SEC Filing | FormFactor, Inc.

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form-20230701

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 July 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 August 2, 2023, 77,656,368 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 JULY 1, 2023

INDEX


Part I.	Financial Information

Item 1.	Financial Statements (Unaudited):

	Condensed Consolidated Balance Sheets as of July 1, 2023 and December 31, 2022	3

	Condensed Consolidated Statements of Income for the three and six months ended July 1, 2023 and June 2 5 , 2022	4

	Condensed Consolidated Statements of Comprehensive Income for the three and six months ended J uly 1, 2023 and June 2 5 , 2022	5

	Condensed Consolidated Statement of Stockholders' Equity for the three and six months ended July 1, 2023 and June 2 5 , 2022	6

	Condensed Consolidated Statements of Cash Flows for the si x months ended July 1, 2023 and June 2 5 , 2022	7

	Notes to Condensed Consolidated Financial Statements	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	31

Item 4.	Controls and Procedures	31

Part II.	Other Information	32



Item 1A.	Risk Factors	32









Item 6.	Exhibits	33

Signatures		34

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

FORMFACTOR, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

(Unaudited)


	July 1, 2023		December 31, 2022
ASSETS
Current assets:
Cash and cash equivalents	$	97,981	$	109,130
Marketable securities	138,943		129,006
Accounts receivable, net of allowance for credit losses of $510 and $168	94,013		88,143
Inventories, net	120,298		123,157
Restricted cash	1,144		1,221
Prepaid expenses and other current assets	25,876		23,895
Total current assets	478,255		474,552
Restricted cash	2,265		2,631
Operating lease, right-of-use-assets	31,001		31,362
Property, plant and equipment, net of accumulated depreciation	204,577		189,848
Goodwill	211,929		211,444
Intangibles, net	22,149		26,751
Deferred tax assets	71,172		67,646
Other assets	3,790		3,994
Total assets	$	1,025,138	$	1,008,228

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	63,770	$	69,308
Accrued liabilities	31,413		42,115
Current portion of term loan, net of unamortized issuance costs	1,150		1,045
Deferred revenue	19,899		29,846
Operating lease liabilities	7,871		7,353
Total current liabilities	124,103		149,667
Term loan, less current portion, net of unamortized issuance costs	13,765		14,389
Deferred tax liabilities	2,704		2,732
Long-term operating lease liabilities	26,458		27,587
Deferred grant	18,000		—
Other liabilities	5,845		5,568
Total liabilities	190,875		199,943

Stockholders’ equity:
Common stock, $0.001 par value:
250,000,000 shares authorized; 77,184,012 and 76,914,590 shares issued and outstanding	77		77
Additional paid-in capital	867,517		844,842
Accumulated other comprehensive loss	(4,445)		(5,578)
Accumulated deficit	(28,886)		(31,056)
Total stockholders’ equity	834,263		808,285
Total liabilities and stockholders’ equity	$	1,025,138	$	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				Six Months Ended
	July 1, 2023		June 25, 2022		July 1, 2023		June 25, 2022
Revenues	$	155,916	$	203,907	$	323,364	$	401,081
Cost of revenues	95,633		109,538		202,003		212,488
Gross profit	60,283		94,369		121,361		188,593
Operating expenses:
Research and development	28,340		28,317		56,585		55,451
Selling, general and administrative	33,255		33,406		65,997		66,312
Total operating expenses	61,595		61,723		122,582		121,763
Operating income (loss)	(1,312)		32,646		(1,221)		66,830
Interest income, net	1,482		181		2,758		127


Other income, net	450		551		473		743
Income before income taxes	620		33,378		2,010		67,700
Provision (benefit) for income taxes	(208)		3,136		(160)		7,586
Net income	$	828	$	30,242	$	2,170	$	60,114
Net income per share:
Basic	$	0.01	$	0.39	$	0.03	$	0.77
Diluted	$	0.01	$	0.38	$	0.03	$	0.76
Weighted-average number of shares used in per share calculations:
Basic	77,159		77,897		77,112		78,071
Diluted	77,616		79,210		77,450		79,423

