FORMFACTOR INC 10-Q

Item 1. Financial Statements FORMFACTOR, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share amounts) (Unaudited) March 26, 2022 December 25, 2021 ASSETS Current assets: Cash and cash equivalents $ 167,182 $ 151,010 Marketable securities 129,174 125,055 Accounts receivable, net of allowance for credit losses of $ 194 and $ 195 113,505 115,541 Inventories, net 125,590 111,548 Restricted cash 2,026 2,233 Prepaid expenses and other current assets 18,671 18,652 Total current assets 556,148 524,039 Restricted cash 2,053 2,099 Operating lease, right-of-use-assets 35,764 35,210 Property, plant and equipment, net of accumulated depreciation 152,179 146,555 Goodwill 211,553 212,299 Intangibles, net 33,638 36,342 Deferred tax assets 62,746 61,995 Other assets 2,799 1,981 Total assets $ 1,056,880 $ 1,020,520 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 65,378 $ 57,862 Accrued liabilities 47,438 50,836 Current portion of term loans, net of unamortized issuance costs 6,790 8,931 Deferred revenue 27,002 23,224 Operating lease liabilities 8,049 7,901 Total current liabilities 154,657 148,754 Term loans, less current portion, net of unamortized issuance costs 15,175 15,434 Deferred tax liabilities 3,131 3,623 Long-term operating lease liabilities 31,366 31,009 Other liabilities 5,878 5,920 Total liabilities 210,207 204,740 Stockholders’ equity: Common stock, $ 0.001 par value: 250,000,000 shares authorized; 78,166,212 and 78,240,506 shares issued and outstanding 78 78 Additional paid-in capital 902,994 898,945 Accumulated other comprehensive loss ( 4,477 ) ( 1,449 ) Accumulated deficit ( 51,922 ) ( 81,794 ) Total stockholders’ equity 846,673 815,780 Total liabilities and stockholders’ equity $ 1,056,880 $ 1,020,520 The accompanying notes are an integral part of these condensed consolidated financial statements. 3 FORMFACTOR, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share amounts) (Unaudited) Three Months Ended March 26, 2022 March 27, 2021 Revenues $ 197,174 $ 186,636 Cost of revenues 102,950 109,930 Gross profit 94,224 76,706 Operating expenses: Research and development 27,134 24,046 Selling, general and administrative 32,906 30,015 Total operating expenses 60,040 54,061 Operating income 34,184 22,645 Interest income 138 194 Interest expense ( 192 ) ( 180 ) Other income, net 192 172 Income before income taxes 34,322 22,831 Provision for income taxes 4,450 3,206 Net income $ 29,872 $ 19,625 Net income per share: Basic $ 0.38 $ 0.25 Diluted $ 0.38 $ 0.25 Weighted-average number of shares used in per share calculations: Basic 78,246 77,598 Diluted 79,468 79,988 The accompanying notes are an integral part of these condensed consolidated financial statements. 4 FORMFACTOR, INC. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In thousands) (Unaudited) Three Months Ended March 26, 2022 March 27, 2021 Net income $ 29,872 $ 19,625 Other comprehensive loss, net of tax: Translation adjustments and other ( 2,698 ) ( 2,379 ) Unrealized losses on available-for-sale marketable securities ( 1,204 ) ( 131 ) Unrealized gains (losses) on derivative instruments 874 ( 226 ) Other comprehensive loss, net of tax ( 3,028 ) ( 2,736 ) Comprehensive income $ 26,844 $ 16,889 The accompanying notes are an integral part of these condensed consolidated financial statements. 5 FORMFACTOR, INC. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (In thousands, except shares) (Unaudited) Shares of Common Stock Common Stock Shares of Treasury Stock Treasury Stock Additional Paid-in Capital Accumulated Other Comprehensive Income (Loss) Accumulated Deficit Total Three Months Ended March 26, 2022 Balances, December 25, 2021 78,240,506 $ 78 — $ — $ 898,945 $ ( 1,449 ) $ ( 81,794 ) $ 815,780 Issuance of common stock under the Employee Stock Purchase Plan 157,642 — — — 5,645 — — 5,645 Issuance of common stock pursuant to exercise of options 6,000 — — — 42 — — 42 Issuance of common stock pursuant to vesting of restricted stock units, net of stock withheld for tax 2,612 — — — ( 72 ) — — ( 72 ) Purchase and retirement of common stock through repurchase program ( 240,548 ) — — — ( 9,397 ) — — ( 9,397 ) Stock-based compensation — — — — 7,831 — — 7,831 Other comprehensive loss — — — — — ( 3,028 ) — ( 3,028 ) Net income — — — — — — 29,872 29,872 Balances, March 26, 2022 78,166,212 $ 78 — $ — $ 902,994 $ ( 4,477 ) $ ( 51,922 ) $ 846,673 Shares of Common Stock Common Stock Shares of Treasury Stock Treasury Stock Additional Paid-in Capital Accumulated Other Comprehensive Income (Loss) Accumulated Deficit Total Three Months Ended March 27, 2021 Balances, December 26, 2020 77,437,997 $ 78 — $ — $ 903,838 $ 5,886 $ ( 165,718 ) $ 744,084 Issuance of common stock under the Employee Stock Purchase Plan 228,784 — — — 5,065 — — 5,065 Issuance of common stock pursuant to exercise of options 50,000 — — — 422 — — 422 Issuance of common stock pursuant to vesting of restricted stock units, net of stock withheld for tax 41,749 — — — ( 1,141 ) — — ( 1,141 ) Purchase of common stock through repurchase program — — ( 136,402 ) ( 5,738 ) — — — ( 5,738 ) Stock-based compensation — — — — 6,952 — — 6,952 Other comprehensive income — — — — — ( 2,736 ) — ( 2,736 ) Net income — — — — — — 19,625 19,625 Balances, March 27, 2021 77,758,530 $ 78 ( 136,402 ) $ ( 5,738 ) $ 915,136 $ 3,150 $ ( 146,093 ) $ 766,533 The accompanying notes are an integral part of these condensed consolidated financial statements. 6 FORMFACTOR, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) Three Months Ended March 26, 2022 March 27, 2021 Cash flows from operating activities: Net income $ 29,872 $ 19,625 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 6,960 6,130 Amortization 2,369 6,805 Reduction in the carrying amount of right-of-use assets 2,492 1,811 Stock-based compensation expense 7,520 7,077 Provision for excess and obsolete inventories 2,501 3,394 Non-cash restructuring charges 150 — Other adjustments to reconcile net income to net cash provided by operating activities 32 2,140 Changes in assets and liabilities: Accounts receivable 966 3,576 Inventories ( 17,080 ) ( 9,911 ) Prepaid expenses and other current assets ( 144 ) 3,011 Other assets ( 73 ) ( 50 ) Accounts payable 10,150 5,722 Accrued liabilities ( 3,120 ) ( 12,732 ) Other liabilities 87 114 Deferred revenues 3,908 ( 2,411 ) Operating lease liabilities ( 2,435 ) ( 1,945 ) Net cash provided by operating activities 44,155 32,356 Cash flows from investing activities: Acquisition of property, plant and equipment ( 15,606 ) ( 13,470 ) Purchases of marketable securities ( 23,462 ) ( 41,062 ) Proceeds from maturities and sales of marketable securities 17,990 14,610 Net cash used in investing activities ( 21,078 ) ( 39,922 ) Cash flows from financing activities: Proceeds from issuances of common stock 5,687 5,487 Purchase of common stock through stock repurchase program ( 9,397 ) ( 5,738 ) Tax withholdings related to net share settlements of equity awards ( 72 ) ( 1,141 ) Principal repayments on term loans ( 2,234 ) ( 2,376 ) Net cash used in financing activities ( 6,016 ) ( 3,768 ) Effect of exchange rate changes on cash, cash equivalents and restricted cash ( 1,142 ) ( 1,456 ) Net increase (decrease) in cash, cash equivalents and restricted cash 15,919 ( 12,790 ) Cash, cash equivalents and restricted cash, beginning of period 155,342 191,098 Cash, cash equivalents and restricted cash, end of period $ 171,261 $ 178,308 The accompanying notes are an integral part of these condensed consolidated financial statements. 7 FORMFACTOR, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) Three Months Ended March 26, 2022 March 27, 2021 Non-cash investing and financing activities: Increase (decrease) in accounts payable and accrued liabilities related to property, plant and equipment purchases $ ( 2,524 ) $ 1,087 Operating lease, right-of-use assets obtained in exchange for lease obligations 3,359 8,572 Supplemental disclosure of cash flow information: Cash paid for income taxes, net $ 890 $ 1,034 Cash paid for interest 163 173 Operating cash outflows from operating leases 2,094 2,201 Reconciliation of cash, cash equivalents and restricted cash: Cash and cash equivalents $ 167,182 $ 173,616 Restricted cash, current 2,026 2,798 Restricted cash, non-current 2,053 1,894 Total cash, cash equivalents and restricted cash $ 171,261 $ 178,308 The accompanying notes are an integral part of these condensed consolidated financial statements. 