What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-08-02 compared with 2022-05-03 · 121 added, 67 removed, 193 unchanged (49% of the section changed)

8 unchanged sentences

We have no obligation to update any of these statements.

These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to differ materially from those expressed or implied by these statements, including risks related to general market trends, the benefits of acquisitions and investments, our supply chain, uncertainties related to COVID-19 and the impact of our responses to it, the interpretation and impacts of changes in export controls and other trade barriers, military conflicts, political volatility and similar factors (including developments related to Ukraine and Russia), our ability to execute our business strategy and other risks discussed in the section titled “Risk Factors” and elsewhere in our Annual Report on Form 10-K for the year ended December 25, 2021 and in this Quarterly Report on Form 10-Q.

These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to differ materially from those expressed or implied by these statements, including risks related to general market trends, the benefits of acquisitions and investments, our supply chain, uncertainties related to COVID-19 and the impact of our responses to it, the interpretation and impacts of changes in export controls and other trade barriers, military conflicts, political volatility and similar factors, our ability to execute our business strategy and other risks discussed in the section titled “Risk Factors” and elsewhere in our Annual Report on Form 10-K for the year ended December 25, 2021 and in this Quarterly Report on Form 10-Q.

You should carefully consider the numerous risks and uncertainties described under these sections.

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and its subsidiaries.

FormFactor, Inc., headquartered in Livermore, California, is 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.

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.

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Sales of our probe cards and analytical probes are included in the Probe Cards segment, while sales of our probe stations, metrology systems, thermal systems and cryogenic systems are included in the Systems segment.

We generated net income of $29.9 million in the first three months of fiscal 2022 as compared to $19.6 million in the first three months of fiscal 2021.

We generated net income of $60.1 million in the first six months of fiscal 2022 as compared to $37.5 million in the first six months of fiscal 2021.

The increase in net income was primarily due to increased revenue with improved gross margins from a change in product mix and a reduction in the amortization of intangibles from significant intangibles becoming fully amortized, partially offset by higher operating expenses.

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Actual results in these areas could differ from management’s estimates.

During the three months ended March 26, 2022, there were no significant changes in our significant accounting policies or estimates from those reported in our Annual Report on Form 10-K for the year ended December 25, 2021, which was filed with the Securities and Exchange Commission on February 18, 2022.

During the six months ended June 25, 2022, there were no significant changes in our significant accounting policies or estimates from those reported in our Annual Report on Form 10-K for the year ended December 25, 2021, which was filed with the Securities and Exchange Commission on February 18, 2022.

Results of Operations

The following table sets forth our operating results as a percentage of revenues for the periods indicated:

Three Months Ended

2022 March 27,

Three Months Ended Six Months Ended

2022 June 26,

2021 June 25,

2022 June 26,

Revenues 100.0 % 100.0 % 100.0 % 100.0 %

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Interest expense (0.1) (0.1) (0.1) (0.1)

Other income, net 0.1 0.1

Other income (expense), net 0.3 (0.1) 0.2 —

Income before income taxes 16.3 10.8 16.9 11.5

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Revenues by Segment and Market

Three Months Ended

2022 March 27,

Three Months Ended Six Months Ended

2022 June 26,

2021 June 25,

2022 June 26,

(In thousands)

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Three Months Ended

2022 % of Revenues March 27,

2022 % of Revenues June 26,

2021 % of Revenues $ Change % Change

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Total revenues $ 203,907 100.0 % $ 188,076 100.0 % $ 15,831 8.4 %

Our Probe Cards markets for the three months ended March 26, 2022, improved slightly in total compared to the three months ended March 27, 2021, despite a decline within our top two customers in these periods.

Our ability to maintain and grow our revenues, despite product mix changes between our top customers, is the result of our long-term customer and market diversification initiatives.

The increase in Systems market revenue for the three months ended March 26, 2022, compared to the three months ended March 27, 2021, was driven by increased sales of metrology systems and our 200 and 300 millimeter probe stations.

