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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 September 30, 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 November 1, 2023, 77,842,001 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 SEPTEMBER 30, 2023

INDEX

Part I.			Financial Information
Item 1.			Financial Statements (Unaudited):
			Condensed Consolidated Balance Sheets as of September 30, 2023 and December 31, 2022			3
			Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2023 and September 24, 2022			4
			Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2023 and September 24, 2022			5
			Condensed Consolidated Statement of Stockholders' Equity for the three and nine months ended September 30, 2023 and September 24, 2022			6
			Condensed Consolidated Statements of Cash Flows for the nine months ended Sept 30, 2023 and September 24, 2022			7
			Notes to Condensed Consolidated Financial Statements			9
Item 2.			Management’s Discussion and Analysis of Financial Condition and Results of Operations			22
Item 3.			Quantitative and Qualitative Disclosures About Market Risk			32
Item 4.			Controls and Procedures			32
Part II.			Other Information			33
Item 1A.			Risk Factors			33
Item 5.			Other Information			33
Item 6.			Exhibits			34
Signatures						35

2

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PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

FORMFACTOR, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

(Unaudited)

			September 30, 2023						December 31, 2022
ASSETS
Current assets:
Cash and cash equivalents			$	108,731					$	109,130
Marketable securities			135,693						129,006
Accounts receivable, net of allowance for credit losses of $500 and $168			88,965						88,143
Inventories, net			111,626						123,157
Restricted cash			1,171						1,221
Assets held-for-sale			33,718						—
Prepaid expenses and other current assets			26,681						23,895
Total current assets			506,585						474,552
Restricted cash			2,146						2,631
Operating lease, right-of-use-assets			29,824						31,362
Property, plant and equipment, net of accumulated depreciation			203,510						189,848
Goodwill			200,485						211,444
Intangibles, net			13,578						26,751
Deferred tax assets			73,572						67,646
Other assets			3,267						3,994
Total assets			$	1,032,967					$	1,008,228
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable			$	61,589					$	69,308
Accrued liabilities			36,487						42,115
Current portion of term loan, net of unamortized issuance costs			1,067						1,045
Deferred revenue			13,855						29,846
Liabilities held-for-sale			8,521						—
Operating lease liabilities			8,007						7,353
Total current liabilities			129,526						149,667
Term loan, less current portion, net of unamortized issuance costs			13,586						14,389
Deferred tax liabilities			317						2,732
Long-term operating lease liabilities			25,096						27,587
Deferred grant			18,000						—
Other liabilities			5,754						5,568
Total liabilities			192,279						199,943
Stockholders’ equity:
Common stock, $0.001 par value:
250,000,000 shares authorized; 77,839,317 and 76,914,590 shares issued and outstanding			78						77
Additional paid-in capital			873,634						844,842
Accumulated other comprehensive loss			(8,509)						(5,578)
Accumulated deficit			(24,515)						(31,056)
Total stockholders’ equity			840,688						808,285
Total liabilities and stockholders’ equity			$	1,032,967					$	1,008,228

 

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

3

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FORMFACTOR, INC.

 CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share amounts)

(Unaudited)

			Three Months Ended												Nine Months Ended
			September 30, 2023						September 24, 2022						September 30, 2023						September 24, 2022
Revenues			$	171,575					$	180,869					$	494,939					$	581,950
Cost of revenues			102,290						118,656						304,293						331,144
Gross profit			69,285						62,213						190,646						250,806
Operating expenses:
Research and development			31,014						26,549						87,599						82,000
Selling, general and administrative			35,564						31,637						101,561						97,949
Total operating expenses			66,578						58,186						189,160						179,949
Operating income			2,707						4,027						1,486						70,857
Interest income, net			1,662						557						4,420						684
Other income, net			788						1,041						1,261						1,784
Income before income taxes			5,157						5,625						7,167						73,325
Provision for income taxes			786						1,274						626						8,860
Net income			$	4,371					$	4,351					$	6,541					$	64,465
Net income per share:
Basic			$	0.06					$	0.06					$	0.08					$	0.83
Diluted			$	0.06					$	0.06					$	0.08					$	0.82
Weighted-average number of shares used in per share calculations:
Basic			77,571						77,245						77,265						77,796
Diluted			78,412						77,688						77,860						78,492

 

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

4

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FORMFACTOR, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

			Three Months Ended												Nine Months Ended
			September 30, 2023						September 24, 2022						September 30, 2023						September 24, 2022
Net income			$	4,371					$	4,351					$	6,541					$	64,465
Other comprehensive loss, net of tax:
Translation adjustments			(3,351)						(7,348)						(2,641)						(13,902)
Unrealized gains (losses) on available-for-sale marketable securities			283						(674)						801						(2,425)
Unrealized losses on derivative instruments			(996)						(881)						(1,091)						(123)
Other comprehensive loss, net of tax:			(4,064)						(8,903)						(2,931)						(16,450)
Comprehensive income (loss)			$	307					$	(4,552)					$	3,610					$	48,015

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

5

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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
			Nine Months Ended September 30, 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			363,190						—						8,822						—						—						8,822
Issuance of common stock pursuant to vesting of restricted stock units, net of stock withheld for tax			561,537						1						(9,350)						—						—						(9,349)
Stock-based compensation			—						—						29,320						—						—						29,320
Other comprehensive loss			—						—						—						(2,931)						—						(2,931)
Net income			—						—						—						—						6,541						6,541
Balances, September 30, 2023			77,839,317						$	78					$	873,634					$	(8,509)					$	(24,515)					$	840,688
			Three Months Ended September 30, 2023
Balances, July 1, 2023			77,184,012						$	77					$	867,517					$	(4,445)					$	(28,886)					$	834,263
Issuance of common stock under the Employee Stock Purchase Plan			153,135						—						3,798						—						—						3,798
Issuance of common stock pursuant to vesting of restricted stock units, net of stock withheld for tax			502,170						1						(8,894)						—						—						(8,893)
Stock-based compensation			—						—						11,213						—						—						11,213
Other comprehensive loss			—						—						—						(4,064)						—						(4,064)
Net income			—						—						—						—						4,371						4,371
Balances, September 30, 2023			77,839,317						$	78					$	873,634					$	(8,509)					$	(24,515)					$	840,688

			Nine Months Ended September 24, 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			316,861						—						10,457						—						—						10,457
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			713,554						1						(15,564)						—						—						(15,563)
Purchase and retirement of common stock through repurchase program			(2,011,822)						(2)						(73,476)						—						—						(73,478)
Stock-based compensation			—						—						23,049						—						—						23,049
Other comprehensive loss			—						—						—						(16,450)						—						(16,450)
Net income			—						—						—						—						64,465						64,465
Balances, September 24, 2022			77,265,099						$	77					$	843,453					$	(17,899)					$	(17,329)					$	808,302
			Three Months Ended September 24, 2022
Balances, June 25, 2022			77,194,733						$	77					$	860,584					$	(8,996)					$	(21,680)					$	829,985
Issuance of common stock under the Employee Stock Purchase Plan			159,219						—						4,812						—						—						4,812
Issuance of common stock pursuant to vesting of restricted stock units, net of stock withheld for tax			479,478						1						(11,321)						—						—						(11,320)
Purchase and retirement of common stock through repurchase program			(568,331)						(1)						(19,149)						—						—						(19,150)
Stock-based compensation			—						—						8,527						—						—						8,527
Other comprehensive loss			—						—						—						(8,903)						—						(8,903)
Net income			—						—						—						—						4,351						4,351
Balances, September 24, 2022			77,265,099						$	77					$	843,453					$	(17,899)					$	(17,329)					$	808,302

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

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FORMFACTOR, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

