FORMFACTOR INC 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Cautionary Statement Regarding Forward-Looking Statements This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Securities Exchange Act of 1934 and the Securities Act of 1933, which are subject to known and unknown risks and uncertainties. The forward-looking statements include statements concerning, among other things, our business strategy (including the influence of anticipated trends and developments in our business and the markets in which we operate), financial and operating results, gross margins, liquidity, operating expenses, products, projected costs and capital expenditure requirements, research and development programs, sales and marketing initiatives, competition and impact of accounting standards. In some cases, you can identify these statements by forward-looking words, such as “may,” “might,” “will,” “could,” “should,” “expect,” “plan,” “anticipate,” “believe,” “continue,” the negative or plural of these words and other comparable terminology. The forward-looking statements are only predictions based on our current expectations and our projections about future events. All forward-looking statements included in this Quarterly Report on Form 10-Q are based upon information available to us as of the filing date of this Quarterly Report on Form 10-Q. You should not place undue reliance on these forward-looking statements. We have no obligation to update any of these statements. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to differ materially from those expressed or implied by these statements, including risks related to general market trends, the benefits of acquisitions and investments, our supply chain, uncertainties related to public health-related crises, the interpretation and impacts of changes in export controls, tariffs and other trade barriers, military conflicts, political volatility and similar factors, our ability to execute our business strategy and other risks discussed in the section titled “Risk Factors” and elsewhere in our Annual Report on Form 10-K for the year ended December 28, 2024 and in this Quarterly Report on Form 10-Q. You should carefully consider the numerous risks and uncertainties described under these sections. 20 The following discussion and analysis should be read in conjunction with our condensed consolidated financial statements and the accompanying notes contained in this Quarterly Report on Form 10-Q. Unless expressly stated or the context otherwise requires, the terms “we,” “our,” “us” and “FormFactor” refer to FormFactor, Inc. and its subsidiaries. Overview FormFactor, Inc., headquartered in Livermore, California, is a leading provider of essential test and measurement technologies along the full semiconductor product lifecycle — from characterization, modeling, reliability, and design de-bug, to qualification and production test. We provide a broad range of high-performance probe cards, analytical probes, probe stations, thermal systems, and cryogenic systems to both semiconductor companies and scientific institutions. Our products provide electrical and optical information from a variety of semiconductor and electro-optical devices and integrated circuits from early research, through development, to high-volume production. Customers use our products and services to accelerate profitability by optimizing device performance and advancing yield knowledge. We operate in two reportable segments consisting of the Probe Cards segment and the Systems segment. Sales of our probe cards and analytical probes are included in the Probe Cards segment, while sales of our probe stations, thermal systems and cryogenic systems are included in the Systems segment. We generated net income of $6.4 million in the first three months of fiscal 2025 as compared to $21.8 million in the first three months of fiscal 2024. The decline in net income is mainly attributable to the $20.3 million gain recognized during the first quarter of fiscal 2024 from the sale of our China operations that also established an exclusive distribution and partnership agreement to continue sales and support of our products to that region (the “China Transaction”). Critical Accounting Estimates Management’s Discussion and Analysis and Note 2, Summary of Significant Accounting Policies , to the Consolidated Financial Statements in our 2024 Annual Report on Form 10-K describe the significant accounting estimates and significant accounting policies used in preparation of the Consolidated Financial Statements. Actual results in these areas could differ from management’s estimates. During the three months ended March 29, 2025, there were no significant changes in our significant accounting policies or estimates from those reported in our Annual Report on Form 10-K for the year ended December 28, 2024 except for the addition of a policy related to Equity Investments. Equity Investment On February 21, 2025, Frontier Investments Co., Ltd (“HoldCo”), a joint holding company in which we hold a 20% share of the equity and an affiliate of MBK Partners holds an 80% share of the equity, through HoldCo’s