FORMFACTOR INC 10-K

Item 9A: Controls and Procedures Evaluation of Disclosure Controls and Procedures Based on our management’s evaluation (with the participation of our principal executive officer and principal financial officer), as of the end of the period covered by this report, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”)) were effective as of December 25, 2021 to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. 36 Changes in Internal Control over Financial Reporting There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the fourth quarter of fiscal 2021, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Management's Report on Internal Control over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Internal control over financial reporting is a process designed by, or under the supervision of, our Principal Executive Officer and Principal Financial Officer, and effected by our board of directors, management and other personnel and consultants, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles, and includes those policies and procedures that: (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions and dispositions of assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with the authorization of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Under the supervision and with the participation of our management, including our Principal Executive Officer and Principal Financial Officer, we conducted an assessment of the effectiveness of our internal control over financial reporting as of December 25, 2021. In making this assessment, our management used the criteria set forth in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on the results of this assessment, management has concluded that our internal control over financial reporting was effective as of December 25, 2021. The effectiveness of our internal control over financial reporting as of December 25, 2021 has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their report which appears in this Annual Report on Form 10-K. Limitations on the Effectiveness of Controls Control systems, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control systems’ objectives are being met. Further, the design of any control systems must reflect the fact that there are resource constraints, and the benefits of all controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected. These inherent limitations include the realities that judgments in decision making can be faulty and that breakdowns can occur because of simple error or mistake. Control systems can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based, in part, on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. CEO and CFO Certifications We have attached as exhibits to this Annual Report on Form 10-K the certifications of our Chief Executive Officer and Chief Financial Officer, which are required in accordance with the Exchange Act. We recommend that this Item 9A be read in conjunction with the certifications for a more complete understanding of the subject matter presented. Item 9B: Other Information None. 37 Item 9C: Disclosure Regarding Foreign Jurisdictions that Prevent Inspections None. 38 PART III Item 10: Directors, Executive Officers and Corporate Governance The information required by this item is incorporated by reference to the proxy statement for our 2022 Annual Meeting of Stockholders under the captions Corporate Governance, Executive Officers, and, if applicable, Delinquent Section 16 Reports. Item 11: Executive Compensation The information required by this item is incorporated by reference to the proxy statement for our 2022 Annual Meeting of Stockholders under the captions Executive Compensation and Related Information, Compensation Committee Interlocks and Insider Participation and Report of the Compensation Committee. Item 12: Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information required by this item is incorporated by reference to the proxy statement for our 2022 Annual Meeting of Stockholders under the captions Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters, and Equity Compensation Plans. Item 13: Certain Relationships and Related Transactions, and Director Independence The information required by this item is incorporated by reference to the proxy statement for our 2022 Annual Meeting of Stockholders under the captions Certain Relationships and Related Transactions and Independence of Directors. Item 14: Principal Accountant Fees and Services Our independent registered public accounting firm is KPMG, LLP ; Portland, Oregon ; Auditor Firm ID: 185 . The information required by this item is incorporated by reference to the proxy statement for our 2022 Annual Meeting of Stockholders under the caption Principal Auditor Fees and Services. 39 PART IV Item 15: Exhibits and Financial Statement Schedules Financial Statements and Schedules The Consolidated Financial Statements, together with the report thereon of KPMG LLP, are included on the pages indicated below: Page Report of Independent Registered Public Accounting Firm 45 Consolidated Balance Sheets as of December 25, 2021 and December 26, 2020 47 Consolidated Statements of Income for the fiscal years ended December 25, 2021, December 26, 2020 and December 28, 2019 48 Consolidated Statements of Comprehensive Income for the fiscal years ended December 25, 2021, December 26, 2020 and December 28, 2019 49 Consolidated Statements of Stockholders' Equity for the fiscal years ended December 25, 2021, December 26, 2020 and December 28, 2019 50 Consolidated Statements of Cash Flows for the fiscal years ended December 25, 2021, December 26, 2020 and December 28, 2019 51 Notes to Consolidated Financial Statements 53 Financial statement schedules have been omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto. Exhibits The exhibits listed in the accompanying index to exhibits are filed or incorporated by reference as part of this Annual Report on Form 10-K. Item 16: Form 10-K Summary None. 40 EXHIBIT INDEX Incorporated by Reference Exhibit Number Exhibit Description Form File No Date of First Filing Exhibit Number Filed Herewith 3.1 Amended and Restated Certificate of Incorporation of the Registrant as filed with the Delaware Secretary of State on June 17, 2003 S-1 333-109815 10/20/2003 3.01 3.2 Amended and Restated Bylaws of the Registrant 8-K 000-50307 7/22/2016 3.2 4.1 Specimen Common Stock Certificate S-1/A 333-86738 5/28/2002 4.01 4.2 Description of Securities 10-K 000-50307 2/22/2021 4.2 10.3 + Form of Indemnity Agreement S-1/A 333-86738 5/28/2002 10.01 10.4 + Form of Change of Control Severance Agreement 10-K 000-50307 3/14/2005 10.48 10.9+ Employee Incentive Plan, as amended and restated effective October 1, 2019 10-K 000-50307 2/21/2020 10.9 10.10+ Equity Incentive Plan, as amended and restated effective May 15, 2020 DEF 14A 000-50307 4/3/2020 Appendix A 10.11 + Employee Stock Purchase Plan, as amended and restated May 18, 2018 DEF 14A 000-50307 4/3/2018 Appendix A 10.12 Pacific Corporate Center Lease (Building 1) by and between Greenville Holding Company LLC (successor to Greenville Investors, L.P.) (“Greenville”) and the Registrant dated May 3, 2001 S-1/A 333-86738 6/10/2003 10.18 10.13 First Amendment to Pacific Corporate Center Lease (Building 1) by and between Greenville and the Registrant dated January 31, 2003 S-1/A 333-86738 5/7/2003 10.18.1 10.14 Pacific Corporate Center Lease (Building 2) by and between Greenville and the Registrant dated May 3, 2001 S-1/A 333-86738 6/10/2003 10.19 10.15 First Amendment to Pacific Corporate Center Lease (Building 2) by and between Greenville and the Registrant dated January 31, 2003 S-1/A 333-86738 5/7/2003 10.19.1 10.16 Pacific Corporate Center Lease (Building 3) by and between Greenville and the Registrant dated May 3, 2001 S-1/A 333-86738 6/10/2003 10.20 10.17 + First Amendment to Pacific Corporate Center Lease (Building 3) by and between Greenville and the Registrant dated January 31, 2003 S-1/A 333-86738 5/7/2003 10.20.1 10.18 Third Amendment, dated December 19, 2016, between FormFactor, Inc. and MOHR PCC, LP, to Pacific Corporate Center Leases (Buildings 1, 2 and 3), dated May 3, 2001, by and between Greenville Investors, L.P. and FormFactor, Inc., as amended 8-K 000-50307 12/23/2016 10.2 10.19 + Pacific Corporate Center Lease by and between Greenville and the Registrant dated September 7, 2004, as amended by First Amendment to Building 6 Lease dated August 16, 2006 10-Q 000-50307 11/7/2006 10.01 10.20 Second Amendment, dated December 19, 2016, between FormFactor, Inc. and MOHR PCC, LP, to Pacific Corporate Center Lease, dated October 5, 2004, by and between Greenville Investors, L.P. and FormFactor, Inc., as amended 8-K 000-50307 12/23/2016 10.1 10.21 Third Amendment, dated October 1, 2018, between FormFactor, Inc. and MOHR PCC, LP, to Pacific Corporate Center Lease, dated October 5, 2004, by and between Greenville Investors, L.P. and FormFactor, Inc., as amended 8-K 000-50307 10/2/2018 10.1 10.22 Fourth Amendment, dated October 1, 2018, between FormFactor, Inc. and MOHR PCC, LP, to Pacific Corporate Center Lease, dated October 5, 2004, by and between Greenville Investors, L.P. and FormFactor, Inc., as amended 8-K 000-50307 10/2/2018 10.2 10.27 Rental Agreement by and between Cascade Microtech Dresden GmbH and Süss Grundstücksverwaltungs GbR dated as of June 17, 2011. 10-Q 000-51072 8/10/2011 10.3 10.29 First Amendment to Lease dated January 10, 2007, between Nimbus Center LLC (as successor in interest to Spieker Properties, L.P.) and Cascade Microtech, Inc. 10-Q 000-51072 5/9/2014 10.1 10.30 Second Amendment to Lease dated February 25, 2013, between Nimbus Center LLC and Cascade Microtech, Inc. 10-Q 000-51072 5/8/2013 10.2 41 10.31 Third Amendment to Lease dated January 23, 2014, between Nimbus Center LLC and Cascade Microtech, Inc. 10-Q 000-51072 5/9/2014 10.2 10.32 Fourth Amendment to Lease dated March 31, 2014, between Nimbus Center LLC and Cascade Microtech, Inc. 10-Q 000-51072 5/9/2014 10.3 10.33 Fifth Amendment to Lease dated September 24, 2014, between Nimbus Center LLC and Cascade Microtech, Inc. 10-K 000-51072 3/72016 10.22 10.34 Sixth Amendment to Lease dated July 8, 2015, between Nimbus Center LLC and Cascade Microtech, Inc. 10-K 000-51072 3/72016 10.23 10.35 + Employment Offer Letter, dated August 29, 2012 to Mike Slessor 10-K 000-50307 3/13/2013 10.19+ 10.37 + CEO Change of Control and Severance Agreement, dated June 19, 2019 by and between Mike Slessor and the Registrant — — — — X 10.39 + Employment Offer Letter, dated February 15, 2018 to Shai Shahar 10-Q 000-50307 5/8/2018 10.1 10.40+ Change of Control Severance Agreement, dated February 16, 2018 by and between Shai Shahar and the Registrant — — — — X 21.1 List of Registrant's subsidiaries — — — — X 23.1 Consent of Independent Registered Public Accounting Firm - KPMG LLP — — — — X 24.1 Power of Attorney (included on the signature page of this Form 10-K) — — — — X 31.1 Certification of Chief Executive Officer pursuant to 15 U.S.C. Section 7241, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 — — — — X 31.2 Certification of Chief Financial Officer pursuant to 15 U.S.C. Section 7241, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 — — — — X 32.1 * Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 — — — — X 101** The following financial statements from the Company’s Annual Report on Form 10-K for the year ended December 25, 2021, formatted in Inline XBRL: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Cash Flows, and (v) Notes to Consolidated Financial Statements, tagged as blocks of text and including detailed tags. — — — — X 101.SCH** XBRL Taxonomy Extension Schema Document — — — — X 101.CAL** XBRL Taxonomy Extension Calculation Linkbase Document — — — — X 101.DEF** XBRL Taxonomy Extension Definition Linkbase Document — — — — X 101.LAB** XBRL Taxonomy Extension Label Linkbase Document — — — — X 101.PRE** XBRL Taxonomy Extension Presentation Linkbase Document — — — — X 104 The cover page from the Company’s Annual Report on Form 10-K for the year ended December 25, 2021, formatted in Inline XBRL (included as Exhibit 101). — — — — X * This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the date hereof and irrespective of any general incorporation language in any filings. ** Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability. *** The schedules, exhibits, and annexes to this exhibit have been omitted in reliance on Item 601(b)(2) of Regulation S-K and will be furnished supplementally to the SEC upon request. + Indicates a management contract or compensatory plan or arrangement. 42 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FORMFACTOR, INC. Date: February 18, 2022 By: /s/ SHAI SHAHAR Shai Shahar Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) POWER OF ATTORNEY KNOW BY ALL PERSONS BY THESE PRESENTS, that each of the undersigned whose signature appears below constitutes and appoints Shai Shahar and Christy Robertson, and each of them, the undersigned's true and lawful attorneys in-fact and agents with full power of substitution, for the undersigned and in the undersigned's name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K and any other documents in connection therewith, and to file the same, with all exhibits thereto, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act requisite and necessary to be done with respect to this Annual Report on Form 10-K, including amendments, as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or his or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, each of the undersigned has executed this Power of Attorney as of the date indicated below. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature Title Date Principal Executive Officer: /s/ MICHAEL D. SLESSOR President, Chief Executive Officer and Director February 18, 2022 Michael D. Slessor Principal Financial Officer and Principal Accounting Officer: /s/ SHAI SHAHAR Chief Financial Officer February 18, 2022 Shai Shahar 43 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature Title Date Additional Directors: /s/ LOTHAR MAIER Director February 18, 2022 Lothar Maier /s/ JORGE TITINGER Director February 18, 2022 Jorge Titinger /s/ KELLEY STEVEN-WAISS Director February 18, 2022 Kelley Steven-Waiss /s/ SHERI RHODES Director February 18, 2022 Sheri Rhodes /s/ RAYMOND LINK Director February 18, 2022 Raymond Link /s/ REBECA OBREGON-JIMENEZ Director February 18, 2022 Rebeca Obregon-Jimenez /s/ THOMAS ST. DENNIS Director February 18, 2022 Thomas St. Dennis 44 Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors FormFactor, Inc.: Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting We have audited the accompanying consolidated balance sheets of FormFactor, Inc. and subsidiaries (the Company) as of December 25, 2021 and December 26, 2020, the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 25, 2021, and the related notes (collectively, the consolidated financial statements). We also have audited the Company’s internal control over financial reporting as of December 25, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 25, 2021 and December 26, 2020, and the results of its operations and its cash flows for each of the years in the three-year period ended December 25, 2021, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 25, 2021 based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Basis for Opinions The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. 45 Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Evaluation of inventory excess and obsolescence As discussed in notes 2 and 3 to the consolidated financial statements, the Company’s net inventories were $111.5 million as of December 25, 2021, and inventory write-downs totaled $15.5 million for the year ended December 25, 2021. T he Company states its inventories at the lower of cost or net realizable value. The Company records an adjustment to the cost basis of inventory when evidence exists that the net realizable value of inventory is lower than its cost, which occurs when the Company has excess and/or obsolete inventory. The Company’s model to estimate the excess and/or obsolete inventory is based on an analysis of existing inventory quantities compared to estimated future consumption. Future consumption is estimated based upon assumptions about how past consumption, recent purchases, backlog or other factors indicate future consumption. We identified the evaluation of inventory excess and obsolescence as a critical audit matter. Complex auditor judgment was required to evaluate that past consumption, recent purchases, or backlog accurately indicate future consumption and thus meet the accounting objective of recording inventory at the lower of its cost or net realizable value. The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the critical audit matter. This included controls related to the Company’s process to develop the assumptions used to predict future consumption of inventory. We assessed the Company’s assumptions about how past consumption, recent purchases, or backlog indicate future consumption by: (1) Evaluating historical cumulative write down trends and relevant changes to the overall business environment, including key customers and product lines in order to evaluate the Company’s methodology that actual past consumption history, recent purchases, or backlog are relevant as predictors of future inventory consumption, and (2) Selecting a sample of products within inventory and for each sample selection (a) evaluating how past consumption, recent purchases, or backlog indicate future consumption of the specific sampled inventory product, and (b) recalculating the Company’s estimate of the cumulative inventory write-downs based on the actual quantity of product on hand compared to the estimate of future consumption. /s/ KPMG LLP We have served as the Company’s auditor since 2013. Portland, Oregon February 18, 2022 46 FORMFACTOR, INC. CONSOLIDATED BALANCE SHEETS December 25, 2021 December 26, 2020 (In thousands, except share and per share data) ASSETS Current assets: Cash and cash equivalents $ 151,010 $ 187,225 Marketable securities 125,055 67,810 Accounts receivable, net 115,541 107,603 Inventories, net 111,548 99,229 Restricted cash 2,233 1,904 Prepaid expenses and other current assets 18,652 23,303 Total current assets 524,039 487,074 Restricted cash 2,099 1,969 Operating lease, right-of-use-assets 35,210 30,756 Property, plant and equipment, net 146,555 104,103 Goodwill 212,299 212,761 Intangibles, net 36,342 59,147 Deferred tax assets 61,995 66,242 Other assets 1,981 1,165 Total assets $ 1,020,520 $ 963,217 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 57,862 $ 62,045 Accrued liabilities 50,836 55,342 Current portion of term loans, net of unamortized issuance cost of $ 5 and $ 5 8,931 9,516 Deferred revenue 23,224 20,964 Operating lease liabilities 7,901 6,704 Total current liabilities 148,754 154,571 Term loans, less current portion, net of unamortized issuance cost of $ 65 and $ 70 15,434 24,978 Deferred tax liabilities 3,623 5,346 Long-term operating lease liabilities 31,009 27,996 Other liabilities 5,920 6,242 Total liabilities 204,740 219,133 Stockholders' equity: Preferred stock, $ 0.001 par value: 10,000,000 shares authorized; no shares issued and outstanding — — Common stock, $ 0.001 par value: 250,000,000 shares authorized; 78,240,506 and 77,437,997 shares issued and outstanding 78 78 Additional paid-in capital 898,945 903,838 Accumulated other comprehensive income (loss) ( 1,449 ) 5,886 Accumulated deficit ( 81,794 ) ( 165,718 ) Total stockholders' equity 815,780 744,084 Total liabilities and stockholders' equity $ 1,020,520 $ 963,217 The accompanying notes are an integral part of these consolidated financial statements. 47 FORMFACTOR, INC. CONSOLIDATED STATEMENTS OF INCOME Fiscal Year Ended December 25, 2021 December 26, 2020 December 28, 2019 (In thousands, except per share data) Revenues $ 769,674 $ 693,616 $ 589,464 Cost of revenues 446,907 405,696 351,968 Gross profit 322,767 287,920 237,496 Operating expenses: Research and development 100,937 89,034 81,499 Selling, general and administrative 123,792 115,098 106,335 Total operating expenses 224,729 204,132 187,834 Operating income 98,038 83,788 49,662 Interest income 569 1,501 2,714 Interest expense ( 602 ) ( 864 ) ( 1,915 ) Other income, net 495 750 602 Income before income taxes 98,500 85,175 51,063 Provision for income taxes 14,576 6,652 11,717 Net income $ 83,924 $ 78,523 $ 39,346 Net income per share: Basic $ 1.08 $ 1.02 $ 0.52 Diluted $ 1.06 $ 0.99 $ 0.51 Weighted-average number of shares used in per share calculations: Basic 77,787 76,681 74,994 Diluted 79,133 79,001 77,286 The accompanying notes are an integral part of these consolidated financial statements. 48 FORMFACTOR, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Fiscal Year Ended December 25, 2021 December 26, 2020 December 28, 2019 (In thousands) Net income $ 83,924 $ 78,523 $ 39,346 Other comprehensive income (loss), net of tax: Translation adjustments and other ( 5,995 ) 5,131 ( 1,028 ) Unrealized gains (losses) on available-for-sale marketable securities ( 598 ) 226 316 Unrealized gains (losses) on derivative instruments ( 742 ) 1,188 ( 727 ) Other comprehensive income (loss), net of tax ( 7,335 ) 6,545 ( 1,439 ) Comprehensive income $ 76,589 $ 85,068 $ 37,907 The accompanying notes are an integral part of these consolidated financial statements. 49 FORMFACTOR, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Income (Loss) Accumulated Deficit Total Shares Amount (In thousands, except shares) Balances, December 29, 2018 74,139,712 $ 74 $ 862,897 $ 780 $ ( 283,587 ) $ 580,164 Issuance of common stock under the Employee Stock Purchase Plan 544,271 1 6,806 — — 6,807 Issuance of common stock pursuant to exercise of options for cash 162,956 — 1,176 — — 1,176 Issuance of common stock pursuant to vesting of restricted stock units, net of stock withheld for tax 918,051 1 ( 8,026 ) — — ( 8,025 ) Stock-based compensation — — 22,968 — — 22,968 Other comprehensive loss — — — ( 1,439 ) — ( 1,439 ) Net income — — — — 39,346 39,346 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 for cash 255,769 1 2,134 — — 2,135 Issuance of common stock pursuant to vesting of restricted stock units, net of stock withheld for tax 931,672 1 ( 15,451 ) — — ( 15,450 ) Stock-based compensation — — 23,459 — — 23,459 Other comprehensive income — — — 6,545 — 6,545 Net income — — — — 78,523 78,523 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 for cash 100,000 — 844 — — 844 Issuance of common stock pursuant to vesting of restricted stock units, net of stock withheld for tax 946,325 1 ( 20,604 ) — — ( 20,603 ) Purchase and retirement of common stock ( 622,400 ) ( 1 ) ( 24,037 ) — — ( 24,038 ) Stock-based compensation — — 29,095 — — 29,095 Other comprehensive loss — — — ( 7,335 ) — ( 7,335 ) Net income — — — — 83,924 83,924 Balances, December 25, 2021 78,240,506 $ 78 $ 898,945 $ ( 1,449 ) $ ( 81,794 ) $ 815,780 The accompanying notes are an integral part of these consolidated financial statements. 50 FORMFACTOR, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Fiscal Year Ended December 25, 2021 December 26, 2020 December 28, 2019 (In thousands) Cash flows from operating activities: Net income $ 83,924 $ 78,523 $ 39,346 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 25,772 20,694 17,185 Amortization 18,747 27,991 27,672 Amortization (accretion) of discount on investments 403 ( 2 ) ( 365 ) Reduction in the carrying amount of right-of-use assets 7,172 5,955 5,269 Stock-based compensation expense 29,384 23,830 23,176 Amortization of debt issuance costs 5 32 160 Deferred income tax provision (benefit) 3,869 ( 562 ) 4,954 Provision for excess and obsolete inventories 15,544 13,117 10,421 Acquired inventory step-up amortization 723 838 465 Loss on disposal of long-lived assets 449 451 486 Non-cash restructuring charges 1,646 — — Gain on contingent consideration ( 95 ) ( 2,879 ) — Foreign currency transaction losses (gains) 1,577 ( 968 ) 408 Loss on derivative instruments — 372 110 Changes in assets and liabilities: Accounts receivable ( 9,086 ) ( 3,545 ) 481 Inventories ( 31,655 ) ( 22,191 ) ( 14,295 ) Prepaid expenses and other current assets 3,808 ( 6,207 ) 230 Other assets ( 326 ) 179 ( 441 ) Accounts payable ( 6,589 ) 16,788 ( 27 ) Accrued liabilities ( 725 ) 13,892 7,517 Other liabilities 285 362 166 Deferred revenues 1,974 8,901 3,130 Operating lease liabilities ( 7,442 ) ( 6,315 ) ( 5,000 ) Net cash provided by operating activities 139,364 169,256 121,048 Cash flows from investing activities: Acquisition of property, plant and equipment ( 66,496 ) ( 55,865 ) ( 20,847 ) Acquisition of business, net of cash acquired — ( 51,880 ) ( 20,524 ) Proceeds from sale of subsidiary — 82 132 Purchases of marketable securities ( 149,979 ) ( 51,224 ) ( 76,327 ) Proceeds from maturities of marketable securities 91,734 59,965 51,214 Net cash used in investing activities ( 124,741 ) ( 98,922 ) ( 66,352 ) Cash flows from financing activities: Proceeds from issuances of common stock 10,653 10,010 8,093 Purchase of common stock through stock repurchase program ( 24,038 ) — — Tax withholdings related to net share settlements of equity awards ( 20,604 ) ( 15,450 ) ( 8,025 ) Proceeds from term loan — 18,000 23,354 Payments on term loan ( 9,337 ) ( 43,417 ) ( 30,000 ) Payment of term loan issuance costs — ( 78 ) — Payment of contingent consideration ( 3,873 ) — — Net cash used in financing activities ( 47,199 ) ( 30,935 ) ( 6,578 ) Effect of exchange rate changes on cash, cash equivalents and restricted cash ( 3,180 ) 3,762 ( 727 ) Net increase (decrease) in cash, cash equivalents and restricted cash ( 35,756 ) 43,161 47,391 Cash, cash equivalents and restricted cash, beginning of year 191,098 147,937 100,546 Cash, cash equivalents and restricted cash, end of year $ 155,342 $ 191,098 $ 147,937 The accompanying notes are an integral part of these consolidated financial statements. 51 FORMFACTOR, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Fiscal Year Ended December 25, 2021 December 26, 2020 December 28, 2019 (In thousands) Supplemental disclosure of non-cash investing and financing activities: Operating lease, right-of-use assets obtained in exchange for lease obligations $ 12,254 $ 1,912 $ 36,709 Contingent consideration payable related to FRT acquisition — — 5,364 Increase in accounts payable and accrued liabilities related to property, plant and equipment purchases 2,711 2,545 866 Supplemental disclosure of cash flow information: Income taxes paid, net $ 7,957 $ 9,150 $ 4,324 Cash paid for interest 643 867 1,405 Operating cash outflows from operating leases 8,520 7,546 6,713 Reconciliation of cash, cash equivalents and restricted cash: Cash and cash equivalents $ 151,010 $ 187,225 $ 144,545 Restricted cash, current 2,233 1,904 1,981 Restricted cash 2,099 1,969 1,411 Total cash, cash equivalents and restricted cash $ 155,342 $ 191,098 $ 147,937 The accompanying notes are an integral part of these consolidated financial statements. 