☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 1, 2023
Or
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 000-50307
FormFactor, Inc.
(Exact name of registrant as specified in its charter)
Delaware
13-3711155
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
7005 Southfront Road, Livermore, California94551
(Address of principal executive offices, including zip code)
(925) 290-4000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common stock, $0.001 par value
FORM
Nasdaq Global Market
______________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes☒ No ☐
Indicate by check mark whether the registrant submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of the Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer
☒
Accelerated Filer
☐
Non-accelerated Filer
☐
Smaller Reporting Company
☐
Emerging Growth Company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of May 3, 2023, 77,144,094 shares of the registrant’s common stock, par value $0.001 per share, were outstanding.
FORMFACTOR, INC.
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED APRIL 1, 2023
(In thousands, except share and per share amounts)
(Unaudited)
April 1, 2023
December 31, 2022
ASSETS
Current assets:
Cash and cash equivalents
$
112,360
$
109,130
Marketable securities
123,891
129,006
Accounts receivable, net of allowance for credit losses of $169 and $168
103,969
88,143
Inventories, net
116,553
123,157
Restricted cash
1,207
1,221
Prepaid expenses and other current assets
22,941
23,895
Total current assets
480,921
474,552
Restricted cash
2,287
2,631
Operating lease, right-of-use-assets
30,420
31,362
Property, plant and equipment, net of accumulated depreciation
198,232
189,848
Goodwill
211,773
211,444
Intangibles, net
24,486
26,751
Deferred tax assets
67,951
67,646
Other assets
3,686
3,994
Total assets
$
1,019,756
$
1,008,228
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable
$
63,756
$
69,308
Accrued liabilities
31,981
42,115
Current portion of term loan, net of unamortized issuance costs
1,142
1,045
Deferred revenue
23,779
29,846
Operating lease liabilities
7,512
7,353
Total current liabilities
128,170
149,667
Term loan, less current portion, net of unamortized issuance costs
14,034
14,389
Deferred tax liabilities
2,905
2,732
Long-term operating lease liabilities
26,407
27,587
Deferred grant
18,000
—
Other liabilities
5,868
5,568
Total liabilities
195,384
199,943
Stockholders’ equity:
Common stock, $0.001 par value:
250,000,000 shares authorized; 77,142,023 and 76,914,590 shares issued and outstanding
77
77
Additional paid-in capital
858,195
844,842
Accumulated other comprehensive loss
(4,186)
(5,578)
Accumulated deficit
(29,714)
(31,056)
Total stockholders’ equity
824,372
808,285
Total liabilities and stockholders’ equity
$
1,019,756
$
1,008,228
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
FORMFACTOR, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended
April 1, 2023
March 26, 2022
Revenues
$
167,448
$
197,174
Cost of revenues
106,370
102,950
Gross profit
61,078
94,224
Operating expenses:
Research and development
28,245
27,134
Selling, general and administrative
32,742
32,906
Total operating expenses
60,987
60,040
Operating income
91
34,184
Interest income (expense), net
1,276
(54)
Other income, net
23
192
Income before income taxes
1,390
34,322
Provision for income taxes
48
4,450
Net income
$
1,342
$
29,872
Net income per share:
Basic
$
0.02
$
0.38
Diluted
$
0.02
$
0.38
Weighted-average number of shares used in per share calculations:
Basic
77,066
78,246
Diluted
77,255
79,468
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
FORMFACTOR, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
Three Months Ended
April 1, 2023
March 26, 2022
Net income
$
1,342
$
29,872
Other comprehensive income (loss), net of tax:
Translation adjustments
832
(2,698)
Unrealized gains (losses) on available-for-sale marketable securities
603
(1,204)
Unrealized gains (losses) on derivative instruments
(43)
874
Other comprehensive income (loss), net of tax:
1,392
(3,028)
Comprehensive income
$
2,734
$
26,844
The accompanying notes are an integral part of these condensed consolidated financial statements.
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
Three Months Ended April 1, 2023
Balances, December 31, 2022
76,914,590
$
77
$
844,842
$
(5,578)
$
(31,056)
$
808,285
Issuance of common stock under the Employee Stock Purchase Plan
210,055
—
5,024
—
—
5,024
Issuance of common stock pursuant to vesting of restricted stock units, net of stock withheld for tax
17,378
—
(387)
—
—
(387)
Stock-based compensation
—
—
8,716
—
—
8,716
Other comprehensive income
—
—
—
1,392
—
1,392
Net income
—
—
—
—
1,342
1,342
Balances, April 1, 2023
77,142,023
$
77
$
858,195
$
(4,186)
$
(29,714)
$
824,372
Three Months Ended March 26, 2022
Balances, December 25, 2021
78,240,506
$
78
$
898,945
$
(1,449)
$
(81,794)
$
815,780
Issuance of common stock under the Employee Stock Purchase Plan
157,642
—
5,645
—
—
5,645
Issuance of common stock pursuant to exercise of options
6,000
—
42
—
—
42
Issuance of common stock pursuant to vesting of restricted stock units, net of stock withheld for tax
2,612
—
(72)
—
—
(72)
Purchase and retirement of common stock through repurchase program
(240,548)
—
(9,397)
—
—
(9,397)
Stock-based compensation
—
—
7,831
—
—
7,831
Other comprehensive loss
—
—
—
(3,028)
—
(3,028)
Net income
—
—
—
—
29,872
29,872
Balances, March 26, 2022
78,166,212
$
78
$
902,994
$
(4,477)
$
(51,922)
$
846,673
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
FORMFACTOR, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three Months Ended
April 1, 2023
March 26, 2022
Cash flows from operating activities:
Net income
$
1,342
$
29,872
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation
7,576
6,960
Amortization
2,378
2,369
Reduction in the carrying amount of right-of-use assets
1,690
2,492
Stock-based compensation expense
9,290
7,520
Provision for excess and obsolete inventories
4,973
2,501
Other adjustments to reconcile net income to net cash provided by operating activities
133
182
Changes in assets and liabilities:
Accounts receivable
(15,926)
966
Inventories
1,375
(17,080)
Prepaid expenses and other current assets
1,009
(144)
Other assets
(55)
(73)
Accounts payable
(1,819)
10,150
Accrued liabilities
(10,209)
(3,120)
Other liabilities
319
87
Deferred revenues
(6,046)
3,908
Deferred grant
18,000
—
Operating lease liabilities
(1,721)
(2,435)
Net cash provided by operating activities
12,309
44,155
Cash flows from investing activities:
Acquisition of property, plant and equipment
(19,701)
(15,606)
Purchases of marketable securities
(27,311)
(23,462)
Proceeds from maturities and sales of marketable securities
33,473
17,990
Net cash used in investing activities
(13,539)
(21,078)
Cash flows from financing activities:
Proceeds from issuances of common stock
5,024
5,687
Purchase of common stock through stock repurchase program
—
(9,397)
Tax withholdings related to net share settlements of equity awards
(387)
(72)
Principal repayments on term loans
(259)
(2,234)
Net cash provided by (used) in financing activities
4,378
(6,016)
Effect of exchange rate changes on cash, cash equivalents and restricted cash
(276)
(1,142)
Net increase in cash, cash equivalents and restricted cash
2,872
15,919
Cash, cash equivalents and restricted cash, beginning of period
112,982
155,342
Cash, cash equivalents and restricted cash, end of period
$
115,854
$
171,261
The accompanying notes are an integral part of these condensed consolidated financial statements.
