FORMFACTOR INC 10-Q

Item 1. Financial Statements FORMFACTOR, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share amounts) (Unaudited) September 30, 2023 December 31, 2022 ASSETS Current assets: Cash and cash equivalents $ 108,731 $ 109,130 Marketable securities 135,693 129,006 Accounts receivable, net of allowance for credit losses of $ 500 and $ 168 88,965 88,143 Inventories, net 111,626 123,157 Restricted cash 1,171 1,221 Assets held-for-sale 33,718 — Prepaid expenses and other current assets 26,681 23,895 Total current assets 506,585 474,552 Restricted cash 2,146 2,631 Operating lease, right-of-use-assets 29,824 31,362 Property, plant and equipment, net of accumulated depreciation 203,510 189,848 Goodwill 200,485 211,444 Intangibles, net 13,578 26,751 Deferred tax assets 73,572 67,646 Other assets 3,267 3,994 Total assets $ 1,032,967 $ 1,008,228 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 61,589 $ 69,308 Accrued liabilities 36,487 42,115 Current portion of term loan, net of unamortized issuance costs 1,067 1,045 Deferred revenue 13,855 29,846 Liabilities held-for-sale 8,521 — Operating lease liabilities 8,007 7,353 Total current liabilities 129,526 149,667 Term loan, less current portion, net of unamortized issuance costs 13,586 14,389 Deferred tax liabilities 317 2,732 Long-term operating lease liabilities 25,096 27,587 Deferred grant 18,000 — Other liabilities 5,754 5,568 Total liabilities 192,279 199,943 Stockholders’ equity: Common stock, $ 0.001 par value: 250,000,000 shares authorized; 77,839,317 and 76,914,590 shares issued and outstanding 78 77 Additional paid-in capital 873,634 844,842 Accumulated other comprehensive loss ( 8,509 ) ( 5,578 ) Accumulated deficit ( 24,515 ) ( 31,056 ) Total stockholders’ equity 840,688 808,285 Total liabilities and stockholders’ equity $ 1,032,967 $ 1,008,228 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 30, 2023 September 24, 2022 September 30, 2023 September 24, 2022 Revenues $ 171,575 $ 180,869 $ 494,939 $ 581,950 Cost of revenues 102,290 118,656 304,293 331,144 Gross profit 69,285 62,213 190,646 250,806 Operating expenses: Research and development 31,014 26,549 87,599 82,000 Selling, general and administrative 35,564 31,637 101,561 97,949 Total operating expenses 66,578 58,186 189,160 179,949 Operating income 2,707 4,027 1,486 70,857 Interest income, net 1,662 557 4,420 684 Other income, net 788 1,041 1,261 1,784 Income before income taxes 5,157 5,625 7,167 73,325 Provision for income taxes 786 1,274 626 8,860 Net income $ 4,371 $ 4,351 $ 6,541 $ 64,465 Net income per share: Basic $ 0.06 $ 0.06 $ 0.08 $ 0.83 Diluted $ 0.06 $ 0.06 $ 0.08 $ 0.82 Weighted-average number of shares used in per share calculations: Basic 77,571 77,245 77,265 77,796 Diluted 78,412 77,688 77,860 78,492 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 30, 2023 September 24, 2022 September 30, 2023 September 24, 2022 Net income $ 4,371 $ 4,351 $ 6,541 $ 64,465 Other comprehensive loss, net of tax: Translation adjustments ( 3,351 ) ( 7,348 ) ( 2,641 ) ( 13,902 ) Unrealized gains (losses) on available-for-sale marketable securities 283 ( 674 ) 801 ( 2,425 ) Unrealized losses on derivative instruments ( 996 ) ( 881 ) ( 1,091 ) ( 123 ) Other comprehensive loss, net of tax: ( 4,064 ) ( 8,903 ) ( 2,931 ) ( 16,450 ) Comprehensive income (loss) $ 307 $ ( 4,552 ) $ 3,610 $ 48,015 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 Loss Accumulated Deficit Total Nine Months Ended September 30, 2023 Balances, December 31, 2022 76,914,590 $ 77 $ 844,842 $ ( 5,578 ) $ ( 31,056 ) $ 808,285 Issuance of common stock under the Employee Stock Purchase Plan 363,190 — 8,822 — — 8,822 Issuance of common stock pursuant to vesting of restricted stock units, net of stock withheld for tax 561,537 1 ( 9,350 ) — — ( 9,349 ) Stock-based compensation — — 29,320 — — 29,320 Other comprehensive loss — — — ( 2,931 ) — ( 2,931 ) Net income — — — — 6,541 6,541 Balances, September 30, 2023 77,839,317 $ 78 $ 873,634 $ ( 8,509 ) $ ( 24,515 ) $ 840,688 Three Months Ended September 30, 2023 Balances, July 1, 2023 77,184,012 $ 77 $ 867,517 $ ( 4,445 ) $ ( 28,886 ) $ 834,263 Issuance of common stock under the Employee Stock Purchase Plan 153,135 — 3,798 — — 3,798 Issuance