UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark one)
For the quarterly period ended March 27, 2021
Or
For the transition period from to
Commission file number: 000-50307
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
(Address of principal executive offices, including zip code)
(925 ) 290-4000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||||||||
______________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of the Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
| ☒ | Accelerated Filer | ☐ | |||||||||
| Non-accelerated Filer | ☐ | Smaller Reporting Company | |||||||||
| Emerging Growth Company | |||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of April 30, 2021, 77,622,717 shares of the registrant’s common stock, par value $0.001 per share, were outstanding.
FORMFACTOR, INC.
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 27, 2021
INDEX
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
FORMFACTOR, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
(Unaudited)
| March 27, 2021 | December 26, 2020 | ||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Marketable securities | |||||||||||
Accounts receivable, net of allowance for doubtful accounts of $ | |||||||||||
| Inventories, net | |||||||||||
| Restricted cash | |||||||||||
| Prepaid expenses and other current assets | |||||||||||
| Total current assets | |||||||||||
| Restricted cash | |||||||||||
| Operating lease, right-of-use-assets | |||||||||||
| Property, plant and equipment, net of accumulated depreciation | |||||||||||
| Goodwill | |||||||||||
| Intangibles, net | |||||||||||
| Deferred tax assets | |||||||||||
| Other assets | |||||||||||
| Total assets | $ | $ | |||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Accrued liabilities | |||||||||||
| Current portion of term loans, net of unamortized issuance costs | |||||||||||
| Deferred revenue | |||||||||||
| Operating lease liabilities | |||||||||||
| Total current liabilities | |||||||||||
| Term loans, less current portion, net of unamortized issuance costs | |||||||||||
| Deferred tax liabilities | |||||||||||
| Long-term operating lease liabilities | |||||||||||
| Other liabilities | |||||||||||
| Total liabilities | |||||||||||
| Stockholders’ equity: | |||||||||||
Common stock, $ | |||||||||||
Treasury stock, at cost, | ( | ||||||||||
| Additional paid-in capital | |||||||||||
| Accumulated other comprehensive income | |||||||||||
| Accumulated deficit | ( | ( | |||||||||
| Total stockholders’ equity | |||||||||||
| Total liabilities and stockholders’ equity | $ | $ | |||||||||
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 | |||||||||||
| March 27, 2021 | March 28, 2020 | ||||||||||
| Revenues | $ | $ | |||||||||
| Cost of revenues | |||||||||||
| Gross profit | |||||||||||
| Operating expenses: | |||||||||||
| Research and development | |||||||||||
| Selling, general and administrative | |||||||||||
| Total operating expenses | |||||||||||
| Operating income | |||||||||||
| Interest income | |||||||||||
| Interest expense | ( | ( | |||||||||
| Other income (expense), net | ( | ||||||||||
| Income before income taxes | |||||||||||
| Provision for income taxes | |||||||||||
| Net income | $ | $ | |||||||||
| Net income per share: | |||||||||||
| Basic | $ | $ | |||||||||
| Diluted | $ | $ | |||||||||
| Weighted-average number of shares used in per share calculations: | |||||||||||
| Basic | |||||||||||
| Diluted | |||||||||||
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 | |||||||||||
| March 27, 2021 | March 28, 2020 | ||||||||||
| Net income | $ | $ | |||||||||
| Other comprehensive loss, net of tax: | |||||||||||
| Translation adjustments and other | ( | ( | |||||||||
| Unrealized losses on available-for-sale marketable securities | ( | ( | |||||||||
| Unrealized gains (losses) on derivative instruments | ( | ||||||||||
| Other comprehensive loss, net of tax | ( | ( | |||||||||
| Comprehensive income | $ | $ | |||||||||
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 | Shares of Treasury Stock | Treasury Stock | Additional Paid-in Capital | Accumulated Other Comprehensive Income (Loss) | Accumulated Deficit | Total | ||||||||||||||||||||||||||||||||||||||||
| Three Months Ended March 27, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||
| Balances, December 26, 2020 | $ | $ | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock under the Employee Stock Purchase Plan | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock pursuant to exercise of options | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock pursuant to vesting of restricted stock units, net of stock withheld for tax | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||||||||||||||
