UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 25, 2021
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
(State or other jurisdiction of
incorporation or organization)
7005 Southfront Road, Livermore, California
(Address of principal executive offices)
13-3711155
(I.R.S. Employer
Identification No.)
94551
(Zip Code)
(925) 290-4000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common stock, $0.001 par value
Trading Symbol(s)
FORM
Name of each exchange on which registered
Nasdaq Global Market
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
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:
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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under
Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepares or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Aggregate market value of registrant's common stock held by non-affiliates of the registrant, based upon the closing price of a share of the registrant's common stock on June 25, 2021
(the last business day of the registrant's most recently completed second quarter) as reported by Nasdaq Global Market on that date: $1,800.1 million.
The number of shares of the registrant's common stock, par value $0.001 per share, outstanding as of February 14, 2022 was 78,333,760 shares.
Portions of the registrant's definitive Proxy Statement for the 2022 Annual Meeting of Stockholders, which will be filed within 120 days of the end of the registrant's fiscal year ended
December 25, 2021, are incorporated by reference in Part III hereof. Except with respect to information specifically incorporated by reference in this Annual Report on Form 10-K, the
Proxy Statement is not deemed to be filed as a part of this Annual Report on Form 10-K.
DOCUMENTS INCORPORATED BY REFERENCE
FORMFACTOR, INC.
Form 10-K for the Fiscal Year Ended December 25, 2021
Index
Item 1:
Item 1A:
Item 1B:
Item 2:
Item 3:
Item 4:
Item 5:
Item 6:
Item 7:
Item 7A:
Item 8:
Item 9:
Item 9A:
Item 9B:
Item 9C:
Item 10:
Item 11:
Item 12:
Item 13:
Item 14:
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Part I
Part II
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
[Reserved]
Management's Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures about Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Part III
Directors, Executive Officers, and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
Part IV
Exhibits and Financial Statement Schedules
Form 10-K Summary
Item 15:
Item 16:
Signatures
Consolidated Financial Statements
Page
4
10
21
21
23
23
23
24
24
35
36
36
36
37
38
39
39
39
39
39
40
40
43
47
______________
Throughout this Annual Report on Form 10-K, we refer to FormFactor, Inc. and its consolidated subsidiaries as “the Company,” “FormFactor,” “we,” “us,”
and “our.” Our fiscal year ends on the last Saturday in December. Our last three fiscal years ended on December 25, 2021, December 26, 2020 and
December 28, 2019.
2
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Securities Exchange Act of 1934 and the Securities Act of
1933, which are subject to known and unknown risks and uncertainties. The forward-looking statements include statements concerning, among other
things, our business strategy (including the influence of anticipated trends and developments in our business and the markets in which we operate),
financial results, operating results, revenues, gross margin, liquidity, operating expenses, products, projected costs and capital expenditures, research and
development programs, sales and marketing initiatives, competition and impact of accounting standards. In some cases, you can identify these statements
by our use of 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. Forward-looking statements are based on
information available to us as of the filing date of this Annual Report on Form 10-K and our current expectations about future events, which are inherently
subject to change and involve known and unknown risks and uncertainties. You should not place undue reliance on these forward-looking statements. We
have no obligation to update any of these statements, and we assume no obligation to do so. Actual events or results may differ materially from those
expressed or implied by these statements due to various factors, including but not limited to the matters discussed below in the section entitled “Item 1A:
Risk Factors,” and elsewhere in this Annual Report on Form 10-K.
Our operating results have fluctuated in the past and are likely to continue to fluctuate. You should not rely on period-to-period comparisons of our
financial results as indicators of our future performance. Some of the important factors that could cause our revenues, operating results and outlook to
fluctuate from period to period include:
customer demand for and adoption of our products;
◦
◦ market and competitive conditions in our industry, the semiconductor industry and the economy as a whole;
◦
◦
◦
◦
the timing and success of new technologies and product introductions by our competitors and by us;
our ability to work efficiently with our customers on their qualification of our new technologies and products;
our ability to deliver reliable, cost-effective products that meet our customers’ testing requirements in a timely manner;
our ability to transition to new product architectures to solve next-generation semiconductor test and measurement challenges, and to bring new
products into volume production on time and at acceptable yields and cost;
our ability to implement measures for enabling efficiencies and supporting growth in our design, applications, manufacturing and other operational
activities;
the reduction, rescheduling or cancellation of orders by our customers;
our ability to collect accounts receivables owed by our customers;
our product and customer sales mix and geographical sales mix;
reductions in the prices or the profitability of our products due to competitive pressures or other factors;
the timely availability or the cost of labor, components and materials utilized in our products;
our ability to efficiently optimize manufacturing capacity and production yields as necessary to meet customer demand and ramp variable
production volumes at our manufacturing facilities;
our ability to protect our intellectual property against infringement and continue our investment in research and development and design activities;
the timing of and return on our investments in research and development;
any disruption in the operation of our manufacturing facilities;
risks to the Company’s realization of benefits from acquisitions and investments in capacity and data systems;
changes in trade, tariff or export regulations in the markets where we produce or sell our products; and
factors impacting political and global economic stability, including natural disasters, pandemics (such as the current COVID-19, or coronavirus
pandemic), military conflicts, climate change, and other factors acting alone or in combination.
◦
◦
◦
◦
◦
◦
◦
◦
◦
◦
◦
◦
◦
3
Item 1: Business
PART I
General
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.
FormFactor, Inc., was incorporated in 1993, and we introduced our first product in 1995. In October 2012, we acquired Astria Semiconductor Holdings,
Inc., including its subsidiary Micro-Probe Incorporated (together “MicroProbe”); in June 2016, we acquired Cascade Microtech, Inc. (“Cascade Microtech”
or “CMI”); in October 2019, we acquired FRT GmbH (“FRT”); in July 2020, we acquired the probe card assets of Advantest Corporation (“Baldwin
Park”); and in October 2020, we acquired High Precision Devices, Inc. (“HPD”). These acquisitions have helped transform our business into a
semiconductor test and measurement market leader with greater scale, diversification, breadth and market opportunities.
As of December 25, 2021, 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.
Products
We design, manufacture and sell multiple product lines, including probe cards, analytical probes, probe stations, metrology systems, thermal systems, and
cryogenic systems, and related services.
Probe Cards. Our probe cards utilize a variety of technologies and product architectures, including micro-electromechanical systems (MEMS)
technologies. We use advanced design and automation technologies to enable rapid and cost-effective manufacturing of resilient composite contact
elements with characteristic length scales of a few microns. These contact elements are designed to provide a specific range of forces on, and across, a
chip’s bond pad, solder bump, micro-bump, through-silicon-via (TSV), or copper pillar, during the test process and maintain their shape and position over a
range of compression levels. In addition, while maintaining these mechanical characteristics, the contact elements must achieve reliable and high-fidelity
electrical contact through wafer surfaces that are generally oxidized or otherwise contaminated, and must maintain these attributes over hundreds of
thousands, and even millions, of compression cycles. Our range of capabilities enable us to rapidly produce customer-design specific probe cards that
deliver leading precision, quality, reliability, and electro-mechanical performance.
Our probe cards are customized for our customers’ unique wafer and chip designs by modifying and adapting our standard product architectures to meet an
individual customer’s specific wafer and chip design layouts and electrical test requirements. We offer probe cards to test a variety of semiconductor device
types, including systems on a chip (SoC), mobile application processors, microprocessors, microcontrollers, graphic processors, radio frequency, analog,
mixed signal, image sensors, electro-optical, DRAM memory, NAND flash memory and NOR flash memory devices.
For many advanced applications, our products must maintain tens of thousands of simultaneous high-fidelity low-impedance electrical contacts with the
corresponding chip contacts on the wafer. Our present technologies enable probe cards with over 100,000 contact elements with spacings as small as 40
microns over geometries as large as an entire 300mm wafer. In addition, for high signal-fidelity devices such as wireless radio frequency transceivers and
automotive radar chips, our probe card technologies are capable of testing at millimeter-wave frequencies range, currently up to 81 GHz.
We have invested, and intend to continue to invest, considerable resources in proprietary probe card design tools and processes. These tools and processes
are intended to enable the rapid and accurate customization of products required to meet customer requirements, including automated routing and trace
length adjustment within our probe cards, to rapidly design complex structures.
In addition, some of our customers test certain chips over a large range of operating temperatures, such as for automotive applications. We design probe
cards to provide for a precise match with the thermal expansion characteristics of the wafer under test across the range of test operating temperatures. For
many of our products, our customers can use the same probe card
4
for both low and high temperature testing. We also design probe cards for customers that require extreme positional accuracy at a specific temperature.
Through ongoing investments in both our technology and operations, we continue to innovate and improve so that our products will meet customers’ future
technical roadmap performance, quality, and commercial requirements. We also focus upon leveraging these ongoing investments across all advanced
probe card markets to realize synergies and economies of scale to benefit our competitiveness, time-to-market and overall profitability.
Analytical Probes. We offer over 50 different analytical probe models for engineering and production testing. Analytical probes are used for a diverse set of
applications, including device characterization, electrical simulation model development, failure analysis, and prototype design debugging. Our customers
for analytical probes include universities, research institutions, semiconductor integrated device manufacturers, semiconductor foundries, and fabless
semiconductor companies. We continue to add new models of analytical probes that address measurements with higher complexities and at higher
frequencies.
Probe Stations. Probe stations, also referred to as probe systems, are a critical tool for the development of new generations of semiconductor and electro-
optical processes and designs. Probe stations are highly configurable for the required measurements, the size and type of wafer under test, the
characteristics of the device design to be tested, and the temperatures at which testing is to be performed. Process development and design complexities
have continually increased with each new generation of semiconductor technology to accommodate smaller design geometries, complex 3-D architectures,
new materials and more layers. Probe systems are a fundamental tool for characterizing and verifying electrical performance and reliability to enable new
semiconductor technologies. We design our probe systems for semiconductor design engineers to capture and analyze more accurate data in a shorter
amount of time and to be able to control and manage testing at temperatures from near absolute zero to hundreds of degrees centigrade.
We build upon our probe stations to create integrated measurement systems that provide complete solutions for our customers’ complex measurement
requirements. These systems include test instrumentation, probe, cabling configurations, and software to enable fast, accurate, on-wafer data collection for
complex application and measurement needs. We offer pre-configured and customized measurement systems for production testing, power device
characterization, vacuum probing, cryogenic probing, high-pressure probing, photonics testing, and a variety of other specific applications.
Metrology Systems. We offer surface metrology systems for various applications including the development, production and quality control of
semiconductor products. With resolution down to nanometer scales, these systems measure topography, structure, step height, roughness, wear, thickness
variation, film thickness and other parameters. The modular architecture of the systems allows for the sensor configuration to be customized for the
application while leveraging a common platform. These systems integrate hybrid metrology capabilities and proprietary software to enable non-destructive
and rapid measurement of multiple features and parameters simultaneously, which has multiple applications but is particularly useful in the growing space
of advanced packaging and MEMS applications.
Thermal Subsystems. Our thermal subsystems include thermal chucks and other test systems used in probe stations and other applications where precise
temperature management is required. Thermal chuck systems enable the testing of devices at precise temperatures or across a range of temperatures. These
systems are both marketed externally and allow for vertical integration with our probe stations.
Cryogenic Systems. Our cryogenic systems include the manufacture of precision cryogenic instruments and semiconductor test and measurement systems.
These include advanced cryogenic probe systems to test wafer or singulated die, as well as Adiabatic Demagnetization Refrigerator (ADR) cryostats used
in various applications at close to absolute zero degree temperature, including quantum and superconducting computing applications, astronomy, and other
situations where cryogenic temperature management is required. These systems are marketed externally and also allow for vertical integration with our
existing cryogenic wafer and chip probe stations and cryogenic engineering probes.
Services and Support. In addition to routine installation services at the time of sale, we offer services to enable our customers to maintain and more
effectively utilize our products and to enhance our customer relationships. In addition to traditional maintenance services, our applications engineers assist
our customers in test methodologies to make advanced measurements during process and product development, and during mass production.
Customers
Our customers include companies, universities and institutions that design or make semiconductor, and semiconductor related products in the Foundry &
Logic, DRAM, Flash, Display and Sensor markets. Our customers use our products to test nearly all semiconductor device types, including SoCs, mobile
application processors, microprocessors, quantum processors,
5
microcontrollers, graphic processors, radio frequency, analog, mixed signal, image sensors, electro-optical, DRAM memory, NAND flash memory and
NOR flash memory devices.
Fabless semiconductor suppliers do not manufacture their own semiconductors, but they purchase our analytical probes, probe stations, and other System
products for research and development, and device characterization. They also purchase, or direct their foundries or wafer test facilities to purchase, our
probe cards to test wafers manufactured for them.
We believe our customers consider timely service and support to be an important aspect of our relationship as our products are critical elements of high-
volume manufacturing and design-specific product ramps. Our probe stations and metrology systems are installed at customer sites either by us, our
manufacturers’ representatives or our distributors, depending on the complexity of the installation and the customer’s geographic location. We assist our
customers in the selection, integration and use of our products through application engineering support. We also provide worldwide on-site probe card
maintenance and service training, seminars and telephone support. In certain geographic regions, and for selected products, our manufacturers’
representatives and distributors provide additional service and support.
Information concerning revenue by geographic region and by country based upon ship-to location appears under Item 7: Management's Discussion and
Analysis of Financial Condition and Results of Operations - Revenues - Revenues by Geographic Region and Note 16 of the Notes to Consolidated
Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.
Information concerning revenue concentration by customer appears under Note 2 of the Notes to Consolidated Financial Statements included in Part II,
Item 8 of this Annual Report on Form 10-K. The following customers represent 10% or more of our quarterly revenues:
Intel Corporation
Samsung Electronics Co., LTD.
Taiwan Semiconductor Manufacturing Co., LTD.
Micron Technology, Inc.
* Less than 10% of revenues.
Dec. 25,
2021
16.7 %
13.8 %
*
*
30.5 %
Sep. 25,
2021
20.8 %
12.9 %
*
*
33.7 %
June 26,
2021
16.3 %
14.7 %
11.0 %
*
42.0 %
Fiscal Quarters Ended
Dec. 26,
2020
29.3 %
12.5 %
*
*
41.8 %
Mar. 27,
2021
28.1 %
*
11.5 %
*
39.6 %
Sep. 26,
2020
25.6 %
10.6 %
10.6 %
10.1 %
56.9 %
June 27,
2020
36.1 %
*
*
*
36.1 %
Mar. 28,
2020
36.2 %
*
*
*
36.2 %
Segment and Enterprise-Wide Disclosures
See Note 16 of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for certain financial
information related to our segments and our enterprise-wide disclosures.
Manufacturing
Our probe cards are designed for each of our customers' unique designs, by modifying and adapting our product architectures to meet an individual
customer’s chip layout and test requirements. Our proprietary manufacturing processes for our probe cards include a complex interconnection system-level
design process; a front-end process, which may include wire bonding, photolithography, plating and metallurgical processes, dry and electro-deposition,
pick and place assembly; and a back-end process, which includes general assembly and test. Critical steps in our manufacturing process are performed in a
variety of clean room environments as stringent as a Class 100, depending on the requirements of the specific manufacturing processes.
Our probe stations and metrology systems are designed to provide highly accurate electrical and optical measurements enabled by precise and reliable
mechanical components and assemblies. We prototype and perform robust testing of our product designs and components to ensure high electrical signal
integrity, mechanical accuracy and safety. We also monitor our product quality throughout the various stages of our manufacturing processes using a variety
of process control methods and tests.
We depend on suppliers for materials and some critical components of our manufacturing processes, including ceramic and organic substrates and complex
printed circuit boards. We also rely on suppliers to provide certain contact elements and interconnects that are incorporated into our products. Some of
these components and materials are supplied by a single vendor, and some are subject to certain minimum order quantities. Generally, we rely on purchase
orders rather than long-term contracts with our suppliers, which subjects us to risks, including price increases, manufacturing capacity constraints and
component shortages. We regularly assess and evaluate alternative sources of supply for all components and materials.
6
Our primary manufacturing facilities are located in Livermore, San Jose, Carlsbad, and Baldwin Park, California, Beaverton, Oregon, Boulder, Colorado,
United States; and in Thiendorf, Germany. We also perform manufacturing operations in our facilities in Munich and Bergisch Gladbach, Germany;
Suzhou, China; and Yokohama, Japan.
We maintain repair and service capabilities in Livermore, San Jose, and Carlsbad, California and Beaverton, Oregon, United States; Thiendorf, Dresden
and Munich, Germany; Bundang, South Korea; Yokohama and Hiroshima, Japan; Suzhou and Shanghai, China; Hsinchu, Taiwan; and Singapore.
Research, Development and Engineering
The semiconductor industry is subject to rapid technological change with a continuous stream of new product introductions and technology enhancements.
We believe that our continued commitment to research and development and our timely introduction of new and enhanced products and technologies are
integral to maintaining and enhancing our competitive position. We allocate significant resources to these efforts and prioritize those resources to prepare
for our customers’ next generation electrical test and measurement challenges. We also increasingly seek to deploy our resources to solve fundamental
challenges that are both common to, and provide competitive advantage across, our probe card and system product offerings and roadmaps.
Sales and Marketing
We sell our products worldwide through a global direct sales force and through a combination of manufacturers’ representatives and distributors.
Our direct sales and marketing staff is located in the United States, China, France, Germany, Italy, United Kingdom, Japan, Singapore, South Korea, and
Taiwan. They work closely with customers in the effort to understand their businesses, anticipate trends and define products that will provide significant
technical and economic advantages to our customers. We employ a highly skilled team of application and customer support engineers that support our
customers as they integrate our products into their research, development and manufacturing processes. Through these customer relationships, we seek to
develop a strong understanding of customer and product requirements to align our capabilities with our customers’ roadmaps and production ramps.
We also have a network of representatives and distributors across the globe to broaden our reach. We engage sales representatives to act as independent
third parties that agree to promote our products, at our prices and on terms set by us, in return for a commission based on sales. We typically use sales
representatives in areas that we believe require greater levels of customer support than we can deliver from our own sales offices and where local language
capabilities can offer an advantage. Our distributors purchase our products and resell them at prices and upon terms set by the particular distributor. We
typically use distributors in particular geographies due to local regulations or business customs.
Governmental Regulations
We are subject to international, federal, state and local regulations that are customary to businesses in our industry. These regulations relate to, among other
things, environmental matters, anti-corruption, marketing, fraud and abuse, export control, employment, and privacy.
Environmental Matters
We are subject to U.S. federal, state, local, and foreign governmental laws and regulations relating to the protection of the environment, including those
governing the discharge of pollutants into the air and water, the management and disposal of hazardous substances and wastes, the clean-up of
contaminated sites and the maintenance of a safe workplace. We believe that we comply in all material respects with the environmental laws and
regulations that apply to us as of December 25, 2021. We did not receive any notices of violations of environmental laws and regulations in fiscal 2021,
2020 or 2019. In the future, we may receive notices of violations of environmental regulations, or otherwise learn of such violations. Environmental
contamination or violations may negatively impact our business.
Import and Export Control
We manufacture, market and sell our products both inside and outside the U.S. Certain products are subject to export control regulations. Failure to comply
with these laws could result in sanctions by the U.S. or other respective governments, including substantial monetary penalties, denial of import or export
or other privileges and debarment from government contracts.
Competition
The markets for our products are highly competitive and we anticipate that these markets will continually evolve and be subject to rapid technological
change. Our current and potential competitors are as below:
7
Probe Cards. The probe card market comprises of many domestic and foreign companies, and has historically been fragmented with many local suppliers
servicing individual customers in often differentiated applications. Our primary competitors are AMST Co., Ltd., Chungwa Precision Technology,
Feinmetall GmbH, Japan Electronic Materials Corporation, Korea Instrument Co., Ltd., M2N Co., Ltd., Microfriend Inc., Micronics Japan Co., Ltd., MPI
Corporation, Micro Square Technology Inc., NHK Spring Co., Ltd., Soulbrain Engineering, Nidec SV TCL, Synergie CAD, TechnoProbe S.p.A, TSE Co.,
Ltd., WinWay Technology Co., Ltd., WILL-Technology Co., Ltd., and Yokowo, among others.
Probe card vendors such as Japan Electronic Materials Corporation, Micronics Japan Co., and TechnoProbe, offer probe cards built using similar types of
MEMS technology as we do. The high capital investment and other costs associated with the development of MEMS probe cards and the time and high
cost of the customer evaluation process represent significant barriers to entry for this type of technology.
We believe that the primary competitive factors in the production probe card market depend upon the type of integrated circuit being tested, and include
customer service, knowledge of measurement techniques, delivery time, price, probe card lifetime, chip damage prevention, probe tip touch-down
accuracy, speed of the probe card, number of chips contacted in parallel, number of probe tips and their layout and pitch, signal integrity, and frequency and
effectiveness of any required cleaning. As a result of our relative strengths in these areas, we believe that we compete favorably in the advanced probe card
market, and in probe cards for parallel testing of chips with densely-packed bond pads, bumps or pillars, and in high signal integrity testing of wireless
radio frequency devices that operate up to millimeter-wave frequencies, a capability needed for components used in 5G applications.
Analytical Probes. Our primary competitor in the analytical probe market is GGB Industries Inc. Regional competitors include Yokowo and TechnoProbe
Co., Ltd., in Japan, and MPI Corporation. We believe that the primary competitive factors in this market are breadth of probe types, probe frequency and
electrical signal integrity, contact integrity and the related cleaning required, knowledge of measurement techniques, calibration support, delivery time and
price. We believe that we compete favorably with respect to these factors.
Probe Stations. Our primary competitors in the probe station market are HiSOL, Inc., LTD/Accretech, The Micromanipulator Company Inc., MPI
Corporation, Semiprobe, Signatone Corporation, Tokyo Electron (“TEL”), Tokyo Seimitsu Co., and Wentworth Laboratories Inc. We believe that the
primary competitive factors in the probe station market are measurement accuracy and versatility at temperature, including cryogenic temperatures,
measurement speed, automation features, knowledge of measurement techniques, completeness of the measurement solutions, delivery time and price. We
believe that we compete favorably with respect to these factors.
Metrology Systems. Our primary competitors in the metrology system market are Bruker Corporation, Camtek Ltd., Cohu, Inc., Filmetrics, Onto
Innovation, and Unity SC. We believe that the primary competitive factors in this market are breadth of measurement types, measurement accuracy,
measurement speed and throughput, ability to apply algorithms to multiple sensor inputs to indirectly measure attributes not otherwise directly observable,
knowledge of measurement techniques and applications, delivery time and price. We believe that we compete favorably with respect to these factors.
Thermal Subsystems. In the market for thermal subsystems, we compete principally against ERS Electronic GmbH, Espec Corp, and Temptronic
Corporation. In addition, many of our probe station competitors develop and produce their own thermal subsystems for use in their products. We believe
the primary competitive factors in this market are thermal performance, reliability, flexibility and completeness of product offerings. We believe that we
compete favorably with respect to these factors.
Cryogenic Systems. In the market for cryogenic systems, we compete principally against Bluefors Oy, Entropy, Leiden Cryogenics B.V., Montana
Instruments, Nagase Techno-Engineering Co., Oxford Instruments, and STAR Cryoelectronics. We believe the primary competitive factors in this market
are cryogenic performance, reliability, throughput and application expertise. We believe we compete favorably with respect to these factors.
Some of our competitors are also suppliers of other types of test and measurement equipment or other semiconductor equipment and may have greater
financial and other resources than we do. Our competitors may enhance their current products and may introduce new products that will be competitive
with ours. New alternatives to our products may also be introduced, by our current competitors or others, which may reduce the value of one or more of our
products.
Semiconductor manufacturers may implement chip designs that include capabilities or use other methodologies that increase test throughput and reduce test
content. This may reduce or eliminate some or all of our current products’ advantages. Semiconductor manufacturers may also increase their use of test
strategies that include low performance semiconductor testers,
8
less complex probe cards, or test procedures that do not involve our products. Our ability to compete favorably may also adversely be affected by the long-
standing relationships between our competitors and certain semiconductor manufacturers.
Intellectual Property
Our success depends in part upon our ability to continue to innovate and invest in research and development to meet the test and measurement requirements
of our customers, to maintain and protect our proprietary technology, and to conduct our business without infringing on the proprietary rights of others. We
rely on a combination of patents, trade secrets, trademarks and contractual restrictions on disclosure to protect our intellectual property rights. We have
filed actions to enforce those rights against third parties in the past, and may pursue such actions in the future.
We have generated, and continue to generate and maintain, patents and other intellectual property rights covering innovations that are intended to create a
competitive advantage, and to support the protection of our investments in research and development. We believe that we possess one of the most
substantial patent portfolios relevant to our products.
Although we believe that our patents and other intellectual property rights have significant value for each of our segments, we do not believe that
maintaining or growing our business is materially dependent on any single patent. Due to the rapid pace of innovation within the markets that we serve, it is
possible that our protection through patents may be less important than factors such as our technological expertise, continuing development of new
products and technologies, protection of trade secrets, market penetration, customer relationships, and our ability to provide comprehensive support and
service to customers worldwide.
No assurance can be given that patents will not be challenged, invalidated or circumvented, or that the rights granted thereunder will provide us with a
sustained competitive advantage. In addition, there can be no assurance that we will be able to protect our technology, or that competitors will not be able
to independently develop similar or functionally competitive technologies, design around our patents, or attempt to manufacture and sell infringing
products in countries that do not strongly enforce intellectual property rights.
Human Capital
We believe that each employee contributes to our culture of integrity, innovation, and teamwork. We reinforce this culture through our human capital
development programs that drive talent acquisition, retention and employee engagement. These programs include carefully designed compensation across
all levels, a variety of training, diversity and inclusion objectives, and other initiatives.
Our compensation programs help attract and retain key talent and are designed for our employees to share in our company’s success. These programs focus
on compensation that we believe is market-competitive, reflects company performance, and aligns with drivers of stockholder value with differentiation
based on performance, skills, geographic location, and tenure. We use information from outside compensation and benefits consulting firms to evaluate the
competitiveness of the compensation we offer to employees in specific job types, and the structure of our compensation programs, to help provide
benchmarking against our peers within the industry.
We offer a variety of benefits such as health insurance, paid and unpaid leaves, retirement, life and disability/accident coverage as applicable to their
geographic location. We also offer a variety of other benefits which allow employees to select the options which meet their needs such as for wellness,
insurance and professional services.
Our training initiatives promote the continuous improvement of our workforce to keep pace with an ever-increasingly complex business and industry. In
addition to formal training, the capabilities of our workforce are intended to grow through structured feedback, mentorship, team building, career
progression, tuition assistance, and a culture of transparency. In 2020, we implemented a new training management platform designed to allow for a more
organized and efficient administration of training to our employees. Our training initiatives are designed to foster skills development, compliance and our
company values.
We leverage both formal and informal programs to identify, foster, and retain top talent. On an annual basis, we have conducted a talent review process
with our chief executive officer, leaders of our business units and functions that is focused upon performance, potential, diversity, and succession for
critical roles.
Our commitment to diversity and inclusion is a significant part of our human capital development programs. We believe that the recruitment, retention and
promotion of a balanced workforce is an important driver of company performance. We support these values through sponsored events, networking groups,
and management objectives. As an equal opportunity employer, we develop and implement an annual and targeted affirmative action plan reflecting
specific metrics.
9
We also inspire employee engagement through our commitment to corporate social responsibility, including in defined focus areas of sustainable
technology, health and safety, labor and human rights, energy and climate change, supply chain responsibility and waste and chemical management.
Our workplace health and safety programs include robust policies, procedures, training programs, and self-audits. Nearly all of our manufacturing
employees are located in California, Oregon and Germany, where workplace safety and labor regulations support maintaining high standards of employee
protection. We have also been demonstrating a focus on health and safety in our response to the COVID-19 pandemic world-wide, including work-from-
home flexibility, requiring those who may be sick to stay home; COVID-19 safety protocols across all locations, including social distancing, personal
protective equipment and cleanings; regular internal communication regarding impacts of the COVID-19 pandemic and safety protocols; and temperature
screening at our manufacturing facilities.
We believe that our current human capital is appropriate to serve the requirements of our business, and that our human capital development programs and
other initiatives are well designed to maintain the quality of our human capital.
For our manufacturing activities, the speed at which we can recruit, train and deploy quality new and replacement personnel is an important part of our
ability to ramp up and maintain our production capacity. We rely upon both employees and resources from staffing firms to meet our needs for direct labor.
Speed, accuracy and agility in this process is important to our business. Similarly, it is important to our business that we are able to regularly recruit and
train quality new and replacement design and engineering staff. For example, our probe card products require that we develop custom designs for our
customers’ new product designs. We face strong competition from companies in a variety of technology fields to secure the engineering talent that we
require. In addition, restrictions on immigration and skilled-worker visas in a variety of jurisdictions impacts the ease and flexibility with which we can
develop these resources.
As of December 25, 2021, we had 2,293 regular full-time employees, including 1,396 in operations, 418 in research and development, 318 in sales and
marketing and 161 in general and administrative functions. By region, 1,644 of our employees were in North America, 371 in Asia and 278 in Europe. As
of December 25, 2021, our Probe Cards Segment had 1,690 regular full-time employees, our Systems Segment had 407 regular full-time employees, plus
we had 196 regular full-time employees in corporate functions. None of our employees in the United States are covered by a collective bargaining
agreement. Certain employees at our manufacturing facility in Germany are represented by a works council. Our employees take pride in their work and we
believe that our overall relations with our employees is positive.
Available Information
We maintain a website at http://www.formfactor.com. We make available free of charge on our website our Annual Reports on Form 10-K, Quarterly
Reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange
Act, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the United State Securities and Exchange
Commission, or SEC. The reference to our website does not constitute incorporation by reference of the information contained at the site.
Item 1A: Risk Factors
In addition to the other information in this Annual Report on Form 10-K, you should carefully consider the risk factors discussed in this Annual Report on
Form 10-K in evaluating FormFactor and our business. If any of the identified risks actually occur, our business, financial condition and results of
operations could be materially adversely affected, 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 this Annual Report on Form 10-K are not the only ones we face. Additional risks that we
currently do not know about, or that we do not consider sufficiently important to describe here in accordance with applicable regulations, may also impair
our business operations or the trading price of our common stock.
Risks Relating to our Operations and the Nature of Our Business
The markets in which we participate are competitive, and if we do not compete effectively, our operating results could be harmed.
We have experienced increased competition in the markets in which we operate, and we expect competition to intensify in the future. Increased competition
has resulted in, and in the future may result in, price reductions, reduced gross margins or loss of market share.
10
Existing competitors might introduce new competitive products for the same markets that our products currently serve. These products may have better
performance, lower prices, shorter delivery times or broader acceptance than our products.
In addition, new competitors, including test equipment manufacturers, may offer comparable or new technologies that reduce the value of our products.
Also, semiconductor manufacturers may implement chip designs or methodologies that increase test throughput, reduce test content, or change their test
procedures, thereby eliminating some or all of our current product advantages.
Our current or potential competitors may have larger customer bases, more established customer relationships or greater financial, technical,
manufacturing, marketing and other resources than we do. As a result, they might be able to respond more quickly to new or emerging technologies and
changes in customer requirements, devote greater resources to the development, promotion, sale and support of their products, and reduce prices to increase
market share.
