FORMFACTOR INC 10-Q

Item 1. Financial Statements FORMFACTOR, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share amounts) (Unaudited) September 24, 2022 December 25, 2021 ASSETS Current assets: Cash and cash equivalents $ 120,602 $ 151,010 Marketable securities 130,991 125,055 Accounts receivable, net of allowance for credit losses of $ 190 and $ 195 110,497 115,541 Inventories, net 132,029 111,548 Restricted cash 1,263 2,233 Prepaid expenses and other current assets 20,932 18,652 Total current assets 516,314 524,039 Restricted cash 1,840 2,099 Operating lease, right-of-use-assets 31,508 35,210 Property, plant and equipment, net of accumulated depreciation 163,384 146,555 Goodwill 209,105 212,299 Intangibles, net 28,208 36,342 Deferred tax assets 67,775 61,995 Other assets 4,229 1,981 Total assets $ 1,022,363 $ 1,020,520 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 75,021 $ 57,862 Accrued liabilities 46,328 50,836 Current portion of term loans, net of unamortized issuance costs 2,734 8,931 Deferred revenue 31,974 23,224 Operating lease liabilities 7,699 7,901 Total current liabilities 163,756 148,754 Term loans, less current portion, net of unamortized issuance costs 14,653 15,434 Deferred tax liabilities 2,232 3,623 Long-term operating lease liabilities 27,858 31,009 Other liabilities 5,562 5,920 Total liabilities 214,061 204,740 Stockholders’ equity: Common stock, $ 0.001 par value: 250,000,000 shares authorized; 77,265,099 and 78,240,506 shares issued and outstanding 77 78 Additional paid-in capital 843,453 898,945 Accumulated other comprehensive loss ( 17,899 ) ( 1,449 ) Accumulated deficit ( 17,329 ) ( 81,794 ) Total stockholders’ equity 808,302 815,780 Total liabilities and stockholders’ equity $ 1,022,363 $ 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 Nine Months Ended September 24, 2022 September 25, 2021 September 24, 2022 September 25, 2021 Revenues $ 180,869 $ 189,964 $ 581,950 $ 564,676 Cost of revenues 118,656 109,745 331,144 331,468 Gross profit 62,213 80,219 250,806 233,208 Operating expenses: Research and development 26,549 26,026 82,000 75,526 Selling, general and administrative 31,637 30,940 97,949 91,434 Total operating expenses 58,186 56,966 179,949 166,960 Operating income 4,027 23,253 70,857 66,248 Interest income 709 121 1,147 463 Interest expense ( 152 ) ( 151 ) ( 463 ) ( 447 ) Other income, net 1,041 58 1,784 36 Income before income taxes 5,625 23,281 73,325 66,300 Provision for income taxes 1,274 2,784 8,860 8,273 Net income $ 4,351 $ 20,497 $ 64,465 $ 58,027 Net income per share: Basic $ 0.06 $ 0.26 $ 0.83 $ 0.75 Diluted $ 0.06 $ 0.26 $ 0.82 $ 0.73 Weighted-average number of shares used in per share calculations: Basic 77,245 77,869 77,796 77,643 Diluted 77,688 79,029 78,492 79,190 The accompanying notes are an integral part of these condensed consolidated financial statements. 4 FORMFACTOR, INC. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In thousands) (Unaudited) Three Months Ended Nine Months Ended September 24, 2022 September 25, 2021 September 24, 2022 September 25, 2021 Net income $ 4,351 $ 20,497 $ 64,465 $ 58,027 Other comprehensive loss, net of tax: Translation adjustments ( 7,348 ) ( 1,511 ) ( 13,902 ) ( 3,258 ) Unrealized losses on available-for-sale marketable securities ( 674 ) ( 62 ) ( 2,425 ) ( 290 ) Unrealized losses on derivative instruments ( 881 ) ( 323 ) ( 123 ) ( 638 ) Other comprehensive loss, net of tax: ( 8,903 ) ( 1,896 ) ( 16,450 ) ( 4,186 ) Comprehensive income (loss) $ ( 4,552 ) $ 18,601 $ 48,015 $ 53,841 The accompanying notes are an integral part of these condensed consolidated financial statements. 5 FORMFACTOR, INC. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (In thousands, except shares) (Unaudited) Shares of Common Stock Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Income (Loss) Accumulated Deficit Total Nine Months Ended September 24, 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 316,861 — 10,457 — — 10,457 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 713,554 1 ( 15,564 ) — — ( 15,563 ) Purchase and retirement of common stock through repurchase program ( 2,011,822 ) ( 2 ) ( 73,476 ) — — ( 73,478 ) Stock-based compensation — — 23,049 — — 23,049 Other comprehensive loss — — — ( 16,450 ) — ( 16,450 ) Net income — — — — 64,465 64,465 Balances, September 24, 2022 77,265,099 $ 77 $ 843,453 $ ( 17,899 ) $ ( 17,329 ) $ 808,302 