| Purchase of common stock through repurchase program | — | — | ( | ( | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Balances, March 27, 2021 | $ | ( | $ | ( | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||
| Shares of Common Stock | Common Stock | Shares of Treasury Stock | Treasury Stock | Additional Paid-in Capital | Accumulated Other Comprehensive Loss | Accumulated Deficit | Total | ||||||||||||||||||||||||||||||||||||||||
| Three Months Ended March 28, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||
| Balances, December 28, 2019 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||
| Issuance of common stock under the Employee Stock Purchase Plan | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock pursuant to exercise of options | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock pursuant to vesting of restricted stock units, net of stock withheld for tax | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Balances, March 28, 2020 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||||
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)
| Three Months Ended | |||||||||||
| March 27, 2021 | March 28, 2020 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net income | $ | $ | |||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Depreciation | |||||||||||
| Amortization | |||||||||||
| Reduction in the carrying amount of right-of-use assets | |||||||||||
| Stock-based compensation expense | |||||||||||
| Provision for excess and obsolete inventories | |||||||||||
| Other adjustments to reconcile net income to net cash provided by operating activities | |||||||||||
| Changes in assets and liabilities: | |||||||||||
| Accounts receivable | |||||||||||
| Inventories | ( | ||||||||||
| Prepaid expenses and other current assets | ( | ||||||||||
| Other assets | ( | ||||||||||
| Accounts payable | |||||||||||
| Accrued liabilities | ( | ( | |||||||||
| Other liabilities | |||||||||||
| Deferred revenues | ( | ( | |||||||||
| Operating lease liabilities | ( | ( | |||||||||
| Net cash provided by operating activities | |||||||||||
| Cash flows from investing activities: | |||||||||||
| Acquisition of property, plant and equipment | ( | ( | |||||||||
| Proceeds from sale of a subsidiary | |||||||||||
| Purchases of marketable securities | ( | ( | |||||||||
| Proceeds from maturities and sales of marketable securities | |||||||||||
| Net cash used in investing activities | ( | ( | |||||||||
| Cash flows from financing activities: | |||||||||||
| Proceeds from issuances of common stock | |||||||||||
| Purchase of common stock through stock repurchase program | ( | ||||||||||
| Tax withholdings related to net share settlements of equity awards | ( | ( | |||||||||
| Principal repayments on term loans | ( | ( | |||||||||
| Net cash used in financing activities | ( | ( | |||||||||
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | ( | ||||||||||
| Net increase (decrease) in cash, cash equivalents and restricted cash | ( | ||||||||||
| Cash, cash equivalents and restricted cash, beginning of period | |||||||||||
| Cash, cash equivalents and restricted cash, end of period | $ | $ | |||||||||
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)
| Three Months Ended | |||||||||||
| March 27, 2021 | March 28, 2020 | ||||||||||
| Non-cash investing and financing activities: | |||||||||||
| Change in accounts payable and accrued liabilities related to property, plant and equipment purchases | $ | $ | ( | ||||||||
| Operating lease, right-of-use assets obtained in exchange for lease obligations | |||||||||||
| Supplemental disclosure of cash flow information: | |||||||||||
| Cash paid for income taxes, net | $ | $ | |||||||||
| Cash paid for interest | |||||||||||
| Reconciliation of cash, cash equivalents and restricted cash: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Restricted cash, current | |||||||||||
| Restricted cash | |||||||||||
| Total cash, cash equivalents and restricted cash | $ | $ | |||||||||
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 New Accounting Pronouncements
Fiscal Year
We operate on a 52/53 week fiscal year, whereby the fiscal year ends on the last Saturday of December. Fiscal 2021 and 2020 each contain 52 weeks and the three months ended March 27, 2021 and March 28, 2020 each contained 13 weeks. Fiscal 2021 will end on December 25, 2021.