52 FORMFACTOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1— Formation and Nature of Business FormFactor, Inc. was incorporated in Delaware on April 15, 1993 and is headquartered in Livermore, California. We are a leading provider of essential test and measurement technologies along the full semiconductor product lifecycle - from characterization, modeling, reliability, and design de-bug, to qualification and production test. We provide a broad range of high-performance probe cards, analytical probes, probe stations, metrology systems, thermal systems, and cryogenic systems to both semiconductor companies and scientific institutions. Our products provide electrical and physical information from a variety of semiconductor and electro-optical devices and integrated circuits from early research, through development, to high-volume production. Customers use our products and services to accelerate profitability by optimizing device performance and advancing yield knowledge. Design, development and manufacturing operations are located in Livermore, San Jose, Carlsbad, and Baldwin Park, California, Beaverton, Oregon and Boulder, Colorado, United States and Bergisch Gladbach, Munich and Thiendorf, Germany, and sales, service and support operations are located in the United States, Germany, France, Italy, South Korea, Japan, Taiwan, China and Singapore. Fiscal Year Our fiscal year ends on the last Saturday in December. The fiscal years ended on December 25, 2021, December 26, 2020 and December 28, 2019, each consisted of 52 weeks, respectively. Note 2— Summary of Significant Accounting Policies Basis of Consolidation and Foreign Currency Translation The consolidated financial statements include our accounts and those of our wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated. The functional currencies of certain of our foreign subsidiaries are the local currencies and, accordingly, all assets and liabilities of these foreign operations are translated to U.S. Dollars at current period-end exchange rates, and revenues and expenses are translated to U.S. Dollars using average exchange rates in effect during the period. The gains and losses from the foreign currency translation of these subsidiaries' financial statements are included as a separate component of stockholders' equity on our Consolidated Balance Sheets under Accumulated other comprehensive income (loss). Certain other of our foreign subsidiaries use the U.S. Dollar as their functional currency. Accordingly, monetary assets and liabilities in non-functional currencies of these subsidiaries are remeasured using exchange rates in effect at the end of the period. Revenues and costs in local currency are remeasured using average exchange rates for the period, except for costs related to those balance sheet items that are remeasured using historical exchange rates. The resulting remeasurement gains and losses are included in the Consolidated Statements of Income as a component of Other income, net as incurred. Use of Estimates The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Estimates may change as new information is obtained. We believe that the estimates, assumptions and judgments involved in revenue recognition, fair value of marketable securities, fair value of derivative financial instruments used to hedge both foreign currency and interest rate exposures, allowance for credit losses, reserves for product warranty, valuation of obsolete and slow moving inventory, assets acquired and liabilities assumed in business combinations, legal contingencies, valuation of goodwill, the assessment of recoverability of long-lived assets, valuation and recognition of stock-based compensation, loss contingencies, provision for income taxes and valuation of deferred tax assets have the greatest potential impact on our consolidated financial statements. Actual results could differ from those estimates. Business Acquisitions Our consolidated financial statements include the operations of acquired businesses after the completion of their respective acquisitions. We account for acquired businesses using the acquisition method of accounting, which requires, among other things, that assets acquired and liabilities assumed be recognized at their estimated fair values as of the acquisition date, and 53 FORMFACTOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) that the fair value of acquired intangibles be recorded on the balance sheet. Transaction costs are expensed as incurred. Any excess of the purchase price over the assigned fair values of the net assets acquired is recorded as goodwill. Cash and Cash Equivalents and Marketable Securities Cash and cash equivalents consist of deposits and financial instruments which are readily convertible into cash and have original maturities of 90 days or less at the time of acquisition. Marketable securities consist primarily of highly liquid investments with maturities of greater than 90 days when purchased. We classify our available-for-sale marketable securities as current assets because they represent investments of cash available for current operations. As a result, the Company recorded all its marketable securities in short-term investments regardless of the contractual maturity date of the securities. Furthermore, we report them at fair value with the related unrealized gains and losses included in Accumulated other comprehensive income (loss) in our Consolidated Balance Sheets. Any unrealized losses which are considered to be other-than-temporary are recorded in Other income, net, in the Consolidated Statements of Income. Realized gains and losses on the sale of marketable securities are determined using the specific-identification method and recorded in Other income, net, in the Consolidated Statements of Income. All of our available-for-sale investments are subject to a periodic impairment review. If an available-for-sale debt security’s fair value is less than its amortized cost basis, then we evaluate whether the decline is the result of a credit loss, in which case an impairment is recorded through an allowance for credit losses. Unrealized gains and losses not attributable to credit losses are included, net of tax, in Accumulated other comprehensive income (loss) in our Consolidated Balance Sheets. We did not record an allowance for credit losses related to our available-for-sale investments during fiscal 2021. Foreign Exchange Management We transact business in various foreign currencies. We enter into forward foreign exchange contracts in an effort to mitigate the risks associated with currency fluctuations on certain foreign currency balance sheet exposures and certain operational costs denominated in local currency impacting our statement of income. 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 Consolidated Balance Sheets with changes in fair value recorded within Other income, net in our Consolidated Statements 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 Consolidated Balance Sheets with changes in fair value recorded as a component of Accumulated other comprehensive income (loss) and reclassified into earnings in the same period in which the hedged transaction affects earnings, and in the same line item on the Consolidated Statements of Income as the impact of the hedge transaction. We do not use derivative financial instruments for trading or speculative purposes. Accounts Receivable and Allowance for Credit Losses The majority of our accounts receivable are derived from sales to large multinational semiconductor manufacturers throughout the world, are recorded at their invoiced amount and do not bear interest. In order to monitor potential credit losses, we perform ongoing credit evaluations of our customers' financial condition. An allowance for credit losses accounts is maintained based upon our assessment of the expected collectability of all accounts receivable. The allowance for credit losses is reviewed and assessed for adequacy on a quarterly basis. We take into consideration (1) any circumstances of which we are aware of a customer's inability to meet its financial obligations and (2) our judgments as to prevailing economic conditions in the industry and their impact on our customers. If circumstances change, and the financial condition of our customers is adversely affected and they are unable to meet their financial obligations, we may need to take additional allowances, which would result in an increase in our operating expense. Activity related to our allowance for credit losses was as follows (in thousands): Fiscal Year Ended December 25, 2021 December 26, 2020 December 28, 2019 Balance at beginning of year $ 248 $ 222 $ 185 Charges (reversals) to costs and expenses ( 53 ) 26 37 Balance at end of year $ 195 $ 248 $ 222 Inventories We state our inventories at the lower of cost (principally standard cost which approximates actual cost on a first in, first out basis) or net realizable value. We regularly assess the value of our inventory and will periodically write down its value for 54 FORMFACTOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) estimated excess inventory and product obsolescence based upon an analysis of existing inventory quantities compared to estimated future consumption. Future consumption is estimated based upon assumptions about how past consumption, recent purchases, backlog and other factors indicate future consumption. On a quarterly basis, we review existing inventory quantities in comparison to our past consumption, recent purchases, backlog and other factors to determine what inventory quantities, if any, may not be sellable. Based on this analysis, we record an adjustment to the cost basis of inventory when evidence exists that the net realizable value of inventory is lower than its cost, which occurs when we have excess and/or obsolete inventory. Once the value is adjusted, the original cost of our inventory, less the related inventory write-down, represents the new cost basis. Reversal of these write downs is recognized only when the related inventory has been scrapped or sold. Shipping and handling costs are classified as a component of Cost of revenues in the Consolidated Statements of Income. We design, manufacture and sell a custom product into a market that has been subject to cyclicality and significant demand fluctuations. Many of our products are complex, custom to a specific chip design and have to be delivered on short lead-times. Probe cards are manufactured in low volumes, but, for certain materials, the purchases are often subject to minimum order quantities in excess of the actual underlying probe card demand. It is not uncommon for us to acquire production materials and commence production activities based on estimated production yields and forecasted demand prior to, or in excess of, actual demand for our probe cards. These factors result in normal recurring inventory valuation charges to Cost of revenues. Inventory write downs totaled $ 15.5 million, $ 13.1 million and $ 10.4 million for fiscal 2021, 2020 and 2019, respectively. Restricted Cash Restricted cash is comprised primarily of funds held by our foreign subsidiaries for employee obligations, office leases, customer deposits, temporary customs import permits, and environmental remediation. Property, Plant, and Equipment Property, plant and equipment is stated at cost less accumulated depreciation and amortization. Depreciation is recorded on a straight-line method. Machinery and equipment, computer equipment and software, and furniture and fixtures are depreciated over 3 to 5 years. Building and building improvements are depreciated over 30 years. Leasehold improvements are amortized over 7 years. Construction-in-progress assets are not depreciated until the assets are placed in service. Upon sale or retirement of assets, the cost and related accumulated depreciation or amortization are removed from the Consolidated Balance Sheets and the resulting gain or loss, if any, is reflected in Operating income in our Consolidated Statements of Income. Leases The Company determines if an arrangement is a lease at its inception. Right-of-use (“ROU”) assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. We use our estimated incremental borrowing rate in determining the present value of lease payments considering the term of the lease, which is derived from information available at the lease commencement date. The lease term includes renewal options when it is reasonably certain that the option will be exercised and excludes termination options. To the extent that the Company’s agreements have variable lease payments, the Company includes variable lease payments that depend on an index or a rate and excludes those that depend on facts or circumstances occurring after the commencement date, other than the passage of time. Lease expense for these leases is recognized on a straight-line basis over the lease term. We have elected not to recognize ROU assets and lease liabilities that arise from short-term leases for any class of underlying asset. Operating leases are included in Operating lease, right-of-use-assets, Operating lease liabilities, and Long-term operating lease liabilities in our Consolidated Balance Sheets. Goodwill Goodwill represents the excess of the purchase price over the fair value of identifiable assets acquired and liabilities assumed. Goodwill is not amortized, rather assessed, at least annually, for impairment at a reporting unit level. Impairment of goodwill exists when the carrying amount of a reporting unit exceeds its fair value. A goodwill impairment loss is recognized for the amount that the carrying amount of the reporting unit, including goodwill, exceeds its fair value, limited to the total amount of goodwill allocated to that reporting unit. If the fair value of a reporting unit exceeds the carrying amount, goodwill of the reporting unit is not considered impaired. We evaluate impairment by first assessing qualitative factors to determine whether it is necessary to perform a quantitative impairment test. If we determine, as a result of the qualitative assessment, that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then the quantitative impairment test is required. Otherwise, no further testing is required. 