Formfactor Inc 10-Q for FY2022 Q3
Formfactor Inc (FORM)
10-Q
2022-11-01
For: 2022-09-24
View Original
Added on
April 07, 2026
About this 10-Q
Formfactor Inc filed this 10-Q on November 1, 2022, covering the quarter ended September 24, 2022 (FY2022 Q3).
Headline figures
Quarter ended September 24, 2022, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $180.87M
- down 4.8% from $189.96M a year earlier
- Net income
- $4.35M
- down 78.8% from net income of $20.5M a year earlier
- Diluted EPS
- $0.06
- down 76.9% from $0.26 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark one)
For the quarterly period ended September 24, 2022
Or
For the transition period from to
Commission file number: 000-50307
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
(Address of principal executive offices, including zip code)
(925 ) 290-4000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||||||||
______________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of the Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
| ☒ | Accelerated Filer | ☐ | Non-accelerated Filer | ☐ | |||||||||||||
| Smaller Reporting Company | Emerging Growth Company | ||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of October 27, 2022, 77,025,103 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 24, 2022
INDEX
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
FORMFACTOR, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
(Unaudited)
| September 24, 2022 | December 25, 2021 | ||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Marketable securities | |||||||||||
Accounts receivable, net of allowance for credit losses of $ | |||||||||||
| Inventories, net | |||||||||||
| Restricted cash | |||||||||||
| Prepaid expenses and other current assets | |||||||||||
| Total current assets | |||||||||||
| Restricted cash | |||||||||||
| Operating lease, right-of-use-assets | |||||||||||
| Property, plant and equipment, net of accumulated depreciation | |||||||||||
| Goodwill | |||||||||||
| Intangibles, net | |||||||||||
| Deferred tax assets | |||||||||||
| Other assets | |||||||||||
| Total assets | $ | $ | |||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Accrued liabilities | |||||||||||
| Current portion of term loans, net of unamortized issuance costs | |||||||||||
| Deferred revenue | |||||||||||
| Operating lease liabilities | |||||||||||
| Total current liabilities | |||||||||||
| Term loans, less current portion, net of unamortized issuance costs | |||||||||||
| Deferred tax liabilities | |||||||||||
| Long-term operating lease liabilities | |||||||||||
| Other liabilities | |||||||||||
| Total liabilities | |||||||||||
| Stockholders’ equity: | |||||||||||
Common stock, $ | |||||||||||
| Additional paid-in capital | |||||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||
| Accumulated deficit | ( | ( | |||||||||
| Total stockholders’ equity | |||||||||||
| Total liabilities and stockholders’ equity | $ | $ | |||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
FORMFACTOR, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 24, 2022 | September 25, 2021 | September 24, 2022 | September 25, 2021 | ||||||||||||||||||||
| Revenues | $ | $ | $ | $ | |||||||||||||||||||
| Cost of revenues | |||||||||||||||||||||||
| Gross profit | |||||||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Research and development | |||||||||||||||||||||||
| Selling, general and administrative | |||||||||||||||||||||||
| Total operating expenses | |||||||||||||||||||||||
| Operating income | |||||||||||||||||||||||
| Interest income | |||||||||||||||||||||||
| Interest expense | ( | ( | ( | ( | |||||||||||||||||||
| Other income, net | |||||||||||||||||||||||
| Income before income taxes | |||||||||||||||||||||||
| Provision for income taxes | |||||||||||||||||||||||
| Net income | $ | $ | $ | $ | |||||||||||||||||||
| Net income per share: | |||||||||||||||||||||||
| Basic | $ | $ | $ | $ | |||||||||||||||||||
| Diluted | $ | $ | $ | $ | |||||||||||||||||||
| Weighted-average number of shares used in per share calculations: | |||||||||||||||||||||||
| Basic | |||||||||||||||||||||||
| Diluted | |||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
FORMFACTOR, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 24, 2022 | September 25, 2021 | September 24, 2022 | September 25, 2021 | ||||||||||||||||||||
| Net income | $ | $ | $ | $ | |||||||||||||||||||
| Other comprehensive loss, net of tax: | |||||||||||||||||||||||
| Translation adjustments | ( | ( | ( | ( | |||||||||||||||||||
| Unrealized losses on available-for-sale marketable securities | ( | ( | ( | ( | |||||||||||||||||||
| Unrealized losses on derivative instruments | ( | ( | ( | ( | |||||||||||||||||||
| Other comprehensive loss, net of tax: | ( | ( | ( | ( | |||||||||||||||||||
| Comprehensive income (loss) | $ | ( | $ | $ | $ | ||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
FORMFACTOR, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except shares)
(Unaudited)
| Shares of Common Stock | Common Stock | Additional Paid-in Capital | Accumulated Other Comprehensive Income (Loss) | Accumulated Deficit | Total | ||||||||||||||||||||||||||||||||||||||||||
| Nine Months Ended September 24, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||
| Balances, December 25, 2021 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock under the Employee Stock Purchase Plan | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock pursuant to exercise of options | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock pursuant to vesting of restricted stock units, net of stock withheld for tax | ( | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||
| Purchase and retirement of common stock through repurchase program | ( | ( | ( | — | — | ( | |||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Balances, September 24, 2022 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||||
| Three Months Ended September 24, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||
| Balances, June 25, 2022 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock under the Employee Stock Purchase Plan | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock pursuant to vesting of restricted stock units, net of stock withheld for tax | ( | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||
| Purchase and retirement of common stock through repurchase program | ( | ( | ( | — | — | ( | |||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Balances, September 24, 2022 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
FORMFACTOR, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except shares)
(Unaudited)
| Shares of Common Stock | Common Stock | Additional Paid-in Capital | Accumulated Other Comprehensive Income (Loss) | Accumulated Deficit | Total | ||||||||||||||||||||||||||||||||||||||||||
| Nine Months Ended September 25, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||
| Balances, December 26, 2020 | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock under the Employee Stock Purchase Plan | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock pursuant to exercise of options | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock pursuant to vesting of restricted stock units, net of stock withheld for tax | ( | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||
| Purchase and retirement of common stock through repurchase program | ( | ( | ( | — | — | ( | |||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Balances, September 25, 2021 | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||||
| Three Months Ended September 25, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||
| Balances, June 26, 2021 | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock under the Employee Stock Purchase Plan | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock pursuant to vesting of restricted stock units, net of stock withheld for tax | ( | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Balances, September 25, 2021 | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
7
FORMFACTOR, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
| Nine Months Ended | |||||||||||
| September 24, 2022 | September 25, 2021 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net income | $ | $ | |||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Depreciation | |||||||||||
| Amortization | |||||||||||
| Reduction in the carrying amount of right-of-use assets | |||||||||||
| Stock-based compensation expense | |||||||||||
| Deferred income tax benefit | ( | ( | |||||||||
| Provision for excess and obsolete inventories | |||||||||||
| Non-cash restructuring charges | |||||||||||
| Gain on contingent consideration | ( | ||||||||||
| Other adjustments to reconcile net income to net cash provided by operating activities | |||||||||||
| Changes in assets and liabilities: | |||||||||||
| Accounts receivable | |||||||||||
| Inventories | ( | ( | |||||||||
| Prepaid expenses and other current assets | ( | ||||||||||
| Other assets | ( | ( | |||||||||
| Accounts payable | |||||||||||
| Accrued liabilities | ( | ( | |||||||||
| Other liabilities | |||||||||||
| Deferred revenues | |||||||||||
| Operating lease liabilities | ( | ( | |||||||||
| Net cash provided by operating activities | |||||||||||
| Cash flows from investing activities: | |||||||||||
| Acquisition of property, plant and equipment | ( | ( | |||||||||
| Acquisition of business | ( | ||||||||||
| Purchases of marketable securities | ( | ( | |||||||||
| Purchase of promissory note receivable | ( | ||||||||||
| Proceeds from maturities and sales of marketable securities | |||||||||||
| Net cash used in investing activities | ( | ( | |||||||||
| Cash flows from financing activities: | |||||||||||
| Proceeds from issuances of common stock | |||||||||||
| Purchase of common stock through stock repurchase program | ( | ( | |||||||||
| Tax withholdings related to net share settlements of equity awards | ( | ( | |||||||||
| Payment of contingent consideration | ( | ||||||||||
| Principal repayments on term loans | ( | ( | |||||||||
| Net cash used in financing activities | ( | ( | |||||||||
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | ( | ( | |||||||||
| Net decrease in cash, cash equivalents and restricted cash | ( | ( | |||||||||
| Cash, cash equivalents and restricted cash, beginning of period | |||||||||||
| Cash, cash equivalents and restricted cash, end of period | $ | $ | |||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
8
FORMFACTOR, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
| Nine Months Ended | |||||||||||
| September 24, 2022 | September 25, 2021 | ||||||||||
| Non-cash investing and financing activities: | |||||||||||
| Increase in accounts payable and accrued liabilities related to property, plant and equipment purchases | $ | $ | |||||||||
| Increase in accrued liabilities related to tax withholdings related to net share settlements of equity awards | |||||||||||
| Operating lease, right-of-use assets obtained in exchange for lease obligations | |||||||||||
| Supplemental disclosure of cash flow information: | |||||||||||
| Cash paid for income taxes, net | $ | $ | |||||||||
| Cash paid for interest | |||||||||||
| Operating cash outflows from operating leases | |||||||||||
| Reconciliation of cash, cash equivalents and restricted cash: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Restricted cash, current | |||||||||||
| Restricted cash, non-current | |||||||||||
| Total cash, cash equivalents and restricted cash | $ | $ | |||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
9
FORMFACTOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 — Basis of Presentation and New Accounting Pronouncements
Fiscal Year
We operate on a 52/53 week fiscal year, whereby the fiscal year ends on the last Saturday of December. Fiscal 2022 and 2021 contain 53 weeks and 52 weeks, respectively, and the nine months ended September 24, 2022 and September 25, 2021 each contained 39 weeks. Fiscal 2022 will end on December 31, 2022.