8 FORMFACTOR, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 1 — Basis of Presentation and New Accounting Pronouncements Basis of Presentation The accompanying condensed consolidated financial information of FormFactor, Inc. is unaudited and has been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). However, such information reflects all adjustments, consisting only of normal recurring adjustments, which are, in the opinion of management, necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods. The condensed consolidated financial statements included herein should be read in conjunction with the consolidated financial statements and the notes thereto included in our 2021 Annual Report on Form 10-K filed with the SEC on February 18, 2022. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the full year. Fiscal Year We operate on a 52/53 week fiscal year, whereby the fiscal year ends on the last Saturday of December. Fiscal 2022 and 2021 contain 53 weeks and 52 weeks, respectively, and the three months ended March 26, 2022 and March 27, 2021 each contained 13 weeks. Fiscal 2022 will end on December 31, 2022. Significant Accounting Policies Our significant accounting policies have not changed during the three months ended March 26, 2022 from those disclosed in our Annual Report on Form 10-K for the year ended December 25, 2021. Reclassifications Certain immaterial reclassifications were made to the prior year financial statements to conform to the current year presentation. New Accounting Pronouncements ASU 2020-04 In March 2020, the FASB issued ASU 2020-04, “Referenced Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” The ASU provides temporary optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference the London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued. In January 2021, the FASB issued ASU 2021-01, “Reference Rate Reform (Topic 848),” which permits entities to apply optional expedients in Topic 848 to derivative instruments modified because of discounting transition resulting from reference rate reform. ASU 2020-04 became effective upon issuance and may be applied prospectively to contract modifications made on or before December 31, 2022. ASU 2021-01 became effective upon issuance and may be applied on a full retrospective basis as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020 or prospectively for contract modifications made on or before December 31, 2022. The Company has not yet applied the relief afforded by these standard amendments and is currently assessing contracts that will require modification due to reference rate reform to which these standard amendments may be applied. 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 Customers. 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. 9 Note 2 — Concentration of Credit and Other Risks Each of the following customers accounted for 10 % or more of our revenues for the periods indicated: Three Months Ended March 26, 2022 March 27, 2021 Intel Corporation 20.8 % 28.1 % Taiwan Semiconductor Manufacturing Co., LTD. 10.7 % 11.5 % 31.5 % 39.6 % At March 26, 2022, one customer accounted for 22.8 % of gross accounts receivable. At December 25, 2021, one customer accounted for 13.8 % of gross accounts receivable. Note 3 — Inventories, net Inventories are stated at the lower of cost (principally standard cost, which approximates actual cost on a first in, first out basis) or net realizable value. Inventories, net, consisted of the following (in thousands): March 26, 2022 December 25, 2021 Raw materials $ 60,976 $ 57,673 Work-in-progress 41,875 35,935 Finished goods 22,739 17,940 $ 125,590 $ 111,548 Note 4 — Goodwill and Intangible Assets Goodwill by reportable segment was as follows (in thousands): Probe Cards Systems Total 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 Foreign currency translation — ( 746 ) ( 746 ) Goodwill, as of March 26, 2022 $ 178,424 $ 33,129 $ 211,553 We have no t recorded goodwill impairments for the three months ended March 26, 2022. Intangible assets were as follows (in thousands): March 26, 2022 December 25, 2021 Intangible Assets Gross Accumulated Amortization Net Gross Accumulated Amortization Net Existing developed technologies $ 171,560 $ 149,149 $ 22,411 $ 172,259 $ 148,784 $ 23,475 Customer relationships 51,080 40,638 10,442 