If we do not innovate and keep pace with technological developments in the semiconductor industry, our products might not be competitive, and our
revenues and operating results could suffer.
We must continue to innovate and to invest in research and development to improve our competitive position and to meet the test and measurement
requirements of our customers. Our future growth depends, in significant part, upon our ability to work effectively with and anticipate the future technical
and operational needs of our customers and to develop and support new products and product enhancements to meet these needs on a timely and cost-
effective basis. Our customers’ needs are becoming more challenging as the semiconductor industry continues to experience rapid technological change
driven by the demand for complex circuits that are shrinking in size, are increasing in speed and functionality, and are produced on shorter cycle times and
at reduced unit cost.
Successful product design, development and introduction on a timely basis require that we:
•
•
•
collaborate with customers to understand their future requirements;
design innovative and performance-enhancing product architectures, technologies and features that differentiate our products from those of our
competitors;
in some cases, engage with third parties who have particular expertise in order to complete one or more aspects of the design and manufacturing
process;
qualify with customers new products, or an existing product incorporating new technology;
transition our products to new manufacturing technologies, as necessary;
offer our products for sale at competitive price levels while maintaining our gross-margins within our financial model;
identify emerging technological trends in our target markets;
•
•
•
•
• maintain effective marketing strategies;
•
•
respond effectively to technological changes or product announcements by others; and
adjust to changing market conditions quickly and cost-effectively.
Not only do we need the technical expertise to implement the changes necessary to keep our technologies current, but we must also rely heavily on the
judgment of our management to anticipate future market trends. If we are unable to timely predict industry changes or industry trends, or if we are unable
to modify our products or design, manufacture and deliver new products on a timely basis, or if a third party with which we engage does not timely deliver
a component or service for one of our product modifications or new products, we might lose customers or market share. In addition, we might not be able
to recover our research and development expenditures, which could harm our operating results.
We depend upon the sale of our probe card products for the substantial majority of our revenues.
We derive the majority of our revenues from the sale of our probe card products, primarily to manufacturers of microprocessor, foundry & logic and
memory devices, despite progress in diversifying our product offerings. We anticipate that sales of probe cards will represent a substantial majority of our
revenues for the foreseeable future. Our success depends in large part upon the continued acceptance of our products on the basis of a variety of factors
including performance, quality, timely delivery and price, and depends upon our ability to continue to develop and introduce new products that meet our
customers’ requirements. The degree to which we depend upon the sales of our probe card products for our revenues may increase our susceptibility to
failures to satisfy the customers for such products, which may adversely affect our revenues and our ability to grow our business.
We derive a substantial portion of our revenues from a small number of customers.
A relatively small number of customers account for a significant portion of our revenues. Two customers represented a combined 31.8% of total revenues
in fiscal 2021, one customer represented 31.5% of total revenues in fiscal 2020 and two customers represented a combined 36.8% of total revenues in fiscal
2019. We anticipate that sales of our products to a relatively
11
small number of customers will continue to account for a significant portion of our revenues and can drive material fluctuations in sales volume.
Consolidation in the semiconductor industry may increase this concentration. In the future, the loss of any of these customers, or cancellation, reduction or
deferral of even a small number of purchases of our products by these customers, could significantly reduce our revenues. A decline in our customers'
market share and commercial success, including their ability to compete favorably within their respective end markets, could significantly impact demand
for our products and reduce our revenues. Cancellations, reductions, deferrals or non-payment of invoices, could result from another downturn in the
semiconductor industry, manufacturing delays, quality or reliability issues with our products, or from interruptions to our customers’ operations due to fire,
natural disasters or other events, or other issues with the financial stability of our customers. Furthermore, because our probe cards are custom products
designed for our customers’ unique wafer designs, any cancellations, reductions or delays can result in significant non-recoverable costs. In some
situations, our customers might be able to cancel or reduce orders without a significant penalty.
If our relationships with our customers deteriorate, our product development activities could be harmed.
The success of our product development efforts depends upon our ability to anticipate market trends and to collaborate closely with our customers. Our
relationships with these customers provide us with access to valuable information regarding manufacturing and process technology trends in the
semiconductor industry, which enables us to better plan our product development activities. These relationships also provide us with opportunities to
understand the performance and functionality requirements of our customers, which improves our ability to customize our products to fulfill their needs.
Our relationships with our customers could deteriorate as a result of a variety of factors, such as if they become concerned about our ability to deliver
quality products on a timely basis or to protect their intellectual property. Many of our customers are large companies that place significant orders with us,
and the consequences of deterioration in our relationship with any of these companies could be significant due to the competitiveness of our industry and
the significant influence that these companies exert in our market.
Consolidation in the semiconductor industry and within the semiconductor test equipment market could adversely affect the market for our products
and negatively impact our ability to compete.
Consolidation in the semiconductor industry may reduce our customer base and could adversely affect the market for our products, which could cause a
decline in our revenues. With consolidation, the number of actual and potential customers for our products has decreased in recent years. Consolidation
may lead to relatively fewer opportunities to sell our products if we are not chosen as a supplier by any given prospective customer, and may lead to
increased pricing pressures from customers that have greater volume purchasing power.
There has also been consolidation within the semiconductor test equipment market. This consolidation trend could change our interactions and
relationships with complementary tester, instrument, and prober suppliers and negatively impact our revenue and operating results.
Changes in customers’ test strategies, equipment and processes could decrease customer demand for our products.
The demand for our products depends in large part upon the number of semiconductor designs, the pace of technology and architecture transitions in chip
designs and overall semiconductor unit volume. The number of probe cards involved in a customer’s wafer testing can depend upon the number of devices
being tested, the complexity of these devices, the test software program, the test equipment itself, and the utilization of chip designs featuring design-for-
testability or self-testing capabilities. Customers may demand fewer probe cards or probing systems if they use test strategies that reduce the technical
requirements on test equipment, improve available data on device performance earlier in the manufacturing process, or test devices later in the
manufacturing process. Changes in the effectiveness of test technologies and test strategies used by customers may cause us to lose sales and revenues.
We may also lose sales if new semiconductor technologies or designs are implemented which cannot be efficiently tested using the products that we offer,
or if semiconductor manufacturers reduce the amount or degree of testing that they perform. We may also incur significant research and development
expenses in order to introduce new product architectures and platforms to serve the testing needs of new semiconductor technologies.
Cyclicality in the semiconductor industry may adversely impact our sales.
The semiconductor industry has historically been cyclical and is characterized by wide fluctuations in product supply and demand. From time to time, this
industry has experienced significant downturns, often in connection with, or in anticipation of, maturing product and technology cycles, excess inventories
and declines in general economic conditions. The global economic and semiconductor downturns have caused and may in the future cause our operating
results to decline dramatically from one period to the next. Global economic stability can be negatively affected by a variety of factors and
interrelationships, including the impacts of Brexit, epidemics and pandemics (such as the current COVID-19 pandemic), military conflicts, climate change,
trade barriers and other factors acting alone or in combination. Some of these factors can also have a more direct adverse impact
12
upon our operations to varying degrees. Our business depends heavily upon the development and manufacture of new semiconductors, the rate at which
semiconductor manufacturers make transitions to smaller nanometer technology nodes and implement tooling cycles, the volume of production by
semiconductor manufacturers and the overall financial strength of our customers, which, in turn, depend upon the current and anticipated market demand
for semiconductors and products, such as servers, personal computers, automobiles and cell phones, that use semiconductors. During industry downturns,
semiconductor manufacturers sharply curtail their spending, including their spending on our products, which may adversely impact our revenues, gross
margins and results of operations. Further, a protracted downturn could cause one or more of our customers to become insolvent, resulting in a loss of
revenue and impacting our ability to collect on accounts receivable. The timing, length and severity of these cyclical downturns are difficult to predict and
our business depends on our ability to plan for and react to these cyclical changes.
Because we generally do not have a sufficient backlog of unfilled orders to meet our quarterly revenue targets, revenues in any quarter are
substantially dependent upon customer orders received and fulfilled in that quarter.
Our revenues are difficult to forecast because we generally do not have sufficient backlog of unfilled orders to meet our quarterly revenue targets at the
beginning of a quarter. Rather, a substantial percentage of our revenues in any quarter depend upon customer orders for our products that we receive and
fulfill in that quarter. Because our expense levels are based in part on our expectations as to future revenues and to a large extent are fixed in the short term,
we might be unable to adjust spending in time to compensate for any unexpected shortfall in revenues. Accordingly, any significant shortfall of revenues in
relation to our expectations could hurt our operating results.
If our ability to forecast demand for our products or the predictability of our manufacturing yields deteriorates, we could incur high inventory losses.
Each semiconductor chip design requires a custom probe card. Because our probe card products are design-specific, demand for these products is difficult
to forecast. Due to our customers’ short delivery time requirements, we often design and procure materials and, at times, produce our products in
anticipation of demand for our products rather than in response to an order. Our manufacturing yields and inventory requirements, particularly for new
products or when we are operating at high output levels, have at times been unpredictable. If we do not obtain orders as we anticipate, if we suffer
manufacturing errors, or if we build additional inventory to compensate for unpredictable manufacturing yields, we could have excess or obsolete inventory
that we may not be able to sell, which would likely result in inventory write-offs or material charges for scrap.
If we are unable to efficiently manufacture our existing and new products, our business may be materially adversely affected.
We must continuously improve our manufacturing processes in an effort to increase yields and product performance, lower our costs and reduce the time
required for us to design, manufacture and deliver our products in volume. If we cannot do these things, both our existing products and our new products
may not be commercially successful, our revenues may be adversely affected, our customer relationships and our reputation may be harmed and our
business may be materially adversely affected.
To improve our manufacturing processes, we have incurred, and may incur in the future, substantial costs in an effort to optimize capacity and yields, open
new manufacturing facilities, implement new manufacturing technologies, methods and processes, purchase new equipment, upgrade existing equipment
and train technical personnel. We have experienced, and may experience in the future, manufacturing delays and other inefficiencies in connection with
implementation of these improvements and customer qualifications of new processes or products, which have caused and could cause in the future, our
operating results to decline. These delays and other inefficiencies may arise from a variety of factors, including disruptions to, or the unavailability of,
sufficient electrical power as a result of insufficient electrical power infrastructure in the regions where we have manufacturing facilities such as in
California and China.
We have also experienced, and may experience in the future, difficulties in manufacturing our complex products in volume on time, and at acceptable
yields and cost, and installation issues in the field, due to the complexity of customer requirements.
If we are unable to continue to reduce the time it takes for us to design and produce products, our growth could be impeded.
Our customers continuously seek to reduce the time it takes them to introduce new products to market. The cyclicality of the semiconductor industry,
coupled with changing demands for semiconductor products, requires our customers to be flexible and highly adaptable to changes in the design, volume
and mix of products they must produce. We may be unable to design, configure and produce our products within the short cycle times required to respond
to such rapid changes. We have lost sales in the past where we were unable to meet a customer’s required delivery schedules. If we are unable to continue
to reduce the time it takes for us to design, manufacture and ship our products in response to the needs of our customers, our competitive position could be
harmed and we could lose sales.
13
Products that do not meet specifications or that contain defects could damage our reputation, decrease market acceptance of our technology, cause us
to lose customers and revenues, and result in liability to us.
The complexity and ongoing development of our product designs and manufacturing processes could lead to design or manufacturing problems. Problems
might result from a number of factors, including design defects, materials failure, failure of components manufactured by our suppliers to meet our
specifications, contamination in the manufacturing environment, impurities in the materials used, and unknown sensitivities to process conditions such as
temperature and humidity, and equipment failures. Any errors or defects could:
•
•
•
•
•
•
•
•
•
cause lower than anticipated yields and lengthen delivery schedules;
cause delays in product shipments;
cause delays in new product introductions;
cause us to incur warranty expenses;
result in increased costs and diversion of development resources;
cause us to incur increased charges due to unusable inventory;
require design modifications;
could have implications for timing of revenue recognition and associated costs; or
decrease market acceptance or customer satisfaction with these products.
The occurrence of any one or more of these events could adversely affect our business, reputation and operating results.
As part of our sales process, we could incur substantial sales and engineering expenses that do not result in revenues.
Our customers generally expend significant efforts evaluating and qualifying our products prior to placing an order. While our customers are evaluating our
products, we might incur substantial sales, marketing, and research and development expenses. For example, we typically expend significant resources
educating our prospective customers regarding the uses and benefits of our products and customizing them to the potential customer’s needs, for which we
might not be reimbursed. The substantial resources we commit to our sales efforts may not result in any revenues from a customer. For example, many
semiconductor processes, architectures, and designs never reach production, including those for which we may have expended development effort and
expense. In addition, prospective customers might decide not to use our products or use our products for a relatively small percentage of their requirements
after we have expended significant effort and expense toward product design, development, and/or manufacture.
We obtain some of the components and materials we use in our products from a sole source or a limited group of suppliers, and the partial or complete
loss of one of these suppliers could cause production delays.
We obtain some of the components and materials used in our products, such as printed circuit board assemblies, plating materials and ceramic substrates,
from a sole source or a limited group of suppliers, and in some cases alternative sources are not currently available. Because we rely on purchase orders
rather than long-term contracts with the majority of our suppliers, we cannot guarantee our ability to obtain components and materials in the long term. A
sole or limited source supplier could increase prices, which could lead to a decline in our gross profit. Our dependence upon sole or limited source suppliers
exposes us to several other risks, including inability to obtain an adequate supply of materials, late deliveries, poor component quality, and business
disruptions while we seek to identify and qualify alternative suppliers. This could be exacerbated by certain events outside the control of either the supplier
or us, such as the COVID-19 pandemic. The occurrence of any of these risks could adversely impact our business, results of operations and financial
condition.
Our operations, or those of our important suppliers, business partners and customers could be adversely affected by events outside of our control such
as natural disasters, pandemics and man-made disasters.
Our business is vulnerable to the direct and indirect impact of natural and man-made disasters, such as floods, earthquakes, volcanic eruptions, nuclear
accidents, acts of terrorism, epidemics, pandemics, military conflicts, climate change, and other factors acting alone or in combination. It is also possible
that future natural and man-made disasters could negatively impact the sales of our products as a result of impacts upon our customers’ ability to make or
sell their products, or impacts upon our suppliers’ ability to supply components to us on a timely basis.
For example, the COVID-19 pandemic has shown the extent to which new pathogens are capable of disrupting business operations and economic activity
locally and worldwide. Epidemics and pandemics can severely disrupt global supply chains, including for parts and materials that we use to manufacture
our products, and affect economic conditions in the markets for our products. The circumstances which give rise to epidemics and pandemics from new or
existing pathogens with similar impacts are expected to persist indefinitely.
Another example of events outside of our control arises from our manufacturing facilities being located in seismically active areas in California and
Oregon. The manufacturing equipment and processes that we use can be severely disrupted by seismic
14
activity. A significant seismic event in the areas of our operations could have a materially negative impact on our operations, financial results or financial
condition.
Much of the infrastructure on which we rely for our operations is outside of our control, such as for electric power. We have recently experienced
disruptions to electrical power at some of our premises in California and China, especially when aging infrastructure or inadequate electric power service
has been impacted by high demand, fires, and weather which may worsen over time with climate change, and other events. Our efforts to mitigate the
effects on us from interruptions in the availability of electric power, or other infrastructure, may not adequately prevent materially negative impacts on our
operations, and in turn our financial results.
The COVID-19 pandemic has impacted, and is expected to continue to negatively impact, our operations, and those of our important suppliers,
business partners and customers.
We are exposed to risks associated with public health crises and outbreaks of contagious diseases, such as COVID-19. To date, COVID-19 has had, and
may continue to have, an adverse impact on our operations, our supply chains and our expenses, including as a result of precautionary measures that we
take in response to COVID-19. A variety of health orders and regulations arising from the pandemic apply to our operations and employees in the regions
where we operate which have had, and will continue to have, negative affects upon our operations and business. The extension of existing government
orders and implementation of new orders or mandates, such as government vaccine and testing mandates, could impact the availability of members of our
workforce or lead to the loss of key employees, further adversely impacting our business. Implementation of such mandates and requirements could also
have similar consequences for our suppliers, which may impact their ability to deliver the goods and services to us. Even as the availability of vaccines has
begun to relieve the economic effects of the COVID-19 pandemic in the future, there remains substantial risk that vaccination rates will remain slow, new
variants of the virus may continue to impede the vaccines’ efficacy, or other factors may prolong or worsen the pandemic and its direct and indirect affects
upon our business.
A significant amount of our management resources have been, and will continue to be, focused on mitigating the negative impacts of COVID-19 on our
business. This has required, and will continue to require, a substantial investment of time and resources across our enterprise which may continue to
negatively impact other valuable activities, such as the development of new technologies, products or capabilities. In addition, many of our employees are
working remotely for an extended period, which can increase operational risk and cybersecurity risks. If we do not respond appropriately to the COVID-19
pandemic, or if employees, customers or others do not perceive our response positively, we could suffer damage to our reputation, which could also
adversely affect our business.
We obtain some of the components and materials used in our products from a sole source or a limited group of suppliers, and in some cases alternative
sources are not readily available. The COVID-19 pandemic may heighten the risks posed by our dependence upon sole or limited source suppliers to the
extent that the pandemic could disrupt the operations of one or more of these suppliers, resulting in an inability to obtain an adequate supply of materials,
late deliveries or poor component quality while we seek to identify and qualify alternative suppliers.
The extent to which the COVID-19 pandemic impacts our operations and those of our important suppliers, business partners and customers will depend on
numerous evolving factors and future developments that we are not able to predict, including but not limited to: the severity and duration of the pandemic;
governmental, business and other actions including government vaccine and testing mandates (which could include further restrictions on our operations);
the ongoing requirements of social distancing and health orders; the impacts on our supply chain; the impact of the pandemic on economic activity; the
extent and duration of the effect on business confidence and investments by our customers; the effects of changes to our operations that may continue
indefinitely; the effects on our workforce and our ability to meet our staffing needs, particularly if members of our workforce are exposed or infected; any
impairments in the value of our assets; and the potential impacts upon our internal controls, including those over financial reporting, that may result from
changes in working environments and other circumstances. All of these circumstances are highly uncertain and cannot be predicted. In addition, the
circumstances which give rise to new or existing infectious diseases becoming epidemics or pandemics with potentially similar impacts are expected to
persist.
Adverse global, regional and national economic conditions resulting from the COVID-19 pandemic could have a negative effect on our business,
results of operations and financial condition and liquidity.
The COVID-19 pandemic has adversely affected, and may continue to adversely affect, national, regional and global economies and financial markets.
Although the long-term macroeconomic effects of the pandemic cannot be predicted with certainty, the continued progression or persistence of the
pandemic may result in global, regional or national economic slowdowns or other economic downturns. Such downturns could curtail or delay spending by
businesses and consumers which may ultimately result in reductions in the demand for our products and greater volatility in demand and supply conditions.
The COVID-19 pandemic has also increased uncertainty in global credit and financial markets. The impacts of such uncertainty and disruptions
15
to the availability of credit or other sources of capital as the pandemic continues or worsens, could also adversely affect our ability to access capital on
favorable terms to meet our objectives. Any of these factors could have a material adverse impact on our business, results of operations, financial condition
and cash flows.
In addition, governments in several countries where we operate, including the United States, have enacted stabilization and stimulus measures in an effort
to counteract some of the economic impacts of COVID-19. The demand and business environments in which we operate have benefited from some of these
measures, while the long-term economic impacts of increased government borrowing to fund these measures may have future negative effects on certain
economies. Any significant discontinuations, reductions, or other changes to such stabilization and stimulus programs may harm our customers’ or
suppliers’ financial results and financial condition, and could also have an adverse macroeconomic impact that may lead to reductions in the demand for
our products. Even if maintained or expanded, such stimulus and stabilization measures may fail over the long term to mitigate the adverse economic
effects of the pandemic, and may fail to prevent or exacerbate any long-term economic downturns.
As a result of the uncertain scope and duration of the COVID-19 pandemic and the uncertain timing of any national, regional or global recovery and
economic normalization, we are unable to estimate the ultimate impacts on our operations and financial results.
We rely on the security and integrity of our electronic data systems, and the proper design and implementation of these systems for our business
requirements, and our business can be damaged by deficiencies, disruptions, security breaches or compromises of these systems.
We rely on electronic data systems, including a variety of software and networking, computing and storage equipment and other information technologies,
to operate and manage our business and to collect, process, maintain, and safeguard information, including information belonging to our customers,
partners, and personnel.
Our electronic data systems may be subject to defects, failures or disruptions as a result of, among other things, natural disasters, accidents, power
disruptions, telecommunications failures, deficiencies in new system designs and implementations, acts of terrorism or war, physical security breaches,
computer viruses or other cyber attacks.
For example, in fiscal 2020, we discovered a data breach incident involving malware and related behaviors that resulted in unauthorized access to our
information technology systems. Although we do not believe this incident had any significant impacts on our production and ordinary course operations,
such incidents or other system failures or disruptions could subject us to downtime and delays, compromise or loss of sensitive or proprietary information,
destruction or corruption of data, financial losses from remedial actions, breaches of obligations to third parties under privacy laws or contracts, or damage
to our reputation or customer relationships. Any of the foregoing could have a material adverse effect on our business, operating results and financial
condition.
In addition, we are actively implementing new electronic data systems relating to parts of our business, operations and accounting. The process of
implementing and commencing our reliance on these new systems involves particularly higher risks of deficiencies or disruptions than the continued use of
systems which have had a longer history of use and observed performance in the Company.
Because we conduct most of our business internationally, we are subject to operational, economic, financial and political risks abroad.
Sales of our products to customers outside of the United States represent a significant part of our past and anticipated revenues. Our international sales as a
percentage of our revenues were 84%, 82% and 74% for fiscal 2021, 2020 and 2019, respectively. Certain of our non-U.S. based customers also purchase
through their subsidiaries in the United States. In the future we expect international sales to continue to account for a significant percentage of our
revenues. Accordingly, we will be subject to risks and challenges that we would not otherwise face if we conducted our business solely in the United States.
These risks and challenges include:
•
•
•
•
•
•
compliance with a wide variety of foreign laws and regulations;
legal uncertainties regarding taxes, tariffs, quotas, export controls, export licenses and other trade barriers;
political and economic instability or foreign conflicts, including trade wars, that involve or affect the countries of our customers;
difficulties in collecting accounts receivable and longer accounts receivable payment cycles;
difficulties in staffing and managing personnel, distributors and representatives;
reduced protection for intellectual property rights in some countries;
16
•
•
•
•
currency exchange rate fluctuations, which could affect the value of our assets denominated in local currency, as well as the price of our products
relative to locally produced products;
the impact of pandemics or other disruptions to trade and production;
seasonal fluctuations in purchasing patterns in other countries; and
fluctuations in freight rates and transportation disruptions.
Any of these factors could harm our existing international operations, impair our ability to continue expanding into international markets or materially
adversely affect our operating results. Political developments in the United States and elsewhere may increase the risks and uncertainties associated with
conducting international business, including the possibilities of greater tariffs and other trade barriers in the regions where we conduct business. In fiscal
2021, we observed a continuing trend of increasing risks and challenges in the conduct of our international business activities, including expanded tariffs
and other trade barriers affecting the United States and China. Additionally, we are required to comply with foreign import and export requirements,
customs and value added tax standards that can be unclear or complex. Our failure to meet these requirements and standards could negatively impact our
business operations.
Our foreign operations expose us to additional risks relating to currency fluctuations.
Our international operations are significant to our revenues and net income, and we plan to continue to grow internationally. We have significant business
operations located in Germany. While we report our financial results in U.S. dollars, we incur certain costs in other currencies, and have certain foreign
currency denominated assets and liabilities. We, therefore, face exposure to fluctuations in currency exchange rates. Significant fluctuations in exchange
rates between the U.S. dollar and foreign currencies may adversely affect our revenues and earnings, despite our hedging of a portion of our international
currency exposures. Additionally, hedging programs are inherently risky and could expose us to additional costs and risks that could adversely affect our
financial condition and results of operations.
Increasingly restrictive export regulations and other trade barriers may materially harm our business.
Sales of our products to customers outside of the United States represent a significant part of our past and anticipated revenues, including sales involving
exports from the United States to China. There is a continuing trend of increasing trade barriers affecting exports and imports between the United States
and China. For example, the U.S. Department of Commerce, Bureau of Industry and Security (“BIS”), has recently amended the U.S. Export
Administration Regulations to expand license requirements on exports to entities in China that may support military end uses. These rules expand export
license requirements on a broader set of items from the U.S., including many of our products and for a broader set of customers in China and elsewhere.
The BIS has also broadened the application of U.S. export controls to items which are the foreign direct products of the U.S. technologies which can affect
a variety of customers outside of China who supply products to certain entities in China. There is no assurance that we will obtain any export licenses on a
timely basis or at all. There also remains considerable uncertainty regarding the interpretation and implementation of new regulations. In addition, the
reaction to these rules by governments and private businesses outside the U.S., particularly in China, may be expected to include retaliatory controls and
preferences for non-U.S. or local suppliers. In China we are already observing stronger preferences for non-U.S. suppliers in general, and in favor of new
and existing local suppliers in particular. These and other regulatory and policy changes, and the reactions of customers to such changes, in the U.S. and
elsewhere could materially and negatively affect our future sales and operating results.
If we fail to protect our proprietary rights, our competitors might gain access to our technology, which could adversely affect our ability to compete
successfully in our markets.
If we choose not to protect our proprietary rights or fail in our efforts to protect our proprietary rights, our competitors might gain access to our technology.
Unauthorized parties might attempt to copy aspects of our products or to obtain and use information that we regard as proprietary. Others might
independently develop similar or competing technologies or methods or design around our patents. In addition, the laws of many foreign countries in which
we or our customers do business do not protect our intellectual property rights to the same extent as the laws of the United States. As a result, our
proprietary rights could be compromised, our competitors might offer products similar to ours and we might not be able to compete successfully. We also
cannot assure that:
•
•
•
•
our means of protecting our proprietary rights will be adequate;
patents will be issued from our pending or future applications;
our existing or future patents will be sufficient in scope or strength to provide any meaningful protection or commercial advantage to us;
our patents or other intellectual property will not be invalidated, circumvented or successfully challenged in the United States or foreign countries;
or
17
•
others will not misappropriate our proprietary technologies or independently develop similar technologies, duplicate our products or design around
any of our patents or other intellectual property, or attempt to manufacture and sell infringing products in countries that do not strongly enforce
intellectual property rights.
We have spent, and may be required to spend in the future, significant resources to monitor and protect our intellectual property rights. Any litigation,
whether or not resolved in our favor, and whether initiated by us or by a third party, could result in significant and possibly material expenses to us and
divert the efforts of our management and technical personnel.
We might be subject to claims of infringement of other parties’ proprietary rights.
Our industry is characterized by uncertain and conflicting intellectual property claims. As we have in the past, we may receive claims that we are infringing
intellectual property rights of others. The resolution of intellectual property claims, with or without merit, could be time consuming, result in costly
litigation with highly uncertain outcomes, or impact our delivery of products. In the event of an adverse judgement or settlement, we might be required to
pay substantial amounts, cease the use or sale of infringing products, spend significant resources to develop non-infringing technology, discontinue the use
of certain technology or enter into license agreements. License agreements might not be available on terms acceptable to us or at all. In addition, certain of
our customer contracts contain provisions that require us to defend or indemnify our customers for third party intellectual property infringement claims,
which could increase the costs and negative impacts of intellectual property claims.
We have recorded restructuring, inventory write-offs and asset impairment charges in the past, in fiscal 2021, and may do so again in the future, which
could have a material negative impact on our business.
We recorded restructuring charges in fiscal 2021 and 2019 and will record further restructuring charges in the near future in relation to the recent
restructuring announced during fiscal 2021. We may implement restructuring plans in the future, which would require us to take additional, potentially
material, restructuring charges related to employee terminations, asset disposal or exit costs. We may also be required to write-off additional inventory if
our product build plans or usage of inventory experience declines, and such additional write-offs could constitute material charges. In addition, significant
adverse changes in market conditions could require us to take additional material impairment charges related to our long-lived assets if the changes impact
the critical assumptions or estimates that we use in our assessment of the recoverability of our long-lived assets. Any such additional charges, whether
related to restructuring, asset impairment or factory underutilization, may have a material negative impact on our operating results and related financial
statements.
We may not be able to recruit or retain qualified personnel.
We believe our ability to manage successfully and grow our business and to develop new products depends, in large part, on our ability to recruit and retain
qualified employees, particularly highly skilled technical, sales, management, and other key personnel. Competition for qualified resources is intense, and
the increased availability of work-from-home arrangements accelerated by the COVID-19 pandemic has intensified and expanded competition. Other
companies may have greater resources available to provide substantial inducements to lure key personnel away from us or to offer more competitive
compensation packages to individuals we are trying to hire.
Our failure to comply with environmental laws and regulations could subject us to significant fines and liabilities, and new laws and regulations or
changes in regulatory interpretation or enforcement could make compliance more difficult and costly.
We are subject to various U.S. federal, state and local, and foreign governmental laws and regulations relating to the protection of the environment,
including those governing the discharge of pollutants into the air and water, the management and disposal of hazardous substances and wastes, the cleanup
of contaminated sites and the maintenance of a safe workplace. We could incur substantial costs, including cleanup costs, civil or criminal fines or
sanctions and third-party claims for property damage or personal injury, as a result of violations of or liabilities under environmental laws and regulations
or non-compliance with the environmental permits required at our facilities.
Environmental laws, regulations and permits could require the installation of costly pollution or waste control equipment or operational changes to limit
waste or emissions or decrease the likelihood of accidental releases of hazardous substances. In addition, changing laws and regulations, new laws and
regulations, stricter enforcement of existing laws and regulations, the discovery of previously unknown contamination at our or others’ sites or the
imposition of new cleanup requirements could require us to curtail our operations, restrict our future expansion, subject us to liability and cause us to incur
future costs that could harm our operations, thereby adversely impacting our operating results and cash flow.
18
We are exposed to additional risks as a result of increased attention by our stakeholders to environmental, social and governance (“ESG”) matters.
Our stakeholders, including customers, investors, advisory firms, employees, and suppliers, among others, are increasing their attention to, and establishing
expectations for, ESG and related matters. These expectations can extend to our corporate practices, initiatives, and disclosures, as well as stakeholder
standards or preferences for investments or doing business. Third-party agencies have also established or added standards for rating companies on a range
of ESG-related factors that may be inconsistent and subject to change. As a result, these expectations may impact the attractiveness of our business, the
manner in which we do business, our reputation, the costs of doing business, and the willingness of these stakeholders to engage with, invest in, or retain
us. We may be further impacted by the adoption and evolution of ESG-related regulation and legislation in the jurisdictions in which we do business, which
could result in increased compliance, operational, and other costs.
In addition, the Company has provided voluntary disclosures on ESG matters, including regarding energy usage, greenhouse gas emissions, health and
safety, diversity and inclusion, and labor and human rights. Such disclosures are aspirational and based on frameworks and standards for such initiatives
and progress that are still developing, assumptions that may change, and disclosure control and procedures that continue to evolve. We may fail, or be
perceived to fail, in attaining or maintaining our ESG-related initiatives. The topics on which we focus may not be popular with our stakeholders. These
events or perceptions may expose us to additional reputational and operational risks.