			Nine Months Ended
			September 30, 2023						September 24, 2022
Cash flows from operating activities:
Net income			$	6,541					$	64,465
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation			22,880						21,189
Amortization			6,043						7,056
Reduction in the carrying amount of right-of-use assets			5,556						5,900
Stock-based compensation expense			29,333						21,873
Deferred income tax benefit			(6,283)						(6,881)
Provision for excess and obsolete inventories			12,566						16,078
Other adjustments to reconcile net income to net cash provided by operating activities			1,375						4,066
Changes in assets and liabilities:
Accounts receivable			(7,796)						1,654
Inventories			(8,910)						(33,023)
Prepaid expenses and other current assets			(1,761)						(2,016)
Other assets			804						(117)
Accounts payable			474						17,613
Accrued liabilities			(5,268)						(5,035)
Other liabilities			467						276
Deferred revenues			(12,915)						3,776
Deferred grant			18,000						—
Operating lease liabilities			(5,754)						(5,826)
Net cash provided by operating activities			55,352						111,048
Cash flows from investing activities:
Acquisition of property, plant and equipment			(46,094)						(39,024)
Acquisition of business			—						(3,350)
Purchases of marketable securities			(96,913)						(80,249)
Purchase of promissory note receivable			—						(1,000)
Proceeds from maturities and sales of marketable securities			93,013						71,610
Net cash used in investing activities			(49,994)						(52,013)
Cash flows from financing activities:
Proceeds from issuances of common stock			8,822						10,499
Purchase of common stock through stock repurchase program			—						(73,478)
Tax withholdings related to net share settlements of equity awards			(9,349)						(15,564)
Principal repayments on term loans			(781)						(6,421)
Net cash used in financing activities			(1,308)						(84,964)
Effect of exchange rate changes on cash, cash equivalents and restricted cash			(3,324)						(5,708)
Net increase (decrease) in cash, cash equivalents and restricted cash			726						(31,637)
Cash, cash equivalents and restricted cash, beginning of period			112,982						155,342
Cash, cash equivalents and restricted cash, end of period			$	113,708					$	123,705

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

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FORMFACTOR, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

			Nine Months Ended
			September 30, 2023						September 24, 2022
Non-cash investing and financing activities:
Increase (decrease) in accounts payable and accrued liabilities related to property, plant and equipment purchases			$	(6,222)					$	341
Operating lease, right-of-use assets obtained in exchange for lease obligations			4,728						3,457
Supplemental disclosure of cash flow information:
Cash paid for income taxes, net			$	12,064					$	9,911
Cash paid for interest			317						455
Operating cash outflows from operating leases			6,836						6,670
Reconciliation of cash, cash equivalents and restricted cash:
Cash and cash equivalents			$	108,731					$	120,602
Restricted cash, current			1,171						1,263
Restricted cash, non-current			2,146						1,840
Cash and cash equivalents included in Assets held-for-sale			1,660						—
Total cash, cash equivalents and restricted cash			$	113,708					$	123,705

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

8

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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 nine months ended September 30, 2023 and September 24, 2022 each contained 39 weeks. Fiscal 2023 will end on December 30, 2023.

Significant Accounting Policies

Our significant accounting policies have not changed during the nine months ended September 30, 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 presented 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 7, 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.

9

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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												Nine Months Ended
			September 30, 2023						September 24, 2022						September 30, 2023						September 24, 2022
Intel Corporation			17.1		%				17.0		%				17.2		%				19.7		%
Samsung Electronics., LTD.			11.2		%				*						*						*
SK Hynix Inc.			*						10.7		%				*						*
			28.3		%				27.7		%				17.2		%				19.7		%

At September 30, 2023 and December 31, 2022, one customer accounted for 23.5% 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):

			September 30, 2023						December 31, 2022
Raw materials			$	50,641					$	55,726
Work-in-progress			40,150						46,067
Finished goods			20,835						21,364
			$	111,626					$	123,157

Note 4 — Assets Held-For-Sale Divestiture

On September 18, 2023, the Company announced entry into a definitive agreement to sell its FRT Metrology (“FRT”) business to Camtek Ltd. (“Camtek”) for $100 million in cash, subject to customary purchase price adjustments. The Company acquired FRT in fiscal 2019 for total consideration of $24.4 million, net of cash acquired. Headquartered in Bergisch Gladbach, Germany, FRT is a leading supplier of high-precision metrology solutions for the Advanced Packaging and Silicon Carbide markets, and is part of our Systems segment.

The related assets and liabilities have been classified as held-for-sale in the Company’s consolidated balance sheet and measured at the lower of their carrying amount or fair value less cost to sell. We did not record an impairment from this event.

The planned disposition of the FRT business did not meet the criteria to be classified as a discontinued operation in the Company’s financial statements since the disposition did not represent a strategic shift that had, or will have, a major effect on the Company’s operations and financial results.

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The components of held-for-sale assets and liabilities at September 30, 2023 were as follows (in thousands):

Assets held-for-sale
Accounts receivable, net of allowance for credit losses						$	5,491
Inventories, net						7,092
Other current assets						2,131
Intangibles, net						7,069
Goodwill						10,668
Other assets						1,267
Total assets held-for-sale						$	33,718
Liabilities held-for-sale
Current liabilities						$	6,045
Other liabilities						2,476
Total liabilities held-for-sale						$	8,521

On November 1, 2023, we closed on the sale of FRT to Camtek and received cash proceeds of $103.8 million after preliminary adjustments with respect to cash, indebtedness, and working capital.

Note 5 — 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
Reclassification - Assets held-for-sale						—						(10,668)						(10,668)
Foreign currency translation						—						(291)						(291)
Goodwill, as of September 30, 2023						$	178,424					$	22,061					$	200,485

We have not recorded goodwill impairments for the nine months ended September 30, 2023.

Intangible assets were as follows (in thousands):

						September 30, 2023																		December 31, 2022
Intangible Assets						Gross						Accumulated Amortization						Net						Gross						Accumulated Amortization						Net
Existing developed technologies						$	159,115					$	147,517					$	11,598					$	171,441					$	151,212					$	20,229
Customer relationships						47,877						46,388						1,489						50,912						45,003						5,909
Trade name						7,754						7,663						91						7,972						7,759						213
In-process research and development						400						—						400						400						—						400
						$	215,146					$	201,568					$	13,578					$	230,725					$	203,974					$	26,751

In the current quarter, $7.1 million of net Intangible assets were reclassified to Assets held-for-sale as described in Note 4, Assets Held-For-Sale Divestiture.

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

			Three Months Ended												Nine Months Ended
			September 30, 2023						September 24, 2022						September 30, 2023						September 24, 2022
Cost of revenues			$	837					$	824					$	2,506					$	2,420
Selling, general and administrative			440						1,530						3,537						4,636
			$	1,277					$	2,354					$	6,043					$	7,056

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						$	640
2024						2,561
2025						2,330
2026						1,630
2027						1,630
Thereafter						4,387
						$	13,178

Note 6 — Accrued Liabilities

Accrued liabilities consisted of the following (in thousands):

			September 30, 2023						December 31, 2022
Accrued compensation and benefits			$	22,684					$	15,864
Accrued warranty			4,984						4,199
Employee stock purchase plan contributions withheld			1,576						4,585
Accrued income and other taxes			2,761						12,817
Accrued restructuring charges			29						1,249
Other accrued expenses			4,453						3,401
			$	36,487					$	42,115

Note 7 — 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 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 September 30, 2023 was 7.19%.

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 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%.