51,270 39,254 12,016 Trade name 8,010 7,625 385 8,054 7,603 451 Backlog — — — 1,896 1,896 — In-process research and development 400 — 400 400 — 400 $ 231,050 $ 197,412 $ 33,638 $ 233,879 $ 197,537 $ 36,342 10 Amortization expense was included in our Condensed Consolidated Statements of Income as follows (in thousands): Three Months Ended March 26, 2022 March 27, 2021 Cost of revenues $ 808 $ 5,090 Selling, general and administrative 1,561 1,715 $ 2,369 $ 6,805 The estimated future amortization of definite-lived intangible assets, excluding in-process research and development, is as follows (in thousands): Fiscal Year Amount Remainder of 2022 $ 7,056 2023 7,062 2024 4,472 2025 4,219 2026 3,195 Thereafter 7,234 $ 33,238 Note 5 — Accrued Liabilities Accrued liabilities consisted of the following (in thousands): March 26, 2022 December 25, 2021 Accrued compensation and benefits $ 28,321 $ 29,706 Accrued income and other taxes 10,276 8,086 Accrued warranty 2,775 2,805 Employee stock purchase plan contributions withheld 2,027 4,693 Accrued restructuring charges 890 2,478 Other accrued expenses 3,149 3,068 $ 47,438 $ 50,836 Note 6 — Restructuring Charges On September 25, 2021, we adopted restructuring plans to improve our business effectiveness and streamline our operations by consolidating certain manufacturing facilities for both the Probe Cards segment and the Systems segment. This includes plans to consolidate or relocate certain leased locations in the United States to other locations in the United States, Germany and Asia. As a result of these changes to certain work locations, we have incurred, and expect to incur, personnel related costs to sever, relocate, or retain select employees. Additionally, we are undertaking actions to adjust capacity for certain product offerings. As a result of these adjustments, contract termination costs include charges to satisfy contract obligations. The liability was recognized using our best estimate and it is reasonably possible that the final amount will differ from the amount estimated in the near term. We expect the actions defined under these plans will be largely completed by the end of December 2022, except facilities charges which may extend beyond that time. These plans are 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. The Company has recognized to date restructuring and other charges in the aggregate amount of $ 4.4 million, comprised of $ 1.2 million of severance and employee-related costs, $ 1.5 million in contract and lease termination costs, $ 1.5 million in inventory impairments, and $ 0.3 million of cost related to impairment of leasehold improvements, facility exits and other costs. 11 Restructuring charges by reportable segment included in our Condensed Consolidated Statements of Income were as follows (in thousands): Three Months Ended March 26, 2022 Probe Cards Systems Total Cost of revenues $ 39 $ 100 $ 139 Research and development — 146 146 Selling, general and administrative 3 25 28 $ 42 $ 271 $ 313 Changes to the restructuring accrual in the three months ended March 26, 2022 were as follows (in thousands): Employee Severance and Benefits Inventory Impairments Contract Termination Costs Total December 25, 2021 $ 1,028 $ — $ 1,450 $ 2,478 Restructuring charges 163 150 — 313 Cash payments ( 301 ) — ( 1,450 ) ( 1,751 ) Non-cash settlement — ( 150 ) — ( 150 ) March 26, 2022 $ 890 $ — $ — $ 890 Note 7 — Fair Value and Derivative Instruments Whenever possible, the fair values of our financial assets and liabilities are determined using quoted market prices of identical securities or quoted market prices of similar securities from active markets. The three levels of inputs that may be used to measure fair value are as follows: • Level 1 valuations are obtained from real-time quotes for transactions in active exchange markets involving identical securities; • Level 2 valuations utilize significant observable inputs, such as quoted prices for similar assets or liabilities, quoted prices near the reporting date in markets that are less active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and • Level 3 valuations utilize unobservable inputs to the valuation methodology and include our own data about assumptions market participants would