Six Months Ended

2022 % of Revenues June 26,

2021 % of Revenues $ Change % Change

(Dollars in thousands)

Probe Cards Markets:

Foundry & Logic $ 236,501 58.9 % $ 217,136 57.9 % $ 19,365 8.9 %

DRAM 71,280 17.8 75,986 20.3 (4,706) (6.2)

Flash 19,910 5.0 19,417 5.2 493 2.5

Systems Market:

Systems 73,390 18.3 62,173 16.6 11,217 18.0

Total revenues $ 401,081 100.0 % $ 374,712 100.0 % $ 26,369 7.0 %

The increase in Foundry & Logic product revenue for the three and six months ended June 25, 2022, compared to the three and six months ended June 26, 2021, was driven principally by the increased demand and increased unit sales to other large semiconductor foundries and integrated device manufacturers.

The decrease in DRAM product revenue for the three and six months ended June 25, 2022, compared to the three and six months ended June 26, 2021, was driven by decreased design wins and customer demand.

The increase in Flash product revenue for the three and six months ended June 25, 2022, compared to the three and six months ended June 26, 2021, was driven by increased customer demand.

The increase in Systems market revenue for the three and six months ended June 25, 2022, compared to the three and six months ended June 26, 2021, was driven by both increased sales of metrology systems and our 200 and 300 millimeter probe stations.

Revenues by Geographic Region

Three Months Ended

Revenue March 27,

Three Months Ended Six Months Ended

Revenue June 26,

Revenue June 25,

Revenue June 26,

(Dollars in thousands)

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China 49,735 24.4 31,827 16.9 88,134 22.0 74,452 19.9

South Korea 27,501 13.9 19,085 10.2

United States 31,242 15.3 32,650 17.4 56,889 14.2 62,136 16.6

South Korea 28,755 14.1 36,177 19.2 56,256 14.0 55,262 14.7

Malaysia 16,244 8.0 3,195 1.7 38,443 9.6 23,125 6.2

Singapore 10,896 5.5 8,558 4.6

Japan 9,937 4.9 7,704 4.1 19,319 4.8 17,025 4.5

Europe 8,091 4.0 12,010 6.4 16,486 4.1 22,009 5.9

Singapore 7,108 3.5 9,962 5.3 18,004 4.5 18,520 4.9

Rest of the world 2,775 1.3 2,667 1.4 4,461 1.1 4,719 1.3

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subsidiary and requests the products to be shipped to an address in South Korea, this sale will be reflected in the revenue for South Korea rather than the U.S.

Changes in revenue by geographic region for the three months ended March 26, 2022, compared to the three months ended March 27, 2021, were primarily attributable to changes in customer demand, shifts in customer regional manufacturing strategies, particularly with our large multinational customers, and product sales mix.

Changes in revenue by geographic region for the three and six months ended June 25, 2022, compared to the three and six months ended June 26, 2021, were primarily attributable to changes in customer demand, shifts in customer regional manufacturing strategies, particularly with our large multinational customers, and product sales mix.

More specifically, the increase in revenues for China and Malaysia were driven principally by a single large U.S.-based company with operations in China and Malaysia.

Further increases in China were driven by increased demand from a large Chinese DRAM integrated device manufacturer.

Cost of Revenues and Gross Margins

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Three Months Ended

2022 March 27,

2022 June 26,

2021 $ Change % Change

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Gross margin 46.3 % 40.6 %

Six Months Ended

2022 June 26,

2021 $ Change % Change

Gross profit $ 188,593 $ 152,989 $ 35,604 23.3 %

Gross margin 47.0 % 40.8 %

Our gross profit and gross margin by segment were as follows (dollars in thousands):

Three Months Ended

March 26, 2022 March 27, 2021

June 25, 2022 June 26, 2021

Probe Cards Systems Corporate and Other Total Probe Cards Systems Corporate and Other Total

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Gross margin 46.8 % 50.5 % 46.3 % 43.3 % 49.1 % 40.6 %

For the three months ended March 26, 2022, gross margins increased compared to the three months ended March 27, 2021, primarily due to improved standard margins due to change in product mix, favorable absorption of costs on higher production volumes, and favorable capitalization, partially offset by higher manufacturing spending driven by higher material costs from fluctuations in commodity costs.