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				Six Months Ended
	July 1, 2023		June 25, 2022		July 1, 2023		June 25, 2022
Net income	$	828	$	30,242	$	2,170	$	60,114
Other comprehensive income (loss), net of tax:
Translation adjustments	(122)		(3,856)		710		(6,554)
Unrealized gains (losses) on available-for-sale marketable securities	(85)		(547)		518		(1,751)
Unrealized gains (losses) on derivative instruments	(52)		(116)		(95)		758
Other comprehensive income (loss), net of tax:	(259)		(4,519)		1,133		(7,547)
Comprehensive income	$	569	$	25,723	$	3,303	$	52,567

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 Loss		Accumulated Deficit		Total

	Six Months Ended July 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	59,367	—		(456)		—		—		(456)

Stock-based compensation	—	—		18,107		—		—		18,107
Other comprehensive income	—	—		—		1,133		—		1,133
Net income	—	—		—		—		2,170		2,170
Balances, July 1, 2023	77,184,012	$	77	$	867,517	$	(4,445)	$	(28,886)	$	834,263

	Three Months Ended July 1, 2023
Balances, April 1, 2023	77,142,023	$	77	$	858,195	$	(4,186)	$	(29,714)	$	824,372


Issuance of common stock pursuant to vesting of restricted stock units, net of stock withheld for tax	41,989	—		(69)		—		—		(69)

Stock-based compensation	—	—		9,391		—		—		9,391
Other comprehensive loss	—	—		—		(259)		—		(259)
Net income	—	—		—		—		828		828
Balances, July 1, 2023	77,184,012	$	77	$	867,517	$	(4,445)	$	(28,886)	$	834,263




	Six Months Ended June 25, 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	234,076	—		(4,243)		—		—		(4,243)
Purchase and retirement of common stock through repurchase program	(1,443,491)	(1)		(54,327)		—		—		(54,328)
Stock-based compensation	—	—		14,522		—		—		14,522
Other comprehensive loss	—	—		—		(7,547)		—		(7,547)
Net income	—	—		—		—		60,114		60,114
Balances, June 25, 2022	77,194,733	$	77	$	860,584	$	(8,996)	$	(21,680)	$	829,985

	Three Months Ended June 25, 2022
Balances, March 26, 2022	78,166,212	$	78	$	902,994	$	(4,477)	$	(51,922)	$	846,673


Issuance of common stock pursuant to vesting of restricted stock units, net of stock withheld for tax	231,464	—		(4,171)		—		—		(4,171)
Purchase and retirement of common stock through repurchase program	(1,202,943)	(1)		(44,930)		—		—		(44,931)
Stock-based compensation	—	—		6,691		—		—		6,691
Other comprehensive loss	—	—		—		(4,519)		—		(4,519)
Net income	—	—		—		—		30,242		30,242
Balances, June 25, 2022	77,194,733	$	77	$	860,584	$	(8,996)	$	(21,680)	$	829,985

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

FORMFACTOR, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)


	Six Months Ended
	July 1, 2023		June 25, 2022
Cash flows from operating activities:
Net income	$	2,170	$	60,114
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	15,121		14,146
Amortization	4,766		4,702
Reduction in the carrying amount of right-of-use assets	3,914		4,414
Stock-based compensation expense	18,494		13,878
Deferred income tax benefit	(3,639)		(3,703)
Provision for excess and obsolete inventories	8,628		4,726