Three Months Ended September 24, 2022 Balances, June 25, 2022 77,194,733 $ 77 $ 860,584 $ ( 8,996 ) $ ( 21,680 ) $ 829,985 Issuance of common stock under the Employee Stock Purchase Plan 159,219 — 4,812 — — 4,812 Issuance of common stock pursuant to vesting of restricted stock units, net of stock withheld for tax 479,478 1 ( 11,321 ) — — ( 11,320 ) Purchase and retirement of common stock through repurchase program ( 568,331 ) ( 1 ) ( 19,149 ) — — ( 19,150 ) Stock-based compensation — — 8,527 — — 8,527 Other comprehensive loss — — — ( 8,903 ) — ( 8,903 ) Net income — — — — 4,351 4,351 Balances, September 24, 2022 77,265,099 $ 77 $ 843,453 $ ( 17,899 ) $ ( 17,329 ) $ 808,302 The accompanying notes are an integral part of these condensed consolidated financial statements. 6 FORMFACTOR, INC. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (In thousands, except shares) (Unaudited) Shares of Common Stock Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Income (Loss) Accumulated Deficit Total Nine Months Ended September 25, 2021 Balances, December 26, 2020 77,437,997 $ 78 $ 903,838 $ 5,886 $ ( 165,718 ) $ 744,084 Issuance of common stock under the Employee Stock Purchase Plan 378,584 — 9,809 — — 9,809 Issuance of common stock pursuant to exercise of options 100,000 — 844 — — 844 Issuance of common stock pursuant to vesting of restricted stock units, net of stock withheld for tax 910,838 1 ( 19,602 ) — — ( 19,601 ) Purchase and retirement of common stock through repurchase program ( 620,200 ) ( 1 ) ( 23,950 ) — — ( 23,951 ) Stock-based compensation — — 21,364 — — 21,364 Other comprehensive loss — — — ( 4,186 ) — ( 4,186 ) Net income — — — — 58,027 58,027 Balances, September 25, 2021 78,207,219 $ 78 $ 892,303 $ 1,700 $ ( 107,691 ) $ 786,390 Three Months Ended September 25, 2021 Balances, June 26, 2021 77,454,800 $ 77 $ 894,062 $ 3,596 $ ( 128,188 ) $ 769,547 Issuance of common stock under the Employee Stock Purchase Plan 149,800 — 4,744 — — 4,744 Issuance of common stock pursuant to vesting of restricted stock units, net of stock withheld for tax 602,619 1 ( 14,341 ) — — ( 14,340 ) Stock-based compensation — — 7,838 — — 7,838 Other comprehensive income — — — ( 1,896 ) — ( 1,896 ) Net income — — — — 20,497 20,497 Balances, September 25, 2021 78,207,219 $ 78 $ 892,303 $ 1,700 $ ( 107,691 ) $ 786,390 The accompanying notes are an integral part of these condensed consolidated financial statements. 7 FORMFACTOR, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) Nine Months Ended September 24, 2022 September 25, 2021 Cash flows from operating activities: Net income $ 64,465 $ 58,027 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 21,189 19,256 Amortization 7,056 16,362 Reduction in the carrying amount of right-of-use assets 5,900 5,412 Stock-based compensation expense 21,873 21,585 Deferred income tax benefit ( 6,881 ) ( 873 ) Provision for excess and obsolete inventories 16,078 11,621 Non-cash restructuring charges 710 1,592 Gain on contingent consideration — ( 95 ) Other adjustments to reconcile net income to net cash provided by operating activities 3,356 2,500 Changes in assets and liabilities: Accounts receivable 1,654 1,157 Inventories ( 33,023 ) ( 30,335 ) Prepaid expenses and other current assets ( 2,016 ) 3,631 Other assets ( 117 ) ( 333 ) Accounts payable 17,613 1,488 Accrued liabilities ( 5,035 ) ( 6,951 ) Other liabilities 276 47 Deferred revenues 3,776 2,000 Operating lease liabilities ( 5,826 ) ( 5,654 ) Net cash provided by operating activities 111,048 100,437 Cash flows from investing activities: Acquisition of property, plant and equipment ( 39,024 ) ( 51,353 ) Acquisition of business ( 3,350 ) — Purchases of marketable securities ( 80,249 ) ( 114,898 ) Purchase of promissory note receivable ( 1,000 ) — Proceeds from maturities and sales of marketable securities 71,610 71,275 Net cash used in investing activities ( 52,013 ) ( 94,976 ) Cash flows from financing activities: Proceeds from issuances of common stock 10,499 10,647 Purchase of common stock through stock repurchase program ( 73,478 ) ( 23,951 ) Tax withholdings related to net share settlements of equity awards ( 15,564 ) ( 12,643 ) Payment of contingent consideration — ( 3,873 ) Principal repayments on term loans ( 6,421 ) ( 7,049 ) Net cash used in financing activities ( 84,964 ) ( 36,869 ) Effect of exchange rate changes on cash, cash equivalents and restricted cash ( 5,708 ) ( 2,216 ) Net decrease in cash, cash equivalents and restricted cash ( 31,637 ) ( 33,624 ) Cash, cash equivalents and restricted cash, beginning of period 155,342 191,098 Cash, cash equivalents and restricted cash, end of period $ 123,705 $ 157,474 The accompanying notes are an integral part of these condensed consolidated financial statements. 