SEC Filing | FormFactor, Inc.

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form-20230401

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark one)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended April 1, 2023

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 000-50307

FormFactor, Inc.

(Exact name of registrant as specified in its charter)


Delaware						13-3711155
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification No.)

7005 Southfront Road, Livermore, California 94551

(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

Common stock, $0.001 par value

FORM

Nasdaq Global Market

______________________________________

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):

Large Accelerated Filer

☒

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 May 3, 2023, 77,144,094 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 APRIL 1, 2023

INDEX


Part I.	Financial Information

Item 1.	Financial Statements (Unaudited):

	Condensed Consolidated Balance Sheets as of April 1 , 202 3 and December 31 , 20 2 2	3

	Condensed Consolidated Statements of Income for the three months ended April 1 , 202 3 and March 2 6 , 20 2 2	4

	Condensed Consolidated Statements of Comprehensive Income for the three months ended April 1 , 202 3 and March 2 6 , 20 2 2	5

	Condensed Consolidated Statement of Stockholders' Equity for the three months ended April 1 , 202 3 and March 2 6 , 20 2 2	6

	Condensed Consolidated Statements of Cash Flows for the three months ended April 1 , 202 3 and March 2 6 , 20 2 2	7

	Notes to Condensed Consolidated Financial Statements	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	27

Item 4.	Controls and Procedures	27

Part II.	Other Information	28



Item 1A.	Risk Factors	28









Item 6.	Exhibits	29

Signatures		30

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

FORMFACTOR, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

(Unaudited)


	April 1, 2023		December 31, 2022
ASSETS
Current assets:
Cash and cash equivalents	$	112,360	$	109,130
Marketable securities	123,891		129,006
Accounts receivable, net of allowance for credit losses of $169 and $168	103,969		88,143
Inventories, net	116,553		123,157
Restricted cash	1,207		1,221
Prepaid expenses and other current assets	22,941		23,895
Total current assets	480,921		474,552
Restricted cash	2,287		2,631
Operating lease, right-of-use-assets	30,420		31,362
Property, plant and equipment, net of accumulated depreciation	198,232		189,848
Goodwill	211,773		211,444
Intangibles, net	24,486		26,751
Deferred tax assets	67,951		67,646
Other assets	3,686		3,994
Total assets	$	1,019,756	$	1,008,228

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	63,756	$	69,308
Accrued liabilities	31,981		42,115
Current portion of term loan, net of unamortized issuance costs	1,142		1,045
Deferred revenue	23,779		29,846
Operating lease liabilities	7,512		7,353
Total current liabilities	128,170		149,667
Term loan, less current portion, net of unamortized issuance costs	14,034		14,389
Deferred tax liabilities	2,905		2,732
Long-term operating lease liabilities	26,407		27,587
Deferred grant	18,000		—
Other liabilities	5,868		5,568
Total liabilities	195,384		199,943

Stockholders’ equity:


Common stock, $0.001 par value:
250,000,000 shares authorized; 77,142,023 and 76,914,590 shares issued and outstanding	77		77

Additional paid-in capital	858,195		844,842
Accumulated other comprehensive loss	(4,186)		(5,578)
Accumulated deficit	(29,714)		(31,056)
Total stockholders’ equity	824,372		808,285
Total liabilities and stockholders’ equity	$	1,019,756	$	1,008,228

The accompanying notes are an integral part of these condensed consolidated financial statements.

FORMFACTOR, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share amounts)

(Unaudited)


	Three Months Ended
	April 1, 2023		March 26, 2022
Revenues	$	167,448	$	197,174
Cost of revenues	106,370		102,950
Gross profit	61,078		94,224
Operating expenses:
Research and development	28,245		27,134
Selling, general and administrative	32,742		32,906
Total operating expenses	60,987		60,040
Operating income	91		34,184
Interest income (expense), net	1,276		(54)


Other income, net	23		192
Income before income taxes	1,390		34,322
Provision for income taxes	48		4,450
Net income	$	1,342	$	29,872
Net income per share:
Basic	$	0.02	$	0.38
Diluted	$	0.02	$	0.38
Weighted-average number of shares used in per share calculations:
Basic	77,066		78,246
Diluted	77,255		79,468

The accompanying notes are an integral part of these condensed consolidated financial statements.

FORMFACTOR, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)


	Three Months Ended
	April 1, 2023		March 26, 2022
Net income	$	1,342	$	29,872
Other comprehensive income (loss), net of tax:
Translation adjustments	832		(2,698)
Unrealized gains (losses) on available-for-sale marketable securities	603		(1,204)
Unrealized gains (losses) on derivative instruments	(43)		874
Other comprehensive income (loss), net of tax:	1,392		(3,028)
Comprehensive income	$	2,734	$	26,844

The accompanying notes are an integral part of these condensed consolidated financial statements.

FORMFACTOR, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(In thousands, except shares)

(Unaudited)


	Shares of Common Stock	Common Stock		Additional Paid-in Capital		Accumulated Other Comprehensive Income (Loss)		Accumulated Deficit		Total

	Three Months Ended April 1, 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	210,055	—		5,024		—		—		5,024

Issuance of common stock pursuant to vesting of restricted stock units, net of stock withheld for tax	17,378	—		(387)		—		—		(387)

Stock-based compensation	—	—		8,716		—		—		8,716
Other comprehensive income	—	—		—		1,392		—		1,392
Net income	—	—		—		—		1,342		1,342
Balances, April 1, 2023	77,142,023	$	77	$	858,195	$	(4,186)	$	(29,714)	$	824,372




	Three Months Ended March 26, 2022
Balances, December 25, 2021	78,240,506	$	78	$	898,945	$	(1,449)	$	(81,794)	$	815,780
Issuance of common stock under the Employee Stock Purchase Plan	157,642	—		5,645		—		—		5,645
Issuance of common stock pursuant to exercise of options	6,000	—		42		—		—		42
Issuance of common stock pursuant to vesting of restricted stock units, net of stock withheld for tax	2,612	—		(72)		—		—		(72)
Purchase and retirement of common stock through repurchase program	(240,548)	—		(9,397)		—		—		(9,397)
Stock-based compensation	—	—		7,831		—		—		7,831
Other comprehensive loss	—	—		—		(3,028)		—		(3,028)
Net income	—	—		—		—		29,872		29,872
Balances, March 26, 2022	78,166,212	$	78	$	902,994	$	(4,477)	$	(51,922)	$	846,673

The accompanying notes are an integral part of these condensed consolidated financial statements.

FORMFACTOR, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)


	Three Months Ended
	April 1, 2023		March 26, 2022
Cash flows from operating activities:
Net income	$	1,342	$	29,872
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	7,576		6,960
Amortization	2,378		2,369
Reduction in the carrying amount of right-of-use assets	1,690		2,492
Stock-based compensation expense	9,290		7,520

Provision for excess and obsolete inventories	4,973		2,501


Other adjustments to reconcile net income to net cash provided by operating activities	133		182
Changes in assets and liabilities:
Accounts receivable	(15,926)		966
Inventories	1,375		(17,080)
Prepaid expenses and other current assets	1,009		(144)
Other assets	(55)		(73)
Accounts payable	(1,819)		10,150
Accrued liabilities	(10,209)		(3,120)
Other liabilities	319		87
Deferred revenues	(6,046)		3,908
Deferred grant	18,000		—
Operating lease liabilities	(1,721)		(2,435)
Net cash provided by operating activities	12,309		44,155
Cash flows from investing activities:
Acquisition of property, plant and equipment	(19,701)		(15,606)

Purchases of marketable securities	(27,311)		(23,462)

Proceeds from maturities and sales of marketable securities	33,473		17,990
Net cash used in investing activities	(13,539)		(21,078)
Cash flows from financing activities:
Proceeds from issuances of common stock	5,024		5,687
Purchase of common stock through stock repurchase program	—		(9,397)
Tax withholdings related to net share settlements of equity awards	(387)		(72)

Principal repayments on term loans	(259)		(2,234)

Net cash provided by (used) in financing activities	4,378		(6,016)
Effect of exchange rate changes on cash, cash equivalents and restricted cash	(276)		(1,142)
Net increase in cash, cash equivalents and restricted cash	2,872		15,919
Cash, cash equivalents and restricted cash, beginning of period	112,982		155,342
Cash, cash equivalents and restricted cash, end of period	$	115,854	$	171,261

The accompanying notes are an integral part of these condensed consolidated financial statements.

FORMFACTOR, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)


	Three Months Ended
	April 1, 2023		March 26, 2022
Non-cash investing and financing activities:
Decrease in accounts payable and accrued liabilities related to property, plant and equipment purchases	$	3,755	$	2,524

Operating lease, right-of-use assets obtained in exchange for lease obligations	727		3,359

Supplemental disclosure of cash flow information:
Cash paid for income taxes, net	$	7,391	$	890
Cash paid for interest	106		163
Operating cash outflows from operating leases	2,191		2,094

Reconciliation of cash, cash equivalents and restricted cash:
Cash and cash equivalents	$	112,360	$	167,182
Restricted cash, current	1,207		2,026
Restricted cash, non-current	2,287		2,053
Total cash, cash equivalents and restricted cash	$	115,854	$	171,261

The accompanying notes are an integral part of these condensed consolidated financial statements.

FORMFACTOR, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1 — Basis of Presentation and Significant Accounting Policies

Basis of Presentation

The accompanying condensed consolidated financial information of FormFactor, Inc. is unaudited and has been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). However, such information reflects all adjustments, consisting only of normal recurring adjustments, which are, in the opinion of management, necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods. The condensed consolidated financial statements included herein should be read in conjunction with the consolidated financial statements and the notes thereto included in our 2022 Annual Report on Form 10-K filed with the SEC on February 24, 2023. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the full year.

Fiscal Year

We operate on a 52/53 week fiscal year, whereby the fiscal year ends on the last Saturday of December. Fiscal 2023 and 2022 contain 52 weeks and 53 weeks, respectively, and the three months ended April 1, 2023 and March 26, 2022 each contained 13 weeks. Fiscal 2023 will end on December 30, 2023.

Significant Accounting Policies

Our significant accounting policies have not changed during the three months ended April 1, 2023 from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022, except for:

Government Assistance

In January 2023, we received $18.0 million in cash from a California Competes Grant (the “Grant”) awarded from the California Governor’s Office of Business and Economic Development. The Grant requires FormFactor to create and maintain full-time jobs and make significant infrastructure investments within California over a 5-year term. If we do not meet the requirements of the Grant, we will be required to repay all or a portion of the Grant.

The Grant is included in our Condensed Consolidated Balance Sheets within Deferred grant and we have elected to recognize when earned as an offset to Cost of revenues and Operating expenses within our Condensed Consolidated Statements of Income. We have elected to present the proceeds from the Grant as cash provided by operating activities within our Condensed Consolidated Statements of Cash Flows as the grant is to offset operations.

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
	April 1, 2023		March 26, 2022
Intel Corporation	20.0	%	20.8	%

Taiwan Semiconductor Manufacturing Co., LTD.	*		10.7	%


	20.0	%	31.5	%

At April 1, 2023, two customers accounted for 17.9% and 15.9% of gross accounts receivable, respectively. At December 31, 2022, one customer accounted for 13.8% of gross accounts receivable.

Note 3 — Inventories, net

Inventories are stated at the lower of cost (principally standard cost, which approximates actual cost on a first in, first out basis) or net realizable value.

Inventories, net, consisted of the following (in thousands):


	April 1, 2023		December 31, 2022
Raw materials	$	57,748	$	55,726
Work-in-progress	39,376		46,067
Finished goods	19,429		21,364
	$	116,553	$	123,157

Note 4 — Goodwill and Intangible Assets

Goodwill by reportable segment was as follows (in thousands):


	Probe Cards		Systems		Total
Goodwill, as of December 25, 2021	$	178,424	$	33,875	$	212,299


Addition - Woburn Acquisition	—		550		550
Foreign currency translation	—		(1,405)		(1,405)
Goodwill, as of December 31, 2022	178,424		33,020		211,444


Foreign currency translation	—		329		329
Goodwill, as of April 1, 2023	$	178,424	$	33,349	$	211,773

We have not recorded goodwill impairments for the three months ended April 1, 2023.

Intangible assets were as follows (in thousands):


	April 1, 2023						December 31, 2022
Intangible Assets	Gross		Accumulated Amortization		Net		Gross		Accumulated Amortization		Net
Existing developed technologies	$	171,750	$	152,260	$	19,490	$	171,441	$	151,212	$	20,229
Customer relationships	50,996		46,559		4,437		50,912		45,003		5,909
Trade name	7,992		7,833		159		7,972		7,759		213

In-process research and development	400		—		400		400		—		400
	$	231,138	$	206,652	$	24,486	$	230,725	$	203,974	$	26,751

Amortization expense was included in our Condensed Consolidated Statements of Income as follows (in thousands):


	Three Months Ended
	April 1, 2023		March 26, 2022
Cost of revenues	$	831	$	808
Selling, general and administrative	1,547		1,561
	$	2,378	$	2,369

The estimated future amortization of definite-lived intangible assets, excluding in-process research and development, is as follows (in thousands):


Fiscal Year	Amount
Remainder of 2023	$	4,813
2024	4,611
2025	4,268
2026	3,175
2027	2,832
Thereafter	4,387
	$	24,086

Note 5 — Accrued Liabilities

Accrued liabilities consisted of the following (in thousands):


	April 1, 2023		December 31, 2022
Accrued compensation and benefits	$	20,028	$	15,864
Accrued income and other taxes	3,241		12,817
Accrued warranty	3,872		4,199
Employee stock purchase plan contributions withheld	1,533		4,585
Accrued restructuring charges	376		1,249
Other accrued expenses	2,931		3,401
	$	31,981	$	42,115

Note 6 — Restructuring Charges

2022 Restructuring Plan

On October 25, 2022, we adopted a restructuring plan (“2022 restructuring plan”) to align our cost structure with reduced demand levels, by streamlining and improving the efficiency and business effectiveness of our operations. This plan included lowering headcount by approximately 13% of our workforce.

The Company has recognized 2022 restructuring plan charges of approximately $8.1 million for severance and employee-related costs, including $0.3 million for stock-based compensation, with $7.1 million within the Probe Cards segment, $0.5 million within the Systems segment, and $0.5 million within Corporate. We do not expect to incur additional material costs related to the 2022 restructuring plan.

2021 Restructuring Plan

On September 25, 2021, we adopted restructuring plans (“2021 restructuring plans”) to improve our business effectiveness and streamline our operations by consolidating certain manufacturing facilities for both the Probe Cards segment and the Systems segment. This included plans to consolidate or relocate certain leased locations in the United States to other locations in the United States, Germany and Asia. As a result of these changes to certain work locations, we have incurred personnel related costs to sever, relocate, or retain select employees. Additionally, as part of these plans we have undertaken actions to adjust capacity for certain product offerings, which included contract termination costs to satisfy contract obligations.

The Company has recognized 2021 restructuring plans charges of approximately $12.7 million, with $9.9 million within the Probe Cards segment and $2.8 million within the Systems segment, and were comprised of $1.3 million of severance and employee-related costs, $1.8 million in contract and lease termination costs, $9.1 million in inventory impairments and other inventory related costs, and $0.5 million of cost related to impairment of leasehold improvements, facility exits and fixed asset related costs. We do not expect additional material costs related to the 2021 restructuring plan.

Total restructuring charges for both the 2022 and 2021 restructuring plans included in our Condensed Consolidated Statements of Income were as follows (in thousands):


	Three Months Ended
	April 1, 2023						March 26, 2022
	Probe Cards		Systems		Total		Probe Cards		Systems		Total
Cost of revenues	$	70	$	(45)	$	25	$	39	$	100	$	139
Research and development	4		66		70		—		146		146
Selling, general and administrative	1,060		62		1,122		3		25		28
	$	1,134	$	83	$	1,217	$	42	$	271	$	313

Changes to the restructuring accrual in the three months ended April 1, 2023 were as follows (in thousands):


	Employee Severance and Benefits		Stock-based Compensation		Inventory Impairments & Other Inventory Related Costs		Total
December 31, 2022	$	1,249	$	—	$	—	$	1,249
Restructuring charges	842		295		80		1,217
Cash payments	(1,715)		—		(63)		(1,778)

Non-cash settlement	—		(295)		(17)		(312)
April 1, 2023	$	376	$	—	$	—	$	376

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 April 1, 2023 or the year ended December 31, 2022.

The carrying values of Cash, Accounts receivable, net, Restricted cash, Prepaid expenses and other current assets, Accounts payable, and Accrued liabilities approximate fair value due to their short maturities.

No changes were made to our valuation techniques during the first three months of fiscal 2023.

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):


April 1, 2023	Level 1		Level 2		Level 3		Total
Assets:
Cash equivalents:
Money market funds	$	44,777	$	—	$	—	$	44,777
Commercial paper	—		4,475		—		4,475



	44,777		4,475		—		49,252
Marketable securities:
U.S. treasuries	25,144		—		—		25,144
Certificates of deposit	—		471		—		471
U.S. agency securities	—		13,062		—		13,062
Corporate bonds	—		53,899		—		53,899
Commercial paper	—		31,315		—		31,315
	25,144		98,747		—		123,891
Foreign exchange derivative contracts	—		763		—		763
Promissory note receivable	—		—		943		943
Interest rate swap derivative contracts	—		2,041		—		2,041
Total assets	$	69,921	$	106,026	$	943	$	176,890
Liabilities:

Interest rate swap derivative contracts	$	—	$	(2)	$	—	$	(2)

Total liabilities	$	—	$	(2)	$	—	$	(2)


December 31, 2022	Level 1		Level 2		Level 3		Total
Assets:
Cash equivalents:
Money market funds	$	21,279	$	—	$	—	$	21,279
Commercial paper	—		4,969		—		4,969

U.S. agency securities	—		996		—		996
	21,279		5,965		—		27,244
Marketable securities:
U.S. treasuries	25,019		—		—		25,019
Certificates of deposit	—		706		—		706
U.S. agency securities	—		11,045		—		11,045
Corporate bonds	—		67,396		—		67,396
Commercial paper	—		24,840		—		24,840
	25,019		103,987		—		129,006
Foreign exchange derivative contracts	—		664		—		664
Promissory note receivable	—		—		943		943
Interest rate swap derivative contracts	—		2,374		—		2,374
Total assets	$	46,298	$	112,990	$	943	$	160,231
Liabilities:
Foreign exchange derivative contracts	$	—	$	(193)	$	—	$	(193)

Total liabilities	$	—	$	(193)	$	—	$	(193)

Cash Equivalents

The fair value of our cash equivalents is determined based on quoted market prices for similar or identical securities.

Marketable Securities

We classify our marketable securities as available-for-sale and value them utilizing a market approach. Our investments are

priced by pricing vendors who provide observable inputs for their pricing without applying significant judgment. Broker pricing is used mainly when a quoted price is not available, the investment is not priced by our pricing vendors or when a broker price is more reflective of fair value. Our broker-priced investments are categorized as Level 2 investments because fair value is based on similar assets without applying significant judgments. In addition, all investments have a sufficient trading volume to demonstrate that the fair value is appropriate.

Unrealized gains and losses were immaterial and were recorded as a component of Accumulated other comprehensive loss in our Condensed Consolidated Balance Sheets. We did not have any other-than-temporary unrealized gains or losses at either period end included in these financial statements.

Interest Rate Swaps

The fair value of our interest rate swap contracts is determined at the end of each reporting period based on valuation models that use interest rate yield curves as inputs. For accounting purposes, our interest rate swap contracts qualify for, and are designated as, cash flow hedges. The cash flows associated with the interest rate swaps are reported in Net cash provided by operating activities in our Condensed Consolidated Statements of Cash Flows and the fair value of the interest rate swap contracts are recorded within Prepaid expenses and other current assets and Other assets in our Condensed Consolidated Balance Sheets.

Foreign Exchange Derivative Contracts

We operate and sell our products in various global markets. As a result, we are exposed to changes in foreign currency exchange rates. We utilize foreign currency forward contracts to hedge against future movements in foreign exchange rates that affect certain existing foreign currency denominated assets and liabilities and forecasted foreign currency revenue and expense transactions. Under this program, our strategy is to have increases or decreases in our foreign currency exposures mitigated by gains or losses on the foreign currency forward contracts in order to mitigate the risks and volatility associated with foreign currency transaction gains or losses.

We do not use derivative financial instruments for speculative or trading purposes. For accounting purposes, certain of our foreign currency forward contracts are not designated as hedging instruments and, accordingly, we record the fair value of these contracts as of the end of our reporting period in our Condensed Consolidated Balance Sheets with changes in fair value recorded within Other income, net in our Condensed Consolidated Statement of Income for both realized and unrealized gains and losses. Certain of our foreign currency forward contracts are designated as cash flow hedges, and, accordingly, we record the fair value of these contracts as of the end of our reporting period in our Condensed Consolidated Balance Sheets with changes in fair value recorded as a component of Accumulated other comprehensive loss and reclassified into earnings in the same period in which the hedged transaction affects earnings, and in the same line item on the Condensed Consolidated Statements of Income as the impact of the hedge transaction.

The fair value of our foreign exchange derivative contracts was determined based on current foreign currency exchange rates and forward points. All of our foreign exchange derivative contracts outstanding at April 1, 2023 will mature by the first quarter of fiscal 2024.

The following table provides information about our foreign currency forward contracts outstanding as of April 1, 2023 (in thousands):


Currency	Contract Position	Contract Amount (Local Currency)	Contract Amount (U.S. Dollars)
Euro Dollar	Buy	23,004	$	24,250
Euro Dollar	Sell	2,356	2,472
Japanese Yen	Sell	3,227,282	24,377
Korean Won	Buy	1,751,490	1,355
Taiwan Dollar	Sell	43,413	1,435

Our foreign currency contracts are classified within Level 2 of the fair value hierarchy as they are valued using pricing models that utilize observable market inputs.

Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis

We measure and report our non-financial assets such as Property, plant and equipment, Goodwill and Intangible assets at fair value on a non-recurring basis if we determine these assets to be impaired or in the period when we make a business

acquisition. Other than as discussed in Note 6, Restructuring Charges, there were no assets or liabilities measured at fair value on a nonrecurring basis during the three months ended April 1, 2023 or March 26, 2022.

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 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):