Significant Accounting Policies
Our significant accounting policies have not changed during the three months ended March 27, 2021 from those disclosed in our Annual Report on Form 10-K for the year ended December 26, 2020.
Reclassifications
Certain immaterial reclassifications were made to the prior year financial statements to conform to the current year presentation.
New Accounting Pronouncements
ASU 2019-12
In December 2019, the Financial Accounting Standard Board (“FASB”) issued Accounting Standards Update (“ASU”) 2019-12, “Income Taxes (Topic 740),” which simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. We adopted ASU 2019-12 on a prospective basis on December 27, 2020, the first day of fiscal 2021. The adoption did not have a material effect on our consolidated financial position, results of operations or cash flows.
ASU 2020-04
In March 2020, the FASB issued ASU 2020-04, “Referenced 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 generally accepted accounting principles 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 January 2021, the FASB issued ASU 2021-01, “Reference Rate Reform (Topic 848),” which permits entities to apply optional expedients in Topic 848 to derivative instruments modified because of discounting transition resulting from reference rate reform. ASU 2020-04 became effective upon issuance and may be applied prospectively to contract modifications made on or before December 31, 2022. ASU 2021-01 became effective upon issuance and may be applied on a full retrospective basis as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020 or prospectively for contract modifications made on or before December 31, 2022. The Company has not yet applied the relief afforded by these standard amendments and is currently assessing contracts that will require modification due to reference rate reform to which these standard amendments may be applied.
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 | |||||||||||
| March 27, 2021 | March 28, 2020 | ||||||||||
| Intel Corporation | % | % | |||||||||
| Taiwan Semiconductor Manufacturing Co., LTD. | % | * | |||||||||
| % | % | ||||||||||
*Represents less than 10% of total revenues.
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):
| March 27, 2021 | December 26, 2020 | ||||||||||
| Raw materials | $ | $ | |||||||||
| Work-in-progress | |||||||||||
| Finished goods | |||||||||||
| $ | $ | ||||||||||
Note 4 — Acquisition
High Precision Devices, Inc. Acquisition
On October 19, 2020, we acquired 100 % of the shares of HPD for total consideration of $16.9 million, net of cash acquired of $1.7 million, which included an estimated adjustment for changes in working capital, which is not yet finalized. This acquisition brings highly specialized skills and know-how to address the unique test challenges within the emerging quantum computing, superconducting computing, and ultra-sensitive sensor markets which operate at temperatures as low as 30 millikelvin.
The acquisition was accounted for using the acquisition method of accounting, with FormFactor treated as the acquirer. The acquired assets and liabilities of HPD were recorded at their respective fair values including an amount for goodwill representing the difference between the acquisition consideration and the fair value of the identifiable net assets.
Our Condensed Consolidated Statements of Income include the financial results of HPD subsequent to the acquisition date of October 19, 2020. Revenue in fiscal 2020 related to HPD subsequent to the acquisition date that was included in our Condensed Consolidated Statements of Income was not material.
The acquisition price was allocated to the tangible and identified intangible assets acquired and liabilities assumed as of the closing date of the acquisition based upon their respective fair values. The fair values assigned to assets acquired and liabilities assumed were based on management’s assumptions as of the reporting date.
We estimated the acquisition price and the allocation of fair value to assets acquired and liabilities assumed as of the acquisition date, October 19, 2020. We subsequently made certain immaterial adjustments within the measurement period to the preliminary acquisition price allocation. See Note 5, Goodwill and Intangible Assets, for changes in identified intangible values and goodwill. Our purchase accounting remains open at March 27, 2021, subject to finalization of the fair value of
10
consideration and certain deferred tax items. The estimated fair value of assets acquired, including goodwill and intangibles, and liabilities assumed is as follows (in thousands):
| Amount | ||||||||
| Cash and cash equivalents | $ | |||||||
| Accounts receivable | ||||||||
| Inventory | ||||||||
| Property, plant and equipment | ||||||||
| Operating lease, right of use assets | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Tangible assets acquired | ||||||||
| Deferred revenue | ( | |||||||
| Accounts payable and accrued liabilities | ( | |||||||
| Operating lease liabilities | ( | |||||||
| Deferred tax liabilities | ( | |||||||
| Total tangible assets acquired and liabilities assumed | ||||||||
| Intangible assets | ||||||||
| Goodwill | ||||||||
| Net Assets Acquired | $ | |||||||
The intangible assets as of the closing date of the acquisition included (in thousands):
| Amount | Weighted Average Useful Life (in years) | |||||||||||||
| Developed technologies | $ | |||||||||||||
| Customer relationships | ||||||||||||||
| Order backlog | ||||||||||||||
| Trade names | ||||||||||||||
| Total intangible assets | $ | |||||||||||||
The fair value of the intangible assets acquired in connection with the acquisition was determined using either the income, market or replacement cost methodologies. The intangible assets are being amortized over periods which reflect the pattern in which economic benefits of the assets are expected to be realized.
Identifiable Intangible Assets
Valuation of intangible assets involves multiple assumptions. The key assumptions are described below.
Developed technology acquired primarily consists of existing technology related to cryogenic probe stations, Adiabatic Demagnetization Refrigerator (“ADR”), and continuous ADR cryostats and similar tools, and technology related to other cryogenic applications. We valued the developed technology using the multi-period excess earnings method under the income approach. Using this approach, the estimated fair values were calculated using expected future cash flows from specific products discounted to their net present values at an appropriate risk-adjusted rate of return.
The value of customer relationships represents the fair value of future projected revenues that will be derived from the sale of products to HPD's existing customers. We valued customer relationships using the incremental cash flow method. This method estimates value based on the incremental cash flow afforded by having the customers relationships in place on the acquisition date versus having no relationships in place and needing to replicate or replace those relationships. The incremental cash flows are then discounted to a present value to arrive at an estimate of fair value for this asset class.
Order backlog represents the value of future sales under existing contracts as of the acquisition date. Expected cash flow from order backlog was valued on a discounted direct cash flow basis, net of returns on contributory assets such as working capital, property and equipment, trade name and assembled workforce.
11
The identified trade names intangibles relate to the estimated fair value of future cash flows related to the HPD brand. We valued trade names by applying the relief-from-royalty method under the income approach. This method is based on the application of a royalty rate to forecasted revenue under the trade name.
Goodwill
The excess of purchase price over the fair value assigned to the assets acquired and liabilities assumed represents the amount of goodwill resulting from the acquisition. We believe the factors that contributed to goodwill include synergies that are specific to our consolidated business, such as cost savings and operational efficiencies, and the acquisition of a talented workforce that expands our expertise in business development and commercializing semiconductor test products, none of which qualify for recognition as a separate intangible asset. We do not expect any portion of this goodwill to be deductible for tax purposes. The goodwill attributable to the acquisition was recorded as a non-current asset and is not amortized, but is subject to an annual review for impairment.
The goodwill arising from the acquisition was allocated to the HPD reporting unit within the Systems reportable segment.
We have not presented unaudited combined pro forma financial information as the HPD acquisition was not significant to our consolidated results of operations and financial position.
Baldwin Park Acquisition
On July 30, 2020, we acquired the probe card assets of Advantest Corporation for total cash consideration of $35.0 million. This acquisition brings important enabling technologies and capabilities for designing and manufacturing advanced probe cards, and adds a complementary 3D-NAND Flash probe-card product that is qualified and in production at one of the world's leading NAND Flash manufacturers.
The acquisition was accounted for using the acquisition method of accounting, with FormFactor treated as the acquirer. The acquired assets and liabilities of Baldwin Park were recorded at their respective fair values including an amount for goodwill representing the difference between the acquisition consideration and the fair value of the identifiable net assets.
Our Condensed Consolidated Statements of Income include the financial results of Baldwin Park subsequent to the acquisition date of July 30, 2020. Revenue related to Baldwin Park since the acquisition date that was included in our Condensed Consolidated Statements of Income for fiscal 2020 was not material.
We estimated the acquisition price and the allocation of fair value to assets acquired and liabilities assumed as of the acquisition date, July 30, 2020. We subsequently made certain immaterial adjustments within the measurement period to the acquisition price allocation as a result of finalization of our valuation of identifiable assets and liabilities. See Note 5, Goodwill and Intangible Assets, for changes in identified intangible values and goodwill. In the current quarter ended March 27, 2021, we finalized our allocation of the assets acquired, including goodwill and intangibles, and liabilities assumed for the purchase as follows (in thousands):
| Amount | ||||||||
| Accounts receivable | $ | |||||||
| Inventory | ||||||||
| Property, plant and equipment | ||||||||
| Operating lease, right of use assets | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Tangible assets acquired | ||||||||
| Accounts payable and accrued liabilities | ( | |||||||
| Operating lease liabilities | ( | |||||||
| Total net tangible assets acquired and liabilities assumed | ||||||||
| Intangible assets | ||||||||
| Goodwill | ||||||||
| Net assets acquired | $ | |||||||
12
The intangible assets as of July 30, 2020 included (in thousands):
| Amount | Weighted Average Useful Life (in years) | |||||||||||||
| Developed technologies | $ | |||||||||||||
| Customer relationships | ||||||||||||||
| In-process research and development | N/A | |||||||||||||
| Total intangible assets | $ | |||||||||||||
Indications of fair value of the intangible assets acquired in connection with the acquisition were determined using either the income, market or replacement cost methodologies. The intangible assets are being amortized over periods which reflect the pattern in which economic benefits of the assets are expected to be realized.
Identifiable Intangible Assets
Valuation of intangible assets involves multiple assumptions. The key assumptions are described below.
Developed technology acquired consists of existing technology related to 3D NAND Flash probe cards and the value expected to be derived from interconnect technology. We valued the developed technology related to 3D NAND Flash using the multi-period excess earnings method under the income approach. Using this approach, the estimated fair values were calculated using expected future cash flows from specific products discounted to their net present values at an appropriate risk-adjusted rate of return. We valued the interconnect developed technology asset using the incremental cash flow method. This method estimates value based on the incremental cash flow afforded by having the interconnect capability in place on the acquisition date versus having no capability in place and needing to replicate or replace that capability. The incremental cash flows are then discounted to a present value to arrive at an estimate of fair value for this asset class.
In-process research and development (“IPR&D”) acquired primarily consists of research and development projects that were in process at the time of acquisition related to technologies used in DRAM probe cards. Once these projects are complete they will be amortized over their useful life. We valued the IPR&D using the multi-period excess earnings method under the income approach. Using this approach, the estimated fair values were calculated using expected future cash flows from specific products discounted to their net present values at an appropriate risk-adjusted rate of return.
The value of customer relationships represents the fair value of future projected revenues that will be derived from the sale of products to Baldwin Park's existing customers. We valued customer relationships using the incremental cash flow method. This method estimates value based on the incremental cash flow afforded by having the customers relationships in place on the acquisition date versus having no relationships in place and needing to replicate or replace those relationships. The incremental cash flows are then discounted to a present value to arrive at an estimate of fair value for this asset class.
Goodwill
The excess of purchase price over the fair value assigned to the assets acquired and liabilities assumed represents the amount of goodwill resulting from the acquisition. We believe the factors that contributed to goodwill include synergies that are specific to our consolidated business, such as cost savings and operational efficiencies, and the acquisition of a talented workforce that expands our expertise in business development, none of which qualify for recognition as a separate intangible asset. We expect this goodwill to be deductible for tax purposes. The goodwill attributable to the acquisition was recorded as a non-current asset and is not amortized, but is subject to an annual review for impairment.
The goodwill arising from the acquisition was allocated to the Probe Cards reporting unit within the Probe Cards reportable segment.
We have not presented unaudited combined pro forma financial information as the Baldwin Park acquisition was not significant to our consolidated results of operations and financial position.
13
Note 5 — Goodwill and Intangible Assets
Goodwill by reportable segment was as follows (in thousands):
| Probe Cards | Systems | Total | |||||||||||||||
| Goodwill, gross, as of December 28, 2019 | $ | $ | $ | ||||||||||||||
| Addition - FRT GmbH Acquisition | |||||||||||||||||
| Addition - Baldwin Park Acquisition | |||||||||||||||||
| Addition - HPD Acquisition | |||||||||||||||||
| Foreign currency translation | |||||||||||||||||
| Goodwill, gross, as of December 26, 2020 | |||||||||||||||||
| Addition - Baldwin Park Acquisition | |||||||||||||||||
| Addition - HPD Acquisition | |||||||||||||||||
| Foreign currency translation | ( | ( | |||||||||||||||
| Goodwill, gross, as of March 27, 2021 | $ | $ | $ | ||||||||||||||
We have no t recorded goodwill impairments for the three months ended March 27, 2021.
Intangible assets were as follows (in thousands):
| March 27, 2021 | December 26, 2020 | |||||||||||||||||||||||||||||||||||||
| Intangible Assets | Gross | Accumulated Amortization | Net | Gross | Accumulated Amortization | Net | ||||||||||||||||||||||||||||||||
| Developed technologies | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||
| Trade names | ||||||||||||||||||||||||||||||||||||||
| Customer relationships | ||||||||||||||||||||||||||||||||||||||
| Backlog | ||||||||||||||||||||||||||||||||||||||
| In-process research and development | ||||||||||||||||||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||
Amortization expense was included in our Condensed Consolidated Statements of Income as follows (in thousands):
| Three Months Ended | |||||||||||
| March 27, 2021 | March 28, 2020 | ||||||||||
| Cost of revenues | $ | $ | |||||||||
| Selling, general and administrative | |||||||||||
| $ | $ | ||||||||||
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 2021 | $ | ||||
| 2022 | |||||
| 2023 | |||||
| 2024 | |||||
| 2025 | |||||
| Thereafter | |||||
| $ | |||||
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Note 6 — Accrued Liabilities
Accrued liabilities consisted of the following (in thousands):
| March 27, 2021 | December 26, 2020 | ||||||||||
| Accrued compensation and benefits | $ | $ | |||||||||
| Accrued income and other taxes | |||||||||||
| Accrued warranty | |||||||||||
| Employee stock purchase plan contributions withheld | |||||||||||
| Accrued contingent consideration | |||||||||||
| Other accrued expenses | |||||||||||
| $ | $ | ||||||||||
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 three months ended March 27, 2021 or the year ended December 26, 2020.
The carrying values of Cash, Accounts receivable, net, Restricted cash, Prepaid expenses and other current assets, Accounts payable, Accrued liabilities, and term loans, net of unamortized issuance costs, approximate fair value due to their short maturities.
No changes were made to our valuation techniques during the first three months of fiscal 2021.
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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):
| March 27, 2021 | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||||
| Assets: | ||||||||||||||||||||||||||
| Cash equivalents: | ||||||||||||||||||||||||||
| Money market funds | $ | $ | $ | $ | ||||||||||||||||||||||
| Commercial paper | ||||||||||||||||||||||||||
| Marketable securities: | ||||||||||||||||||||||||||
| U.S. treasuries | ||||||||||||||||||||||||||
| Certificates of deposit | ||||||||||||||||||||||||||
| U.S. agency securities | ||||||||||||||||||||||||||
| Corporate bonds | ||||||||||||||||||||||||||
| Commercial paper | ||||||||||||||||||||||||||
| Foreign exchange derivative contracts (Designated) | ||||||||||||||||||||||||||
| Interest rate swap derivative contracts | ||||||||||||||||||||||||||
| Total assets | $ | $ | $ | $ | ||||||||||||||||||||||
| Liabilities: | ||||||||||||||||||||||||||
| Foreign exchange derivative contracts (Designated) | $ | $ | ( | $ | $ | ( | ||||||||||||||||||||
| Interest rate swap derivative contracts | ( | ( | ||||||||||||||||||||||||
| Contingent consideration | ( | ( | ||||||||||||||||||||||||
| Total liabilities | $ | $ | ( | $ | ( | $ | ( | |||||||||||||||||||
| December 26, 2020 | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||||
| Assets: | ||||||||||||||||||||||||||
| Cash equivalents: | ||||||||||||||||||||||||||
| Money market funds | $ | $ | $ | $ | ||||||||||||||||||||||
| Marketable securities: | ||||||||||||||||||||||||||
| U.S. treasuries | ||||||||||||||||||||||||||
| Certificates of deposit | ||||||||||||||||||||||||||
| U.S. agency securities | ||||||||||||||||||||||||||
| Corporate bonds | ||||||||||||||||||||||||||
| Foreign exchange derivative contracts | ||||||||||||||||||||||||||
| Interest rate swap derivative contracts | ||||||||||||||||||||||||||
| Total assets | $ | $ | $ | $ | ||||||||||||||||||||||
| Liabilities: | ||||||||||||||||||||||||||
| Interest rate swap derivative contracts | $ | $ | ( | $ | $ | ( | ||||||||||||||||||||
| Contingent consideration | ( | ( | ||||||||||||||||||||||||
| Total liabilities | $ | $ | ( | $ | ( | $ | ( | |||||||||||||||||||
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
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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 income 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.
Contingent Consideration
Contingent consideration, arising from the acquisition of FRT, is a cash amount equal to 1.5 x EBIT as defined in the purchase agreement, up to a maximum of €10.3 million, payable subject to the performance of the acquired business in calendar 2020. We estimated the fair value of contingent consideration using a probability weighted approach. Key assumptions in determining the fair value of contingent consideration included estimating EBIT levels that we believed as of the acquisition date were likely to be achieved during the performance period and discounting at an appropriate discount rate. Contingent consideration as of March 27, 2021 was estimated to be $3.9 million, with the change from December 26, 2020 resulting from foreign currency translation.
Interest Rate Swaps
The fair value of our interest rate swap contracts is determined at the end of each reporting period based on valuation models that use interest rate yield curves as inputs. For accounting purposes, our interest rate swap contracts qualify for, and are designated as, cash flow hedges. The cash flows associated with the interest rate swaps are reported in Net cash provided by operating activities in our Condensed Consolidated Statements of Cash Flows and the fair value of the interest rate swap contracts are recorded within Accrued liabilities and Other liabilities in our Condensed Consolidated Balance Sheets.
The impact of the interest rate swaps on our Condensed Consolidated Statements of Income was as follows (in thousands):
| Amount of Gain or (Loss) Recognized in OCI on Derivative (Effective Portion) | Location of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) | Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) | Location of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion) | Amount of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion) | ||||||||||||||||||||||||||||
| Three Months Ended March 27, 2021 | $ | Interest expense | $ | ( | Interest expense | $ | — | |||||||||||||||||||||||||
| Three Months Ended March 28, 2020 | $ | ( | Interest expense | $ | Interest expense | $ | — | |||||||||||||||||||||||||