wholly-owned subsidiary, FM Holdings Co., Ltd., acquired 100% of the shares of FICT Limited (“FICT”) from Advantage Partners Inc. Our investment of $67.2 million, comprises the funding of our share of the purchase price of $59.6 million, subject to changes in foreign currency fluctuations, and acquisition costs of $7.5 million. Headquartered in Nagano, Japan, FICT is a provider of semiconductor test and high-performance computing industries with complex multi-layer organic substrates, printed circuit boards, and related leading-edge technologies and services. This investment is accounted for as an equity method investment and recorded in Equity investment on our Condensed Consolidated Balance Sheets. We will report our share of the earnings or losses of the HoldCo on a one-quarter lag as its results are not expected to be available in time to be recorded in the concurrent period. 21 Results of Operations The following table sets forth our operating results as a percentage of revenues for the periods indicated: Three Months Ended March 29, 2025 March 30, 2024 Revenues 100.0 % 100.0 % Cost of revenues 62.3 62.8 Gross profit 37.7 37.2 Operating expenses: Research and development 16.2 17.0 Selling, general and administrative 19.5 19.6 Total operating expenses 35.7 36.6 Gain on sale of business — 12.0 Operating income 2.0 12.6 Interest income, net 1.9 1.9 Other income, net 0.5 0.3 Income before income taxes 4.4 14.8 Provision for income taxes 0.6 1.9 Net income 3.8 % 12.9 % Revenues by Segment and Market Three Months Ended March 29, 2025 March 30, 2024 (In thousands) Probe Cards $ 136,520 $ 136,701 Systems 34,836 32,024 $ 171,356 $ 168,725 Three Months Ended March 29, 2025 % of Revenues March 30, 2024 % of Revenues $ Change % Change (Dollars in thousands) Probe Cards Markets: Foundry & Logic $ 85,272 49.8 % $ 86,768 51.4 % $ (1,496) (1.7) % DRAM 48,858 28.5 45,896 27.2 2,962 6.5 Flash 2,390 1.4 4,037 2.4 (1,647) (40.8) Systems Market: Systems 34,836 20.3 32,024 19.0 2,812 8.8 Total revenues $ 171,356 100.0 % $ 168,725 100.0 % $ 2,631 1.6 % Foundry & Logic — The decrease in Foundry & Logic product revenue for the three months ended March 29, 2025, compared to the three months ended March 30, 2024, was driven by weaker probe-card demand for client PC and server microprocessor designs. DRAM — The increase in DRAM product revenue for the three months ended March 29, 2025, compared to the three months ended March 30, 2024, was driven by increased demand for HBM designs utilized in generative artificial intelligence applications as well as increased demand for other non-HBM DRAM designs, particularly DDR5. Flash — The decrease in Flash product revenue for the three months ended March 29, 2025, compared to the three months ended March 30, 2024, was driven by decreased customer production activity and demand for our products. 22 Systems — The increase in Systems market revenue for the three months ended March 29, 2025, compared to the three months ended March 30, 2024, was driven by increased sales of probe stations, cryogenic systems, and thermal systems. Revenues by Geographic Region Three Months Ended March 29, 2025 % of Revenues March 30, 2024 % of Revenues (Dollars in thousands) Taiwan $ 45,362 26.5 % $ 29,877 17.7 % South Korea 43,171 25.2 50,717 30.1 United States 40,325 23.5 45,766 27.1 China 13,615 7.9 15,613 9.3 Japan 10,319 6.0 8,542 5.1 Europe 7,781 4.5 8,849 5.2 Singapore 6,249 3.6 4,758 2.8 Malaysia 2,600 1.5 1,863 1.1 Rest of the world 1,934 1.3 2,740 1.6 Total revenues $ 171,356 100.0 % $ 168,725 100.0 % Geographic revenue information is based on the location to which we ship the product. For example, if a certain South Korean customer purchases through its U.S. subsidiary and requests the products to be shipped to an address in South Korea, this sale will be reflected in the revenue for South Korea rather than the U.S. Changes in revenue by geographic region for the three months ended March 29, 2025, compared to the three months ended March 30, 2024, were primarily attributable to changes in customer demand, product sales mix, and impacts from trade restrictions. Cost of Revenues and Gross Margins Cost of revenues consists primarily of manufacturing materials, compensation and benefits, shipping and handling costs, manufacturing-related overhead (including equipment costs, related occupancy, and computer services), warranty costs, inventory adjustments (including write-downs for inventory obsolescence), and amortization of certain intangible assets. Our manufacturing operations rely on a limited number of suppliers to provide key components and materials for our products, some of which are a sole source. We order materials and supplies based on backlog and forecasted customer orders. Tooling and setup costs related to changing manufacturing lots at our suppliers are also included in the cost of revenues. We expense all warranty costs, inventory provisions and amortization of certain intangible assets as cost of revenues. Our gross profit and gross margin were as follows (dollars in thousands): Three Months Ended March 29, 2025 March 30, 2024 $ Change % Change Gross profit $ 