For the three months ended March 26, 2022, gross margins increased compared to the three months ended March 27, 2021, primarily as a result of favorable product mix, largely related to increased sales of metrology systems and improved leverage on fixed costs at these higher volumes.

Six Months Ended

June 25, 2022 June 26, 2021

Probe Cards Systems Corporate and Other Total Probe Cards Systems Corporate and Other Total

Gross profit $155,622 $ 37,683 $ (4,712) $ 188,593 $136,915 $ 30,506 $ (14,432) $ 152,989

Gross margin 47.5 % 51.3 % 47.0 % 43.8 % 49.1 % 40.8 %

For the three and six months ended June 25, 2022, gross margins increased compared to the three and six months ended June 26, 2021, primarily due to higher revenues and improved standard margins related to favorable product mix, partially offset by higher net manufacturing spending driven by higher material and labor costs, and — for the three month periods — unfavorable absorption of costs despite higher production volumes.

For the three and six months ended June 25, 2022, gross margins increased compared to the three and six months ended June 26, 2021, primarily as a result of favorable product mix primarily driven by increased sales of metrology tools at favorable margins, and improved leverage on fixed costs at these higher volumes.

Corporate and Other

Corporate and Other includes unallocated expenses relating to share-based compensation and amortization of intangible assets, inventory and fixed asset fair value adjustments due to acquisitions, and restructuring which are not used in evaluating the results of, or in allocating resources to, our reportable segments.

The reduction in Corporate and Other for the three months ended March 26, 2022 compared to the three months ended March 27, 2021 is primarily due to a reduction in the amortization of intangibles from significant intangibles becoming fully amortized.

The reduction in Corporate and Other for the three and six months ended June 25, 2022 compared to the three and six months ended June 26, 2021 is primarily due to a reduction in the amortization of intangibles resulting from significant intangibles becoming fully amortized, partially offset by increased share-based compensation driven by increases in headcount to support our growth.

Gross profit and gross margins fluctuate with revenue levels, product mix, selling prices, factory loading and material costs.

For the three months ended March 26, 2022, compared to the three months ended March 27, 2021, gross profit and gross margins have increased on greater revenue levels, a favorable product mix, and less amortization of intangibles.

For the three and six months ended June 25, 2022, compared to the three and six months ended June 26, 2021, gross profit and gross margins have increased on higher revenue levels, favorable product mix, and less amortization of intangibles.

Cost of revenues included stock-based compensation expense as follows (in thousands):

Three Months Ended

2022 March 27,

Three Months Ended Six Months Ended

2022 June 26,

2021 June 25,

2022 June 26,

Stock-based compensation $ 734 $ 1,079 $ 1,812 $ 2,414

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Three Months Ended

2022 March 27,

2022 June 26,

2021 $ Change % Change

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% of revenues 13.9 % 13.5 %

The increase in research and development expenses in the three months ended March 26, 2022 when compared to the corresponding period in the prior year was primarily driven by an increase in headcount to support current operating levels.

Six Months Ended

2022 June 26,

2021 $ Change % Change

(Dollars in thousands)

Research and development $ 55,451 $ 49,500 $ 5,951 12.0 %

% of revenues 13.8 % 13.2 %

The increase in research and development expenses in the three and six months ended June 25, 2022 when compared to the corresponding period in the prior year was primarily driven by an increase in headcount to support our continued investment in technology leadership.

Increased general operational costs, annual salary adjustments, project material costs, and stock-based compensation also contributed to the increase.

