FORMFACTOR INC 10-Q

Item 1. Financial Statements FORMFACTOR, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share amounts) (Unaudited) September 28, 2024 December 30, 2023 ASSETS Current assets: Cash and cash equivalents $ 184,506 $ 177,812 Marketable securities 169,961 150,507 Accounts receivable, net of allowance for credit losses of $ 4 and $ 501 116,866 102,957 Inventories, net 105,374 111,685 Restricted cash 3,773 1,152 Prepaid expenses and other current assets 34,302 29,667 Total current assets 614,782 573,780 Restricted cash 2,210 2,309 Operating lease, right-of-use-assets 25,034 30,519 Property, plant and equipment, net of accumulated depreciation 204,108 204,399 Goodwill 200,137 201,090 Intangibles, net 11,017 12,938 Deferred tax assets 92,826 78,964 Other assets 3,669 2,795 Total assets $ 1,153,783 $ 1,106,794 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 52,086 $ 63,857 Accrued liabilities 46,508 41,037 Current portion of term loan, net of unamortized issuance costs 1,098 1,075 Deferred revenue 20,972 16,704 Operating lease liabilities 8,512 8,422 Total current liabilities 129,176 131,095 Term loan, less current portion, net of unamortized issuance costs 12,488 13,314 Long-term operating lease liabilities 19,731 25,334 Deferred grant 18,000 18,000 Other liabilities 19,378 10,247 Total liabilities 198,773 197,990 Stockholders’ equity: Common stock, $ 0.001 par value: 250,000,000 shares authorized; 77,447,989 and 77,376,903 shares issued and outstanding 77 77 Additional paid-in capital 845,466 861,448 Accumulated other comprehensive loss ( 1,773 ) ( 4,052 ) Accumulated income 111,240 51,331 Total stockholders’ equity 955,010 908,804 Total liabilities and stockholders’ equity $ 1,153,783 $ 1,106,794 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 28, 2024 September 30, 2023 September 28, 2024 September 30, 2023 Revenues $ 207,917 $ 171,575 $ 574,116 $ 494,939 Cost of revenues 123,212 102,290 339,773 304,293 Gross profit 84,705 69,285 234,343 190,646 Operating expenses: Research and development 31,243 31,014 91,434 87,599 Selling, general and administrative 35,607 35,564 106,560 101,561 Total operating expenses 66,850 66,578 197,994 189,160 Gain on sale of business — — 20,581 — Operating income 17,855 2,707 56,930 1,486 Interest income, net 3,650 1,662 10,221 4,420 Other income (expense), net ( 558 ) 788 322 1,261 Income before income taxes 20,947 5,157 67,473 7,167 Provision for income taxes 2,211 786 7,564 626 Net income $ 18,736 $ 4,371 $ 59,909 $ 6,541 Net income per share: Basic $ 0.24 $ 0.06 $ 0.77 $ 0.08 Diluted $ 0.24 $ 0.06 $ 0.76 $ 0.08 Weighted-average number of shares used in per share calculations: Basic 77,406 77,571 77,364 77,265 Diluted 78,439 78,412 78,495 77,860 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 28, 2024 September 30, 2023 September 28, 2024 September 30, 2023 Net income $ 18,736 $ 4,371 $ 59,909 $ 6,541 Other comprehensive income (loss), net of tax: Foreign currency translation adjustments 4,326 ( 3,351 ) 968 ( 2,641 ) Unrealized gains on available-for-sale marketable securities 1,669 283 1,432 801 Unrealized gains (losses) on derivative instruments 180 ( 996 ) ( 121 ) ( 1,091 ) Other comprehensive income (loss) 6,175 ( 4,064 ) 2,279 ( 2,931 ) Comprehensive income $ 24,911 $ 307 $ 62,188 $ 3,610 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 Income (Deficit) Total Three Months Ended September 28, 2024 Balances, June 29, 2024 77,281,052 $ 77 $ 863,283 $ ( 7,948 ) $ 92,504 $ 947,916 Issuance of common stock under the Employee Stock Purchase Plan 143,975 — 4,800 — — 4,800 Issuance of common stock pursuant to vesting of restricted stock units, net of stock withheld for tax 428,694 — ( 14,421 ) — — ( 14,421 ) Purchase and retirement of common stock through repurchase program ( 405,732 ) — ( 16,909 ) — — ( 16,909 ) Stock-based compensation — — 8,713 — — 8,713 Other comprehensive income — — — 6,175 — 6,175 Net income — — — — 18,736 18,736 Balances, September 28, 2024 77,447,989 $ 77 $ 845,466 $ ( 1,773 ) $ 111,240 $ 955,010 Nine Months Ended September 28, 2024 Balances, December 30, 2023 77,376,903 $ 77 $ 861,448 $ ( 4,052 ) $ 51,331 $ 908,804 Issuance of common stock under the Employee Stock Purchase Plan 340,989 — 9,748 — — 9,748 Issuance of common stock pursuant to vesting of restricted stock units, net of stock withheld for tax 619,780 — ( 17,990 ) — — ( 17,990 ) Purchase and retirement of common stock through repurchase program ( 889,683 ) — ( 37,211 ) — — ( 37,211 ) Stock-based compensation — — 29,471 — — 29,471 Other comprehensive income — — — 2,279 — 2,279 Net income — — — — 59,909 59,909 Balances, September 28, 2024 77,447,989 $ 77 $ 845,466 $ ( 1,773 ) $ 111,240 $ 955,010 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 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 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 28, 2024 September 30, 2023 Cash flows from operating activities: Net income $ 59,909 $ 6,541 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 22,197 22,880 Amortization 1,920 6,043 Reduction in the carrying amount of right-of-use assets 5,129 5,556 Stock-based compensation expense 29,550 29,333 Deferred income tax benefit ( 14,044 ) ( 6,283 ) Provision for excess and obsolete inventories 10,052 12,566 Gain on sale of business ( 20,581 ) — Other adjustments to reconcile net income to net cash provided by operating activities ( 2,178 ) 1,375 Changes in assets and liabilities: Accounts receivable ( 13,300 ) ( 7,796 ) Inventories ( 7,573 ) ( 8,910 ) Prepaid expenses and other current assets ( 256 ) ( 1,761 ) Other assets 295 804 Accounts payable ( 8,780 ) 474 Accrued liabilities 7,368 ( 5,268 ) Other liabilities 9,331 467 Deferred revenues 7,883 ( 12,915 ) Deferred grant — 18,000 Operating lease liabilities ( 5,301 ) ( 5,754 ) Net cash provided by operating activities 81,621 55,352 Cash flows from investing activities: Acquisition of property, plant and equipment ( 30,773 ) ( 46,094 ) Proceeds from sale of business 21,585 — Purchases of marketable securities ( 109,727 ) ( 96,913 ) Purchase of promissory note receivable ( 1,500 ) — Proceeds from maturities and sales of marketable securities 94,263 93,013 Net cash used in investing activities ( 26,152 ) ( 49,994 ) Cash flows from financing activities: Proceeds from issuances of common stock 9,748 8,822 Purchase of common stock through stock repurchase program ( 37,211 ) — Tax withholdings related to net share settlements of equity awards ( 17,990 ) ( 9,349 ) Payments on term loan ( 803 ) ( 781 ) Net cash used in financing activities ( 46,256 ) ( 1,308 ) Effect of exchange rate changes on cash, cash equivalents and restricted cash 3 ( 3,324 ) Net increase in cash, cash equivalents and restricted cash 9,216 726 Cash, cash equivalents and restricted cash, beginning of year 181,273 112,982 Cash, cash equivalents and restricted cash, end of period $ 190,489 $ 113,708 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 28, 2024 September 30, 2023 Non-cash investing and financing activities: Decrease in accounts payable and accrued liabilities related to property, plant and equipment purchases $ 2,915 $ 6,222 Operating lease, right-of-use assets obtained in exchange for lease obligations — 4,728 Supplemental disclosure of cash flow information: Cash paid for income taxes, net $ 13,114 $ 12,064 Cash paid for interest 298 317 Operating cash outflows from operating leases 6,960 6,836 Reconciliation of cash, cash equivalents and restricted cash: Cash and cash equivalents $ 184,506 $ 108,731 Restricted cash, current 3,773 1,171 Restricted cash 2,210 2,146 Cash and cash equivalents included in Assets held-for-sale — 1,660 Total cash, cash equivalents and restricted cash $ 190,489 $ 113,708 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 2023 Annual Report on Form 10-K filed with the SEC on February 23, 2024. 