What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-08-04 compared with 2020-05-07 · 163 added, 106 removed, 177 unchanged (60% of the section changed)

8 unchanged sentences

We have no obligation to update any of these statements.

These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to differ materially from those expressed or implied by these statements, including risks related to general market trends, uncertainties related to COVID-19 and the impact of our responses to it, the interpretation and impacts of changes in export controls and other trade barriers, our ability to execute our business strategy and other risks discussed in the section titled “Risk Factors” and elsewhere in our Annual Report on Form 10-K for the year ended December 28, 2019 and in this Quarterly Report on Form 10-Q.

These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to differ materially from those expressed or implied by these statements, including risks related to general market trends, the benefits of acquisitions and investments, uncertainties related to COVID-19 and the impact of our responses to it, the interpretation and impacts of changes in export controls and other trade barriers, our ability to execute our business strategy and other risks discussed in the section titled “Risk Factors” and elsewhere in our Annual Report on Form 10-K for the year ended December 28, 2019 and in this Quarterly Report on Form 10-Q.

You should carefully consider the numerous risks and uncertainties described under these sections.

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Sales of our probe cards and analytical probes are included in the Probe Cards segment, while sales of our probe stations, metrology systems and thermal sub-systems are included in the Systems segment.

We generated net income of $15.9 million in the first three months of fiscal 2020 as compared to $5.5 million in the first three months of fiscal 2019.

The increase in net income was primarily due to higher revenues, partially offset by higher operating expenses, both generated by higher operating levels.

We generated net income of $36.4 million in the first six months of fiscal 2020 as compared to $12.4 million in the first six months of fiscal 2019.

The increase in net income was primarily due to increased revenues and good leverage on operating expenses, which only marginally increase on significantly higher operating levels.

Impact of COVID-19

An outbreak of an illness caused by a novel coronavirus in 2019 (“COVID-19”) has resulted in millions of infections and well over one hundred thousand deaths worldwide as of the date of filing this Quarterly Report.

An outbreak of an illness caused by a novel coronavirus in 2019 (“COVID-19”) has resulted in millions of infections and well over six hundred thousand deaths worldwide as of the date of filing this Quarterly Report.

COVID-19 continues to spread in many of the regions that we, our customers and our suppliers operate.

The COVID-19 pandemic has resulted in significant governmental measures being implemented to control the spread of the virus, including the imposition of stay-at-home and other orders in locations where we have manufacturing and other activities.

We experienced a significant disruption to our operations as a result of the COVID-19 pandemic during the last two weeks of our first fiscal quarter of 2020 which continues, although currently to a lessening extent.

We experienced a significant disruption to our operations as a result of the COVID-19 pandemic during the last two weeks of our first fiscal quarter of 2020.

Through our second quarter we implemented social distancing, contact tracing, and various other measures to enable our manufacturing sites to continue efficient production.

While we believe those measures have been largely successful, we continue to monitor the situation closely.

We believe that we operate in a critical infrastructure industry, as defined by the U.S.

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This reduces the current and anticipated impacts of the COVID-19 pandemic on our major customers and suppliers, and upon our operations, as compared to companies that are not part of the critical infrastructure.

After a temporary suspension of manufacturing to implement safety measures in our California and Oregon locations, consistent with federal guidelines and state and local orders, we recommenced manufacturing.

We currently continue to operate in all of our manufacturing sites

subject to certain safety and related constraints.

After a temporary suspension of manufacturing to implement safety measures in our California and Oregon locations during our first fiscal quarter of 2020, consistent with federal guidelines and state and local orders, we recommenced manufacturing.

We currently continue to operate in all of our manufacturing sites at production levels comparable to those prior to the pandemic, albeit subject to certain safety and related constraints.

Our other operations are similarly continuing with substantial work-from-home activities.

If the provisions of governmental health orders or other safety requirements continue for an extended period of time, or if we have occurrences of COVID-19 in any of our facilities, we may experience further disruptions or delays in manufacturing, product design, product development, customer support, manufacturing and sales, and an overall loss of productivity and efficiency.