55 FORMFACTOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) We perform our annual goodwill impairment test in the fourth quarter of each year by assessing qualitative factors, including, but not limited to an assessment of our market capitalization, which was significantly higher than our book value. Based on these tests, we determined that the quantitative impairment test was not required and no impairment charges were recorded in fiscal 2021, 2020 or 2019. The evaluation of goodwill for impairment requires the exercise of judgment. In the event of future changes in business conditions, we will be required to reassess and update our forecasts and estimates used in future impairment analysis. If the results of these analysis are lower than current estimates, a material impairment charge may result at that time. See Note 10, Goodwill and Intangible Assets , for additional information. Intangible Assets Intangible assets consist of acquisition related intangible assets and intellectual property. The intangible assets are being amortized over periods of 1 to 10 years, which reflect the pattern in which economic benefits of the assets are expected to be realized. We perform a review of intangible assets when facts and circumstances indicate that the useful life is shorter than originally estimated or that the carrying amount of assets may not be recoverable. Such facts and circumstances include significant adverse changes in the business climate or legal factors; current period cash flow or operating losses combined with a history of losses or a forecast of continuing losses associated with the use of the intangible assets; and current expectation that the intangible assets will more likely than not be sold or disposed of before the end of their estimated useful lives. We assess the recoverability of identified intangible assets by comparing the projected undiscounted net cash flows associated with the related asset or group of assets over their remaining lives against their respective carrying amounts. Impairments, if any, are based on the excess of the carrying amount over the fair value of those assets. See Note 10, Goodwill and Intangible Assets , for additional information. Impairment of Long-Lived Assets We test long-lived assets or asset groups, such as property, plant and equipment and intangible assets, for recoverability when events or changes in circumstances indicate that their carrying amounts may not be recoverable. Circumstances which could trigger a review include, but are not limited to: significant decreases in the market price of the asset; significant adverse changes in the business climate or legal factors; accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of the asset; current period cash flow or operating losses combined with a history of losses or a forecast of continuing losses associated with the use of the asset; and current expectation that the asset will more likely than not be sold or disposed of before the end of its estimated useful life. Recoverability is assessed based on the carrying amounts of the asset or asset group and the sum of the undiscounted cash flows expected to result from the use and the eventual disposal of the asset. An impairment loss is recognized when the carrying amount is not recoverable and exceeds fair value. Concentration of Credit Risk and Other Risks and Uncertainties Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash equivalents, marketable securities and accounts receivable. Our cash equivalents and marketable securities are held in safekeeping by large, credit worthy financial institutions. We invest our excess cash primarily in U.S. banks, government and agency bonds, money market funds and corporate obligations. We have established guidelines relative to credit ratings, diversification and maturities that seek to maintain safety and liquidity. Deposits in these banks may exceed the amounts of insurance provided on such deposits. To date, we have not experienced any losses on our deposits of cash and cash equivalents. We market and sell our products to a relatively narrow base of customers and generally do not require collateral. The following customers represented 10% or more of our revenues: Fiscal Year Ended December 25, 2021 December 26, 2020 December 28, 2019 Intel Corporation 20.4 % 31.5 % 25.3 % Samsung Electronics Co., LTD. 11.4 % * 11.5 % * Less than 10% of revenues. At December 25, 2021, one customer accounted for 13.8 % of gross accounts receivable. At December 26, 2020, two customers accounted for 15.3 % and 13.7 % of gross accounts receivable, respectively. No other customers accounted for 10% or more of gross accounts receivable for these fiscal period ends. 56 FORMFACTOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) We are exposed to non-performance risk by counterparties on our derivative instruments used in hedging activities. We seek to minimize risk by diversifying our hedging program across multiple financial institutions. These counterparties are large international financial institutions, and, to date, no such counterparty has failed to meet its financial obligations to us. Revenue Recognition Revenue is recognized upon transferring control of products and services, and the amounts recognized reflect the consideration we expect to be entitled to receive in exchange for these products and services. Revenue is recognized net of any taxes collected from customers, which are subsequently remitted to governmental authorities. An arrangement may include some or all of the following products and services: probe cards, systems, accessories, installation services, service contracts and extended warranty contracts. We sell our products and services direct to customers and to partners in two distribution channels: global direct sales force and through a combination of manufacturers’ representatives and distributors. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer. In contracts with multiple performance obligations, we identify each performance obligation and evaluate whether the performance obligation is distinct within the context of the contract at contract inception. Performance obligations that are not distinct at contract inception are combined and accounted for as one unit of account. Generally, the performance obligations in a contract are considered distinct within the context of the contract and are accounted for as separate units of account. Our products may be customized to our customers’ specifications, however, control of our product is typically transferred to the customer at the point in time the product is either shipped or delivered, depending on the terms of the arrangement, as the criteria for over time recognition is not met. In limited circumstances, substantive acceptance by the customer exists which results in the deferral of revenue until acceptance is formally received from the customer. Judgment may be required in determining if the acceptance clause is substantive. In certain instances control of products is transferred to the customer over time based on performance and in those instances we utilize an appropriate input or output measure to determine to what extent control has transferred to the customer. Judgment may be required in determining an appropriate measure of performance. Installation services are routinely provided to customers purchasing our systems. Installation services are a distinct performance obligation apart from the systems and recognized in the period they are performed. Service contracts, which include repair and maintenance service contracts, and extended warranty contracts are also distinct performance obligations and recognized over the contractual service period, which ranges from one to three years . For these service contracts recognized over time, we use an input measure, days elapsed, to measure progress. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. In determining the transaction price, we evaluate whether the price is subject to refund or adjustment to determine the net consideration to which we expect to be entitled. We generally do not grant return privileges, except for defective products during the warranty period. Sales incentives and other programs that we may make available to our customers are considered to be a form of variable consideration, which is estimated in determining the contract’s transaction price to be allocated to the performance obligations. For contracts with multiple performance obligations, we allocate the contract’s transaction price to each performance obligation based on its relative stand-alone selling price. The stand-alone selling prices are determined based on observable prices, which are the prices at which we separately sell these products. For items which do not have observable prices, we use our best estimate of the stand-alone selling prices. Transaction price allocated to the remaining performance obligations: On December 25, 2021, we had $ 7.8 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 79.5 % of our remaining performance obligations as revenue in fiscal 2022, approximately 16.2 % in fiscal 2023, and approximately 4.3 % in fiscal 2024 and thereafter. The foregoing excludes the value of remaining performance obligations that 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 credit losses. 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. 57 FORMFACTOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Contract assets as of December 25, 2021 and December 26, 2020 were $ 0.9 million and $ 3.7 million, respectively, and are reported on the Consolidated Balance Sheets as a component of Prepaid expenses and other current assets. Contract liabilities include payments received and payments due in advance of performance under a contract and are satisfied as the associated revenue is recognized. Contract liabilities are reported on the Consolidated Balance Sheets on a contract-by-contract basis at the end of each reporting period as a component of Deferred revenue and Other liabilities. Contract liabilities totaled $ 24.2 million and $ 22.2 million at December 25, 2021 and December 26, 2020, respectively. During fiscal 2021, we recognized $ 17.8 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, Segments and Geographic Information , for further details. Warranty Obligations 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 incurred in correcting a product failure. We continuously monitor product returns for warranty and maintain a reserve for the related expenses based upon our historical experience and any specifically identified field 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. Warranty costs are reflected in the Consolidated Statement of Income as a Cost of revenues. A reconciliation of the changes in our warranty liability is as follows (in thousands): Fiscal Year Ended December 25, 2021 December 26, 2020 December 28, 2019 Balance at beginning of year $ 3,918 $ 1,942 $ 2,102 Accruals 5,759 5,727 3,881 Settlements ( 6,872 ) ( 3,751 ) ( 4,041 ) Balance at end of year $ 2,805 $ 3,918 $ 1,942 Research and Development Research and development expenses include expenses related to product development, engineering and material costs. All research and development costs are expensed as incurred. Income Taxes We utilize the asset and liability method of accounting for income taxes, under which deferred taxes are determined based on the temporary differences between the financial statement and tax basis of assets and liabilities using tax rates expected to be in effect during the years in which the basis differences reverse and for operating losses and tax credit carryforwards. We estimate our provision for income taxes and amounts ultimately payable or recoverable in numerous tax jurisdictions around the world. Estimates involve interpretations of regulations and are inherently complex. Resolution of income tax treatments in individual jurisdictions may not be known for many years after completion of any fiscal year. We are required to evaluate the realizability of our deferred tax assets on an ongoing basis to determine whether there is a need for a valuation allowance with respect to such deferred tax assets. A valuation allowance is recorded when it is more likely than not that some or all of the deferred tax assets will not be realized. In evaluating the ability to recover deferred tax assets, we consider all available positive and negative evidence giving greater weight to our recent cumulative income, our historical ability to utilize net operating losses in recent years and our forecast of future taxable income, including the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. We recognize and measure uncertain tax positions taken or expected to be taken in a tax return if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized are then measured based on the largest benefit that has a greater than 50 percent likelihood of being realized 58 FORMFACTOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) upon ultimate settlement. We report a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return. We adjust these reserves in light of changing facts and circumstances, such as the closing of a tax audit or the refinement of an estimate. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will impact the provision for income taxes in the period in which such determination is made. The provision for income taxes includes the impact of reserve provisions and changes to reserves that are considered appropriate, as well as the related net interest. We recognize interest and penalties related to unrecognized tax benefits within the income tax provision. Accrued interest and penalties are included within the related tax liability in the Consolidated Balance Sheets. We file annual income tax returns in multiple taxing jurisdictions around the world. A number of years may elapse before an uncertain tax position is audited and finally resolved. While it is often difficult to predict the final outcome or the timing of resolution of any particular uncertain tax position, we believe that our related liability reflects the most likely outcome. We adjust the liability, as well as the related interest, in light of changing facts and circumstances. Settlement of any particular position could require the use of cash. Stock-Based Compensation We recognize compensation expense for all stock-based awards based on the grant-date estimated fair values. The value of the portion of the award that is ultimately expected to vest is recognized as expense ratably over the requisite service periods in our Consolidated Statements of Income. The fair value of stock options is measured using the Black-Scholes option pricing model, while the fair value for restricted stock units (“RSUs”) is measured based on the closing market price of our common stock on the date of grant. The fair value of Performance RSUs (“PRSU”) is based on certain market performance criteria and is measured using a Monte Carlo simulation pricing model. See Note 12, Stockholders' Equity , and Note 13, Stock-Based Compensation , for additional information. Net Income Per Share Basic net income per share is computed by dividing net income by the weighted-average number of common shares outstanding for the period. Diluted net income per share is computed giving effect to all potentially dilutive common stock and common stock equivalents, including stock options, RSUs and common stock subject to repurchase. The following table reconciles the shares used in calculating basic net income per share and diluted net income per share (in thousands): Fiscal Year Ended December 25, 2021 December 26, 2020 December 28, 2019 Weighted-average shares used in computing basic net income per share 77,787 76,681 74,994 Add potentially dilutive securities 1,346 2,320 2,292 Weighted-average shares used in computing basic and diluted net income per share 79,133 79,001 77,286 Accumulated Other Comprehensive Income (Loss) Accumulated other comprehensive income (loss) (“OCI”) includes the following items, the impact of which has been excluded from earnings and reflected as components of stockholders' equity as shown below (in thousands): December 25, 2021 December 26, 2020 Unrealized losses on available-for-sale marketable securities $ ( 724 ) $ ( 126 ) Translation adjustments and other ( 811 ) 5,184 Unrealized gains on derivative instruments 86 828 Accumulated other comprehensive income (loss) $ ( 1,449 ) $ 5,886 59 FORMFACTOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 3— Balance Sheet Components Marketable Securities Marketable securities consisted of the following (in thousands): December 25, 2021 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value U.S. treasuries $ 39,128 $ — $ ( 143 ) $ 38,985 Commercial paper 32,174 — ( 13 ) 32,161 Corporate bonds 52,832 29 ( 151 ) 52,710 Certificate of deposit 1,200 1 ( 2 ) 1,199 $ 125,334 $ 30 $ ( 309 ) $ 125,055 December 26, 2020 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value U.S. treasuries $ 40,602 $ 124 $ — $ 40,726 Corporate bond 24,156 176 ( 2 ) 24,330 Certificate of deposit 2,160 19 — 2,179 U.S. agency securities 575 — — 575 $ 67,493 $ 319 $ ( 2 ) $ 67,810 We typically invest in highly-rated securities with low probabilities of default. Our investment policy requires investments to be rated single A or better, limits the types of acceptable investments, concentration as to security holder and duration of the investment. The gross unrealized gains and losses in fiscal 2021 and 2020 were caused primarily by changes in interest rates. The longer the duration of marketable securities, the more susceptible they are to changes in market interest rates and bond yields. As yields increase, those securities with a lower yield-at-cost show a mark-to-market unrealized loss. We anticipate recovering the full cost of the securities either as market conditions improve, or as the securities mature. Accordingly, we believe that the unrealized losses are not as a result of a credit loss. As of December 25, 2021 and December 26, 2020, gross unrealized losses related to our marketable securities portfolio were not material. The contractual maturities of marketable securities were as follows (in thousands): December 25, 2021 December 26, 2020 Amortized Cost Fair Value Amortized Cost Fair Value Due in one year or less $ 75,804 $ 75,778 $ 50,500 $ 50,679 Due after one year to five years 49,530 49,277 16,993 17,131 $ 125,334 $ 125,055 $ 67,493 $ 67,810 See also Note 9, Fair Value . Inventories, net Inventories consisted of the following (in thousands): December 25, 2021 December 26, 2020 Raw materials $ 57,673 $ 48,122 Work-in-progress 35,935 30,806 Finished goods 17,940 20,301 $ 111,548 $ 99,229 60 FORMFACTOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Property, Plant and Equipment, net Property, plant and equipment, net consisted of the following (in thousands): December 25, 2021 December 26, 2020 Land $ 4,751 $ 4,751 Building and building improvements 41,722 — Machinery and equipment 252,632 226,185 Computer equipment and software 44,667 36,361 Furniture and fixtures 7,293 6,894 Leasehold improvements 82,266 79,144 Sub-total 433,331 353,335 Less: Accumulated depreciation and amortization ( 312,700 ) ( 294,468 ) Net property, plant and equipment 120,631 58,867 Construction-in-progress 25,924 45,236 Total $ 146,555 $ 104,103 Accrued Liabilities Accrued liabilities consisted of the following (in thousands): December 25, 2021 December 26, 2020 Accrued compensation and benefits $ 29,706 $ 33,110 Accrued employee stock purchase plan contributions withheld 4,693 4,240 Accrued warranty 2,805 3,918 Accrued income and other taxes 8,086 6,976 Accrued restructuring charges 2,478 — Accrued contingent consideration — 4,012 Other accrued expenses 3,068 3,086 $ 50,836 $ 55,342 Note 4— Acquisitions High Precision Devises, Inc. (“HPD”) 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 adjustment for changes in working capital. This acquisition brought 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 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 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 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. The purchase price allocated to the underlying assets acquired, including goodwill and intangibles, and liabilities assumed based on the final amounts are as follows (in thousands):` 61 FORMFACTOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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 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 liability ( 2,400 ) Total net 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 date 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 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 technologies acquired primarily consist 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 technologies using the multi-period excess earnings method under the income approach. Using this approach, the estimated fair values were calculated using expected future cash flows from specific products discounted to their net present values at an appropriate risk-adjusted rate of return. Customer relationships represent the fair value of future projected revenues that will be derived from the sale of products to 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 business under existing contractual obligations. 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. 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. 62 FORMFACTOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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 brought 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 Consolidated Statements of Income include the financial results of Baldwin Park subsequent to the acquisition date of July 30, 2020. Revenue in fiscal 2020 related to Baldwin Park subsequent to the acquisition date that was included in our 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 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. The purchase price allocated to the underlying assets acquired, including goodwill and intangibles, and liabilities assumed based on the final amounts are 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 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 63 FORMFACTOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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 The 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 technologies acquired consists of existing technology related to 3D NAND Flash probe cards and the value of cost savings expected to be derived from Low Temperature Co-fired Ceramic (“LTCC”) 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 LTCC developed technology asset using the incremental cash flow method. This method estimates value based on the incremental cash flow afforded by having the LTCC 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 placed in developed technologies and amortized over their useful lives. 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. Customer relationships represent 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. FRT GmbH Acquisition On October 9, 2019, we acquired 100 % of the shares of FRT, a German-based company, for total consideration of $ 26.9 million, net of cash acquired of $ 1.7 million. The fair value of the purchase consideration was comprised of a $ 22.2 million cash payment and $ 6.5 million of contingent consideration. The contingent consideration was a cash amount equal to 1.5 x Earnings Before Interest and Tax (“EBIT”) as defined in the purchase agreement, from a minimum of zero up to a maximum of € 10.3 million, payable subject to the performance of the acquired business in calendar 2020. We estimated the fair value of 64 FORMFACTOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) contingent consideration using a probability weighted approach. Key assumptions in determining the fair value of contingent consideration include estimating the probability of achieving certain EBIT levels and discounting at an appropriate discount rate. See Note 9, Fair Value, for additional information . This acquisition strengthened our leadership in test and measurement by expanding our addressable market into 3D hybrid surface metrology and extending the optical applications scope of our existing Systems segment. The acquisition was accounted for using the acquisition method of accounting, with FormFactor treated as the acquirer. The acquired assets and liabilities of FRT 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 Consolidated Statements of Income include the financial results of FRT subsequent to the acquisition date of October 9, 2019. Revenue in fiscal 2019 related to FRT subsequent to the acquisition date that was included in our Consolidated Statements of Income was not material. Separate from the purchase agreement, we entered into a term loan agreement with a lender for an aggregate amount of $ 23.4 million to finance the acquisition. See Note 5, Debt , for additional information. 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 have finalized our allocation of the assets acquired, including goodwill and intangibles, and liabilities assumed for the purchase as follows (in thousands): Amount Cash and cash equivalents $ 1,687 Accounts receivable 3,079 Inventory 2,643 Property, plant and equipment 696 Operating lease, right-of-use-assets 335 Prepaid expenses and other assets 838 Tangible assets acquired 9,278 Customer deposits ( 1,933 ) Accounts payable and accrued liabilities ( 1,182 ) Operating lease liabilities ( 335 ) Deferred tax liabilities ( 5,757 ) Total net tangible assets acquired and liabilities assumed 71 Intangible assets 17,429 Goodwill 11,123 Net assets acquired $ 28,623 The intangible assets as of the closing date of the acquisition included (in thousands): Amount Weighted Average Useful Life (in years) Developed technologies $ 12,505 8.0 Customer relationships 3,071 6.0 Order backlog 1,645 0.5 Trade names 208 2.0 Total intangible assets $ 17,429 6.9 The 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. 