Risks Relating to Our Acquisitions
We have made acquisitions, and may make additional acquisitions or investments in the future, which could put a strain on our resources, cause
ownership dilution to our stockholders or adversely affect our financial results.
Our acquisitions or investments may subject us to new or heightened risks. Integrating any newly acquired businesses, products or technologies into our
company draws upon our resources in ways that can be expensive and time consuming. These activities can substantially affect our financial resources,
could cause delays in product delivery and might not be successful. Acquisitions and investments can divert management’s attention and expose our
business to new liabilities or risks associated with entering into new business activities. In addition, we might lose key employees while integrating new
organizations. We might not be successful in integrating any acquired businesses, products or technologies, and might not achieve anticipated revenues and
cost benefits. Investments that we make may not result in a return consistent with our projections upon which such investments are made, or may require
additional investment that we did not originally anticipate. In addition, acquisitions can result in customer dissatisfaction, performance problems with an
acquired company, potentially dilutive issuances of equity securities or the incurrence of debt and restrictive debt covenants, contingent liabilities, possible
impairment charges related to goodwill or other intangible assets or other adverse impacts or circumstances. If any of these risks were to come about, our
business, financial results and stock price could be materially and adversely affected.
If goodwill or other intangible assets that we recorded, or will record, in connection with our acquisitions become impaired, we could be required to
take significant charges against earnings.
In connection with our accounting for acquired businesses, we record a significant amount of goodwill and other intangible assets. Under U.S. generally
accepted accounting principles, or GAAP, we must assess, at least annually and potentially more frequently, whether the value of goodwill and other
indefinite-lived intangible assets have been impaired. Finite-lived intangible assets are assessed for impairment in the event of an impairment indicator.
Any reduction or impairment of the value of goodwill or other intangible assets will result in a charge against earnings, which could materially adversely
affect our results of operations and stockholders’ equity in future periods.
Risks Relating to Owning Our Stock
If we fail to maintain an effective system of internal and disclosure controls and procedures, we may not be able to accurately report our financial
results or prevent fraud.
Effective internal and disclosure controls and procedures are necessary for us to provide reliable financial reports, to prevent fraud and to operate
successfully as a public company. If we cannot provide reliable financial reports or prevent fraud, our business and reputation may be harmed. We regularly
review and assess our internal controls over financial reporting and our disclosure controls and procedures. As part of that process, we may discover
material weaknesses in our internal controls.
In addition, we are actively implementing new electronic data systems relating to substantial parts of our business, operations and accounting. The process
of implementing and commencing our reliance on these new systems involves particularly higher risks of deficiencies or disruptions in relation to our
internal controls and disclosure controls and procedures than the continued use of systems which have had a longer history of use and observed
performance in the Company.
19
If we fail to maintain effective controls or timely effect any necessary improvement of our internal and disclosure controls, we may not have accurate
information to make management decisions, our operating results could be harmed or we may fail to meet our reporting obligations. Ineffective internal and
disclosure controls could also cause stockholders to lose confidence in our reported financial information and our ability to manage our business, which
would likely have a negative effect on the trading price of our securities.
The trading price of our common stock has been and is likely to continue to be volatile, and you might not be able to sell your shares at or above the
price that you paid for them.
The trading prices of the securities of technology companies have been highly volatile. During fiscal 2021, our stock price (Nasdaq Global Market close
price) ranged from $33.07 per share to $51.12 per share. The trading price of our common stock is likely to continue to be subject to wide fluctuations.
Factors affecting the trading price of our common stock could include:
•
•
•
variations in our operating results;
our forecasts and financial guidance for future periods;
announcements of technological innovations, new products or product enhancements, new product adoptions at semiconductor customers or
significant agreements by us or by our competitors;
reports regarding our ability to bring new products into volume production efficiently;
the gain or loss of significant orders or customers;
changes in the estimates of our operating results or changes in recommendations by any securities analysts that elect to follow our common stock;
rulings on litigation and proceedings;
seasonality, principally due to our customers' purchasing cycles;
•
•
•
•
•
• market and competitive conditions in our industry, the entire semiconductor industry and the economy as a whole;
•
•
recruitment or departure of key personnel;
announcements of mergers and acquisition transactions and the ability to successfully integrate the business activities of the acquired/merged
company; and
political and global economic instability, including as a result of trade barriers, natural disasters, epidemics and pandemics (such as the current
COVID-19 pandemic), military conflicts, climate change, and other factors acting alone or in combination.
•
In addition, if the market for technology stocks or the stock market in general experiences loss of investor confidence, the trading price of our common
stock could decline for reasons unrelated to our business, operating results or financial condition. The trading price of our common stock also might decline
in reaction to events that affect other companies in our industry even if these events do not directly affect us.
Provisions of our certificate of incorporation and bylaws or Delaware law might discourage, delay or prevent a change of control of our company or
changes in our management and, therefore, depress the trading price of our common stock.
Delaware corporate law and our certificate of incorporation and bylaws contain provisions that could discourage, delay or prevent a change in control of
our company or changes in our management that the stockholders of our company may deem advantageous. These provisions:
•
•
•
•
•
•
•
•
establish a classified board of directors so that not all members of our board are elected at one time (subject to shareholder approval of a
declassification amendment at the 2022 annual meeting of Stockholders);
provide that directors may only be removed “for cause” and only with the approval of 66.7% of our stockholders;
require super-majority voting to amend some provisions in our certificate of incorporation and bylaws;
authorize the issuance of “blank check” preferred stock that our board could issue to increase the number of outstanding shares and to discourage a
takeover attempt;
limit the ability of our stockholders to call special meetings of stockholders;
prohibit stockholder action by written consent, which requires all stockholder actions to be taken at a meeting of our stockholders;
provide that the board of directors is expressly authorized to make, alter or repeal our bylaws; and
establish advance notice requirements for nominations for election to our board or for proposing matters that can be acted upon by stockholders at
stockholder meetings.
In addition, Section 203 of the Delaware General Corporation Law may discourage, delay or prevent a change in control of our company. Also, each of our
named executive officers and certain other executives of the company have entered into change of control severance agreements, which were approved by
our Compensation Committee, which could increase the costs associated with a change of control and thus, potentially deter such a transaction.
20
Item 1B: Unresolved Staff Comments
None.
Item 2: Properties
Our corporate headquarters, which includes sales, marketing, administration, manufacturing, engineering, and research and development facilities, is
located in Livermore, California, United States. Our corporate headquarters comprises a campus of five buildings totaling approximately 259,000 square
feet. We presently lease four of the buildings and own one of the buildings. In addition, we lease office, repair and service, manufacturing and/or research
and development space both inside and outside of the United States. The leases expire at various times through 2028. We believe that our existing and
planned facilities are suitable for our current needs.
21
Information concerning our properties as of December 25, 2021 is set forth below:
Location
Principal Use
Livermore, California, United States Manufacturing
Livermore, California, United States
Beaverton, Oregon, United States
Thiendorf, Germany
Baldwin Park, California, United
States
Boulder, Colorado, United States
Carlsbad, California, United States
San Jose, California, United States
Singapore
Jubei City, Hsinchu, Taiwan
Bundang, South Korea
Suzhou, China
Yokohama City, Japan
Bergisch Gladbach, Germany
Munich, Germany
Montbonnot Saint Martin, France
Shanghai, China
Dresden, Germany
Hiroshima, Japan
Legnano, Italy
Corporate headquarters, sales, marketing, administration, product
design, manufacturing, service and repair, distribution, research and
development
Sales, marketing, administration, product design, manufacturing,
service and repair, distribution, research and development
Sales, marketing, administration, manufacturing, service and repair,
distribution, research and development
Manufacturing
Manufacturing, distribution, research and development
Sales, product design, administration, manufacturing, service and
repair, distribution, research and development
Administration, product design, manufacturing, service and repair,
distribution, research and development
Sales, administration, product design, service, and field service
Sales, administration, product design, field service and repair center
Sales, administration, product design, field service, and repair center
Sales, marketing, administration, product design, manufacturing,
service and repair, distribution, research and development
Sales, marketing, administration, product design, manufacturing,
service and repair, distribution, research and development
Manufacturing, service and repair, distribution, research and
development
Sales, manufacturing, service and repair, distribution, research and
development
Sales and service
Sales and service
Sales and service
Repair center
Sales office
22
Segment
Probe Cards
Probe Cards
Square
Footage
90,508
168,636
Ownership
Owned
Leased
Probe Cards
98,946
Leased
Systems
54,361
Leased
Probe Cards
44,000
Leased
Systems
Probe Cards
34,133
30,876
Leased
Leased
Probe Cards
24,758
Leased
All
All
All
All
All
24,413
18,568
17,161
15,177
Leased
Leased
Leased
Leased
13,309
Leased
Systems
12,235
Leased
Systems
10,656
Leased
All
All
All
Probe Cards
All
4,736
3,348
2,960
1,007
215
Leased
Leased
Leased
Leased
Leased
Item 3: Legal Proceedings
From time to time, we may be subject to legal proceedings and claims in the ordinary course of business. As of December 25, 2021, and as of the filing of
this Annual Report on Form 10-K, we were not involved in any material legal proceedings. In the future, we may become a party to additional legal
proceedings that may require us to spend significant resources, including proceedings designed to protect our intellectual property rights. Litigation can be
expensive and disruptive to normal business operations. Moreover, the results of legal proceedings are difficult to predict, and the costs incurred in
litigation can be substantial, regardless of outcome.
Item 4: Mine Safety Disclosures
Not applicable.
PART II
Item 5: Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our common stock is listed on the Nasdaq Global Market under the symbol “FORM.” As of February 14, 2022, there were 123 registered holders of record
of our common stock.
Dividends
No cash dividends have been declared on shares of our common stock, and the Company currently does not intend to pay dividends in the future.
Repurchase of Common Stock
In October 2020, our Board of Directors authorized a program to repurchase up to $50.0 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. 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, the Company's
current stock price and other factors. The program may be modified or discontinued at any time. The share repurchase program will expire on October 28,
2022.
The following table provides information as of December 25, 2021 with respect to the shares of common stock repurchased during the fourth quarter of
fiscal 2021 pursuant to the foregoing Board authorization.
Period (fiscal months)
September 26, 2021 - October 23, 2021
October 24, 2021 - November 20, 2021
November 21, 2021 - December 25, 2021
Total Number of Shares
Purchased
Average Price Paid per
Share
Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs
Maximum Amount that
May Yet Be Purchased
Under the Plans or
Programs
200 $
—
2,000
2,200 $
33.00
—
40.00
39.36
200 $
—
2,000
2,200
26,042,818
26,042,818
25,962,818
25,962,818
23
Stock Price Performance Graph
The following graph shows the total stockholder return of an investment of $100 in cash on December 31, 2016 through December 25, 2021 for (1) our
common stock, (2) the S&P 500 Index and (3) the RDG Semiconductor Composite Index. All values assume reinvestment of the full amount of all
dividends. Stockholder returns over the indicated period are based on historical data and are not necessarily indicative of future stockholder returns.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among FormFactor, Inc., the S&P 500 Index, and the RDG Semiconductor Composite Index
*$100 invested on December 31, 2016 in stock or index, including reinvestment of dividends.
FormFactor, Inc.
S&P 500
RDG Semiconductor Composite
Item 6: [Reserved]
Cumulative Total Return
December 31,
2016
December 30,
2017
December 29,
2018
December 28,
2019
December 26,
2020
December 25,
2021
$
100.00 $
100.00
100.00
139.73 $
121.83
135.72
125.09 $
116.49
126.17
232.50 $
153.17
186.57
380.18 $
181.35
271.57
397.41
233.41
413.36
Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial
statements and the related notes included elsewhere in this Annual Report on Form 10-K. In addition to historical consolidated financial information, the
following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions as described under the “Note
Regarding Forward-Looking Statements” that appears earlier in this Annual Report on Form 10-K. Our actual results could differ materially from those
24
anticipated by these forward-looking statements as a result of many factors, including those discussed under “Item 1A: Risk Factors” and elsewhere in this
Annual Report on Form 10-K.
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 $83.9 million in fiscal 2021 compared to net income of $78.5 million in fiscal 2020 and net income of $39.3 million in fiscal
2019. The increase in net income in fiscal 2021 compared to fiscal 2020 was primarily due to increased revenue in both of our reportable segments,
partially offset by slightly lower margins driven primarily by product mix and a higher tax rate due to significant one-time tax benefits during fiscal 2020
that did not recur. The increase in net income in fiscal 2020 compared to fiscal 2019 was primarily due to increased revenue and leverage on operating
expenses, which only marginally increased on significantly higher operating levels, as well as a decrease in provision for income taxes due to a lower
effective tax rate in fiscal 2020.
Impact of COVID-19
The COVID-19 pandemic continues to cause serious illness and death in many of the regions that we, our customers and our suppliers operate. The
COVID-19 pandemic has resulted in significant governmental actions designed to control the spread of the virus, including the imposition of safety
requirements and other orders in locations where we have manufacturing and other activities.
We continue to operate our manufacturing sites at production levels greater than those prior to the pandemic, albeit subject to certain safety and related
constraints. Our other operations are continuing with substantial work-from-home activities.
If the provisions of governmental health orders or other safety requirements applicable to us or our customers or suppliers become more restrictive for an
extended period of time, or if we have repeated occurrences of COVID-19 in any of our facilities, we may experience disruptions or delays in
manufacturing, product design, product development, customer support, manufacturing and sales, and an overall loss of productivity and efficiency.
While the disruptions in our operations, supply chain and customer demand as a result of the COVID-19 pandemic have been somewhat limited, we
continue to see impacts on elements in the supply chain and believe that the COVID-19 pandemic represents a sustained threat that may give rise to a
variety of more significant adverse impacts on our business and financial results. The semiconductor industry is experiencing various supply constraints
due to the pandemic. While we are working with our global supply chain partners to mitigate this risk, the duration and extent of the supply chain
disruptions remain uncertain. For a further description of the uncertainties and business risks associated with the COVID-19 pandemic, see Part I, Item 1A,
“Risk Factors” in this Annual Report on Form 10-K.
Fiscal Year
We operate on a 52/53 week fiscal year, whereby the fiscal year ends on the last Saturday of December. The fiscal years ended December 25, 2021,
December 26, 2020 and December 28, 2019 each included 52 weeks.
Use of Estimates
Preparation of our financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses. Management bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under
the circumstances, the results of which form the basis for making
25
judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates
under different assumptions or conditions.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been
prepared in accordance with generally accepted accounting principles (“GAAP”). The preparation of these financial statements requires us to make
estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of net
revenue and expenses in the reporting period. Our accounting policies are fundamental to understanding our financial condition and results of operations
reported in our financial statements and related disclosures. We have identified the following accounting policies as being critical because they require our
management to make particularly difficult, subjective and/or complex judgments about the effect of matters that are inherently uncertain. Our management
has discussed the development, selection, application and disclosure of these critical accounting policies with the Audit Committee of our Board of
Directors.
Inventory Valuation
We state our inventories at the lower of cost (principally standard cost which approximates actual cost on a first in, first out basis) or net realizable value.
We regularly assess the value of our inventory and will periodically write down its value for estimated excess inventory and product obsolescence based
upon an analysis of existing inventory quantities compared to estimated future consumption. Future consumption is estimated based upon assumptions
about how past consumption, recent purchases, backlog and other factors indicate future consumption. On a quarterly basis, we review existing inventory
quantities in comparison to our past consumption, recent purchases, backlog and other factors to determine what inventory quantities, if any, may not be
sellable. Based on this analysis, we record an adjustment to the cost basis of inventory when evidence exists that the net realizable value of inventory is
lower than its cost, which occurs when we have excess and/or obsolete inventory.
At the point of loss recognition, a new, lower cost basis for that inventory is established, and subsequent changes in facts and circumstances do not result in
the restoration or increase in that newly established cost basis. Market conditions are subject to change, and demand for our products can fluctuate
significantly. Actual consumption of inventories could differ from forecasted demand, and this difference could have a material impact on our gross profit
and inventory balances based on additional provisions for excess or obsolete inventories or a benefit from the sale of inventories previously written down.
Revenue Recognition
Revenue is recognized upon transferring control of products and services, and the amounts recognized reflect the consideration we expect to be entitled to
receive in exchange for these products and services. An arrangement may include some or all of the following products and services: probe cards, systems,
accessories, installation services, service contracts and extended warranty contracts.
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer. In contracts with multiple performance
obligations, we identify each performance obligation and evaluate whether the performance obligation is distinct within the context of the contract at
contract inception. Performance obligations that are not distinct at contract inception are combined and accounted for as one unit of account. Generally, the
performance obligations in a contract are considered distinct within the context of the contract and are accounted for as separate units of account.
Our products may be customized to our customers’ specifications, however, control of our product is typically transferred to the customer at the point in
time the product is either shipped or delivered, depending on the terms of the arrangement, as the criteria for over time recognition is not met. In limited
circumstances, substantive acceptance by the customer exists which results in the deferral of revenue until acceptance is formally received from the
customer. Judgment may be required in determining if the acceptance clause is substantive. In certain instances control of products is transferred to the
customer over time based on performance and in those instances we utilize an appropriate input or output measure to determine to what extent control has
transferred to the customer. Judgment may be required in determining an appropriate measure of performance.
Installation services are routinely provided to customers purchasing our systems. Installation services are a distinct performance obligation apart from the
systems and recognized in the period they are performed. Service contracts, which include repair and maintenance service contracts, and extended warranty
contracts are also distinct performance obligations and recognized over the contractual service period, which ranges from one to three years. For these
service contracts recognized over time, we use an input measure, days elapsed, to measure progress.
A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is
satisfied. In determining the transaction price, we evaluate whether the price is subject to refund or
26
adjustment to determine the net consideration to which we expect to be entitled. We generally do not grant return privileges, except for defective products
during the warranty period. Sales incentives and other programs that we may make available to our customers are considered to be a form of variable
consideration, which is estimated in determining the contract’s transaction price to be allocated to the performance obligations.
For contracts with multiple performance obligations, we allocate the contract’s transaction price to each performance obligation based on its relative stand-
alone selling price. The stand-alone selling prices are determined based on observable prices, which are the prices at which we separately sell these
products. For items which do not have observable prices, we use our best estimate of the stand-alone selling prices.
We account for tax assessed by a governmental authority that is directly imposed on a revenue-producing transaction (i.e., sales, use, value added) on a net
(excluded from revenue) basis.
Results of Operations
In this section, we discuss the results of our operations for the year ended December 25, 2021 compared to the year ended December 26, 2020. For a
discussion of the year ended December 26, 2020 compared to the year ended December 28, 2019, please refer to Part II, Item 7, “Management's Discussion
and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 26, 2020.
The following table sets forth our operating results as a percentage of revenues:
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
* Amounts insignificant and not greater than 0.1%.
Revenues by Segment
Probe Cards
Systems
Total
Fiscal 2021
Fiscal 2020
Fiscal 2019
100.0 %
58.1
41.9
13.1
16.1
29.2
12.7
0.1
(0.1)
0.1
12.8
1.9
10.9 %
100.0 %
58.5
41.5
12.8
16.6
29.4
12.1
0.2
(0.1)
0.1
12.3
1.0
11.3 %
100.0 %
59.7
40.3
13.8
18.0
31.8
8.5
0.5
(0.3)
*
8.7
2.0
6.7 %
Fiscal 2021
Fiscal 2020
Fiscal 2019
(In thousands)
$
$
633,281 $
136,393
769,674 $
581,739 $
111,877
693,616 $
491,363
98,101
589,464
27
Revenues by Market
Probe Cards Markets:
Foundry & Logic
DRAM
Flash
Systems Market:
Systems
Total revenues
Probe Cards Markets:
Foundry & Logic
DRAM
Flash
Systems Market:
Systems
Total revenues
Fiscal
2021
% of
Revenues
Fiscal
2020
% of
Revenues
Change
$
%
(In thousands, except percentages)
435,812
156,049
41,420
136,393
769,674
56.6 % $
20.3
5.4
446,183
109,734
25,822
64.3 % $
15.8
3.7
(10,371)
46,315
15,598
17.7
100.0 % $
111,877
693,616
16.2
100.0 % $
24,516
76,058
(2.3)%
42.2
60.4
21.9
11.0 %
Fiscal
2020
% of
Revenues
Fiscal
2019
% of
Revenues
Change
$
%
(In thousands, except percentages)
446,183
109,734
25,822
111,877
693,616
64.3 % $
15.8
3.7
318,552
147,257
25,554
54.0 % $
25.0
4.3
127,631
(37,523)
268
16.2
100.0 % $
98,101
589,464
16.7
100.0 % $
13,776
104,152
40.1 %
(25.5)
1.0
14.0
17.7 %
$
$
$
$
The decrease in Foundry & Logic product revenue in fiscal 2021 compared to fiscal 2020 was driven by lower demand from two major customers, partially
offset by increased unit sales to other large semiconductor foundries and integrated device manufacturers. Our ability to significantly grow our overall
revenue, despite these fluctuations, is the result of our long-term customer and market diversification initiatives.
The increase in DRAM product revenues in fiscal 2021 compared to fiscal 2020 was driven by increased sales to several customers and strong market-
based demand for DRAM products through fiscal 2021. While we expect DRAM revenues to fluctuate from period to period, we believe new-design
activity will continue to sustain healthy DRAM demand from each of our customers throughout fiscal 2022.
The increase in Flash product revenue in fiscal 2021 compared to fiscal 2020 was driven by increased sales resulting from the acquisition of the probe card
assets of Advantest Corporation (“Baldwin Park”), offset by decreased sales as a result of decreased customer demand for our existing products. Our
revenue in this market continues to be highly variable.
The increase in Systems product revenue in fiscal 2021 compared to fiscal 2020 was driven by increased sales of cryogenic systems due to the acquisition
of High Precision Devices, Inc. (“HPD”) and increased sales of thermal sub-systems and metrology systems.
28
Revenues by Geographic Region
Taiwan
China
South Korea
United States
Asia-Pacific
Europe
Japan
Rest of World
(1)
Total Revenues
Fiscal 2021
% of
Revenues
Fiscal 2020
% of
Revenues
Fiscal 2019
% of
Revenues
(In thousands, except percentages)
$
$
185,925
163,069
123,463
122,147
88,550
43,705
36,504
6,311
769,674
24.2 % $
21.2
16.0
15.9
11.5
5.7
4.7
0.8
100.0 % $
150,837
174,915
86,951
127,628
32,991
65,572
43,605
11,117
693,616
21.7 % $
25.2
12.5
18.4
4.8
9.5
6.3
1.6
100.0 % $
86,539
106,256
116,882
155,202
21,468
41,473
52,584
9,060
589,464
14.7 %
18.0
19.8
26.3
3.7
7.0
8.9
1.6
100.0 %
(1)
Asia-Pacific includes all countries in the region except Taiwan, South Korea, China and Japan, which are disclosed separately.
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 U.S.
Changes in revenue by geographic region in fiscal 2021 compared to fiscal 2020 were primarily attributable to changes in customer demand, shifts in
customer regional manufacturing strategies, particularly with our large multinational customers, and product sales mix.
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.
Gross profit and gross margin by segment were as follows (dollars in thousands):
Gross profit
Gross margin
Gross profit
Gross margin
Gross profit
Gross margin
Probe Cards
Systems
$
279,873
$
44.2 %
65,834
48.3 %
Corporate and Other
(22,940)
$
— %
Fiscal 2021
Fiscal 2020
$
$
Probe Cards
Systems
263,215
$
45.2 %
51,835
46.3 %
Corporate and Other
(27,130)
$
— %
Fiscal 2019
Probe Cards
Systems
211,382
$
43.0 %
50,927
51.9 %
Corporate and Other
(24,813)
$
— %
$
$
$
Total
322,767
41.9 %
Total
287,920
41.5 %
Total
237,496
40.3 %
Probe Cards
Gross profit in the Probe Cards segment increased in fiscal 2021 compared to fiscal 2020, primarily due to higher revenues. Gross margin in the Probe
Cards segment decreased in fiscal 2021 compared to fiscal 2020, primarily due to product mix within and between our served markets, including the effects
of increased DRAM revenues at gross margin levels lower than fiscal
29
2020, unfavorable manufacturing variances, higher material costs driven by fluctuations in commodity costs, and increases in wafer expense primarily due
to timing of factory loading, partially offset by higher gross margin Foundry & Logic revenues.
Systems
Gross profit and gross margin in the Systems segment increased in fiscal 2021 compared to fiscal 2020, primarily as a result of higher revenues and
favorable product mix, largely related to increased sales of metrology systems and thermal sub-systems.
Corporate and Other
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, net, which are not used in evaluating the results of, or in allocating resources to, our
reportable segments. The reduction in Corporate and Other in fiscal 2021 compared to fiscal 2020, is primarily due to a reduction in the amortization of
intangibles from significant intangibles becoming fully amortized, partially offset by increased stock-based compensation expense.
Overall
Gross profit and gross margin fluctuate with revenue levels, product mix, selling prices, factory loading and material costs. For fiscal 2021 compared to
fiscal 2020, gross profit has increased on greater revenue levels and gross margins increased due to the reduction in the amortization of intangibles,
partially offset by lower blended gross margins due to product mix.
Stock-based compensation expense included in cost of revenues for fiscal 2021 and 2020 was $5.2 million and $4.0 million, respectively.
Research and Development
Research and development
% of revenues
Research and development
% of revenues
Fiscal Year Ended
December 25, 2021
December 26, 2020
$ Change
% Change
$
100,937
$
(Dollars in thousands)
89,034
$
11,903
13.4 %
13.1 %
12.8 %
Fiscal Year Ended
December 26, 2020
December 28, 2019
$ Change
% Change
$
89,034
$
(Dollars in thousands)
81,499
$
7,535
9.2 %
12.8 %
13.8 %
The increase in research and development expenses in fiscal 2021 compared to fiscal 2020 was primarily driven by our acquisitions of Baldwin Park and
HPD during the third and fourth quarters of fiscal 2020, respectively, which increased headcount and general operational costs. Annual salary increases,
higher stock-based compensation, and restructuring charges also contributed to the increase. The components of this increase were as follows (in
thousands):
Employee compensation costs
General operating expenses
Stock-based compensation
Restructure
Depreciation
Project material costs
Fiscal 2021
compared to
Fiscal 2020
5,697
3,259
1,759
869
181
138
11,903
$
$
Stock-based compensation expense included within research and development in fiscal 2021 and 2020 was $7.6 million and $5.8 million, respectively.
30
Selling, General and Administrative
Selling, general and administrative
% of revenues
Selling, general and administrative
% of revenues
December 25, 2021
December 26, 2020
$ Change
% Change
Fiscal Year Ended
$
123,792
$
115,098
$
8,694
7.6 %
16.1 %
16.6 %
(Dollars in thousands)
December 26, 2020
December 28, 2019
$ Change
% Change
Fiscal Year Ended
$
115,098
$
106,335
$
8,763
8.2 %
16.6 %
18.0 %
(Dollars in thousands)
The increase in selling, general and administrative expenses in fiscal 2021 compared to fiscal 2020 was primarily driven by our acquisitions of Baldwin
Park and HPD during the third and fourth quarter of fiscal 2020, respectively, which increased headcount and general operational costs. Annual salary
increases, higher stock-based compensation, and the benefit in the prior year related to adjustments to contingent consideration for the acquisition of FRT
GmbH (“FRT”) that did not repeat also contributed to the increases. These increases were partially offset by decreased consulting fees for information
technology security remediation costs incurred in fiscal 2020 that did not repeat in fiscal 2021.
The components of this overall increase were as follows (in thousands):
Employee compensation
Gain on contingent consideration
Stock-based compensation
General operating expenses
Consulting fees
Fiscal 2021
compared to
Fiscal 2020
$
$
5,832
2,784
2,546
1,537
(4,005)
8,694
Stock-based compensation expense included within selling, general and administrative in fiscal 2021 and 2020 was $16.6 million, and $14.1 million,
respectively.
Interest Income and Interest Expense
Interest income
Weighted average balance of cash and investments
Weighted average yield on cash and investments
Interest expense
Average debt outstanding
Weighted average interest rate on debt
December 25, 2021
December 26, 2020
December 28, 2019
Fiscal Year Ended
$
$
569
265,248
0.29 %
(Dollars in thousands)
$
1,501
230,310
0.90 %
$
602
16,304
1.42 %
864
37,563
1.94 %
$
$
2,714
179,526
2.05 %
1,915
56,776
4.09 %
31
Interest income is earned on our cash, cash equivalents, restricted cash and marketable securities. The decrease in interest income in fiscal 2021 compared
to fiscal 2020 was attributable to lower investment yields due to the low interest rate environment, despite higher invested balances.
Interest expense primarily includes interest on our term loans, interest rate swap derivative contracts, and term loan issuance costs amortization charges.
The decrease in interest expense in fiscal 2021 compared to fiscal 2020 was primarily due to lower outstanding debt balances driven primarily by the pay-
off of one of our term loans on June 30, 2020.
Other income, net
Other income, net primarily includes the effects of foreign currency impact and various other gains and losses.
Provision for income taxes
Provision for income taxes
Effective tax rate
December 25, 2021
Fiscal Year Ended
December 26, 2020
December 28, 2019
$
14,576
14.8 %
(Dollars in thousands)
$
6,652
$
7.8 %
11,717
22.9 %
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 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 in fiscal 2021, and expect the FDII deduction and corresponding benefit to be available,
resulting in a decrease from the U.S. statutory rate and included in our worldwide effective tax rate for the year ended December 25, 2021. In fiscal 2020,
the U.S. Department of Treasury and the Internal Revenue Service finalized regulations T.D. 9902 with respect to the global intangible low-taxes income
high-tax exemption, resulting in a decrease in our effective tax rate. This adjustment was retroactive to the fiscal years 2018 and 2019 and the cumulative
impact was taken into account during fiscal 2020, which provided a significant one-time tax benefit in fiscal 2020.
Liquidity and Capital Resources
Capital Resources
Our working capital increased to $375.3 million at December 25, 2021 compared to $332.5 million at December 26, 2020, primarily due to higher cash,
cash equivalents and marketable securities, net, from cash generated from operations, higher inventories and accounts receivable on higher operating levels,
and lower accounts payable and accrued liabilities from timing of payments, partially offset by higher deferred revenue and operating lease liabilities.
Cash and cash equivalents primarily consist of deposits held at banks, money market funds, and U.S. agency securities. 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 $276.1 million at December 25, 2021 compared to $255.0 million at
December 26, 2020. 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.
32
The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains and created significant volatility and disruption of
financial markets. An extended period of global supply chain and economic disruption could materially affect our business, results of operations, access to
sources of liquidity and financial condition.
If we are unsuccessful in maintaining or growing our revenues, maintaining or reducing our cost structure (in response to a potential reduction in demand
due to an industry downturn, COVID-19, or other event), 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 in an effort to manage our worldwide cash and deploy funds to locations where they are
needed. As part of these strategies, we indefinitely reinvest a portion of our foreign earnings. Should we require additional capital in the U.S., we may elect
to repatriate indefinitely-reinvested foreign funds or raise capital in the United States.