Significant Accounting Policies
Our significant accounting policies have not changed during the nine months ended September 24, 2022 from those disclosed in our Annual Report on Form 10-K for the year ended December 25, 2021.
Reclassifications
Certain immaterial reclassifications were made to the prior year financial statements to conform to the current year presentation.
New Accounting Pronouncements
ASU 2021-08
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. The new guidance requires contract assets and contract liabilities acquired in a business combination to be recognized and measured by the acquirer on the acquisition date in accordance with Accounting Standards Codification 606, “Revenue from Contracts with Customers,” as if it had originated the contracts. The Company elected to early adopt on a prospective basis during the second quarter of fiscal 2022. The adoption did not have a material effect on the Company's Consolidated Financial Statements.
Note 2 — Concentration of Credit and Other Risks
Each of the following customers accounted for 10
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 24, 2022 | September 25, 2021 | September 24, 2022 | September 25, 2021 | ||||||||||||||||||||
| Intel Corporation | % | % | % | % | |||||||||||||||||||
| SK Hynix Inc. | * | * | * | ||||||||||||||||||||
| Samsung Electronics., LTD. | * | % | * | % | |||||||||||||||||||
| % | % | % | % | ||||||||||||||||||||
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.
10
Inventories, net, consisted of the following (in thousands):
| September 24, 2022 | December 25, 2021 | ||||||||||
| Raw materials | $ | $ | |||||||||
| Work-in-progress | |||||||||||
| Finished goods | |||||||||||
| $ | $ | ||||||||||
Note 4 — Acquisition
Woburn Acquisition
On June 9, 2022, we acquired the assets of the dilution refrigerator product line of American ULT Cryogenics, formerly d/b/a JanisULT (“Woburn”), for total consideration of $3.4 million. This acquisition adds cryogen-free dilution refrigerators capable of cooling to sub-10 millikelvin to our product portfolio, which is required for operation of superconducting quantum computers.
The acquisition price was allocated to the tangible and identified intangible assets acquired and liabilities assumed as of the closing date of the acquisition based upon their respective fair values. The fair values assigned to assets acquired and liabilities assumed were based on management’s assumptions as of the reporting date. Goodwill represents the excess of purchase price over the fair value assigned to the assets acquired and liabilities assumed and is allocated to the HPD reporting unit within the Systems reportable segment. The identified intangible asset, developed technology, has a useful life of three years.
Our purchase accounting remains open as of the reporting date, with the purchase price preliminarily allocated to acquired assets and liabilities assumed that are subject to change as more information becomes available. The primary areas of the purchase price allocation that are not yet finalized relate to the valuation of inventories, developed technology intangible asset, and residual goodwill. The preliminary fair value of assets acquired, including goodwill and intangibles, and liabilities assumed for the purchase as follows (in thousands):
| Amount | ||||||||
| Accounts receivable | $ | |||||||
| Inventories | ||||||||
| Property, plant and equipment | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Other assets | ||||||||
| Tangible assets acquired | ||||||||
| Deferred revenue | ( | |||||||
| Accounts payable and accrued liabilities | ( | |||||||
| Total tangible assets acquired and liabilities assumed | ||||||||
| Developed technology intangible asset | ||||||||
| Goodwill | ||||||||
| Net assets acquired | $ | |||||||
11
Note 5 — Goodwill and Intangible Assets
Goodwill by reportable segment was as follows (in thousands):
| Probe Cards | Systems | Total | ||||||||||||||||||
| Goodwill, as of December 26, 2020 | $ | $ | $ | |||||||||||||||||
| Addition - Baldwin Park Acquisition | ||||||||||||||||||||
| Addition - HPD Acquisition | ||||||||||||||||||||
| Foreign currency translation | ( | ( | ||||||||||||||||||
| Goodwill, as of December 25, 2021 | ||||||||||||||||||||
| Addition - Woburn Acquisition | ||||||||||||||||||||
| Foreign currency translation | ( | ( | ||||||||||||||||||
| Goodwill, as of June 25, 2022 | $ | $ | $ | |||||||||||||||||
We have no t recorded goodwill impairments for the nine months ended September 24, 2022.
Intangible assets were as follows (in thousands):
| September 24, 2022 | December 25, 2021 | |||||||||||||||||||||||||||||||||||||
| Intangible Assets | Gross | Accumulated Amortization | Net | Gross | Accumulated Amortization | Net | ||||||||||||||||||||||||||||||||
| Existing developed technologies | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||
| Customer relationships | ||||||||||||||||||||||||||||||||||||||
| Trade name | ||||||||||||||||||||||||||||||||||||||
| Backlog | ||||||||||||||||||||||||||||||||||||||
| In-process research and development | ||||||||||||||||||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||
Amortization expense was included in our Condensed Consolidated Statements of Income as follows (in thousands):
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 24, 2022 | September 25, 2021 | September 24, 2022 | September 25, 2021 | ||||||||||||||||||||
| Cost of revenues | $ | $ | $ | $ | |||||||||||||||||||
| Selling, general and administrative | |||||||||||||||||||||||
| $ | $ | $ | $ | ||||||||||||||||||||
The estimated future amortization of definite-lived intangible assets, excluding in-process research and development, is as follows (in thousands):
| Fiscal Year | Amount | |||||||
| Remainder of 2022 | $ | |||||||
| 2023 | ||||||||
| 2024 | ||||||||
| 2025 | ||||||||
| 2026 | ||||||||
| Thereafter | ||||||||
| $ | ||||||||
12
Note 6 — Accrued Liabilities
Accrued liabilities consisted of the following (in thousands):
| September 24, 2022 | December 25, 2021 | ||||||||||
| Accrued compensation and benefits | $ | $ | |||||||||
| Accrued income and other taxes | |||||||||||
| Accrued warranty | |||||||||||
| Employee stock purchase plan contributions withheld | |||||||||||
| Accrued restructuring charges | |||||||||||
| Other accrued expenses | |||||||||||
| $ | $ | ||||||||||
Note 7 — Restructuring Charges
On September 25, 2021, we adopted 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, this included plans to adjust capacity for certain product offerings, which resulted in contract termination costs and receipt of inventories ultimately deemed to be impaired to satisfy contract obligations. We expect the actions defined under these plans will be largely completed by the end of December 2022, except facilities charges which may extend beyond that time.