7
FORMFACTOR, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three Months Ended
April 1, 2023
March 26, 2022
Non-cash investing and financing activities:
Decrease in accounts payable and accrued liabilities related to property, plant and equipment purchases
$
3,755
$
2,524
Operating lease, right-of-use assets obtained in exchange for lease obligations
727
3,359
Supplemental disclosure of cash flow information:
Cash paid for income taxes, net
$
7,391
$
890
Cash paid for interest
106
163
Operating cash outflows from operating leases
2,191
2,094
Reconciliation of cash, cash equivalents and restricted cash:
Cash and cash equivalents
$
112,360
$
167,182
Restricted cash, current
1,207
2,026
Restricted cash, non-current
2,287
2,053
Total cash, cash equivalents and restricted cash
$
115,854
$
171,261
The accompanying notes are an integral part of these condensed consolidated financial statements.
8
FORMFACTOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 — Basis of Presentation and Significant Accounting Policies
Basis of Presentation
The accompanying condensed consolidated financial information of FormFactor, Inc. is unaudited and has been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). However, such information reflects all adjustments, consisting only of normal recurring adjustments, which are, in the opinion of management, necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods. The condensed consolidated financial statements included herein should be read in conjunction with the consolidated financial statements and the notes thereto included in our 2022 Annual Report on Form 10-K filed with the SEC on February 24, 2023. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the full year.
Fiscal Year
We operate on a 52/53 week fiscal year, whereby the fiscal year ends on the last Saturday of December. Fiscal 2023 and 2022 contain 52 weeks and 53 weeks, respectively, and the three months ended April 1, 2023 and March 26, 2022 each contained 13 weeks. Fiscal 2023 will end on December 30, 2023.
Significant Accounting Policies
Our significant accounting policies have not changed during the three months ended April 1, 2023 from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022, except for:
Government Assistance
In January 2023, we received $18.0 million in cash from a California Competes Grant (the “Grant”) awarded from the California Governor’s Office of Business and Economic Development. The Grant requires FormFactor to create and maintain full-time jobs and make significant infrastructure investments within California over a 5-year term. If we do not meet the requirements of the Grant, we will be required to repay all or a portion of the Grant.
The Grant is included in our Condensed Consolidated Balance Sheets within Deferred grant and we have elected to recognize when earned as an offset to Cost of revenues and Operating expenses within our Condensed Consolidated Statements of Income. We have elected to present the proceeds from the Grant as cash provided by operating activities within our Condensed Consolidated Statements of Cash Flows as the grant is to offset operations.
Note 2 — Concentration of Credit and Other Risks
Each of the following customers accounted for 10% or more of our revenues for the periods indicated:
Three Months Ended
April 1, 2023
March 26, 2022
Intel Corporation
20.0
%
20.8
%
Taiwan Semiconductor Manufacturing Co., LTD.
*
10.7
%
20.0
%
31.5
%
At April 1, 2023, two customers accounted for 17.9% and 15.9% of gross accounts receivable, respectively. At December 31, 2022, one customer accounted for 13.8% of gross accounts receivable.
Note 3 — Inventories, net
Inventories are stated at the lower of cost (principally standard cost, which approximates actual cost on a first in, first out basis) or net realizable value.
9
Inventories, net, consisted of the following (in thousands):
April 1, 2023
December 31, 2022
Raw materials
$
57,748
$
55,726
Work-in-progress
39,376
46,067
Finished goods
19,429
21,364
$
116,553
$
123,157
Note 4— Goodwill and Intangible Assets
Goodwill by reportable segment was as follows (in thousands):
Probe Cards
Systems
Total
Goodwill, as of December 25, 2021
$
178,424
$
33,875
$
212,299
Addition - Woburn Acquisition
—
550
550
Foreign currency translation
—
(1,405)
(1,405)
Goodwill, as of December 31, 2022
178,424
33,020
211,444
Foreign currency translation
—
329
329
Goodwill, as of April 1, 2023
$
178,424
$
33,349
$
211,773
We have not recorded goodwill impairments for the three months ended April 1, 2023.
Intangible assets were as follows (in thousands):
April 1, 2023
December 31, 2022
Intangible Assets
Gross
Accumulated Amortization
Net
Gross
Accumulated Amortization
Net
Existing developed technologies
$
171,750
$
152,260
$
19,490
$
171,441
$
151,212
$
20,229
Customer relationships
50,996
46,559
4,437
50,912
45,003
5,909
Trade name
7,992
7,833
159
7,972
7,759
213
In-process research and development
400
—
400
400
—
400
$
231,138
$
206,652
$
24,486
$
230,725
$
203,974
$
26,751
Amortization expense was included in our Condensed Consolidated Statements of Income as follows (in thousands):
Three Months Ended
April 1, 2023
March 26, 2022
Cost of revenues
$
831
$
808
Selling, general and administrative
1,547
1,561
$
2,378
$
2,369
The estimated future amortization of definite-lived intangible assets, excluding in-process research and development, is as follows (in thousands):
Fiscal Year
Amount
Remainder of 2023
$
4,813
2024
4,611
2025
4,268
2026
3,175
2027
2,832
Thereafter
4,387
$
24,086
10
Note 5— Accrued Liabilities
Accrued liabilities consisted of the following (in thousands):
April 1, 2023
December 31, 2022
Accrued compensation and benefits
$
20,028
$
15,864
Accrued income and other taxes
3,241
12,817
Accrued warranty
3,872
4,199
Employee stock purchase plan contributions withheld
1,533
4,585
Accrued restructuring charges
376
1,249
Other accrued expenses
2,931
3,401
$
31,981
$
42,115
Note 6— Restructuring Charges
2022 Restructuring Plan
On October 25, 2022, we adopted a restructuring plan (“2022 restructuring plan”) to align our cost structure with reduced demand levels, by streamlining and improving the efficiency and business effectiveness of our operations. This plan included lowering headcount by approximately 13% of our workforce.