Cash Flows
Net cash provided by operating activities
Net cash used in investing activities
Net cash used in financing activities
December 25, 2021
Fiscal Year Ended
December 26, 2020
(Dollars in thousands)
December 28, 2019
$
139,364 $
(124,741)
(47,199)
169,256 $
(98,922)
(30,935)
121,048
(66,352)
(6,578)
Operating Activities
Cash provided by operating activities consists of net income for the period adjusted for certain non-cash items and changes in certain operating assets and
liabilities. The $29.9 million decrease in cash provided by operating activities for fiscal 2021, as compared to fiscal 2020, was primarily related to
increased investment in working capital to support higher operating levels.
Net cash provided by operating activities in fiscal 2021 was primarily attributable to net income of $83.9 million, which included $105.2 million of net
non-cash items, offset by changes in operating assets and liabilities using $49.8 million of cash as discussed in more detail below.
Accounts receivable increased $7.9 million to $115.5 million at December 25, 2021 compared to $107.6 million at December 26, 2020, as a result of higher
operating levels and timing of customer payments.
Inventories, net, increased $12.3 million to $111.5 million at December 25, 2021 compared to $99.2 million at December 26, 2020, as a result of higher
operating levels.
Accounts payable and accrued liabilities decreased $8.7 million to $108.7 million at December 25, 2021 compared to $117.4 million at December 26, 2020,
as a result of the timing of payments and decreases in accrued warranty, partially offset by higher operating levels and increases in accrued taxes.
Operating lease liabilities increased $4.2 million to $38.9 million at December 25, 2021, compared to $34.7 million at December 26, 2020, as a result of
additional right-of-use assets obtained in exchange for lease obligations of $7.2 million, offset by lease payments.
Investing Activities
Net cash used in investing activities in fiscal 2021 primarily related to $66.5 million of cash used in the acquisition of property, plant and equipment, and
$58.2 million used for the purchase of marketable securities, net of maturities.
Financing Activities
Net cash used in financing activities in fiscal 2021 primarily related to $24.0 million used to purchase common stock under our stock repurchase program,
$20.6 million used to pay tax withholdings for net share settlements of employee equity awards, and $9.3 million of principal payments made towards the
repayment of our term loans, partially offset by $10.7 million of proceeds received from issuances of common stock under our stock incentive plans.
33
Debt
CMI Term Loan
On June 24, 2016, we entered into a Credit Agreement (the “Credit Agreement”) with HSBC Bank USA, National Association (“HSBC”), as
administrative agent, co-lead arranger, sole bookrunner and syndication agent, other lenders that may from time-to-time be a party to the Credit
Agreement, and certain guarantors. Pursuant to the Credit Agreement, the lenders provided us with a senior secured term loan facility of $150 million (the
“CMI Term Loan”). The proceeds of the CMI Term Loan were used to finance a portion of the purchase price paid in connection with the Cascade
Microtech acquisition in fiscal 2016 and to pay related bank fees and expenses.
The CMI Term Loan bore interest at a rate equal to, at our option, (i) the applicable London Interbank Offered Rate (“LIBOR”) rate plus 2.00% per annum
or (ii) Base Rate (as defined in the Credit Agreement) plus 1.00% per annum. We elected to pay interest at 2.00% over the one-month LIBOR rate. Interest
payments were payable in quarterly installments over a five-year period.
The principal payments on the CMI Term Loan were scheduled to be paid in equal quarterly installments that began June 30, 2016, in an annual amount
equal to 5% for year one, 10% for year two, 20% for year three, 30% for year four and 35% for year five. We accelerated payments of these scheduled
amounts and made the final payment on the CMI Term Loan on June 30, 2020, approximately one year before the original maturity. We are no longer
subject to the terms of the Credit Agreement.
FRT Term Loan
On October 25, 2019, we entered into a euro denominated $23.4 million, three-year credit facility loan agreement (the “FRT Term Loan”) with HSBC
Trinkaus & Burkhardt AG, Germany, 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 $2.0 million plus interest. The interest rate at December 25, 2021 was 1.20%.
The obligations under the FRT Term Loan are fully and unconditionally guaranteed by FormFactor, Inc. The FRT Term Loan contains negative covenants
customary for financing of this type, including covenants that place limitations on the incurrence of additional indebtedness, the creation of liens, the
payment of dividends; dispositions; fundamental changes, including mergers and acquisitions; loans and investments; sale leasebacks; negative pledges;
transactions with affiliates; changes in fiscal year; sanctions and anti-bribery laws and regulations, and modifications to charter documents in a manner
materially adverse to the Lenders. The FRT Term Loan also contains affirmative covenants and representations and warranties customary for financing of
this type. As of December 25, 2021, the balance outstanding pursuant to the FRT term loan was $7.9 million, and we were in compliance with all
covenants.
Building Term Loan
On June 22, 2020, we entered into an $18.0 million 15-year credit facility loan agreement (the “Building Term Loan”) with MUFG Union Bank, National
Association (“Union Bank”). The proceeds of the Building Term Loan were used to purchase a building adjacent to our leased facilities in Livermore,
California.
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 December 25, 2021 was 1.85%.
On March 17, 2020, we entered into an interest rate swap agreement with Union Bank to hedge the interest payments on the Building Term Loan for the
notional amount of $18.0 million. 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 convert a floating rate interest at
one-month LIBOR plus 1.75% into a fixed rate interest at 2.75%. The interest rate swap included a 0% floor that was effective for one year from the date of
the swap. As of December 25, 2021, the notional amount of the loan that is subject to this interest rate swap is $16.5 million.
The obligations under the Building Term Loan are guaranteed by a deed of trust covering certain real property and improvements and certain personal
property used in connection therewith. The deed of trust creates a first priority lien or encumbrance on the property with only such exceptions as may be
approved by the Union Bank in writing.
34
The Credit Agreement contains covenants customary for financing of this type. As of December 25, 2021, the balance outstanding pursuant to the Building
Term Loan was $16.5 million, and we were in compliance with all covenants under the Credit Agreement.
Stock Repurchase Program
In October 2020, our Board of Directors authorized a program to repurchase up to $50 million of outstanding common stock to offset potential dilution
from issuances of common stock under our stock-based incentive plans. The share repurchase program will expire October 28, 2022. This repurchase
program replaced the previous repurchase program that expired in February 2020 to purchase up to $25.0 million of outstanding common stock. During
fiscal 2021, we repurchased 622,400 shares of common stock for $24.0 million, and, as of December 25, 2021, $26.0 million remained available for future
repurchases. There was no stock repurchased in fiscal 2020 or 2019.
Contractual Obligations and Commitments
The following table summarizes our significant contractual commitments to make future payments in cash under contractual obligations as of
December 25, 2021 (in thousands):
Operating leases
Term loans - principal payments
(1)
Term loans - interest payments
Total
Payments Due In Fiscal Year
2022
2023
2024
2025
2026
2027 and
thereafter
$
$
8,594 $
8,935
361
17,890 $
7,232 $
1,050
282
8,564 $
6,814 $
1,080
263
8,157 $
6,799 $
1,111
240
8,150 $
6,008 $
1,142
220
7,370 $
8,970 $
11,117
930
21,017 $
Total
44,417
24,435
2,296
71,148
(1)
Represents our minimum interest payment commitments at 1.20% per annum for the FRT Term Loan and 1.85% per annum for the Building Term Loan.
The table above excludes our gross liability for unrecognized tax benefits, which totaled $35.7 million as of December 25, 2021. The timing of any
payments which could result from these unrecognized tax benefits will depend upon a number of factors and, accordingly, the timing of payment cannot be
estimated.
Indemnification Agreements
We have entered, and may from time to time in the ordinary course of our business enter, into contractual arrangements with third parties that include
indemnification obligations. Under these contractual arrangements, we have agreed to defend, indemnify and/or hold the third party harmless from and
against certain liabilities. These arrangements include indemnities in favor of customers in the event that our products or services infringe a third party's
intellectual property or cause property or other indemnities in favor of our lessors in connection with facility leasehold liabilities that we may cause. In
addition, we have entered into indemnification agreements with our directors and certain of our officers, and our bylaws contain indemnification
obligations in favor of our directors, officers and agents. These indemnity arrangements may limit the type of the claim, the total amount that we can be
required to pay in connection with the indemnification obligation and the time within which an indemnification claim can be made. The duration of the
indemnification obligation may vary, and for most arrangements, survives the agreement term and is indefinite. We believe that substantially all of our
indemnity arrangements provide either for limitations on the maximum potential future payments we could be obligated to make, or for limitations on the
types of claims and damages we could be obligated to indemnify, or both. However, it is not possible to determine or reasonably estimate the maximum
potential amount of future payments under these indemnification obligations due to the varying terms of such obligations, a lack of history of prior
indemnification claims, the unique facts and circumstances involved in each particular contractual arrangement and in each potential future claim for
indemnification, and the contingency of any potential liabilities upon the occurrence of events that are not reasonably determinable. We have not had any
material requests for indemnification under these arrangements. We have not recorded any liabilities for these indemnification arrangements on our
Consolidated Balance Sheets as of December 25, 2021 or December 26, 2020.
New Accounting Pronouncements
See Note 17, New Accounting Pronouncements, of Notes to Consolidated Financial Statements.
35
Item 7A: Quantitative and Qualitative Disclosures about Market Risk
Foreign Currency Exchange Risk
We conduct certain operations in foreign currencies. We enter into currency forward exchange contracts to hedge a portion, but not all, of existing foreign
currency denominated amounts. Gains and losses on these contracts are generally recognized in Other income, net in our Consolidated Statements of
Income. Because the effect of movements in currency exchange rates on the currency forward exchange contracts generally offsets the related effect on the
underlying items being hedged, these financial instruments are not expected to subject us to risks that would otherwise result from changes in currency
exchange rates as of December 25, 2021. We do not use derivative financial instruments for trading or speculative purposes. We recognized a net gain from
foreign exchange of zero and $0.5 million in fiscal 2021 and 2020, respectively, and a net loss of $0.4 million in fiscal 2019.
Interest Rate Sensitivity
Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio. We invest in a number of securities including U.S.
agency discount notes, money market funds and commercial paper. We attempt to maintain the safety and preservation of our invested principal funds by
limiting default risk, market risk and reinvestment risk. We mitigate default risk by investing in high grade investment securities. By policy, we limit the
amount of credit exposure to an issuer, except U.S. Treasuries and U.S. agencies.
Our exposure to interest rate risk arising from our Term Loans (see Note 5, Debt, of Notes to Consolidated Financial Statements) is insignificant as a result
of the interest-rate swap agreement (see Note 8, Derivative Financial Instruments, of Notes to Consolidated Financial Statements) that we entered into with
Union Bank to hedge the interest payments on our Building Term Loan.
We use interest rate derivative instruments to manage certain interest rate exposures. We do not use derivative instruments for trading or speculative
purposes. The fair market value of our fixed rate securities may be adversely impacted by increases in interest rates while income earned on floating rate
securities may decline as a result of decreases in interest rates. A hypothetical 100 basis-point (one percentage point) increase or decrease in interest rates
compared to rates at December 25, 2021 and December 26, 2020 would have affected the fair value of our investment portfolio by $0.1 million and $0.1
million, respectively.
Item 8: Financial Statements and Supplementary Data
Consolidated Financial Statements
The consolidated financial statements and supplementary data required by this item are included in the section entitled “Consolidated Financial Statements”
of this Annual Report on Form 10-K. See Item 15 for a list of our consolidated financial statements.
Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A: 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”)) were effective as of December 25, 2021
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.
36
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 fourth quarter of fiscal 2021, that have materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting.
Management's Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-
15(f) under the Exchange Act. Internal control over financial reporting is a process designed by, or under the supervision of, our Principal Executive
Officer and Principal Financial Officer, and effected by our board of directors, management and other personnel and consultants, 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, and includes those policies and procedures that:
(i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions and dispositions of assets;
(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with the authorization of our
management and directors; and
(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have
a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of our management, including our Principal Executive Officer and Principal Financial Officer, we
conducted an assessment of the effectiveness of our internal control over financial reporting as of December 25, 2021. In making this assessment, our
management used the criteria set forth in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the
Treadway Commission (“COSO”). Based on the results of this assessment, management has concluded that our internal control over financial reporting
was effective as of December 25, 2021.
The effectiveness of our internal control over financial reporting as of December 25, 2021 has been audited by KPMG LLP, an independent registered
public accounting firm, as stated in their report which appears in this Annual Report on Form 10-K.
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 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 Annual Report on Form 10-K 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 9A be read in conjunction with the certifications for a more complete
understanding of the subject matter presented.
Item 9B: Other Information
None.
37
Item 9C: Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
None.
38
Item 10: Directors, Executive Officers and Corporate Governance
PART III
The information required by this item is incorporated by reference to the proxy statement for our 2022 Annual Meeting of Stockholders under the captions
Corporate Governance, Executive Officers, and, if applicable, Delinquent Section 16 Reports.
Item 11: Executive Compensation
The information required by this item is incorporated by reference to the proxy statement for our 2022 Annual Meeting of Stockholders under the captions
Executive Compensation and Related Information, Compensation Committee Interlocks and Insider Participation and Report of the Compensation
Committee.
Item 12: Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item is incorporated by reference to the proxy statement for our 2022 Annual Meeting of Stockholders under the captions
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters, and Equity Compensation Plans.
Item 13: Certain Relationships and Related Transactions, and Director Independence
The information required by this item is incorporated by reference to the proxy statement for our 2022 Annual Meeting of Stockholders under the captions
Certain Relationships and Related Transactions and Independence of Directors.
Item 14: Principal Accountant Fees and Services
Our independent registered public accounting firm is KPMG, LLP; Portland, Oregon; Auditor Firm ID: 185.
The information required by this item is incorporated by reference to the proxy statement for our 2022 Annual Meeting of Stockholders under the caption
Principal Auditor Fees and Services.
39
Item 15: Exhibits and Financial Statement Schedules
Financial Statements and Schedules
PART IV
The Consolidated Financial Statements, together with the report thereon of KPMG LLP, are included on the pages indicated below:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 25, 2021 and December 26, 2020
Consolidated Statements of Income for the fiscal years ended December 25, 2021, December 26, 2020 and December 28, 2019
Consolidated Statements of Comprehensive Income for the fiscal years ended December 25, 2021, December 26, 2020 and
December 28, 2019
Consolidated Statements of Stockholders' Equity for the fiscal years ended December 25, 2021, December 26, 2020 and December 28,
2019
Consolidated Statements of Cash Flows for the fiscal years ended December 25, 2021, December 26, 2020 and December 28, 2019
Notes to Consolidated Financial Statements
Page
45
47
48
49
50
51
53
Financial statement schedules have been omitted because they are not applicable or the required information is shown in the consolidated financial
statements or notes thereto.
Exhibits
The exhibits listed in the accompanying index to exhibits are filed or incorporated by reference as part of this Annual Report on Form 10-K.
Item 16: Form 10-K Summary
None.
40
Exhibit
Number
Exhibit Description
Form
File No
Date of
First Filing
Exhibit
Number
Filed
Herewith
EXHIBIT INDEX
Incorporated by Reference
3.1 Amended and Restated Certificate of Incorporation of the
Registrant as filed with the Delaware Secretary of State on
June 17, 2003
3.2 Amended and Restated Bylaws of the Registrant
4.1
4.2 Description of Securities
Specimen Common Stock Certificate
Form of Indemnity Agreement
10.3+
10.4+
Form of Change of Control Severance Agreement
10.9+ Employee Incentive Plan, as amended and restated effective
October 1, 2019
10.10+ Equity Incentive Plan, as amended and restated effective May 15,
2020
10.11+ Employee Stock Purchase Plan, as amended and restated May 18,
2018
Pacific Corporate Center Lease (Building 1) by and between
Greenville Holding Company LLC (successor to Greenville
Investors, L.P.) (“Greenville”) and the Registrant dated May 3,
2001
First Amendment to Pacific Corporate Center Lease (Building 1)
by and between Greenville and the Registrant dated January 31,
2003
Pacific Corporate Center Lease (Building 2) by and between
Greenville and the Registrant dated May 3, 2001
First Amendment to Pacific Corporate Center Lease (Building 2)
by and between Greenville and the Registrant dated January 31,
2003
Pacific Corporate Center Lease (Building 3) by and between
Greenville and the Registrant dated May 3, 2001
First Amendment to Pacific Corporate Center Lease (Building 3)
by and between Greenville and the Registrant dated January 31,
2003
10.18 Third Amendment, dated December 19, 2016, between
FormFactor, Inc. and MOHR PCC, LP, to Pacific Corporate
Center Leases (Buildings 1, 2 and 3), dated May 3, 2001, by and
between Greenville Investors, L.P. and FormFactor, Inc., as
amended
Pacific Corporate Center Lease by and between Greenville and the
Registrant dated September 7, 2004, as amended by First
Amendment to Building 6 Lease dated August 16, 2006
Second Amendment, dated December 19, 2016, between
FormFactor, Inc. and MOHR PCC, LP, to Pacific Corporate
Center Lease, dated October 5, 2004, by and between Greenville
Investors, L.P. and FormFactor, Inc., as amended
10.21 Third Amendment, dated October 1, 2018, between FormFactor,
Inc. and MOHR PCC, LP, to Pacific Corporate Center Lease,
dated October 5, 2004, by and between Greenville Investors, L.P.
and FormFactor, Inc., as amended
Fourth Amendment, dated October 1, 2018, between FormFactor,
Inc. and MOHR PCC, LP, to Pacific Corporate Center Lease,
dated October 5, 2004, by and between Greenville Investors, L.P.
and FormFactor, Inc., as amended
10.29
10.27 Rental Agreement by and between Cascade Microtech Dresden
GmbH and Süss Grundstücksverwaltungs GbR dated as of June
17, 2011.
First Amendment to Lease dated January 10, 2007, between
Nimbus Center LLC (as successor in interest to Spieker
Properties, L.P.) and Cascade Microtech, Inc.
Second Amendment to Lease dated February 25, 2013, between
Nimbus Center LLC and Cascade Microtech, Inc.
10.30
10.12
10.13
10.14
10.15
10.16
10.17+
10.19+
10.20
10.22
S-1
333-109815
10/20/2003
3.01
8-K
S-1/A
10-K
S-1/A
10-K
10-K
DEF 14A
DEF 14A
000-50307
333-86738
000-50307
333-86738
000-50307
000-50307
7/22/2016
5/28/2002
2/22/2021
5/28/2002
3/14/2005
2/21/2020
3.2
4.01
4.2
10.01
10.48
10.9
000-50307
4/3/2020
Appendix A
000-50307
4/3/2018
Appendix A
S-1/A
333-86738
6/10/2003
10.18
S-1/A
S-1/A
S-1/A
S-1/A
S-1/A
8-K
333-86738
5/7/2003
10.18.1
333-86738
6/10/2003
333-86738
5/7/2003
333-86738
6/10/2003
333-86738
5/7/2003
10.19
10.19.1
10.20
10.20.1
000-50307
12/23/2016
10.2
10-Q
000-50307
11/7/2006
10.01
000-50307
12/23/2016
10.1
000-50307
10/2/2018
10.1
000-50307
10/2/2018
10.2
000-51072
8/10/2011
000-51072
5/9/2014
000-51072
5/8/2013
10.3
10.1
10.2
8-K
8-K
8-K
10-Q
10-Q
10-Q
41
10.31 Third Amendment to Lease dated January 23, 2014, between
10.32
10.33
10.34
Nimbus Center LLC and Cascade Microtech, Inc.
Fourth Amendment to Lease dated March 31, 2014, between
Nimbus Center LLC and Cascade Microtech, Inc.
Fifth Amendment to Lease dated September 24, 2014, between
Nimbus Center LLC and Cascade Microtech, Inc.
Sixth Amendment to Lease dated July 8, 2015, between Nimbus
Center LLC and Cascade Microtech, Inc.
10.35+ Employment Offer Letter, dated August 29, 2012 to Mike Slessor
10.37+ CEO Change of Control and Severance Agreement, dated June 19,
2019 by and between Mike Slessor and the Registrant
10.39+ Employment Offer Letter, dated February 15, 2018 to Shai Shahar
10.40+ Change of Control Severance Agreement, dated February 16, 2018
by and between Shai Shahar and the Registrant
21.1 List of Registrant's subsidiaries
23.1 Consent of Independent Registered Public Accounting Firm -
24.1
KPMG LLP
Power of Attorney (included on the signature page of this
Form 10-K)
31.1 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
31.2 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
32.1* Certification of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
101** The following financial statements from the Company’s Annual
Report on Form 10-K for the year ended December 25, 2021,
formatted in Inline XBRL: (i) Consolidated Balance Sheets, (ii)
Consolidated Statements of Income, (iii) Consolidated Statements
of Comprehensive Income, (iv) Consolidated Statements of Cash
Flows, and (v) Notes to Consolidated Financial Statements, tagged
as blocks of text and including detailed tags.
101.SCH** XBRL Taxonomy Extension Schema Document
101.CAL** XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF** XBRL Taxonomy Extension Definition Linkbase Document
101.LAB** XBRL Taxonomy Extension Label Linkbase Document
101.PRE** XBRL Taxonomy Extension Presentation Linkbase Document
104
The cover page from the Company’s Annual Report on Form 10-K
for the year ended December 25, 2021, formatted in Inline XBRL
(included as Exhibit 101).
10-Q
10-Q
10-K
10-K
10-K
—
10-Q
—
—
—
—
—
—
—
—
—
—
—
—
—
—
000-51072
000-51072
000-51072
000-51072
000-50307
—
000-50307
—
5/9/2014
5/9/2014
3/72016
3/72016
3/13/2013
—
5/8/2018
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
10.2
10.3
10.22
10.23
10.19+
—
10.1
—
—
—
—
—
—
—
—
—
—
—
—
—
—
X
X
X
X
X
X
X
X
X
X
X
X
X
X
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.
** Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities
Act of 1933 or Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability.
*** The schedules, exhibits, and annexes to this exhibit have been omitted in reliance on Item 601(b)(2) of Regulation S-K and will be furnished supplementally to the SEC upon request.
+ Indicates a management contract or compensatory plan or arrangement.
42
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date:
February 18, 2022
FORMFACTOR, INC.
By:
/s/ SHAI SHAHAR
Shai Shahar
Chief Financial Officer
(Principal Financial Officer and Principal
Accounting Officer)
POWER OF ATTORNEY
KNOW BY ALL PERSONS BY THESE PRESENTS, that each of the undersigned whose signature appears below constitutes and appoints Shai Shahar
and Christy Robertson, and each of them, the undersigned's true and lawful attorneys in-fact and agents with full power of substitution, for the undersigned
and in the undersigned's name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K and any
other documents in connection therewith, and to file the same, with all exhibits thereto, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act requisite and necessary to be done with
respect to this Annual Report on Form 10-K, including amendments, as fully to all intents and purposes as the undersigned might or could do in person,
hereby ratifying and confirming all that said attorneys-in-fact and agents, or his or their substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, each of the undersigned has executed this Power of Attorney as of the date indicated below.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated.
Signature
Title
Date
Principal Executive Officer:
/s/ MICHAEL D. SLESSOR
Michael D. Slessor
Principal Financial Officer and Principal
Accounting Officer:
/s/ SHAI SHAHAR
Shai Shahar
President, Chief Executive Officer and Director
February 18, 2022
Chief Financial Officer
February 18, 2022
43
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated.
Signature
Title
Date
Additional Directors:
/s/ LOTHAR MAIER
Lothar Maier
/s/ JORGE TITINGER
Jorge Titinger
/s/ KELLEY STEVEN-WAISS
Kelley Steven-Waiss
/s/ SHERI RHODES
Sheri Rhodes
/s/ RAYMOND LINK
Raymond Link
/s/ REBECA OBREGON-JIMENEZ
Rebeca Obregon-Jimenez
/s/ THOMAS ST. DENNIS
Thomas St. Dennis
Director
Director
Director
Director
Director
Director
Director
44
February 18, 2022
February 18, 2022
February 18, 2022
February 18, 2022
February 18, 2022
February 18, 2022
February 18, 2022
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
FormFactor, Inc.:
Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting
We have audited the accompanying consolidated balance sheets of FormFactor, Inc. and subsidiaries (the Company) as of December 25, 2021 and
December 26, 2020, the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the years in the
three-year period ended December 25, 2021, and the related notes (collectively, the consolidated financial statements). We also have audited the Company’s
internal control over financial reporting as of December 25, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued
by the Committee of Sponsoring Organizations of the Treadway Commission.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of
December 25, 2021 and December 26, 2020, and the results of its operations and its cash flows for each of the years in the three-year period ended
December 25, 2021, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of December 25, 2021 based on the criteria established in Internal Control - Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting,
and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal
Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the
Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting
Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities
laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable
assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective
internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used
and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal
control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness
exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing
such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed 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. A company’s internal control
over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
45
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was
communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated
financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not
alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below,
providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Evaluation of inventory excess and obsolescence
As discussed in notes 2 and 3 to the consolidated financial statements, the Company’s net inventories were $111.5 million as of December 25,
2021, and inventory write-downs totaled $15.5 million for the year ended December 25, 2021. The Company states its inventories at the lower of
cost or net realizable value. The Company records an adjustment to the cost basis of inventory when evidence exists that the net realizable value of
inventory is lower than its cost, which occurs when the Company has excess and/or obsolete inventory. The Company’s model to estimate the
excess and/or obsolete inventory is based on an analysis of existing inventory quantities compared to estimated future consumption. Future
consumption is estimated based upon assumptions about how past consumption, recent purchases, backlog or other factors indicate future
consumption.
We identified the evaluation of inventory excess and obsolescence as a critical audit matter. Complex auditor judgment was required to evaluate
that past consumption, recent purchases, or backlog accurately indicate future consumption and thus meet the accounting objective of recording
inventory at the lower of its cost or net realizable value.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating
effectiveness of certain internal controls related to the critical audit matter. This included controls related to the Company’s process to develop the
assumptions used to predict future consumption of inventory. We assessed the Company’s assumptions about how past consumption, recent
purchases, or backlog indicate future consumption by: (1) Evaluating historical cumulative write down trends and relevant changes to the overall
business environment, including key customers and product lines in order to evaluate the Company’s methodology that actual past consumption
history, recent purchases, or backlog are relevant as predictors of future inventory consumption, and (2) Selecting a sample of products within
inventory and for each sample selection (a) evaluating how past consumption, recent purchases, or backlog indicate future consumption of the
specific sampled inventory product, and (b) recalculating the Company’s estimate of the cumulative inventory write-downs based on the actual
quantity of product on hand compared to the estimate of future consumption.
/s/ KPMG LLP
We have served as the Company’s auditor since 2013.
Portland, Oregon
February 18, 2022
46
FORMFACTOR, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
Current assets:
Cash and cash equivalents
Marketable securities
Accounts receivable, net
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
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 cost of $5 and $5
Deferred revenue
Operating lease liabilities
Total current liabilities
Term loans, less current portion, net of unamortized issuance cost of $65 and $70
Deferred tax liabilities
Long-term operating lease liabilities
Other liabilities
Total liabilities
Stockholders' equity:
Preferred stock, $0.001 par value:
10,000,000 shares authorized; no shares issued and outstanding
Common stock, $0.001 par value:
250,000,000 shares authorized; 78,240,506 and 77,437,997 shares issued and outstanding
Additional paid-in capital
Accumulated other comprehensive income (loss)
Accumulated deficit
Total stockholders' equity
Total liabilities and stockholders' equity
December 25, 2021 December 26, 2020
(In thousands, except share and per
share data)
$
$
$
$
151,010 $
125,055
115,541
111,548
2,233
18,652
524,039
2,099
35,210
146,555
212,299
36,342
61,995
1,981
1,020,520 $
57,862 $
50,836
8,931
23,224
7,901
148,754
15,434
3,623
31,009
5,920
204,740
187,225
67,810
107,603
99,229
1,904
23,303
487,074
1,969
30,756
104,103
212,761
59,147
66,242
1,165
963,217
62,045
55,342
9,516
20,964
6,704
154,571
24,978
5,346
27,996
6,242
219,133
—
—
78
898,945
(1,449)
(81,794)
815,780
1,020,520 $
78
903,838
5,886
(165,718)
744,084
963,217
The accompanying notes are an integral part of these consolidated financial statements.
47
FORMFACTOR, INC.
CONSOLIDATED STATEMENTS OF INCOME
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
December 25, 2021
Fiscal Year Ended
December 26, 2020
December 28, 2019
(In thousands, except per share data)
$
$
$
$
769,674 $
446,907
322,767
100,937
123,792
224,729
98,038
569
(602)
495
98,500
14,576
83,924 $
1.08 $
1.06 $
77,787
79,133
693,616 $
405,696
287,920
89,034
115,098
204,132
83,788
1,501
(864)
750
85,175
6,652
78,523 $
1.02 $
0.99 $
76,681
79,001
589,464
351,968
237,496
81,499
106,335
187,834
49,662
2,714
(1,915)
602
51,063
11,717
39,346
0.52
0.51
74,994
77,286
The accompanying notes are an integral part of these consolidated financial statements.
48
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FORMFACTOR, INC.
Net income
Other comprehensive income (loss), net of tax:
Translation adjustments and other
Unrealized gains (losses) on available-for-sale marketable securities
Unrealized gains (losses) on derivative instruments
Other comprehensive income (loss), net of tax
Comprehensive income
December 25, 2021
Fiscal Year Ended
December 26, 2020
(In thousands)
December 28, 2019
83,924 $
78,523 $
39,346
(5,995)
(598)
(742)
(7,335)
76,589 $
5,131
226
1,188
6,545
85,068 $
(1,028)
316
(727)
(1,439)
37,907
$
$
The accompanying notes are an integral part of these consolidated financial statements.
49
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FORMFACTOR, INC.
Common Stock
Shares
Amount
Additional
Paid-in Capital
Accumulated Other
Comprehensive
Income (Loss)
Accumulated
Deficit
Total
74,139,712 $
74 $
(In thousands, except shares)
862,897 $
780 $
(283,587) $
580,164
Balances, December 29, 2018
Issuance of common stock under the Employee Stock Purchase
Plan
Issuance of common stock pursuant to exercise of options for cash
Issuance of common stock pursuant to vesting of restricted stock
units, net of stock withheld for tax
Stock-based compensation
Other comprehensive loss
Net income
Balances, December 28, 2019
Issuance of common stock under the Employee Stock Purchase
Plan
Issuance of common stock pursuant to exercise of options for cash
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, December 26, 2020
Issuance of common stock under the Employee Stock Purchase
Plan
Issuance of common stock pursuant to exercise of options for cash
Issuance of common stock pursuant to vesting of restricted stock
units, net of stock withheld for tax
Purchase and retirement of common stock
Stock-based compensation
Other comprehensive loss
Net income
544,271
162,956
918,051
—
—
—
75,764,990
485,566
255,769
931,672
—
—
—
77,437,997
378,584
100,000
946,325
(622,400)
—
—
—
Balances, December 25, 2021
78,240,506 $
1
—
1
—
—
—
76
—
1
1
—
—
—
78
—
—
6,806
1,176
(8,026)
22,968
—
—
885,821
7,875
2,134
(15,451)
23,459
—
—
903,838
9,809
844
—
—
—
—
(1,439)
—
(659)
—
—
—
—
6,545
—
5,886
—
—
—
—
—
—
—
39,346
(244,241)
—
—
—
—
—
78,523
(165,718)
—
—
1
(1)
—
—
—
78 $
(20,604)
(24,037)
29,095
—
—
898,945 $
—
—
—
(7,335)
—
(1,449) $
—
—
—
—
83,924
(81,794) $
6,807
1,176
(8,025)
22,968
(1,439)
39,346
640,997
7,875
2,135
(15,450)
23,459
6,545
78,523
744,084
9,809
844
(20,603)
(24,038)
29,095
(7,335)
83,924
815,780
The accompanying notes are an integral part of these consolidated financial statements.