These plans are expected to result in FormFactor recording restructuring and other charges in the aggregate amount of approximately $10.5 million to $12.6 million, estimated to be comprised primarily of $1.0 million to $1.2 million of severance and employee-related costs, $1.5 million to $1.9 million in contract and lease termination costs, $7.5 million to $8.5 million in inventory impairments, and $0.5 million to $1.0 million of cost related to impairment of leasehold improvements, facility exits, and other costs. Approximately $8.7 million to $9.7 million is expected within the Probe Cards segment and $1.8 million to $2.9 million is expected within the Systems segments.
The Company has recognized restructuring and other charges to date in the aggregate amount of $11.2 million, comprised of $1.2 million of severance and employee-related costs, $1.5 million in contract and lease termination costs, $8.0 million in inventory impairments, and $0.6 million of cost related to impairment of leasehold improvements, facility exits and other costs.
During the three months ended September 24, 2022 we reassessed the estimate for excess inventory received to satisfy our contract obligations from our adjustment of certain product offerings. As a result of receiving additional clarity regarding future customer demand, we recorded an additional $5.9 million inventory impairment not included in our original estimate of restructuring charges.
13
Restructuring charges by reportable segment included in our Condensed Consolidated Statements of Income were as follows (in thousands):
| Three Months Ended | |||||||||||||||||||||||||||||||||||
| September 24, 2022 | September 25, 2021 | ||||||||||||||||||||||||||||||||||
| Probe Cards | Systems | Total | Probe Cards | Systems | Total | ||||||||||||||||||||||||||||||
| Cost of revenues | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Research and development | |||||||||||||||||||||||||||||||||||
| Selling, general and administrative | |||||||||||||||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||
| Nine Months Ended | |||||||||||||||||||||||||||||||||||
| September 24, 2022 | September 25, 2021 | ||||||||||||||||||||||||||||||||||
| Probe Cards | Systems | Total | Probe Cards | Systems | Total | ||||||||||||||||||||||||||||||
| Cost of revenues | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Research and development | |||||||||||||||||||||||||||||||||||
| Selling, general and administrative | |||||||||||||||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||
Changes to the restructuring accrual in the nine months ended September 24, 2022 were as follows (in thousands):
| Employee Severance and Benefits | Inventory Impairments | Property and Equipment Impairments and Move Costs | Contract Termination Costs | Total | |||||||||||||||||||||||||||||||
| December 25, 2021 | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||
| Restructuring charges | |||||||||||||||||||||||||||||||||||
| Cash payments | ( | ( | ( | ( | ( | ||||||||||||||||||||||||||||||
| Non-cash settlement | ( | ( | ( | ||||||||||||||||||||||||||||||||
| September 24, 2022 | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||
Note 8 — Fair Value and Derivative Instruments
Whenever possible, the fair values of our financial assets and liabilities are determined using quoted market prices of identical securities or quoted market prices of similar securities from active markets. The three levels of inputs that may be used to measure fair value are as follows:
•Level 1 valuations are obtained from real-time quotes for transactions in active exchange markets involving identical securities;
•Level 2 valuations utilize significant observable inputs, such as quoted prices for similar assets or liabilities, quoted prices near the reporting date in markets that are less active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and
•Level 3 valuations utilize unobservable inputs to the valuation methodology and include our own data about assumptions market participants would use in pricing the asset or liability based on the best information available under the circumstances.
We did not have any transfers of assets or liabilities measured at fair value on a recurring basis to or from Level 1, Level 2 or Level 3 during the three and nine months ended September 24, 2022 or the year ended December 25, 2021.
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 2022.
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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 24, 2022 | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||||
| Assets: | ||||||||||||||||||||||||||
| Cash equivalents: | ||||||||||||||||||||||||||
| Money market funds | $ | $ | $ | $ | ||||||||||||||||||||||
| Commercial paper | ||||||||||||||||||||||||||
| Corporate bonds | ||||||||||||||||||||||||||
| Marketable securities: | ||||||||||||||||||||||||||
| Corporate bonds | ||||||||||||||||||||||||||
| U.S. treasuries | ||||||||||||||||||||||||||
| Commercial paper | ||||||||||||||||||||||||||
| U.S. agency securities | ||||||||||||||||||||||||||
| Certificates of deposit | ||||||||||||||||||||||||||
| Promissory note receivable | ||||||||||||||||||||||||||
| Interest rate swap derivative contracts | ||||||||||||||||||||||||||
| Total assets | $ | $ | $ | $ | ||||||||||||||||||||||
| Liabilities: | ||||||||||||||||||||||||||
| Foreign exchange derivative contracts | $ | $ | ( | $ | $ | ( | ||||||||||||||||||||
| December 25, 2021 | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||||
| Assets: | ||||||||||||||||||||||||||
| Cash equivalents: | ||||||||||||||||||||||||||
| Money market funds | $ | $ | $ | $ | ||||||||||||||||||||||
| U.S. agency securities | ||||||||||||||||||||||||||
| U.S. treasuries | ||||||||||||||||||||||||||
| Commercial paper | ||||||||||||||||||||||||||
| Marketable securities: | ||||||||||||||||||||||||||
| Corporate bonds | ||||||||||||||||||||||||||
| U.S. treasuries | ||||||||||||||||||||||||||
| Commercial paper | ||||||||||||||||||||||||||
| Certificates of deposit | ||||||||||||||||||||||||||
| Interest rate swap derivative contracts | ||||||||||||||||||||||||||
| Total assets | $ | $ | $ | $ | ||||||||||||||||||||||
| Liabilities: | ||||||||||||||||||||||||||
| Foreign exchange derivative contracts | $ | $ | ( | $ | $ | ( | ||||||||||||||||||||
| Interest rate swap derivative contracts | ( | ( | ||||||||||||||||||||||||
| Total liabilities | $ | $ | ( | $ | $ | ( | ||||||||||||||||||||
Cash Equivalents
The fair value of our cash equivalents is determined based on quoted market prices for similar or identical securities.
Marketable Securities
We classify our marketable securities as available-for-sale and value them utilizing a market approach. Our investments are priced by pricing vendors who provide observable inputs for their pricing without applying significant judgment. Broker pricing is used mainly when a quoted price is not available, the investment is not priced by our pricing vendors or when a broker price
15
is more reflective of fair value. Our broker-priced investments are categorized as Level 2 investments because fair value is based on similar assets without applying significant judgments. In addition, all investments have a sufficient trading volume to demonstrate that the fair value is appropriate.
Unrealized gains and losses were immaterial and were recorded as a component of Accumulated other comprehensive loss in our Condensed Consolidated Balance Sheets. We did not have any other-than-temporary unrealized gains or losses at either period end included in these financial statements.
Interest Rate Swaps
The fair value of our interest rate swap contracts is determined at the end of each reporting period based on valuation models that use interest rate yield curves as inputs. For accounting purposes, our interest rate swap contracts qualify for, and are designated as, cash flow hedges. The cash flows associated with the interest rate swaps are reported in Net cash provided by operating activities in our Condensed Consolidated Statements of Cash Flows and the fair value of the interest rate swap contracts are recorded within Prepaid expenses and other current assets and Other assets in our Condensed Consolidated Balance Sheets.
Foreign Exchange Derivative Contracts
We operate and sell our products in various global markets. As a result, we are exposed to changes in foreign currency exchange rates. We utilize foreign currency forward contracts to hedge against future movements in foreign exchange rates that affect certain existing foreign currency denominated assets and liabilities and forecasted foreign currency revenue and expense transactions. Under this program, our strategy is to have increases or decreases in our foreign currency exposures mitigated by gains or losses on the foreign currency forward contracts in order to mitigate the risks and volatility associated with foreign currency transaction gains or losses.