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Note 8 — 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 costs 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
			September 30, 2023																		September 24, 2022
			Probe Cards						Systems						Total						Probe Cards						Systems						Total
Cost of revenues			$	—					$	—					$	—					$	5,928					$	132					$	6,060
Research and development			—						—						—						38						29						67
Selling, general and administrative			—						—						—						—						47						47
			$	—					$	—					$	—					$	5,966					$	208					$	6,174
			Nine Months Ended
			September 30, 2023																		September 24, 2022
			Probe Cards						Systems						Total						Probe Cards						Systems						Total
Cost of revenues			$	106					$	251					$	357					$	6,194					$	459					$	6,653
Research and development			182						109						291						38						228						266
Selling, general and administrative			1,069						118						1,187						3						146						149
			$	1,357					$	478					$	1,835					$	6,235					$	833					$	7,068

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Changes to the restructuring accrual in the nine months ended September 30, 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			(2,137)						—						(89)												(233)												(2,459)
Non-cash settlement			—						(295)						(301)												—												(596)
September 30, 2023			$	29					$	—					$	—											$	—											$	29

Note 9 — 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 nine months ended September 30, 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 nine months of fiscal 2023.

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Assets and Liabilities Measured at Fair Value on a Recurring Basis

Assets and liabilities measured at fair value on a recurring basis were as follows (in thousands): 

September 30, 2023						Level 1						Level 2						Level 3						Total
Assets:
Cash equivalents:
Money market funds						$	26,936					$	—					$	—					$	26,936
U.S. treasuries						2,290						—						—						2,290
Commercial paper						—						1,790						—						1,790
						29,226						1,790						—						31,016
Marketable securities:
U.S. treasuries						46,403						—						—						46,403
Certificates of deposit						—						238						—						238
U.S. agency securities						—						12,141						—						12,141
Corporate bonds						—						61,106						—						61,106
Commercial paper						—						15,805						—						15,805
						46,403						89,290						—						135,693
Promissory note receivable						—						—						922						922
Interest rate swap derivative contract						—						2,536						—						2,536
Total assets						$	75,629					$	93,616					$	922					$	170,167
Liabilities:
Foreign exchange derivative contracts						$	—					$	(781)					$	—					$	(781)
Total liabilities						$	—					$	(781)					$	—					$	(781)

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 contract						—						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

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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 Swap

The fair value of our interest rate swap contract 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 contract qualifies for, and is designated as a cash flow hedge. The hedged risk is the interest rate exposure to changes in interest payments attributable to changes in our variable-rate interest over the interest rate swap term. The changes in cash flows of the interest rate swap are expected to exactly offset changes in cash flows of the variable-rate debt. Cash settlements, in the form of cash payments or cash receipts, of the interest rate swap, in the form of cash payments or cash receipts, are recognized as a component of interest expense. 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 September 30, 2023 will mature by the third quarter of fiscal 2024.

The following table provides information about our foreign currency forward contracts outstanding as of September 30, 2023 (in thousands):

Currency						Contract Position						Contract Amount (Local Currency)						Contract Amount (U.S. Dollars)
Euro Dollar						Buy						20,312						$	22,427
Euro Dollar						Sell						3,576						3,786
Japanese Yen						Sell						2,759,293						18,535
Korean Won						Buy						1,520,865						1,133
Taiwan Dollar						Sell						59,367						1,839

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.

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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 8, Restructuring Charges, there were no assets or liabilities measured at fair value on a nonrecurring basis during the three and nine months ended September 30, 2023 or September 24, 2022.

Note 10 — 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):

			Nine Months Ended
			September 30, 2023						September 24, 2022
Balance at beginning of period			$	4,199					$	2,805
Accruals			6,426						5,653
Settlements			(5,535)						(4,652)
Reclassification - Liabilities held-for-sale			(106)						—
Balance at end of period			$	4,984					$	3,806

Note 11 — Property, Plant and Equipment, net

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

			September 30, 2023						December 31, 2022
Land			$	17,136					$	17,136
Building and building improvements			44,452						44,932
Machinery and equipment			286,033						276,180
Computer equipment and software			46,968						45,813
Furniture and fixtures			7,471						7,540
Leasehold improvements			90,813						86,500
Sub-total			492,873						478,101
Less: Accumulated depreciation and amortization			(353,796)						(335,711)
Net, property, plant and equipment			139,077						142,390
Construction-in-process			64,433						47,458
Total			$	203,510					$	189,848

In the current quarter, $0.9 million of net Property, plant and equipment were reclassified to Assets held-for-sale as described in Note 4, Assets Held-For-Sale Divestiture.

Note 12 — 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 nine months ended September 24, 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.

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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 nine months ended September 30, 2023, we did not repurchase any common stock. As of September 30, 2023, $18.6 million remained available for future repurchases.

On October 30, 2023, our Board of Directors authorized a new two-year program to repurchase up to $75 million of outstanding common stock to offset potential dilution from issuance of common stock under our stock-based compensation programs

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. The net share repurchases are subject to a 1% excise tax under the Inflation Reduction Act. The excise tax incurred reduces the amount available under the repurchase programs, as applicable, and is included in the cost of shares repurchased in the Condensed Consolidated Statement of Stockholders Equity. 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			1,402,715						33.84
Awards vested			(830,549)						33.56
Awards forfeited			(336,753)						30.14
RSUs at September 30, 2023			2,462,494						35.74

Performance Restricted Stock Units

We may grant Performance RSUs (“PRSUs”) to certain executives, which vest based upon us achieving certain market performance criteria.

On August 7, 2023, we granted 172,680 PRSUs to certain senior executives for a total grant date fair value of $8.6 million which will be recognized ratably over the requisite service period. The performance criteria are based on Total Shareholder Returns (“TSR”) for the period of July 1, 2023 - June 30, 2026, relative to the TSR of the companies identified as being part of the S&P Semiconductors Select Industry Index (FormFactor peer companies) as of the grant date.

Of the 258,600 PRSUs granted in fiscal 2020, none of the 191,400 outstanding PRSU awards vested in 2023, at the end of the requisite service period, as the TSR performance was not met.

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:

						Nine Months Ended
						September 30, 2023
Shares issued						363,190
Weighted average per share purchase price						$	24.29
Weighted average per share discount from the fair value of our common stock on the date of issuance						$	7.65

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Stock-Based Compensation

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

			Three Months Ended												Nine Months Ended
			September 30, 2023						September 24, 2022						September 30, 2023						September 24, 2022
Cost of revenues			$	1,376					$	1,022					$	4,801					$	2,834
Research and development			3,173						2,027						7,908						5,708
Selling, general and administrative			6,290						4,946						16,624						13,331
Total stock-based compensation			$	10,839					$	7,995					$	29,333					$	21,873

 

Unrecognized Compensation Costs

At September 30, 2023, the unrecognized stock-based compensation was as follows (dollars in thousands): 

			Unrecognized Expense						Average Expected Recognition Period in Years
Restricted stock units			$	58,985					2.21
Performance restricted stock units			14,667						2.20
Employee stock purchase plan			1,498						0.25
Total unrecognized stock-based compensation expense			$	75,150					2.17

Note 13 — 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												Nine Months Ended
			September 30, 2023						September 24, 2022						September 30, 2023						September 24, 2022
Weighted-average shares used in computing basic net income per share			77,571						77,245						77,265						77,796
Add potentially dilutive securities			841						443						595						696
Weighted-average shares used in computing diluted net income per share			78,412						77,688						77,860						78,492
Securities not included as they would have been antidilutive			172						897						94						266

Note 14 — Commitments and Contingencies

Leases

See Note 15, Leases.

Contractual Obligations and Commitments

Our contractual obligations and commitments have not materially changed as of September 30, 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 15 — 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.

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The weighted-average remaining lease term for our operating leases was 5 years as of September 30, 2023 and the weighted-average discount rate was 4.39%.