50
FORMFACTOR, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
December 25,
2021
Fiscal Year Ended
December 26,
2020
(In thousands)
December 28,
2019
$
83,924 $
78,523 $
39,346
Depreciation
Amortization
Amortization (accretion) of discount on investments
Reduction in the carrying amount of right-of-use assets
Stock-based compensation expense
Amortization of debt issuance costs
Deferred income tax provision (benefit)
Provision for excess and obsolete inventories
Acquired inventory step-up amortization
Loss on disposal of long-lived assets
Non-cash restructuring charges
Gain on contingent consideration
Foreign currency transaction losses (gains)
Loss on derivative instruments
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, net of cash acquired
Proceeds from sale of subsidiary
Purchases of marketable securities
Proceeds from maturities of marketable securities
Net cash used in investing activities
Cash flows from financing activities:
25,772
18,747
403
7,172
29,384
5
3,869
15,544
723
449
1,646
(95)
1,577
—
(9,086)
(31,655)
3,808
(326)
(6,589)
(725)
285
1,974
(7,442)
139,364
(66,496)
—
—
(149,979)
91,734
(124,741)
20,694
27,991
(2)
5,955
23,830
32
(562)
13,117
838
451
—
(2,879)
(968)
372
(3,545)
(22,191)
(6,207)
179
16,788
13,892
362
8,901
(6,315)
169,256
(55,865)
(51,880)
82
(51,224)
59,965
(98,922)
Proceeds from issuances of common stock
Purchase of common stock through stock repurchase program
Tax withholdings related to net share settlements of equity awards
Proceeds from term loan
Payments on term loan
Payment of term loan issuance costs
Payment of contingent consideration
Net cash used in financing activities
Effect of exchange rate changes on cash, cash equivalents and restricted cash
Net increase (decrease) in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash, beginning of year
Cash, cash equivalents and restricted cash, end of year
10,653
(24,038)
(20,604)
—
(9,337)
—
(3,873)
(47,199)
(3,180)
(35,756)
191,098
155,342 $
10,010
—
(15,450)
18,000
(43,417)
(78)
—
(30,935)
3,762
43,161
147,937
191,098 $
$
The accompanying notes are an integral part of these consolidated financial statements.
51
17,185
27,672
(365)
5,269
23,176
160
4,954
10,421
465
486
—
—
408
110
481
(14,295)
230
(441)
(27)
7,517
166
3,130
(5,000)
121,048
(20,847)
(20,524)
132
(76,327)
51,214
(66,352)
8,093
—
(8,025)
23,354
(30,000)
—
—
(6,578)
(727)
47,391
100,546
147,937
FORMFACTOR, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Supplemental disclosure of non-cash investing and financing activities:
Operating lease, right-of-use assets obtained in exchange for lease obligations
Contingent consideration payable related to FRT acquisition
Increase in accounts payable and accrued liabilities related to property, plant and equipment purchases
$
Supplemental disclosure of cash flow information:
Income taxes paid, 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
Total cash, cash equivalents and restricted cash
$
$
$
December 25,
2021
Fiscal Year Ended
December 26,
2020
(In thousands)
December 28,
2019
12,254 $
—
2,711
7,957 $
643
8,520
1,912 $
—
2,545
9,150 $
867
7,546
151,010 $
2,233
2,099
155,342 $
187,225 $
1,904
1,969
191,098 $
36,709
5,364
866
4,324
1,405
6,713
144,545
1,981
1,411
147,937
The accompanying notes are an integral part of these consolidated financial statements.
52
FORMFACTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1—Formation and Nature of Business
FormFactor, Inc. was incorporated in Delaware on April 15, 1993 and is headquartered in Livermore, California. We are 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.
Design, development and manufacturing operations are located in Livermore, San Jose, Carlsbad, and Baldwin Park, California, Beaverton, Oregon and
Boulder, Colorado, United States and Bergisch Gladbach, Munich and Thiendorf, Germany, and sales, service and support operations are located in the
United States, Germany, France, Italy, South Korea, Japan, Taiwan, China and Singapore.
Fiscal Year
Our fiscal year ends on the last Saturday in December. The fiscal years ended on December 25, 2021, December 26, 2020 and December 28, 2019, each
consisted of 52 weeks, respectively.
Note 2—Summary of Significant Accounting Policies
Basis of Consolidation and Foreign Currency Translation
The consolidated financial statements include our accounts and those of our wholly-owned subsidiaries. All intercompany balances and transactions have
been eliminated.
The functional currencies of certain of our foreign subsidiaries are the local currencies and, accordingly, all assets and liabilities of these foreign operations
are translated to U.S. Dollars at current period-end exchange rates, and revenues and expenses are translated to U.S. Dollars using average exchange rates
in effect during the period. The gains and losses from the foreign currency translation of these subsidiaries' financial statements are included as a separate
component of stockholders' equity on our Consolidated Balance Sheets under Accumulated other comprehensive income (loss).
Certain other of our foreign subsidiaries use the U.S. Dollar as their functional currency. Accordingly, monetary assets and liabilities in non-functional
currencies of these subsidiaries are remeasured using exchange rates in effect at the end of the period. Revenues and costs in local currency are remeasured
using average exchange rates for the period, except for costs related to those balance sheet items that are remeasured using historical exchange rates. The
resulting remeasurement gains and losses are included in the Consolidated Statements of Income as a component of Other income, net as incurred.
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America
(“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent
assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Estimates may
change as new information is obtained. We believe that the estimates, assumptions and judgments involved in revenue recognition, fair value of marketable
securities, fair value of derivative financial instruments used to hedge both foreign currency and interest rate exposures, allowance for credit losses,
reserves for product warranty, valuation of obsolete and slow moving inventory, assets acquired and liabilities assumed in business combinations, legal
contingencies, valuation of goodwill, the assessment of recoverability of long-lived assets, valuation and recognition of stock-based compensation, loss
contingencies, provision for income taxes and valuation of deferred tax assets have the greatest potential impact on our consolidated financial statements.
Actual results could differ from those estimates.
Business Acquisitions
Our consolidated financial statements include the operations of acquired businesses after the completion of their respective acquisitions. We account for
acquired businesses using the acquisition method of accounting, which requires, among other things, that assets acquired and liabilities assumed be
recognized at their estimated fair values as of the acquisition date, and
53
FORMFACTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
that the fair value of acquired intangibles be recorded on the balance sheet. Transaction costs are expensed as incurred. Any excess of the purchase price
over the assigned fair values of the net assets acquired is recorded as goodwill.
Cash and Cash Equivalents and Marketable Securities
Cash and cash equivalents consist of deposits and financial instruments which are readily convertible into cash and have original maturities of 90 days or
less at the time of acquisition. Marketable securities consist primarily of highly liquid investments with maturities of greater than 90 days when purchased.
We classify our available-for-sale marketable securities as current assets because they represent investments of cash available for current operations. As a
result, the Company recorded all its marketable securities in short-term investments regardless of the contractual maturity date of the securities.
Furthermore, we report them at fair value with the related unrealized gains and losses included in Accumulated other comprehensive income (loss) in our
Consolidated Balance Sheets. Any unrealized losses which are considered to be other-than-temporary are recorded in Other income, net, in the
Consolidated Statements of Income. Realized gains and losses on the sale of marketable securities are determined using the specific-identification method
and recorded in Other income, net, in the Consolidated Statements of Income.
All of our available-for-sale investments are subject to a periodic impairment review. If an available-for-sale debt security’s fair value is less than its
amortized cost basis, then we evaluate whether the decline is the result of a credit loss, in which case an impairment is recorded through an allowance for
credit losses. Unrealized gains and losses not attributable to credit losses are included, net of tax, in Accumulated other comprehensive income (loss) in our
Consolidated Balance Sheets. We did not record an allowance for credit losses related to our available-for-sale investments during fiscal 2021.
Foreign Exchange Management
We transact business in various foreign currencies. We enter into forward foreign exchange contracts in an effort to mitigate the risks associated with
currency fluctuations on certain foreign currency balance sheet exposures and certain operational costs denominated in local currency impacting our
statement of income. 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 Consolidated Balance Sheets with changes in fair value
recorded within Other income, net in our Consolidated Statements 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 Consolidated Balance Sheets with changes in fair value recorded as a component of Accumulated other comprehensive income (loss) and
reclassified into earnings in the same period in which the hedged transaction affects earnings, and in the same line item on the Consolidated Statements of
Income as the impact of the hedge transaction. We do not use derivative financial instruments for trading or speculative purposes.
Accounts Receivable and Allowance for Credit Losses
The majority of our accounts receivable are derived from sales to large multinational semiconductor manufacturers throughout the world, are recorded at
their invoiced amount and do not bear interest.
In order to monitor potential credit losses, we perform ongoing credit evaluations of our customers' financial condition. An allowance for credit losses
accounts is maintained based upon our assessment of the expected collectability of all accounts receivable. The allowance for credit losses is reviewed and
assessed for adequacy on a quarterly basis. We take into consideration (1) any circumstances of which we are aware of a customer's inability to meet its
financial obligations and (2) our judgments as to prevailing economic conditions in the industry and their impact on our customers. If circumstances
change, and the financial condition of our customers is adversely affected and they are unable to meet their financial obligations, we may need to take
additional allowances, which would result in an increase in our operating expense.
Activity related to our allowance for credit losses was as follows (in thousands):
Balance at beginning of year
Charges (reversals) to costs and expenses
Balance at end of year
December 25, 2021
Fiscal Year Ended
December 26, 2020
December 28, 2019
$
$
248 $
(53)
195 $
222 $
26
248 $
185
37
222
Inventories
We state our inventories at the lower of cost (principally standard cost which approximates actual cost on a first in, first out basis) or net realizable value.
We regularly assess the value of our inventory and will periodically write down its value for
54
FORMFACTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
estimated excess inventory and product obsolescence based upon an analysis of existing inventory quantities compared to estimated future consumption.
Future consumption is estimated based upon assumptions about how past consumption, recent purchases, backlog and other factors indicate future
consumption. On a quarterly basis, we review existing inventory quantities in comparison to our past consumption, recent purchases, backlog and other
factors to determine what inventory quantities, if any, may not be sellable. Based on this analysis, we record an adjustment to the cost basis of inventory
when evidence exists that the net realizable value of inventory is lower than its cost, which occurs when we have excess and/or obsolete inventory. Once
the value is adjusted, the original cost of our inventory, less the related inventory write-down, represents the new cost basis. Reversal of these write downs
is recognized only when the related inventory has been scrapped or sold. Shipping and handling costs are classified as a component of Cost of revenues in
the Consolidated Statements of Income.
We design, manufacture and sell a custom product into a market that has been subject to cyclicality and significant demand fluctuations. Many of our
products are complex, custom to a specific chip design and have to be delivered on short lead-times. Probe cards are manufactured in low volumes, but, for
certain materials, the purchases are often subject to minimum order quantities in excess of the actual underlying probe card demand. It is not uncommon for
us to acquire production materials and commence production activities based on estimated production yields and forecasted demand prior to, or in excess
of, actual demand for our probe cards. These factors result in normal recurring inventory valuation charges to Cost of revenues.
Inventory write downs totaled $15.5 million, $13.1 million and $10.4 million for fiscal 2021, 2020 and 2019, respectively.
Restricted Cash
Restricted cash is comprised primarily of funds held by our foreign subsidiaries for employee obligations, office leases, customer deposits, temporary
customs import permits, and environmental remediation.
Property, Plant, and Equipment
Property, plant and equipment is stated at cost less accumulated depreciation and amortization. Depreciation is recorded on a straight-line method.
Machinery and equipment, computer equipment and software, and furniture and fixtures are depreciated over 3 to 5 years. Building and building
improvements are depreciated over 30 years. Leasehold improvements are amortized over 7 years. Construction-in-progress assets are not depreciated until
the assets are placed in service. Upon sale or retirement of assets, the cost and related accumulated depreciation or amortization are removed from the
Consolidated Balance Sheets and the resulting gain or loss, if any, is reflected in Operating income in our Consolidated Statements of Income.
Leases
The Company determines if an arrangement is a lease at its inception. Right-of-use (“ROU”) assets and liabilities are recognized at the lease
commencement date based on the present value of lease payments over the lease term. We use our estimated incremental borrowing rate in determining the
present value of lease payments considering the term of the lease, which is derived from information available at the lease commencement date. The lease
term includes renewal options when it is reasonably certain that the option will be exercised and excludes termination options. To the extent that the
Company’s agreements have variable lease payments, the Company includes variable lease payments that depend on an index or a rate and excludes those
that depend on facts or circumstances occurring after the commencement date, other than the passage of time.
Lease expense for these leases is recognized on a straight-line basis over the lease term. We have elected not to recognize ROU assets and lease liabilities
that arise from short-term leases for any class of underlying asset. Operating leases are included in Operating lease, right-of-use-assets, Operating lease
liabilities, and Long-term operating lease liabilities in our Consolidated Balance Sheets.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of identifiable assets acquired and liabilities assumed. Goodwill is not amortized,
rather assessed, at least annually, for impairment at a reporting unit level. Impairment of goodwill exists when the carrying amount of a reporting unit
exceeds its fair value. A goodwill impairment loss is recognized for the amount that the carrying amount of the reporting unit, including goodwill, exceeds
its fair value, limited to the total amount of goodwill allocated to that reporting unit. If the fair value of a reporting unit exceeds the carrying amount,
goodwill of the reporting unit is not considered impaired.
We evaluate impairment by first assessing qualitative factors to determine whether it is necessary to perform a quantitative impairment test. If we
determine, as a result of the qualitative assessment, that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then
the quantitative impairment test is required. Otherwise, no further testing is required.
55
FORMFACTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
We perform our annual goodwill impairment test in the fourth quarter of each year by assessing qualitative factors, including, but not limited to an
assessment of our market capitalization, which was significantly higher than our book value. Based on these tests, we determined that the quantitative
impairment test was not required and no impairment charges were recorded in fiscal 2021, 2020 or 2019.
The evaluation of goodwill for impairment requires the exercise of judgment. In the event of future changes in business conditions, we will be required to
reassess and update our forecasts and estimates used in future impairment analysis. If the results of these analysis are lower than current estimates, a
material impairment charge may result at that time.
See Note 10, Goodwill and Intangible Assets, for additional information.
Intangible Assets
Intangible assets consist of acquisition related intangible assets and intellectual property. The intangible assets are being amortized over periods of 1 to 10
years, which reflect the pattern in which economic benefits of the assets are expected to be realized. We perform a review of intangible assets when facts
and circumstances indicate that the useful life is shorter than originally estimated or that the carrying amount of assets may not be recoverable. Such facts
and circumstances include significant adverse changes in the business climate or legal factors; current period cash flow or operating losses combined with a
history of losses or a forecast of continuing losses associated with the use of the intangible assets; and current expectation that the intangible assets will
more likely than not be sold or disposed of before the end of their estimated useful lives. We assess the recoverability of identified intangible assets by
comparing the projected undiscounted net cash flows associated with the related asset or group of assets over their remaining lives against their respective
carrying amounts. Impairments, if any, are based on the excess of the carrying amount over the fair value of those assets.
See Note 10, Goodwill and Intangible Assets, for additional information.
Impairment of Long-Lived Assets
We test long-lived assets or asset groups, such as property, plant and equipment and intangible assets, for recoverability when events or changes in
circumstances indicate that their carrying amounts may not be recoverable. Circumstances which could trigger a review include, but are not limited to:
significant decreases in the market price of the asset; significant adverse changes in the business climate or legal factors; accumulation of costs significantly
in excess of the amount originally expected for the acquisition or construction of the asset; current period cash flow or operating losses combined with a
history of losses or a forecast of continuing losses associated with the use of the asset; and current expectation that the asset will more likely than not be
sold or disposed of before the end of its estimated useful life.
Recoverability is assessed based on the carrying amounts of the asset or asset group and the sum of the undiscounted cash flows expected to result from the
use and the eventual disposal of the asset. An impairment loss is recognized when the carrying amount is not recoverable and exceeds fair value.
Concentration of Credit Risk and Other Risks and Uncertainties
Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash equivalents, marketable securities and accounts
receivable. Our cash equivalents and marketable securities are held in safekeeping by large, credit worthy financial institutions. We invest our excess cash
primarily in U.S. banks, government and agency bonds, money market funds and corporate obligations. We have established guidelines relative to credit
ratings, diversification and maturities that seek to maintain safety and liquidity. Deposits in these banks may exceed the amounts of insurance provided on
such deposits. To date, we have not experienced any losses on our deposits of cash and cash equivalents. We market and sell our products to a relatively
narrow base of customers and generally do not require collateral.
The following customers represented 10% or more of our revenues:
Intel Corporation
Samsung Electronics Co., LTD.
* Less than 10% of revenues.
December 25, 2021
Fiscal Year Ended
December 26, 2020
December 28, 2019
20.4 %
11.4 %
31.5 %
*
25.3 %
11.5 %
At December 25, 2021, one customer accounted for 13.8% of gross accounts receivable. At December 26, 2020, two customers accounted for 15.3% and
13.7% of gross accounts receivable, respectively. No other customers accounted for 10% or more of gross accounts receivable for these fiscal period ends.
56
FORMFACTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
We are exposed to non-performance risk by counterparties on our derivative instruments used in hedging activities. We seek to minimize risk by
diversifying our hedging program across multiple financial institutions. These counterparties are large international financial institutions, and, to date, no
such counterparty has failed to meet its financial obligations to us.
Revenue Recognition
Revenue is recognized upon transferring control of products and services, and the amounts recognized reflect the consideration we expect to be entitled to
receive in exchange for these products and services. Revenue is recognized net of any taxes collected from customers, which are subsequently remitted to
governmental authorities. An arrangement may include some or all of the following products and services: probe cards, systems, accessories, installation
services, service contracts and extended warranty contracts. We sell our products and services direct to customers and to partners in two distribution
channels: global direct sales force and through a combination of manufacturers’ representatives and distributors.
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer. In contracts with multiple performance
obligations, we identify each performance obligation and evaluate whether the performance obligation is distinct within the context of the contract at
contract inception. Performance obligations that are not distinct at contract inception are combined and accounted for as one unit of account. Generally, the
performance obligations in a contract are considered distinct within the context of the contract and are accounted for as separate units of account.
Our products may be customized to our customers’ specifications, however, control of our product is typically transferred to the customer at the point in
time the product is either shipped or delivered, depending on the terms of the arrangement, as the criteria for over time recognition is not met. In limited
circumstances, substantive acceptance by the customer exists which results in the deferral of revenue until acceptance is formally received from the
customer. Judgment may be required in determining if the acceptance clause is substantive. In certain instances control of products is transferred to the
customer over time based on performance and in those instances we utilize an appropriate input or output measure to determine to what extent control has
transferred to the customer. Judgment may be required in determining an appropriate measure of performance.
Installation services are routinely provided to customers purchasing our systems. Installation services are a distinct performance obligation apart from the
systems and recognized in the period they are performed. Service contracts, which include repair and maintenance service contracts, and extended warranty
contracts are also distinct performance obligations and recognized over the contractual service period, which ranges from one to three years. For these
service contracts recognized over time, we use an input measure, days elapsed, to measure progress.
A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is
satisfied. In determining the transaction price, we evaluate whether the price is subject to refund or adjustment to determine the net consideration to which
we expect to be entitled. We generally do not grant return privileges, except for defective products during the warranty period. Sales incentives and other
programs that we may make available to our customers are considered to be a form of variable consideration, which is estimated in determining the
contract’s transaction price to be allocated to the performance obligations.
For contracts with multiple performance obligations, we allocate the contract’s transaction price to each performance obligation based on its relative stand-
alone selling price. The stand-alone selling prices are determined based on observable prices, which are the prices at which we separately sell these
products. For items which do not have observable prices, we use our best estimate of the stand-alone selling prices.
Transaction price allocated to the remaining performance obligations: On December 25, 2021, we had $7.8 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 79.5% of our remaining performance obligations as revenue in fiscal 2022, approximately 16.2%
in fiscal 2023, and approximately 4.3% in fiscal 2024 and thereafter. The foregoing excludes the value of remaining performance obligations that 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.
57
FORMFACTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Contract assets as of December 25, 2021 and December 26, 2020 were $0.9 million and $3.7 million, respectively, and are reported on the 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 Consolidated Balance Sheets on a contract-by-contract basis at the end of each reporting period as a
component of Deferred revenue and Other liabilities. Contract liabilities totaled $24.2 million and $22.2 million at December 25, 2021 and December 26,
2020, respectively. During fiscal 2021, we recognized $17.8 million of revenue that was included in contract liabilities as of December 26, 2020.
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 16, Segments and Geographic Information, for further details.
Warranty Obligations
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 incurred in correcting a
product failure. We continuously monitor product returns for warranty and maintain a reserve for the related expenses based upon our historical experience
and any specifically identified field 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. Warranty costs are reflected in the Consolidated Statement of
Income as a Cost of revenues.
A reconciliation of the changes in our warranty liability is as follows (in thousands):
Balance at beginning of year
Accruals
Settlements
Balance at end of year
Fiscal Year Ended
December 25, 2021 December 26, 2020 December 28, 2019
2,102
$
3,881
(4,041)
1,942
1,942 $
5,727
(3,751)
3,918 $
3,918 $
5,759
(6,872)
2,805 $
$
Research and Development
Research and development expenses include expenses related to product development, engineering and material costs. All research and development costs
are expensed as incurred.
Income Taxes
We utilize the asset and liability method of accounting for income taxes, under which deferred taxes are determined based on the temporary differences
between the financial statement and tax basis of assets and liabilities using tax rates expected to be in effect during the years in which the basis differences
reverse and for operating losses and tax credit carryforwards. We estimate our provision for income taxes and amounts ultimately payable or recoverable in
numerous tax jurisdictions around the world. Estimates involve interpretations of regulations and are inherently complex. Resolution of income tax
treatments in individual jurisdictions may not be known for many years after completion of any fiscal year. We are required to evaluate the realizability of
our deferred tax assets on an ongoing basis to determine whether there is a need for a valuation allowance with respect to such deferred tax assets. A
valuation allowance is recorded when it is more likely than not that some or all of the deferred tax assets will not be realized. In evaluating the ability to
recover deferred tax assets, we consider all available positive and negative evidence giving greater weight to our recent cumulative income, our historical
ability to utilize net operating losses in recent years and our forecast of future taxable income, including the reversal of temporary differences and the
implementation of feasible and prudent tax planning strategies.
We recognize and measure uncertain tax positions taken or expected to be taken in a tax return if it is more likely than not that the tax position will be
sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized are then measured based on
the largest benefit that has a greater than 50 percent likelihood of being realized
58
FORMFACTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
upon ultimate settlement. We report a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax
return. We adjust these reserves in light of changing facts and circumstances, such as the closing of a tax audit or the refinement of an estimate. To the
extent that the final tax outcome of these matters is different than the amounts recorded, such differences will impact the provision for income taxes in the
period in which such determination is made. The provision for income taxes includes the impact of reserve provisions and changes to reserves that are
considered appropriate, as well as the related net interest. We recognize interest and penalties related to unrecognized tax benefits within the income tax
provision. Accrued interest and penalties are included within the related tax liability in the Consolidated Balance Sheets.
We file annual income tax returns in multiple taxing jurisdictions around the world. A number of years may elapse before an uncertain tax position is
audited and finally resolved. While it is often difficult to predict the final outcome or the timing of resolution of any particular uncertain tax position, we
believe that our related liability reflects the most likely outcome. We adjust the liability, as well as the related interest, in light of changing facts and
circumstances. Settlement of any particular position could require the use of cash.
Stock-Based Compensation
We recognize compensation expense for all stock-based awards based on the grant-date estimated fair values. The value of the portion of the award that is
ultimately expected to vest is recognized as expense ratably over the requisite service periods in our Consolidated Statements of Income. The fair value of
stock options is measured using the Black-Scholes option pricing model, while the fair value for restricted stock units (“RSUs”) is measured based on the
closing market price of our common stock on the date of grant. The fair value of Performance RSUs (“PRSU”) is based on certain market performance
criteria and is measured using a Monte Carlo simulation pricing model.
See Note 12, Stockholders' Equity, and Note 13, Stock-Based Compensation, for additional information.
Net Income Per Share
Basic net income per share is computed by dividing net income by the weighted-average number of common shares outstanding for the period. Diluted net
income per share is computed giving effect to all potentially dilutive common stock and common stock equivalents, including stock options, RSUs and
common stock subject to repurchase.
The following table reconciles the shares used in calculating basic net income per share and diluted net income per share (in thousands):
Weighted-average shares used in computing basic net income per share
Add potentially dilutive securities
Weighted-average shares used in computing basic and diluted net income per share
December 25, 2021
77,787
1,346
79,133
Fiscal Year Ended
December 26, 2020
76,681
2,320
79,001
December 28, 2019
74,994
2,292
77,286
Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive income (loss) (“OCI”) includes the following items, the impact of which has been excluded from earnings and reflected
as components of stockholders' equity as shown below (in thousands):
Unrealized losses on available-for-sale marketable securities
Translation adjustments and other
Unrealized gains on derivative instruments
Accumulated other comprehensive income (loss)
December 25, 2021
December 26, 2020
$
$
(724) $
(811)
86
(1,449) $
(126)
5,184
828
5,886
59
FORMFACTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 3—Balance Sheet Components
Marketable Securities
Marketable securities consisted of the following (in thousands):
December 25, 2021
U.S. treasuries
Commercial paper
Corporate bonds
Certificate of deposit
December 26, 2020
U.S. treasuries
Corporate bond
Certificate of deposit
U.S. agency securities
Amortized Cost
Gross Unrealized
Gains
Gross Unrealized
Losses
Fair Value
39,128 $
32,174
52,832
1,200
125,334 $
— $
—
29
1
30 $
(143) $
(13)
(151)
(2)
(309) $
38,985
32,161
52,710
1,199
125,055
Amortized Cost
Gross Unrealized
Gains
Gross Unrealized
Losses
Fair Value
40,602 $
24,156
2,160
575
67,493 $
124 $
176
19
—
319 $
— $
(2)
—
—
(2) $
40,726
24,330
2,179
575
67,810
$
$
$
$
We typically invest in highly-rated securities with low probabilities of default. Our investment policy requires investments to be rated single A or better,
limits the types of acceptable investments, concentration as to security holder and duration of the investment. The gross unrealized gains and losses in fiscal
2021 and 2020 were caused primarily by changes in interest rates.
The longer the duration of marketable securities, the more susceptible they are to changes in market interest rates and bond yields. As yields increase, those
securities with a lower yield-at-cost show a mark-to-market unrealized loss. We anticipate recovering the full cost of the securities either as market
conditions improve, or as the securities mature. Accordingly, we believe that the unrealized losses are not as a result of a credit loss. As of December 25,
2021 and December 26, 2020, gross unrealized losses related to our marketable securities portfolio were not material.
The contractual maturities of marketable securities were as follows (in thousands):
Due in one year or less
Due after one year to five years
See also Note 9, Fair Value.
Inventories, net
Inventories consisted of the following (in thousands):
Raw materials
Work-in-progress
Finished goods
December 25, 2021
December 26, 2020
Amortized Cost
Fair Value
Amortized Cost
Fair Value
$
$
75,804 $
49,530
125,334 $
75,778 $
49,277
125,055 $
50,500 $
16,993
67,493 $
50,679
17,131
67,810
December 25, 2021
$
57,673 $
35,935
17,940
111,548 $
December 26, 2020
48,122
30,806
20,301
99,229
$
60
FORMFACTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Property, Plant and Equipment, net
Property, plant and equipment, net consisted of the following (in thousands):
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-progress
Total
Accrued Liabilities
Accrued liabilities consisted of the following (in thousands):
Accrued compensation and benefits
Accrued employee stock purchase plan contributions withheld
Accrued warranty
Accrued income and other taxes
Accrued restructuring charges
Accrued contingent consideration
Other accrued expenses
Note 4—Acquisitions
$
$
December 25, 2021
$
4,751 $
December 26, 2020
4,751
—
226,185
36,361
6,894
79,144
353,335
(294,468)
58,867
45,236
104,103
41,722
252,632
44,667
7,293
82,266
433,331
(312,700)
120,631
25,924
146,555 $
December 25, 2021
$
29,706 $
4,693
2,805
8,086
2,478
—
3,068
50,836 $
December 26, 2020
33,110
4,240
3,918
6,976
—
4,012
3,086
55,342
High Precision Devises, Inc. (“HPD”) Acquisition
On October 19, 2020, we acquired 100% of the shares of HPD for total consideration of $16.9 million, net of cash acquired of $1.7 million, which included
an adjustment for changes in working capital. This acquisition brought highly specialized skills and know-how to address the unique test challenges within
the emerging quantum computing, superconducting computing, and ultra-sensitive sensor markets which operate at temperatures as low as 30 millikelvin.
The acquisition was accounted for using the acquisition method of accounting, with FormFactor treated as the acquirer. The acquired assets and liabilities
of HPD were recorded at their respective fair values including an amount for goodwill representing the difference between the acquisition consideration
and the fair value of the identifiable net assets.
Our Consolidated Statements of Income include the financial results of HPD subsequent to the acquisition date of October 19, 2020. Revenue in fiscal 2020
related to HPD subsequent to the acquisition date that was included in our Consolidated Statements of Income was not material.
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 acquisition date. We subsequently made certain immaterial adjustments within the measurement period to the acquisition price allocation as a result of
finalization of our valuation of identifiable assets and liabilities. The purchase price allocated to the underlying assets acquired, including goodwill and
intangibles, and liabilities assumed based on the final amounts are as follows (in thousands):`
61
FORMFACTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Cash and cash equivalents
Accounts receivable
Inventory
Property, plant and equipment
Operating lease, right-of-use-assets
Prepaid expenses and other assets
Tangible assets acquired
Deferred revenue
Accounts payable and accrued liabilities
Operating lease liabilities
Deferred tax liability
Total net tangible assets acquired and liabilities assumed
Intangible assets
Goodwill
Net assets acquired
The intangible assets as of the acquisition date included (in thousands):
Developed technologies
Customer relationships
Order backlog
Trade names
Total intangible assets
Amount
1,680
1,017
3,047
669
2,554
916
9,883
(2,529)
(1,268)
(2,554)
(2,400)
1,132
11,520
5,908
18,560
$
$
Amount
7,500
3,600
200
220
11,520
$
$
Weighted Average Useful Life (in
years)
10.0
5.0
0.5
5.0
8.2
The fair value of the intangible assets acquired in connection with the acquisition were determined using either the income, market or replacement cost
methodologies. The intangible assets are being amortized over periods which reflect the pattern in which economic benefits of the assets are expected to be
realized.
Identifiable Intangible Assets
Valuation of intangible assets involves multiple assumptions. The key assumptions are described below.