65 FORMFACTOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Developed technologies acquired primarily consist of existing technology related to hybrid 3D surface metrology measurement equipment. We valued the developed technologies using the multi-period excess earnings method under the income approach. Using this approach, the estimated fair values were calculated using expected future cash flows from specific products discounted to their net present values at an appropriate risk-adjusted rate of return. Customer relationships represent the fair value of future projected revenues that will be derived from the sale of products to FRT's existing customers. We valued customer relationships using the incremental cash flow method. This method estimates value based on the incremental cash flow afforded by having the customers relationships in place on the acquisition date versus having no relationships in place and needing to replicate or replace those relationships. The incremental cash flows are then discounted to a present value to arrive at an estimate of fair value for this asset class. Order backlog represents business under existing contractual obligations. Expected cash flow from order backlog was valued on a direct cash flow basis. The identified trade names intangibles relate to the estimated fair value of future cash flows related to the FRT 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 FRT reporting unit within the Systems reportable segment. We have not presented unaudited combined pro forma financial information as the FRT acquisition was not significant to our consolidated results of operations and financial position. Note 5— Debt Our debt consisted of the following (in thousands): December 25, 2021 December 26, 2020 Term loans $ 24,435 $ 34,569 Less unamortized issuance costs ( 70 ) ( 75 ) Term loans less issuance costs $ 24,365 $ 34,494 CMI Term Loan On June 24, 2016, we entered into a Credit Agreement (the “Credit Agreement”) with HSBC Bank USA, National Association (“HSBC”), as administrative agent, co-lead arranger, sole bookrunner and syndication agent, other lenders that may from time-to-time be a party to the Credit Agreement, and certain guarantors. Pursuant to the Credit Agreement, the lenders provided us with a senior secured term loan facility of $ 150 million (the “CMI Term Loan”). The proceeds of the CMI Term Loan were used to finance a portion of the purchase price paid in connection with the Cascade Microtech acquisition in fiscal 2016 and to pay related bank fees and expenses. The CMI Term Loan bore interest at a rate equal to, at our option, (i) the applicable London Interbank Offered Rate (“LIBOR”) rate plus 2.00 % per annum or (ii) Base Rate (as defined in the Credit Agreement) plus 1.00 % per annum. We elected to pay interest at 2.00 % over the one-month LIBOR rate. Interest payments were payable in quarterly installments over a five-year period. The principal payments on the CMI Term Loan were scheduled to be paid in equal quarterly installments that began June 30, 2016, in an annual amount equal to 5 % for year one, 10 % for year two, 20 % for year three, 30 % for year four and 35 % for year 66 FORMFACTOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) five. We accelerated payments of these scheduled amounts and made the final payment on the CMI Term Loan on June 30, 2020, approximately one year before the original maturity. We are no longer subject to the terms of the Credit Agreement. FRT Term Loan On October 25, 2019, we entered into a euro denominated $ 23.4 million three-year credit facility loan agreement (the “FRT Term Loan”) with HSBC Trinkaus & Burkhardt AG, Germany, to fund the acquisition of FRT GmbH, which we acquired on October 9, 2019. See Note 4, Acquisitions , for further details of the acquisition. The FRT Term Loan bears interest at a rate equal to the Euro Interbank Offered Rate (“EURIBOR”) plus 1.75 % per annum and will be repaid in quarterly installments of approximately $ 2.0 million plus interest. The interest rate at December 25, 2021 was 1.20 %. The obligations under the FRT Term Loan are fully and unconditionally guaranteed by FormFactor, Inc. The FRT Term Loan contains negative covenants customary for financing of this type, including covenants that place limitations on the incurrence of additional indebtedness, the creation of liens, the payment of dividends; dispositions; fundamental changes, including mergers and acquisitions; loans and investments; sale leasebacks; negative pledges; transactions with affiliates; changes in fiscal year; sanctions and anti-bribery laws and regulations, and modifications to charter documents in a manner materially adverse to the Lenders. The FRT Term Loan also contains affirmative covenants and representations and warranties customary for financing of this type. As of December 25, 2021, the balance outstanding pursuant to the FRT term loan was $ 7.9 million. Building Term Loan On June 22, 2020, we entered into an $ 18.0 million 15-year credit facility loan agreement (the “Building Term Loan”) with MUFG Union Bank, National Association (“Union Bank”). The proceeds of the Building Term Loan were used to purchase a building adjacent to our leased facilities in Livermore, California. The Building Term Loan bears interest at a rate equal to the applicable LIBOR rate plus 1.75 % per annum. Interest payments are payable in monthly installments over a fifteen-year period. The interest rate at December 25, 2021 was 1.85 %. On March 17, 2020, we entered into an interest rate swap agreement with Union Bank to hedge the interest payments on the Building Term Loan for the notional amount of $ 18.0 million. As future levels of LIBOR over the life of the loan are uncertain, we entered into this interest-rate swap agreement to hedge the exposure in interest rate risks associated with movement in LIBOR rates. By entering into the agreement, we convert a floating rate interest at one-month LIBOR plus 1.75 % into a fixed rate interest at 2.75 %. The interest rate swap included a 0 % floor that was effective for one year from the date of the swap. As of December 25, 2021, the notional amount of the loan that is subject to this interest rate swap is $ 16.5 million. See Note 9, Fair Value , for additional information. The obligations under the Building Term Loan are guaranteed by a deed of trust covering certain real property and improvements and certain personal property used in connection therewith. The deed of trust creates a first priority lien or encumbrance on the property with only such exceptions as may be approved by the Union Bank in writing. The Credit Agreement contains covenants customary for financing of this type. As of December 25, 2021, the balance outstanding pursuant to the Building Term Loan was $ 16.5 million. Future principal and interest payments on our term loans as of December 25, 2021, based on the interest rate in effect at that date were as follows (in thousands): Payments Due In Fiscal Year 2022 2023 2024 2025 2026 2027 and thereafter Total Term loans - principal payments $ 8,935 $ 1,050 $ 1,080 $ 1,111 $ 1,142 $ 11,117 $ 24,435 Term loans - interest payments (1) 361 282 263 240 220 930 2,296 $ 9,296 $ 1,332 $ 1,343 $ 1,351 $ 1,362 $ 12,047 $ 26,731 (1) Represents our minimum interest payment commitments at 1.20 % per annum for the FRT Term Loan and 1.85 % per annum for the Building Term Loan. 67 FORMFACTOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 6— Leases Our operating lease, right-of-use assets relate to 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 3 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 5.4 years at December 25, 2021 and the weighted-average discount rate was 3.74 %. The components of lease expense were as follows (in thousands): Lease Expense December 25, 2021 December 26, 2020 December 28, 2019 Operating lease expense $ 8,485 $ 7,468 $ 6,985 Short-term lease expense 180 136 142 Variable lease expense 1,842 1,574 1,286 $ 10,507 $ 9,178 $ 8,413 Future minimum payments under our non-cancelable operating leases were as follows as of December 25, 2021 (in thousands): Fiscal Year Amount 2022 $ 8,594 2023 7,232 2024 6,814 2025 6,799 2026 6,008 Thereafter 8,970 Total minimum lease payments 44,417 Less: interest ( 5,507 ) Present value of net minimum lease payments 38,910 Less: current portion ( 7,901 ) Total long-term operating lease liabilities $ 31,009 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, as part of these plans we are undertaking actions to adjust capacity for certain product offerings. Contract termination costs include charges to satisfy contract obligations. The amounts accrued are based on our best estimates, however it is reasonably possible that the final amount paid or incurred 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 $ 6.0 million to $ 9.0 million, estimated to be comprised primarily of $ 1.0 million to $ 2.0 million of severance and employee-related costs, $ 2.0 million to 3.0 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 $ 3.0 million to $ 4.5 million and $ 3.0 million to $ 4.5 million is expected within the Probe Cards segment and Systems segment, respectively. 68 FORMFACTOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Restructuring charges by reportable segment included in our Consolidated Statements of Income were as follows (in thousands): Fiscal Year Ended December 25, 2021 Probe Cards Systems Total Cost of revenues $ 2,720 $ 485 $ 3,205 Research and development — 869 869 Selling, general and administrative — 50 50 $ 2,720 $ 1,404 $ 4,124 Changes to the restructuring accrual during December 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 1,175 1,376 270 2,800 5,621 Adjustment to restructuring charges ( 147 ) — — ( 1,350 ) ( 1,497 ) Non-cash settlement — ( 1,376 ) ( 270 ) — ( 1,646 ) December 25, 2021 $ 1,028 $ — $ — $ 1,450 $ 2,478 Note 8— Derivative Financial Instruments 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 Consolidated Balance Sheets with changes in fair value recorded within Other income, net in our Consolidated Statements 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 Consolidated Balance Sheets with changes in fair value recorded as a component of Accumulated other comprehensive income (loss) and reclassified into earnings in the same period in which the hedged transaction affects earnings, and in the same line item on the Consolidated Statements of Income as the impact of the hedge transaction. At December 25, 2021, we expect to reclassify $ 0.5 million of the amount accumulated in other comprehensive loss to earnings during the next 12 months, due to the recognition in earnings of the hedged forecasted transactions. 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 December 25, 2021 will mature by the fourth quarter of fiscal 2022. 69 FORMFACTOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The following table provides information about our foreign currency forward contracts outstanding as of December 25, 2021 (in thousands): Currency Contract Position Contract Amount (Local Currency) Contract Amount (U.S. Dollars) Euro Buy ( 9,774 ) $ ( 11,579 ) Euro Sell 5,906 6,680 Japanese Yen Sell 1,902,670 16,629 Korean Won Buy ( 1,901,547 ) ( 1,603 ) Taiwan Dollar Sell 47,548 1,718 Total USD notional amount of outstanding foreign exchange contracts $ 11,845 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 location and amount of gains (losses) related to non-designated derivative instruments in the Consolidated Statements of Income were as follows (in thousands): Location of Gain (Loss) Recognized on Derivatives Fiscal Year Ended Derivatives Not Designated as Hedging Instruments December 25, 2021 December 26, 2020 December 28, 2019 Foreign exchange forward contracts Other income, net $ 1,585 $ ( 1,437 ) $ 248 The location and amount of gains (losses) related to derivative instruments designated as cash flow hedges on our Consolidated Statements of Income was as follows (in thousands): Amount of Gain or (Loss) Recognized in Accumulated OCI on Derivative Location of Gain or (Loss) Reclassified from Accumulated OCI into Income Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income Fiscal 2021 $ ( 1,096 ) Cost of revenues $ 184 Research and development 3 Selling, general and administrative 64 $ 251 Fiscal 2020 $ 1,142 Cost of revenues $ 89 Research and development 77 Selling, general and administrative 25 $ 191 Fiscal 2019 $ 93 Cost of revenues $ ( 526 ) Research and development ( 75 ) Selling, general and administrative ( 172 ) $ ( 773 ) Interest Rate Swaps Pursuant to our interest rate and risk management strategy, during fiscal 2016 we entered into an interest rate swap agreement with HSBC and other lenders to hedge the interest payments on the CMI Term Loan for the notional amount of $ 95.6 million. As future levels of LIBOR over the life of the loan were uncertain, we entered into these interest-rate swap agreements to hedge the exposure in interest rate risks associated with the movement in LIBOR rates. By entering into the agreements, we converted a floating rate interest at one-month LIBOR plus 2.00 % into a fixed rate interest at 2.94 %. The interest rate swap agreement ended as of March 28, 2020. During fiscal 2020 we entered into an interest rate swap agreement with Union Bank to hedge the interest payments on the Building Term Loan for the notional amount of $ 18.0 million. As future levels of LIBOR over the life of the loan are uncertain, we entered into this interest-rate swap agreement to hedge the exposure in interest rate risks associated with movement in LIBOR rates. By entering into the agreement, we convert a floating rate interest at one-month LIBOR plus 1.75 % into a fixed 70 FORMFACTOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) rate interest at 2.75 %. The interest rate swap also included a 0 % floor that was effective for one year from the date of the swap. As of December 25, 2021, the notional amount of the loan that is subject to this interest rate swap was $ 16.5 million. See Note 5, Debt , for additional information. For accounting purposes, the interest-rate swap contracts qualify for and are designated as cash flow hedges. All hedging relationships are formally documented, and the hedges are designed to offset changes to future cash flows on hedged transactions. We evaluate hedge effectiveness at hedge inception and on an ongoing basis. The fair value of our interest rate swap contracts are determined at the end of each reporting period based on valuation models that use interest rate yield curves as inputs. The cash flows associated with the interest rate swaps are reported in Net cash provided by operating activities in our Consolidated Statements of Cash Flows and the fair value of the interest rate swap contracts are recorded within Accrued Liabilities and Other assets. The impact of the interest rate swaps on the 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) Fiscal 2021 $ 451 Other income, net $ ( 154 ) Fiscal 2020 ( 119 ) Other income, net ( 64 ) Fiscal 2019 ( 86 ) Other income, net 548 See also Note 9, Fair Value . Note 9— Fair Value 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 fiscal 2021, 2020 or 2019. The carrying values of Cash, Accounts receivable, net, Restricted cash, Prepaid expenses and other current assets, Accounts payable, Accrued liabilities, and Current portion of term loans, net of unamortized issuance costs approximate fair value due to their short maturities. No changes were made to our valuation techniques during fiscal 2021. 