We do not use derivative financial instruments for speculative or trading purposes. For accounting purposes, certain of our foreign currency forward contracts are not designated as hedging instruments and, accordingly, we record the fair value of these contracts as of the end of our reporting period in our Condensed Consolidated Balance Sheets with changes in fair value recorded within Other income, net in our Condensed Consolidated Statement of Income for both realized and unrealized gains and losses. Certain of our foreign currency forward contracts are designated as cash flow hedges, and, accordingly, we record the fair value of these contracts as of the end of our reporting period in our Condensed Consolidated Balance Sheets with changes in fair value recorded as a component of Accumulated other comprehensive loss and reclassified into earnings in the same period in which the hedged transaction affects earnings, and in the same line item on the Condensed Consolidated Statements of Income as the impact of the hedge transaction.
The fair value of our foreign exchange derivative contracts was determined based on current foreign currency exchange rates and forward points. All of our foreign exchange derivative contracts outstanding at September 24, 2022 will mature by the third quarter of fiscal 2023.
The following table provides information about our foreign currency forward contracts outstanding as of September 24, 2022 (in thousands):
| Currency | Contract Position | Contract Amount (Local Currency) | Contract Amount (U.S. Dollars) | |||||||||||||||||
| Euro Dollar | Buy | ( | $ | ( | ||||||||||||||||
| Japanese Yen | Sell | |||||||||||||||||||
| Korean Won | Buy | ( | ( | |||||||||||||||||
| Taiwan Dollar | Sell | |||||||||||||||||||
| Total USD notional amount of outstanding foreign exchange contracts | $ | ( | ||||||||||||||||||
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.
16
Note 9 — Warranty
We offer warranties on certain products and record a liability for the estimated future costs associated with warranty claims at the time revenue is recognized. The warranty liability is based upon historical experience and our estimate of the level of future costs. While we engage in product quality programs and processes, our warranty obligation is affected by product failure rates, material usage and service delivery costs. We regularly monitor product returns for warranty and maintain a reserve for the related expenses based upon our historical experience and any specifically identified failures. As we sell new products to our customers, we must exercise considerable judgment in estimating the expected failure rates. This estimating process is based on historical experience of similar products, as well as various other assumptions that we believe to be reasonable under the circumstances. We provide for the estimated cost of product warranties at the time revenue is recognized as a component of Cost of revenues in our Condensed Consolidated Statement of Income.
Changes in our warranty liability were as follows (in thousands):
| Nine Months Ended | |||||||||||
| September 24, 2022 | September 25, 2021 | ||||||||||
| Balance at beginning of period | $ | $ | |||||||||
| Accruals | |||||||||||
| Settlements | ( | ( | |||||||||
| Balance at end of period | $ | $ | |||||||||
Note 10 — Property, Plant and Equipment, net
Property, plant and equipment, net consisted of the following (in thousands):
| September 24, 2022 | December 25, 2021 | ||||||||||
| Land | $ | $ | |||||||||
| Building and building improvements | |||||||||||
| Machinery and equipment | |||||||||||
| Computer equipment and software | |||||||||||
| Furniture and fixtures | |||||||||||
| Leasehold improvements | |||||||||||
| Sub-total | |||||||||||
| Less: Accumulated depreciation and amortization | ( | ( | |||||||||
| Net, property, plant and equipment | |||||||||||
| Construction-in-process | |||||||||||
| Total | $ | $ | |||||||||
Note 11 — Stockholders’ Equity and Stock-Based Compensation
Common Stock Repurchase Programs
On October 26, 2020, our Board of Directors authorized a two-year program to repurchase up to $50 million of outstanding common stock to offset potential dilution from issuances of common stock under our stock-based compensation programs. During fiscal 2021 we repurchased and retired 622,400 shares of common stock for $24.0 million. During the nine months ended September 24, 2022, we repurchased and retired 676,408 shares of common stock for $26.0 million, utilizing the remaining funds available for repurchase.
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 24, 2022, we repurchased and retired 1,335,414 shares of common stock for $47.5 million under the program. As of September 24, 2022, $27.5 million remained available for future repurchases.
17
Our policy related to repurchases of our common stock is to charge the excess of cost over par value to additional paid-in capital once the shares are retired. All repurchases were made in compliance with Rule 10b-18 under the Securities Exchange Act of 1934, as amended.
Restricted Stock Units
Restricted stock unit (“RSU”) activity under our equity incentive plan was as follows:
| Units | Weighted Average Grant Date Fair Value | ||||||||||
| RSUs at December 25, 2021 | $ | ||||||||||
| Awards granted | |||||||||||
| Awards vested | ( | ||||||||||
| Awards forfeited | ( | ||||||||||
| RSUs at September 24, 2022 | |||||||||||
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 1, 2022, we granted 204,903 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, 2022 - June 30, 2025, 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 273,000 PRSUs granted in fiscal 2019, 36,000 shares were forfeited, resulting in 237,000 shares vesting in 2022. These shares achieved 147 % TSR performance, which resulted in an additional 110,605 shares issued in fiscal 2022 related to the fiscal 2019 PRSU grant.
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 24, 2022 | ||||||||
| Shares issued | ||||||||
| Weighted average per share purchase price | $ | |||||||
| Weighted average per share discount from the fair value of our common stock on the date of issuance | $ | ( | ||||||
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 24, 2022 | September 25, 2021 | September 24, 2022 | September 25, 2021 | ||||||||||||||||||||
| Cost of revenues | $ | $ | $ | $ | |||||||||||||||||||
| Research and development | |||||||||||||||||||||||
| Selling, general and administrative | |||||||||||||||||||||||
| Total stock-based compensation | $ | $ | $ | $ | |||||||||||||||||||
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Unrecognized Compensation Costs
At September 24, 2022, the unrecognized stock-based compensation was as follows (dollars in thousands):
| Unrecognized Expense | Average Expected Recognition Period in Years | ||||||||||
| Restricted stock units | $ | ||||||||||
| Performance restricted stock units | |||||||||||
| Employee stock purchase plan | |||||||||||
| Total unrecognized stock-based compensation expense | $ | ||||||||||
Note 12 — Net Income per Share
The following table reconciles the shares used in calculating basic net income per share and diluted net income per share (in thousands):
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 24, 2022 | September 25, 2021 | September 24, 2022 | September 25, 2021 | ||||||||||||||||||||
| Weighted-average shares used in computing basic net income per share | |||||||||||||||||||||||
| Add potentially dilutive securities | |||||||||||||||||||||||
| Weighted-average shares used in computing diluted net income per share | |||||||||||||||||||||||
| Securities not included as they would have been antidilutive | |||||||||||||||||||||||
Note 13 — Commitments and Contingencies
Leases
See Note 14, Leases.
Contractual Obligations and Commitments
Our contractual obligations and commitments have not materially changed as of September 24, 2022 from those disclosed in our Annual Report on Form 10-K for the year ended December 25, 2021.
Legal Matters
Note 14 — Leases
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| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 24, 2022 | September 25, 2021 | September 24, 2022 | September 25, 2021 | ||||||||||||||||||||
| Lease expense: | |||||||||||||||||||||||
| Operating lease expense | $ | $ | $ | $ | |||||||||||||||||||
| Short-term lease expense | |||||||||||||||||||||||
| Variable lease expense | |||||||||||||||||||||||
| $ | $ | $ | $ | ||||||||||||||||||||
Future minimum payments under our non-cancelable operating leases were as follows as of September 24, 2022 (in thousands):
| Fiscal Year | Amount | |||||||
| Remainder of 2022 | $ | |||||||
| 2023 | ||||||||
| 2024 | ||||||||
| 2025 | ||||||||
| 2026 | ||||||||
| Thereafter | ||||||||
| Total minimum lease payments | ||||||||
| Less: interest | ( | |||||||
| Present value of net minimum lease payments | ||||||||
| Less: current portion | ( | |||||||
| Total long-term operating lease liabilities | $ | |||||||
Note 15 — Revenue
Transaction price allocated to the remaining performance obligations: On September 24, 2022, we had $8.3 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 40.0 % of our remaining performance obligations as revenue in the remainder of fiscal 2022, approximately 49.8 % in fiscal 2023, and approximately 10.2 % in fiscal 2024 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 24, 2022 and December 25, 2021 were $3.0 million and $0.9 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 and Other liabilities. Contract liabilities as of September 24, 2022 and December 25, 2021 were $33.1 million and $24.2 million, respectively. During the nine months ended September 24, 2022, we recognized $19.0 million of revenue that was included in contract liabilities as of December 25, 2021.