Developed technologies acquired primarily consist of existing technology related to cryogenic probe stations, Adiabatic Demagnetization Refrigerator
(“ADR”), and continuous ADR cryostats and similar tools, and technology related to other cryogenic applications. We valued the developed technologies
using the multi-period excess earnings method under the income approach. Using this approach, the estimated fair values were calculated using expected
future cash flows from specific products discounted to their net present values at an appropriate risk-adjusted rate of return.
Customer relationships represent the fair value of future projected revenues that will be derived from the sale of products to HPD's existing customers. We
valued customer relationships using the incremental cash flow method. This method estimates value based on the incremental cash flow afforded by having
the customers relationships in place on the acquisition date versus having no relationships in place and needing to replicate or replace those relationships.
The incremental cash flows are then discounted to a present value to arrive at an estimate of fair value for this asset class.
Order backlog represents business under existing contractual obligations. Expected cash flow from order backlog was valued on a discounted direct cash
flow basis, net of returns on contributory assets such as working capital, property and equipment, trade name and assembled workforce.
The identified trade names intangibles relate to the estimated fair value of future cash flows related to the HPD brand. We valued trade names by applying
the relief-from-royalty method under the income approach. This method is based on the application of a royalty rate to forecasted revenue under the trade
name.
62
FORMFACTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Goodwill
The excess of purchase price over the fair value assigned to the assets acquired and liabilities assumed represents the amount of goodwill resulting from the
acquisition. We believe the factors that contributed to goodwill include synergies that are specific to our consolidated business, such as cost savings and
operational efficiencies, and the acquisition of a talented workforce that expands our expertise in business development and commercializing
semiconductor test products, none of which qualify for recognition as a separate intangible asset. We do not expect any portion of this goodwill to be
deductible for tax purposes. The goodwill attributable to the acquisition was recorded as a non-current asset and is not amortized, but is subject to an annual
review for impairment.
The goodwill arising from the acquisition was allocated to the HPD reporting unit within the Systems reportable segment.
We have not presented unaudited combined pro forma financial information as the HPD acquisition was not significant to our consolidated results of
operations and financial position.
Baldwin Park Acquisition
On July 30, 2020, we acquired the probe card assets of Advantest Corporation for total cash consideration of $35.0 million. This acquisition brought
important enabling technologies and capabilities for designing and manufacturing advanced probe cards, and adds a complementary 3D-NAND Flash
probe-card product that is qualified and in production at one of the world's leading NAND Flash manufacturers.
The acquisition was accounted for using the acquisition method of accounting, with FormFactor treated as the acquirer. The acquired assets and liabilities
of Baldwin Park were recorded at their respective fair values including an amount for goodwill representing the difference between the acquisition
consideration and the fair value of the identifiable net assets.
Our Consolidated Statements of Income include the financial results of Baldwin Park subsequent to the acquisition date of July 30, 2020. Revenue in fiscal
2020 related to Baldwin Park subsequent to the acquisition date that was included in our Consolidated Statements of Income was not material.
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 acquisition date. We subsequently made certain immaterial adjustments within the measurement period to the acquisition price allocation as a result of
finalization of our valuation of identifiable assets and liabilities. The purchase price allocated to the underlying assets acquired, including goodwill and
intangibles, and liabilities assumed based on the final amounts are as follows (in thousands):
Accounts receivable
Inventory
Property, plant and equipment
Operating lease, right-of-use-assets
Prepaid expenses and other assets
Tangible assets acquired
Accounts payable and accrued liabilities
Operating lease liabilities
Total net tangible assets acquired and liabilities assumed
Intangible assets
Goodwill
Net assets acquired
63
Amount
4,365
2,727
9,053
519
56
16,720
(743)
(519)
15,458
13,600
5,942
35,000
$
$
FORMFACTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The intangible assets as of the acquisition date included (in thousands):
Developed technologies
Customer relationships
In-process research and development
Total intangible assets
Amount
8,800
4,400
400
13,600
$
$
Weighted Average Useful Life (in
years)
10.0
3.0
N/A
7.7
The fair value of the intangible assets acquired in connection with the acquisition were determined using either the income, market or replacement cost
methodologies. The intangible assets are being amortized over periods which reflect the pattern in which economic benefits of the assets are expected to be
realized.
Identifiable Intangible Assets
Valuation of intangible assets involves multiple assumptions. The key assumptions are described below.
Developed technologies acquired consists of existing technology related to 3D NAND Flash probe cards and the value of cost savings expected to be
derived from Low Temperature Co-fired Ceramic (“LTCC”) technology. We valued the developed technology related to 3D NAND Flash using the multi-
period excess earnings method under the income approach. Using this approach, the estimated fair values were calculated using expected future cash flows
from specific products discounted to their net present values at an appropriate risk-adjusted rate of return. We valued the LTCC developed technology asset
using the incremental cash flow method. This method estimates value based on the incremental cash flow afforded by having the LTCC capability in place
on the acquisition date versus having no capability in place and needing to replicate or replace that capability. The incremental cash flows are then
discounted to a present value to arrive at an estimate of fair value for this asset class.
In-process research and development (“IPR&D”) acquired primarily consists of research and development projects that were in process at the time of
acquisition related to technologies used in DRAM probe cards. Once these projects are complete they will be placed in developed technologies and
amortized over their useful lives. We valued the IPR&D using the multi-period excess earnings method under the income approach. Using this approach,
the estimated fair values were calculated using expected future cash flows from specific products discounted to their net present values at an appropriate
risk-adjusted rate of return.
Customer relationships represent the fair value of future projected revenues that will be derived from the sale of products to Baldwin Park's existing
customers. We valued customer relationships using the incremental cash flow method. This method estimates value based on the incremental cash flow
afforded by having the customers relationships in place on the acquisition date versus having no relationships in place and needing to replicate or replace
those relationships. The incremental cash flows are then discounted to a present value to arrive at an estimate of fair value for this asset class.
Goodwill
The excess of purchase price over the fair value assigned to the assets acquired and liabilities assumed represents the amount of goodwill resulting from the
acquisition. We believe the factors that contributed to goodwill include synergies that are specific to our consolidated business, such as cost savings and
operational efficiencies, and the acquisition of a talented workforce that expands our expertise in business development, none of which qualify for
recognition as a separate intangible asset. We expect this goodwill to be deductible for tax purposes. The goodwill attributable to the acquisition was
recorded as a non-current asset and is not amortized, but is subject to an annual review for impairment.
The goodwill arising from the acquisition was allocated to the Probe Cards reporting unit within the Probe Cards reportable segment.
We have not presented unaudited combined pro forma financial information as the Baldwin Park acquisition was not significant to our consolidated results
of operations and financial position.
FRT GmbH Acquisition
On October 9, 2019, we acquired 100% of the shares of FRT, a German-based company, for total consideration of $26.9 million, net of cash acquired of
$1.7 million. The fair value of the purchase consideration was comprised of a $22.2 million cash payment and $6.5 million of contingent consideration.
The contingent consideration was a cash amount equal to 1.5x Earnings Before Interest and Tax (“EBIT”) as defined in the purchase agreement, from a
minimum of zero up to a maximum of €10.3 million, payable subject to the performance of the acquired business in calendar 2020. We estimated the fair
value of
64
FORMFACTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
contingent consideration using a probability weighted approach. Key assumptions in determining the fair value of contingent consideration include
estimating the probability of achieving certain EBIT levels and discounting at an appropriate discount rate. See Note 9, Fair Value, for additional
information. This acquisition strengthened our leadership in test and measurement by expanding our addressable market into 3D hybrid surface metrology
and extending the optical applications scope of our existing Systems segment.
The acquisition was accounted for using the acquisition method of accounting, with FormFactor treated as the acquirer. The acquired assets and liabilities
of FRT were recorded at their respective fair values including an amount for goodwill representing the difference between the acquisition consideration and
the fair value of the identifiable net assets.
Our Consolidated Statements of Income include the financial results of FRT subsequent to the acquisition date of October 9, 2019. Revenue in fiscal 2019
related to FRT subsequent to the acquisition date that was included in our Consolidated Statements of Income was not material.
Separate from the purchase agreement, we entered into a term loan agreement with a lender for an aggregate amount of $23.4 million to finance the
acquisition. See Note 5, Debt, for additional information.
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. We have finalized our allocation of the assets acquired, including goodwill and intangibles, and liabilities assumed for the purchase as
follows (in thousands):
Cash and cash equivalents
Accounts receivable
Inventory
Property, plant and equipment
Operating lease, right-of-use-assets
Prepaid expenses and other assets
Tangible assets acquired
Customer deposits
Accounts payable and accrued liabilities
Operating lease liabilities
Deferred tax liabilities
Total net tangible assets acquired and liabilities assumed
Intangible assets
Goodwill
Net assets acquired
Amount
1,687
3,079
2,643
696
335
838
9,278
(1,933)
(1,182)
(335)
(5,757)
71
17,429
11,123
28,623
$
$
The intangible assets as of the closing date of the acquisition included (in thousands):
Developed technologies
Customer relationships
Order backlog
Trade names
Total intangible assets
Amount
12,505
3,071
1,645
208
17,429
$
$
Weighted Average Useful Life (in
years)
8.0
6.0
0.5
2.0
6.9
The fair value of the intangible assets acquired in connection with the acquisition were determined using either the income, market or replacement cost
methodologies. The intangible assets are being amortized over periods which reflect the pattern in which economic benefits of the assets are expected to be
realized.
Identifiable Intangible Assets
Valuation of intangible assets involves multiple assumptions. The key assumptions are described below.
65
FORMFACTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Developed technologies acquired primarily consist of existing technology related to hybrid 3D surface metrology measurement equipment. We valued the
developed technologies using the multi-period excess earnings method under the income approach. Using this approach, the estimated fair values were
calculated using expected future cash flows from specific products discounted to their net present values at an appropriate risk-adjusted rate of return.
Customer relationships represent the fair value of future projected revenues that will be derived from the sale of products to FRT's existing customers. We
valued customer relationships using the incremental cash flow method. This method estimates value based on the incremental cash flow afforded by having
the customers relationships in place on the acquisition date versus having no relationships in place and needing to replicate or replace those relationships.
The incremental cash flows are then discounted to a present value to arrive at an estimate of fair value for this asset class.
Order backlog represents business under existing contractual obligations. Expected cash flow from order backlog was valued on a direct cash flow basis.
The identified trade names intangibles relate to the estimated fair value of future cash flows related to the FRT brand. We valued trade names by applying
the relief-from-royalty method under the income approach. This method is based on the application of a royalty rate to forecasted revenue under the trade
name.
Goodwill
The excess of purchase price over the fair value assigned to the assets acquired and liabilities assumed represents the amount of goodwill resulting from the
acquisition. We believe the factors that contributed to goodwill include synergies that are specific to our consolidated business, such as cost savings and
operational efficiencies, and the acquisition of a talented workforce that expands our expertise in business development and commercializing
semiconductor test products, none of which qualify for recognition as a separate intangible asset. We do not expect any portion of this goodwill to be
deductible for tax purposes. The goodwill attributable to the acquisition was recorded as a non-current asset and is not amortized, but is subject to an annual
review for impairment.
The goodwill arising from the acquisition was allocated to the FRT reporting unit within the Systems reportable segment.
We have not presented unaudited combined pro forma financial information as the FRT acquisition was not significant to our consolidated results of
operations and financial position.
Note 5—Debt
Our debt consisted of the following (in thousands):
Term loans
Less unamortized issuance costs
Term loans less issuance costs
December 25, 2021
$
24,435 $
(70)
24,365 $
December 26, 2020
34,569
(75)
34,494
$
CMI Term Loan
On June 24, 2016, we entered into a Credit Agreement (the “Credit Agreement”) with HSBC Bank USA, National Association (“HSBC”), as
administrative agent, co-lead arranger, sole bookrunner and syndication agent, other lenders that may from time-to-time be a party to the Credit
Agreement, and certain guarantors. Pursuant to the Credit Agreement, the lenders provided us with a senior secured term loan facility of $150 million (the
“CMI Term Loan”). The proceeds of the CMI Term Loan were used to finance a portion of the purchase price paid in connection with the Cascade
Microtech acquisition in fiscal 2016 and to pay related bank fees and expenses.
The CMI Term Loan bore interest at a rate equal to, at our option, (i) the applicable London Interbank Offered Rate (“LIBOR”) rate plus 2.00% per annum
or (ii) Base Rate (as defined in the Credit Agreement) plus 1.00% per annum. We elected to pay interest at 2.00% over the one-month LIBOR rate. Interest
payments were payable in quarterly installments over a five-year period.
The principal payments on the CMI Term Loan were scheduled to be paid in equal quarterly installments that began June 30, 2016, in an annual amount
equal to 5% for year one, 10% for year two, 20% for year three, 30% for year four and 35% for year
66
FORMFACTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
five. We accelerated payments of these scheduled amounts and made the final payment on the CMI Term Loan on June 30, 2020, approximately one year
before the original maturity. We are no longer subject to the terms of the Credit Agreement.
FRT Term Loan
On October 25, 2019, we entered into a euro denominated $23.4 million three-year credit facility loan agreement (the “FRT Term Loan”) with HSBC
Trinkaus & Burkhardt AG, Germany, to fund the acquisition of FRT GmbH, which we acquired on October 9, 2019. See Note 4, Acquisitions, for further
details of the acquisition.
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 $2.0 million plus interest. The interest rate at December 25, 2021 was 1.20%.
The obligations under the FRT Term Loan are fully and unconditionally guaranteed by FormFactor, Inc. The FRT Term Loan contains negative covenants
customary for financing of this type, including covenants that place limitations on the incurrence of additional indebtedness, the creation of liens, the
payment of dividends; dispositions; fundamental changes, including mergers and acquisitions; loans and investments; sale leasebacks; negative pledges;
transactions with affiliates; changes in fiscal year; sanctions and anti-bribery laws and regulations, and modifications to charter documents in a manner
materially adverse to the Lenders. The FRT Term Loan also contains affirmative covenants and representations and warranties customary for financing of
this type. As of December 25, 2021, the balance outstanding pursuant to the FRT term loan was $7.9 million.
Building Term Loan
On June 22, 2020, we entered into an $18.0 million 15-year credit facility loan agreement (the “Building Term Loan”) with MUFG Union Bank, National
Association (“Union Bank”). The proceeds of the Building Term Loan were used to purchase a building adjacent to our leased facilities in Livermore,
California.
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 December 25, 2021 was 1.85%.
On March 17, 2020, we entered into an interest rate swap agreement with Union Bank to hedge the interest payments on the Building Term Loan for the
notional amount of $18.0 million. 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 convert a floating rate interest at
one-month LIBOR plus 1.75% into a fixed rate interest at 2.75%. The interest rate swap included a 0% floor that was effective for one year from the date of
the swap. As of December 25, 2021, the notional amount of the loan that is subject to this interest rate swap is $16.5 million. See Note 9, Fair Value, for
additional information.
The obligations under the Building Term Loan are guaranteed by a deed of trust covering certain real property and improvements and certain personal
property used in connection therewith. The deed of trust creates a first priority lien or encumbrance on the property with only such exceptions as may be
approved by the Union Bank in writing.
The Credit Agreement contains covenants customary for financing of this type. As of December 25, 2021, the balance outstanding pursuant to the Building
Term Loan was $16.5 million.
Future principal and interest payments on our term loans as of December 25, 2021, based on the interest rate in effect at that date were as follows (in
thousands):
Term loans - principal payments
(1)
Term loans - interest payments
Payments Due In Fiscal Year
2022
2023
2024
2025
2026
2027 and
thereafter
$
$
8,935 $
361
9,296 $
1,050 $
282
1,332 $
1,080 $
263
1,343 $
1,111 $
240
1,351 $
1,142 $
220
1,362 $
11,117 $
930
12,047 $
Total
24,435
2,296
26,731
(1)
Represents our minimum interest payment commitments at 1.20% per annum for the FRT Term Loan and 1.85% per annum for the Building Term Loan.
67
FORMFACTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 6—Leases
Our operating lease, right-of-use assets relate to real estate space under non-cancelable operating lease agreements for commercial and industrial space, as
well as for our corporate headquarters located in Livermore, California. Our leases have remaining terms of 1 to 7 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 to 3 years. 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 5.4 years at December 25, 2021
and the weighted-average discount rate was 3.74%.
The components of lease expense were as follows (in thousands):
Operating lease expense
Short-term lease expense
Variable lease expense
December 25,
2021
Lease Expense
December 26,
2020
December 28,
2019
$
$
8,485 $
180
1,842
10,507 $
7,468 $
136
1,574
9,178 $
6,985
142
1,286
8,413
Future minimum payments under our non-cancelable operating leases were as follows as of December 25, 2021 (in thousands):
Fiscal Year
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 7—Restructuring Charges
Amount
8,594
7,232
6,814
6,799
6,008
8,970
44,417
(5,507)
38,910
(7,901)
31,009
$
$
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 includes 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, and
expect to incur, personnel related costs to sever, relocate, or retain select employees. Additionally, as part of these plans we are undertaking actions to
adjust capacity for certain product offerings. Contract termination costs include charges to satisfy contract obligations. The amounts accrued are based on
our best estimates, however it is reasonably possible that the final amount paid or incurred will differ from the amount estimated in the near term. 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.
This plan is expected to result in FormFactor recording restructuring and other charges in the aggregate amount of approximately $6.0 million to
$9.0 million, estimated to be comprised primarily of $1.0 million to $2.0 million of severance and employee-related costs, $2.0 million to 3.0 million in
contract and lease termination costs, $1.0 million to $1.5 million in inventory impairments, and $2.0 million to $2.5 million of cost related to impairment of
leasehold improvements, facility exits, and other costs. Approximately $3.0 million to $4.5 million and $3.0 million to $4.5 million is expected within the
Probe Cards segment and Systems segment, respectively.
68
FORMFACTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Restructuring charges by reportable segment included in our Consolidated Statements of Income were as follows (in thousands):
Cost of revenues
Research and development
Selling, general and administrative
Changes to the restructuring accrual during December 25, 2021 were as follows (in thousands):
Fiscal Year Ended
December 25, 2021
Systems
Probe Cards
$
$
2,720 $
—
—
2,720 $
485 $
869
50
1,404 $
Total
3,205
869
50
4,124
December 26, 2020
Restructuring charges
Adjustment to restructuring charges
Non-cash settlement
December 25, 2021
Note 8—Derivative Financial Instruments
Employee
Severance
and Benefits
Inventory
Impairments
Property and
Equipment
Impairments
Contract
Termination Costs
Total
$
$
— $
1,175
(147)
—
1,028 $
— $
1,376
—
(1,376)
— $
— $
270
—
(270)
— $
— $
2,800
(1,350)
—
1,450 $
—
5,621
(1,497)
(1,646)
2,478
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
Consolidated Balance Sheets with changes in fair value recorded within Other income, net in our Consolidated Statements 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 Consolidated Balance Sheets with changes in fair value recorded as a component of
Accumulated other comprehensive income (loss) and reclassified into earnings in the same period in which the hedged transaction affects earnings, and in
the same line item on the Consolidated Statements of Income as the impact of the hedge transaction. At December 25, 2021, we expect to reclassify $0.5
million of the amount accumulated in other comprehensive loss to earnings during the next 12 months, due to the recognition in earnings of the hedged
forecasted transactions.
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 December 25, 2021 will mature by the fourth quarter of fiscal 2022.
69
FORMFACTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table provides information about our foreign currency forward contracts outstanding as of December 25, 2021 (in thousands):
Currency
Contract Position
Contract Amount
(Local Currency)
Contract Amount (U.S.
Dollars)
Euro
Euro
Japanese Yen
Korean Won
Taiwan Dollar
Total USD notional amount of outstanding foreign exchange contracts
Buy
Sell
Sell
Buy
Sell
(9,774) $
5,906
1,902,670
(1,901,547)
47,548
$
(11,579)
6,680
16,629
(1,603)
1,718
11,845
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.
The location and amount of gains (losses) related to non-designated derivative instruments in the Consolidated Statements of Income were as follows (in
thousands):
Fiscal Year Ended
Derivatives Not Designated as Hedging Instruments
Foreign exchange forward contracts
Location of Gain (Loss) Recognized
on Derivatives
Other income, net
$
December 25,
2021
December 26, 2020 December 28, 2019
248
(1,437)
$
1,585 $
The location and amount of gains (losses) related to derivative instruments designated as cash flow hedges on our Consolidated Statements of Income was
as follows (in thousands):
Amount of Gain or
(Loss) Recognized in
Accumulated OCI on
Derivative
Location of Gain or (Loss) Reclassified from Accumulated
OCI into Income
Amount of Gain or
(Loss) Reclassified from
Accumulated OCI into
Income
Fiscal 2021
Fiscal 2020
Fiscal 2019
$
$
$
(1,096) Cost of revenues
Research and development
Selling, general and administrative
1,142 Cost of revenues
Research and development
Selling, general and administrative
93 Cost of revenues
Research and development
Selling, general and administrative
$
$
$
$
$
$
184
3
64
251
89
77
25
191
(526)
(75)
(172)
(773)
Interest Rate Swaps
Pursuant to our interest rate and risk management strategy, during fiscal 2016 we entered into an interest rate swap agreement with HSBC and other lenders
to hedge the interest payments on the CMI Term Loan for the notional amount of $95.6 million. As future levels of LIBOR over the life of the loan were
uncertain, we entered into these interest-rate swap agreements to hedge the exposure in interest rate risks associated with the movement in LIBOR rates. By
entering into the agreements, we converted a floating rate interest at one-month LIBOR plus 2.00% into a fixed rate interest at 2.94%. The interest rate
swap agreement ended as of March 28, 2020.
During fiscal 2020 we entered into an interest rate swap agreement with Union Bank to hedge the interest payments on the Building Term Loan for the
notional amount of $18.0 million. 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 convert a floating rate interest at
one-month LIBOR plus 1.75% into a fixed
70
FORMFACTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
rate interest at 2.75%. The interest rate swap also included a 0% floor that was effective for one year from the date of the swap. As of December 25, 2021,
the notional amount of the loan that is subject to this interest rate swap was $16.5 million. See Note 5, Debt, for additional information.
For accounting purposes, the interest-rate swap contracts qualify for and are designated as cash flow hedges. All hedging relationships are formally
documented, and the hedges are designed to offset changes to future cash flows on hedged transactions. We evaluate hedge effectiveness at hedge inception
and on an ongoing basis.
The fair value of our interest rate swap contracts are determined at the end of each reporting period based on valuation models that use interest rate yield
curves as inputs. The cash flows associated with the interest rate swaps are reported in Net cash provided by operating activities in our Consolidated
Statements of Cash Flows and the fair value of the interest rate swap contracts are recorded within Accrued Liabilities and Other assets.
The impact of the interest rate swaps on the Consolidated Statements of Income was as follows (in thousands):
Fiscal 2021
Fiscal 2020
Fiscal 2019
See also Note 9, Fair Value.
Note 9—Fair Value
Amount of Gain or (Loss)
Recognized in OCI on
Derivative (Effective
Portion)
Location of Gain or
(Loss) Reclassified from
Accumulated OCI into
Income (Effective
Portion)
Amount of Gain or (Loss)
Reclassified from
Accumulated OCI into
Income (Effective
Portion)
$
451
(119)
(86)
Other income, net
Other income, net
Other income, net
$
(154)
(64)
548
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 fiscal 2021,
2020 or 2019.
The carrying values of Cash, Accounts receivable, net, Restricted cash, Prepaid expenses and other current assets, Accounts payable, Accrued liabilities,
and Current portion of term loans, net of unamortized issuance costs approximate fair value due to their short maturities.
No changes were made to our valuation techniques during fiscal 2021.
Cash Equivalents
The fair value of our cash equivalents is determined based on quoted market prices for similar or identical securities.
Marketable Securities
We classify our marketable securities as available-for-sale and value them utilizing a market approach. Our investments are priced by pricing vendors who
provide observable inputs for their pricing without applying significant judgment. Broker pricing is used mainly when a quoted price is not available, the
investment is not priced by our pricing vendors or when a broker price is more reflective of fair value. Our broker-priced investments are categorized as
Level 2 investments because fair value is based on similar assets without applying significant judgments. In addition, all of our investments have a
sufficient level of trading volume to demonstrate that the fair value is appropriate.
71
FORMFACTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Contingent Consideration
Contingent consideration, arising from the acquisition of FRT (see Note 4, Acquisitions), was a cash amount equal to 1.5x EBIT as defined in the purchase
agreement, up to a maximum of €10.3 million, payable subject to the performance of the acquired business in calendar 2020. We estimated the fair value of
contingent consideration using a probability weighted approach. Key assumptions in determining the fair value of contingent consideration included
estimating EBIT levels that we believed as of the acquisition date were likely to be achieved during the performance period, discounted to present value at
an appropriate discount rate. In the second quarter of fiscal 2021, we paid $3.9 million in contingent consideration in satisfaction of our obligation under
the purchase agreement, resulting in a $0.1 million credit to Selling, general and administrative expense with the remaining change from December 26,
2020 resulting from foreign currency translation.
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):
December 25, 2021
Assets:
Level 1
Level 2
Level 3
Total
Cash equivalents:
Money market funds
U.S. treasuries
Commercial paper
U.S. agency securities
Marketable securities:
U.S. treasuries
Certificates of deposit
Corporate bonds
Commercial paper
Interest rate swap derivative contracts
Total assets
Liabilities:
Foreign exchange derivative contracts
Interest rate swap derivative contracts
Total liabilities
December 26, 2020
Assets:
Cash equivalents:
Money market funds
Marketable securities:
U.S. Treasuries
Certificates of deposit
Agency securities
Corporate bonds
Foreign exchange derivative contract
Interest rate swap derivative contracts
Total assets
Liabilities:
Interest rate swap derivative contracts
Contingent consideration
Total liabilities
9,526 $
2,500
—
—
12,026
38,985
—
—
—
38,985
—
51,011 $
— $
—
— $
— $
—
1,000
5,556
6,556
—
1,199
52,709
32,162
86,070
629
93,255 $
(489) $
(55)
(544) $
— $
—
—
—
—
—
—
—
—
—
—
— $
— $
—
— $
9,526
2,500
1,000
5,556
18,582
38,985
1,199
52,709
32,162
125,055
629
144,266
(489)
(55)
(544)
Level 1
Level 2
Level 3
Total
43,019 $
— $
— $
43,019
40,726
—
—
—
40,726
—
—
83,745 $
— $
—
— $
—
2,179
575
24,330
27,084
1,057
57
28,198 $
(87) $
—
(87) $
—
—
—
—
—
—
—
— $
— $
(4,012)
(4,012) $
40,726
2,179
575
24,330
67,810
1,057
57
111,943
(87)
(4,012)
(4,099)
$
$
$
$
$
$
$
$
72
FORMFACTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis
We measure and report our non-financial assets such as Property, plant and equipment, Goodwill and Intangible assets at fair value on a non-recurring basis
if we determine these assets to be impaired or in the period when we make a business acquisition. Other than as discussed in Note 4, Acquisitions and
Note 7, Restructuring Charges, there were no assets or liabilities measured at fair value on a non-recurring basis during fiscal 2021, 2020 or 2019.
Note 10—Goodwill and Intangible Assets
Goodwill
Goodwill by reportable segment was as follows (in thousands):
Goodwill, as of December 28, 2019
Addition - FRT acquisition
Addition - Baldwin Park acquisition
Addition - HPD acquisition
Foreign currency translation
Goodwill, as of December 26, 2020
Addition - Baldwin Park acquisition
Addition - HPD acquisition
Foreign currency translation
Goodwill, as of December 25, 2021
Intangible Assets
Intangible assets were as follows (in thousands):
Probe Cards
Systems
Total
$
$
172,482 $
—
5,590
—
—
178,072
352
—
—
178,424 $
26,714 $
975
—
4,654
2,346
34,689
—
1,254
(2,068)
33,875 $
199,196
975
5,590
4,654
2,346
212,761
352
1,254
(2,068)
212,299
Net
38,511
799
19,110
327
400
59,147
Other Intangible Assets
Gross
December 25, 2021
Accumulated
Amortization
Net
Gross
December 26, 2020
Accumulated
Amortization
Existing developed technologies
Trade name
Customer relationships
Backlog
In-process research and development
$
$
172,259 $
8,054
51,270
1,896
400
233,879 $
148,784 $
7,603
39,254
1,896
—
197,537 $
23,475 $
451
12,016
—
400
36,342 $
176,265 $
8,162
52,488
2,227
400
239,542 $
137,754 $
7,363
33,378
1,900
—
180,395 $
Amortization expense was included in our Consolidated Statements of Income as follows (in thousands):
Cost of revenues
Selling, general and administrative
December 25,
2021
Fiscal Year Ended
December 26,
2020
December 28,
2019
$
$
12,269 $
6,478
18,747 $
21,609 $
6,382
27,991 $
20,036
7,636
27,672
73
FORMFACTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The estimated future amortization of definite-lived intangible assets, excluding in-process research and development, is as follows (in thousands):
Fiscal Year
2022
2023
2024
2025
2026
Thereafter
$
Total
$
We did not record any impairment of intangible assets in fiscal 2021, 2020 and 2019.
Note 11—Commitments and Contingencies
Leases
See Note 6, Leases.
Amount
9,488
7,133
4,533
4,277
3,241
7,270
35,942
Environmental Matters
We are subject to U.S. federal, state, local, and foreign governmental laws and regulations relating to the protection of the environment, including those
governing the discharge of pollutants into the air and water, the management and disposal of hazardous substances and wastes, the clean-up of
contaminated sites and the maintenance of a safe workplace. We believe that we comply in all material respects with the environmental laws and
regulations that apply to us. We did not receive any notices of violations of environmental laws and regulations in fiscal 2021, 2020 or 2019. In the future,
we may receive notices of violations of environmental regulations, or otherwise learn of such violations. Environmental contamination or violations may
negatively impact our business.
Indemnification Arrangements
We have entered, and may from time to time in the ordinary course of our business enter, into contractual arrangements with third parties that include
indemnification obligations. Under these contractual arrangements, we have agreed to defend, indemnify and/or hold the third party harmless from and
against certain liabilities. These arrangements include indemnities in favor of customers in the event that our products or services infringe a third party's
intellectual property or cause property or other indemnities in favor of our lessors in connection with facility leasehold liabilities that we may cause. In
addition, we have entered into indemnification agreements with our directors and certain of our officers, and our bylaws contain indemnification
obligations in favor of our directors, officers and agents. These indemnity arrangements may limit the type of the claim, the total amount that we can be
required to pay in connection with the indemnification obligation and the time within which an indemnification claim can be made. The duration of the
indemnification obligation may vary, and for most arrangements, survives the agreement term and is indefinite. We believe that substantially all of our
indemnity arrangements provide either for limitations on the maximum potential future payments we could be obligated to make, or for limitations on the
types of claims and damages we could be obligated to indemnify, or both. However, it is not possible to determine or reasonably estimate the maximum
potential amount of future payments under these indemnification obligations due to the varying terms of such obligations, a lack of history of prior
indemnification claims, the unique facts and circumstances involved in each particular contractual arrangement and in each potential future claim for
indemnification, and the contingency of any potential liabilities upon the occurrence of events that are not reasonably determinable. We have not had any
material requests for indemnification under these arrangements. We have not recorded any liabilities for these indemnification arrangements on our
Consolidated Balance Sheets as of December 25, 2021 or December 26, 2020.