The components of lease expense were as follows (in thousands):

			Three Months Ended												Nine Months Ended
			September 30, 2023						September 24, 2022						September 30, 2023						September 24, 2022
Lease expense:
Operating lease expense			$	2,157					$	2,118					$	6,233					$	6,522
Short-term lease expense			126						135						419						251
Variable lease expense			625						590						1,854						1,725
			$	2,908					$	2,843					$	8,506					$	8,498

Future minimum payments under our non-cancelable operating leases were as follows as of September 30, 2023 (in thousands):

Fiscal Year						Amount
Remainder of 2023						$	2,175
2024						8,773
2025						8,670
2026						7,151
2027						6,734
Thereafter						3,541
Total minimum lease payments						37,044
Less: interest						(3,941)
Present value of net minimum lease payments						33,103
Less: current portion						(8,007)
Total long-term operating lease liabilities						$	25,096

Note 16 — Revenue

Transaction price allocated to the remaining performance obligations: On September 30, 2023, we had $13.8 million of remaining performance obligations, which were comprised of deferred service contracts and extended warranty contracts and contracts with overtime revenue recognition that are not yet delivered. We expect to recognize approximately 23.2% of our remaining performance obligations as revenue in the remainder of fiscal 2023, approximately 66.7% in fiscal 2024, and approximately 10.1% in fiscal 2025 and thereafter. The foregoing excludes the value of other remaining performance obligations as they have original durations of one year or less, and also excludes information about variable consideration allocated entirely to a wholly unsatisfied performance obligation.

Contract balances: The timing of revenue recognition may differ from the timing of invoicing to customers. Accounts receivable is recorded at the invoiced amount, net of an allowance for credit losses. A receivable is recognized in the period we deliver goods or provide services or when our right to consideration is unconditional. A contract asset is recorded when we have performed under the contract but our right to consideration is conditional on something other than the passage of time. Contract assets as of September 30, 2023 and December 31, 2022 were $2.9 million and $1.9 million, respectively, and are reported on the Condensed Consolidated Balance Sheets as a component of Prepaid expenses and other current assets.

Contract liabilities include payments received and payments due in advance of performance under a contract and are satisfied as the associated revenue is recognized. Contract liabilities are reported on the Condensed Consolidated Balance Sheets at the end of each reporting period as a component of Deferred revenue, Assets held-for-sale, and Other liabilities. Contract liabilities as of September 30, 2023 and December 31, 2022 were $18.0 million and $30.9 million, respectively. During the nine months ended September 30, 2023, we recognized $26.0 million of revenue that was included in contract liabilities as of December 31, 2022.

Costs to obtain a contract: We generally expense sales commissions when incurred as a component of Selling, general and administrative expense, as the amortization period is typically less than one year.

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Revenue by category: Refer to Note 17, Operating Segments and Enterprise-Wide Information, for further details.

Note 17 — Operating Segments and Enterprise-Wide Information

Our chief operating decision maker (“CODM”) is our Chief Executive Officer, who reviews operating results to make decisions about allocating resources and assessing performance for the entire company. We operate in two reportable segments consisting of the Probe Cards segment and the Systems segment. The following table summarizes the operating results by reportable segment (dollars in thousands):

			Three Months Ended
			September 30, 2023																								September 24, 2022
			Probe Cards						Systems						Corporate and Other						Total						Probe Cards						Systems						Corporate and Other						Total
Revenues			$	128,339					$	43,236					$	—					$	171,575					$	139,365					$	41,504					$	—					$	180,869
Gross profit			49,383						22,396						(2,494)						69,285						48,252						22,284						(8,323)						62,213
Gross margin			38.5		%				51.8		%										40.4		%				34.6		%				53.7		%										34.4		%
			Nine Months Ended
			September 30, 2023																								September 24, 2022
			Probe Cards						Systems						Corporate and Other						Total						Probe Cards						Systems						Corporate and Other						Total
Revenues			$	370,970					$	123,969					$	—					$	494,939					$	467,056					$	114,894					$	—					$	581,950
Gross profit			135,118						64,266						(8,738)						190,646						203,874						59,967						(13,035)						250,806
Gross margin			36.4		%				51.8		%										38.5		%				43.7		%				52.2		%										43.1		%

Operating results provide useful information to our management for assessment of our performance and results of operations. Certain components of our operating results are utilized to determine executive compensation along with other measures.

Corporate and Other includes unallocated expenses relating to amortization of intangible assets, inventory and fixed asset fair value adjustments due to acquisitions, share-based compensation, divestiture related expenses, and restructuring charges which are not used in evaluating the results of, or in allocating resources to, our reportable segments.

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Certain revenue category information by reportable segment was as follows (in thousands):

			Three Months Ended
			September 30, 2023																		September 24, 2022
			Probe Cards						Systems						Total						Probe Cards						Systems						Total
Market:
Foundry & Logic			$	96,366					$	—					$	96,366					$	90,605					$	—					$	90,605
DRAM			27,478						—						27,478						34,922						—						34,922
Flash			4,495						—						4,495						13,838						—						13,838
Systems			—						43,236						43,236						—						41,504						41,504
Total			$	128,339					$	43,236					$	171,575					$	139,365					$	41,504					$	180,869
Timing of revenue recognition:
Products transferred at a point in time			$	127,731					$	41,776					$	169,507					$	138,602					$	37,842					$	176,444
Products and services transferred over time			608						1,460						2,068						763						3,662						4,425
Total			$	128,339					$	43,236					$	171,575					$	139,365					$	41,504					$	180,869
Geographical region:
United States			$	31,182					$	12,543					$	43,725					$	25,909					$	12,180					$	38,089
Taiwan			39,155						3,820						42,975						32,227						4,611						36,838
South Korea			31,805						3,270						35,075						28,118						819						28,937
China			10,779						10,971						21,750						27,973						8,755						36,728
Europe			2,583						6,713						9,296						3,682						8,116						11,798
Japan			2,976						3,988						6,964						4,533						3,159						7,692
Malaysia			5,778						186						5,964						6,272						237						6,509
Singapore			2,752						925						3,677						7,983						2,374						10,357
Rest of the world			1,329						820						2,149						2,668						1,253						3,921
Total			$	128,339					$	43,236					$	171,575					$	139,365					$	41,504					$	180,869

			Nine Months Ended
			September 30, 2023																		September 24, 2022
			Probe Cards						Systems						Total						Probe Cards						Systems						Total
Market:
Foundry & Logic			$	279,895					$	—					$	279,895					$	327,106					$	—					$	327,106
DRAM			77,832						—						77,832						106,202						—						106,202
Flash			13,243						—						13,243						33,748						—						33,748
Systems			—						123,969						123,969						—						114,894						114,894
Total			$	370,970					$	123,969					$	494,939					$	467,056					$	114,894					$	581,950
Timing of revenue recognition:
Products transferred at a point in time			$	368,939					$	116,981					$	485,920					$	464,139					$	106,339					$	570,478
Products and services transferred over time			2,031						6,988						9,019						2,917						8,555						11,472
Total			$	370,970					$	123,969					$	494,939					$	467,056					$	114,894					$	581,950
Geographical region:
United States			$	86,954					$	37,175					$	124,129					$	67,424					$	27,554					$	94,978
Taiwan			103,368						9,448						112,816						119,937						19,990						139,927
South Korea			77,832						5,881						83,713						80,417						4,776						85,193
China			45,771						26,586						72,357						101,342						23,520						124,862
Europe			8,424						21,114						29,538						9,888						18,396						28,284
Japan			14,014						11,859						25,873						16,034						10,977						27,011
Malaysia			22,279						1,632						23,911						43,946						1,006						44,952
Singapore			7,670						4,170						11,840						23,398						4,963						28,361
Rest of the world			4,658						6,104						10,762						4,670						3,712						8,382
Total			$	370,970					$	123,969					$	494,939					$	467,056					$	114,894					$	581,950

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

 

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Cautionary Statement Regarding Forward-Looking Statements

 

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Securities Exchange Act of 1934 and the Securities Act of 1933, which are subject to risks and uncertainties. The forward-looking statements include statements concerning, among other things, our business strategy, financial and operating results, gross margins, liquidity and capital expenditure requirements and impact of accounting standards. In some cases, you can identify these statements by forward-looking words, such as “may,” “might,” “will,” “could,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “intend” and “continue,” the negative or plural of these words and other comparable terminology.