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.
20
Note 16 — 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 24, 2022 | September 25, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||
| Probe Cards | Systems | Corporate and Other | Total | Probe Cards | Systems | Corporate and Other | Total | ||||||||||||||||||||||||||||||||||||||||
| Revenues | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||
| Gross profit | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||
| Gross margin | % | % | % | % | % | % | |||||||||||||||||||||||||||||||||||||||||
| Nine Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||
| September 24, 2022 | September 25, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||
| Probe Cards | Systems | Corporate and Other | Total | Probe Cards | Systems | Corporate and Other | Total | ||||||||||||||||||||||||||||||||||||||||
| Revenues | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||
| Gross profit | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||
| Gross margin | % | % | % | % | % | % | |||||||||||||||||||||||||||||||||||||||||
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, and restructuring charges which are not used in evaluating the results of, or in allocating resources to, our reportable segments.
| Three Months Ended | |||||||||||||||||||||||||||||||||||
| September 24, 2022 | September 25, 2021 | ||||||||||||||||||||||||||||||||||
| Probe Cards | Systems | Total | Probe Cards | Systems | Total | ||||||||||||||||||||||||||||||
| Market: | |||||||||||||||||||||||||||||||||||
| Foundry & Logic | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| DRAM | |||||||||||||||||||||||||||||||||||
| Flash | |||||||||||||||||||||||||||||||||||
| Systems | |||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Timing of revenue recognition: | |||||||||||||||||||||||||||||||||||
| Products transferred at a point in time | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Products and services transferred over time | |||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Geographical region: | |||||||||||||||||||||||||||||||||||
| United States | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Taiwan | |||||||||||||||||||||||||||||||||||
| China | |||||||||||||||||||||||||||||||||||
| South Korea | |||||||||||||||||||||||||||||||||||
| Europe | |||||||||||||||||||||||||||||||||||
| Singapore | |||||||||||||||||||||||||||||||||||
| Japan | |||||||||||||||||||||||||||||||||||
| Malaysia | |||||||||||||||||||||||||||||||||||
| Rest of the world | |||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
21
| Nine Months Ended | |||||||||||||||||||||||||||||||||||
| September 24, 2022 | September 25, 2021 | ||||||||||||||||||||||||||||||||||
| Probe Cards | Systems | Total | Probe Cards | Systems | Total | ||||||||||||||||||||||||||||||
| Market: | |||||||||||||||||||||||||||||||||||
| Foundry & Logic | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| DRAM | |||||||||||||||||||||||||||||||||||
| Flash | |||||||||||||||||||||||||||||||||||
| Systems | |||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Timing of revenue recognition: | |||||||||||||||||||||||||||||||||||
| Products transferred at a point in time | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Products and services transferred over time | |||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Geographical region: | |||||||||||||||||||||||||||||||||||
| Taiwan | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| China | |||||||||||||||||||||||||||||||||||
| United States | |||||||||||||||||||||||||||||||||||
| South Korea | |||||||||||||||||||||||||||||||||||
| Malaysia | |||||||||||||||||||||||||||||||||||
| Singapore | |||||||||||||||||||||||||||||||||||
| Europe | |||||||||||||||||||||||||||||||||||
| Japan | |||||||||||||||||||||||||||||||||||
| Rest of the world | |||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
Note 17 — Subsequent Events
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 COVID-19 and other 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
22
year ended December 25, 2021 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 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.
We generated net income of $64.5 million in the first nine months of fiscal 2022 as compared to $58.0 million in the first nine months of fiscal 2021. The increase in net income was primarily due to increased revenue with improved gross margins from a reduction in the amortization of intangibles due to significant intangibles becoming fully amortized, partially offset by higher operating expenses. The first half of fiscal 2022 was strong, realizing $60.1 million of the $64.5 million net income in the first nine months of fiscal 2022 with $401.1 million in revenue and 47.0% gross margins. For the third quarter of fiscal 2022, we generated net income of $4.4 million with $180.9 million in revenue and 34.4% gross margins, which was a significant decline in results after a strong first half.
In October 2022, the United States government imposed new controls, including expanded export license requirements that significantly impact trade with China for advanced U.S. semiconductor technology sold in China. The impact of this on our business is still being evaluated and updated guidance is being provided by the U.S. Government on an ongoing basis and subject to change. We expect these regulatory conditions, on top of the slowing business environment seen in the third quarter of fiscal 2022, to negatively impact our financial results over the next few quarters. Given the rapidly evolving situation, the impacts beyond that time frame are uncertain.
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 2021 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 24, 2022, there were no significant changes in our significant accounting policies or estimates from those reported in our Annual Report on Form 10-K for the year ended December 25, 2021, which was filed with the Securities and Exchange Commission on February 18, 2022.
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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 24, 2022 | September 25, 2021 | September 24, 2022 | September 25, 2021 | ||||||||||||||||||||
| Revenues | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | |||||||||||||||
| Cost of revenues | 65.6 | 57.8 | 56.9 | 58.7 | |||||||||||||||||||
| Gross profit | 34.4 | 42.2 | 43.1 | 41.3 | |||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Research and development | 14.7 | 13.7 | 14.1 | 13.4 | |||||||||||||||||||
| Selling, general and administrative | 17.5 | 16.3 | 16.8 | 16.2 | |||||||||||||||||||
| Total operating expenses | 32.2 | 30.0 | 30.9 | 29.6 | |||||||||||||||||||
| Operating income | 2.2 | 12.2 | 12.2 | 11.7 | |||||||||||||||||||
| Interest income | 0.4 | 0.1 | 0.2 | 0.1 | |||||||||||||||||||
| Interest expense | (0.1) | (0.1) | (0.1) | (0.1) | |||||||||||||||||||
| Other income, net | 0.6 | 0.1 | 0.3 | — | |||||||||||||||||||
| Income before income taxes | 3.1 | 12.3 | 12.6 | 11.7 | |||||||||||||||||||
| Provision for income taxes | 0.7 | 1.5 | 1.5 | 1.4 | |||||||||||||||||||
| Net income | 2.4 | % | 10.8 | % | 11.1 | % | 10.3 | % | |||||||||||||||
Revenues by Segment and Market
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 24, 2022 | September 25, 2021 | September 24, 2022 | September 25, 2021 | ||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
| Probe Cards | $ | 139,365 | $ | 154,850 | $ | 467,056 | $ | 467,389 | |||||||||||||||
| Systems | 41,504 | 35,114 | 114,894 | 97,287 | |||||||||||||||||||
| $ | 180,869 | $ | 189,964 | $ | 581,950 | $ | 564,676 | ||||||||||||||||
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| Three Months Ended | |||||||||||||||||||||||||||||||||||
| September 24, 2022 | % of Revenues | September 25, 2021 | % of Revenues | $ Change | % Change | ||||||||||||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||||||||||||||
| Probe Cards Markets: | |||||||||||||||||||||||||||||||||||
| Foundry & Logic | $ | 90,605 | 50.1 | % | $ | 104,640 | 55.1 | % | $ | (14,035) | (13.4) | % | |||||||||||||||||||||||
| DRAM | 34,922 | 19.3 | 39,816 | 20.9 | (4,894) | (12.3) | |||||||||||||||||||||||||||||
| Flash | 13,838 | 7.7 | 10,394 | 5.5 | 3,444 | 33.1 | |||||||||||||||||||||||||||||
| Systems Market: | |||||||||||||||||||||||||||||||||||
| Systems | 41,504 | 22.9 | 35,114 | 18.5 | 6,390 | 18.2 | |||||||||||||||||||||||||||||
| Total revenues | $ | 180,869 | 100.0 | % | $ | 189,964 | 100.0 | % | $ | (9,095) | (4.8) | % | |||||||||||||||||||||||
| Nine Months Ended | |||||||||||||||||||||||||||||||||||
| September 24, 2022 | % of Revenues | September 25, 2021 | % of Revenues | $ Change | % Change | ||||||||||||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||||||||||||||
| Probe Cards Markets: | |||||||||||||||||||||||||||||||||||
| Foundry & Logic | $ | 327,106 | 56.3 | % | $ | 321,776 | 57.0 | % | $ | 5,330 | 1.7 | % | |||||||||||||||||||||||
| DRAM | 106,202 | 18.2 | 115,802 | 20.5 | (9,600) | (8.3) | |||||||||||||||||||||||||||||
| Flash | 33,748 | 5.8 | 29,811 | 5.3 | 3,937 | 13.2 | |||||||||||||||||||||||||||||
| Systems Market: | |||||||||||||||||||||||||||||||||||
| Systems | 114,894 | 19.7 | 97,287 | 17.2 | 17,607 | 18.1 | |||||||||||||||||||||||||||||
| Total revenues | $ | 581,950 | 100.0 | % | $ | 564,676 | 100.0 | % | $ | 17,274 | 3.1 | % | |||||||||||||||||||||||
Foundry & Logic
The decrease in Foundry & Logic product revenue for the three months ended September 24, 2022, compared to the three months ended September 25, 2021, was driven principally by softening demand for the second half of fiscal 2022 causing decreased unit sales to integrated device manufacturers, offset slightly by increased demand at large semiconductor foundries.