of common stock pursuant to vesting of restricted stock units, net of stock withheld for tax 502,170 1 ( 8,894 ) — — ( 8,893 ) Stock-based compensation — — 11,213 — — 11,213 Other comprehensive loss — — — ( 4,064 ) — ( 4,064 ) Net income — — — — 4,371 4,371 Balances, September 30, 2023 77,839,317 $ 78 $ 873,634 $ ( 8,509 ) $ ( 24,515 ) $ 840,688 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 CASH FLOWS (In thousands) (Unaudited) Nine Months Ended September 30, 2023 September 24, 2022 Cash flows from operating activities: Net income $ 6,541 $ 64,465 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 22,880 21,189 Amortization 6,043 7,056 Reduction in the carrying amount of right-of-use assets 5,556 5,900 Stock-based compensation expense 29,333 21,873 Deferred income tax benefit ( 6,283 ) ( 6,881 ) Provision for excess and obsolete inventories 12,566 16,078 Other adjustments to reconcile net income to net cash provided by operating activities 1,375 4,066 Changes in assets and liabilities: Accounts receivable ( 7,796 ) 1,654 Inventories ( 8,910 ) ( 33,023 ) Prepaid expenses and other current assets ( 1,761 ) ( 2,016 ) Other assets 804 ( 117 ) Accounts payable 474 17,613 Accrued liabilities ( 5,268 ) ( 5,035 ) Other liabilities 467 276 Deferred revenues ( 12,915 ) 3,776 Deferred grant 18,000 — Operating lease liabilities ( 5,754 ) ( 5,826 ) Net cash provided by operating activities 55,352 111,048 Cash flows from investing activities: Acquisition of property, plant and equipment ( 46,094 ) ( 39,024 ) Acquisition of business — ( 3,350 ) Purchases of marketable securities ( 96,913 ) ( 80,249 ) Purchase of promissory note receivable — ( 1,000 ) Proceeds from maturities and sales of marketable securities 93,013 71,610 Net cash used in investing activities ( 49,994 ) ( 52,013 ) Cash flows from financing activities: Proceeds from issuances of common stock 8,822 10,499 Purchase of common stock through stock repurchase program — ( 73,478 ) Tax withholdings related to net share settlements of equity awards ( 9,349 ) ( 15,564 ) Principal repayments on term loans ( 781 ) ( 6,421 ) Net cash used in financing activities ( 1,308 ) ( 84,964 ) Effect of exchange rate changes on cash, cash equivalents and restricted cash ( 3,324 ) ( 5,708 ) Net increase (decrease) in cash, cash equivalents and restricted cash 726 ( 31,637 ) Cash, cash equivalents and restricted cash, beginning of period 112,982 155,342 Cash, cash equivalents and restricted cash, end of period $ 113,708 $ 123,705 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 30, 2023 September 24, 2022 Non-cash investing and financing activities: Increase (decrease) in accounts payable and accrued liabilities related to property, plant and equipment purchases $ ( 6,222 ) $ 341 Operating lease, right-of-use assets obtained in exchange for lease obligations 4,728 3,457 Supplemental disclosure of cash flow information: Cash paid for income taxes, net $ 12,064 $ 9,911 Cash paid for interest 317 455 Operating cash outflows from operating leases 6,836 6,670 Reconciliation of cash, cash equivalents and restricted cash: Cash and cash equivalents $ 108,731 $ 120,602 Restricted cash, current 1,171 1,263 Restricted cash, non-current 2,146 1,840 Cash and cash equivalents included in Assets held-for-sale 1,660 — Total cash, cash equivalents and restricted cash $ 113,708 $ 123,705 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 Significant Accounting Policies 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 2022 Annual Report on Form 10-K filed with the SEC on February 24, 2023. 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 2023 and 2022 contain 52 weeks and 53 weeks, respectively, and the nine months ended September 30, 2023 and September 24, 2022 each contained 39 weeks. Fiscal 2023 will end on December 30, 2023. Significant Accounting Policies Our significant accounting policies have not changed during the nine months ended September 30, 2023 from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022, except for: Government Assistance In January 2023, we received $ 18.0 million in cash from a California Competes Grant (the “Grant”) awarded from the California Governor’s Office of Business and Economic Development. The