The forward-looking statements are only predictions based on our current expectations and our projections about future events. All forward-looking statements included in this Quarterly Report on Form 10-Q are based upon information available to us as of the filing date of this Quarterly Report on Form 10-Q. You should not place undue reliance on these forward-looking statements. We have no obligation to update any of these statements. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to differ materially from those expressed or implied by these statements, including risks related to general market trends, the benefits of acquisitions and investments, our supply chain, uncertainties related to global, regional or national public health-related crises and the impact of our responses to them, the interpretation and impacts of changes in export controls and other trade barriers, military conflicts, political volatility and similar factors, our ability to execute our business strategy and other risks discussed in the section titled “Risk Factors” and elsewhere in our Annual Report on Form 10-K for the year ended December 31, 2022 and in this Quarterly Report on Form 10-Q. You should carefully consider the numerous risks and uncertainties described under these sections.

 

The following discussion and analysis should be read in conjunction with our condensed consolidated financial statements and the accompanying notes contained in this Quarterly Report on Form 10-Q. Unless expressly stated or the context otherwise requires, the terms “we,” “our,” “us” and “FormFactor” refer to FormFactor, Inc. and its subsidiaries.

Overview

FormFactor, Inc., headquartered in Livermore, California, is a leading provider of essential test and measurement technologies along the full semiconductor product lifecycle - from metrology and inspection, characterization, modeling, reliability, and design de-bug, to qualification and production test. We provide a broad range of high-performance probe cards, analytical probes, probe stations, metrology systems, thermal systems, and cryogenic systems to both semiconductor companies and scientific institutions. Our products provide electrical and physical information from a variety of semiconductor and electro-optical devices and integrated circuits from early research, through development, to high-volume production. Customers use our products and services to accelerate profitability by optimizing device performance and advancing yield knowledge.

We operate in two reportable segments consisting of the Probe Cards segment and the Systems segment. Sales of our probe cards and analytical probes are included in the Probe Cards segment, while sales of our probe stations, metrology systems, thermal systems and cryogenic systems are included in the Systems segment.

On September 18, 2023, we announced entry into a definitive agreement to sell our FRT Metrology (“FRT”) business for $100 million in cash, subject to customary purchase price adjustments. See Note 4, Assets Held-For-Sale Divestiture, for further details of the divestiture. FRT is a leading supplier of high-precision metrology solutions for the Advanced Packaging and Silicon Carbide markets, and produces metrology systems that are included in the Systems segment results. On November 1, 2023, we closed on the sale of FRT to Camtek and received cash proceeds of $103.8 million after preliminary adjustments with respect to cash, indebtedness, and working capital.

We generated net income of $6.5 million in the first nine months of fiscal 2023 as compared to $64.5 million in the first nine months of fiscal 2022. The decrease in net income was primarily due to a decline in revenues and the associated decline in gross margins and higher operating expenses. The first half of fiscal 2022 was strong, realizing $60.1 million of the $64.5 million net income for the first nine months of fiscal 2022, followed by the semiconductor industry weakness that began in the third quarter of fiscal 2022 and has continued into the nine months ended September 30, 2023.

Significant Accounting Policies and the Use of Estimates

Management’s Discussion and Analysis and Note 2, Summary of Significant Accounting Policies, to the Consolidated Financial Statements in our 2022 Annual Report on Form 10-K describe the significant accounting estimates and significant accounting policies used in preparation of the Consolidated Financial Statements. Actual results in these areas could differ from management’s estimates. During the nine months ended September 30, 2023, there were no significant changes in our

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significant accounting policies or estimates from those reported in our Annual Report on Form 10-K for the year ended December 31, 2022, which was filed with the Securities and Exchange Commission on February 24, 2023, 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 presented 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.

Results of Operations

 

The following table sets forth our operating results as a percentage of revenues for the periods indicated:

			Three Months Ended												Nine Months Ended
			September 30, 2023						September 24, 2022						September 30, 2023						September 24, 2022
Revenues			100.0		%				100.0		%				100.0		%				100.0		%
Cost of revenues			59.6						65.6						61.5						56.9
Gross profit			40.4						34.4						38.5						43.1
Operating expenses:
Research and development			18.1						14.7						17.7						14.1
Selling, general and administrative			20.7						17.5						20.5						16.8
Total operating expenses			38.8						32.2						38.2						30.9
Operating income			1.6						2.2						0.3						12.2
Interest income, net			0.9						0.3						0.9						0.1
Other income, net			0.5						0.6						0.2						0.3
Income before income taxes			3.0						3.1						1.4						12.6
Provision for income taxes			0.5						0.7						0.1						1.5
Net income			2.5		%				2.4		%				1.3		%				11.1		%

Revenues by Segment and Market

			Three Months Ended												Nine Months Ended
			September 30, 2023						September 24, 2022						September 30, 2023						September 24, 2022
			(In thousands)
Probe Cards			$	128,339					$	139,365					$	370,970					$	467,056
Systems			43,236						41,504						123,969						114,894
			$	171,575					$	180,869					$	494,939					$	581,950

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			Three Months Ended
			September 30, 2023						% of Revenues						September 24, 2022						% of Revenues						$ Change						% Change
			(Dollars in thousands)
Probe Cards Markets:
Foundry & Logic			$	96,366					56.2		%				$	90,605					50.1		%				$	5,761					6.4		%
DRAM			27,478						16.0						34,922						19.3						(7,444)						(21.3)
Flash			4,495						2.6						13,838						7.7						(9,343)						(67.5)
Systems Market:
Systems			43,236						25.2						41,504						22.9						1,732						4.2
Total revenues			$	171,575					100.0		%				$	180,869					100.0		%				$	(9,294)					(5.1)		%
			Nine Months Ended
			September 30, 2023						% of Revenues						September 24, 2022						% of Revenues						$ Change						% Change
			(Dollars in thousands)
Probe Cards Markets:
Foundry & Logic			$	279,895					56.6		%				$	327,106					56.3		%				$	(47,211)					(14.4)		%
DRAM			77,832						15.7						106,202						18.2						(28,370)						(26.7)
Flash			13,243						2.7						33,748						5.8						(20,505)						(60.8)
Systems Market:
Systems			123,969						25.0						114,894						19.7						9,075						7.9
Total revenues			$	494,939					100.0		%				$	581,950					100.0		%				$	(87,011)					(15.0)		%

Foundry & Logic — The decrease in Foundry & Logic product revenue for the nine months ended September 30, 2023, compared to the nine months ended September 24, 2022, was driven by the weaker demand in the semiconductor industry, especially in the personal computer and mobile sectors, that began in the third quarter of fiscal 2022, has continued into the nine months ended September 30, 2023 and has resulted in decreased unit sales across the majority of our major customers. The increase in Foundry & Logic product revenue for the three months ended September 30, 2023, compared to the three months ended September 24, 2022, was the result of an increase in unit sales driven by stronger demand in the personal computer sector.

DRAM — The decrease in DRAM product revenue for the three and nine months ended September 30, 2023, compared to the three and nine months ended September 24, 2022, was driven by lower customer production activity and demand for our products in light of worldwide excess supply of DRAM chips, along with weaker demand in the overall semiconductor industry. These declines for the three and nine months ended September 30, 2023 were partially offset due to increased demand for high bandwidth memory (“HBM”) chips utilized in artificial intelligence.