The progression of the COVID-19 pandemic could also negatively impact our business or results of operations through new restrictions at our operating locations or at those of our customers or suppliers.

If the provisions of governmental health orders or other safety requirements applicable to us or our customers or suppliers continue or become more restrictive for an extended period of time, or if we have occurrences of COVID-19 in any of our facilities, we may experience further disruptions or delays in manufacturing, product design, product development, customer support, manufacturing and sales, and an overall loss of productivity and efficiency.

Even with our continued operations, COVID-19 has had, and may have further, negative impacts on our supply chain, workforce and customers.

The continued progression of the COVID-19 pandemic and associated macro-economic, trade-related, and even site-specific restrictions, including but not limited to the effects of any overall global, regional or national economic slowdowns or other economic downturns, increased trade and transport costs, and inability to access customer sites for certain activities could also negatively impact our business or results of operations through new restrictions at our operating locations or at those of our customers or suppliers.

As the COVID-19 pandemic is a widespread public health crisis, it is also adversely affecting major economies and financial markets world-wide.

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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 impacts of COVID-19.

We may benefit from some of these measures, although we do not believe those benefits will have a material effect upon our financial results or financial condition.

We have benefited and may continue to benefit from some of these measures, although we do not believe those benefits have had or will have a material effect upon our financial results or financial condition.

Governments may discontinue, amend, replace or otherwise change or supplement such stabilization and stimulus measures in ways that are difficult to predict, and it is possible that such changes could have a material effect upon our financial results or financial condition, or the financial results or financial condition of our customers or suppliers.

While to date the disruptions in our operations, supply chain and customer demand as a result of the COVID-19 pandemic have been somewhat limited, we believe that the COVID-19 pandemic represents a sustained threat that may eventually give rise to a variety of more significant adverse impacts on our business and financial results.

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For a further description of the uncertainties and business risks associated with the COVID-19 pandemic, see the section entitled “Risk Factors” in this Quarterly Report.

Critical Accounting Policies and the Use of Estimates

Management’s Discussion and Analysis and Note 2 to the Consolidated Financial Statements in our 2019 Annual Report on Form 10-K describe the significant accounting estimates and critical accounting policies used in preparation of the Consolidated Financial Statements.

Significant Accounting Policies and the Use of Estimates

Management’s Discussion and Analysis and Note 2, Summary of Significant Accounting Policies , to the Consolidated Financial Statements in our 2019 Annual Report on Form 10-K describe the significant accounting estimates and significant accounting policies used in preparation of the Consolidated Financial Statements.

Actual results in these areas could differ from management’s estimates.

During the three months ended March 28, 2020, there were no significant changes in our critical accounting policies or estimates from those reported in our Annual Report on Form 10-K for the year ended December 28, 2019, which was filed with the Securities and Exchange Commission on February 21, 2020.

During the six months ended June 27, 2020, there were no significant changes in our significant accounting policies or estimates from those reported in our Annual Report on Form 10-K for the year ended December 28, 2019, which was filed with the Securities and Exchange Commission on February 21, 2020.

Results of Operations

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

Three Months Ended

2020 March 30,

Three Months Ended Six Months Ended

2020 June 29,

2019 June 27,

2020 June 29,

Revenues 100.0 % 100.0 % 100.0 % 100.0 %

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Interest expense (0.1) (0.4) (0.2) (0.4)

Other expense, net (0.1) (0.1)

Other income (expense), net — 0.1 — —

Income before income taxes 14.3 6.7 13.0 6.2

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Revenues by Segment and Market

Three Months Ended

2020 March 30,

Three Months Ended Six Months Ended

2020 June 29,

2019 June 27,

2020 June 29,

(In thousands)

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Three Months Ended

2020 % of Revenues March 30,

2020 % of Revenues June 29,

2019 % of Revenues $ Change % Change

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Total revenues $ 157,824 100.0 % $ 138,018 100.0 % $ 19,806 14.4 %

The increase in Foundry & Logic product revenue for the three months ended March 28, 2020, compared to the three months ended March 30, 2019, was driven principally by increased unit sales to large semiconductor foundries and integrated device manufacturers, as they increased manufacturing of new chip designs on leading-edge nodes.