Legal Matters
From time to time, we may be subject to legal proceedings and claims in the ordinary course of business. As of December 25, 2021, and as of the filing of
these financial statements, we were not involved in any material legal proceedings. In the future, we may become a party to additional legal proceedings
that may require us to spend significant resources. Litigation can be expensive and disruptive to normal business operations. The results of legal
proceedings are difficult to predict, and the costs incurred in litigation can be substantial, regardless of outcome.
74
FORMFACTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 12—Stockholders' Equity
Preferred Stock
We have authorized 10,000,000 shares of undesignated preferred stock, $0.001 par value, none of which is issued and outstanding. Our Board of Directors
shall determine the rights, preferences, privileges and restrictions of the preferred stock, including dividends rights, conversion rights, voting rights, terms
of redemption, liquidation preferences, sinking fund terms and the number of shares constituting any series or the designation of any series.
Common Stock
Each share of common stock has the right to one vote. The holders of common stock are also entitled to receive dividends whenever funds are legally
available and when declared by the Board of Directors, subject to the prior rights of holders, if any, of all classes of stock outstanding having priority rights
as to dividends. No dividends have been declared or paid as of December 25, 2021.
Common Stock Repurchase Program
On October 26, 2020, our Board of Directors authorized a program to repurchase up to $50 million of outstanding common stock to offset potential dilution
from issuances of common stock under our stock-based incentive plans. The share repurchase program will expire October 28, 2022. This repurchase
program replaced the previous repurchase program that expired in February 2020 to purchase up to $25.0 million of outstanding common stock. During
fiscal 2021, we repurchased and retired 622,400 shares of common stock for $24.0 million and, as of December 25, 2021 $26.0 million remained available
for future repurchases. During fiscal 2020 and 2019, we did not repurchase any shares.
Equity Incentive Plan
We currently grant equity-based awards under our Equity Incentive Plan, as amended (the “2012 Plan”) which was approved by our stockholders. As
amended, the 2012 Plan has authorized for issuance a total of 23.4 million shares, 4.5 million of which were available for grant as of December 25, 2021.
RSUs granted under the 2012 Plan generally vest over three years in annual tranches, though we have granted, and will continue to grant, such awards that
vest over a shorter term for employee retention purposes.
The 2012 Plan provides that incentive stock options may be granted to our employees and nonqualified stock options, and all awards other than incentive
stock options, may be granted to employees, directors and consultants. The exercise price of incentive stock options must be at least equal to the fair market
value of our common stock on the date of grant. All restricted stock units and options granted under the 2012 Plan generally vest over three years and
options expire after seven years, unless otherwise determined by the Compensation Committee of the Board of Directors.
Stock Options
Stock option activity was as follows:
Outstanding at December 26, 2020
Options exercised
Outstanding at December 25, 2021
Vested and expected to vest at December 25, 2021
Exercisable at December 25, 2021
Outstanding Options
Number of
Shares
Weighted
Average
Exercise Price
Weighted
Average
Remaining
Contractual
Life in Years
Aggregate
Intrinsic
Value
106,000 $
(100,000)
6,000 $
6,000 $
6,000 $
8.35
8.44
6.93
6.93
6.93
0.6 $
0.6 $
0.6 $
225,480
225,480
225,480
75
FORMFACTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Restricted Stock Units
RSUs, including Performance Restricted Stock Units (“PRSUs”) are converted into shares of our common stock upon vesting on a one-for-one basis. The
vesting of RSUs is subject to the employee's continuing service. RSU activity was as follows:
Restricted stock units at December 26, 2020
Granted
Vested
Canceled
Restricted stock units at December 25, 2021
Number of
Shares
Weighted
Average Grant
Date Fair Value
2,840,922 $
1,036,537
(1,517,402)
(193,123)
2,166,934
19.80
36.12
17.26
28.28
28.63
The PRSUs granted in fiscal 2021, 2020 and 2019 listed below vest based on us achieving certain market performance criteria. The performance criteria are
based on a metric called Total Shareholder Return (“TSR”) for the performance period of three years, relative to the TSR of the companies identified as
being part of the S&P Semiconductor Select Industry Index (FormFactor peer companies) as of a specific date.
All 318,100 PRSUs granted in fiscal 2018 vested in fiscal 2021. These shares achieved TSR performance that resulted in an additional 124,600 shares
issued during fiscal 2021 related to the 2018 PRSU grant.
PRSU grant activity was as follows:
Grant Date
Performance period
Number of shares
TSR as-of date
Stock-based compensation
December 25, 2021
August 2, 2021
July 1, 2021 - June 30, 2024
197,128
August 2, 2021
$8.6 million
Fiscal Year Ended
December 26, 2020
August 27, 2020
July 1, 2020 - June 30, 2023
258,000
August 27, 2020
$6.9 million
December 28, 2019
June 4, 2019
July 1, 2019 - June 30, 2022
273,000
June 4, 2019
$4.4 million
Employee Stock Purchase Plan
Our 2012 Employee Stock Purchase Plan (the “ESPP”), as amended, allows for the issuance of a total of 7,000,000 shares. The offering periods under the
ESPP are 12 months commencing on February 1 of each calendar year and ending on January 31 of the subsequent calendar year, and a six-month fixed
offering period commencing on August 1 of each calendar year and ending on January 31 of the subsequent calendar year. The 12-month offering period
consists of two six-month purchase periods and the six-month offering period consists of one six-month purchase period. The price of the common stock
purchased is 85% of the lesser of the fair market value of the common stock on the first day of the applicable offering period or the last day of each
purchase period. We have treated the 2012 ESPP as a compensatory plan.
During fiscal 2021, employees purchased 378,584 shares under this program at a weighted average exercise price of $25.91 per share, which represented a
weighted average discount of $13.53 per share from the fair value of the stock purchased. As of December 25, 2021, 1,793,072 shares remained available
for issuance.
76
FORMFACTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 13—Stock-Based Compensation
Stock-Based Compensation Expense
Certain information regarding our stock-based compensation was as follows (in thousands, except per share amounts):
Weighted average grant date per share fair value of RSUs granted
Total intrinsic value of stock options exercised
Fair value of RSUs vested
Fiscal Year Ended
December 26, 2020
December 25, 2021
$
36.12 $
3,179
54,948
25.96 $
4,688
42,597
December 28, 2019
15.12
1,814
23,450
Pre-tax stock-based compensation expense by financial statement line and related tax benefit in the Consolidated Statements of Income are as follows (in
thousands):
Stock-based compensation expense included in:
Cost of revenues
Research and development
Selling, general and administrative
Total stock-based compensation
Stock-based compensation tax benefit
December 25, 2021
Fiscal Year Ended
December 26, 2020
December 28, 2019
$
$
$
5,200 $
7,583
16,601
29,384 $
6,118 $
3,951 $
5,824
14,055
23,830 $
4,962 $
4,055
6,367
12,754
23,176
911
Unrecognized Stock-Based Compensation Expense
Unrecognized stock-based compensation expense at December 25, 2021 consisted of the following (in thousands):
Restricted stock units
Performance restricted stock units
Employee stock purchase plan
Total unrecognized stock-based compensation expense
77
Unrecognized
Expense
$
$
36,055
10,126
452
46,633
Weighted
Average
Recognition
Period (Years)
2.2
2.1
0.1
2.1
FORMFACTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Valuation Assumptions
The following assumptions were used in estimating the fair value of PRSUs:
PRSUs:
Dividend yield
Expected volatility
Risk-free interest rate
Expected life (in years)
December 25, 2021
Fiscal Year Ended
December 26, 2020
December 28, 2019
— %
52.5 %
0.3 %
2.9
— %
52.0 %
0.2 %
2.8
— %
47.3 %
1.8 %
3.1
The following assumptions were used in estimating the fair value of shares under the Employee Stock Purchase Plan:
Employee Stock Purchase Plan:
Dividend yield
Expected volatility
Risk-free interest rate
Expected life (in years)
Note 14—Income Taxes
Components of Income Before Income Taxes
The components of income before income taxes were as follows (in thousands):
United States
Foreign
Provision for Income Taxes
The components of the provision for income taxes are as follows (in thousands):
$
December 25, 2021
Fiscal Year Ended
December 26, 2020
December 28, 2019
— %
33.6% - 74.4%
0.1% - 1.5%
0.5 - 1.0
— %
30.4% - 74.4%
0.1% - 1.5%
0.5 - 1.0
— %
36.6% - 59.5%
2.0% - 2.5%
0.5 - 1.0
Fiscal Year Ended
December 26, 2020
December 25, 2021
$
74,298 $
24,202
98,500 $
72,950 $
12,225
85,175 $
December 28, 2019
41,115
9,948
51,063
Current provision:
Federal
State
Foreign
Deferred provision (benefit):
Federal
State
Foreign
Total provision for income taxes
December 25, 2021
Fiscal Year Ended
December 26, 2020
December 28, 2019
$
$
2,334 $
712
7,661
10,707
4,651
522
(1,304)
3,869
14,576 $
1,799 $
1,194
4,278
7,271
1,472
(267)
(1,824)
(619)
6,652 $
179
2,302
4,202
6,683
8,128
(1,898)
(1,196)
5,034
11,717
78
FORMFACTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Tax Rate Reconciliation
The following is a reconciliation of the difference between income taxes computed by applying the federal statutory rate of 21% and the provision from
income taxes (in thousands):
U.S. statutory federal tax rate
State taxes and credits, net of federal benefit
Stock-based compensation
Research and development credits
Foreign taxes at rates different than the U.S.
Other permanent differences
Global intangible low-taxed income
Foreign derived intangible income
Change in valuation allowance
Other
Total
December 25, 2021
$
Fiscal Year Ended
December 26, 2020
20,685 $
811
(6,118)
(7,153)
2,286
2,043
—
(2,486)
2,231
2,277
14,576 $
$
17,887 $
663
(4,962)
(6,576)
415
400
—
(3,668)
1,862
631
6,652 $
December 28, 2019
10,723
441
(911)
(6,436)
1,454
(148)
1,369
—
2,567
2,658
11,717
Deferred Tax Assets and Liabilities
Deferred tax assets and liabilities are recognized for the future tax consequences of differences between the carrying amounts of assets and liabilities and
their respective tax basis using enacted tax rates in effect for the year in which the differences are expected to be reversed.
Significant deferred tax assets and liabilities consisted of the following (in thousands):
As of
Tax credits
Inventory reserve
Other reserves and accruals
Non-statutory stock options
Lease liability
Depreciation and amortization
Net operating loss carryforwards
Gross deferred tax assets
Valuation allowance
Total deferred tax assets
Right of use asset
Acquired intangibles and fixed assets
Unrealized investment gains
Tax on undistributed earnings
Total deferred tax liabilities
Net deferred tax assets
December 25, 2021
$
41,650 $
13,691
8,523
2,837
6,717
17,912
18,395
109,725
(40,698)
69,027
(5,910)
(4,522)
(105)
(118)
(10,655)
58,372 $
December 26, 2020
42,927
13,401
8,610
2,794
6,934
20,961
18,421
114,048
(38,466)
75,582
(6,074)
(8,395)
(106)
(110)
(14,685)
60,897
$
We are required to evaluate the realizability of our deferred tax assets in both our U.S. and non-U.S. jurisdictions on an ongoing basis to determine whether
there is a need for a valuation allowance with respect to such deferred tax assets. As of December 25, 2021, we maintained a valuation allowance of
$40.7 million, primarily related to California deferred tax assets and foreign tax credit carryovers, due to uncertainty about the future realization of these
assets. We believe that future reversals of taxable temporary differences, and our forecast of continued earnings in both our U.S. and non-U.S. jurisdictions,
support our decision to not record a valuation allowance on other deferred tax assets.
79
FORMFACTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Tax Credits and Carryforwards
Tax credits and carryforwards available to us at December 25, 2021 consisted of the following (in thousands):
Federal research and development tax credit
Foreign tax credit carryforwards
California research credits
State net operating loss carryforwards
Singapore net operating loss carryforwards
$
Amount
34,838
1,029
46,993
250,472
6,331
Latest Expiration Date
2024-2041
2022-2027
Indefinite
2022-Indefinite
Indefinite
Undistributed Earnings
As of December 25, 2021, unremitted earnings of foreign subsidiaries was estimated at $45.0 million. We intend to permanently invest $10.0 million of
undistributed earnings indefinitely outside of the U.S. To the extent we repatriate the remaining $35.0 million of undistributed foreign earnings to the U.S.,
we established a deferred tax liability of $0.1 million for foreign withholding taxes. Our estimates are provisional and subject to change because of the
complexity and variety of assumptions necessary to compute the tax.
Unrecognized Tax Benefits
We recognize the benefits of tax return positions if we determine that the positions are “more-likely-than-not” to be sustained by the taxing authority.
Interest and penalties accrued on unrecognized tax benefits are recorded as tax expense in the period incurred.
The following table reflects changes in the unrecognized tax benefits (in thousands):
Unrecognized tax benefit, beginning balance
Additions based on tax positions related to the current year
Additions based on tax positions from prior years
Reductions for tax positions of prior years
Reductions due to lapse of the applicable statute of limitations
Unrecognized tax benefit, ending balance
Interest and penalties recognized as a component of provision for income taxes
Interest and penalties accrued at period end
December 25, 2021
$
Fiscal Year Ended
December 26, 2020
32,497 $
3,201
124
—
(77)
35,745 $
28,800 $
3,072
702
—
(77)
32,497 $
December 28, 2019
25,224
3,679
—
(5)
(98)
28,800
40 $
188
50 $
204
59
212
$
$
Of the unrecognized tax benefits at December 25, 2021, $17.5 million would impact the effective tax rate if recognized.
The amount of income taxes we pay is subject to ongoing audits by federal, state and foreign tax authorities which might result in proposed assessments.
Our estimate for the potential outcome for any uncertain tax issue is judgmental in nature. However, we believe we have adequately provided for any
reasonably foreseeable outcome related to those matters. Our future results may include favorable or unfavorable adjustments to our estimated tax liabilities
in the period the assessments are made or resolved or when statutes of limitation on potential assessments expire. As of December 25, 2021, changes to our
uncertain tax positions in the next 12 months that are reasonably possible are not expected to have a significant impact on our financial position or results
of operations.
At December 25, 2021, our tax years 2018 through 2021, 2017 through 2021 and 2016 through 2021, remain open for examination in the federal, state and
foreign jurisdictions, respectively. However, to the extent allowed by law, the taxing authorities may have the right to examine prior periods where net
operating losses and credits were generated and carried forward, and make adjustments up to the net operating loss and credit carryforward amounts.
80
FORMFACTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 15—Employee Benefit Plans
We have an employee savings plan that qualifies as a deferred salary arrangement under Section 401(k) of the Internal Revenue Code. The plan is designed
to provide employees with an accumulation of funds for retirement on a tax-deferred basis and provide for annual discretionary employer contributions.
The total charge to net income under the 401(k) plan for fiscal 2021, 2020 and 2019 aggregated $2.7 million, $2.2 million and $2.1 million, respectively.
Note 16—Segments and Geographic Information
We operate in two reportable segments consisting of the Probe Cards Segment and the Systems Segment.
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.
The following table summarizes the operating results by reportable segment (dollars in thousands):
Fiscal 2021
Probe Cards
Systems
Revenues
Gross profit
Gross margin
Revenues
Gross profit
Gross margin
Revenues
Gross profit
Gross margin
$
$
$
$
633,281
279,873
44.2 %
Probe Cards
581,739
263,215
45.2 %
136,393
65,834
48.3 %
$
Corporate and Other
—
(22,940)
— %
Fiscal 2020
Systems
111,877
51,835
46.3 %
$
Corporate and Other
—
(27,130)
— %
Fiscal 2019
$
$
$
Total
769,674
322,767
41.9 %
Total
693,616
287,920
41.5 %
Total
589,464
237,496
Probe Cards
Systems
$
$
491,363
211,382
43.0 %
98,101
50,927
51.9 %
$
Corporate and Other
—
(24,813)
— %
40.3 %
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, share-based compensation expense, acquisition-related
costs, including charges related to inventory and fixed assets stepped up to fair value, and other costs, which are not used in evaluating the results of, or in
allocating resources to, our reportable segments. Acquisition-related costs include transaction costs and any costs directly related to the acquisition and
integration of acquired businesses.
81
FORMFACTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table summarizes revenue, by geographic region, as a percentage of total revenues based upon ship-to location:
Taiwan
China
South Korea
United States
Asia-Pacific
Europe
Japan
Rest of World
(1)
Total Revenues
December 25, 2021
Fiscal Year Ended
December 26, 2020
December 28, 2019
24.2 %
21.2
16.0
15.9
11.5
5.7
4.7
0.8
100.0 %
21.7 %
25.2
12.5
18.4
4.8
9.5
6.3
1.6
100.0 %
14.7 %
18.0
19.8
26.3
3.7
7.0
8.9
1.6
100.0 %
(1)
Asia-Pacific includes all countries in the region except Taiwan, South Korea, China, and Japan, which are disclosed separately.
The following table summarizes revenue by market (in thousands):
Foundry & Logic
DRAM
Flash
Systems
Total revenues
Fiscal Year Ended
December 26, 2020
December 25, 2021
$
435,812 $
156,049
41,420
136,393
769,674 $
$
446,183 $
109,734
25,822
111,877
693,616 $
December 28, 2019
318,552
147,257
25,554
98,101
589,464
The following table summarizes revenue by timing of revenue recognition (in thousands):
Probe Cards
December 25,
2021
Systems
Total
Probe Cards
Fiscal Year Ended
December 26,
2020
Systems
Total
Probe Cards
December 28,
2019
Systems
Total
Products transferred at a
point in time
Services transferred over
time
Total
$
630,038 $
124,788 $
754,826 $
579,569 $
104,858 $
684,427 $
488,925 $
93,837 $
582,762
3,243
633,281 $
11,605
136,393 $
14,848
769,674 $
2,170
581,739 $
7,019
111,877 $
9,189
693,616 $
2,438
491,363 $
$
4,264
98,101 $
6,702
589,464
Long-lived assets, comprised of Operating lease, Right-of-use assets, Property, plant and equipment, net, Goodwill and Intangibles, net, reported based on
the location of the asset was as follows (in thousands):
United States
Europe
Asia-Pacific
Total
Note 17—New Accounting Pronouncements
December 25, 2021
December 26, 2020
December 28, 2019
$
$
372,338 $
47,700
10,368
430,406 $
347,654 $
51,791
7,322
406,767 $
287,600
52,309
7,064
346,973
ASU 2019-12
In December 2019, the Financial Accounting Standard Board (“FASB”) issued Accounting Standards Update (“ASU”) 2019-12, Income Taxes (Topic 740),
which simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve
consistent application of and simplify GAAP for other areas of
82
FORMFACTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Topic 740 by clarifying and amending existing guidance. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning
after December 15, 2020. We adopted ASU 2019-12 on a prospective basis on December 27, 2020, the first day of fiscal 2021. The adoption did not have a
material effect on our consolidated financial position, results of operations or cash flows.
ASU 2020-04
In March 2020, the FASB issued ASU 2020-04, Referenced Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial
Reporting. The ASU provides temporary optional expedients and exceptions for applying generally accepted accounting principles to contract
modifications and hedging relationships, subject to meeting certain criteria, that reference the LIBOR or another reference rate expected to be discontinued.
In January 2021, the FASB issued ASU 2021-01, “Reference Rate Reform (Topic 848),” which permits entities to apply optional expedients in Topic 848 to
derivative instruments modified because of discounting transition resulting from reference rate reform. ASU 2020-04 became effective upon issuance and
may be applied prospectively to contract modifications made on or before December 31, 2022. ASU 2021-01 became effective upon issuance and may be
applied on a full retrospective basis as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020 or
prospectively for contract modifications made on or before December 31, 2022. The Company has not yet applied the relief afforded by these standard
amendments and is currently assessing contracts that will require modification due to reference rate reform to which these standard amendments may be
applied.
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. This approach differs from the current requirement to measure contract assets and contract liabilities acquired in a business
combination at fair value. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022, with
early adoption permitted. The adoption impact of the new standard will depend on the magnitude of future acquisitions. The standard will not impact
acquired contract assets or liabilities from business combinations occurring prior to the adoption date.
83
CEO CHANGE OF CONTROL AND SEVERANCE AGREEMENT
Exhibit 10.37
This CEO Change of Control and Severance Agreement (the “Agreement”) is made and entered into effective as of June 19, 2019 (the
“Effective Date”), by and between Michael Slessor (the “Employee”) and FormFactor, Inc., a Delaware corporation (the “Company”).
RECITALS
WHEREAS, the Company considers it essential to the best interests of its shareholders to foster the continuous employment of key management
personnel;
WHEREAS, the Board of Directors of the Company (the “Board”) recognizes that, as is the case with many publicly-held corporations,
the possibility of a Change in Control (as defined below) exists and that such possibility, and the uncertainty and questions which it may raise
among management, could result in the departure or distraction of management personnel to the detriment of the Company and its shareholders;
and
WHEREAS, the Board has determined that appropriate steps should be taken to reinforce and encourage the continued attention and
dedication of members of the Company's management, including the Employee, to their assigned duties without distraction in light of the
possibility of a Change in Control.
NOW THEREFORE, in consideration of the premises and the mutual covenants herein contained, the Company and the Employee hereby
agree as follows.
l. Definitions. The following terms referred to in this Agreement shall have the following meanings.
ARTICLES
“Cause” shall mean (i) any act of personal dishonesty taken by the Employee in connection with his or her responsibilities as an employee
which is intended to result in substantial personal enrichment of the Employee and is reasonably likely to result in material harm to the Company,
(ii) the Employee's conviction of a felony, (iii) a willful act by the Employee which constitutes misconduct and is materially injurious to the
Company, or (iv) continued willful violations by the Employee of the Employee's obligations to the Company after the Employee has received a
written demand for performance from the Company which describes the basis for the Company's belief that the Employee has not substantially
performed his or her duties.
“Change of Control” shall mean the first to occur of any of the following events after the date hereof:
(i)
(ii)
the consummation of a merger or consolidation of the Company with any other corporation, other than a merger or consolidation
which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either
by remaining outstanding or by being converted into or exchanged for voting securities of the surviving entity) more than sixty
percent (60%) of the total voting power represented by the voting securities of the Company or such surviving entity outstanding
immediately after such merger or consolidation; or
(A) any approval by the shareholders of the Company of a plan of complete liquidation of the Company, other than as a result of
insolvency or (B) the consummation of the sale or disposition (or the last in a series of sales or dispositions) by the Company of all
or substantially all of the Company's assets, other than a sale or disposition to a wholly-owned direct or indirect subsidiary of the
Company and other than a sale or disposition which would result in the voting securities of the Company outstanding immediately
prior thereto
continuing to represent (by being converted into or exchanged for voting securities of the entity to which such sale or disposition
was made) more than sixty percent (60%) of the total voting power represented by the voting securities of the entity to which such
sale or disposition was made after such sale or disposition; or
any “person” (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended) becoming the
“beneficial owner” (as defined in Rule 13d-3 under said Act), directly or indirectly, of securities of the Company representing 40%
or more of the total voting power represented by the Company's then outstanding voting securities; or
during any period of two consecutive years after the Effective Date, Incumbent Directors cease for any reason to constitute a
majority of the Board.
(iii)
(iv)
“Good Reason” shall mean the occurrence of any of the following: (i) without the Employee's express written consent, a material reduction
of the Employee's duties, position or responsibilities relative to the Employee's duties, position or responsibilities in effect immediately prior such
reduction; (ii) a reduction by more than 10% of the Employee's base salary or target bonus as in effect immediately prior to such reduction;
(iii) without the Employee's express written consent, the relocation of the Employee's primary work location by more than 50 miles; or (iv) the
failure of the Company to obtain the assumption of this Agreement by a successor (by express agreement or operation of law); provided, however, that
the Employee will have Good Reason to terminate employment only if (i) the Employee provides notice to the Company of the existence of the event
or circumstances constituting Good Reason specified in any of the preceding clauses within 90 days of the initial existence of such event or
circumstances, and (ii) the Company does not remedy such event or circumstances within 15 days following receipt of such notice.
“Incumbent Directors” shall mean directors who either (A) are directors of the Company as of the Effective Date, or (B) are elected, or
nominated for election, to the Board with the affirmative votes of at least a majority of those directors then still in office who either were directors on
the Effective Date or whose election or nomination for election was so approved.
“Involuntary Termination” shall mean a termination of the Employee by the Company without Cause or a resignation by the Employee
within 120 days of any event constituting Good Reason.
“Separation from Service” shall have the meaning given in Section 409A of the Internal Revenue Code (as defined herein).
2. Term of Agreement. This Agreement shall be in effect for the period commencing on the Effective Date and ending on the third anniversary
of the Effective Date (the “Term”); provided, however, that the Term shall automatically be extended for one additional year unless, not later
than 90 days prior to the scheduled expiration of the then-current Term, the Company or Employee shall have given notice not to extend the
Term; and provided further that if a Change of Control shall have occurred during the Term, this Agreement shall remain in effect until 12
months following such Change of Control to give effect to its provisions.
3. At-Will Employment. The Company and the Employee acknowledge that the Employee's employment is and shall continue to be at-will, as
defined under applicable law. If the Employee's employment terminates for any reason, the Employee shall not be entitled to any payments,
benefits, damages, awards or compensation other than as provided by this Agreement, or as may otherwise be established under the
Company's then existing employee benefit plans or policies at the time of termination.
4. Change of Control and Severance Benefits; Non-solicitation.
(a) Involuntary Termination Following Change of Control. If the Employee's employment with the Company terminates as a result of an
Involuntary Termination at any time within twelve (12) months after a Change of Control, then the Employee shall be entitled to
receive from the Company the following benefits (the “CIC Severance Benefits”), contingent upon the Employee's delivery of a
signed release reasonably satisfactory to the Company (the
“Release”) within 45 days from the Employee's Separation from Service (the “Release Deadline”) and non-revocation of such
Release within the time period specified therein.
(i)
(ii)
(iii)
(iv)
Cash Severance Payments. Employee shall receive an aggregate amount equal to one times the sum of (A) the
Employee's annual base salary in effect on the date of termination plus (B) the greater of (x) the Employee's annual
target bonus amount for the year of termination assuming a 100% payout on all objectives under the Company's bonus
plan in effect on the date of termination or (y) such annual target bonus amount times the average rate of annual bonus
paid to each executive officer (compared to such officer's target bonus) covered under a change of control severance
agreement substantially similar to this Agreement averaged over the two most recently completed fiscal years
preceding the date of termination. The Company shall pay the foregoing amount to the Employee in a lump sum within
60 days following the Employee's Separation from Service.
Health Benefits Continuation. The Company shall pay to the Employee the product of: (A) the Company's monthly
COBRA premium in effect on the date of Separation from Service under the Company's group health plan for the type
of coverage in effect under such plan (e.g., family coverage) for the Employee on the date of Separation from Service,
and (B) 12, which shall be paid in a lump sum within 60 days following the Employee's Separation from Service.
Equity Acceleration. The vesting and exercisability of each option, restricted stock award, restricted stock unit or other
stock based award, including any cash-based award that was substituted or assumed for any stock-based award at the
time of the Change in Control (each, an “Equity Award”) shall be automatically accelerated in full and the forfeiture
provisions and/or Company right of repurchase of each Equity Award shall automatically lapse in full.
Forfeiture upon Breach of Covenants. Notwithstanding any of the foregoing, if the Employee materially breaches his
or her obligations under paragraph (e) or (f) of this Article 4, from and after the date of such breach, the Employee
will no longer be entitled to, and the Company will no longer be obligated to pay, any remaining unpaid portion of the
CIC Severance Benefits.
(b) Other Termination. If Employee's employment with the Company terminates as a result of an Involuntary Termination at any time
during the Term other than within twelve (12) months following a Change of Control, then Employee shall be entitled to receive
from the Company the following benefits (the “Severance Benefits”), contingent upon the Employee's delivery of a signed release
reasonably satisfactory to the Company (the “Release”) within 45 days from the Employee's Separation from Service (the “Release
Deadline”) and non-revocation of such Release within the time period specified therein.
(v)
Cash Severance Payments. Employee shall receive an aggregate amount equal to (A) one times the Employee's
annual base salary in effect on the date of termination plus (B) a pro-rated annual bonus (pro-rated through the date of
termination) equal to (1) a pro-rata portion of Employee's annual target bonus for the fiscal year of termination of
employment or (2) if such annual bonus is intended to be under a Section 162(m) plan, a pro-rata portion of the lesser
of (x) the bonus actually earned for the year of termination, as determined following the end of the year, or (y) the
target bonus. The Company shall pay the foregoing amount to the Employee in a lump sum within 60 days following
the Employee's Separation from Service or, if payment is made under clause (2) of the foregoing sentence, within two
and one half months following the end of the year of termination.
(vi)
(vii)
Health Benefits Continuation. The Company shall pay to the Employee the product of: (A) the Company's monthly
COBRA premium in effect on the date of Separation from Service under the Company's group health plan for the type
of coverage in effect under such plan (e.g., family coverage) for the Employee on the date of Separation from Service,
and (B) 12, which shall be paid in a lump sum within 60 days following the Employee's Separation from Service.
Equity Acceleration. Employee will become immediately vested in an additional number of shares of Company
common stock under all of Employees outstanding Equity Awards as if Employee had continued in employment for
twelve (12) additional months following Employee's Separation from Service; provided that with respect to any
performance-based Equity Award for which the performance period has not ended as of the date of termination (a
“Performance Award”) but for which the initial vesting date would occur within 12 months following Employee's
Separation from Service, such Performance Award shall remain outstanding and, upon determination of the amount
earned for such performance period, the earned amount of the Performance Period shall be subject to the foregoing 12-
month acceleration provision (from the date of termination) and, if applicable, shall be settled within two and one-half
months following the year in which Employee's Separation from Service occurs. Further, Employee will have twelve
(12) months following Employee's Separation from Service to exercise any vested stock options not to exceed the
expiration date of such options.
(c) Other Termination. If the Employee's employment with the Company terminates other than as a result of an Involuntary
Termination, then the Employee shall not be entitled to receive the CIC Severance Benefits or Severance Benefits, as applicable, but
may be eligible for those benefits (if any) as may then be established under the Company's then existing severance and benefits plans
and policies.
(d) Accrued Wages and Vacation; Expenses. Without regard to the reason for, or the timing of, Employee's termination of employment:
(i) the Company shall pay the Employee any unpaid base salary due for periods prior to the date of termination; (ii) the Company
shall pay the Employee all of the Employee's accrued and unused vacation through the date of termination; and (iii) following
submission of proper expense reports by the Employee, the Company shall reimburse the Employee for all expenses reasonably and
necessarily incurred by the Employee in connection with the business of the Company prior to the date of termination. These
payments shall be made promptly upon termination and within the period of time mandated by law.