Foundry & Logic product revenue increased slightly for the nine months ended September 24, 2022, compared to the nine months ended September 25, 2021. Although a slight increase year-over-year, demand has weakened from the slowdown in the semiconductor industry for the second half of fiscal 2022, and as previously described within the Overview.
DRAM
The decrease in DRAM product revenue for the three and nine months ended September 24, 2022, compared to the three and nine months ended September 25, 2021, was driven by decreased design wins and customer demand.
Flash
The increase in Flash product revenue for the three and nine months ended September 24, 2022, compared to the three and nine months ended September 25, 2021, was driven by increased customer demand.
Systems
The increase in Systems market revenue for the three months ended September 24, 2022, compared to the three months ended September 25, 2021, was driven by increased sales of our 200 and 300 millimeter probe stations and cryogenic systems.
The increase in Systems market revenue for the nine months ended September 24, 2022, compared to the nine months ended September 25, 2021, was driven by increased sales of our 200 and 300 millimeter probe stations and metrology systems.
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Revenues by Geographic Region
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||
| September 24, 2022 | % of Revenue | September 25, 2021 | % of Revenue | September 24, 2022 | % of Revenue | September 25, 2021 | % of Revenue | ||||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||||||||||||||||||||||||||
| Taiwan | $ | 36,838 | 20.4 | % | $ | 41,574 | 21.9 | % | $ | 139,927 | 24.0 | % | $ | 139,038 | 24.6 | % | |||||||||||||||||||||||||||||||
| China | 36,728 | 20.3 | 51,047 | 26.8 | 124,862 | 21.5 | 125,499 | 22.2 | |||||||||||||||||||||||||||||||||||||||
| United States | 38,089 | 21.1 | 25,468 | 13.4 | 94,978 | 16.3 | 87,604 | 15.5 | |||||||||||||||||||||||||||||||||||||||
| South Korea | 28,937 | 16.0 | 28,972 | 15.3 | 85,193 | 14.6 | 84,234 | 14.9 | |||||||||||||||||||||||||||||||||||||||
| Malaysia | 6,509 | 3.6 | 11,633 | 6.1 | 44,952 | 7.7 | 34,758 | 6.2 | |||||||||||||||||||||||||||||||||||||||
| Singapore | 10,357 | 5.7 | 7,552 | 4.0 | 28,361 | 4.9 | 26,072 | 4.6 | |||||||||||||||||||||||||||||||||||||||
| Europe | 11,798 | 6.5 | 10,486 | 5.5 | 28,284 | 4.9 | 32,495 | 5.8 | |||||||||||||||||||||||||||||||||||||||
| Japan | 7,692 | 4.3 | 10,728 | 5.6 | 27,011 | 4.6 | 27,753 | 4.9 | |||||||||||||||||||||||||||||||||||||||
| Rest of the world | 3,921 | 2.1 | 2,504 | 1.4 | 8,382 | 1.5 | 7,223 | 1.3 | |||||||||||||||||||||||||||||||||||||||
| Total revenues | $ | 180,869 | 100.0 | % | $ | 189,964 | 100.0 | % | $ | 581,950 | 100.0 | % | $ | 564,676 | 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 their 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 24, 2022, compared to the three and nine months ended September 25, 2021, 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 China mentioned previously was partially offset by increased demand from a large Chinese DRAM integrated device manufacturer.
Cost of Revenues and Gross Margins
Cost of revenues consists primarily of manufacturing materials, compensation and benefits, shipping and handling costs, manufacturing-related overhead 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 24, 2022 | September 25, 2021 | $ Change | % Change | ||||||||||||||||||||
| Gross profit | $ | 62,213 | $ | 80,219 | $ | (18,006) | (22.4) | % | |||||||||||||||
| Gross margin | 34.4 | % | 42.2 | % | |||||||||||||||||||
| Nine Months Ended | |||||||||||||||||||||||
| September 24, 2022 | September 25, 2021 | $ Change | % Change | ||||||||||||||||||||
| Gross profit | $ | 250,806 | $ | 233,208 | $ | 17,598 | 7.5 | % | |||||||||||||||
| Gross margin | 43.1 | % | 41.3 | % | |||||||||||||||||||
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Our gross profit and gross margin by segment were as follows (dollars in thousands):
| Three Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||
| September 24, 2022 | September 25, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||
| Probe Cards | Systems | Corporate and Other | Total | Probe Cards | Systems | Corporate and Other | Total | ||||||||||||||||||||||||||||||||||||||||
| Gross profit | $ | 48,252 | $ | 22,284 | $ | (8,323) | $ | 62,213 | $ | 69,868 | $ | 17,553 | $ | (7,202) | $ | 80,219 | |||||||||||||||||||||||||||||||
| Gross margin | 34.6 | % | 53.7 | % | 34.4 | % | 45.1 | % | 50.0 | % | 42.2 | % | |||||||||||||||||||||||||||||||||||
| Nine Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||
| September 24, 2022 | September 25, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||
| Probe Cards | Systems | Corporate and Other | Total | Probe Cards | Systems | Corporate and Other | Total | ||||||||||||||||||||||||||||||||||||||||
| Gross profit | $ | 203,874 | $ | 59,967 | $ | (13,035) | $ | 250,806 | $ | 206,783 | $ | 48,059 | $ | (21,634) | $ | 233,208 | |||||||||||||||||||||||||||||||
| Gross margin | 43.7 | % | 52.2 | % | 43.1 | % | 44.2 | % | 49.4 | % | 41.3 | % | |||||||||||||||||||||||||||||||||||
Probe Cards
For the three months ended September 24, 2022, gross margins decreased compared to the three months ended September 25, 2021, primarily due to greater inventory excess and obsolescence reserves, higher net manufacturing spending driven by higher labor and overhead costs, and lower standard margins related to a less favorable product mix. For the nine months ended September 24, 2022, gross margins decreased compared to the nine months ended September 25, 2021, primarily due to higher net manufacturing spending driven by higher labor and overhead costs, partially offset by improved standard margins related to a more favorable product mix.
Systems
For the three and nine months ended September 24, 2022, gross margins increased compared to the three and nine months ended September 25, 2021, primarily as a result of a more favorable product mix and improved leverage on fixed costs at higher revenues.
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.
The increase in Corporate and Other for the three months ended September 24, 2022 compared to the three months ended September 25, 2021 is primarily due to increased restructuring charges arising from a change in estimate of excess and obsolete inventories related to our third quarter of fiscal 2021 plan to adjust capacity for certain product offerings, partially offset by a reduction in the amortization of intangibles resulting from significant intangibles becoming fully amortized.
The decrease in Corporate and Other for the nine months ended September 24, 2022 compared to the nine months ended September 25, 2021 is primarily due to a reduction in the amortization of intangibles resulting from significant intangibles becoming fully amortized, partially offset by increased restructuring charges in the third quarter of fiscal 2022 arising from a change in estimate of excess and obsolete inventories related to our fiscal 2021 plan to adjust capacity for certain product offerings.