Grant requires FormFactor to create and maintain full-time jobs and make significant infrastructure investments within California over a 5-year term. If we do not meet the requirements of the Grant, we will be required to repay all or a portion of the Grant. The Grant is included in our Condensed Consolidated Balance Sheets within Deferred grant and we have elected to recognize the Grant when earned as an offset to Cost of revenues and Operating expenses within our Condensed Consolidated Statements of Income. We have presented the proceeds from the Grant as cash provided by operating activities within our Condensed Consolidated Statements of Cash Flows as the Grant is to offset operations. New Accounting Pronouncements Reference Rate Reform In March 2020, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2020-04, “Reference 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 GAAP 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 December 2022, the FASB issued ASU 2022-06, “Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848,” extending the relief offered in Topic 848 from December 31, 2022 to December 31, 2024, after which entities will no longer be permitted to apply the optional expedients in Topic 848. In May 2023, the Company entered into a rate replacement amendment to its credit facility loan agreement to replace LIBOR with the Secured Overnight Financing Rate (“SOFR”) and concurrently signed an amendment to modify the floating rate option on its interest rate swap to match that of the debt. The Company applied practical expedients provided in Topic 848 allowing the modified instrument to be accounted for and presented in the same manner as the instrument existing before the modification. These modifications had no significant impact on our financial statements. Refer to Note 7, Debt, for further information regarding the terms of the credit facility loan agreement and interest rate swap agreement. Reclassifications Certain immaterial reclassifications were made to the prior year financial statements to conform to the current year presentation. 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 Nine Months Ended September 30, 2023 September 24, 2022 September 30, 2023 September 24, 2022 Intel Corporation 17.1 % 17.0 % 17.2 % 19.7 % Samsung Electronics., LTD. 11.2 % * * * SK Hynix Inc. * 10.7 % * * 28.3 % 27.7 % 17.2 % 19.7 % At September 30, 2023 and December 31, 2022, one customer accounted for 23.5 % and 13.8 % of gross accounts receivable, respectively. Note 3 — Inventories, net Inventories are stated at the lower of cost (principally standard cost, which approximates actual cost on a first in, first out basis) or net realizable value. Inventories, net, consisted of the following (in thousands): September 30, 2023 December 31, 2022 Raw materials $ 50,641 $ 55,726 Work-in-progress 40,150 46,067 Finished goods 20,835 21,364 $ 111,626 $ 123,157 Note 4 — Assets Held-For-Sale Divestiture On September 18, 2023, the Company announced entry into a definitive agreement to sell its FRT Metrology (“FRT”) business to Camtek Ltd. (“Camtek”) for $ 100 million in cash, subject to customary purchase price adjustments. The Company acquired FRT in fiscal 2019 for total consideration of $ 24.4 million, net of cash acquired. Headquartered in Bergisch Gladbach, Germany, FRT is a leading supplier of high-precision metrology solutions for the Advanced Packaging and Silicon Carbide markets, and is part of our Systems segment. The related assets and liabilities have been classified as held-for-sale in the Company’s consolidated balance sheet and measured at the lower of their carrying amount or fair value less cost to sell. We did not record an impairment from this event. The planned disposition of the FRT business did not meet the criteria to be classified as a discontinued operation in the Company’s financial statements since the disposition did not represent a strategic shift that had, or will have, a major effect on the Company’s operations and financial results. 