8 FORMFACTOR, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) Nine Months Ended September 24, 2022 September 25, 2021 Non-cash investing and financing activities: Increase in accounts payable and accrued liabilities related to property, plant and equipment purchases $ 341 $ 4,684 Increase in accrued liabilities related to tax withholdings related to net share settlements of equity awards — 6,952 Operating lease, right-of-use assets obtained in exchange for lease obligations 3,457 11,699 Supplemental disclosure of cash flow information: Cash paid for income taxes, net $ 9,911 $ 6,795 Cash paid for interest 455 496 Operating cash outflows from operating leases 6,670 6,553 Reconciliation of cash, cash equivalents and restricted cash: Cash and cash equivalents $ 120,602 $ 153,781 Restricted cash, current 1,263 2,019 Restricted cash, non-current 1,840 1,674 Total cash, cash equivalents and restricted cash $ 123,705 $ 157,474 The accompanying notes are an integral part of these condensed consolidated financial statements. 9 FORMFACTOR, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 1 — Basis of Presentation and New Accounting Pronouncements Basis of Presentation The accompanying condensed consolidated financial information of FormFactor, Inc. is unaudited and has been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). However, such information reflects all adjustments, consisting only of normal recurring adjustments, which are, in the opinion of management, necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods. The condensed consolidated financial statements included herein should be read in conjunction with the consolidated financial statements and the notes thereto included in our 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 nine months ended September 24, 2022 and September 25, 2021 each contained 39 weeks. Fiscal 2022 will end on December 31, 2022. Significant Accounting Policies Our significant accounting policies have not changed during the nine months ended September 24, 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 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. The Company elected to early adopt on a prospective basis during the second quarter of fiscal 2022. The adoption did not have a material effect on the Company's Consolidated Financial Statements. Note 2 — Concentration of Credit and Other Risks Each of the following customers accounted for 10 % or more of our revenues for the periods indicated: Three Months Ended Nine Months Ended September 24, 2022 September 25, 2021 September 24, 2022 September 25, 2021 Intel Corporation 17.0 % 20.8 % 19.7 % 21.7 % SK Hynix Inc. 10.7 * * * Samsung Electronics., LTD. * 12.9 % * 10.5 % 27.7 % 33.7 % 19.7 % 32.2 % At September 24, 2022, one customer accounted for 18.1 % 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. 10 Inventories, net, consisted of the following (in thousands): September 24, 2022 December 25, 2021 Raw materials $ 61,312 $ 57,673 Work-in-progress 48,439 35,935 Finished goods 22,278 17,940 $ 132,029 $ 111,548 Note 4 — Acquisition Woburn Acquisition On June 9, 2022, we acquired the assets of the dilution refrigerator product line of American ULT Cryogenics, formerly d/b/a JanisULT (“Woburn”), for total consideration of $ 3.4 million. This acquisition adds cryogen-free dilution refrigerators capable of cooling to sub-10 millikelvin to our product portfolio, which is required for operation of superconducting quantum computers. 