64,523 $ 62,738 $ 1,785 2.8 % Gross margin 37.7 % 37.2 % Our gross profit and gross margin by segment were as follows (dollars in thousands): Three Months Ended March 29, 2025 March 30, 2024 Probe Cards Systems Corporate and Other Total Probe Cards Systems Corporate and Other Total Gross profit $ 51,615 $ 15,515 $ (2,607) $ 64,523 $ 50,791 $ 14,506 $ (2,559) $ 62,738 Gross margin 37.8 % 44.5 % 37.7 % 37.2 % 45.3 % 37.2 % Probe Cards — For the three months ended March 29, 2025, gross profit and gross margins increased compared to the three months ended March 30, 2024, primarily due to a more favorable product mix. 23 Systems — For the three months ended March 29, 2025, gross profit increased while gross margins decreased compared to the three months ended March 30, 2024, primarily as a result of greater revenues with a more favorable absorption of costs on higher production volumes, more than offset by an increase in manufacturing spending. Corporate and Other — Corporate and Other includes unallocated expenses relating to stock-based compensation expense, amortization of intangible assets and fixed asset fair value adjustments due to acquisitions, and restructuring charges, net, which are not used in evaluating the results of, or in allocating resources to, our reportable segments. Overall — Gross profit and gross margins fluctuate with revenue levels, product mix, selling prices, factory loading, and material costs. For the three months ended March 29, 2025, compared to the three months ended March 30, 2024, gross profit and gross margins have increased primarily as a result of greater revenues with a more favorable absorption of costs on higher production volumes, a more favorable product mix, partially offset by an increase in manufacturing spending, as described above. Cost of revenues included stock-based compensation expense as follows (in thousands): Three Months Ended March 29, 2025 March 30, 2024 Stock-based compensation $ 2,005 $ 1,928 Research and Development Three Months Ended March 29, 2025 March 30, 2024 $ Change % Change (Dollars in thousands) Research and development $ 27,800 $ 28,627 $ (827) (2.9) % % of revenues 16.2 % 17.0 % Research and development expenses in the three months ended March 29, 2025 decreased compared to the corresponding period in the prior year primarily due to slightly lower project material costs and general operational costs on higher revenues. A detail of the changes is as follows (in thousands): Three Months Ended March 29, 2025 compared to Three Months Ended March 30, 2024 Project material costs $ (674) General operational costs (101) Employee compensation costs (85) Stock-based compensation expense 33 $ (827) Research and development included stock-based compensation expense as follows (in thousands): Three Months Ended March 29, 2025 March 30, 2024 Stock-based compensation expense $ 2,646 $ 2,613 24 Selling, General and Administrative Three Months Ended March 29, 2025 March 30, 2024 $ Change % Change (Dollars in thousands) Selling, general and administrative $ 33,454 $ 33,079 $ 375 1.1 % % of revenues 19.5 % 19.6 % Selling, general and administrative expenses increased in total for the three months ended March 29, 2025 compared to the corresponding period in the prior year, but decreased slightly as a percent of revenues. The drivers of the increase for the three month period were increased restructuring charges from operating efficiency initiatives and increased commissions expense from increased revenues, partially offset by lower general operating expenses from decreased headcount, lower consulting fees from the China Transaction in the first quarter of fiscal 2024 and lower stock-based compensation expense. A detail of the changes is as follows (in thousands): Three Months Ended March 29, 2025 compared to Three Months Ended March 30, 2024 Restructuring charges $ 2,677 General operating expenses (1,069) Consulting fees (958) Stock-based compensation expense (719) Commission expenses 524 Employee compensation costs (80) $ 375 Selling, general and administrative included stock-based compensation expense as follows (in thousands): Three Months Ended March 29, 2025 March 30, 2024 Stock-based compensation expense $ 5,145 $ 5,864 Interest Income, Net Three Months Ended March 29, 2025 March 30, 2024 (Dollars in thousands) Interest Income $ 3,416 $ 3,258 Weighted average balance of cash and investments $ 349,664 $ 330,277 Weighted average yield on cash and investments 4.47 % 4.54 % Interest Expense $ 99 $ 102 Average debt outstanding $ 13,110 $ 14,188 Weighted average interest rate on debt 2.75 % 2.75 % Interest income is earned on our cash, cash equivalents, restricted cash and marketable securities. The increase in interest income for the three months ended March 29, 2025, compared with the corresponding period of the prior year, was attributable to higher invested balances. Interest expense primarily includes interest on our term loan, interest rate swap derivative contracts, and term loan issuance costs amortization charges. The interest expense for the three months ended March 29, 2025 was effectively flat compared to the