The decrease in DRAM product revenue for the three months ended March 28, 2020, compared to the three months ended March 30, 2019, was driven by decreased unit sales as a result of decreased customer demand.

The decrease in Flash product revenue for the three months ended March 28, 2020, compared to the three months ended March 30, 2019, was driven by decreased unit sales as a result of decreased customer demand, as our revenue in this market continues to be highly variable.

The increase in Systems product revenue for the three months ended March 28, 2020, compared to the three months ended March 30, 2019, was driven by increased sales of probe stations, which includes an increase in revenue from 300mm stations, partially offset by lower revenue from thermal sub-systems and 200mm stations.

Six Months Ended

2020 % of Revenues June 29,

2019 % of Revenues $ Change % Change

(Dollars in thousands)

Probe Cards Markets:

Foundry & Logic $ 215,092 67.6 % $ 145,022 53.7 % $ 70,070 48.3 %

DRAM 43,748 13.7 64,930 24.0 (21,182) (32.6)

Flash 9,659 3.0 11,788 4.4 (2,129) (18.1)

Systems Market:

Systems 50,078 15.7 48,491 17.9 1,587 3.3

Total revenues $ 318,577 100.0 % $ 270,231 100.0 % $ 48,346 17.9 %

The increase in Foundry & Logic product revenue for the three and six months ended June 27, 2020, compared to the three and six months ended June 29, 2019, was driven principally by increased unit sales to large semiconductor foundries and integrated device manufacturers, as well as increasing our market share with our larger customers as part of our success in diversifying the products we sell to our strategic accounts as they increased manufacturing of new chip designs on leading-edge nodes.

Additionally, we began to see an increase in sales due to the demand for 5G handsets and devices.

The decrease in DRAM product revenue for the three and six months ended June 27, 2020, compared to the three and six months ended June 29, 2019, was driven by decreased unit sales as a result of decreased customer demand.

The increase in Flash product revenue for the three months ended June 27, 2020, compared to the three months ended June 29, 2019, was driven by increased unit sales as a result of increased customer demand.

This increase helped reduce the overall decrease in the six months ended June 27, 2020, compared to the six months ended June 29, 2019, as our revenue in this market continues to be highly variable.

The increase in Systems product revenue for the six months ended June 27, 2020, compared to the six months ended June 29, 2019, was driven by increased sales of probe stations year over year, which includes an increase in revenue from 300mm stations, and additional contribution from our acquisition of FRT GmbH, partially offset by lower revenue from thermal sub-systems and 200mm stations.

Due to COVID-19, there were various impacts across our segments due to governmental mandates of social distancing.

This resulted in a temporary factory shut down for almost two weeks in certain locations, limiting our manufacturing capacity.

This resulted in a temporary factory shutdown for almost two weeks during our first fiscal quarter of 2020 in certain locations, limiting our manufacturing capacity.

These shutdowns negatively affected revenue, especially in our Probes segment.

Revenues by Geographic Region

Three Months Ended

Revenue March 30,

Three Months Ended Six Months Ended

Revenue June 29,

Revenue June 27,

Revenue June 29,

(Dollars in thousands)

China $ 48,758 30.9 % $ 20,355 14.7 % $ 92,400 29.0 % $ 42,198 15.6 %

United States 31,916 19.9 % 34,263 25.9 %

Taiwan 33,171 21.0 % 14,872 10.8 % 64,951 20.4 % 37,259 13.8 %

Europe 21,043 13.1 % 9,493 7.2 %

United States 28,121 17.8 % 38,369 27.8 % 60,037 18.8 % 72,632 26.9 %

South Korea 15,113 9.6 % 28,171 20.4 % 29,201 9.2 % 54,894 20.3 %

Europe 14,132 9.0 % 10,648 7.7 % 35,175 11.0 % 20,141 7.5 %

Japan 10,059 6.4 % 16,093 11.7 % 18,429 5.8 % 26,525 9.8 %

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subsidiary and requests the products to be shipped to an address in South Korea, this sale will be reflected in the revenue for South Korea rather than the U.S.