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. Goodwill represents the excess of purchase price over the fair value assigned to the assets acquired and liabilities assumed and is allocated to the HPD reporting unit within the Systems reportable segment. The identified intangible asset, developed technology, has a useful life of three years. Our purchase accounting remains open as of the reporting date, with the purchase price preliminarily allocated to acquired assets and liabilities assumed that are subject to change as more information becomes available. The primary areas of the purchase price allocation that are not yet finalized relate to the valuation of inventories, developed technology intangible asset, and residual goodwill. The preliminary fair value of assets acquired, including goodwill and intangibles, and liabilities assumed for the purchase as follows (in thousands): Amount Accounts receivable $ 178 Inventories 7,041 Property, plant and equipment 479 Prepaid expenses and other current assets 117 Other assets 28 Tangible assets acquired 7,843 Deferred revenue ( 5,513 ) Accounts payable and accrued liabilities ( 30 ) Total tangible assets acquired and liabilities assumed 2,300 Developed technology intangible asset 500 Goodwill 550 Net assets acquired $ 3,350 11 Note 5 — 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 Addition - Woburn Acquisition — 550 550 Foreign currency translation — ( 3,744 ) ( 3,744 ) Goodwill, as of June 25, 2022 $ 178,424 $ 30,681 $ 209,105 We have no t recorded goodwill impairments for the nine months ended September 24, 2022. Intangible assets were as follows (in thousands): September 24, 2022 December 25, 2021 Intangible Assets Gross Accumulated Amortization Net Gross Accumulated Amortization Net Existing developed technologies $ 169,246 $ 148,916 $ 20,330 $ 172,259 $ 148,784 $ 23,475 Customer relationships 50,316 43,094 7,222 51,270 39,254 12,016 Trade name 7,835 7,579 256 8,054 7,603 451 Backlog — — — 1,896 1,896 — In-process research and development 400 — 400 400 — 400 $ 227,797 $ 199,589 $ 28,208 $ 233,879 $ 197,537 $ 36,342 Amortization expense was included in our Condensed Consolidated Statements of Income as follows (in thousands): Three Months Ended Nine Months Ended September 24, 2022 September 25, 2021 September 24, 2022 September 25, 2021 Cost of revenues $ 824 $ 858 $ 2,420 $ 11,453 Selling, general and administrative 1,530 1,604 4,636 4,909 $ 2,354 $ 2,462 $ 7,056 $ 16,362 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 $ 2,307 2023 6,944 2024 4,393 2025 4,062 2026 3,011 Thereafter 7,091 $ 27,808 12 Note 6 — Accrued Liabilities Accrued liabilities consisted of the following (in thousands): September 24, 2022 December 25, 2021 Accrued compensation and benefits $ 23,398 $ 29,706 Accrued income and other taxes 11,835 8,086 Accrued warranty 3,806 2,805 Employee stock purchase plan contributions withheld 1,979 4,693 Accrued restructuring charges — 2,478 Other accrued expenses 5,310 3,068 $ 46,328 $ 50,836 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 included 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 personnel-related costs to sever, relocate, or retain select employees. Additionally, this included plans to adjust capacity for certain product offerings, which resulted in contract termination costs and receipt of inventories ultimately deemed to be impaired to satisfy contract obligations. 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 $ 10.5 million to $ 12.6 million, estimated to be comprised primarily of $ 1.0 million to $ 1.2 million of severance and employee-related costs, $ 1.5 million to $ 1.9 million in contract and lease termination costs, $ 7.5 million to $ 8.5 million in inventory impairments, and $ 0.5 million to $ 1.0 million of cost related to impairment of leasehold improvements, facility exits, and other costs. Approximately $ 8.7 million to $ 9.7 million is expected within the Probe Cards segment and $ 1.8 million to $ 2.9 million is expected within the Systems segments. The Company has recognized restructuring and other charges to date in the aggregate amount of $ 11.2 million, comprised of $ 1.2 million of severance and employee-related costs, $ 1.5 million in contract and lease termination costs, $ 8.0 million in inventory impairments, and $ 0.6 million of cost related to impairment of leasehold improvements, facility exits and other costs. During the three months ended September 24, 2022 we reassessed the estimate for excess inventory received to satisfy our contract obligations from our adjustment of certain product offerings. As a result of receiving additional clarity regarding future customer demand, we recorded an additional $ 5.9 million inventory impairment not included in our original estimate of restructuring charges. 