corresponding periods in the prior year. This stability is due to our interest rate swap, which fixes the interest rate on our long-term debt. 25 Other Income, Net Other income, net, primarily includes the effects of foreign currency and various other gains and losses. We partially mitigate our risks from currency movements by hedging certain balance sheet exposures, which minimizes the impacts during periods of foreign exchange volatility. Provision for Income Taxes Three Months Ended March 29, 2025 March 30, 2024 (In thousands, except percentages) Provision for income taxes $ 1,075 $ 3,198 Effective tax rate 14.4 % 12.8 % Provision for income taxes reflects the tax provision on our operations in foreign and U.S. jurisdictions, offset by tax benefits from tax credits and the foreign-derived intangible income deduction. Our effective tax rate may vary from period to period based on changes in estimated taxable income or loss by jurisdiction, changes to the valuation allowance, changes to U.S. federal, state or foreign tax laws, changes in stock-based compensation expense/benefit, future expansion into areas with varying country, state, and local income tax rates, and deductibility of certain costs and expenses by jurisdiction. The increase in our effective tax rate for the three months ended March 29, 2025 compared to the corresponding period in the prior year was primarily driven by effective tax rate impacts the China Transaction had on the prior year. Liquidity and Capital Resources Capital Resources Our working capital decreased to $427.2 million at March 29, 2025, compared to $473.8 million at December 28, 2024. Cash and cash equivalents primarily consist of deposits held at banks and money market funds. Marketable securities primarily consist of corporate bonds, U.S. treasuries, U.S. agency securities, and commercial paper. We typically invest in highly rated securities with low probabilities of default. Our investment policy requires investments to be rated single A or better, and limits the types of acceptable investments, issuer concentration and duration of the investment. Our cash, cash equivalents and marketable securities totaled approximately $299.0 million at March 29, 2025, compared to $360.0 million at December 28, 2024. Based on our historical results of operations, we expect that our cash, cash equivalents, and marketable securities on hand, and the cash we expect to generate from operations, will be sufficient to fund our short-term and long-term liquidity requirements primarily arising from: research and development, capital expenditures, working capital, outstanding commitments, and other liquidity requirements associated with existing operations. However, we cannot be certain that our cash, cash equivalents, and marketable securities on hand, and cash generated from operations, will be available in the future to fund all of our capital and operating requirements. In addition, any future strategic investments and significant acquisitions may require additional cash and capital resources. To the extent necessary, we may consider entering into short and long-term debt obligations, raising cash through a stock issuance, or obtaining new financing facilities, which may not be available on terms favorable to us. If we are unable to obtain sufficient cash or capital to meet our needs on a timely basis and on favorable terms, our business and operations could be materially and adversely affected. If we are unsuccessful in maintaining or growing our revenues, maintaining or reducing our cost structure, or increasing our available cash through debt or equity financings, our cash, cash equivalents and marketable securities may decline. We utilize a variety of tax planning and financing strategies to manage our worldwide cash and deploy funds to locations where needed. As part of these strategies, we indefinitely reinvest a portion of our foreign earnings. Should we require additional capital in the United States, we may elect to repatriate indefinitely-reinvested foreign funds or raise capital in the United States. 26 Cash Flows The following table sets forth our net cash flows from operating, investing and financing activities: Three Months Ended March 29, 2025 March 30, 2024 (In thousands) Net cash provided by operating activities $ 23,539 $ 33,012 Net cash used in investing activities $ (84,660) $ (3,820) Net cash used in financing activities $ (2,964) $ (14,492) Operating Activities Net cash provided by operating activities consists of net income for the period, adjusted for certain non-cash items and changes in certain operating assets and liabilities. Net cash provided by operating activities for the three months ended March 29, 2025 was attributable to net income of $6.4 million and net non-cash expenses of $23.7 million, partially offset by the increase in net working capital of $6.6 million. The cash used in net working capital mainly related to increased inventories of $10.2 million and lowered accrued liabilities of $7.9 million, partially offset by increased accounts payable of $10.5 million and decreased accounts receivable, net, of $6.3 million. The non-cash