Flash — The decrease in Flash product revenue for the three and nine months ended September 30, 2023, compared to the three and nine months ended September 24, 2022, was driven by lower customer production activity and demand for our products in light of worldwide excess supply, a result of the semiconductor industry's overall demand weakening and Flash market weakness.

Systems — The increase in Systems market revenue for the nine months ended September 30, 2023, compared to the nine months ended September 24, 2022, was driven by increased sales of probe stations, thermal systems, and cryogenic systems, partially offset by decreased sales of our metrology systems. The increase in Systems market revenue for the three months ended September 30, 2023, compared to the three months ended September 24, 2022, was driven by increased sales of metrology and thermal systems, partially offset by decreased sales of cryogenic systems.

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Revenues by Geographic Region

			Three Months Ended																								Nine Months Ended
			September 30, 2023						% of Revenues						September 24, 2022						% of Revenues						September 30, 2023						% of Revenue						September 24, 2022						% of Revenue
			(Dollars in thousands)
United States			$	43,725					25.5		%				$	38,089					21.1		%				$	124,129					25.1		%				$	94,978					16.3		%
Taiwan			42,975						25.0						36,838						20.4						112,816						22.8						139,927						24.0
South Korea			35,075						20.4						28,937						16.0						83,713						16.9						85,193						14.6
China			21,750						12.7						36,728						20.3						72,357						14.6						124,862						21.5
Europe			9,296						5.4						11,798						6.5						29,538						6.0						28,284						4.9
Japan			6,964						4.1						7,692						4.3						25,873						5.2						27,011						4.6
Malaysia			5,964						3.5						6,509						3.6						23,911						4.8						44,952						7.7
Singapore			3,677						2.1						10,357						5.7						11,840						2.4						28,361						4.9
Rest of the world			2,149						1.3						3,921						2.1						10,762						2.2						8,382						1.5
Total revenues			$	171,575					100.0		%				$	180,869					100.0		%				$	494,939					100.0		%				$	581,950					100.0		%

Geographic revenue information is based on the location to which we ship the product. For example, if a certain South Korean customer purchases through its U.S. subsidiary and requests the products to be shipped to an address in South Korea, this sale will be reflected in the revenue for South Korea rather than the U.S.

Changes in revenue by geographic region for the three and nine months ended September 30, 2023, compared to the three and nine months ended September 24, 2022, were primarily attributable to changes in customer demand, shifts in customer regional manufacturing strategies, particularly with our large multinational customers, and product sales mix. More specifically, the increase in revenues for the United States, and decreases in revenues for China and Malaysia, were driven principally by a single large U.S.-based company with operations in these regions. The decrease in revenues for China was also impacted by lowered demand from a large Chinese DRAM integrated device manufacturer and the impact of expanded export license requirements imposed by the United States government beginning the fourth quarter of fiscal 2022 for exporting advanced U.S. semiconductor technology to China.

Cost of Revenues and Gross Margins

Cost of revenues consists primarily of manufacturing materials, compensation and benefits, shipping and handling costs, manufacturing-related overhead (including equipment costs, related occupancy, and computer services), warranty adjustments, inventory adjustments (including write-downs for inventory obsolescence), and amortization of certain intangible assets. Our manufacturing operations rely on a limited number of suppliers to provide key components and materials for our products, some of which are a sole source. We order materials and supplies based on backlog and forecasted customer orders. Tooling and setup costs related to changing manufacturing lots at our suppliers are also included in the cost of revenues. We expense all warranty costs, inventory provisions and amortization of certain intangible assets as cost of revenues.

Our gross profit and gross margin were as follows (dollars in thousands):

			Three Months Ended
			September 30, 2023						September 24, 2022						$ Change						% Change
Gross profit			$	69,285					$	62,213					$	7,072					11.4		%
Gross margin			40.4		%				34.4		%
			Nine Months Ended
			September 30, 2023						September 24, 2022						$ Change						% Change
Gross profit			$	190,646					$	250,806					$	(60,160)					(24.0)		%
Gross margin			38.5		%				43.1		%

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Our gross profit and gross margin by segment were as follows (dollars in thousands):

			Three Months Ended
			September 30, 2023																								September 24, 2022
			Probe Cards						Systems						Corporate and Other						Total						Probe Cards						Systems						Corporate and Other						Total
Gross profit			$	49,383					$	22,396					$	(2,494)					$	69,285					$	48,252					$	22,284					$	(8,323)					$	62,213
Gross margin			38.5		%				51.8		%										40.4		%				34.6		%				53.7		%										34.4		%
			Nine Months Ended
			September 30, 2023																								September 24, 2022
			Probe Cards						Systems						Corporate and Other						Total						Probe Cards						Systems						Corporate and Other						Total
Gross profit			$	135,118					$	64,266					$	(8,738)					$	190,646					$	203,874					$	59,967					$	(13,035)					$	250,806
Gross margin			36.4		%				51.8		%										38.5		%				43.7		%				52.2		%										43.1		%

Probe Cards — For the three months ended September 30, 2023, gross margins increased compared to the three months ended September 24, 2022, primarily due to a more favorable product mix and lower inventory excess and obsolescence reserves, partially offset by greater warranty reserves. For the nine months ended September 30, 2023, gross margins decreased compared to the nine months ended September 24, 2022, primarily due to lower revenues and unfavorable absorption of costs on these lower production volumes.

Systems — For the three and nine months ended September 30, 2023, gross margins decreased compared to the three and nine months ended September 24, 2022, primarily as a result of a less favorable product mix.

Corporate and Other — Corporate and Other includes unallocated expenses relating to share-based compensation and amortization of intangible assets, inventory and fixed asset fair value adjustments due to acquisitions, and restructuring, which are not used in evaluating the results of, or in allocating resources to, our reportable segments.

Overall — Gross profit and gross margins fluctuate with revenue levels, product mix, selling prices, factory loading, labor costs, and material costs. For the three months ended September 30, 2023, compared to the three months ended September 24, 2022, gross profit and gross margins have increased because of a more favorable product mix and less inventory excess and obsolescence reserves, partially offset by greater warranty reserves. For the nine months ended September 30, 2023, compared to the nine ended September 24, 2022, gross profit and gross margins have decreased because of lower revenue levels and unfavorable absorption of costs on lower production volumes.

Cost of revenues included stock-based compensation expense as follows (in thousands):

			Three Months Ended												Nine Months Ended
			September 30, 2023						September 24, 2022						September 30, 2023						September 24, 2022
Stock-based compensation			$	1,376					$	1,022					$	4,801					$	2,834

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Research and Development

			Three Months Ended
			September 30, 2023						September 24, 2022						$ Change						% Change
			(Dollars in thousands)
Research and development			$	31,014					$	26,549					$	4,465					16.8		%
% of revenues			18.1		%				14.7		%
			Nine Months Ended
			September 30, 2023						September 24, 2022						$ Change						% Change
			(Dollars in thousands)
Research and development			$	87,599					$	82,000					$	5,599					6.8		%
% of revenues			17.7		%				14.1		%

Research and development expenses in the three and nine months ended September 30, 2023 increased when compared to the corresponding period in the prior year primarily due to an increase in headcount to support our continued investment in technology leadership. Increased stock-based compensation from timing of grants, salary adjustments, depreciation, and general operational costs also contributed to the increase.