A detail of the changes is as follows (in thousands):

Three Months Ended March 26, 2022 compared to Three Months Ended March 27, 2021

Three Months Ended June 25, 2022 compared to Three Months Ended June 26, 2021 Six Months Ended June 25, 2022 compared to Six Months Ended June 26, 2021

Employee compensation costs $ 1,006 $ 2,612

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Project material costs 404 623

$ 2,863 $ 5,951

Research and development included stock-based compensation expense as follows (in thousands):

Three Months Ended

2022 March 27,

Three Months Ended Six Months Ended

2022 June 26,

2021 June 25,

2022 June 26,

Stock-based compensation $ 1,695 $ 1,663 $ 3,681 $ 3,352

1 unchanged sentence

Three Months Ended

2022 March 27,

2022 June 26,

2021 $ Change % Change

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% of revenues 16.4 % 16.2 %

The increase in selling, general and administrative expenses in the three months ended March 26, 2022 when compared to the corresponding period in the prior year was primarily driven by increased headcount, annual salary adjustments, increased travel related costs as restrictions related to COVID-19 relaxed, and higher stock-based compensation.

Six Months Ended

2022 June 26,

2021 $ Change % Change

(Dollars in thousands)

Selling, general and administrative $ 66,312 $ 60,494 $ 5,818 9.6 %

% of revenues 16.5 % 16.1 %

The increase in selling, general and administrative expenses in the three and six months ended June 25, 2022 when compared to the corresponding period in the prior year was primarily driven by increased headcount, annual salary adjustments, increased travel related costs as restrictions related to COVID-19 relaxed, and higher stock-based compensation.

We expect travel costs to continue to return to previous levels assuming travel restrictions continue to ease.

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A detail of the changes is as follows (in thousands):

Three Months Ended March 26, 2022 compared to Three Months Ended March 27, 2021

Three Months Ended June 25, 2022 compared to Three Months Ended June 26, 2021 Six Months Ended June 25, 2022 compared to Six Months Ended June 26, 2021

Employee compensation costs $ 1,249 $ 2,632

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Amortization of intangibles (45) (201)

$ 2,927 $ 5,818

Selling, general and administrative included stock-based compensation expense as follows (in thousands):

Three Months Ended

2022 March 27,

Three Months Ended Six Months Ended

2022 June 26,

2021 June 25,

2022 June 26,

Stock-based compensation $ 3,929 $ 3,846 $ 8,385 $ 7,899

1 unchanged sentence

Interest income is earned on our cash, cash equivalents, restricted cash and marketable securities.

The decrease in interest income for the three months ended March 26, 2022 compared with the corresponding period of the prior year was attributable to lower investment yields due to the low interest rate environment, despite higher invested balances.

The increase in interest income for the three and six months ended June 25, 2022 compared with the corresponding period of the prior year was attributable to a slight increase in investment yields due to the higher interest rate environment on higher invested balances.

Interest expense primarily includes interest on our term loans, interest rate swap derivative contracts, and term loan issuance costs amortization charges.

The interest expense for the three months ended March 26, 2022 compared to the same period of the prior year increased slightly primarily due to increased average interest rates on the outstanding debt.

The interest expense for the three and six months ended June 25, 2022 compared to the same period of the prior year remained consistent despite a lower outstanding debt due to increased average interest rates on the outstanding debt.

Other Income (Expense), Net

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Provision for Income Taxes

Three Months Ended

2022 March 27,

Three Months Ended Six Months Ended

2022 June 26,

2021 June 25,

2022 June 26,

(In thousands, except percentages)

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We have utilized our previous net operating loss carryforwards, and expect the FDII deduction and corresponding benefit to be available, resulting in a decrease from the U.S.

statutory rate and included in our worldwide effective tax rate for the year ending December 31, 2022.

The decrease in the effective tax rate in the three months ended March 26, 2022 when compared to the corresponding period in the prior year was primarily driven by an increased tax deduction from foreign derived intangible income, offset by a reduction in stock-based compensation tax benefits.

statutory rate for the year ending December 31, 2022.