use in pricing the asset or liability based on the best information available under the circumstances. We did not have any transfers of assets or liabilities measured at fair value on a recurring basis to or from Level 1, Level 2 or Level 3 during the three months ended March 26, 2022 or the year ended December 25, 2021. The carrying values of Cash, Accounts receivable, net, Restricted cash, Prepaid expenses and other current assets, Accounts payable, Accrued liabilities, and Term loans, net of unamortized issuance costs, approximate fair value due to their short maturities. No changes were made to our valuation techniques during the first three months of fiscal 2022. 12 Assets and Liabilities Measured at Fair Value on a Recurring Basis Assets and liabilities measured at fair value on a recurring basis were as follows (in thousands): March 26, 2022 Level 1 Level 2 Total Assets: Cash equivalents: Money market funds $ 25,172 $ — $ 25,172 Commercial paper — 7,132 7,132 U.S. treasuries 6,000 — 6,000 31,172 7,132 38,304 Marketable securities: U.S. treasuries 40,039 — 40,039 Certificates of deposit — 951 951 U.S. agency securities — 1,939 1,939 Corporate bonds — 58,318 58,318 Commercial paper — 27,927 27,927 40,039 89,135 129,174 Interest rate swap derivative contracts — 1,537 1,537 Total assets $ 71,211 $ 97,804 $ 169,015 Liabilities: Foreign exchange derivative contracts $ — $ ( 577 ) $ ( 577 ) December 25, 2021 Level 1 Level 2 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 ) 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 13 based on similar assets without applying significant judgments. In addition, all investments have a sufficient trading volume to demonstrate that the fair value is appropriate. Unrealized gains and losses were immaterial and were recorded as a component of Accumulated other comprehensive income in our Condensed Consolidated Balance Sheets. We did not have any other-than-temporary unrealized gains or losses at either period end included in these financial statements. Interest Rate Swaps The fair value of our interest rate swap contracts is determined at the end of each reporting period based on valuation models that use interest rate yield curves as inputs. For accounting purposes, our interest rate swap contracts qualify for, and are designated as, cash flow hedges. The cash flows associated with the interest rate swaps are reported in Net cash provided by operating activities in our Condensed Consolidated Statements of Cash Flows and the fair value of the interest rate swap contracts are recorded within Prepaid expenses and other current assets and Other assets in our Condensed Consolidated Balance Sheets. Foreign Exchange Derivative Contracts We operate and sell our products in various global markets. As a result, we are exposed to changes in foreign currency exchange rates. We utilize foreign currency forward contracts to hedge against future movements in foreign exchange rates that affect certain existing foreign currency denominated assets and liabilities and forecasted foreign currency revenue and expense transactions. Under this program, our strategy is to have increases or decreases in our foreign currency exposures mitigated by gains or losses on the foreign currency forward contracts in order to mitigate the risks and volatility associated with foreign currency transaction gains or losses. We do not use derivative financial instruments for speculative or trading purposes. For accounting purposes, certain of our foreign currency forward contracts are not designated as hedging instruments and, accordingly, we record the fair value of these contracts as of the end of our reporting period in our Condensed Consolidated Balance Sheets with changes in fair value recorded within Other income, net in our Condensed Consolidated Statement of Income for both realized and unrealized gains and losses. Certain of our foreign currency forward contracts are designated as cash flow hedges, and, accordingly, we record the fair value of these contracts as of the end of our reporting period in our Condensed Consolidated Balance Sheets with changes in fair value recorded as a component of Accumulated other comprehensive loss and reclassified into earnings in the same period in