Other adjustments to reconcile net income to net cash provided by operating activities	1,801		3,846
Changes in assets and liabilities:
Accounts receivable	(6,830)		5,530
Inventories	(5,880)		(32,268)
Prepaid expenses and other current assets	(1,099)		1,295
Other assets	(83)		(40)
Accounts payable	3,578		7,521
Accrued liabilities	(10,606)		4,102
Other liabilities	456		73
Deferred revenues	(9,945)		2,727
Deferred grant	18,000		—
Operating lease liabilities	(4,065)		(4,262)
Net cash provided by operating activities	34,781		86,801
Cash flows from investing activities:
Acquisition of property, plant and equipment	(40,177)		(30,116)
Acquisition of business	—		(3,121)
Purchases of marketable securities	(66,650)		(52,344)
Purchase of promissory note receivable	—		(1,000)
Proceeds from maturities and sales of marketable securities	58,363		45,470
Net cash used in investing activities	(48,464)		(41,111)
Cash flows from financing activities:
Proceeds from issuances of common stock	5,024		5,687
Purchase of common stock through stock repurchase program	—		(54,328)
Tax withholdings related to net share settlements of equity awards	(456)		(4,243)

Principal repayments on term loans	(519)		(4,379)

Net cash provided by (used in) financing activities	4,049		(57,263)
Effect of exchange rate changes on cash, cash equivalents and restricted cash	(1,958)		(3,470)
Net decrease in cash, cash equivalents and restricted cash	(11,592)		(15,043)
Cash, cash equivalents and restricted cash, beginning of period	112,982		155,342
Cash, cash equivalents and restricted cash, end of period	$	101,390	$	140,299

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

FORMFACTOR, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)


	Six Months Ended
	July 1, 2023		June 25, 2022
Non-cash investing and financing activities:
Decrease in accounts payable and accrued liabilities related to property, plant and equipment purchases	$	9,187	$	4,165

Operating lease, right-of-use assets obtained in exchange for lease obligations	3,635		3,438

Supplemental disclosure of cash flow information:
Cash paid for income taxes, net	$	9,427	$	6,473
Cash paid for interest	212		294
Operating cash outflows from operating leases	4,514		4,379

Reconciliation of cash, cash equivalents and restricted cash:
Cash and cash equivalents	$	97,981	$	136,395
Restricted cash, current	1,144		2,102
Restricted cash, non-current	2,265		1,802
Total cash, cash equivalents and restricted cash	$	101,390	$	140,299

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 six months ended July 1, 2023 and June 25, 2022 each contained 26 weeks. Fiscal 2023 will end on December 30, 2023.

Significant Accounting Policies

Our significant accounting policies have not changed during the six months ended July 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 the Grant 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.

New Accounting Pronouncements

Reference Rate Reform

In March 2020, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2020-04, “Reference 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 GAAP 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 December 2022, the FASB issued ASU 2022-06, “Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848,” extending the relief offered in Topic 848 from December 31, 2022 to December 31, 2024, after which entities will no longer be permitted to apply the optional expedients in Topic 848.

In May 2023, the Company entered into a rate replacement amendment to its credit facility loan agreement to replace LIBOR with the Secured Overnight Financing Rate (“SOFR”) and concurrently signed an amendment to modify the floating rate option on its interest rate swap to match that of the debt. The Company applied practical expedients provided in Topic 848 allowing the modified instrument to be accounted for and presented in the same manner as the instrument existing before the modification. These modifications had no significant impact on our financial statements. Refer to Note 6, Debt for further information regarding the terms of the credit facility loan agreement and interest rate swap agreement.

Reclassifications

Certain immaterial reclassifications were made to the prior year financial statements to conform to the current year presentation.

Note 2 — Concentration of Credit and Other Risks

The following customer accounted for 10% or more of our revenues for the periods indicated:


	Three Months Ended				Six Months Ended
	July 1, 2023		June 25, 2022		July 1, 2023		June 25, 2022
Intel Corporation	14.2	%	20.9	%	17.2	%	20.9	%

At July 1, 2023 and December 31, 2022, one customer accounted for 15.3% and 13.8% of gross accounts receivable, respectively.