The decrease in the effective tax rate in the three months ended June 25, 2022 when compared to the corresponding period in the prior year was primarily driven by an increased tax deduction from FDII.

As of January 1, 2022, the Tax Cuts and Jobs Act of 2017 eliminates the option to deduct research and experimental expenditures immediately in the year incurred and requires taxpayers to amortize such expenditures over five years in the U.S.

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Capital Resources

Our working capital was $401.5 million at March 26, 2022, compared to $375.3 million at December 25, 2021.

Our working capital was $377.5 million at June 25, 2022, compared to $375.3 million at December 25, 2021.

Cash and cash equivalents primarily consist of deposits held at banks, money market funds, U.S.

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Our investment policy requires investments to be rated single A or better, and limits the types of acceptable investments, issuer concentration and duration of the investment.

Our cash, cash equivalents and marketable securities totaled approximately $296.4 million at March 26, 2022, compared to $276.1 million at December 25, 2021.

Our cash, cash equivalents and marketable securities totaled approximately $266.3 million at June 25, 2022, compared to $276.1 million at December 25, 2021.

Based on our historical results of operations, we expect that our cash, cash equivalents, and marketable securities on hand, and the cash we expect to generate from operations, will be sufficient to fund our short-term and long-term liquidity requirements primarily arising from:

research and development, capital expenditures, working capital, outstanding commitments, and other liquidity requirements associated with existing operations.

However, we cannot be certain that our cash, cash equivalents, and marketable securities on hand, and cash generated from operations, will be available in the

future to fund all of our capital and operating requirements.

However, we cannot be certain that our cash, cash equivalents, and marketable securities on hand, and cash generated from operations, will be available in the future to fund all of our capital and operating requirements.

In addition, any future strategic investments and significant acquisitions may require additional cash and capital resources.

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If we are unable to obtain sufficient cash or capital to meet our needs on a timely basis and on favorable terms, our business and operations could be materially and adversely affected.

If we are unsuccessful in maintaining or growing our revenues, maintaining or reducing our cost structure (in response to a potential reduction in demand due to an industry downturn, COVID-19, developments related to Ukraine and Russia, or other event), or increasing our available cash through debt or equity financings, our cash, cash equivalents and marketable securities may decline.

If we are unsuccessful in maintaining or growing our revenues, maintaining or reducing our cost structure (in response to a potential reduction in demand due to an industry downturn, COVID-19, or other event), or increasing our available cash through debt or equity financings, our cash, cash equivalents and marketable securities may decline.

We utilize a variety of tax planning and financing strategies to manage our worldwide cash and deploy funds to locations where needed.

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The following table sets forth our net cash flows from operating, investing and financing activities:

Three Months Ended

2022 March 27,

Six Months Ended

2022 June 26,

(In thousands)

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Operating Activities

Net cash provided by operating activities for the three months ended March 26, 2022 was primarily attributable to net income of $29.9 million and net non-cash expenses of $22.0 million, which includes depreciation, amortization, stock-based compensation, and the provision for excess and obsolete inventories.

These inflows were partially offset by net changes in working capital of $7.7 million primarily related to cash paid for inventories of $17.1 million, partially offset by cash provided by an increase in accounts payable for $10.2 million.

Net cash provided by operating activities for the six months ended June 25, 2022 was primarily attributable to net income of $60.1 million and net non-cash expenses of $42.0 million, which includes depreciation, amortization, stock-based compensation, and the provision for excess and obsolete inventories.

These inflows were partially offset by net changes in working capital of $15.3 million, primarily related to cash paid for inventories of $32.3 million, partially offset by cash provided by an increase in accounts payable of $7.5 million, an increase in accrued liabilities for $4.1 million, and a reduction in accounts receivable of $5.5 million.

Investing Activities

Net cash used in investing activities for the three months ended March 26, 2022 was primarily related to $15.6 million property, plant and equipment acquisitions and $5.5 million net cash used to purchase marketable securities.