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 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 of our investments have a sufficient level of trading volume to demonstrate that the fair value is appropriate. 71 FORMFACTOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Contingent Consideration Contingent consideration, arising from the acquisition of FRT (see Note 4, Acquisitions ), 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, discounted to present value at an appropriate discount rate. In the second quarter of fiscal 2021, we paid $ 3.9 million in contingent consideration in satisfaction of our obligation under the purchase agreement, 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. 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): December 25, 2021 Level 1 Level 2 Level 3 Total Assets: Cash equivalents: Money market funds $ 9,526 $ — $ — $ 9,526 U.S. treasuries 2,500 — — 2,500 Commercial paper — 1,000 — 1,000 U.S. agency securities — 5,556 — 5,556 12,026 6,556 — 18,582 Marketable securities: U.S. treasuries 38,985 — — 38,985 Certificates of deposit — 1,199 — 1,199 Corporate bonds — 52,709 — 52,709 Commercial paper — 32,162 — 32,162 38,985 86,070 — 125,055 Interest rate swap derivative contracts — 629 — 629 Total assets $ 51,011 $ 93,255 $ — $ 144,266 Liabilities: Foreign exchange derivative contracts $ — $ ( 489 ) $ — $ ( 489 ) Interest rate swap derivative contracts — ( 55 ) — ( 55 ) Total liabilities $ — $ ( 544 ) $ — $ ( 544 ) 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 Agency securities — 575 — 575 Corporate bonds — 24,330 — 24,330 40,726 27,084 — 67,810 Foreign exchange derivative contract — 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 ) 72 FORMFACTOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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, Acquisitions and Note 7, Restructuring Charges, there were no assets or liabilities measured at fair value on a non-recurring basis during fiscal 2021, 2020 or 2019. Note 10— Goodwill and Intangible Assets Goodwill Goodwill by reportable segment was as follows (in thousands): Probe Cards Systems Total Goodwill, as of December 28, 2019 $ 172,482 $ 26,714 $ 199,196 Addition - FRT 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, 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 — ( 2,068 ) ( 2,068 ) Goodwill, as of December 25, 2021 $ 178,424 $ 33,875 $ 212,299 Intangible Assets Intangible assets were as follows (in thousands): December 25, 2021 December 26, 2020 Other Intangible Assets Gross Accumulated Amortization Net Gross Accumulated Amortization Net Existing developed technologies $ 172,259 $ 148,784 $ 23,475 $ 176,265 $ 137,754 $ 38,511 Trade name 8,054 7,603 451 8,162 7,363 799 Customer relationships 51,270 39,254 12,016 52,488 33,378 19,110 Backlog 1,896 1,896 — 2,227 1,900 327 In-process research and development 400 — 400 400 — 400 $ 233,879 $ 197,537 $ 36,342 $ 239,542 $ 180,395 $ 59,147 Amortization expense was included in our Consolidated Statements of Income as follows (in thousands): Fiscal Year Ended December 25, 2021 December 26, 2020 December 28, 2019 Cost of revenues $ 12,269 $ 21,609 $ 20,036 Selling, general and administrative 6,478 6,382 7,636 $ 18,747 $ 27,991 $ 27,672 73 FORMFACTOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The estimated future amortization of definite-lived intangible assets, excluding in-process research and development, is as follows (in thousands): Fiscal Year Amount 2022 $ 9,488 2023 7,133 2024 4,533 2025 4,277 2026 3,241 Thereafter 7,270 Total $ 35,942 We did no t record any impairment of intangible assets in fiscal 2021, 2020 and 2019. Note 11— Commitments and Contingencies Leases See Note 6, Leases . Environmental Matters We are subject to U.S. federal, state, local, and foreign governmental laws and regulations relating to the protection of the environment, including those governing the discharge of pollutants into the air and water, the management and disposal of hazardous substances and wastes, the clean-up of contaminated sites and the maintenance of a safe workplace. We believe that we comply in all material respects with the environmental laws and regulations that apply to us. We did not receive any notices of violations of environmental laws and regulations in fiscal 2021, 2020 or 2019. In the future, we may receive notices of violations of environmental regulations, or otherwise learn of such violations. Environmental contamination or violations may negatively impact our business. Indemnification Arrangements We have entered, and may from time to time in the ordinary course of our business enter, into contractual arrangements with third parties that include indemnification obligations. Under these contractual arrangements, we have agreed to defend, indemnify and/or hold the third party harmless from and against certain liabilities. These arrangements include indemnities in favor of customers in the event that our products or services infringe a third party's intellectual property or cause property or other indemnities in favor of our lessors in connection with facility leasehold liabilities that we may cause. In addition, we have entered into indemnification agreements with our directors and certain of our officers, and our bylaws contain indemnification obligations in favor of our directors, officers and agents. These indemnity arrangements may limit the type of the claim, the total amount that we can be required to pay in connection with the indemnification obligation and the time within which an indemnification claim can be made. The duration of the indemnification obligation may vary, and for most arrangements, survives the agreement term and is indefinite. We believe that substantially all of our indemnity arrangements provide either for limitations on the maximum potential future payments we could be obligated to make, or for limitations on the types of claims and damages we could be obligated to indemnify, or both. However, it is not possible to determine or reasonably estimate the maximum potential amount of future payments under these indemnification obligations due to the varying terms of such obligations, a lack of history of prior indemnification claims, the unique facts and circumstances involved in each particular contractual arrangement and in each potential future claim for indemnification, and the contingency of any potential liabilities upon the occurrence of events that are not reasonably determinable. We have not had any material requests for indemnification under these arrangements. We have not recorded any liabilities for these indemnification arrangements on our Consolidated Balance Sheets as of December 25, 2021 or 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 December 25, 2021, and as of the filing of these financial statements, we were not involved in any material legal proceedings. In the future, we may become a party to additional legal proceedings that may require us to spend significant resources. Litigation can be expensive and disruptive to normal business operations. The results of legal proceedings are difficult to predict, and the costs incurred in litigation can be substantial, regardless of outcome. 74 FORMFACTOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 12— Stockholders' Equity Preferred Stock We have authorized 10,000,000 shares of undesignated preferred stock, $ 0.001 par value, none of which is issued and outstanding. Our Board of Directors shall determine the rights, preferences, privileges and restrictions of the preferred stock, including dividends rights, conversion rights, voting rights, terms of redemption, liquidation preferences, sinking fund terms and the number of shares constituting any series or the designation of any series. Common Stock Each share of common stock has the right to one vote. The holders of common stock are also entitled to receive dividends whenever funds are legally available and when declared by the Board of Directors, subject to the prior rights of holders, if any, of all classes of stock outstanding having priority rights as to dividends. No dividends have been declared or paid as of December 25, 2021. 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 incentive plans. The share repurchase program will expire October 28, 2022. This repurchase program replaced the previous repurchase program that expired in February 2020 to purchase up to $ 25.0 million of outstanding common stock. During fiscal 2021, we repurchased and retired 622,400 shares of common stock for $ 24.0 million and, as of December 25, 2021 $ 26.0 million remained available for future repurchases. During fiscal 2020 and 2019, we did not repurchase any shares. Equity Incentive Plan We currently grant equity-based awards under our Equity Incentive Plan, as amended (the “2012 Plan”) which was approved by our stockholders. As amended, the 2012 Plan has authorized for issuance a total of 23.4 million shares, 4.5 million of which were available for grant as of December 25, 2021. RSUs granted under the 2012 Plan generally vest over three years in annual tranches, though we have granted, and will continue to grant, such awards that vest over a shorter term for employee retention purposes. The 2012 Plan provides that incentive stock options may be granted to our employees and nonqualified stock options, and all awards other than incentive stock options, may be granted to employees, directors and consultants. The exercise price of incentive stock options must be at least equal to the fair market value of our common stock on the date of grant. All restricted stock units and options granted under the 2012 Plan generally vest over three years and options expire after seven years , unless otherwise determined by the Compensation Committee of the Board of Directors. Stock Options Stock option activity was as follows: Outstanding Options Number of Shares 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 ( 100,000 ) 8.44 Outstanding at December 25, 2021 6,000 $ 6.93 0.6 $ 225,480 Vested and expected to vest at December 25, 2021 6,000 $ 6.93 0.6 $ 225,480 Exercisable at December 25, 2021 6,000 $ 6.93 0.6 $ 225,480 75 FORMFACTOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Restricted Stock Units RSUs, including Performance Restricted Stock Units (“PRSUs”) are converted into shares of our common stock upon vesting on a one-for-one basis. The vesting of RSUs is subject to the employee's continuing service. RSU activity was as follows: Number of Shares Weighted Average Grant Date Fair Value Restricted stock units at December 26, 2020 2,840,922 $ 19.80 Granted 1,036,537 36.12 Vested ( 1,517,402 ) 17.26 Canceled ( 193,123 ) 28.28 Restricted stock units at December 25, 2021 2,166,934 28.63 The PRSUs granted in fiscal 2021, 2020 and 2019 listed below vest based on us achieving certain market performance criteria. The performance criteria are based on a metric called Total Shareholder Return (“TSR”) for the performance period of three years , relative to the TSR of the companies identified as being part of the S&P Semiconductor Select Industry Index (FormFactor peer companies) as of a specific date. All 318,100 PRSUs granted in fiscal 2018 vested in fiscal 2021. These shares achieved TSR performance that resulted in an additional 124,600 shares issued during fiscal 2021 related to the 2018 PRSU grant. PRSU grant activity was as follows: Fiscal Year Ended December 25, 2021 December 26, 2020 December 28, 2019 Grant Date August 2, 2021 August 27, 2020 June 4, 2019 Performance period July 1, 2021 - June 30, 2024 July 1, 2020 - June 30, 2023 July 1, 2019 - June 30, 2022 Number of shares 197,128 258,000 273,000 TSR as-of date August 2, 2021 August 27, 2020 June 4, 2019 Stock-based compensation $ 8.6 million $ 6.9 million $ 4.4 million Employee Stock Purchase Plan Our 2012 Employee Stock Purchase Plan (the “ESPP”), as amended, allows for the issuance of a total of 7,000,000 shares. The offering periods under the ESPP are 12 months commencing on February 1 of each calendar year and ending on January 31 of the subsequent calendar year, and a six-month fixed offering period commencing on August 1 of each calendar year and ending on January 31 of the subsequent calendar year. The 12-month offering period consists of two six-month purchase periods and the six-month offering period consists of one six-month purchase period. The price of the common stock purchased is 85 % of the lesser of the fair market value of the common stock on the first day of the applicable offering period or the last day of each purchase period. We have treated the 2012 ESPP as a compensatory plan. During fiscal 2021, employees purchased 378,584 shares under this program at a weighted average exercise price of $ 25.91 per share, which represented a weighted average discount of $ 13.53 per share from the fair value of the stock purchased. As of December 25, 2021, 1,793,072 shares remained available for issuance. 