The Company has recognized 2022 restructuring plan charges of approximately $8.1 million for severance and employee-related costs, including $0.3 million for stock-based compensation, with $7.1 million within the Probe Cards segment, $0.5 million within the Systems segment, and $0.5 million within Corporate. We do not expect to incur additional material costs related to the 2022 restructuring plan.
2021 Restructuring Plan
On September 25, 2021, we adopted restructuring plans (“2021 restructuring plans”) to improve our business effectiveness and streamline our operations by consolidating certain manufacturing facilities for both the Probe Cards segment and the Systems segment. This included plans to consolidate or relocate certain leased locations in the United States to other locations in the United States, Germany and Asia. As a result of these changes to certain work locations, we have incurred personnel related costs to sever, relocate, or retain select employees. Additionally, as part of these plans we have undertaken actions to adjust capacity for certain product offerings, which included contract termination costs to satisfy contract obligations.
The Company has recognized 2021 restructuring plans charges of approximately $12.7 million, with $9.9 million within the Probe Cards segment and $2.8 million within the Systems segment, and were comprised of $1.3 million of severance and employee-related costs, $1.8 million in contract and lease termination costs, $9.1 million in inventory impairments and other inventory related costs, and $0.5 million of cost related to impairment of leasehold improvements, facility exits and fixed asset related costs. We do not expect additional material costs related to the 2021 restructuring plan.
Total restructuring charges for both the 2022 and 2021 restructuring plans included in our Condensed Consolidated Statements of Income were as follows (in thousands):
Three Months Ended
April 1, 2023
March 26, 2022
Probe Cards
Systems
Total
Probe Cards
Systems
Total
Cost of revenues
$
70
$
(45)
$
25
$
39
$
100
$
139
Research and development
4
66
70
—
146
146
Selling, general and administrative
1,060
62
1,122
3
25
28
$
1,134
$
83
$
1,217
$
42
$
271
$
313
11
Changes to the restructuring accrual in the three months ended April 1, 2023 were as follows (in thousands):
Employee Severance and Benefits
Stock-based Compensation
Inventory Impairments & Other Inventory Related Costs
Total
December 31, 2022
$
1,249
$
—
$
—
$
1,249
Restructuring charges
842
295
80
1,217
Cash payments
(1,715)
—
(63)
(1,778)
Non-cash settlement
—
(295)
(17)
(312)
April 1, 2023
$
376
$
—
$
—
$
376
Note 7 — Fair Value and Derivative Instruments
Whenever possible, the fair values of our financial assets and liabilities are determined using quoted market prices of identical securities or quoted market prices of similar securities from active markets. The three levels of inputs that may be used to measure fair value are as follows:
•Level 1 valuations are obtained from real-time quotes for transactions in active exchange markets involving identical securities;
•Level 2 valuations utilize significant observable inputs, such as quoted prices for similar assets or liabilities, quoted prices near the reporting date in markets that are less active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and
•Level 3 valuations utilize unobservable inputs to the valuation methodology and include our own data about assumptions market participants would use in pricing the asset or liability based on the best information available under the circumstances.
We did not have any transfers of assets or liabilities measured at fair value on a recurring basis to or from Level 1, Level 2 or Level 3 during the three months ended April 1, 2023 or the year ended December 31, 2022.
The carrying values of Cash, Accounts receivable, net, Restricted cash, Prepaid expenses and other current assets, Accounts payable, and Accrued liabilities approximate fair value due to their short maturities.
No changes were made to our valuation techniques during the first three months of fiscal 2023.
12
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Assets and liabilities measured at fair value on a recurring basis were as follows (in thousands):
April 1, 2023
Level 1
Level 2
Level 3
Total
Assets:
Cash equivalents:
Money market funds
$
44,777
$
—
$
—
$
44,777
Commercial paper
—
4,475
—
4,475
44,777
4,475
—
49,252
Marketable securities:
U.S. treasuries
25,144
—
—
25,144
Certificates of deposit
—
471
—
471
U.S. agency securities
—
13,062
—
13,062
Corporate bonds
—
53,899
—
53,899
Commercial paper
—
31,315
—
31,315
25,144
98,747
—
123,891
Foreign exchange derivative contracts
—
763
—
763
Promissory note receivable
—
—
943
943
Interest rate swap derivative contracts
—
2,041
—
2,041
Total assets
$
69,921
$
106,026
$
943
$
176,890
Liabilities:
Interest rate swap derivative contracts
$
—
$
(2)
$
—
$
(2)
Total liabilities
$
—
$
(2)
$
—
$
(2)
December 31, 2022
Level 1
Level 2
Level 3
Total
Assets:
Cash equivalents:
Money market funds
$
21,279
$
—
$
—
$
21,279
Commercial paper
—
4,969
—
4,969
U.S. agency securities
—
996
—
996
21,279
5,965
—
27,244
Marketable securities:
U.S. treasuries
25,019
—
—
25,019
Certificates of deposit
—
706
—
706
U.S. agency securities
—
11,045
—
11,045
Corporate bonds
—
67,396
—
67,396
Commercial paper
—
24,840
—
24,840
25,019
103,987
—
129,006
Foreign exchange derivative contracts
—
664
—
664
Promissory note receivable
—
—
943
943
Interest rate swap derivative contracts
—
2,374
—
2,374
Total assets
$
46,298
$
112,990
$
943
$
160,231
Liabilities:
Foreign exchange derivative contracts
$
—
$
(193)
$
—
$
(193)
Total liabilities
$
—
$
(193)
$
—
$
(193)
Cash Equivalents
The fair value of our cash equivalents is determined based on quoted market prices for similar or identical securities.
Marketable Securities
We classify our marketable securities as available-for-sale and value them utilizing a market approach. Our investments are
13
priced by pricing vendors who provide observable inputs for their pricing without applying significant judgment. Broker pricing is used mainly when a quoted price is not available, the investment is not priced by our pricing vendors or when a broker price is more reflective of fair value. Our broker-priced investments are categorized as Level 2 investments because fair value is based on similar assets without applying significant judgments. In addition, all investments have a sufficient trading volume to demonstrate that the fair value is appropriate.
Unrealized gains and losses were immaterial and were recorded as a component of Accumulated other comprehensive loss in our Condensed Consolidated Balance Sheets. We did not have any other-than-temporary unrealized gains or losses at either period end included in these financial statements.
Interest Rate Swaps
The fair value of our interest rate swap contracts is determined at the end of each reporting period based on valuation models that use interest rate yield curves as inputs. For accounting purposes, our interest rate swap contracts qualify for, and are designated as, cash flow hedges. The cash flows associated with the interest rate swaps are reported in Net cash provided by operating activities in our Condensed Consolidated Statements of Cash Flows and the fair value of the interest rate swap contracts are recorded within Prepaid expenses and other current assets and Other assets in our Condensed Consolidated Balance Sheets.