10 The components of held-for-sale assets and liabilities at September 30, 2023 were as follows (in thousands): Assets held-for-sale Accounts receivable, net of allowance for credit losses $ 5,491 Inventories, net 7,092 Other current assets 2,131 Intangibles, net 7,069 Goodwill 10,668 Other assets 1,267 Total assets held-for-sale $ 33,718 Liabilities held-for-sale Current liabilities $ 6,045 Other liabilities 2,476 Total liabilities held-for-sale $ 8,521 On November 1, 2023, we closed on the sale of FRT to Camtek and received cash proceeds of $ 103.8 million after preliminary adjustments with respect to cash, indebtedness, and working capital. Note 5 — Goodwill and Intangible Assets Goodwill by reportable segment was as follows (in thousands): Probe Cards Systems Total Goodwill, as of December 25, 2021 $ 178,424 $ 33,875 $ 212,299 Addition - Woburn Acquisition — 550 550 Foreign currency translation — ( 1,405 ) ( 1,405 ) Goodwill, as of December 31, 2022 178,424 33,020 211,444 Reclassification - Assets held-for-sale — ( 10,668 ) ( 10,668 ) Foreign currency translation — ( 291 ) ( 291 ) Goodwill, as of September 30, 2023 $ 178,424 $ 22,061 $ 200,485 We have no t recorded goodwill impairments for the nine months ended September 30, 2023. Intangible assets were as follows (in thousands): September 30, 2023 December 31, 2022 Intangible Assets Gross Accumulated Amortization Net Gross Accumulated Amortization Net Existing developed technologies $ 159,115 $ 147,517 $ 11,598 $ 171,441 $ 151,212 $ 20,229 Customer relationships 47,877 46,388 1,489 50,912 45,003 5,909 Trade name 7,754 7,663 91 7,972 7,759 213 In-process research and development 400 — 400 400 — 400 $ 215,146 $ 201,568 $ 13,578 $ 230,725 $ 203,974 $ 26,751 In the current quarter, $ 7.1 million of net Intangible assets were reclassified to Assets held-for-sale as described in Note 4 , Assets Held-For-Sale Divestiture. 11 Amortization expense was included in our Condensed Consolidated Statements of Income as follows (in thousands): Three Months Ended Nine Months Ended September 30, 2023 September 24, 2022 September 30, 2023 September 24, 2022 Cost of revenues $ 837 $ 824 $ 2,506 $ 2,420 Selling, general and administrative 440 1,530 3,537 4,636 $ 1,277 $ 2,354 $ 6,043 $ 7,056 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 2023 $ 640 2024 2,561 2025 2,330 2026 1,630 2027 1,630 Thereafter 4,387 $ 13,178 Note 6 — Accrued Liabilities Accrued liabilities consisted of the following (in thousands): September 30, 2023 December 31, 2022 Accrued compensation and benefits $ 22,684 $ 15,864 Accrued warranty 4,984 4,199 Employee stock purchase plan contributions withheld 1,576 4,585 Accrued income and other taxes 2,761 12,817 Accrued restructuring charges 29 1,249 Other accrued expenses 4,453 3,401 $ 36,487 $ 42,115 Note 7 — Debt On June 22, 2020, we entered into an $ 18.0 million 15-year credit facility loan agreement (the “Building Term Loan”) with MUFG Union Bank, National Association (“Union Bank”). The proceeds of the Building Term Loan were used to purchase a building adjacent to our leased facilities in Livermore, California. On May 19, 2023, we amended the Building Term Loan, replacing the benchmark reference rate LIBOR with SOFR, with no change to the amount or timing of contractual cash flows. The Building Term Loan bears interest at a rate equal to the applicable SOFR rate, plus 0.1148 %, plus 1.75 % per annum. Interest payments are payable in monthly installments over a fifteen-year period. The interest rate at September 30, 2023 was 7.19 %. On March 17, 2020, we entered into an interest rate swap agreement with Union Bank to hedge the interest payment on the Building Term Loan for the notional amount of $ 18.0 million. As future levels of LIBOR over the life of the loan were 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 %. This agreement was amended on May 19, 2023 to replace the benchmark reference rate LIBOR with SOFR to match the Building Term Loan agreement (as amended). After the amendment, the interest rate swap continues to convert our floating-rate interest into a fixed-rate at 2.75 %. 