13 Restructuring charges by reportable segment included in our Condensed Consolidated Statements of Income were as follows (in thousands): Three Months Ended September 24, 2022 September 25, 2021 Probe Cards Systems Total Probe Cards Systems Total Cost of revenues $ 5,928 $ 132 $ 6,060 $ 4,070 $ 252 $ 4,322 Research and development 38 29 67 — 289 289 Selling, general and administrative — 47 47 — 22 22 $ 5,966 $ 208 $ 6,174 $ 4,070 $ 563 $ 4,633 Nine Months Ended September 24, 2022 September 25, 2021 Probe Cards Systems Total Probe Cards Systems Total Cost of revenues $ 6,194 $ 459 $ 6,653 $ 4,070 $ 420 $ 4,490 Research and development 38 228 266 — 694 694 Selling, general and administrative 3 146 149 — 83 83 $ 6,235 $ 833 $ 7,068 $ 4,070 $ 1,197 $ 5,267 Changes to the restructuring accrual in the nine months ended September 24, 2022 were as follows (in thousands): Employee Severance and Benefits Inventory Impairments Property and Equipment Impairments and Move Costs Contract Termination Costs Total December 25, 2021 $ 1,028 $ — $ — $ 1,450 $ 2,478 Restructuring charges 152 6,580 292 44 7,068 Cash payments ( 1,180 ) ( 31 ) ( 228 ) ( 1,494 ) ( 2,933 ) Non-cash settlement — ( 6,549 ) ( 64 ) — ( 6,613 ) September 24, 2022 $ — $ — $ — $ — $ — Note 8 — Fair Value and Derivative Instruments Whenever possible, the fair values of our financial assets and liabilities are determined using quoted market prices of identical securities or quoted market prices of similar securities from active markets. The three levels of inputs that may be used to measure fair value are as follows: • Level 1 valuations are obtained from real-time quotes for transactions in active exchange markets involving identical securities; • Level 2 valuations utilize significant observable inputs, such as quoted prices for similar assets or liabilities, quoted prices near the reporting date in markets that are less active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and • Level 3 valuations utilize unobservable inputs to the valuation methodology and include our own data about assumptions market participants would use in pricing the asset or liability based on the best information available under the circumstances. We did not have any transfers of assets or liabilities measured at fair value on a recurring basis to or from Level 1, Level 2 or Level 3 during the three and nine months ended September 24, 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, and Accrued liabilities approximate fair value due to their short maturities. No changes were made to our valuation techniques during the first nine months of fiscal 2022. 14 Assets and Liabilities Measured at Fair Value on a Recurring Basis Assets and liabilities measured at fair value on a recurring basis were as follows (in thousands): September 24, 2022 Level 1 Level 2 Level 3 Total Assets: Cash equivalents: Money market funds $ 27,581 $ — $ — $ 27,581 Commercial paper — 1,398 — 1,398 Corporate bonds — 2,995 — 2,995 27,581 4,393 — 31,974 Marketable securities: Corporate bonds — 69,548 — 69,548 U.S. treasuries 32,820 — — 32,820 Commercial paper — 16,881 — 16,881 U.S. agency securities — 11,041 — 11,041 Certificates of deposit — 701 — 701 32,820 98,171 — 130,991 Promissory note receivable — — 1,019 1,019 Interest rate swap derivative contracts — 2,420 — 2,420 Total assets $ 60,401 $ 104,984 $ 1,019 $ 166,404 Liabilities: Foreign exchange derivative contracts $ — $ ( 2,457 ) $ — $ ( 2,457 ) December 25, 2021 Level 1 Level 2 Level 3 Total Assets: Cash equivalents: Money market funds $ 9,526 $ — $ — $ 9,526 U.S. agency securities — 5,556 — 5,556 U.S. treasuries 2,500 — — 2,500 Commercial paper — 1,000 — 1,000 12,026 6,556 — 18,582 Marketable securities: Corporate bonds — 52,709 — 52,709 U.S. treasuries 38,985 — — 38,985 Commercial paper — 32,162 — 32,162 Certificates of deposit — 1,199 — 1,199 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 15 is more reflective of fair value. Our broker-priced investments are categorized as Level 2 investments because fair value is based on similar assets without applying significant judgments. In addition, all investments have a sufficient trading volume to demonstrate that the fair value is appropriate. Unrealized gains and losses were immaterial and were recorded as a component of Accumulated other comprehensive loss 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 September 24, 2022 will mature by the third quarter of fiscal 2023. The following table provides information about our foreign currency forward contracts outstanding as of September 24, 2022 (in thousands): Currency Contract Position Contract Amount (Local Currency) Contract Amount (U.S. Dollars) Euro Dollar Buy ( 29,215 ) $ ( 31,087 ) Japanese Yen Sell 2,145,851 14,995 Korean Won Buy ( 847,855 ) ( 603 ) Taiwan Dollar Sell 27,157 857 Total USD notional amount of outstanding foreign exchange contracts $ ( 15,838 ) Our foreign currency contracts are classified within Level 2 of the fair value hierarchy as they are valued using pricing models that utilize observable market inputs. Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis We measure and report our non-financial assets such as Property, plant and equipment, Goodwill and Intangible assets at fair value on a non-recurring basis if we determine these assets to be impaired or in the period when we make a business acquisition. Other than as discussed in Note 4, Acquisition, and Note 7, Restructuring Charges, there were no assets or liabilities measured at fair value on a nonrecurring basis during the three and nine months ended September 24, 2022 or September 25, 2021. 16 Note 9 — Warranty We offer warranties on certain products and record a liability for the estimated future costs associated with warranty claims at the time revenue is recognized. The warranty liability is based upon historical experience and our estimate of the level of future costs. While we engage in product quality programs and processes, our warranty obligation is affected by product failure rates, material usage and service delivery costs. We 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): Nine Months Ended September 24, 2022 September 25, 2021 Balance at beginning of period $ 2,805 $ 3,918 Accruals 5,653 4,688 Settlements ( 4,652 ) ( 5,803 ) Balance at end of period $ 3,806 $ 2,803 Note 10 — Property, Plant and Equipment, net Property, plant and equipment, net consisted of the following (in thousands): September 24, 2022 December 25, 2021 Land $ 4,751 $ 4,751 Building and building improvements 44,447 41,722 Machinery and equipment 267,612 252,632 Computer equipment and software 45,533 44,667 Furniture and fixtures 7,375 7,293 Leasehold improvements 83,682 82,266 Sub-total 453,400 433,331 Less: Accumulated depreciation and amortization ( 327,884 ) ( 312,700 ) Net, property, plant and equipment 125,516 120,631 Construction-in-process 37,868 25,924 Total $ 163,384 $ 146,555 Note 11 — Stockholders’ Equity and Stock-Based Compensation Common 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 nine months ended September 24, 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 nine months ended September 24, 2022, we repurchased and retired 1,335,414 shares of common stock for $ 47.5 million under the program. As of September 24, 2022, $ 27.5 million remained available for future repurchases. 17 Our policy related to repurchases of our common stock is to charge the excess of cost over par value to additional paid-in capital once the shares are retired. All repurchases were made in compliance with Rule 10b-18 under the Securities Exchange Act of 1934, as amended. Restricted Stock Units Restricted stock unit (“RSU”) activity under our equity incentive plan was as follows: Units Weighted Average Grant Date Fair Value RSUs at December 25, 2021 2,166,934 $ 28.63 Awards granted 1,338,278 34.95 Awards vested ( 1,133,782 ) 22.45 Awards forfeited ( 66,279 ) 31.07 RSUs at September 24, 2022 2,305,151 35.27 Performance Restricted Stock Units We may grant Performance RSUs (“PRSUs”) to certain executives, which vest based upon us achieving certain market performance criteria. On August 1, 2022, we granted 204,903 PRSUs to certain senior executives for a total grant date fair value of $ 8.6 million which will be recognized ratably over the requisite service period. The performance criteria are based on Total Shareholder Returns (“TSR”) for the period of July 1, 2022 - June 30, 2025, relative to the TSR of the companies identified as being part of the S&P Semiconductors Select Industry Index (FormFactor peer companies) as of the grant date. Of the 273,000 PRSUs granted in fiscal 2019, 36,000 shares were forfeited, resulting in 237,000 shares vesting in 2022. These shares achieved 147 % TSR performance, which resulted in an additional 110,605 shares issued in fiscal 2022 related to the fiscal 2019 PRSU grant. 