Changes in revenue by geographic region for the three months ended March 28, 2020, compared to the three months ended March 30, 2019, was primarily attributable to changes in customer demand, shifts in customer regional manufacturing strategies, and product sales mix.

Changes in revenue by geographic region for the three and six months ended June 27, 2020, compared to the three and six months ended June 29, 2019, 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

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Three Months Ended

2020 March 30,

2020 June 29,

2019 $ Change % Change

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Gross margin 41.9 % 40.1 %

Six Months Ended

2020 June 29,

2019 $ Change % Change

Gross profit $ 133,557 $ 107,873 $ 25,684 23.8 %

Gross margin 41.9 % 39.9 %

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

Three Months Ended

March 28, 2020 March 30, 2019

June 27, 2020 June 29, 2019

Probe Cards Systems Corporate and Other Total Probe Cards Systems Corporate and Other Total

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Gross margin 46.0 % 44.6 % — % 41.9 % 42.7 % 52.0 % — % 40.1 %

For the three months ended March 28, 2020, gross profit and gross margins increased compared to the three months ended March 30, 2019, primarily due to increased sales and higher factory utilization.

For the three months ended March 28, 2020, gross profit increased while gross margin decreased compared to the three months ended March 30, 2019, primarily as a result of product mix and additional contribution from our acquisition of FRT GmbH.

Six Months Ended

June 27, 2020 June 29, 2019

Probe Cards Systems Corporate and Other Total Probe Cards Systems Corporate and Other Total

Gross profit $122,266 $ 24,053 $ (12,762) $ 133,557 $93,785 $ 25,688 $ (11,600) $ 107,873

Gross margin 45.5 % 48.0 % — % 41.9 % 42.3 % 53.0 % — % 39.9 %

For the three and six months ended June 27, 2020, gross profit and gross margins increased compared to the three and six months ended June 29, 2019, primarily due to increased sales and higher factory utilization.

For the three and six months ended June 27, 2020, gross profit and gross margin decreased compared to the three and six months ended June 29, 2019, primarily as a result of lower sales and less favorable product mix, in particular lower probe station sales.

Corporate and Other

Corporate and Other includes unallocated expenses relating to amortization of intangible assets, share-based compensation, and restructuring charges, net, which are not used in evaluating the results of, or in allocating resources to, our reportable segments.

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

Gross profit and gross margin fluctuate with revenue levels, product mix, selling prices, factory loading and material costs.

For the three months ended March 28, 2020, compared to the three months ended March 30, 2019, gross profit and gross margins have improved, primarily on higher sales.

For the three and six months ended June 27, 2020, compared to the three and six months ended June 29, 2019, gross profit and gross margins have improved, primarily on higher sales.

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

Three Months Ended

2020 March 30,

Three Months Ended Six Months Ended

2020 June 29,

2019 June 27,

2020 June 29,

Stock-based compensation $ 901 $ 964 $ 1,838 $ 1,914

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Three Months Ended

2020 March 30,

2020 June 29,

2019 $ Change % Change

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% of revenues 13.3 % 14.6 %

The increase in research and development expenses in the three months ended March 28, 2020 when compared to the corresponding period in the prior year was primarily driven by increased headcount combined with higher variable compensation, partially offset by a decrease in project material costs.

Six Months Ended

2020 June 29,

2019 $ Change % Change

(Dollars in thousands)

Research and development $ 42,186 $ 39,797 $ 2,389 6.0 %

% of revenues 13.2 % 14.7 %

The increase in research and development expenses in the three and six months ended June 27, 2020 when compared to the corresponding period in the prior year was primarily driven by increased headcount combined with higher variable performance based compensation and higher project material costs, partially offset by a decrease in travel due to travel restrictions and decreased stock-based compensation related to the timing of annual grants.