expenses consisted of depreciation, amortization, stock-based compensation, and the provision for excess and obsolete inventories. Investing Activities Net cash used in investing activities for the three months ended March 29, 2025 primarily related to $67.2 million used to acquire our equity investment in FICT and $18.6 million of property, plant and equipment purchases, partially offset by $1.1 million in net proceeds from the maturities and sales of marketable securities. Financing Activities Net cash used in financing activities for the three months ended March 29, 2025 primarily related to $22.1 million used to purchase common stock under our stock repurchase program, $2.1 million used to pay tax withholdings for net share settlements of employee stock awards, partially offset by $21.6 million received from issuances of common stock in a private placement and under our employee stock purchase plan. Debt On June 22, 2020, we entered into an $18.0 million 15-year credit facility loan agreement (the “Building Term Loan”). 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 London Interbank Offered Rate (“LIBOR“) with the term Secured Overnight Financing Rate (“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 0.1145%, plus 1.75% per annum. Interest payments are payable in monthly installments over a fifteen-year period. The interest rate at March 29, 2025, before consideration of the interest rate swap discussed in the next paragraph, was 6.19%. As of March 29, 2025, the balance outstanding pursuant to the Building Term Loan was $13.1 million. On March 17, 2020, we entered into an interest rate swap agreement to hedge the interest payment on the Building Term Loan for the notional amount of $18.0 million, and an amortization period that matches the debt. As future levels of LIBOR over the life of the loan are uncertain, we entered into this interest-rate swap agreement to hedge the exposure in interest rate risks associated with movement in LIBOR rates. 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%. As of March 29, 2025, the notional amount of the loan that is subject to this interest rate swap is $13.1 million. Stock Repurchase Programs On October 30, 2023, our Board of Directors authorized a 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. On March 29, 2025, our Board of Directors approved an increase to the repurchase program, authorizing the repurchase of an additional $1.6 million shares. During fiscal 2024, we repurchased and retired 1,309,635 shares 27 of common stock for $53.3 million. During the three months ended March 29, 2025, we repurchased and retired 665,000 shares of common stock for $22.1 million, utilizing the remaining shares available for repurchase under the program. On April 24, 2025, our Board of Directors authorized an additional program to repurchase up to $75.0 million of outstanding common stock, also with the primary purpose of offsetting potential dilution from issuance of common stock under our stock-based compensation programs. The share repurchase program will expire on April 24, 2027. Contractual Obligations and Commitments The following table summarizes our significant contractual commitments to make future payments in cash under contractual obligations as of March 29, 2025: Payments Due In Fiscal Year Remainder 2025 2026 2027 2028 2029 Thereafter Total Operating leases $ 6,834 $ 7,643 $ 7,212 $ 3,902 $ 241 $ 1,161 $ 26,993 Term loans - principal payments 836 1,142 1,175 1,208 1,242 7,491 13,094 Term loans - interest payments (1) 597 736 664 591 515 1,343 4,446 Total $ 8,267 $ 9,521 $ 9,051 $ 5,701 $ 1,998 $ 9,995 $ 44,533 (1) Represents our minimum interest payment commitments at 6.19% per annum, excluding the interest rate swap described in Debt , above. The table above excludes our gross liability for unrecognized tax benefits and our deferred grant. The gross liability for unrecognized tax benefits was $52.1 million as of March 29, 2025. The timing of any payments which could result from these unrecognized tax benefits will depend upon a number of factors and, accordingly, the timing of payment cannot be estimated. The deferred grant was $18.0 million as of March 29, 2025, and consists of cash received from a California Competes Grant awarded from the California Governor's Office of Business and Economic Development. The timing of any potential repayments is dependent upon a number of factors, including the number of employees and capital investments within California over the 5-year term. Accordingly, the timing of any repayment cannot be estimated. Off-Balance Sheet Arrangements Historically, we have not participated in transactions that have generated relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As of March 29, 2025, we were not involved in any such off-balance sheet arrangements. Recent Accounting Standards For a description of a recent change in accounting standards, including the expected dates of adoption and estimated effects, if any, in our condensed consolidated financial statements, see Note 1, Basis of Presentation and Significant Accounting Policies, in Part I, Item 1 of this Form 10-Q.