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 24, 2022, compared to the three months ended September 25, 2021, gross profit and gross margins have decreased on lower revenue levels, a less favorable Probe Cards segment product mix, increased labor, overhead, and inventory excess and obsolescence reserves, and less amortization of intangibles. For the nine months ended September 24, 2022, compared to the nine months ended September 25, 2021, gross profit and gross margins have increased on higher revenue levels, improved product mix, and less amortization of intangibles, partially offset by higher labor and overhead costs.
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Cost of revenues included stock-based compensation expense as follows (in thousands):
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 24, 2022 | September 25, 2021 | September 24, 2022 | September 25, 2021 | ||||||||||||||||||||
| Stock-based compensation | $ | 1,022 | $ | 1,392 | $ | 2,834 | $ | 3,806 | |||||||||||||||
Research and Development
| Three Months Ended | |||||||||||||||||||||||
| September 24, 2022 | September 25, 2021 | $ Change | % Change | ||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||
| Research and development | $ | 26,549 | $ | 26,026 | $ | 523 | 2.0 | % | |||||||||||||||
| % of revenues | 14.7 | % | 13.7 | % | |||||||||||||||||||
| Nine Months Ended | |||||||||||||||||||||||
| September 24, 2022 | September 25, 2021 | $ Change | % Change | ||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||
| Research and development | $ | 82,000 | $ | 75,526 | $ | 6,474 | 8.6 | % | |||||||||||||||
| % of revenues | 14.1 | % | 13.4 | % | |||||||||||||||||||
Research and development expenses in the three months ended September 24, 2022 increased slightly when compared to the corresponding period in the prior year primarily due to an increase in headcount, which increased allocated costs within Other general operations. This increase was partially offset by a net decrease in employee compensation due to a decrease in performance based compensation, net of an increase in employee compensation due to annual salary adjustments. For the nine months ended September 24, 2022 when compared to the corresponding period in the prior year there was an increase in research and development expenses primarily driven by an increase in headcount which is to support our continued investment in technology leadership. Increased general operational costs, annual salary adjustments, project material costs, and stock-based compensation also contributed to the increase.
A detail of the changes is as follows (in thousands):
| Three Months Ended September 24, 2022 compared to Three Months Ended September 25, 2021 | Nine Months Ended September 24, 2022 compared to Nine Months Ended September 25, 2021 | ||||||||||
| Other general operations | $ | 1,700 | $ | 4,168 | |||||||
| Project material costs | 249 | 850 | |||||||||
| Depreciation | 70 | (9) | |||||||||
| Stock-based compensation | 17 | 346 | |||||||||
| Restructuring charges | (222) | (428) | |||||||||
| Employee compensation costs | (1,291) | 1,547 | |||||||||
| $ | 523 | $ | 6,474 | ||||||||
Research and development included stock-based compensation expense as follows (in thousands):
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 24, 2022 | September 25, 2021 | September 24, 2022 | September 25, 2021 | ||||||||||||||||||||
| Stock-based compensation | $ | 2,027 | $ | 2,010 | $ | 5,708 | $ | 5,362 | |||||||||||||||
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Selling, General and Administrative
| Three Months Ended | |||||||||||||||||||||||
| September 24, 2022 | September 25, 2021 | $ Change | % Change | ||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||
| Selling, general and administrative | $ | 31,637 | $ | 30,940 | $ | 697 | 2.3 | % | |||||||||||||||
| % of revenues | 17.5 | % | 16.3 | % | |||||||||||||||||||
| Nine Months Ended | |||||||||||||||||||||||
| September 24, 2022 | September 25, 2021 | $ Change | % Change | ||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||
| Selling, general and administrative | $ | 97,949 | $ | 91,434 | $ | 6,515 | 7.1 | % | |||||||||||||||
| % of revenues | 16.8 | % | 16.2 | % | |||||||||||||||||||
Selling, general and administrative expenses increased in the three and nine months ended September 24, 2022 when compared to the corresponding period in the prior year, primarily driven by increased headcount, annual salary adjustments, increased travel related costs as restrictions related to COVID-19 relaxed, and higher stock-based compensation. Furthermore, the increase for the three months ended September 24, 2022 when compared to the corresponding period in the prior year was partially offset by lower performance based compensation.
A detail of the changes is as follows (in thousands):
| Three Months Ended September 24, 2022 compared to Three Months Ended September 25, 2021 | Nine Months Ended September 24, 2022 compared to Nine Months Ended September 25, 2021 | ||||||||||
| Travel related costs | $ | 583 | $ | 2,257 | |||||||
| General operating expenses | 576 | 2,046 | |||||||||
| Stock-based compensation | 428 | 914 | |||||||||
| Restructure | 25 | 66 | |||||||||
| Consulting fees | 19 | (319) | |||||||||
| Amortization of intangibles | (73) | (273) | |||||||||
| Employee compensation costs | (861) | 1,824 | |||||||||
| $ | 697 | $ | 6,515 | ||||||||
Selling, general and administrative included stock-based compensation expense as follows (in thousands):
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 24, 2022 | September 25, 2021 | September 24, 2022 | September 25, 2021 | ||||||||||||||||||||
| Stock-based compensation | $ | 4,946 | $ | 4,518 | $ | 13,331 | $ | 12,417 | |||||||||||||||
Interest Income and Interest Expense
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 24, 2022 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 loans, interest rate swap derivative contracts, and term loan issuance costs amortization charges. The interest expense for the three and nine months ended September 24, 2022 compared to the same period of the prior year remained consistent despite a lower outstanding debt due to increased average interest rates on the outstanding debt.
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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 24, 2022 | September 25, 2021 | September 24, 2022 | September 25, 2021 | ||||||||||||||||||||
| (In thousands, except percentages) | |||||||||||||||||||||||
| Provision for income taxes | $ | 1,274 | $ | 2,784 | $ | 8,860 | $ | 8,273 | |||||||||||||||
| Effective tax rate | 22.6 | % | 12.0 | % | 12.1 | % | 12.5 | % | |||||||||||||||
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 ASC 718 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.
We have utilized our previous net operating loss carryforwards, and expect the FDII deduction and corresponding benefit to be available, resulting in a decrease from the U.S. statutory rate for the year ending December 31, 2022.
The increase in the effective tax rate in the three months ended September 24, 2022 when compared to the corresponding period in the prior year was primarily driven by a change within the third quarter of fiscal 2022 to the estimated annual taxable income, including by jurisdiction, and lower discrete benefits from stock-based compensation.
As of January 1, 2022, the Tax Cuts and Jobs Act of 2017 eliminates the option to deduct research and experimental expenditures immediately in the year incurred and requires taxpayers to amortize such expenditures over five years in the U.S. and fifteen years in foreign jurisdictions. 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. If this provision is not deferred, modified, or repealed with retroactive effect to January 1, 2022, we expect our cash taxes to slowly increase over the next few years until we have fully utilized our Federal research and development credits to offset our Federal tax liability to the extent allowed by law.
Liquidity and Capital Resources
Capital Resources
Our working capital was $352.6 million at September 24, 2022, compared to $375.3 million at December 25, 2021.
Cash and cash equivalents primarily consist of deposits held at banks, money market funds, corporate bonds, and commercial paper. Marketable securities primarily consist of U.S. treasuries, corporate bonds, and commercial paper. 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 $251.6 million at September 24, 2022, compared to $276.1 million at December 25, 2021. 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.
30
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.
Cash Flows
The following table sets forth our net cash flows from operating, investing and financing activities:
| Nine Months Ended | |||||||||||
| September 24, 2022 | September 25, 2021 | ||||||||||
| (In thousands) | |||||||||||
| Net cash provided by operating activities | $ | 111,048 | $ | 100,437 | |||||||
| Net cash used in investing activities | $ | (52,013) | $ | (94,976) | |||||||
| Net cash used in financing activities | $ | (84,964) | $ | (36,869) | |||||||
Operating Activities
Net cash provided by operating activities for the nine months ended September 24, 2022 was primarily attributable to net income of $64.5 million and net non-cash expenses of $69.3 million, which includes depreciation, amortization, stock-based compensation, and the provision for excess and obsolete inventories. This was partially offset by an increase in net working capital of $22.7 million, primarily related to cash paid for inventories of $33.0 million and a decrease in accrued liabilities for $5.0 million, partially offset by cash provided by an increase in accounts payable of $17.6 million.