Foreign Exchange Derivative Contracts
We operate and sell our products in various global markets. As a result, we are exposed to changes in foreign currency exchange rates. We utilize foreign currency forward contracts to hedge against future movements in foreign exchange rates that affect certain existing foreign currency denominated assets and liabilities and forecasted foreign currency revenue and expense transactions. Under this program, our strategy is to have increases or decreases in our foreign currency exposures mitigated by gains or losses on the foreign currency forward contracts in order to mitigate the risks and volatility associated with foreign currency transaction gains or losses.
We do not use derivative financial instruments for speculative or trading purposes. For accounting purposes, certain of our foreign currency forward contracts are not designated as hedging instruments and, accordingly, we record the fair value of these contracts as of the end of our reporting period in our Condensed Consolidated Balance Sheets with changes in fair value recorded within Other income, net in our Condensed Consolidated Statement of Income for both realized and unrealized gains and losses. Certain of our foreign currency forward contracts are designated as cash flow hedges, and, accordingly, we record the fair value of these contracts as of the end of our reporting period in our Condensed Consolidated Balance Sheets with changes in fair value recorded as a component of Accumulated other comprehensive loss and reclassified into earnings in the same period in which the hedged transaction affects earnings, and in the same line item on the Condensed Consolidated Statements of Income as the impact of the hedge transaction.
The fair value of our foreign exchange derivative contracts was determined based on current foreign currency exchange rates and forward points. All of our foreign exchange derivative contracts outstanding at April 1, 2023 will mature by the first quarter of fiscal 2024.
The following table provides information about our foreign currency forward contracts outstanding as of April 1, 2023 (in thousands):
Currency
Contract Position
Contract Amount (Local Currency)
Contract Amount (U.S. Dollars)
Euro Dollar
Buy
23,004
$
24,250
Euro Dollar
Sell
2,356
2,472
Japanese Yen
Sell
3,227,282
24,377
Korean Won
Buy
1,751,490
1,355
Taiwan Dollar
Sell
43,413
1,435
Our foreign currency contracts are classified within Level 2 of the fair value hierarchy as they are valued using pricing models that utilize observable market inputs.
Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis
We measure and report our non-financial assets such as Property, plant and equipment, Goodwill and Intangible assets at fair value on a non-recurring basis if we determine these assets to be impaired or in the period when we make a business
14
acquisition. Other than as discussed in Note 6,Restructuring Charges, there were no assets or liabilities measured at fair value on a nonrecurring basis during the three months ended April 1, 2023 or March 26, 2022.
Note 8 — Warranty
We offer warranties on certain products and record a liability for the estimated future costs associated with warranty claims at the time revenue is recognized. The warranty liability is based upon historical experience and our estimate of the level of future costs. While we engage in product quality programs and processes, our warranty obligation is affected by product failure rates, material usage and service delivery costs. We regularly monitor product returns for warranty and maintain a reserve for the related expenses based upon our historical experience and any specifically identified failures. As we sell new products to our customers, we must exercise considerable judgment in estimating the expected failure rates. This estimating process is based on historical experience of similar products, as well as various other assumptions that we believe to be reasonable under the circumstances. We provide for the estimated cost of product warranties at the time revenue is recognized as a component of Cost of revenues in our Condensed Consolidated Statement of Income.
Changes in our warranty liability were as follows (in thousands):
Three Months Ended
April 1, 2023
March 26, 2022
Balance at beginning of period
$
4,199
$
2,805
Accruals
1,390
1,214
Settlements
(1,717)
(1,244)
Balance at end of period
$
3,872
$
2,775
Note 9 — Property, Plant and Equipment, net
Property, plant and equipment, net consisted of the following (in thousands):
April 1, 2023
December 31, 2022
Land
$
17,136
$
17,136
Building and building improvements
44,444
44,932
Machinery and equipment
280,936
276,180
Computer equipment and software
46,568
45,813
Furniture and fixtures
7,481
7,540
Leasehold improvements
87,318
86,500
Sub-total
483,883
478,101
Less: Accumulated depreciation and amortization
(342,763)
(335,711)
Net, property, plant and equipment
141,120
142,390
Construction-in-process
57,112
47,458
Total
$
198,232
$
189,848
Note 10 — Stockholders’ Equity and Stock-Based Compensation
Common Stock Repurchase Programs
On October 26, 2020, our Board of Directors authorized a two-year program to repurchase up to $50 million of outstanding common stock to offset potential dilution from issuances of common stock under our stock-based compensation programs. During the three months ended March 26, 2022, we repurchased 240,548 shares of common stock for $9.4 million. We utilized the remaining funds available for repurchase under this program during fiscal 2022.
On May 20, 2022, our Board of Directors authorized an additional program to repurchase up to $75 million of outstanding common stock, also with the primary purpose to offset potential dilution from issuances of common stock under our stock-based compensation programs. The share repurchase program will expire on May 20, 2024. During the three months ended April 1, 2023, we did not repurchase any common stock. As of April 1, 2023, $18.6 million remained available for future repurchases.
15
Our policy related to repurchases of our common stock is to charge the excess of cost over par value to additional paid-in capital once the shares are retired. All repurchases were made in compliance with Rule 10b-18 under the Securities Exchange Act of 1934, as amended.
Restricted Stock Units
Restricted stock unit (“RSU”) activity under our equity incentive plan was as follows:
Units
Weighted Average Grant Date Fair Value
RSUs at December 31, 2022
2,227,081
$
35.28
Awards granted
79,020
25.51
Awards vested
(30,751)
34.87
Awards forfeited
(82,523)
35.16
RSUs at April 1, 2023
2,192,827
34.94
Performance Restricted Stock Units
We may grant Performance RSUs (“PRSUs”) to certain executives, which vest based upon us achieving certain market performance criteria. There were no market based PRSUs granted during the three months ended April 1, 2023. PRSUs are included as part of the RSU activity above.