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 2024 and 2023 each contain 52 weeks and the nine months ended September 28, 2024 and September 30, 2023 each contained 39 weeks. Fiscal 2024 will end on December 28 , 2024. Significant Accounting Policies Our significant accounting policies have not changed during the nine months ended September 28, 2024 from those disclosed in our Annual Report on Form 10-K for the year ended December 30, 2023. New Accounting Pronouncements ASU 2023-09 In December 2023, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2023-09, “ Income Taxes (Topic 740): Improvements to Income Tax Disclosures. ” The ASU includes requirements that an entity disclose specific categories in the rate reconciliation and provide additional information for reconciling items that are greater than five percent of the amount computed by multiplying pretax income by the applicable statutory income tax rate. The standard also requires that entities disclose income before income taxes and provision for income taxes disaggregated between domestic and foreign. This ASU is effective for annual periods beginning after December 15, 2024, with early adoption permitted. We are currently evaluating the effect the adoption of this ASU may have on our disclosures. ASU 2023-07 In November 2023, the FASB issued ASU 2023-07, “ Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures .” The ASU includes requirements that an entity disclose the title of the chief operating decision maker (“CODM”) and on an interim and annual basis, significant segment expenses and the composition of other segment items for each segment's reported profit. The standard also permits disclosure of additional measures of segment profit. This ASU is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, on a retrospective basis, with early adoption permitted. We are currently evaluating the effect the adoption of this ASU may have on our disclosures. 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 28, 2024 September 30, 2023 September 28, 2024 September 30, 2023 SK hynix Inc. 18.1 % * 17.8 % * Intel Corporation 17.1 % 17.1 % 16.6 % 17.2 % Samsung Electronics Co., LTD. * 11.2 % * * 35.2 % 28.3 % 34.4 % 17.2 % * Less than 10% of revenues. At September 28, 2024 and December 30, 2023, two customers accounted for 24.7 % and 10.2 % and two customers accounted for 17.8 % and 11.0 % of gross accounts receivable, respectively. 9 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 28, 2024 December 30, 2023 Raw materials $ 43,488 $ 50,808 Work-in-progress 41,383 39,336 Finished goods 20,503 21,541 $ 105,374 $ 111,685 Note 4 — Divestitures China Operations Divestiture On February 7, 2024, the Company entered into a definitive agreement to sell its China operations to Grand Junction Semiconductor Pte. Ltd. (“Grand Junction”) for $ 25.0 million in cash, subject to customary purchase price adjustments, and establish an exclusive distribution and partnership agreement to continue sales and support of our products in the region. The following subsidiaries were included as part of the divestiture: Microprobe Hong Kong Limited, FormFactor Technology (Suzhou) Co. Ltd., Cascade Microtech Singapore Pte, Ltd, and FormFactor International (Shanghai) Trading Co., Ltd. These entities supported both the Probe Cards and Systems segments. On February 26, 2024, we closed on the sale of the operations in China to Grand Junction and received total consideration of $ 21.4 million, net of cash transferred and transaction expenses, and after customary adjustments for indebtedness and changes in net working capital. The disposition of the China operations did not meet the criteria to be classified as a discontinued operation in the Company’s financial statements because the disposition did not represent a strategic shift that had, or will have, a major effect on the Company’s operations and financial results. The following table summarizes the fair value of the sale proceeds received in connection with the divestiture (in thousands): February 26, 2024 Gross purchase price $ 25,000 Working capital adjustment 159 Cash transferred to the buyer at closing ( 2,743 ) Direct costs to sell ( 986 ) Fair value of sale consideration, net $ 21,430 10 The carrying amount of net assets associated with the China operations was approximately $ 1.2 million. The major classes of assets and liabilities sold consisted of the following (in thousands): February 26, 2024 ASSETS Accounts receivable, net $ 1,174 Inventories, net 3,729 Other current assets 391 Total current assets 5,294 Property, plant and equipment, net 1,283 Goodwill 1,117 Other assets 3,029 Total assets $ 10,723 LIABILITIES Deferred Revenue $ 3,739 Other current liabilities 1,546 Other liabilities 4,283 Total liabilities $ 9,568 As a result of the divestiture, the Company recognized a pre-tax gain of $ 20.3 million. The Company recorded income tax expense associated with the divestiture of approximately $ 3.3 million. FRT 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 GmbH in fiscal 2019 for total consideration of $ 24.4 million, net of cash acquired. Headquartered in Bergisch Gladbach, Germany, the FRT business is a leading supplier of high-precision metrology solutions for the Advanced Packaging and Silicon Carbide markets, and was part of the Company's Systems segment. On November 1, 2023, we closed on the sale of the FRT business to Camtek and received net cash proceeds of $ 100.1 million, net of cash transferred and transaction expenses, and after customary adjustments for indebtedness and changes in net working capital. The following table summarizes the fair value of the sale proceeds received in connection with the divestiture (in thousands): November 1, 2023 Gross purchase price $ 99,100 Estimated working capital adjustment 4,266 Cash transferred to the buyer at closing ( 2,049 ) Direct costs to sell ( 1,225 ) Fair value of sale consideration $ 100,092 11 The carrying amount of net assets associated with the FRT business was approximately $ 26.8 million. The major classes of assets and liabilities sold consisted of the following (in thousands): November 1, 2023 ASSETS Accounts receivable, net $ 7,738 Inventories, net 6,446 Other current assets 635 Total current assets 14,819 Intangibles, net 6,897 Goodwill 10,660 Other assets 1,612 Total assets $ 33,988 LIABILITIES Current liabilities $ 4,300 Other liabilities 2,856 Total liabilities $ 7,156 As a result of the divestiture, the Company recognized a pre-tax gain of $ 73.3 million. The Company recorded income tax expense associated with the divestiture of approximately $ 6.0 million. Note 5 — Goodwill and Intangible Assets Goodwill by reportable segment was as follows (in thousands): Probe Cards Systems Total Goodwill, as of December 31, 2022 $ 178,424 $ 33,020 $ 211,444 Reduction - FRT divestiture — ( 10,660 ) ( 10,660 ) Foreign currency translation — 306 306 Goodwill, as of December 30, 2023 178,424 22,666 201,090 Reduction - China divestiture ( 1,055 ) ( 62 ) ( 1,117 ) Foreign currency translation — 164 164 Goodwill, as of September 28, 2024 $ 177,369 $ 22,768 $ 200,137 We have no t recorded goodwill impairments for the nine months ended September 28, 2024. Intangible assets were as follows (in thousands): September 28, 2024 December 30, 2023 Intangible Assets Gross Accumulated Amortization Net Gross Accumulated Amortization Net Existing developed technologies $ 159,724 $ 149,923 $ 9,801 $ 159,593 $ 148,445 $ 11,148 Trade name 7,823 7,776 47 7,808 7,728 80 Customer relationships 48,060 47,291 769 48,022 46,712 1,310 In-process research and development 400 — 400 400 — 400 $ 216,007 $ 204,990 $ 11,017 $ 215,823 $ 202,885 $ 12,938 Amortization expense was included in our Condensed Consolidated Statements of Income as follows (in thousands): Three Months Ended Nine Months Ended September 28, 2024 September 30, 2023 September 28, 2024 September 30, 2023 Cost of revenues $ 449 $ 837 $ 1,347 $ 2,506 Selling, general and administrative 191 440 573 3,537 $ 640 $ 1,277 $ 1,920 $ 6,043 12 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 2024 $ 640 2025 2,330 2026 1,630 2027 1,630 2028 1,630 Thereafter 2,757 $ 10,617 Note 6 — Accrued Liabilities