76 FORMFACTOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 13— Stock-Based Compensation Stock-Based Compensation Expense Certain information regarding our stock-based compensation was as follows (in thousands, except per share amounts): Fiscal Year Ended December 25, 2021 December 26, 2020 December 28, 2019 Weighted average grant date per share fair value of RSUs granted $ 36.12 $ 25.96 $ 15.12 Total intrinsic value of stock options exercised 3,179 4,688 1,814 Fair value of RSUs vested 54,948 42,597 23,450 Pre-tax stock-based compensation expense by financial statement line and related tax benefit in the Consolidated Statements of Income are as follows (in thousands): Fiscal Year Ended December 25, 2021 December 26, 2020 December 28, 2019 Stock-based compensation expense included in: Cost of revenues $ 5,200 $ 3,951 $ 4,055 Research and development 7,583 5,824 6,367 Selling, general and administrative 16,601 14,055 12,754 Total stock-based compensation $ 29,384 $ 23,830 $ 23,176 Stock-based compensation tax benefit $ 6,118 $ 4,962 $ 911 Unrecognized Stock-Based Compensation Expense Unrecognized stock-based compensation expense at December 25, 2021 consisted of the following (in thousands): Unrecognized Expense Weighted Average Recognition Period (Years) Restricted stock units $ 36,055 2.2 Performance restricted stock units 10,126 2.1 Employee stock purchase plan 452 0.1 Total unrecognized stock-based compensation expense $ 46,633 2.1 77 FORMFACTOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Valuation Assumptions The following assumptions were used in estimating the fair value of PRSUs: Fiscal Year Ended December 25, 2021 December 26, 2020 December 28, 2019 PRSUs: Dividend yield — % — % — % Expected volatility 52.5 % 52.0 % 47.3 % Risk-free interest rate 0.3 % 0.2 % 1.8 % Expected life (in years) 2.9 2.8 3.1 The following assumptions were used in estimating the fair value of shares under the Employee Stock Purchase Plan: Fiscal Year Ended December 25, 2021 December 26, 2020 December 28, 2019 Employee Stock Purchase Plan: Dividend yield — % — % — % Expected volatility 33.6 % - 74.4 % 30.4 % - 74.4 % 36.6 % - 59.5 % Risk-free interest rate 0.1 % - 1.5 % 0.1 % - 1.5 % 2.0 % - 2.5 % Expected life (in years) 0.5 - 1.0 0.5 - 1.0 0.5 - 1.0 Note 14— Income Taxes Components of Income Before Income Taxes The components of income before income taxes were as follows (in thousands): Fiscal Year Ended December 25, 2021 December 26, 2020 December 28, 2019 United States $ 74,298 $ 72,950 $ 41,115 Foreign 24,202 12,225 9,948 $ 98,500 $ 85,175 $ 51,063 Provision for Income Taxes The components of the provision for income taxes are as follows (in thousands): Fiscal Year Ended December 25, 2021 December 26, 2020 December 28, 2019 Current provision: Federal $ 2,334 $ 1,799 $ 179 State 712 1,194 2,302 Foreign 7,661 4,278 4,202 10,707 7,271 6,683 Deferred provision (benefit): Federal 4,651 1,472 8,128 State 522 ( 267 ) ( 1,898 ) Foreign ( 1,304 ) ( 1,824 ) ( 1,196 ) 3,869 ( 619 ) 5,034 Total provision for income taxes $ 14,576 $ 6,652 $ 11,717 78 FORMFACTOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Tax Rate Reconciliation The following is a reconciliation of the difference between income taxes computed by applying the federal statutory rate of 21% and the provision from income taxes (in thousands): Fiscal Year Ended December 25, 2021 December 26, 2020 December 28, 2019 U.S. statutory federal tax rate $ 20,685 $ 17,887 $ 10,723 State taxes and credits, net of federal benefit 811 663 441 Stock-based compensation ( 6,118 ) ( 4,962 ) ( 911 ) Research and development credits ( 7,153 ) ( 6,576 ) ( 6,436 ) Foreign taxes at rates different than the U.S. 2,286 415 1,454 Other permanent differences 2,043 400 ( 148 ) Global intangible low-taxed income — — 1,369 Foreign derived intangible income ( 2,486 ) ( 3,668 ) — Change in valuation allowance 2,231 1,862 2,567 Other 2,277 631 2,658 Total $ 14,576 $ 6,652 $ 11,717 Deferred Tax Assets and Liabilities Deferred tax assets and liabilities are recognized for the future tax consequences of differences between the carrying amounts of assets and liabilities and their respective tax basis using enacted tax rates in effect for the year in which the differences are expected to be reversed. Significant deferred tax assets and liabilities consisted of the following (in thousands): As of December 25, 2021 December 26, 2020 Tax credits $ 41,650 $ 42,927 Inventory reserve 13,691 13,401 Other reserves and accruals 8,523 8,610 Non-statutory stock options 2,837 2,794 Lease liability 6,717 6,934 Depreciation and amortization 17,912 20,961 Net operating loss carryforwards 18,395 18,421 Gross deferred tax assets 109,725 114,048 Valuation allowance ( 40,698 ) ( 38,466 ) Total deferred tax assets 69,027 75,582 Right of use asset ( 5,910 ) ( 6,074 ) Acquired intangibles and fixed assets ( 4,522 ) ( 8,395 ) Unrealized investment gains ( 105 ) ( 106 ) Tax on undistributed earnings ( 118 ) ( 110 ) Total deferred tax liabilities ( 10,655 ) ( 14,685 ) Net deferred tax assets $ 58,372 $ 60,897 We are required to evaluate the realizability of our deferred tax assets in both our U.S. and non-U.S. jurisdictions on an ongoing basis to determine whether there is a need for a valuation allowance with respect to such deferred tax assets. As of December 25, 2021, we maintained a valuation allowance of $ 40.7 million, primarily related to California deferred tax assets and foreign tax credit carryovers, due to uncertainty about the future realization of these assets. We believe that future reversals of taxable temporary differences, and our forecast of continued earnings in both our U.S. and non-U.S. jurisdictions, support our decision to not record a valuation allowance on other deferred tax assets. 79 FORMFACTOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Tax Credits and Carryforwards Tax credits and carryforwards available to us at December 25, 2021 consisted of the following (in thousands): Amount Latest Expiration Date Federal research and development tax credit $ 34,838 2024-2041 Foreign tax credit carryforwards 1,029 2022-2027 California research credits 46,993 Indefinite State net operating loss carryforwards 250,472 2022-Indefinite Singapore net operating loss carryforwards 6,331 Indefinite Undistributed Earnings As of December 25, 2021, unremitted earnings of foreign subsidiaries was estimated at $ 45.0 million. We intend to permanently invest $ 10.0 million of undistributed earnings indefinitely outside of the U.S. To the extent we repatriate the remaining $ 35.0 million of undistributed foreign earnings to the U.S., we established a deferred tax liability of $ 0.1 million for foreign withholding taxes. Our estimates are provisional and subject to change because of the complexity and variety of assumptions necessary to compute the tax. Unrecognized Tax Benefits We recognize the benefits of tax return positions if we determine that the positions are “more-likely-than-not” to be sustained by the taxing authority. Interest and penalties accrued on unrecognized tax benefits are recorded as tax expense in the period incurred. The following table reflects changes in the unrecognized tax benefits (in thousands): Fiscal Year Ended December 25, 2021 December 26, 2020 December 28, 2019 Unrecognized tax benefit, beginning balance $ 32,497 $ 28,800 $ 25,224 Additions based on tax positions related to the current year 3,201 3,072 3,679 Additions based on tax positions from prior years 124 702 — Reductions for tax positions of prior years — — ( 5 ) Reductions due to lapse of the applicable statute of limitations ( 77 ) ( 77 ) ( 98 ) Unrecognized tax benefit, ending balance $ 35,745 $ 32,497 $ 28,800 Interest and penalties recognized as a component of provision for income taxes $ 40 $ 50 $ 59 Interest and penalties accrued at period end 188 204 212 Of the unrecognized tax benefits at December 25, 2021, $ 17.5 million would impact the effective tax rate if recognized. The amount of income taxes we pay is subject to ongoing audits by federal, state and foreign tax authorities which might result in proposed assessments. Our estimate for the potential outcome for any uncertain tax issue is judgmental in nature. However, we believe we have adequately provided for any reasonably foreseeable outcome related to those matters. Our future results may include favorable or unfavorable adjustments to our estimated tax liabilities in the period the assessments are made or resolved or when statutes of limitation on potential assessments expire. As of December 25, 2021, changes to our uncertain tax positions in the next 12 months that are reasonably possible are not expected to have a significant impact on our financial position or results of operations. At December 25, 2021, our tax years 2018 through 2021, 2017 through 2021 and 2016 through 2021, remain open for examination in the federal, state and foreign jurisdictions, respectively. However, to the extent allowed by law, the taxing authorities may have the right to examine prior periods where net operating losses and credits were generated and carried forward, and make adjustments up to the net operating loss and credit carryforward amounts. 80 FORMFACTOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 15— Employee Benefit Plans We have an employee savings plan that qualifies as a deferred salary arrangement under Section 401(k) of the Internal Revenue Code. The plan is designed to provide employees with an accumulation of funds for retirement on a tax-deferred basis and provide for annual discretionary employer contributions. The total charge to net income under the 401(k) plan for fiscal 2021, 2020 and 2019 aggregated $ 2.7 million, $ 2.2 million and $ 2.1 million, respectively. Note 16— Segments and Geographic Information We operate in two reportable segments consisting of the Probe Cards Segment and the Systems Segment. 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. The following table summarizes the operating results by reportable segment (dollars in thousands): Fiscal 2021 Probe Cards Systems Corporate and Other Total Revenues $ 633,281 $ 136,393 $ — $ 769,674 Gross profit 279,873 65,834 ( 22,940 ) 322,767 Gross margin 44.2 % 48.3 % — % 41.9 % Fiscal 2020 Probe Cards Systems Corporate and Other Total Revenues $ 581,739 $ 111,877 $ — $ 693,616 Gross profit 263,215 51,835 ( 27,130 ) 287,920 Gross margin 45.2 % 46.3 % — % 41.5 % Fiscal 2019 Probe Cards Systems Corporate and Other Total Revenues $ 491,363 $ 98,101 $ — $ 589,464 Gross profit 211,382 50,927 ( 24,813 ) 237,496 Gross margin 43.0 % 51.9 % — % 40.3 % 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, share-based compensation expense, acquisition-related costs, including charges related to inventory and fixed assets stepped up to fair value, and other costs, which are not used in evaluating the results of, or in allocating resources to, our reportable segments. Acquisition-related costs include transaction costs and any costs directly related to the acquisition and integration of acquired businesses. 81 FORMFACTOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The following table summarizes revenue, by geographic region, as a percentage of total revenues based upon ship-to location: Fiscal Year Ended December 25, 2021 December 26, 2020 December 28, 2019 Taiwan 24.2 % 21.7 % 14.7 % China 21.2 25.2 18.0 South Korea 16.0 12.5 19.8 United States 15.9 18.4 26.3 Asia-Pacific (1) 11.5 4.8 3.7 Europe 5.7 9.5 7.0 Japan 4.7 6.3 8.9 Rest of World 0.8 1.6 1.6 Total Revenues 100.0 % 100.0 % 100.0 % (1) Asia-Pacific includes all countries in the region except Taiwan, South Korea, China, and Japan, which are disclosed separately. The following table summarizes revenue by market (in thousands): Fiscal Year Ended December 25, 2021 December 26, 2020 December 28, 2019 Foundry & Logic $ 435,812 $ 446,183 $ 318,552 DRAM 156,049 109,734 147,257 Flash 41,420 25,822 25,554 Systems 136,393 111,877 98,101 Total revenues $ 769,674 $ 693,616 $ 589,464 The following table summarizes revenue by timing of revenue recognition (in thousands): Fiscal Year Ended December 25, 2021 December 26, 2020 December 28, 2019 Probe Cards Systems Total Probe Cards Systems Total Probe Cards Systems Total Products transferred at a point in time $ 630,038 $ 124,788 $ 754,826 $ 579,569 $ 104,858 $ 684,427 $ 488,925 $ 93,837 $ 582,762 Services transferred over time 3,243 11,605 14,848 2,170 7,019 9,189 2,438 4,264 6,702 Total $ 633,281 $ 136,393 $ 769,674 $ 581,739 $ 111,877 $ 693,616 $ 491,363 $ 98,101 $ 589,464 Long-lived assets, comprised of Operating lease, Right-of-use assets, Property, plant and equipment, net, Goodwill and Intangibles, net, reported based on the location of the asset was as follows (in thousands): December 25, 2021 December 26, 2020 December 28, 2019 United States $ 372,338 $ 347,654 $ 287,600 Europe 47,700 51,791 52,309 Asia-Pacific 10,368 7,322 7,064 Total $ 430,406 $ 406,767 $ 346,973 Note 17— 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 82 FORMFACTOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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 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. ASU 2021-08 In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customer s. The new guidance requires contract assets and contract liabilities acquired in a business combination to be recognized and measured by the acquirer on the acquisition date in accordance with Accounting Standards Codification 606, Revenue from Contracts with Customers, as if it had originated the contracts. This approach differs from the current requirement to measure contract assets and contract liabilities acquired in a business combination at fair value. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022, with early adoption permitted. The adoption impact of the new standard will depend on the magnitude of future acquisitions. The standard will not impact acquired contract assets or liabilities from business combinations occurring prior to the adoption date. 83