Employee Stock Purchase Plan
Information related to activity under our Employee Stock Purchase Plan (“ESPP”) was as follows:
Three Months Ended
April 1, 2023
Shares issued
210,055
Weighted average per share purchase price
$
23.92
Weighted average per share discount from the fair value of our common stock on the date of issuance
$
(4.22)
Stock-Based Compensation
Stock-based compensation was included in our Condensed Consolidated Statements of Income as follows (in thousands):
Three Months Ended
April 1, 2023
March 26, 2022
Cost of revenues
$
1,910
$
1,078
Research and development
2,372
1,986
Selling, general and administrative
5,008
4,456
Total stock-based compensation
$
9,290
$
7,520
Unrecognized Compensation Costs
At April 1, 2023, the unrecognized stock-based compensation was as follows (dollars in thousands):
Unrecognized Expense
Average Expected Recognition Period in Years
Restricted stock units
$
39,761
1.98
Performance restricted stock units
9,486
1.86
Employee stock purchase plan
985
0.33
Total unrecognized stock-based compensation expense
$
50,232
1.93
16
Note 11 — 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
April 1, 2023
March 26, 2022
Weighted-average shares used in computing basic net income per share
77,066
78,246
Add potentially dilutive securities
189
1,222
Weighted-average shares used in computing diluted net income per share
77,255
79,468
Securities not included as they would have been antidilutive
1,121
—
Note 12 — Commitments and Contingencies
Leases
See Note 13, Leases.
Contractual Obligations and Commitments
Our contractual obligations and commitments have not materially changed as of April 1, 2023 from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022.
Legal Matters
From time to time, we may be subject to legal proceedings and claims in the ordinary course of business. As of April 1, 2023, and as of the filing of this Quarterly Report on Form 10-Q, we were not involved in any material legal proceedings.
Note 13 — Leases
We lease real estate space under non-cancelable operating lease agreements for commercial and industrial space, as well as for a portion of our corporate headquarters located in Livermore, California. Our leases have remaining terms of 1 to 6 years, and some leases include options to extend up to 20 years. We also have operating leases for automobiles with remaining lease terms of 1 year. We did not include any of our renewal options in our lease terms for calculating our lease liability as the renewal options allow us to maintain operational flexibility and we are not reasonably certain we will exercise these options at this time. The weighted-average remaining lease term for our operating leases was 5 years as of April 1, 2023 and the weighted-average discount rate was 3.92%.
The components of lease expense were as follows (in thousands):
Three Months Ended
April 1, 2023
March 26, 2022
Lease expense:
Operating lease expense
$
1,952
$
2,221
Short-term lease expense
157
40
Variable lease expense
746
458
$
2,855
$
2,719
17
Future minimum payments under our non-cancelable operating leases were as follows as of April 1, 2023 (in thousands):
Fiscal Year
Amount
Remainder of 2023
$
6,190
2024
8,106
2025
8,018
2026
6,641
2027
5,756
Thereafter
3,431
Total minimum lease payments
38,142
Less: interest
(4,223)
Present value of net minimum lease payments
33,919
Less: current portion
(7,512)
Total long-term operating lease liabilities
$
26,407
Note 14 — Revenue
Transaction price allocated to the remaining performance obligations: On April 1, 2023, we had $9.8 million of remaining performance obligations, which were comprised of deferred service contracts and extended warranty contracts and contracts with overtime revenue recognition that are not yet delivered. We expect to recognize approximately 67.6% of our remaining performance obligations as revenue in the remainder of fiscal 2023, approximately 26.8% in fiscal 2024, and approximately 5.6% in fiscal 2025 and thereafter. The foregoing excludes the value of other remaining performance obligations as they have original durations of one year or less, and also excludes information about variable consideration allocated entirely to a wholly unsatisfied performance obligation.
Contract balances: The timing of revenue recognition may differ from the timing of invoicing to customers. Accounts receivable is recorded at the invoiced amount, net of an allowance for credit losses. A receivable is recognized in the period we deliver goods or provide services or when our right to consideration is unconditional. A contract asset is recorded when we have performed under the contract but our right to consideration is conditional on something other than the passage of time. Contract assets as of April 1, 2023 and December 31, 2022 were $2.9 million and $1.9 million, respectively, and are reported on the Condensed Consolidated Balance Sheets as a component of Prepaid expenses and other current assets.
Contract liabilities include payments received and payments due in advance of performance under a contract and are satisfied as the associated revenue is recognized. Contract liabilities are reported on the Condensed Consolidated Balance Sheets at the end of each reporting period as a component of Deferred revenue and Other liabilities. Contract liabilities as of April 1, 2023 and December 31, 2022 were $24.9 million and $30.9 million, respectively. During the three months ended April 1, 2023, we recognized $14.0 million of revenue that was included in contract liabilities as of December 31, 2022.
Costs to obtain a contract: We generally expense sales commissions when incurred as a component of Selling, general and administrative expense, as the amortization period is typically less than one year.
Revenue by category: Refer to Note 15, Operating Segments and Enterprise-Wide Information, for further details.
Note 15 — 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
18
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
April 1, 2023
March 26, 2022
Probe Cards
Systems
Corporate and Other
Total
Probe Cards
Systems
Corporate and Other
Total
Revenues
$
127,328
$
40,120
$
—
$
167,448
$
159,983
$
37,191
$
—
$
197,174
Gross profit
43,623
20,746
(3,291)
61,078
77,202
19,407
(2,385)
94,224
Gross margin
34.3
%
51.7
%
36.5
%
48.3
%
52.2
%
47.8
%
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.
Certain revenue category information by reportable segment was as follows (in thousands):
Three Months Ended
April 1, 2023
March 26, 2022
Probe Cards
Systems
Total
Probe Cards
Systems
Total
Market:
Foundry & Logic
$
101,562
$
—
$
101,562
$
114,121
$
—
$
114,121
DRAM
19,890
—
19,890
34,437
—
34,437
Flash
5,876
—
5,876
11,425
—
11,425
Systems
—
40,120
40,120
—
37,191
37,191
Total
$
127,328
$
40,120
$
167,448
$
159,983
$
37,191
$
197,174
Timing of revenue recognition:
Products transferred at a point in time
$
126,678
$
36,710
$
163,388
$
158,836
$
35,416
$
194,252
Products and services transferred over time
650
3,410
4,060
1,147
1,775
2,922
Total
$
127,328
$
40,120
$
167,448
$
159,983
$
37,191
$
197,174
Geographical region:
Taiwan
$
38,897
$
1,432
$
40,329
$
42,522
$
10,547
$
53,069
United States
24,641
13,090
37,731
19,976
5,671
25,647
China
18,476
8,623
27,099
32,791
5,608
38,399
South Korea
19,572
1,203
20,775
24,881
2,620
27,501
Malaysia
10,324
946
11,270
21,517
682
22,199
Japan
7,136
3,841
10,977
4,785
4,597
9,382
Europe
3,426
6,000
9,426
2,382
6,013
8,395
Singapore
3,200
2,140
5,340
10,284
612
10,896
Rest of the world
1,656
2,845
4,501
845
841
1,686
Total
$
127,328
$
40,120
$
167,448
$
159,983
$
37,191
$
197,174
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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.
19
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 year ended December 31, 2022 and in this Quarterly Report on Form 10-Q. You should carefully consider the numerous risks and uncertainties described under these sections.