which the hedged transaction affects earnings, and in the same line item on the Condensed Consolidated Statements of Income as the impact of the hedge transaction. The fair value of our foreign exchange derivative contracts was determined based on current foreign currency exchange rates and forward points. All of our foreign exchange derivative contracts outstanding at March 26, 2022 will mature by the first quarter of fiscal 2023. The following table provides information about our foreign currency forward contracts outstanding as of March 26, 2022 (in thousands): Currency Contract Position Contract Amount (Local Currency) Contract Amount (U.S. Dollars) Euro Dollar Buy ( 9,967 ) $ ( 11,617 ) Euro Dollar Sell 2,065 2,269 Japanese Yen Sell 2,334,287 19,127 Korean Won Buy ( 1,281,414 ) ( 1,052 ) Taiwan Dollar Sell 27,806 972 Total USD notional amount of outstanding foreign exchange contracts $ 9,699 Our foreign currency contracts are classified within Level 2 of the fair value hierarchy as they are valued using pricing models that utilize observable market inputs. Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis We measure and report our non-financial assets such as Property, plant and equipment, Goodwill and Intangible assets at fair value on a non-recurring basis if we determine these assets to be impaired or in the period when we make a business acquisition. Other than as discussed in Note 6, Restructuring Charges, there were no assets or liabilities measured at fair value on a nonrecurring basis during the three months ended March 26, 2022 or March 27, 2021. 14 Note 8 — Warranty We offer warranties on certain products and record a liability for the estimated future costs associated with warranty claims at the time revenue is recognized. The warranty liability is based upon historical experience and our estimate of the level of future costs. While we engage in product quality programs and processes, our warranty obligation is affected by product failure rates, material usage and service delivery costs. We regularly monitor product returns for warranty and maintain a reserve for the related expenses based upon our historical experience and any specifically identified failures. As we sell new products to our customers, we must exercise considerable judgment in estimating the expected failure rates. This estimating process is based on historical experience of similar products, as well as various other assumptions that we believe to be reasonable under the circumstances. We provide for the estimated cost of product warranties at the time revenue is recognized as a component of Cost of revenues in our Condensed Consolidated Statement of Income. Changes in our warranty liability were as follows (in thousands): Three Months Ended March 26, 2022 March 27, 2021 Balance at beginning of period $ 2,805 $ 3,918 Accruals 1,214 1,374 Settlements ( 1,244 ) ( 1,573 ) Balance at end of period $ 2,775 $ 3,719 Note 9 — Property, Plant and Equipment, net Property, plant and equipment, net consisted of the following (in thousands): March 26, 2022 December 25, 2021 Land $ 4,751 $ 4,751 Building and building improvements 44,123 41,722 Machinery and equipment 258,783 252,632 Computer equipment and software 45,200 44,667 Furniture and fixtures 7,367 7,293 Leasehold improvements 83,707 82,266 Sub-total 443,931 433,331 Less: Accumulated depreciation and amortization ( 318,726 ) ( 312,700 ) Net, property, plant and equipment 125,205 120,631 Construction-in-process 26,974 25,924 Total $ 152,179 $ 146,555 Note 10 — Stockholders’ Equity and Stock-Based Compensation Common Stock Repurchase Program On October 26, 2020, our Board of Directors authorized a program to repurchase up to $ 50 million of outstanding common stock to offset potential dilution from issuances of common stock under our stock-based compensation plans. The share repurchase program will expire on October 28, 2022. During the three months ended March 26, 2022, we repurchased and retired 240,548 shares of common stock for $ 9.4 million. During fiscal 2021 we repurchased and retired 622,400 shares of common stock for $ 24.0 million. As of March 26, 2022, $ 16.6 million remained available for future repurchases. Our policy related to repurchases of our common stock is to charge the excess of cost over par value to additional paid-in capital once the shares are retired. All repurchases were made in compliance with Rule 10b-18 under the Securities Exchange Act of 1934, as amended. 