Accrued liabilities consisted of the following (in thousands): September 28, 2024 December 30, 2023 Accrued compensation and benefits $ 33,599 $ 20,073 Accrued warranty 3,610 3,177 Accrued income and other taxes 2,851 8,205 Accrued employee stock purchase plan contributions withheld 2,535 4,263 Other accrued expenses 3,913 5,319 $ 46,508 $ 41,037 Note 7 — Fair Value and Derivative Instruments Whenever possible, the fair values of our financial assets and liabilities are determined using quoted market prices of identical securities or quoted market prices of similar securities from active markets. The three levels of inputs that may be used to measure fair value are as follows: • Level 1 valuations are obtained from real-time quotes for transactions in active exchange markets involving identical securities; • Level 2 valuations utilize significant observable inputs, such as quoted prices for similar assets or liabilities, quoted prices near the reporting date in markets that are less active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and • Level 3 valuations utilize unobservable inputs to the valuation methodology and include our own data about assumptions market participants would use in pricing the asset or liability based on the best information available under the circumstances. We did not have any transfers of assets or liabilities measured at fair value on a recurring basis to or from Level 1, Level 2 or Level 3 during the nine months ended September 28, 2024 or the year ended December 30, 2023. 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 2024. 13 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 28, 2024 Level 1 Level 2 Level 3 Total Assets: Cash equivalents: Money market funds $ 125,293 $ — $ — $ 125,293 U.S. treasuries 1,198 — — 1,198 126,491 — — 126,491 Marketable securities: U.S. treasuries 65,646 — — 65,646 U.S. agency securities — 13,851 — 13,851 Corporate bonds — 84,512 — 84,512 Commercial paper — 5,952 — 5,952 65,646 104,315 — 169,961 Foreign exchange derivative contracts — 505 — 505 Promissory note receivable — — 1,500 1,500 Interest rate swap derivative contracts — 1,618 — 1,618 Total assets $ 192,137 $ 106,438 $ 1,500 $ 300,075 December 30, 2023 Level 1 Level 2 Level 3 Total Assets: Cash equivalents: Money market funds $ 110,980 $ — $ — $ 110,980 U.S. treasuries 4,581 — — 4,581 115,561 — — 115,561 Marketable securities: U.S. treasuries 45,837 — — 45,837 U.S. agency securities — 10,003 — 10,003 Corporate bonds — 81,350 — 81,350 Commercial paper — 13,317 — 13,317 45,837 104,670 — 150,507 Foreign exchange derivative contracts — 284 — 284 Interest rate swap derivative contracts — 1,989 — 1,989 Total assets $ 161,398 $ 106,943 $ — $ 268,341 Liabilities: Foreign exchange derivative contracts $ — $ ( 30 ) $ — $ ( 30 ) Total liabilities $ — $ ( 30 ) $ — $ ( 30 ) Cash Equivalents The fair value of our cash equivalents is determined based on quoted market prices for similar or identical securities. Marketable Securities We classify our marketable securities as available-for-sale and value them utilizing a market approach. Our investments are priced by pricing vendors who provide observable inputs for their pricing without applying significant judgment. Broker pricing is used mainly when a quoted price is not available, the investment is not priced by our pricing vendors or when a broker price is more reflective of fair value. Our broker-priced investments are categorized as Level 2 investments because fair value is based on similar assets without applying significant judgments. In addition, all 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 14 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, 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 28, 2024 will mature by the third quarter of fiscal 2025. The following table provides information about our foreign currency forward contracts outstanding as of September 28, 2024 (in thousands): Currency Contract Position Contract Amount (Local Currency) Contract Amount (U.S. Dollars) Euro