Investing Activities
Net cash used in investing activities for the nine months ended September 24, 2022 was primarily related to $39.0 million property, plant and equipment purchases, $8.6 million of net cash used to purchase marketable securities, and $3.4 million used for acquisition of a business.
Financing Activities
Net cash used in financing activities for the nine months ended September 24, 2022 primarily related to $73.5 million used to purchase common stock under our stock repurchase programs, $6.4 million of principal payments made towards the repayment of our term loans, and $15.6 million related to tax withholdings associated with the net share settlements of our equity awards, partially offset by $10.5 million of proceeds received from issuances of common stock under our employee stock purchase plan.
Debt
FRT Term Loan
On October 25, 2019, we entered into a $23.4 million three-year credit facility loan agreement (the “FRT Term Loan”), to fund the acquisition of FRT GmbH, which we acquired on October 9, 2019.
The FRT Term Loan bears interest at a rate equal to the Euro Interbank Offered Rate (“EURIBOR”) plus 1.75% per annum and will be repaid in quarterly installments of approximately $1.8 million plus interest. The interest rate at September 24, 2022 was 1.90%. As of September 24, 2022, the balance outstanding pursuant to the FRT term loan was $1.7 million. The FRT Term Loan was fully paid as of October 25, 2022.
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 finance the purchase of a building adjacent to our leased facilities in Livermore, California.
The Building Term Loan bears interest at a rate equal to the applicable LIBOR rate plus 1.75% per annum. Interest payments are payable in monthly installments over a fifteen-year period. The interest rate at September 24, 2022 was 4.31%. As of September 24, 2022, the balance outstanding pursuant to the Building Term Loan was $15.8 million.
On March 17, 2020, we entered into a forward starting interest rate swap agreement to hedge the interest payments 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 interest
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rate of one-month LIBOR plus 1.75% into a fixed interest rate of 2.75%. As of September 24, 2022, the notional amount of the loan that is subject to this interest rate swap is $15.8 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 fiscal 2021 we repurchased and retired 622,400 shares of common stock for $24.0 million. During the nine months ended September 24, 2022, we repurchased and retired 676,408 shares of common stock for $26.0 million, utilizing the remaining funds available for repurchase.
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 of offsetting 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 24, 2022, we repurchased and retired 1,335,414 shares of common stock for $47.5 million under this program. As of September 24, 2022, $27.5 million remained available for future repurchases.
Contractual Obligations and Commitments
The following table summarizes our significant contractual commitments to make future payments in cash under contractual obligations as of September 24, 2022:
| Payments Due In Fiscal Year | |||||||||||||||||||||||||||||||||||||||||
| Remainder 2022 | 2023 | 2024 | 2025 | 2026 | Thereafter | Total | |||||||||||||||||||||||||||||||||||
| Operating leases | $ | 4,275 | $ | 7,545 | $ | 7,236 | $ | 7,170 | $ | 6,450 | $ | 9,042 | $ | 41,718 | |||||||||||||||||||||||||||
| Term loans - principal payments | 1,953 | 1,050 | 1,080 | 1,111 | 1,142 | 11,116 | 17,452 | ||||||||||||||||||||||||||||||||||
Term loans - interest payments (1) | 179 | 657 | 614 | 561 | 513 | 2,170 | 4,694 | ||||||||||||||||||||||||||||||||||
| Total | $ | 6,407 | $ | 9,252 | $ | 8,930 | $ | 8,842 | $ | 8,105 | $ | 22,328 | $ | 63,864 | |||||||||||||||||||||||||||
(1) Represents our minimum interest payment commitments at 4.31% per annum for the Building Term Loan and 1.90% per annum for the FRT 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 24, 2022, we were not involved in any such off-balance sheet arrangements.
Recent Accounting Pronouncements
See Note 1, Basis of Presentation and New Accounting Pronouncements, of Notes to Condensed Consolidated Financial Statements.
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 25, 2021. Our exposure to market risk has not changed materially since December 25, 2021.
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
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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.
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 24, 2022 to the risk factors discussed in our Annual Report on Form 10-K for the year ended December 25, 2021. 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 25, 2021 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 2. Unregistered Sales of Equity Securities and Use of Proceeds
Repurchase of Common Stock
The following table summarizes our repurchases of outstanding common stock for the three months ended September 24, 2022:
| Period (fiscal months) | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(1) | Maximum Amount that May Yet Be Purchased Under the Plans or Programs | ||||||||||||||||||||||
| June 26, 2022 - July 23, 2022 | 256,084 | $ | 36.48 | 256,084 | $ | 37,292,828 | ||||||||||||||||||||
| July 24, 2022 - August 20, 2022 | 34,172 | 33.16 | 34,172 | 36,159,555 | ||||||||||||||||||||||
| August 21, 2022 - September 24, 2022 | 278,075 | 31.20 | 278,075 | 27,484,925 | ||||||||||||||||||||||
| 568,331 | $ | 33.70 | 568,331 | |||||||||||||||||||||||
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1 In May 2022, our Board of Directors authorized a program to repurchase up to $75.0 million of outstanding common stock to offset potential dilution from issuances of our common stock under our employee stock purchase plan and equity incentive plan. This authorization is in addition to the program authorized to repurchase up to $50.0 million of outstanding common stock that was fully utilized through June 2022 and expired October 2022. Under the authorized stock repurchase program, we may repurchase shares from time to time on the open market. The pace of repurchase activity will depend on levels of cash generation, current stock price and other factors. The program may be modified or discontinued at any time. This new share repurchase program will expire May 2024.
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 | |||||||||||||||||||||||||||
| 3.1 | 8-K | June 3, 2022 | 3.01 | |||||||||||||||||||||||||||||
| 3.2 | 8-K | June 3, 2022 | 3.02 | |||||||||||||||||||||||||||||
| 3.3 | 8-K | June 3, 2022 | 3.03 | |||||||||||||||||||||||||||||
| 31.01 | X | |||||||||||||||||||||||||||||||
| 31.02 | X | |||||||||||||||||||||||||||||||
| 32.01 | * | |||||||||||||||||||||||||||||||
| 101 | The following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 24, 2022, 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 24, 2022, 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 1, 2022 | By: | /s/ SHAI SHAHAR | ||||||||
| Shai Shahar | |||||||||||
| Chief Financial Officer | |||||||||||
| (Duly Authorized Officer, Principal Financial Officer, and Principal Accounting Officer) | |||||||||||
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Exhibit 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
I, Michael D. Slessor, certify that:
1.I have reviewed the quarterly report on Form 10-Q of FormFactor, Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c.Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d.Disclosed in the quarterly report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a.All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| Date: | November 1, 2022 | /s/ MICHAEL D. SLESSOR | ||||||
Michael D. Slessor Chief Executive Officer (Principal Executive Officer and Director) | ||||||||
Exhibit 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
I, Shai Shahar, certify that:
1.I have reviewed the quarterly report on Form 10-Q of FormFactor, Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c.Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d.Disclosed in the quarterly report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a.All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| Date: | November 1, 2022 | /s/ SHAI SHAHAR | ||||||
Shai Shahar Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) | ||||||||
Exhibit 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
In connection with the Quarterly Report on Form 10-Q of FormFactor, Inc., a Delaware corporation, for the period ended September 24, 2022, as filed with the Securities and Exchange Commission, each of the undersigned officers of FormFactor, Inc. certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to his respective knowledge:
1.The quarterly report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
2.The information contained in the quarterly report fairly presents, in all material respects, the financial condition and results of operations of FormFactor, Inc. for the periods presented therein.
| Date: | November 1, 2022 | /s/ MICHAEL D. SLESSOR | ||||||
Michael D. Slessor Chief Executive Officer (Principal Executive Officer and Director) | ||||||||
| Date: | November 1, 2022 | /s/ SHAI SHAHAR | ||||||
Shai Shahar Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) | ||||||||