The following discussion and analysis should be read in conjunction with our condensed consolidated financial statements and the accompanying notes contained in this Quarterly Report on Form 10-Q. Unless expressly stated or the context otherwise requires, the terms “we,” “our,” “us” and “FormFactor” refer to FormFactor, Inc. and its subsidiaries.
Overview
FormFactor, Inc., headquartered in Livermore, California, is a leading provider of essential test and measurement technologies along the full semiconductor product lifecycle - from 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 $1.3 million in the first three months of fiscal 2023 as compared to $29.9 million in the first three months of fiscal 2022. The decrease in net income was primarily due to a decline in revenues and the associated decline in gross margins.
Significant Accounting Policies and the Use of Estimates
Management’s Discussion and Analysis and Note 2, Summary of Significant Accounting Policies, to the Consolidated Financial Statements in our 2022 Annual Report on Form 10-K describe the significant accounting estimates and significant accounting policies used in preparation of the Consolidated Financial Statements. Actual results in these areas could differ from management’s estimates. During the three months ended April 1, 2023, 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 31, 2022, which was filed with the Securities and Exchange Commission on February 24, 2023, except for:
Government Assistance
In January 2023, we received $18.0 million in cash from a California Competes Grant (the “Grant”) awarded from the California Governor’s Office of Business and Economic Development. The Grant requires FormFactor to create and maintain full-time jobs and make significant infrastructure investments within California over a 5-year term. If we do not meet the requirements of the Grant, we will be required to repay all or a portion of the Grant.
The Grant is included in our Condensed Consolidated Balance Sheets within Deferred grant and we have elected to recognize when earned as an offset to Cost of revenues and Operating expenses within our Condensed Consolidated Statements of Income. We have elected to present the proceeds from the Grant as cash provided by operating activities within our Condensed Consolidated Statements of Cash Flows as the grant is to offset operations.
20
Results of Operations
The following table sets forth our operating results as a percentage of revenues for the periods indicated:
Three Months Ended
April 1, 2023
March 26, 2022
Revenues
100.0
%
100.0
%
Cost of revenues
63.5
52.2
Gross profit
36.5
47.8
Operating expenses:
Research and development
16.9
13.8
Selling, general and administrative
19.5
16.7
Total operating expenses
36.4
30.5
Operating income
0.1
17.3
Interest income
0.8
0.1
Interest expense
(0.1)
(0.1)
Other income, net
—
0.1
Income before income taxes
0.8
17.4
Provision for income taxes
—
2.2
Net income
0.8
%
15.2
%
Revenues by Segment and Market
Three Months Ended
April 1, 2023
March 26, 2022
(In thousands)
Probe Cards
$
127,328
$
159,983
Systems
40,120
37,191
$
167,448
$
197,174
Three Months Ended
April 1, 2023
% of Revenues
March 26, 2022
% of Revenues
$ Change
% Change
(Dollars in thousands)
Probe Cards Markets:
Foundry & Logic
$
101,562
60.6
%
$
114,121
57.8
%
$
(12,559)
(11.0)
%
DRAM
19,890
11.9
34,437
17.5
(14,547)
(42.2)
Flash
5,876
3.5
11,425
5.8
(5,549)
(48.6)
Systems Market:
Systems
40,120
24.0
37,191
18.9
2,929
7.9
Total revenues
$
167,448
100.0
%
$
197,174
100.0
%
$
(29,726)
(15.1)
%
Foundry & Logic— The decrease in Foundry & Logic product revenue for the three months ended April 1, 2023, compared to the three months ended March 26, 2022, was driven by the weakening demand in the semiconductor industry that began in the third quarter of fiscal 2022 and continued into the three months ended April 1, 2023 and resulted in decreased unit sales across all major customers.
DRAM— The decrease in DRAM product revenue for the three months ended April 1, 2023, compared to the three months ended March 26, 2022, was driven by lower customer demand, a result of the semiconductor industry's overall demand weakening and DRAM market weakness.
21
Flash— The decrease in Flash product revenue for the three months ended April 1, 2023, compared to the three months ended March 26, 2022, was driven by decreased customer demand from large multi-national customers, a result of the semiconductor industry's overall demand weakening and Flash market weakness.
Systems— The increase in Systems market revenue for the three months ended April 1, 2023, compared to the three months ended March 26, 2022, was driven by increased sales of our 200 millimeter probe stations and cryogenic systems, partially offset by decreased sales of our metrology systems.
Revenues by Geographic Region
Three Months Ended
April 1, 2023
% of Revenues
March 26, 2022
% of Revenues
(Dollars in thousands)
Taiwan
$
40,329
24.1
%
$
53,069
26.9
%
United States
37,731
22.5
25,647
13.0
China
27,099
16.2
38,399
19.5
South Korea
20,775
12.4
27,501
13.9
Malaysia
11,270
6.7
22,199
11.3
Japan
10,977
6.6
9,382
4.8
Europe
9,426
5.6
8,395
4.3
Singapore
5,340
3.2
10,896
5.5
Rest of the world
4,501
2.7
1,686
0.8
Total revenues
$
167,448
100.0
%
$
197,174
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 months ended April 1, 2023, compared to the three months ended March 26, 2022, were primarily attributable to changes in customer demand, shifts in customer regional manufacturing strategies, particularly with our large multinational customers, and product sales mix. More specifically, the increase in revenues for the United States, and decreases in revenues for China and Malaysia were driven principally by a single large U.S.-based company with operations in these regions. The decrease in China mentioned previously is also impacted by lowered demand from a large Chinese DRAM integrated device manufacturer and the impact from expanded export license requirements imposed by the United States government in the fourth quarter of fiscal 2022 for exporting advanced U.S. semiconductor technology sold in China.
Cost of Revenues and Gross Margins
Cost of revenues consists primarily of manufacturing materials, compensation and benefits, shipping and handling costs, manufacturing-related overhead (including equipment costs, related occupancy, and computer services), warranty adjustments, inventory adjustments (including write-downs for inventory obsolescence), and amortization of certain intangible assets. Our manufacturing operations rely on a limited number of suppliers to provide key components and materials for our products, some of which are a sole source. We order materials and supplies based on backlog and forecasted customer orders. Tooling and setup costs related to changing manufacturing lots at our suppliers are also included in the cost of revenues. We expense all warranty costs, inventory provisions and amortization of certain intangible assets as cost of revenues.