Buy 29,925 $ 33,028 Japanese Yen Sell 2,863,220 20,203 Korean Won Buy 2,898,328 2,202 Taiwan Dollar Sell 113,723 3,598 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. There were no assets or liabilities measured at fair value on a nonrecurring basis during the three and nine months ended September 28, 2024 or September 30, 2023. Note 8 — Warranty We offer warranties on certain products and record a liability for the estimated future costs associated with warranty claims at the time revenue is recognized. The warranty liability is based upon historical experience and our estimate of the level of future 15 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 28, 2024 September 30, 2023 Balance at beginning of year $ 3,177 $ 4,199 Accruals 6,918 6,426 Settlements ( 6,485 ) ( 5,535 ) Reclassification - Liabilities held-for-sale — ( 106 ) Balance at end of period $ 3,610 $ 4,984 Note 9 — Property, Plant and Equipment, net Property, plant and equipment, net consisted of the following (in thousands): September 28, 2024 December 30, 2023 Land $ 17,124 $ 17,124 Building and building improvements 46,375 46,526 Machinery and equipment 302,638 286,215 Computer equipment and software 47,562 46,866 Furniture and fixtures 7,581 7,490 Leasehold improvements 99,288 91,063 Sub-total 520,568 495,284 Less: Accumulated depreciation and amortization ( 377,644 ) ( 358,021 ) Net property, plant and equipment 142,924 137,263 Construction-in-progress 61,184 67,136 Total $ 204,108 $ 204,399 Note 10 — Stockholders’ Equity and Stock-Based Compensation Common Stock Repurchase Programs On May 20, 2022, our Board of Directors authorized a two-year program to repurchase up to $ 75.0 million of outstanding common stock to offset potential dilution from issuance of common stock under our stock-based compensation programs. During fiscal 2022 and fiscal 2023, we repurchased and retired 1,700,893 shares of common stock for $ 56.4 million and 504,352 shares of common stock for $ 18.6 million, respectively, utilizing the remaining shares available for repurchase under the program. On October 30, 2023, our Board of Directors authorized an additional two-year program to repurchase up to $ 75.0 million of outstanding common stock, with the primary purpose of offsetting potential dilution from issuance of common stock under our stock-based compensation programs. This share repurchase program will expire on October 30, 2025. During fiscal 2023 we repurchased and retired 32,020 shares of common stock for $ 1.2 million. During the nine months ended September 28, 2024, we repurchased and retired 889,683 shares of common stock for $ 37.2 million, and as of September 28, 2024, $ 36.6 million remained available for future repurchases. Our policy related to repurchases of our common stock is to charge the excess of cost over par value to additional paid-in capital once the shares are retired. Share repurchases are subject to an excise tax enabled by the Inflation Reduction Act that is generally 1% of the fair market value of the shares repurchased at the time of the repurchase, net of the fair market value of certain new stock issuances during the same taxable year. Certain exceptions apply to the excise tax. The excise tax incurred 16 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 30, 2023 2,165,729 $ 35.85 Awards granted 882,718 44.73 Awards vested ( 981,072 ) 36.14 Awards forfeited ( 178,252 ) 43.90 RSUs at September 28, 2024 1,889,123 38.97 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 5, 2024, we granted 117,624 PRSUs to certain senior executives for a total grant date fair value of $ 5.8 million which will be recognized ratably over the requisite service period. The number of PRSUs granted represents the “target” number of units that can be earned based on the performance criteria. The performance criteria are based on Total Shareholder Returns (“TSR”) for the period of July 1, 2024 - June 30, 2027, 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 197,128 PRSUs granted in fiscal 