12 Note 8 — Restructuring Charges 2022 Restructuring Plan On October 25, 2022, we adopted a restructuring plan (“2022 restructuring plan”) to align our cost structure with reduced demand levels, by streamlining and improving the efficiency and business effectiveness of our operations. This plan included lowering headcount by approximately 13 % of our workforce. The Company has recognized 2022 restructuring plan charges of approximately $ 8.1 million for severance and employee-related costs, including $ 0.3 million for stock-based compensation, with $ 7.1 million within the Probe Cards segment, $ 0.5 million within the Systems segment, and $ 0.5 million within Corporate. We do not expect to incur additional material costs related to the 2022 restructuring plan. 2021 Restructuring Plan On September 25, 2021, we adopted restructuring plans (“2021 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, as part of these plans we have undertaken actions to adjust capacity for certain product offerings, which included contract termination costs to satisfy contract obligations. The Company has recognized 2021 restructuring plans charges of approximately $ 13.3 million, with $ 10.1 million within the Probe Cards segment and $ 3.2 million within the Systems segment, which were comprised of $ 1.4 million of severance and employee-related costs, $ 2.0 million in contract and lease termination costs, $ 9.4 million in inventory impairments and other inventory related costs, and $ 0.5 million of costs related to impairment of leasehold improvements, facility exits and fixed asset related costs. We do not expect additional material costs related to the 2021 restructuring plan. Total restructuring charges for both the 2022 and 2021 restructuring plans included in our Condensed Consolidated Statements of Income were as follows (in thousands): Three Months Ended September 30, 2023 September 24, 2022 Probe Cards Systems Total Probe Cards Systems Total Cost of revenues $ — $ — $ — $ 5,928 $ 132 $ 6,060 Research and development — — — 38 29 67 Selling, general and administrative — — — — 47 47 $ — $ — $ — $ 5,966 $ 208 $ 6,174 Nine Months Ended September 30, 2023 September 24, 2022 Probe Cards Systems Total Probe Cards Systems Total Cost of revenues $ 106 $ 251 $ 357 $ 6,194 $ 459 $ 6,653 Research and development 182 109 291 38 228 266 Selling, general and administrative 1,069 118 1,187 3 146 149 $ 1,357 $ 478 $ 1,835 $ 6,235 $ 833 $ 7,068 13 Changes to the restructuring accrual in the nine months ended September 30, 2023 were as follows (in thousands): Employee Severance and Benefits Stock-based Compensation Inventory Impairments & Other Inventory Related Costs Contract Termination & Other Costs Total December 31, 2022 $ 1,249 $ — $ — $ — $ 1,249 Restructuring charges 917 295 390 233 1,835 Cash payments ( 2,137 ) — ( 89 ) ( 233 ) ( 2,459 ) Non-cash settlement — ( 295 ) ( 301 ) — ( 596 ) September 30, 2023 $ 29 $ — $ — $ — $ 29 Note 9 — 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 30, 2023 or the year ended December 31, 2022. 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 2023. 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 30, 2023 Level 1 Level 2 Level 3 Total Assets: Cash equivalents: Money market funds $ 26,936 $ — $ — $ 26,936 U.S. treasuries 2,290 — — 2,290 Commercial paper — 1,790 — 1,790 29,226 1,790 — 31,016 Marketable securities: U.S. treasuries 46,403 — — 46,403 Certificates of deposit — 238 — 238 U.S. agency securities — 12,141 — 12,141 Corporate bonds — 61,106 — 61,106 Commercial paper — 15,805 — 15,805 46,403 89,290 — 135,693 Promissory note receivable — — 922 922 Interest rate swap derivative contract — 2,536 — 2,536 Total assets $ 75,629 $ 93,616 $ 922 $ 170,167 Liabilities: Foreign exchange derivative contracts $ — $ ( 781 ) $ — $ ( 781 ) Total liabilities $ — $ ( 781 ) $ — $ ( 781 ) December 31, 2022 Level 1 Level 2 Level 3 Total Assets: Cash equivalents: Money market funds $ 21,279 $ — $ — $ 21,279 Commercial paper — 4,969 — 4,969 U.S. agency securities — 996 — 996 21,279 5,965 — 27,244 Marketable securities: U.S. treasuries 25,019 — — 25,019 Certificates of deposit — 706 — 706 U.S. agency securities — 11,045 — 11,045 Corporate bonds — 67,396 — 67,396 Commercial paper — 24,840 — 24,840 25,019 103,987 — 129,006 Foreign exchange derivative contracts — 664 — 664 Promissory note receivable — — 943 943 Interest rate swap derivative contract — 2,374 — 2,374 Total assets $ 46,298 $ 112,990 $ 943 $ 160,231 Liabilities: Foreign exchange derivative contracts $ — $ ( 193 ) $ — $ ( 193 ) Total liabilities $ — $ ( 193 ) $ — $ ( 193 ) 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 15 priced by pricing vendors who provide observable inputs for their pricing without applying significant judgment. Broker pricing is used mainly when a quoted price is not available, the investment is not priced by our pricing vendors or when a broker price is more reflective of fair value. Our broker-priced investments are categorized as Level 2 investments because fair value is based on similar assets without applying significant judgments. In addition, all investments have a sufficient trading volume to demonstrate that the fair value is appropriate. Unrealized gains and losses were immaterial and were recorded as a component of Accumulated other comprehensive 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 Swap The fair value of our interest rate swap contract 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 contract qualifies for, and is designated as a cash flow hedge. The hedged risk is the interest rate exposure to changes in interest payments attributable to changes in our variable-rate interest over the interest rate swap term. The changes in cash flows of the interest rate swap are expected to exactly offset changes in cash flows of the variable-rate debt. Cash settlements, in the form of cash payments or cash receipts, of the interest rate swap, in the form of cash payments or cash receipts, are recognized as a component of interest expense. 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 30, 2023 will mature by the third quarter of fiscal 2024. The following table provides information about our foreign currency forward contracts outstanding as of September 30, 2023 (in thousands): Currency Contract Position Contract Amount (Local Currency) Contract Amount (U.S. Dollars) Euro Dollar Buy 20,312 $ 22,427 Euro Dollar Sell 3,576 3,786 Japanese Yen Sell 2,759,293 18,535 Korean Won Buy 1,520,865 1,133 Taiwan Dollar Sell 59,367 1,839 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. 16 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 8, Restructuring Charges, there were no assets or liabilities measured at fair value on a nonrecurring basis during the three and nine months ended September 30, 2023 or September 24, 2022. Note 10 — 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 30, 2023 September 24, 2022 Balance at beginning of period $ 4,199 $ 2,805 Accruals 6,426 5,653 Settlements ( 5,535 ) ( 4,652 ) Reclassification - Liabilities held-for-sale ( 106 ) — Balance at end of period $ 4,984 $ 3,806 Note 11 — Property, Plant and Equipment, net Property, plant and equipment, net consisted of the following (in thousands): September 30, 2023 December 31, 2022 Land $ 17,136 $ 17,136 Building and building improvements 44,452 44,932 Machinery and equipment 286,033 276,180 Computer equipment and software 46,968 45,813 Furniture and fixtures 7,471 7,540 Leasehold improvements 90,813 86,500 Sub-total 492,873 478,101 Less: Accumulated depreciation and amortization ( 353,796 ) ( 335,711 ) Net, property, plant and equipment 139,077 142,390 Construction-in-process 64,433 47,458 Total $ 203,510 $ 189,848 In the current quarter, $ 0.9 million of net Property, plant and equipment were reclassified to Assets held-for-sale as described in Note 4 , Assets Held-For-Sale Divestiture. Note 12 — 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 the nine months ended September 24, 2022, we repurchased 676,408 shares of common stock for $ 26.0 million. We utilized the remaining funds available for repurchase under this program during fiscal 2022. 17 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 30, 2023, we did no t repurchase any common stock. As of September 30, 2023, $ 18.6 million remained available for future repurchases. On October 30, 2023, our Board of Directors authorized a new two -year program to repurchase up to $ 75 million of outstanding common stock to offset potential dilution from issuance of common stock under our stock-based compensation programs 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. The net share repurchases are subject to a 1% excise tax under the Inflation Reduction Act. The excise tax incurred reduces the amount available under the repurchase programs, as applicable, and is included in the cost of shares repurchased in the Condensed Consolidated Statement of Stockholders Equity. 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 31, 2022 2,227,081 $ 35.28 Awards granted 1,402,715 33.84 Awards vested ( 830,549 ) 33.56 Awards forfeited ( 336,753 ) 30.14 RSUs at September 30, 2023 2,462,494 35.74 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 7, 2023, we granted 172,680 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, 2023 - June 30, 2026, 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 258,600 PRSUs granted in fiscal 2020, no ne of the 191,400 outstanding PRSU awards vested in 2023, at the end of the requisite service period, as the TSR performance was not met. 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 30, 2023 Shares issued 363,190 Weighted average per share purchase price $ 24.29 Weighted average per share discount from the fair value of our common stock on the date of issuance $ 7.65 18 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 30, 2023 September 24, 2022 September 30, 2023 September 24, 2022 Cost of revenues $ 1,376 $ 1,022 $ 4,801 $ 2,834 Research and development 3,173 2,027 7,908 5,708 Selling, general and administrative 6,290 4,946 16,624 13,331 Total stock-based compensation $ 10,839 $ 7,995 $ 29,333 $ 21,873 Unrecognized Compensation Costs At September 30, 2023, the unrecognized stock-based compensation was as follows (dollars in thousands): Unrecognized Expense Average Expected Recognition Period in Years Restricted stock units $ 58,985 2.21 Performance restricted stock units 14,667 2.20 Employee stock purchase plan 1,498 0.25 Total unrecognized stock-based compensation expense $ 75,150 2.17 Note 13 — 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 30, 2023 September 24, 2022 September 30, 2023 September 24, 2022 Weighted-average shares used in computing basic net income per share 77,571 77,245 77,265 77,796 Add potentially dilutive securities 841 443 595 696 Weighted-average shares used in computing diluted net income per share 78,412 77,688 77,860 78,492 Securities not included as they would have been antidilutive 172 897 94 266 Note 14 — Commitments and Contingencies Leases See Note 15, Leases . Contractual Obligations and Commitments Our contractual obligations and commitments have not materially changed as of September 30, 2023 from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022. Legal Matters From time to time, we are subject to legal proceedings and claims in the ordinary course of business, the outcomes of which cannot be estimated with certainty. Our ability to estimate the outcomes may change in the near term and the effect of any such change could have a material adverse effect on our financial position, results of operations or cash flows. Note 15 — 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 year. 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. 19 The weighted-average remaining lease term for our operating leases was 5 years as of September 30, 2023 and the weighted-average discount rate was 4.39 %. The components of lease expense were as follows (in thousands): Three Months Ended Nine Months Ended September 30, 2023 September 24, 2022 September 30, 2023 September 24, 2022 Lease expense: Operating lease expense $ 2,157 $ 2,118 $ 6,233 $ 6,522 Short-term lease expense 126 135 419 251 Variable lease expense 625 590 1,854 1,725 $ 2,908 $ 2,843 $ 8,506 $ 8,498 Future minimum payments under our non-cancelable operating leases were as follows as of September 30, 2023 (in thousands): Fiscal Year Amount Remainder of 2023 $ 2,175 2024 8,773 2025 8,670 2026 7,151 2027 6,734 Thereafter 3,541 Total minimum lease payments 37,044 Less: interest ( 3,941 ) Present value of net minimum lease payments 33,103 Less: current portion ( 8,007 ) Total long-term operating lease liabilities $ 25,096 Note 16 — Revenue Transaction price allocated to the remaining performance obligations: On September 30, 2023, we had $ 13.8 million of remaining performance obligations, which were comprised of deferred service contracts and extended warranty contracts and contracts with overtime revenue recognition that are not yet delivered. We expect to recognize approximately 23.2 % of our remaining performance obligations as revenue in the remainder of fiscal 2023, approximately 66.7 % in fiscal 2024, and approximately 10.1 % in fiscal 2025 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 30, 2023 and December 31, 2022 were $ 2.9 million and $ 1.9 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, Assets held-for-sale, and Other liabilities. Contract liabilities as of September 30, 2023 and December 31, 2022 were $ 18.0 million and $ 30.9 million, respectively. During the nine months ended September 30, 2023, we recognized $ 26.0 million of revenue that was included in contract liabilities as of December 31, 2022. 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. 20 Revenue by category: Refer to Note 17, Operating Segments and Enterprise-Wide Information , for further details. Note 17 — 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 30, 2023 September 24, 2022 Probe Cards Systems Corporate and Other Total Probe Cards Systems Corporate and Other Total Revenues $ 128,339 $ 43,236 $ — $ 171,575 $ 139,365 $ 41,504 $ — $ 180,869 Gross profit 49,383 22,396 ( 2,494 ) 69,285 48,252 22,284 ( 8,323 ) 62,213 Gross margin 38.5 % 51.8 % 40.4 % 34.6 % 53.7 % 34.4 % Nine Months Ended September 30, 2023 September 24, 2022 Probe Cards Systems Corporate and Other Total Probe Cards Systems Corporate and Other Total Revenues $ 370,970 $ 123,969 $ — $ 494,939 $ 467,056 $ 114,894 $ — $ 581,950 Gross profit 135,118 64,266 ( 8,738 ) 190,646 203,874 59,967 ( 13,035 ) 250,806 Gross margin 36.4 % 51.8 % 38.5 % 43.7 % 52.2 % 43.1 % 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, divestiture related expenses, and restructuring charges which are not used in evaluating the results of, or in allocating resources to, our reportable segments. 21 Certain revenue category information by reportable segment was as follows (in thousands): Three Months Ended September 30, 2023 September 24, 2022 Probe Cards Systems Total Probe Cards Systems Total Market: Foundry & Logic $ 96,366 $ — $ 96,366 $ 90,605 $ — $ 90,605 DRAM 27,478 — 27,478 34,922 — 34,922 Flash 4,495 — 4,495 13,838 — 13,838 Systems — 43,236 43,236 — 41,504 41,504 Total $ 128,339 $ 43,236 $ 171,575 $ 139,365 $ 41,504 $ 180,869 Timing of revenue recognition: Products transferred at a point in time $ 127,731 $ 41,776 $ 169,507 $ 138,602 $ 37,842 $ 176,444 Products and services transferred over time 608 1,460 2,068 763 3,662 4,425 Total $ 128,339 $ 43,236 $ 171,575 $ 139,365 $ 41,504 $ 180,869 Geographical region: United States $ 31,182 $ 12,543 $ 43,725 $ 25,909 $ 12,180 $ 38,089 Taiwan 39,155 3,820 42,975 32,227 4,611 36,838 South Korea 31,805 3,270 35,075 28,118 819 28,937 China 10,779 10,971 21,750 27,973 8,755 36,728 Europe 2,583 6,713 9,296 3,682 8,116 11,798 Japan 2,976 3,988 6,964 4,533 3,159 7,692 Malaysia 5,778 186 5,964 6,272 237 6,509 Singapore 2,752 925 3,677 7,983 2,374 10,357 Rest of the world 1,329 820 2,149 2,668 1,253 3,921 Total $ 128,339 $ 43,236 $ 171,575 $ 139,365 $ 41,504 $ 180,869 Nine Months Ended September 30, 2023 September 24, 2022 Probe Cards Systems Total Probe Cards Systems Total Market: Foundry & Logic $ 279,895 $ — $ 279,895 $ 327,106 $ — $ 327,106 DRAM 77,832 — 77,832 106,202 — 106,202 Flash 13,243 — 13,243 33,748 — 33,748 Systems — 123,969 123,969 — 114,894 114,894 Total $ 370,970 $ 123,969 $ 494,939 $ 467,056 $ 114,894 $ 581,950 Timing of revenue recognition: Products transferred at a point in time $ 368,939 $ 116,981 $ 485,920 $ 464,139 $ 106,339 $ 570,478 Products and services transferred over time 2,031 6,988 9,019 2,917 8,555 11,472 Total $ 370,970 $ 123,969 $ 494,939 $ 467,056 $ 114,894 $ 581,950 Geographical region: United States $ 86,954 $ 37,175 $ 124,129 $ 67,424 $ 27,554 $ 94,978 Taiwan 103,368 9,448 112,816 119,937 19,990 139,927 South Korea 77,832 5,881 83,713 80,417 4,776 85,193 China 45,771 26,586 72,357 101,342 23,520 124,862 Europe 8,424 21,114 29,538 9,888 18,396 28,284 Japan 14,014 11,859 25,873 16,034 10,977 27,011 Malaysia 22,279 1,632 23,911 43,946 1,006 44,952 Singapore 7,670 4,170 11,840 23,398 4,963 28,361 Rest of the world 4,658 6,104 10,762 4,670 3,712 8,382 Total $ 370,970 $ 123,969 $ 494,939 $ 467,056 $ 114,894 $ 581,950