Net cash used in investing activities for the six months ended June 25, 2022 was primarily related to $30.1 million property, plant and equipment purchases, $6.9 million net cash used to purchase marketable securities, and $3.1 million for acquisition of a business.

Financing Activities

Net cash used in financing activities for the three months ended March 26, 2022 primarily related to $9.4 million used to purchase common stock under our stock repurchase program and $2.2 million of principal payments made towards the repayment of our term loans, partially offset by $5.7 million of proceeds received from issuances of common stock under our employee stock purchase plan and stock option plans.

Net cash used in financing activities for the six months ended June 25, 2022 primarily related to $54.3 million used to purchase common stock under our stock repurchase programs, $4.4 million of principal payments made towards the repayment of our term loans, and $4.2 million related to tax withholdings associated with the net share settlements of our equity awards, partially offset by $5.7 million of proceeds received from issuances of common stock under our employee stock purchase plan.

FRT Term Loan

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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 $1.8 million plus interest.

The interest rate at March 26, 2022 was 1.20%.

As of March 26, 2022, the balance outstanding pursuant to the FRT term loan was $5.8 million.

The interest rate at June 25, 2022 was 1.29%.

As of June 25, 2022, the balance outstanding pursuant to the FRT term loan was $3.7 million.

The FRT Term Loan is expected to be fully paid as of October 25, 2022.

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Interest payments are payable in monthly installments over a fifteen-year period.

The interest rate at March 26, 2022 was 1.98%.

As of March 26, 2022, the balance outstanding pursuant to the Building Term Loan was $16.3 million.

The interest rate at June 25, 2022 was 2.81%.

As of June 25, 2022, the balance outstanding pursuant to the Building Term Loan was $16.0 million.

On March 17, 2020, we entered into a forward starting interest rate swap agreement to hedge the interest payments on the Building Term Loan for the notional amount of $18.0 million, and an amortization period that matches the debt.

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 converted a floating rate interest at one-month LIBOR plus 1.75% into a fixed rate interest at 2.75%.

As of March 26, 2022, the notional amount of the loan that is subject to this interest rate swap is $16.3 million.

Stock Repurchase Program

In October 2020, our Board of Directors authorized a program to repurchase up to $50.0 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 240,548 shares of common stock for $9.4 million.

During 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.

By entering into the agreement, we converted a floating interest rate of one-month LIBOR plus 1.75% into a fixed interest rate of 2.75%.

As of June 25, 2022, the notional amount of the loan that is subject to this interest rate swap is $16.0 million.

Stock Repurchase Programs

On October 26, 2020, our Board of Directors authorized a two-year 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 programs.

During fiscal 2021 we repurchased and retired 622,400 shares of common stock for $24.0 million.

During the six months ended June 25, 2022, we repurchased and retired 676,408 shares of common stock for $26.0 million, utilizing the remaining funds available for repurchase.

On May 20, 2022, our Board of Directors authorized an additional program to repurchase up to $75 million of outstanding common stock, also with the primary purpose to offset potential dilution from issuances of common stock under our stock-based compensation programs.

The share repurchase program will expire on May 20, 2024.

During the three months ended June 25, 2022, we repurchased and retired 767,083 shares of common stock for $28.4 million under this program.

As of June 25, 2022, $46.6 million remained available for future repurchases.

Contractual Obligations and Commitments

The following table summarizes our significant contractual commitments to make future payments in cash under contractual obligations as of March 26, 2022:

The following table summarizes our significant contractual commitments to make future payments in cash under contractual obligations as of June 25, 2022:

Payments Due In Fiscal Year

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Historically, we have not participated in transactions that have generated relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

As of March 26, 2022, we were not involved in any such off-balance sheet arrangements.

As of June 25, 2022, we were not involved in any such off-balance sheet arrangements.

Recent Accounting Pronouncements

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis