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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
Or
☐ 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
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) | |
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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 | |
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| 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 | |
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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 | |
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Provision for excess and obsolete inventories | 4,973 | | | 2,501 | |
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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) | |
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Purchases of marketable securities | (27,311) | | | (23,462) | |
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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) | |
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Principal repayments on term loans | (259) | | | (2,234) | |
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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 | |
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Operating lease, right-of-use assets obtained in exchange for lease obligations | 727 | | | 3,359 | |
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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 | |
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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:
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| Three Months Ended | | |
| April 1, 2023 | | March 26, 2022 | | | | |
Intel Corporation | 20.0 | % | | 20.8 | % | | | | |
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Taiwan Semiconductor Manufacturing Co., LTD. | * | | 10.7 | % | | | | |
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| 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):
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| 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):
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| | Probe Cards | | Systems | | Total |
Goodwill, as of December 25, 2021 | | $ | 178,424 | | | $ | 33,875 | | | $ | 212,299 | |
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Addition - Woburn Acquisition | | — | | | 550 | | | 550 | |
Foreign currency translation | | — | | | (1,405) | | | (1,405) | |
Goodwill, as of December 31, 2022 | | 178,424 | | | 33,020 | | | 211,444 | |
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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):
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| | 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 | |
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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):
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| 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):
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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):
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| 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):
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| 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 | |
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Changes to the restructuring accrual in the three months ended April 1, 2023 were as follows (in thousands):
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| 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) | |
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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):
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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 | |
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| | 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: | | | | | | | | |
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Interest rate swap derivative contracts | | $ | — | | | $ | (2) | | | $ | — | | | $ | (2) | |
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Total liabilities | | $ | — | | | $ | (2) | | | $ | — | | | $ | (2) | |
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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 | |
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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) | |
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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):
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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 | |
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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):