Our gross profit and gross margin were as follows (dollars in thousands):
Three Months Ended
April 1, 2023
March 26, 2022
$ Change
% Change
Gross profit
$
61,078
$
94,224
$
(33,146)
(35.2)
%
Gross margin
36.5
%
47.8
%
22
Our gross profit and gross margin by segment were as follows (dollars in thousands):
Three Months Ended
April 1, 2023
March 26, 2022
Probe Cards
Systems
Corporate and Other
Total
Probe Cards
Systems
Corporate and Other
Total
Gross profit
$
43,623
$
20,746
$
(3,291)
$
61,078
$
77,202
$
19,407
$
(2,385)
$
94,224
Gross margin
34.3
%
51.7
%
36.5
%
48.3
%
52.2
%
47.8
%
Probe Cards — For the three months ended April 1, 2023, gross margins decreased compared to the three months ended March 26, 2022, primarily due to unfavorable absorption of costs on lower production volumes and greater inventory excess and obsolescence reserves.
Systems— For the three months ended April 1, 2023, gross margins decreased compared to the three months ended March 26, 2022, primarily as a result of less favorable product mix.
Corporate and Other — Corporate and Other includes unallocated expenses relating to share-based compensation and amortization of intangible assets, inventory and fixed asset fair value adjustments due to acquisitions, and restructuring, which are not used in evaluating the results of, or in allocating resources to, our reportable segments.
Overall— Gross profit and gross margins fluctuate with revenue levels, product mix, selling prices, factory loading, labor costs, and material costs. For the three months ended April 1, 2023, compared to the three months ended March 26, 2022, gross profit and gross margins have decreased on lower revenue levels, unfavorable absorption of costs on lower production volumes, and greater inventory excess and obsolescence reserves.
Cost of revenues included stock-based compensation expense as follows (in thousands):
Three Months Ended
April 1, 2023
March 26, 2022
Stock-based compensation
$
1,910
$
1,078
Research and Development
Three Months Ended
April 1, 2023
March 26, 2022
$ Change
% Change
(Dollars in thousands)
Research and development
$
28,245
$
27,134
$
1,111
4.1
%
% of revenues
16.9
%
13.8
%
Research and development expenses in the three months ended April 1, 2023 increased when compared to the corresponding period in the prior year primarily due to an increase in headcount, which is to support our continued investment in technology leadership. Increased general operational costs, annual salary adjustments, and stock-based compensation also contributed to the increase. These increases were partially offset by lower performance-based compensation and project material costs.
A detail of the changes is as follows (in thousands):
Three Months Ended April 1, 2023 compared to Three Months Ended March 26, 2022
Other general operational costs
$
490
Stock-based compensation
386
Depreciation
263
Project material costs
(214)
Employee compensation costs
186
$
1,111
23
Research and development included stock-based compensation expense as follows (in thousands):
Three Months Ended
April 1, 2023
March 26, 2022
Stock-based compensation
$
2,372
$
1,986
Selling, General and Administrative
Three Months Ended
April 1, 2023
March 26, 2022
$ Change
% Change
(Dollars in thousands)
Selling, general and administrative
$
32,742
$
32,906
$
(164)
(0.5)
%
% of revenues
19.5
%
16.7
%
Selling, general and administrative expenses decreased in the three months ended April 1, 2023 when compared to the corresponding period in the prior year, primarily driven by lower performance-based compensation, mostly offset by restructuring charges, higher stock-based compensation, and higher general operating expenses.
A detail of the changes is as follows (in thousands):
Three Months Ended April 1, 2023 compared to Three Months Ended March 26, 2022
Employee compensation
(2,385)
General operating expenses
843
Restructuring charges
826
Stock-based compensation
552
$
(164)
Selling, general and administrative included stock-based compensation expense as follows (in thousands):
Three Months Ended
April 1, 2023
March 26, 2022
Stock-based compensation
$
5,008
$
4,456
Interest Income (Expense), Net
Interest income is earned on our cash, cash equivalents, restricted cash and marketable securities. The increase in interest income for the three months ended April 1, 2023 compared with the corresponding period of the prior year was attributable to an increase in investment yields due to the higher interest rate environment.
Interest expense primarily includes interest on our term loan, interest rate swap derivative contracts, and term loan issuance costs amortization charges. The interest expense for the three months ended April 1, 2023 compared to the same period of the prior year decreased due to lower outstanding debt.
Other Income, Net
Other income, net, primarily includes the effects of foreign currency impact and various other gains and losses. We partially mitigate our risks from currency movements by hedging certain balance sheet exposures, which minimizes the impacts during periods of foreign exchange volatility.
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Provision for Income Taxes
Three Months Ended
April 1, 2023
March 26, 2022
(In thousands, except percentages)
Provision for income taxes
$
48
$
4,450
Effective tax rate
3.5
%
13.0
%
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 allowing us to benefit more from the available FDII deduction, which, combined with higher research and development tax credits, results in a lower worldwide effective tax rate for the three months ended April 1, 2023 when compared to the corresponding period in the prior year.
The Creating Helpful Incentives to Produce Semiconductors and Science Act of 2022 (“CHIPS Act”) was signed into law on August 9, 2022. The CHIPS Act provides for various incentives and tax credits among other items including the Advanced Manufacturing Investment Credit (“AMIC”) which equals 25% of qualified investments in an advanced manufacturing facility that is placed in service after December 31, 2022. At least a portion of our future capital expenditures and research and development costs will qualify for this credit, which benefits us by allowing us to net the credit received against our costs. The AMIC credit is accounted for outside of ASC 740 as a reduction to the depreciable basis of the assets used in operations and will not have an impact on our effective tax rate.
Beginning in 2022, the U.S. Tax Cuts and Jobs Act of 2017 (“TCJA”) eliminated the existing option to deduct research and development expenditures and requires taxpayers to amortize such expenditures attributable to domestic and foreign research over five and fifteen years, respectively, pursuant to IRC Section 174. While the capitalization requirement has a negative impact on our cash flows, there are offsetting benefits from the enactment of this provision that we have included in our estimated annual effective tax rate. While it is possible that Congress may defer, modify, or repeal this provision, potentially with retroactive effect, we have no assurance that this provision will be deferred, modified, or repealed. Changes in our tax provisions or an increase in our tax liabilities, whether due to changes in applicable laws and regulations, the interpretation or application thereof, or a final determination of tax audits or litigation or agreements, could have a material adverse effect on our financial position, results of operations and/or cash flows.
Liquidity and Capital Resources
Capital Resources
Our working capital was $352.8 million at April 1, 2023, compared to $324.9 million at December 31, 2022.