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: Nine Months Ended September 24, 2022 Shares issued 316,861 Weighted average per share purchase price $ 33.00 Weighted average per share discount from the fair value of our common stock on the date of issuance $ ( 6.13 ) Stock-Based Compensation Stock-based compensation was included in our Condensed Consolidated Statements of Income as follows (in thousands): Three Months Ended Nine Months Ended September 24, 2022 September 25, 2021 September 24, 2022 September 25, 2021 Cost of revenues $ 1,022 $ 1,392 $ 2,834 $ 3,806 Research and development 2,027 2,010 5,708 5,362 Selling, general and administrative 4,946 4,518 13,331 12,417 Total stock-based compensation $ 7,995 $ 7,920 $ 21,873 $ 21,585 18 Unrecognized Compensation Costs At September 24, 2022, the unrecognized stock-based compensation was as follows (dollars in thousands): Unrecognized Expense Average Expected Recognition Period in Years Restricted stock units $ 54,872 2.31 Performance restricted stock units 14,239 2.25 Employee stock purchase plan 1,694 0.36 Total unrecognized stock-based compensation expense $ 70,805 2.25 Note 12 — Net Income per Share The following table reconciles the shares used in calculating basic net income per share and diluted net income per share (in thousands): Three Months Ended Nine Months Ended September 24, 2022 September 25, 2021 September 24, 2022 September 25, 2021 Weighted-average shares used in computing basic net income per share 77,245 77,869 77,796 77,643 Add potentially dilutive securities 443 1,160 696 1,547 Weighted-average shares used in computing diluted net income per share 77,688 79,029 78,492 79,190 Securities not included as they would have been antidilutive 897 121 266 109 Note 13 — Commitments and Contingencies Leases See Note 14, Leases . Contractual Obligations and Commitments Our contractual obligations and commitments have not materially changed as of September 24, 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 September 24, 2022, and as of the filing of this Quarterly Report on Form 10-Q, we were not involved in any material legal proceedings. Note 14 — Leases We lease real estate space under non-cancelable operating lease agreements for commercial and industrial space, as well as for a portion of our corporate headquarters located in Livermore, California. Our leases have remaining terms of 1 to 6 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 years as of September 24, 2022 and the weighted-average discount rate was 3.75 %. 19 The components of lease expense were as follows (in thousands): Three Months Ended Nine Months Ended September 24, 2022 September 25, 2021 September 24, 2022 September 25, 2021 Lease expense: Operating lease expense $ 2,118 $ 2,167 $ 6,522 $ 6,338 Short-term lease expense 135 51 251 133 Variable lease expense 590 461 1,725 1,424 $ 2,843 $ 2,679 $ 8,498 $ 7,895 Future minimum payments under our non-cancelable operating leases were as follows as of September 24, 2022 (in thousands): Fiscal Year Amount Remainder of 2022 $ 4,275 2023 7,545 2024 7,236 2025 7,170 2026 6,450 Thereafter 9,042 Total minimum lease payments 41,718 Less: interest ( 6,161 ) Present value of net minimum lease payments 35,557 Less: current portion ( 7,699 ) Total long-term operating lease liabilities $ 27,858 Note 15 — Revenue Transaction price allocated to the remaining performance obligations: On September 24, 2022, we had $ 8.3 million of remaining performance obligations, which were comprised of deferred service contracts and extended warranty contracts and contracts with overtime revenue recognition that are not yet delivered. We expect to recognize approximately 40.0 % of our remaining performance obligations as revenue in the remainder of fiscal 2022, approximately 49.8 % in fiscal 2023, and approximately 10.2 % 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 September 24, 2022 and December 25, 2021 were $ 3.0 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 September 24, 2022 and December 25, 2021 were $ 33.1 million and $ 24.2 million, respectively. During the nine months ended September 24, 2022, we recognized $ 19.0 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 16, Operating Segments and Enterprise-Wide Information , for further details. 