A detail of the changes is as follows (in thousands):

			Three Months Ended September 30, 2023 compared to Three Months Ended September 24, 2022						Nine Months Ended September 30, 2023 compared to Nine Months Ended September 24, 2022
Employee compensation costs			$	2,343					$	2,064
Stock-based compensation			1,146						2,200
Project material costs			672						(23)
Depreciation			210						584
Other general operational costs			94						774
			$	4,465					$	5,599

Research and development included stock-based compensation expense as follows (in thousands):

			Three Months Ended												Nine Months Ended
			September 30, 2023						September 24, 2022						September 30, 2023						September 24, 2022
Stock-based compensation			$	3,173					$	2,027					$	7,908					$	5,708

Selling, General and Administrative

			Three Months Ended
			September 30, 2023						September 24, 2022						$ Change						% Change
			(Dollars in thousands)
Selling, general and administrative			$	35,564					$	31,637					$	3,927					12.4		%
% of revenues			20.7		%				17.5		%
			Nine Months Ended
			September 30, 2023						September 24, 2022						$ Change						% Change
			(Dollars in thousands)
Selling, general and administrative			$	101,561					$	97,949					$	3,612					3.7		%
% of revenues			20.5		%				16.8		%

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Selling, general and administrative expenses increased in the three and nine months ended September 30, 2023 when compared to the corresponding period in the prior year. The drivers of the increase for the three month period were increased consulting fees related to the divestiture of FRT, stock-based compensation from timing of grants, performance-based compensation, and general operating expenses, partially offset by lower headcount and amortization of intangibles from significant intangibles becoming fully amortized. The drivers of the increase for the nine month period were increased consulting fees related to the divestiture of FRT, stock-based compensation from timing of grants, and general operating expenses, partially offset by lower performance-based compensation, headcount, and amortization of intangibles from significant intangibles becoming fully amortized.

A detail of the changes is as follows (in thousands):

			Three Months Ended September 30, 2023 compared to Three Months Ended September 24, 2022						Nine Months Ended September 30, 2023 compared to Nine Months Ended September 24, 2022
Consulting fees			$	2,539					$	3,357
Stock-based compensation			1,344						3,293
Amortization of intangibles			(1,090)						(1,099)
General operating expenses			599						1,965
Employee compensation			535						(4,650)
Restructuring charges			—						746
			$	3,927					$	3,612

Selling, general and administrative included stock-based compensation expense as follows (in thousands):

			Three Months Ended												Nine Months Ended
			September 30, 2023						September 24, 2022						September 30, 2023						September 24, 2022
Stock-based compensation			$	6,290					$	4,946					$	16,624					$	13,331

Interest Income (Expense), Net

Interest income is earned on our cash, cash equivalents, restricted cash and marketable securities. The increase in interest income for the three and nine months ended September 30, 2023 compared with the corresponding period of the prior year was attributable to an increase in investment yields due to the higher interest rate environment.

Interest expense primarily includes interest on our term loan, interest rate swap derivative contracts, and term loan issuance costs amortization charges. The interest expense for the three and nine months ended September 30, 2023 compared to the same period of the prior year decreased due to lower outstanding debt.

Other Income, Net

Other income, net, primarily includes the effects of foreign currency impact and various other gains and losses. We partially mitigate our risks from currency movements by hedging certain balance sheet exposures, which minimizes the impacts during periods of foreign exchange volatility.

Provision for Income Taxes

			Three Months Ended												Nine Months Ended
			September 30, 2023						September 24, 2022						September 30, 2023						September 24, 2022
			(In thousands, except percentages)
Provision for income taxes			$	786					$	1,274					$	626					$	8,860
Effective tax rate			15.2		%				22.6		%				8.7		%				12.1		%

Provision for income taxes reflects the tax provision on our operations in foreign and U.S. jurisdictions, offset by tax benefits from tax credits and the foreign-derived intangible income (“FDII”) deduction. Our effective tax rate may vary from period to period based on changes in estimated taxable income or loss by jurisdiction, changes to the valuation allowance, changes to U.S. federal, state or foreign tax laws, changes in stock-based compensation expense/benefit, future expansion into areas with varying country, state, and local income tax rates, and deductibility of certain costs and expenses by jurisdiction.

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The decrease in our effective tax rate for the three months ended September 30, 2023, when compared to the corresponding period in the prior year, was primarily driven by higher than normal effective rates for the three months ended September 24, 2022 as a result of a rapid change in expected 2022 taxable income driven by the weaker demand in the semiconductor industry in the second half of fiscal year 2022, as described previously.

The decrease in our effective tax rate for the nine months ended September 30, 2023, when compared to the corresponding period in the prior year, was primarily driven by relatively higher benefits from FDII and U.S. tax credits as compared to taxable income, resulting from higher Research and development spending and lower taxable income in the U.S. for the nine months ended September 30, 2023.

The Creating Helpful Incentives to Produce Semiconductors and Science Act of 2022 (“CHIPS Act”) was signed into law on August 9, 2022. The CHIPS Act provides for various incentives and tax credits, among other items, including the Advanced Manufacturing Investment Credit (“AMIC”), which equals 25% of qualified investments in an advanced manufacturing facility that is placed in service after December 31, 2022. At least a portion of our future capital expenditures and research and development costs will qualify for this credit, which benefits us by allowing us to net the credit received against our costs. The AMIC credit is accounted for outside of ASC 740 as a reduction to the depreciable basis of the assets used in operations and will not have an impact on our effective tax rate.

Beginning in 2022, the U.S. Tax Cuts and Jobs Act of 2017 (“TCJA”) eliminated the existing option to deduct research and development expenditures and requires taxpayers to amortize such expenditures attributable to domestic and foreign research over five and fifteen years, respectively, pursuant to IRC Section 174. While the capitalization requirement has a negative impact on our cash flows, there are offsetting benefits from the enactment of this provision that we have included in our estimated annual effective tax rate. While it is possible that Congress may defer, modify, or repeal this provision, potentially with retroactive effect, we have no assurance that this provision will be deferred, modified, or repealed. Changes in our tax provisions or an increase in our tax liabilities, whether due to changes in applicable laws and regulations, the interpretation or application thereof, or a final determination of tax audits or litigation or agreements, could have a material adverse effect on our financial position, results of operations and/or cash flows.

Liquidity and Capital Resources

Capital Resources

Our working capital was $377.1 million at September 30, 2023, compared to $324.9 million at December 31, 2022.

Cash and cash equivalents primarily consist of deposits held at banks and money market funds. Marketable securities primarily consist of corporate bonds, U.S. treasuries, commercial paper, and U.S. agency securities. We typically invest in highly rated securities with low probabilities of default. Our investment policy requires investments to be rated single A or better, and limits the types of acceptable investments, issuer concentration and duration of the investment.

Our cash, cash equivalents and marketable securities totaled approximately $244.4 million at September 30, 2023, compared to $238.1 million at December 31, 2022. Based on our historical results of operations, we expect that our cash, cash equivalents, and marketable securities on hand, and the cash we expect to generate from operations, will be sufficient to fund our short-term and long-term liquidity requirements primarily arising from: research and development, capital expenditures, working capital, outstanding commitments, and other liquidity requirements associated with existing operations. However, we cannot be certain that our cash, cash equivalents, and marketable securities on hand, and cash generated from operations, will be available in the future to fund all of our capital and operating requirements. In addition, any future strategic investments and significant acquisitions may require additional cash and capital resources. To the extent necessary, we may consider entering into short and long-term debt obligations, raising cash through a stock issuance, or obtaining new financing facilities, which may not be available on terms favorable to us. If we are unable to obtain sufficient cash or capital to meet our needs on a timely basis and on favorable terms, our business and operations could be materially and adversely affected.

If we are unsuccessful in maintaining or growing our revenues, maintaining or reducing our cost structure, or increasing our available cash through debt or equity financings, our cash, cash equivalents and marketable securities may decline.

We utilize a variety of tax planning and financing strategies to manage our worldwide cash and deploy funds to locations where needed. As part of these strategies, we indefinitely reinvest a portion of our foreign earnings. Should we require additional capital in the United States, we may elect to repatriate indefinitely-reinvested foreign funds or raise capital in the United States.