Cash and cash equivalents primarily consist of deposits held at banks, money market funds, and commercial paper. Marketable securities primarily consist of U.S. treasuries, U.S. agency securities, 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 $236.3 million at April 1, 2023, compared to $238.1 million at December 31, 2022. Based on our historical results of operations, we expect that our cash, cash equivalents, and marketable securities on hand, and the cash we expect to generate from operations, will be sufficient to fund our short-term and long-term liquidity requirements primarily arising from: research and development, capital expenditures, working capital, outstanding commitments, and other liquidity requirements associated with existing operations. However, we cannot be certain that our cash, cash equivalents, and marketable securities on hand, and cash generated from operations, will be available in the future to fund all of our capital and operating requirements. In addition, any future strategic investments and significant acquisitions may require additional cash and capital resources. To the extent necessary, we may consider entering into short and long-term debt obligations, raising cash through a stock issuance, or obtaining new financing facilities, which may not be available on terms favorable to us. If we are unable to obtain sufficient cash or capital to meet our needs on a timely basis and on favorable terms, our business and operations could be materially and adversely affected.
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If we are unsuccessful in maintaining or growing our revenues, maintaining or reducing our cost structure, or increasing our available cash through debt or equity financings, our cash, cash equivalents and marketable securities may decline.
We utilize a variety of tax planning and financing strategies to manage our worldwide cash and deploy funds to locations where needed. As part of these strategies, we indefinitely reinvest a portion of our foreign earnings. Should we require additional capital in the United States, we may elect to repatriate indefinitely-reinvested foreign funds or raise capital in the United States.
Cash Flows
The following table sets forth our net cash flows from operating, investing and financing activities:
Three Months Ended
April 1, 2023
March 26, 2022
(In thousands)
Net cash provided by operating activities
$
12,309
$
44,155
Net cash used in investing activities
$
(13,539)
$
(21,078)
Net cash provided by (used) in financing activities
$
4,378
$
(6,016)
Operating Activities
Net cash provided by operating activities for the three months ended April 1, 2023 was attributable to net income of $1.3 million and net non-cash expenses of $26.0 million, which includes depreciation, amortization, stock-based compensation, and the provision for excess and obsolete inventories, partially offset by an increase in net working capital of $15.1 million. The increase in net working capital related to an increase in accounts receivable of $15.9 million and decreases in accrued liabilities and deferred revenues of $10.2 million and $6.0 million, respectively, partially offset by an increase in deferred grant of $18.0 million.
Investing Activities
Net cash used in investing activities for the three months ended April 1, 2023 primarily related to $19.7 million in property, plant and equipment purchases, partially offset by $6.2 million net cash received from the maturities and sales of marketable securities.
Financing Activities
Net cash provided by financing activities for the three months ended April 1, 2023 primarily related to $5.0 million received from issuances of common stock under our employee stock purchase plan, partially offset by $0.3 million principal payments made towards the repayment of our term loan and $0.4 million related to tax withholdings associated with the net share settlements of our equity awards.
Debt
Building Term Loan
On June 22, 2020, we entered into an $18.0 million 15-year credit facility loan agreement (the “Building Term Loan”). The proceeds of the Building Term Loan were used to 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 April 1, 2023 was 4.66%. As of April 1, 2023, the balance outstanding pursuant to the Building Term Loan was $15.2 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 rate of one-month LIBOR plus 1.75% into a fixed interest rate of 2.75%. As of April 1, 2023, the notional amount of the loan that is subject to this interest rate swap is $15.2 million.
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Stock Repurchase Programs
On October 26, 2020, our Board of Directors authorized a two-year program to repurchase up to $50 million of outstanding common stock to offset potential dilution from issuances of common stock under our stock-based compensation programs. During the three months ended March 26, 2022, we repurchased 240,548 shares of common stock for $9.4 million. We utilized the remaining funds available for repurchase under this program during fiscal 2022.
On May 20, 2022, our Board of Directors authorized an additional program to repurchase up to $75 million of outstanding common stock, also with the primary purpose to offset potential dilution from issuances of common stock under our stock-based compensation programs. The share repurchase program will expire on May 20, 2024. During the three months ended April 1, 2023, we did not repurchase any shares of common stock. As of April 1, 2023, $18.6 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 April 1, 2023:
Payments Due In Fiscal Year
Remainder 2023
2024
2025
2026
2027
Thereafter
Total
Operating leases
$
6,190
$
8,106
$
8,018
$
6,641
$
5,756
$
3,431
$
38,142
Term loans - principal payments
791
1,080
1,111
1,142
1,175
9,940
15,239
Term loans - interest payments (1)
729
912
834
763
688
2,538
6,464
Total
$
7,710
$
10,098
$
9,963
$
8,546
$
7,619
$
15,909
$
59,845
(1) Represents our minimum interest payment commitments at 4.66% per annum for the Building Term Loan. This excludes any amounts related to our interest rate swap.
Off-Balance Sheet Arrangements
Historically, we have not participated in transactions that have generated relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As of April 1, 2023, we were not involved in any such off-balance sheet arrangements.
Recent Accounting Standards
For a description of a recent change in accounting standards, including the expected dates of adoption and estimated effects, if any, in our condensed consolidated financial statements, see Note 1, Basis of Presentation and Significant Accounting Policies, in Part I, Item 1 of this Form 10-Q.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
For financial market risks related to changes in interest rates and foreign currency exchange rates, reference is made to Item 7A “Quantitative and Qualitative Disclosures about Market Risk” contained in Part II of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022. Our exposure to market risk has not changed materially since December 31, 2022.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Based on our management’s evaluation (with the participation of our principal executive officer and principal financial officer), as of the end of the period covered by this report, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”)) are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in
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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 three months ended April 1, 2023 to the risk factors discussed in our Annual Report on Form 10-K for the year ended December 31, 2022. If any of the identified risks actually occur, our business, financial condition and results of operations could suffer. The trading price of our common stock could decline and you may lose all or part of your investment in our common stock. The risks and uncertainties described in our Annual Report on Form 10-K for the year ended December 31, 2022 are not the only ones we face. Additional risks that we currently do not know about or that we currently believe to be immaterial may also impair our business operations.
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Item 6. Exhibits
The following exhibits are filed herewith and this list constitutes the exhibit index.
The following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended April 1, 2023, formatted in Inline XBRL: (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Income, (iii) Condensed Consolidated Statements of Comprehensive Income, (iv) Condensed Consolidated Statements of Stockholders’ Equity, (v) Condensed Consolidated Statements of Cash Flows, and (vi) Notes to Condensed Consolidated Financial Statements, tagged as blocks of text and including detailed tags
The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended April 1, 2023, formatted in Inline XBRL (included as Exhibit 101)
X
______________________________________
* This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the date hereof and irrespective of any general incorporation language in any filings.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
FormFactor, Inc.
Date:
May 9, 2023
By:
/s/ SHAI SHAHAR
Shai Shahar
Chief Financial Officer
(Duly Authorized Officer, Principal Financial Officer, and Principal Accounting Officer)