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):


	July 1, 2023		December 31, 2022
Raw materials	$	55,491	$	55,726
Work-in-progress	44,549		46,067
Finished goods	20,258		21,364
	$	120,298	$	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	—		485		485
Goodwill, as of July 1, 2023	$	178,424	$	33,505	$	211,929

We have not recorded goodwill impairments for the six months ended July 1, 2023.

Intangible assets were as follows (in thousands):


	July 1, 2023						December 31, 2022
Intangible Assets	Gross		Accumulated Amortization		Net		Gross		Accumulated Amortization		Net
Existing developed technologies	$	171,896	$	153,200	$	18,696	$	171,441	$	151,212	$	20,229
Customer relationships	51,036		48,085		2,951		50,912		45,003		5,909
Trade name	8,000		7,898		102		7,972		7,759		213

In-process research and development	400		—		400		400		—		400
	$	231,332	$	209,183	$	22,149	$	230,725	$	203,974	$	26,751

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


	Three Months Ended				Six Months Ended
	July 1, 2023		June 25, 2022		July 1, 2023		June 25, 2022
Cost of revenues	$	838	$	788	$	1,669	$	1,596
Selling, general and administrative	1,550		1,545		3,097		3,106
	$	2,388	$	2,333	$	4,766	$	4,702

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	$	2,435
2024	4,624
2025	4,280
2026	3,184
2027	2,839
Thereafter	4,387
	$	21,749

Note 5 — Accrued Liabilities

Accrued liabilities consisted of the following (in thousands):


	July 1, 2023		December 31, 2022
Accrued compensation and benefits	$	17,386	$	15,864
Employee stock purchase plan contributions withheld	4,142		4,585
Accrued income and other taxes	3,944		12,817
Accrued warranty	3,506		4,199
Accrued restructuring charges	207		1,249
Other accrued expenses	2,228		3,401
	$	31,413	$	42,115

Note 6 — Debt

On June 22, 2020, we entered into an $18.0 million 15-year credit facility loan agreement (the “Building Term Loan”) with MUFG Union Bank, National Association (“Union Bank”). The proceeds of the Building Term Loan were used to purchase a building adjacent to our leased facilities in Livermore, California. On May 19, 2023, we amended the Building Term Loan, replacing the benchmark reference rate LIBOR with the term SOFR, with no change to the amount or timing of contractual cash flows.

The Building Term Loan bears interest at a rate equal to the applicable SOFR rate, plus 0.1148%, plus 1.75% per annum. Interest payments are payable in monthly installments over a fifteen-year period. The interest rate at July 1, 2023 was 5.17%.

On March 17, 2020, we entered into an interest rate swap agreement with Union Bank to hedge the interest payment on the Building Term Loan for the notional amount of $18.0 million. As future levels of LIBOR over the life of the loan were uncertain, we entered into this interest-rate swap agreement to hedge the exposure in interest rate risks associated with movement in LIBOR rates. By entering into the agreement, we converted a floating-rate interest at one-month LIBOR plus 1.75% into a fixed-rate interest at 2.75%. This agreement was amended on May 19, 2023 to replace the benchmark reference rate LIBOR with the term SOFR to match the Building Term Loan agreement (as amended). After the amendment, the interest rate swap continues to convert our floating-rate interest into a fixed-rate at 2.75%.

Note 7 — 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 $13.3 million, with $10.1 million within the Probe Cards segment and $3.2 million within the Systems segment, which were comprised of $1.4 million of severance and employee-related costs, $2.0 million in contract and lease termination costs, $9.4 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
	July 1, 2023						June 25, 2022
	Probe Cards		Systems		Total		Probe Cards		Systems		Total
Cost of revenues	$	47	$	285	$	332	$	227	$	227	$	454
Research and development	170		51		221		—		53		53
Selling, general and administrative	6		59		65		—		74		74
	$	223	$	395	$	618	$	227	$	354	$	581