20 Note 16 — Operating Segments and Enterprise-Wide Information Our chief operating decision maker (“CODM”) is our Chief Executive Officer, who reviews operating results to make decisions about allocating resources and assessing performance for the entire company. We operate in two reportable segments consisting of the Probe Cards segment and the Systems segment. The following table summarizes the operating results by reportable segment (dollars in thousands): Three Months Ended September 24, 2022 September 25, 2021 Probe Cards Systems Corporate and Other Total Probe Cards Systems Corporate and Other Total Revenues $ 139,365 $ 41,504 $ — $ 180,869 $ 154,850 $ 35,114 $ — $ 189,964 Gross profit 48,252 22,284 ( 8,323 ) 62,213 69,868 17,553 ( 7,202 ) 80,219 Gross margin 34.6 % 53.7 % 34.4 % 45.1 % 50.0 % 42.2 % Nine Months Ended September 24, 2022 September 25, 2021 Probe Cards Systems Corporate and Other Total Probe Cards Systems Corporate and Other Total Revenues $ 467,056 $ 114,894 $ — $ 581,950 $ 467,389 $ 97,287 $ — $ 564,676 Gross profit 203,874 59,967 ( 13,035 ) 250,806 206,783 48,059 ( 21,634 ) 233,208 Gross margin 43.7 % 52.2 % 43.1 % 44.2 % 49.4 % 41.3 % 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, inventory and fixed asset fair value adjustments due to acquisitions, share-based compensation, and restructuring charges which are not used in evaluating the results of, or in allocating resources to, our reportable segments. Certain revenue category information by reportable segment was as follows (in thousands): Three Months Ended September 24, 2022 September 25, 2021 Probe Cards Systems Total Probe Cards Systems Total Market: Foundry & Logic $ 90,605 $ — $ 90,605 $ 104,640 $ — $ 104,640 DRAM 34,922 — 34,922 39,816 — 39,816 Flash 13,838 — 13,838 10,394 — 10,394 Systems — 41,504 41,504 — 35,114 35,114 Total $ 139,365 $ 41,504 $ 180,869 $ 154,850 $ 35,114 $ 189,964 Timing of revenue recognition: Products transferred at a point in time $ 138,602 $ 37,842 $ 176,444 $ 154,217 $ 33,564 $ 187,781 Products and services transferred over time 763 3,662 4,425 633 1,550 2,183 Total $ 139,365 $ 41,504 $ 180,869 $ 154,850 $ 35,114 $ 189,964 Geographical region: United States $ 25,909 $ 12,180 $ 38,089 $ 18,530 $ 6,938 $ 25,468 Taiwan 32,227 4,611 36,838 34,100 7,474 41,574 China 27,973 8,755 36,728 46,011 5,036 51,047 South Korea 28,118 819 28,937 27,895 1,077 28,972 Europe 3,682 8,116 11,798 3,595 6,891 10,486 Singapore 7,983 2,374 10,357 6,841 711 7,552 Japan 4,533 3,159 7,692 5,767 4,961 10,728 Malaysia 6,272 237 6,509 11,353 280 11,633 Rest of the world 2,668 1,253 3,921 758 1,746 2,504 Total $ 139,365 $ 41,504 $ 180,869 $ 154,850 $ 35,114 $ 189,964 21 Nine Months Ended September 24, 2022 September 25, 2021 Probe Cards Systems Total Probe Cards Systems Total Market: Foundry & Logic $ 327,106 $ — $ 327,106 $ 321,776 $ — $ 321,776 DRAM 106,202 — 106,202 115,802 — 115,802 Flash 33,748 — 33,748 29,811 — 29,811 Systems — 114,894 114,894 — 97,287 97,287 Total $ 467,056 $ 114,894 $ 581,950 $ 467,389 $ 97,287 $ 564,676 Timing of revenue recognition: Products transferred at a point in time $ 464,139 $ 106,339 $ 570,478 $ 465,822 $ 89,119 $ 554,941 Products and services transferred over time 2,917 8,555 11,472 1,567 8,168 9,735 Total $ 467,056 $ 114,894 $ 581,950 $ 467,389 $ 97,287 $ 564,676 Geographical region: Taiwan $ 119,937 $ 19,990 $ 139,927 $ 125,571 $ 13,467 $ 139,038 China 101,342 23,520 124,862 107,838 17,661 125,499 United States 67,424 27,554 94,978 64,012 23,592 87,604 South Korea 80,417 4,776 85,193 81,322 2,912 84,234 Malaysia 43,946 1,006 44,952 34,275 483 34,758 Singapore 23,398 4,963 28,361 23,070 3,002 26,072 Europe 9,888 18,396 28,284 12,894 19,601 32,495 Japan 16,034 10,977 27,011 14,493 13,260 27,753 Rest of the world 4,670 3,712 8,382 3,914 3,309 7,223 Total $ 467,056 $ 114,894 $ 581,950 $ 467,389 $ 97,287 $ 564,676 Note 17 — Subsequent Events On October 25, 2022, we adopted a restructuring plan to align our cost structure with reduced demand levels within the Probe Cards segment by streamlining and improving the efficiency and business effectiveness of our operations. The plan includes lowering headcount by approximately 13 % of our workforce, which is expected to result in recognizing restructuring charges of approximately $ 6.6 million in cash, consisting of severance and employee-related costs. We expect the actions defined under this plan will be largely completed by the end of the fourth quarter of fiscal 2022. Upon completion, this action is expected to reduce our cost structure by approximately $ 25 to $ 30 million on an annualized basis.