(e) Non-solicitation. In consideration of the benefits and protections conferred under this Agreement, Employee agrees that for the Non-
solicit Period (as defined below), the Employee shall not either directly or indirectly solicit, induce, recruit or encourage any of the
Company's Personnel (as defined below) to leave their employment, or take away such Personnel, or attempt to solicit, induce,
recruit, encourage or take away such Personnel, either for the Employee or for any other person or entity. “Personnel” means any of
the Company's employees, excluding the Employee's administrative assistant. “Non-solicit Period” means the period commencing on
the date of a Change of Control and ending 12 months thereafter.
(f) Confidentiality. In consideration of the benefits and protections conferred under this Agreement, the Employee agrees that he or she
will continue to abide by the confidentiality provisions in the Company's Employment, Confidential Information and Invention
Assignment Agreement, as executed by the Employee.
5. Limitation on Benefits.
(a) Notwithstanding anything contained in this Agreement to the contrary, to the extent that the payments and benefits provided under
this Agreement and benefits provided to, or for the benefit of, the Employee under any other employer plan or agreement (such
payments or benefits are collectively referred to as the “Benefits”) would be subject to the excise tax (the “Excise Tax”) imposed
under Section 4999 of the Internal Revenue Code of 1986, as amended (the “Code”), the Benefits shall be reduced (but not below
zero) if and to the extent that a reduction in the Benefits would result in Employee retaining a larger amount, on an after tax basis
(taking into account federal, state and local income taxes and the Excise Tax), than if Employee received all of the Benefits (such
reduced amount is hereinafter referred to as the “Limited Benefit Amount”). The Company shall reduce or eliminate the Benefits, by
first reducing or eliminating those payments or benefits which are not payable in cash and then by reducing or eliminating cash
payments, in each case in reverse order beginning with payments or benefits which are to be paid the farthest in time from the
“Determination” (as hereinafter defined).
(b) A determination as to whether the Benefits shall be reduced to the Limited Benefit Amount pursuant to this Agreement and the
amount of such Limited Benefit Amount shall be made by the Company's independent public accountants or another certified public
accounting firm or valuation firm designated by the Company (the “Accounting Firm”) at the Company's expense. The Accounting
Firm shall provide its determination (the “Determination”), together with detailed supporting calculations and documentation to the
Company and Employee within 30 days of the date of termination of Employee's employment.
6.
Successors.
(a) Company's Successors. Any successor to the Company (whether direct or indirect) to all or substantially all of the Company's
business and/or assets shall assume the Company's obligations under this Agreement and agree (either expressly or by operation of
law) to perform the Company's obligations under this Agreement in the same manner and to the same extent as the Company would
be required to perform such obligations in the absence of a succession. For all purposes under this Agreement, the term “Company”
shall include any successor to the Company's business and/or assets.
(b) Employee's Successors. Without the written consent of the Company, Employee shall not assign or transfer this Agreement or any
right or obligation under this Agreement to any other person or entity. Notwithstanding the foregoing, the terms of this Agreement
and all rights of Employee hereunder shall inure to the benefit of, and be enforceable by, Employee's personal or legal
representatives, executors, administrators, successors, heirs, distributees, devisees and legatees.
7. Notices.
(a) General. Notices and all other communications contemplated by this Agreement shall be in writing and shall be deemed to have
been duly given when personally delivered or when mailed by U.S. registered or certified mail, return receipt requested and
postage prepaid. In the case of the Employee, mailed notices shall be addressed to him or her at the home address that he or she
most recently communicated to the Company in writing. In the case of the Company, mailed notices shall be addressed to its
corporate headquarters, and all notices shall be directed to the attention of its General Counsel, or to the Chief Financial Officer if
the notice to the Company is from the General Counsel. Notice of Termination. Any termination by the Company or by the
Employee shall be communicated by a notice of termination to the other party hereto given in accordance with this Article.
8. Arbitration.
(a) Any dispute or controversy arising out of, relating to, or in connection with this Agreement, or the interpretation, validity,
construction, performance, breach, or termination thereof, shall be settled by binding arbitration to be held in San Francisco,
California, in accordance with the National Rules for the Resolution of Employment Disputes then in effect of the American
Arbitration Association (the “Rules”). The arbitrator(s) may grant injunctions or other relief in such dispute or controversy. The
decision of the arbitrator shall be final, conclusive and binding on the parties to the arbitration. Judgment may be entered on the
arbitrator's decision in any court having jurisdiction.
(b) The arbitrator(s) shall apply California law to the merits of any dispute or claim, without reference to conflicts of law rules. The
arbitral proceedings shall be governed by federal arbitration law and by the Rules, without reference to state arbitration law.
Employee hereby consents to the personal jurisdiction of the state and federal courts located in California for any action or
proceeding arising from or relating to this Agreement or relating to any arbitration in which the parties are participants.
(c) EMPLOYEE HAS READ AND UNDERSTANDS THIS ARTICLE, WHICH DISCUSSES ARBITRATION. EMPLOYEE
UNDERSTANDS THAT SUBMITTING ANY CLAIMS ARISING OUT OF, RELATING TO, OR IN CONNECTION WITH
THIS AGREEMENT, OR THE INTERPRETATION, VALIDITY, CONSTRUCTION, PERFORMANCE, BREACH OR
TERMINATION THEREOF TO BINDING ARBITRATION, CONSTITUTES A WAIVER OF EMPLOYEE'S RIGHT TO A
JURY TRIAL AND RELATES TO THE RESOLUTION OF ALL DISPUTES RELATING TO ALL ASPECTS OF THE
EMPLOYER/EMPLOYEE RELATIONSHIP, INCLUDING BUT NOT LIMITED TO, THE FOLLOWING CLAIMS:
i. ANY AND ALL CLAIMS FOR WRONGFUL DISCHARGE OF EMPLOYMENT; BREACH OF CONTRACT, BOTH
EXPRESS AND IMPLIED; BREACH OF THE COVENANT OF GOOD FAITH AND FAIR DEALING, BOTH
EXPRESS AND IMPLIED; NEGLIGENT OR INTENTIONAL INFLICTION OF EMOTIONAL DISTRESS;
NEGLIGENT OR INTENTIONAL MISREPRESENTATION; NEGLIGENT OR INTENTIONAL INTERFERENCE
WITH CONTRACT OR PROSPECTIVE ECONOMIC ADVANTAGE; AND DEFAMATION.
ii. ANY AND ALL CLAIMS FOR VIOLATION OF ANY FEDERAL, STATE OR MUNICIPAL STATUTE,
INCLUDING, BUT NOT LIMITED TO, TITLE VII OF THE CIVIL RIGHTS ACT OF 1964, THE CIVIL RIGHTS ACT
OF 1991, THE AGE DISCRIMINATION IN EMPLOYMENT ACT OF 1967, THE AMERICANS WITH
DISABILITIES ACT OF 1990, THE FAIR LABOR STANDARDS ACT, THE CALIFORNIA FAIR EMPLOYMENT
AND HOUSING ACT, AND LABOR CODE SECTION 201, et seq.;
iii. ANY AND ALL CLAIMS ARISING OUT OF ANY OTHER LAWS AND REGULATIONS RELATING TO
EMPLOYMENT OR EMPLOYMENT DISCRIMINATION.
9. Miscellaneous Provisions.
(a) Section 409A. It is intended, and this Agreement will be so construed, that any amounts payable under this Agreement shall either be
exempt from or comply with the provisions of Section 409A of the Code and the treasury regulations relating thereto so as not to
subject the Employee to the payment of interest and/or any tax penalty that may be imposed under Section 409A of the Code.
Employee acknowledges and agrees that the Company has made no representation to Employee as to the tax treatment of the
compensation and benefits provided pursuant to this Agreement and that Employee is solely responsible for all taxes due with
respect to such compensation and benefits. In addition, to the extent (i) any payments to which Employee becomes entitled under
this Agreement in connection with Employee's
termination of employment with the Company constitutes deferred compensation subject to Section 409A and (ii) Employee is
deemed at the time of such termination of employment to be a “specified” employee under Section 409A, then to the extent required
to avoid adverse tax treatment under Section 409A to Employee, such payment or payments shall not be made or commence until
the date which is more than six (6) months after the Employee's Separation from Service or, if earlier, the date of death of the
Employee. If the condition of providing a Release by the Employee could cause the payment of any amount or provision of any
Benefit subject to such release to be paid or provided in either of two taxable years of the Employee, then to the extent required to
avoid adverse tax treatment under Section 409A to Employee,
such amount or benefit shall be paid or provided in the later such taxable year.
(b) No Duty to Mitigate. The Employee shall not be required to mitigate the amount of any payment contemplated by this
Agreement, nor shall any such payment be reduced by any earnings that the Employee may receive from any other source.
(c) Waiver. No provision of this Agreement may be modified, waived or discharged unless the modification, waiver or discharge is
agreed to in writing and signed by the Employee and by an authorized officer of the Company other than the Employee. No
waiver by either party of any breach of, or of compliance with, any condition or provision of this Agreement by the other party
shall be considered a waiver of any other condition or provision or of the same condition or provision at another time.
(d) Integration. This Agreement represents the entire agreement and understanding between the parties as to the subject matter
herein and supersede all prior or contemporaneous agreements, whether written or oral.
(e) Choice of Law. The validity, interpretation, construction and performance of this Agreement shall be governed by the internal
substantive laws, but not the conflicts of law rules, of the State of California.
(f) Severability. The invalidity or unenforceability of any provision or provisions of this Agreement shall not affect the validity or
enforceability of any other provision hereof, which shall remain in full force and effect.
(g) Withholding Taxes. All payments made pursuant to this Agreement shall be subject to withholding of applicable income and
employment taxes.
(h) Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together
will constitute one and the same instrument.
(Remainder of page intentionally blank.)
IN WITNESS WHEREOF, each of the parties has executed this Agreement, in the case of the Company by its duly authorized officer, as of
the day and year first above written.
FormFactor, Inc.
Michael Slessor
By:
/s/ JASON COHEN
Name:
Title:
Jason Cohen
Vice Present and General Counsel
/s/ MICHAEL SLESSOR
FORMFACTOR, INC.
CHANGE OF CONTROL SEVERANCE AGREEMENT
Exhibit 10.40
This Change of Control Severance Agreement (the “Agreement”) is made and entered into effective as of February 16, 2018 (the “Effective
Date”), by and between the undersigned employee (the “Employee”) and FormFactor, Inc., a Delaware corporation (the “Company”).
R E C I T A L S
WHEREAS, the Company considers it essential to the best interests of its shareholders to foster the continuous employment of key
management personnel;
WHEREAS, the Board of Directors of the Company (the “Board”) recognizes that, as is the case with many publicly-held corporations, the
possibility of a Change in Control (as defined below) exists and that such possibility, and the uncertainty and questions which it may raise among
management, could result in the departure or distraction of management personnel to the detriment of the Company and its shareholders; and
WHEREAS, the Board has determined that appropriate steps should be taken to reinforce and encourage the continued attention and
dedication of members of the Company’s management, including the Employee, to their assigned duties without distraction in light of the possibility
of a Change in Control;
NOW THEREFORE, in consideration of the premises and the mutual covenants herein contained, the Company and the Employee hereby
agree as follows.
1. Definitions. The following terms referred to in this Agreement shall have the following meanings.
ARTICLES
“Cause” shall mean (i) any act of personal dishonesty taken by the Employee in connection with his or her responsibilities as an employee
which is intended to result in substantial personal enrichment of the Employee and is reasonably likely to result in material harm to the Company, (ii)
the Employee’s conviction of a felony, (iii) a willful act by the Employee which constitutes misconduct and is materially injurious to the Company, or
(iv) continued willful violations by the Employee of the Employee’s obligations to the Company after the Employee has received a written demand for
performance from the Company which describes the basis for the Company’s belief that the Employee has not substantially performed his or her
duties.
“Change of Control” shall mean the first to occur of any of the following events after the date hereof:
(i)
(ii)
(iii)
(iv)
the consummation of a merger or consolidation of the Company with any other corporation, other than a merger or consolidation
which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into or exchanged for voting securities of the surviving entity) more than sixty percent
(60%) of the total voting power represented by the voting securities of the Company or such surviving entity outstanding immediately
after such merger or consolidation; or
(A) any approval by the shareholders of the Company of a plan of complete liquidation of the Company, other than as a result of
insolvency or (B) the consummation of the sale or disposition (or the last in a series of sales or dispositions) by the Company of all
or substantially all of the Company’s assets, other than a sale or disposition to a wholly-owned direct or indirect subsidiary of the
Company and other than a sale or disposition which would result in the voting securities of the Company outstanding immediately
prior thereto continuing to represent (by being converted into or exchanged for voting securities of the entity to which such sale or
disposition was made) more than sixty percent (60%) of the total voting power represented by the voting securities of the entity to
which such sale or disposition was made after such sale or disposition; or
any “person” (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended) becoming the
“beneficial owner” (as defined in Rule 13d-3 under said Act), directly or indirectly, of securities of the Company representing 40% or
more of the total voting power represented by the Company’s then outstanding voting securities; or
during any period of two consecutive years after the Effective Date, Incumbent Directors cease for any reason to constitute a
majority of the Board.
“Good Reason” shall mean the occurrence of any of the following: (i) without the Employee’s express written consent, a material reduction of
the Employee’s duties, position or responsibilities relative to the Employee’s duties, position or responsibilities in effect immediately prior to the Change
of Control; (ii) a reduction by more than 10% of the Employee’s base salary or target bonus as in effect immediately prior to such reduction; (iii) without
the Employee’s express written consent, the relocation of the Employee’s primary work location by more than 50 miles; or (iv) the failure of the
Company to obtain the assumption of this Agreement by a successor (by express agreement or operation of law); provided, however, that the Employee
will have Good Reason to terminate employment only if (i) the Employee provides notice to the Company of the existence of the event or circumstances
constituting Good Reason specified in any of the preceding clauses within 90 days of the initial existence of such event or circumstances, and (ii) the
Company does not remedy such event or circumstances within 15 days following receipt of such notice.
“Incumbent Directors” shall mean directors who either (A) are directors of the Company as of the Effective Date, or (B) are elected, or
nominated for election, to the Board with the affirmative votes of at least a majority of those directors then still in office who either were directors
on the Effective Date or whose election or nomination for election was so approved.
“Involuntary Termination” shall mean a termination of the Employee by the Company without Cause or a resignation by the Employee within
120 days of any event constituting Good Reason.
“Separation from Service” shall have the meaning given in Section 409A of the Internal Revenue Code (as defined herein).
2. Term of Agreement. This Agreement shall be in effect for the period commencing on the Effective Date and ending on the third anniversary of
the Effective Date (the “Term”); provided, however, that the Term shall automatically be extended for one additional year unless, not later than
90 days prior to the scheduled expiration of the then-current Term, the Company or Employee shall have given notice not to extend the Term;
and provided further that if a Change of Control shall have occurred during the Term, this Agreement shall remain in effect until 12 months
following such Change of Control to give effect to its provisions.
3. At-Will Employment. The Company and the Employee acknowledge that the Employee’s employment is and shall continue to be at-will, as
defined under applicable law. If the Employee’s employment terminates for any reason, the Employee shall not be entitled to any payments,
benefits, damages, awards or compensation other than as provided by this Agreement, or as may otherwise be established under the
Company’s then existing employee benefit plans or policies at the time of termination.
4. Change of Control and Severance Benefits; Non-solicitation.
(a)
Involuntary Termination Following Change of Control. If the Employee’s employment with the Company terminates as a result of an
Involuntary Termination at any time within twelve (12) months after a Change of Control, then the Employee shall be entitled to
receive from the Company the following benefits (the “Severance Benefits”), contingent upon the Employee’s delivery of a signed
release reasonably satisfactory to the Company (the “Release”) within 45 days from the Employee’s Separation from Service (the
“Release Deadline”) and non-revocation of such Release within the time period specified therein.
(i)
Cash Severance Payments. Employee shall receive an aggregate amount equal to one times the sum of (A) the
Employee’s annual base salary in effect on the date of termination plus (B) the greater of (x) the Employee’s annual
target bonus amount for the year of termination assuming a 100% payout on all objectives under the Company’s bonus
plan in effect on the date of termination or (y) such annual target bonus amount times the average rate of annual bonus
paid to each executive officer (compared to such officer’s target bonus) covered under a change of control severance
agreement substantially similar to this Agreement averaged over the two most recently completed fiscal years
preceding the date of termination. The Company shall pay the foregoing amount to the Employee in a lump sum within
60 days following the Employee’s Separation from Service.
(ii)
Health Benefits Continuation. The Company shall pay to the Employee the product of: (A) the Company’s monthly
COBRA premium in effect on the date of Separation from Service under the Company’s group health plan for the type of
coverage in effect under such plan (e.g., family coverage) for the Employee on the
date of Separation from Service, and (B) 12, which shall be paid in a lump sum within 60 days following the Employee’s
Separation from Service.
(iii)
(iv)
Equity Acceleration. The vesting and exercisability of each option, restricted stock award, restricted stock unit or other
stock based award, including any cash-based award that was substituted or assumed for any stock-based award at the
time of the Change in Control (each, an “Equity Award”) shall be automatically accelerated in full and the forfeiture
provisions and/or Company right of repurchase of each Equity Award shall automatically lapse in full.
Forfeiture upon Breach of Covenants. Notwithstanding any of the foregoing, if the Employee materially breaches his or
her obligations under paragraph (e) or (f) of this Article 4, from and after the date of such breach, the Employee will no
longer be entitled to, and the Company will no longer be obligated to pay, any remaining unpaid portion of the
Severance Benefits.
(b) Other Termination in Connection with a Change of Control. If the Employee’s employment with the Company terminates other
than as a result of an Involuntary Termination at any time within twelve
(12) months after a Change of Control, then the Employee shall not be entitled to receive the Severance Benefits, but may be
eligible for those benefits (if any) as may then be established under the Company’s then existing severance and benefits plans and
policies.
(c) Termination Apart from a Change of Control. If the Employee’s employment with the Company terminates for any or no reason
other than within twelve (12) months following a Change of Control, then the Employee shall not be entitled to receive the
Severance Benefits, but may be eligible for those benefits (if any) as may then be established under the Company’s then existing
severance and benefits plans and policies at the time of such termination.
(d) Accrued Wages and Vacation; Expenses. Without regard to the reason for, or the timing of, Employee’s termination of employment: (i)
the Company shall pay the Employee any unpaid base salary due for periods prior to the date of termination; (ii) the Company shall
pay the Employee all of the Employee’s accrued and unused vacation through the date of termination; and (iii) following submission
of proper expense reports by the Employee, the Company shall reimburse the Employee for all expenses reasonably and necessarily
incurred by the Employee in connection with the business of the Company prior to the date of termination. These payments shall be
made promptly upon termination and within the period of time mandated by law.
(e) Non-solicitation. In consideration of the benefits and protections conferred under this Agreement, Employee agrees that for the Non-
solicit Period (as defined below), the Employee shall not either directly or indirectly solicit, induce, recruit or encourage any of the
Company’s Personnel (as defined below) to leave their employment, or take away such Personnel, or attempt to solicit, induce, recruit,
encourage or take away such Personnel, either for the Employee or for any other person or entity. “Personnel” means any of the
Company’s employees, excluding the Employee’s administrative assistant. “Non-solicit Period” means the period commencing on the
date of a Change of Control and ending 12 months thereafter.
(f) Confidentiality. In consideration of the benefits and protections conferred under this Agreement, the Employee agrees that he or she
will continue to abide by the confidentiality provisions in the Company’s Employment, Confidential Information and Invention
Assignment Agreement, as executed by the Employee.
5. Limitation on Benefits.
(a) Notwithstanding anything contained in this Agreement to the contrary, to the extent that the payments and benefits provided under
this Agreement and benefits provided to, or for the benefit of, the Employee under any other employer plan or agreement (such
payments or benefits are collectively referred to as the “Benefits”) would be subject to the excise tax (the “Excise Tax”) imposed
under Section 4999 of the Internal Revenue Code of 1986, as amended (the “Code”), the Benefits shall be reduced (but not below
zero) if and to the extent that a reduction in the Benefits would result in Employee retaining a larger amount, on an after- tax basis
(taking into account federal, state and local income taxes and the Excise Tax), than if Employee received all of the Benefits (such
reduced amount is hereinafter referred to
as the “Limited Benefit Amount”). The Company shall reduce or eliminate the Benefits, by first reducing or eliminating those
payments or benefits which are not payable in cash and then by reducing or eliminating cash payments, in each case in reverse order
beginning with payments or benefits which are to be paid the farthest in time from the “Determination” (as hereinafter defined).
(b) A determination as to whether the Benefits shall be reduced to the Limited Benefit Amount pursuant to this Agreement and the
amount of such Limited Benefit Amount shall be made by the Company’s independent public accountants or another certified public
accounting firm or valuation firm designated by the Company (the “Accounting Firm”) at the Company’s expense. The Accounting
Firm shall provide its determination (the “Determination”), together with detailed supporting calculations and documentation to the
Company and Employee within 30 days of the date of termination of Employee’s employment.
6.
Successors.
(a) Company’s Successors. Any successor to the Company (whether direct or indirect) to all or substantially all of the Company’s
business and/or assets shall assume the Company’s obligations under this Agreement and agree (either expressly or by operation of
law) to perform the Company’s obligations under this Agreement in the same manner and to the same extent as the Company would
be required to perform such obligations in the absence of a succession. For all purposes under this Agreement, the term “Company”
shall include any successor to the Company’s business and/or assets.
(b) Employee’s Successors. Without the written consent of the Company, Employee shall not assign or transfer this Agreement or any right
or obligation under this Agreement to any other person or entity. Notwithstanding the foregoing, the terms of this Agreement and all
rights of Employee hereunder shall inure to the benefit of, and be enforceable by, Employee’s personal or legal representatives,
executors, administrators, successors, heirs, distributees, devisees and legatees.
7. Notices.
(a) General. Notices and all other communications contemplated by this Agreement shall be in writing and shall be deemed to have
been duly given when personally delivered or when mailed by U.S. registered or certified mail, return receipt requested and postage
prepaid. In the case of the Employee, mailed notices shall be addressed to him or her at the home address that he or she most
recently communicated to the Company in writing. In the case of the Company, mailed notices shall be addressed to its corporate
headquarters, and all notices shall be directed to the attention of its General Counsel, or to the Chief Financial Officer if the notice
to the Company is from the General Counsel.
(b) Notice of Termination. Any termination by the Company or by the Employee shall be communicated by a notice of termination to
the other party hereto given in accordance with this Article.
8. Arbitration.
(a) Any dispute or controversy arising out of, relating to, or in connection with this Agreement, or the interpretation, validity,
construction, performance, breach, or termination thereof, shall be settled by binding arbitration to be held in San Francisco,
California, in accordance with the National Rules for the Resolution of Employment Disputes then in effect of the American
Arbitration Association (the “Rules”). The arbitrator(s) may grant injunctions or other relief in such dispute or controversy. The
decision of the arbitrator shall be final, conclusive and binding on the parties to the arbitration. Judgment may be entered on the
arbitrator’s decision in any court having jurisdiction.
(b) The arbitrator(s) shall apply California law to the merits of any dispute or claim, without reference to conflicts of law rules. The
arbitral proceedings shall be governed by federal arbitration law and by the Rules, without reference to state arbitration law.
Employee hereby consents to the personal jurisdiction of the state and federal courts located in California for any action or proceeding
arising from or relating to this Agreement or relating to any arbitration in which the parties are participants.
(c) EMPLOYEE HAS READ AND UNDERSTANDS THIS ARTICLE, WHICH DISCUSSES ARBITRATION. EMPLOYEE
UNDERSTANDS THAT SUBMITTING ANY CLAIMS
ARISING OUT OF, RELATING TO, OR IN CONNECTION WITH THIS AGREEMENT, OR THE INTERPRETATION,
VALIDITY, CONSTRUCTION, PERFORMANCE, BREACH OR TERMINATION THEREOF TO BINDING ARBITRATION,
CONSTITUTES A WAIVER OF EMPLOYEE’S RIGHT TO A JURY TRIAL AND RELATES TO THE RESOLUTION OF ALL
DISPUTES RELATING TO ALL ASPECTS OF THE EMPLOYER/EMPLOYEE RELATIONSHIP, INCLUDING BUT NOT
LIMITED TO, THE FOLLOWING CLAIMS:
i.
ii.
ANY AND ALL CLAIMS FOR WRONGFUL DISCHARGE OF EMPLOYMENT; BREACH OF CONTRACT, BOTH
EXPRESS AND IMPLIED; BREACH OF THE COVENANT OF GOOD FAITH AND FAIR DEALING, BOTH
EXPRESS AND IMPLIED; NEGLIGENT OR INTENTIONAL INFLICTION OF EMOTIONAL DISTRESS;
NEGLIGENT OR INTENTIONAL MISREPRESENTATION; NEGLIGENT OR INTENTIONAL INTERFERENCE
WITH CONTRACT OR PROSPECTIVE ECONOMIC ADVANTAGE; AND DEFAMATION.
ANY AND ALL CLAIMS FOR VIOLATION OF ANY FEDERAL, STATE OR MUNICIPAL STATUTE, INCLUDING,
BUT NOT LIMITED TO, TITLE VII OF THE CIVIL RIGHTS ACT OF 1964, THE CIVIL RIGHTS ACT OF 1991, THE
AGE DISCRIMINATION IN EMPLOYMENT ACT OF 1967, THE AMERICANS WITH DISABILITIES ACT OF 1990,
THE FAIR LABOR STANDARDS ACT, THE CALIFORNIA FAIR EMPLOYMENT AND HOUSING ACT, AND
LABOR CODE SECTION 201, et seq.;
iii.
ANY AND ALL CLAIMS ARISING OUT OF ANY OTHER LAWS AND REGULATIONS RELATING TO
EMPLOYMENT OR EMPLOYMENT DISCRIMINATION.
9. Miscellaneous Provisions.
(a) Section 409A. It is intended, and this Agreement will be so construed, that any amounts payable under this Agreement shall either be
exempt from or comply with the provisions of Section 409A of the Code and the treasury regulations relating thereto so as not to
subject the Employee to the payment of interest and/or any tax penalty that may be imposed under Section 409A of the Code.
Employee acknowledges and agrees that the Company has made no representation to Employee as to the tax treatment of the
compensation and benefits provided pursuant to this Agreement and that Employee is solely responsible for all taxes due with respect
to such compensation and benefits. In addition, to the extent (i) any payments to which Employee becomes entitled under this
Agreement in connection with Employee's termination of employment with the Company constitutes deferred compensation subject to
Section 409A and (ii) Employee is deemed at the time of such termination of employment to be a “specified” employee under Section
409A, then to the extent required to avoid adverse tax treatment under Section 409A to Employee, such payment or payments shall
not be made or commence until the date which is more than six (6) months after the Employee's Separation from Service or, if earlier,
the date of death of the Employee. If the condition of providing a Release by the Employee could cause the payment of any amount or
provision of any Benefit subject to such release to be paid or provided in either of two taxable years of the Employee, then to the
extent required to avoid adverse tax treatment under Section 409A to Employee, such amount or benefit shall be paid or provided in
the later such taxable year.
(b) No Duty to Mitigate. The Employee shall not be required to mitigate the amount of any payment contemplated by this Agreement,
nor shall any such payment be reduced by any earnings that the Employee may receive from any other source.
(c) Waiver. No provision of this Agreement may be modified, waived or discharged unless the modification, waiver or discharge is
agreed to in writing and signed by the Employee and by an authorized officer of the Company other than the Employee. No waiver
by either party of any breach of, or of compliance with, any condition or provision of this Agreement by the other party shall be
considered a waiver of any other condition or provision or of the same condition or provision at another time.
(d) Integration. This Agreement represents the entire agreement and understanding between the parties as to the subject matter herein
and supersede all prior or contemporaneous agreements, whether written or oral.
(e) Choice of Law. The validity, interpretation, construction and performance of this Agreement shall be governed by the internal
substantive laws, but not the conflicts of law rules, of the State of California.
(f) Severability. The invalidity or unenforceability of any provision or provisions of this Agreement shall not affect the validity or
enforceability of any other provision hereof, which shall remain in full force and effect.
(g) Withholding Taxes. All payments made pursuant to this Agreement shall be subject to withholding of applicable income and
employment taxes.
(h) Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together
will constitute one and the same instrument.
IN WITNESS WHEREOF, each of the parties has executed this Agreement, in the case of the Company by its duly authorized officer, as of
the day and year first above written.
FormFactor, Inc.
Shai Shahar
By:
/s/ MICHAEL SLESSOR
Name:
Title:
Michael Slessor
Chief Executive Officer
/s/ SHAI SHAHAR
LIST OF REGISTRANT'S SUBSIDIARIES
EXHIBIT 21.1
SUBSIDIARY NAME
FormFactor International, Inc.
FormFactor, K.K.
FormFactor Korea, Inc.
FormFactor Singapore Pte. Ltd.
Microprobe HongKong Limited
Microprobe Technology (Suzhou) Co. Ltd.
FormFactor GmbH
Cascade Microtech Singapore Pte, Ltd
Cascade International (Shanghai) Trading Co., Ltd.
Advanced Temperature Test Systems GmbH
FormFactor SASU
FRT GmbH
High Precision Devices, Inc.
JURISDICTION OF ORGANIZATION
Delaware, United States
Japan
South Korea
Singapore
Hong Kong
People's Republic of China
Germany
Singapore
People's Republic of China
Germany
France
Germany
Colorado, United States
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
EXHIBIT 23.1
The Board of Directors
FormFactor, Inc.:
We consent to the incorporation by reference in the registration statement on Form S3 (No. 333-198760) and Form S-8 (Nos. 333-239388, 333-232990,
333-226432, 333-222551, 333-212587, 333-195744, 333-188363, 333-181450, 333-179589, 333-172318, 333-165058, 333-157610, 333-149411, 333-
148198, 333-139074, 333-125918, 333-115137, and 333-106043) of FormFactor, Inc. of our report dated February 18, 2022, with respect to the
consolidated balance sheets of FormFactor, Inc. as of December 25, 2021 and December 26, 2020, the related consolidated statements of income,
comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 25, 2021, and the related notes,
and the effectiveness of internal control over financial reporting as of December 25, 2021, which report appears in the December 25, 2021 annual report on
Form 10-K of FormFactor, Inc.
/s/ KPMG LLP
Portland, Oregon
February 18, 2022
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
EXHIBIT 31.1
I, Michael D. Slessor, certify that:
1. I have reviewed the Annual Report on Form 10-K 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 this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent
fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting; and
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.
February 18, 2022
Date:
/s/ MICHAEL D. SLESSOR
Michael D. Slessor
Chief Executive Officer
(Principal Executive Officer and Director)
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
EXHIBIT 31.2
I, Shai Shahar, certify that:
1. I have reviewed the Annual Report on Form 10-K 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 this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent
fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting; and
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.
February 18, 2022
Date:
/s/ SHAI SHAHAR
Shai Shahar
Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)
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
EXHIBIT 32.1
In connection with the annual report on Form 10-K of FormFactor, Inc., a Delaware corporation, for the period ended December 25, 2021, 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 annual 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 annual report fairly presents, in all material respects, the financial condition and results of operations of
Date:
FormFactor, Inc. for the periods presented therein.
February 18, 2022
/s/ MICHAEL D. SLESSOR
Michael D. Slessor
Chief Executive Officer
(Principal Executive Officer and Director)
Date:
February 18, 2022
/s/ SHAI SHAHAR
Shai Shahar
Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)