	Six Months Ended
	July 1, 2023						June 25, 2022
	Probe Cards		Systems		Total		Probe Cards		Systems		Total
Cost of revenues	$	106	$	251	$	357	$	266	$	327	$	593
Research and development	182		109		291		—		199		199
Selling, general and administrative	1,069		118		1,187		3		99		102
	$	1,357	$	478	$	1,835	$	269	$	625	$	894

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


	Employee Severance and Benefits		Stock-based Compensation		Inventory Impairments & Other Inventory Related Costs		Contract Termination & Other Costs		Total
December 31, 2022	$	1,249	$	—	$	—	$	—	$	1,249
Restructuring charges	917		295		390		233		1,835
Cash payments	(1,959)		—		(89)		(233)		(2,281)

Non-cash settlement	—		(295)		(301)		—		(596)
July 1, 2023	$	207	$	—	$	—	$	—	$	207

Note 8 — 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 and six months ended July 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 six 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):


July 1, 2023	Level 1		Level 2		Level 3		Total
Assets:
Cash equivalents:
Money market funds	$	30,179	$	—	$	—	$	30,179



U.S. treasuries	1,691		—		—		1,691
	31,870		—		—		31,870
Marketable securities:
U.S. treasuries	46,803		—		—		46,803
Certificates of deposit	—		235		—		235
U.S. agency securities	—		14,733		—		14,733
Corporate bonds	—		53,097		—		53,097
Commercial paper	—		24,075		—		24,075
	46,803		92,140		—		138,943
Foreign exchange derivative contracts	—		549		—		549
Promissory note receivable	—		—		926		926
Interest rate swap derivative contracts	—		2,263		—		2,263
Total assets	$	78,673	$	94,952	$	926	$	174,551
Liabilities:
Foreign exchange derivative contracts	$	—	$	(60)	$	—	$	(60)


Total liabilities	$	—	$	(60)	$	—	$	(60)


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 July 1, 2023 will mature by the second quarter of fiscal 2024.

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


Currency	Contract Position	Contract Amount (Local Currency)	Contract Amount (U.S. Dollars)
Euro Dollar	Buy	18,558	$	19,903
Euro Dollar	Sell	1,077	1,176
Japanese Yen	Sell	3,104,537	21,583
Korean Won	Buy	1,258,185	962
Taiwan Dollar	Sell	31,197	1,001

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 7, Restructuring Charges, there were no assets or liabilities measured at fair value on a nonrecurring basis during the three and six months ended July 1, 2023 or June 25, 2022.

Note 9 — 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):


	Six Months Ended
	July 1, 2023		June 25, 2022
Balance at beginning of period	$	4,199	$	2,805
Accruals	2,934		3,846
Settlements	(3,627)		(2,673)
Balance at end of period	$	3,506	$	3,978

Note 10 — Property, Plant and Equipment, net

Property, plant and equipment, net consisted of the following (in thousands):


	July 1, 2023		December 31, 2022
Land	$	17,136	$	17,136
Building and building improvements	44,452		44,932
Machinery and equipment	284,837		276,180
Computer equipment and software	46,774		45,813
Furniture and fixtures	7,468		7,540
Leasehold improvements	88,416		86,500
Sub-total	489,083		478,101
Less: Accumulated depreciation and amortization	(349,123)		(335,711)
Net, property, plant and equipment	139,960		142,390
Construction-in-process	64,617		47,458
Total	$	204,577	$	189,848

Note 11 — Stockholders’ Equity and Stock-Based Compensation

Common Stock Repurchase Programs

On October 26, 2020, our Board of Directors authorized a two-year program to repurchase up to $50 million of outstanding common stock to offset potential dilution from issuances of common stock under our stock-based compensation programs. During the six months ended June 25, 2022, we repurchased 676,408 shares of common stock for $26.0 million. We utilized the remaining funds available for repurchase under this program during fiscal 2022.

