September 26, 2020 Probe Cards Systems Total Probe Cards Systems Total Market: Foundry & Logic $ 104,640 $ — $ 104,640 $ 108,411 $ — $ 108,411 DRAM 39,816 — 39,816 31,379 — 31,379 Flash 10,394 — 10,394 10,983 — 10,983 Systems — 35,114 35,114 — 27,223 27,223 Total $ 154,850 $ 35,114 $ 189,964 $ 150,773 $ 27,223 $ 177,996 Timing of revenue recognition: Products transferred at a point in time $ 154,217 $ 33,564 $ 187,781 $ 150,252 $ 25,987 $ 176,239 Products and services transferred over time 633 1,550 2,183 521 1,236 1,757 Total $ 154,850 $ 35,114 $ 189,964 $ 150,773 $ 27,223 $ 177,996 Geographical region: China $ 46,011 $ 5,036 $ 51,047 $ 24,851 $ 3,695 $ 28,546 Taiwan 34,100 7,474 41,574 33,351 3,584 36,935 South Korea 27,895 1,077 28,972 28,337 1,234 29,571 United States 18,530 6,938 25,468 31,596 4,732 36,328 Asia-Pacific 1 18,566 1,315 19,881 5,505 3,449 8,954 Japan 5,767 4,961 10,728 12,288 4,857 17,145 Europe 3,595 6,891 10,486 11,679 5,300 16,979 Rest of the world 386 1,422 1,808 3,166 372 3,538 Total $ 154,850 $ 35,114 $ 189,964 $ 150,773 $ 27,223 $ 177,996 23 Nine Months Ended September 25, 2021 September 26, 2020 Probe Cards Systems Total Probe Cards Systems Total Market: Foundry & Logic $ 321,776 $ — $ 321,776 $ 323,503 $ — $ 323,503 DRAM 115,802 — 115,802 75,127 — 75,127 Flash 29,811 — 29,811 20,642 — 20,642 Systems — 97,287 97,287 — 77,301 77,301 Total $ 467,389 $ 97,287 $ 564,676 $ 419,272 $ 77,301 $ 496,573 Timing of revenue recognition: Products transferred at a point in time $ 465,822 $ 89,119 $ 554,941 $ 417,529 $ 73,393 $ 490,922 Products and services transferred over time 1,567 8,168 9,735 1,743 3,908 5,651 Total $ 467,389 $ 97,287 $ 564,676 $ 419,272 $ 77,301 $ 496,573 Geographical region: Taiwan $ 125,571 $ 13,467 $ 139,038 $ 93,596 $ 8,290 $ 101,886 China 107,838 17,661 125,499 107,756 13,190 120,946 United States 64,012 23,592 87,604 79,575 16,790 96,365 South Korea 81,322 2,912 84,234 56,278 2,494 58,772 Asia-Pacific 1 59,013 4,114 63,127 14,307 9,010 23,317 Europe 12,894 19,601 32,495 36,656 15,498 52,154 Japan 14,493 13,260 27,753 24,502 11,072 35,574 Rest of the world 2,246 2,680 4,926 6,602 957 7,559 Total $ 467,389 $ 97,287 $ 564,676 $ 419,272 $ 77,301 $ 496,573 1 Asia-Pacific includes all countries in the region except China, Japan, South Korea, and Taiwan, which are disclosed separately.