15 Restricted Stock Units Restricted stock unit (“RSU”) activity under our equity incentive plan was as follows: Units Weighted Average Grant Date Fair Value RSUs at December 25, 2021 2,166,934 $ 28.63 Awards granted 12,450 40.94 Awards vested ( 4,255 ) 36.70 Awards forfeited ( 19,511 ) 28.18 RSUs at March 26, 2022 2,155,618 28.69 Performance Restricted Stock Units We may grant Performance RSUs (“PRSUs”) to certain executives, which vest based upon us achieving certain market performance criteria. There were no PRSUs granted during the three months ended March 26, 2022. PRSUs are included as part of the RSU activity above. Employee Stock Purchase Plan Information related to activity under our Employee Stock Purchase Plan (“ESPP”) was as follows: Three Months Ended March 26, 2022 Shares issued 157,642 Weighted average per share purchase price $ 35.81 Weighted average per share discount from the fair value of our common stock on the date of issuance $ ( 6.93 ) Stock-Based Compensation Stock-based compensation was included in our Condensed Consolidated Statements of Income as follows (in thousands): Three Months Ended March 26, 2022 March 27, 2021 Cost of revenues $ 1,078 $ 1,335 Research and development 1,986 1,689 Selling, general and administrative 4,456 4,053 Total stock-based compensation $ 7,520 $ 7,077 Unrecognized Compensation Costs At March 26, 2022, the unrecognized stock-based compensation was as follows (dollars in thousands): Unrecognized Expense Average Expected Recognition Period in Years Restricted stock units $ 31,005 2.00 Performance restricted stock units 8,652 1.90 Employee stock purchase plan 1,140 0.86 Total unrecognized stock-based compensation expense $ 40,797 1.95 16 Note 11 — Net Income per Share The following table reconciles the shares used in calculating basic net income per share and diluted net income per share (in thousands): Three Months Ended March 26, 2022 March 27, 2021 Weighted-average shares used in computing basic net income per share 78,246 77,598 Add potentially dilutive securities 1,222 2,390 Weighted-average shares used in computing diluted net income per share 79,468 79,988 Securities not included as they would have been antidilutive — 3 Note 12 — Commitments and Contingencies Leases See Note 13, Leases . Contractual Obligations and Commitments Our contractual obligations and commitments have not materially changed as of March 26, 2022 from those disclosed in our Annual Report on Form 10-K for the year ended December 25, 2021. Legal Matters From time to time, we may be subject to legal proceedings and claims in the ordinary course of business. As of March 26, 2022, and as of the filing of this Quarterly Report on Form 10-Q, we were not involved in any material legal proceedings. Note 13 — Leases We lease real estate space under non-cancelable operating lease agreements for commercial and industrial space, as well as for our corporate headquarters located in Livermore, California. Our leases have remaining terms of 1 to 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 6 years as of March 26, 2022 and the weighted-average discount rate was 3.67 %. The components of lease expense were as follows (in thousands): Three Months Ended March 26, 2022 March 27, 2021 Lease expense: Operating lease expense $ 2,221 $ 2,123 Short-term lease expense 40 37 Variable lease expense 458 537 $ 2,719 $ 2,697 17 Future minimum payments under our non-cancelable operating leases were as follows as of March 26, 2022 (in thousands): Fiscal Year Amount Remainder of 2022 $ 6,589 2023 7,680 2024 7,317 2025 7,270 2026 6,532 Thereafter 9,195 Total minimum lease payments 44,583 Less: interest ( 5,168 ) Present value of net minimum lease payments 39,415 Less: current portion ( 8,049 ) Total long-term operating lease liabilities $ 31,366 Note 14 — Revenue Transaction price allocated to the remaining performance obligations: On March 26, 2022, we had $ 7.7 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 75.6 % of our remaining performance obligations as revenue in the