On May 20, 2022, our Board of Directors authorized an additional program to repurchase up to $75 million of outstanding common stock, also with the primary purpose to offset potential dilution from issuances of common stock under our stock-based compensation programs. The share repurchase program will expire on May 20, 2024. During the six months ended July 1, 2023, we did not repurchase any common stock. As of July 1, 2023, $18.6 million remained available for future repurchases.

Our policy related to repurchases of our common stock is to charge the excess of cost over par value to additional paid-in capital once the shares are retired. All repurchases were made in compliance with Rule 10b-18 under the Securities Exchange Act of 1934, as amended.

Restricted Stock Units

Restricted stock unit (“RSU”) activity under our equity incentive plan was as follows:


	Units	Weighted Average Grant Date Fair Value
RSUs at December 31, 2022	2,227,081	$	35.28
Awards granted	1,014,619	30.97
Awards vested	(75,144)	37.76
Awards forfeited	(122,881)	35.09
RSUs at July 1, 2023	3,043,675	33.78

Performance Restricted Stock Units

We may grant Performance RSUs (“PRSUs”) to certain executives, which vest based upon us achieving certain market performance criteria. There were no market based PRSUs granted during the six months ended July 1, 2023. PRSUs are included as part of the RSU activity above.

Employee Stock Purchase Plan

Information related to activity under our Employee Stock Purchase Plan (“ESPP”) was as follows:


	Six Months Ended
	July 1, 2023
Shares issued	210,055
Weighted average per share purchase price	$	23.92
Weighted average per share discount from the fair value of our common stock on the date of issuance	$	(4.22)

Stock-Based Compensation

Stock-based compensation was included in our Condensed Consolidated Statements of Income as follows (in thousands):


	Three Months Ended				Six Months Ended
	July 1, 2023		June 25, 2022		July 1, 2023		June 25, 2022
Cost of revenues	$	1,515	$	734	$	3,425	$	1,812
Research and development	2,363		1,695		4,735		3,681
Selling, general and administrative	5,326		3,929		10,334		8,385
Total stock-based compensation	$	9,204	$	6,358	$	18,494	$	13,878

Unrecognized Compensation Costs

At July 1, 2023, the unrecognized stock-based compensation was as follows (dollars in thousands):


	Unrecognized Expense		Average Expected Recognition Period in Years
Restricted stock units	$	60,794	2.28
Performance restricted stock units	7,789		1.72
Employee stock purchase plan	246		0.09
Total unrecognized stock-based compensation expense	$	68,829	2.22

Note 12 — Net Income per Share

The following table reconciles the shares used in calculating basic net income per share and diluted net income per share (in thousands):


	Three Months Ended		Six Months Ended
	July 1, 2023	June 25, 2022	July 1, 2023	June 25, 2022



Weighted-average shares used in computing basic net income per share	77,159	77,897	77,112	78,071
Add potentially dilutive securities	457	1,313	338	1,352
Weighted-average shares used in computing diluted net income per share	77,616	79,210	77,450	79,423

Securities not included as they would have been antidilutive	486	23	343	—

Note 13 — Commitments and Contingencies

Leases

See Note 14, Leases.

Contractual Obligations and Commitments

Our contractual obligations and commitments have not materially changed as of July 1, 2023 from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022.

Legal Matters

From time to time, we are subject to legal proceedings and claims in the ordinary course of business, the outcomes of which cannot be estimated with certainty. Our ability to estimate the outcomes may change in the near term and the effect of any such change could have a material adverse effect on our financial position, results of operations or cash flows.

Note 14 — Leases

We lease real estate space under non-cancelable operating lease agreements for commercial and industrial space, as well as for a portion of our corporate headquarters located in Livermore, California. Our leases have remaining terms of 1 to 6 years, and some leases include options to extend up to 20 years. We also have operating leases for automobiles with remaining lease terms of 1 year. We did not include any of our renewal options in our lease terms for calculating our lease liability as the renewal options allow us to maintain operational flexibility and we are not reasonably certain we will exercise these options at this time. The weighted-average remaining lease term for our operating leases was