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Cash Flows

The following table sets forth our net cash flows from operating, investing and financing activities:

			Nine Months Ended
			September 30, 2023						September 24, 2022
			(In thousands)
Net cash provided by operating activities			$	55,352					$	111,048
Net cash used in investing activities			$	(49,994)					$	(52,013)
Net cash used in financing activities			$	(1,308)					$	(84,964)

Operating Activities 

Net cash provided by operating activities for the nine months ended September 30, 2023 was attributable to net income of $6.5 million and net non-cash expenses of $71.5 million, which includes depreciation, amortization, stock-based compensation, and the provision for excess and obsolete inventories, partially offset by an increase in net working capital of $22.7 million. The increase in net working capital is related to decreases in deferred revenues and accrued liabilities of $12.9 million and $5.3 million, respectively, and increases in inventory, net and accounts receivable, net of $8.9 million and $7.8 million, respectively, partially offset by an increase from a deferred grant of $18.0 million.

Investing Activities

Net cash used in investing activities for the nine months ended September 30, 2023 primarily related to $46.1 million in property, plant and equipment purchases and $3.9 million in net purchases of marketable securities.

Financing Activities

Net cash used in financing activities for the nine months ended September 30, 2023 primarily related to $9.3 million tax withholding payments associated with the net share settlements of our equity awards and $0.8 million principal payments made towards the repayment of our term loan, partially offset by $8.8 million received from issuances of common stock under our employee stock purchase plan.

Debt

Building Term Loan

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

The Building Term Loan bears interest at a rate equal to the applicable SOFR rate, plus 0.1148%, plus 1.75% per annum. Interest payments are payable in monthly installments over a fifteen-year period. The interest rate at September 30, 2023 was 7.19%. As of September 30, 2023, the balance outstanding pursuant to the Building Term Loan was $14.7 million.

On March 17, 2020, we entered into an interest rate swap agreement to hedge the interest payment on the Building Term Loan for the notional amount of $18.0 million, and an amortization period that matches the debt. As future levels of LIBOR over the life of the loan are uncertain, we entered into this interest-rate swap agreement to hedge the exposure in interest rate risks associated with movement in LIBOR rates. 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 SOFR to match the Building Term Loan agreement (as amended). After the amendment, the interest rate swap continues to convert our floating-rate interest into a fixed-rate at 2.75%. As of September 30, 2023, the notional amount of the loan that is subject to this interest rate swap is $14.7 million.

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 nine months ended September 24, 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.

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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 nine months ended September 30, 2023, we did not repurchase any shares of common stock. As of September 30, 2023, $18.6 million remained available for future repurchases.

On October 30, 2023, our Board of Directors authorized an additional program to repurchase up to $75 million of outstanding common stock, also with the primary purpose of offsetting potential dilution from issuance of common stock under our stock-based compensation programs. The share repurchase program will expire on October 30, 2025.

Contractual Obligations and Commitments

The following table summarizes our significant contractual commitments to make future payments in cash under contractual obligations as of September 30, 2023:

			Payments Due In Fiscal Year
			Remainder  2023						2024						2025						2026						2027						Thereafter						Total
Operating leases			$	2,175					$	8,773					$	8,670					$	7,151					$	6,734					$	3,541					$	37,044
Term loans - principal payments			266						1,080						1,111						1,142						1,175						9,940						14,714
Term loans - interest payments (1)			266						1,023						935						856						771						2,846						6,697
Total			$	2,707					$	10,876					$	10,716					$	9,149					$	8,680					$	16,327					$	58,455

(1) Represents our minimum interest payment commitments at 7.19% per annum for the Building Term Loan. This excludes any amounts related to our interest rate swap.

Off-Balance Sheet Arrangements

 

Historically, we have not participated in transactions that have generated relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As of September 30, 2023, we were not involved in any such off-balance sheet arrangements.

Recent Accounting Standards

For a description of a recent change in accounting standards, including the expected dates of adoption and estimated effects, if any, in our condensed consolidated financial statements, see Note 1, Basis of Presentation and Significant Accounting Policies, in Part I, Item 1 of this Form 10-Q.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

For financial market risks related to changes in interest rates and foreign currency exchange rates, reference is made to Item 7A “Quantitative and Qualitative Disclosures about Market Risk” contained in Part II of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022. Our exposure to market risk has not changed materially since December 31, 2022.

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

Based on our management’s evaluation (with the participation of our principal executive officer and principal financial officer), as of the end of the period covered by this report, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”)) are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

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Changes in Internal Control over Financial Reporting

 

There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations on the Effectiveness of Controls

 

Control systems, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control systems’ objectives are being met. Further, the design of any control systems must reflect the fact that there are resource constraints, and the benefits of all controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected. These inherent limitations include the realities that judgments in decision making can be faulty and that breakdowns can occur because of a simple error or mistake. Control systems can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based, in part, on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.

CEO and CFO Certifications

 

We have attached as exhibits to this Quarterly Report on Form 10-Q the certifications of our Chief Executive Officer and Chief Financial Officer, which are required in accordance with the Exchange Act. We recommend that this Item 4 be read in conjunction with the certifications for a more complete understanding of the subject matter presented. 

PART II - OTHER INFORMATION

 

Item 1A. Risk Factors

There have been no material changes during the nine months ended September 30, 2023 to the risk factors discussed in our Annual Report on Form 10-K for the year ended December 31, 2022. If any of the identified risks actually occur, our business, financial condition and results of operations could suffer. The trading price of our common stock could decline and you may lose all or part of your investment in our common stock. The risks and uncertainties described in our Annual Report on Form 10-K for the year ended December 31, 2022 are not the only ones we face. Additional risks that we currently do not know about or that we currently believe to be immaterial may also impair our business operations.

Item 5. Other Information

Rule 10b5-1 Trading Arrangements

During the quarter ended September 30, 2023, no director or officer of the Company adopted, modified, or terminated a “Rule 10b5-1 trading arrangement” or a “non-Rule 10b5-1 trading arrangement” as each term is defined in Item 408(a) of Regulation S-K.

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Item 6. Exhibits

The following exhibits are filed herewith and this list constitutes the exhibit index.

Exhibit

Incorporated by Reference

Filed

Number

Exhibit Description

Form

Date

Number

Herewith

10.01

Share Purchase Agreement by and among Camtek, Ltd. as purchaser and FormFactor GmbH as seller and FormFactor, Inc as Parent and FRT GmbH as Company, dated as of September 17, 2023

X

31.01

Certification of Chief Executive Officer pursuant to 15 U.S.C. Section 7241, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

X

31.02

Certification of Chief Financial Officer pursuant to 15 U.S.C. Section 7241, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

X

32.01

Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

*

101

The following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2023, formatted in Inline XBRL: (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Income, (iii) Condensed Consolidated Statements of Comprehensive Income, (iv) Condensed Consolidated Statements of Stockholders’ Equity, (v) Condensed Consolidated Statements of Cash Flows, and (vi) Notes to Condensed Consolidated Financial Statements, tagged as blocks of text and including detailed tags

X

101.INS

XBRL Instance Document

X

101.SCH

XBRL Taxonomy Extension Schema Document

X

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document

X

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document

X

101.LAB

XBRL Taxonomy Extension Label Linkbase Document

X

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document

X

104

The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2023, formatted in Inline XBRL (included as Exhibit 101)

X

 ______________________________________

*    This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the date hereof and irrespective of any general incorporation language in any filings.

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SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

						FormFactor, Inc.
Date:			November 7, 2023			By:			/s/ SHAI SHAHAR
									Shai Shahar
									Chief Financial Officer
									(Duly Authorized Officer, Principal Financial Officer, and Principal Accounting Officer)

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