remainder of fiscal 2022, approximately 18.4 % in fiscal 2023, and approximately 6.0 % in fiscal 2024 and thereafter. The foregoing excludes the value of other remaining performance obligations as they have original durations of one year or less, and also excludes information about variable consideration allocated entirely to a wholly unsatisfied performance obligation. Contract balances: The timing of revenue recognition may differ from the timing of invoicing to customers. Accounts receivable is recorded at the invoiced amount, net of an allowance for 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. Contract assets as of March 26, 2022 and December 25, 2021 were $ 0.9 million and $ 0.9 million, respectively, and are reported on the Condensed Consolidated Balance Sheets as a component of Prepaid expenses and other current assets. Contract liabilities include payments received 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 Condensed Consolidated Balance Sheets at the end of each reporting period as a component of Deferred revenue and Other liabilities. Contract liabilities as of March 26, 2022 and December 25, 2021 were $ 28.0 million and $ 24.2 million, respectively. During the three months ended March 26, 2022, we recognized $ 11.0 million of revenue that was included in contract liabilities as of December 25, 2021. Costs to obtain a contract: We generally expense sales commissions when incurred as a component of Selling, general and administrative expense, as the amortization period is typically less than one year. Revenue by Category: Refer to Note 15, Operating Segments and Enterprise-Wide Information , for further details. Note 15 — Operating Segments and Enterprise-Wide Information Our chief operating decision maker (“CODM”) is our Chief Executive Officer, who reviews operating results to make decisions about allocating resources and assessing performance for the entire company. We operate in two reportable segments consisting 18 of the Probe Cards segment and the Systems segment. The following table summarizes the operating results by reportable segment (dollars in thousands): Three Months Ended March 26, 2022 March 27, 2021 Probe Cards Systems Corporate and Other Total Probe Cards Systems Corporate and Other Total Revenues $ 159,983 $ 37,191 $ — $ 197,174 $ 158,898 $ 27,738 $ — $ 186,636 Gross profit 77,202 19,407 ( 2,385 ) 94,224 70,315 13,599 ( 7,208 ) 76,706 Gross margin 48.3 % 52.2 % 47.8 % 44.3 % 49.0 % 41.1 % Operating results provide useful information to our management for assessment of our performance and results of operations. Certain components of our operating results are utilized to determine executive compensation along with other measures. Corporate and Other includes unallocated expenses relating to amortization of intangible assets, inventory and fixed asset fair value adjustments due to acquisitions, share-based compensation, and restructuring charges which are not used in evaluating the results of, or in allocating resources to, our reportable segments. Certain revenue category information by reportable segment was as follows (in thousands): Three Months Ended March 26, 2022 March 27, 2021 Probe Cards Systems Total Probe Cards Systems Total Market: Foundry & Logic $ 114,121 $ — $ 114,121 $ 113,410 $ — $ 113,410 DRAM 34,437 — 34,437 33,898 — 33,898 Flash 11,425 — 11,425 11,590 — 11,590 Systems — 37,191 37,191 — 27,738 27,738 Total $ 159,983 $ 37,191 $ 197,174 $ 158,898 $ 27,738 $ 186,636 Timing of revenue recognition: Products transferred at a point in time $ 158,836 $ 35,416 $ 194,252 $ 158,476 $ 24,671 $ 183,147 Products and services transferred over time 1,147 1,775 2,922 422 3,067 3,489 Total $ 159,983 $ 37,191 $ 197,174 $ 158,898 $ 27,738 $ 186,636 Geographical region: Taiwan $ 42,522 $ 10,547 $ 53,069 $ 44,734 $ 846 $ 45,580 China 32,791 5,608 38,399 37,831 4,794 42,625 South Korea 24,881 2,620 27,501 18,001 1,084 19,085 Malaysia 21,517 682 22,199 19,888 42 19,930 United States 19,976 5,671 25,647 21,308 8,178 29,486 Singapore 10,284 612 10,896 7,627 931 8,558 Japan 4,785 4,597 9,382 5,249 4,072 9,321 Europe 2,382 6,013 8,395 2,833 7,166 9,999 Rest of the world 845 841 1,686 1,427 625 2,052 Total $ 159,983 $ 37,191 $ 197,174 $ 158,898 $ 27,738 $ 186,636