2021, 56,685 shares were forfeited during the requisite service period, resulting in 140,443 shares vesting in 2024. These shares achieved 146 % TSR performance, which resulted in an additional 64,525 shares issued in fiscal 2024 in excess of the target number of units related to the fiscal 2021 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 28, 2024 Shares issued 340,989 Weighted average per share purchase price $ 28.59 Weighted average per share discount from the fair value of our common stock on the date of issuance $ ( 16.43 ) 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 28, 2024 September 30, 2023 September 28, 2024 September 30, 2023 Cost of revenues $ 1,934 $ 1,376 $ 5,794 $ 4,801 Research and development 2,679 3,173 7,906 7,908 Selling, general and administrative 4,323 6,290 15,850 16,624 Total stock-based compensation $ 8,936 $ 10,839 $ 29,550 $ 29,333 17 Unrecognized Compensation Costs At September 28, 2024, the unrecognized stock-based compensation was as follows (dollars in thousands): Unrecognized Expense Average Expected Recognition Period in Years Restricted stock units $ 50,506 2.07 Performance restricted stock units 10,497 2.09 Employee stock purchase plan 1,894 0.35 Total unrecognized stock-based compensation expense $ 62,897 2.02 Note 11 — Net Income per Share The following table reconciles the shares used in calculating basic net income per share and diluted net income per share (in thousands): Three Months Ended Nine Months Ended September 28, 2024 September 30, 2023 September 28, 2024 September 30, 2023 Weighted-average shares used in computing basic net income per share 77,406 77,571 77,364 77,265 Add potentially dilutive securities 1,033 841 1,131 595 Weighted-average shares used in computing diluted net income per share 78,439 78,412 78,495 77,860 Securities not included as they would have been antidilutive 170 172 144 94 Note 12 — Commitments and Contingencies Leases See Note 13, Leases . Contractual Obligations and Commitments Our contractual obligations and commitments have not materially changed as of September 28, 2024 from those disclosed in our Annual Report on Form 10-K for the year ended December 30, 2023. 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 13 — 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 year to 10 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 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 4 years as of September 28, 2024 and the weighted-average discount rate was 4.70 %. 18 The components of lease expense were as follows (in thousands): Three Months Ended Nine Months Ended September 28, 2024 September 30, 2023 September 28, 2024 September 30, 2023 Lease expense: Operating lease expense $ 2,180 $ 2,157 $ 6,360 $ 6,233 Short-term lease expense 102 126 247 419 Variable lease expense 1,112 625 2,974 1,854 $ 3,394 $ 2,908 $ 9,581 $ 8,506 Future minimum payments under our non-cancelable operating leases were as follows as of September 28, 2024 (in thousands): Fiscal Year Amount Remainder of 2024 $ 2,294 2025 9,185 2026 7,695 2027 7,259 2028 3,935 Thereafter 1,449 Total minimum lease payments 31,817 Less: interest ( 3,574 ) Present value of net minimum lease payments 28,243 Less: current portion ( 8,512 ) Total long-term operating lease liabilities $ 19,731 Note 14 — Revenue Transaction price allocated to the remaining performance obligations: On September 28, 2024, we had $ 23.9 million of remaining performance obligations, which were comprised of deferred service contracts, extended warranty contracts, and contracts with overtime revenue recognition that are not yet delivered. We expect to recognize approximately 26.7 % of our remaining performance obligations as revenue in the remainder of fiscal 2024, approximately 48.8 % in fiscal 2025, and approximately 24.5 % in fiscal 2026 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 28, 2024 and December 30, 2023 were $ 6.8 million and $ 3.8 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 28, 2024 and December 30, 2023 were $ 22.1 million and $ 18.0 million, respectively. During the nine months ended September 28, 2024, we recognized $ 12.7 million of revenue that was included in contract liabilities as of December 30, 2023. During the nine months ended September 28, 2024, we divested contract liabilities of $ 1.7 million as of December 30, 2023 with the divestiture of our China operations. Costs to obtain a contract: We generally expense sales commissions when incurred as a component of Selling, general and administrative expense, as the amortization period is typically less than one year. Revenue by category: Refer to Note 15, Operating Segments and Enterprise-Wide Information , for further details. 19 Note 15 — Operating Segments and Enterprise-Wide Information Our 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 28, 2024 September 30, 2023 Probe Cards Systems Corporate and Other Total Probe Cards Systems Corporate and Other Total Revenues $ 172,174 $ 35,743 $ — $ 207,917 $ 128,339 $ 43,236 $ — $ 171,575 Gross profit 72,855 14,838 ( 2,988 ) 84,705 49,383 22,396 ( 2,494 ) 69,285 Gross margin 42.3 % 41.5 % 40.7 % 38.5 % 51.8 % 40.4 % Nine Months Ended September 28, 2024 September 30, 2023 Probe Cards Systems Corporate and Other Total Probe Cards Systems Corporate and Other Total Revenues $ 475,667 $ 98,449 $ — $ 574,116 $ 370,970 $ 123,969 $ — $ 494,939 Gross profit 198,885 43,521 ( 8,063 ) 234,343 135,118 64,266 ( 8,738 ) 190,646 Gross margin 41.8 % 44.2 % 40.8 % 36.4 % 51.8 % 38.5 % 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 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. 20 Certain revenue category information by reportable segment was as follows (in thousands): Three Months Ended September 28, 2024 September 30, 2023 Probe Cards Systems Total Probe Cards Systems Total Market: Foundry & Logic $ 107,446 $ — $ 107,446 $ 96,366 $ — $ 96,366 DRAM 60,184 — 60,184 27,478 — 27,478 Flash 4,544 — 4,544 4,495 — 4,495 Systems — 35,743 35,743 — 43,236 43,236 Total $ 172,174 $ 35,743 $ 207,917 $ 128,339 $ 43,236 $ 171,575 Timing of revenue recognition: Products transferred at a point in time $ 166,968 $ 34,292 $ 201,260 $ 127,731 $ 41,776 $ 169,507 Products and services transferred over time 5,206 1,451 6,657 608 1,460 2,068 Total $ 172,174 $ 35,743 $ 207,917 $ 128,339 $ 43,236 $ 171,575 Geographical region: United States $ 45,015 $ 10,000 $ 55,015 $ 31,182 $ 12,543 $ 43,725 Taiwan 42,105 5,817 47,922 39,155 3,820 42,975 South Korea 40,870 858 41,728 31,805 3,270 35,075 China 27,367 7,146 34,513 10,779 10,971 21,750 Japan 3,734 4,322 8,056 2,976 3,988 6,964 Europe 2,149 5,607 7,756 2,583 6,713 9,296 Singapore 4,726 749 5,475 2,752 925 3,677 Malaysia 4,458 822 5,280 5,778 186 5,964 Rest of World 1,750 422 2,172 1,329 820 2,149 Total $ 172,174 $ 35,743 $ 207,917 $ 128,339 $ 43,236 $ 171,575 21 Nine Months Ended September 28, 2024 September 30, 2023 Probe Cards Systems Total Probe Cards Systems Total Market: Foundry & Logic $ 297,874 $ — $ 297,874 $ 279,895 $ — $ 279,895 DRAM 164,122 — 164,122 77,832 — 77,832 Flash 13,671 — 13,671 13,243 — 13,243 Systems — 98,449 98,449 — 123,969 123,969 Total $ 475,667 $ 98,449 $ 574,116 $ 370,970 $ 123,969 $ 494,939 Timing of revenue recognition: Products transferred at a point in time $ 464,668 $ 94,638 $ 559,306 $ 368,939 $ 116,981 $ 485,920 Products and services transferred over time 10,999 3,811 14,810 2,031 6,988 9,019 Total $ 475,667 $ 98,449 $ 574,116 $ 370,970 $ 123,969 $ 494,939 Geographical region: United States $ 120,046 $ 28,626 $ 148,672 $ 86,954 $ 37,175 $ 124,129 South Korea 140,233 1,319 141,552 77,832 5,881 83,713 Taiwan 109,476 13,136 122,612 103,368 9,448 112,816 China 56,364 18,849 75,213 45,771 26,586 72,357 Europe 8,927 16,493 25,420 8,424 21,114 29,538 Japan 12,594 11,615 24,209 14,014 11,859 25,873 Singapore 12,354 2,401 14,755 7,670 4,170 11,840 Malaysia 11,150 2,595 13,745 22,279 1,632 23,911 Rest of the world 4,523 3,415 7,938 4,658 6,104 10,762 Total $ 475,667 $ 98,449 $ 574,116 $ 370,970 $ 123,969 $ 494,939