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

Three Months Ended March 28, 2020 compared to Three Months Ended March 30, 2019

Three Months Ended June 27, 2020 compared to Three Months Ended June 29, 2019 Six Months Ended June 27, 2020 compared to Six Months Ended June 29, 2019

Employee compensation costs 911 2,558

Project material costs 328 263

Depreciation 62 151

Stock-based compensation (193) (273)

Project material costs (65)

Other general operations (263) (310)

$ 845 $ 2,389

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

Three Months Ended

2020 March 30,

Three Months Ended Six Months Ended

2020 June 29,

2019 June 27,

2020 June 29,

Stock-based compensation $ 1,389 $ 1,582 $ 2,828 $ 3,101

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Three Months Ended

2020 March 30,

2020 June 29,

2019 $ Change % Change

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% of revenues 14.4 % 19.0 %

The increase in selling, general and administrative in the three months ended March 28, 2020 when compared to the corresponding period in the prior year was primarily due to increased headcount combined with higher variable compensation, higher stock-based compensation related to the timing of annual grants, and higher costs from acquisition of FRT GmbH, offset partially by a decrease in the amortization of intangible assets.

Six Months Ended

2020 June 29,

2019 $ Change % Change

(Dollars in thousands)

Selling, general and administrative $ 50,448 $ 51,467 $ (1,019) (2.0) %

% of revenues 15.8 % 19.0 %

The decrease in selling, general and administrative in the three and six months ended June 27, 2020 when compared to the corresponding period in the prior year was primarily due to decreased general operating expenses due to the gain on contingent consideration from the remeasurement of the contingent consideration related to the acquisition of FRT GmbH, as well as decreased travel due to travel restrictions and decreased amortization of intangibles, partially offset by an increase in headcount combined with higher variable performance based compensation, higher stock-based compensation, and higher costs from acquisition of FRT GmbH.

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

Three Months Ended March 28, 2020 compared to Three Months Ended March 30, 2019

Three Months Ended June 27, 2020 compared to Three Months Ended June 29, 2019 Six Months Ended June 27, 2020 compared to Six Months Ended June 29, 2019

Employee compensation 1,385 3,326

Amortization of intangibles (858)

Consulting fees 566

Stock-based compensation 609 1,030

Consulting fees 62 628

Amortization of intangibles (840) (1,697)

Gain on contingent consideration (3,700) (3,700)

General operating expenses (1,044) (606)

$ (3,528) $ (1,019)

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

Three Months Ended

2020 March 30,

Three Months Ended Six Months Ended

2020 June 29,

2019 June 27,

2020 June 29,

Stock-based compensation $ 3,352 $ 2,743 $ 6,599 $ 5,569

Interest Income and Interest Expense

Three Months Ended

2020 March 30,

Three Months Ended Six Months Ended

2020 June 29,

2019 June 27,

2020 June 29,

(Dollars in thousands)

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Interest income is earned on our cash, cash equivalents, restricted cash and marketable securities.

The increase in interest income for the three months ended March 28, 2020 compared with the corresponding period of the prior year was attributable to higher invested balances and sustained investment yields, related in part to longer duration investments.

The decrease in interest income for the three and six months ended June 27, 2020 compared with the corresponding period of the prior year was attributable to lower investment yields due to the low interest rate environment partially offset by higher invested balances.

Interest expense primarily includes interest on our term loans, partially offset by income from our interest-rate swap derivative contracts, as well as term loan issuance costs amortization charges.

The decrease in interest expense for the three months ended March 28, 2020 compared to the same period of the prior year was primarily due to lower outstanding debt balances related to the acquisition of Cascade Microtech in fiscal 2016 as a result of principal payments made, partially offset by additional interest expense related to the term loan originated to finance the acquisition of FRT GmbH in the fourth quarter of 2019.

The decrease in interest expense for the three and six months ended June 27, 2020 compared to the same period of the prior year was primarily due to lower outstanding debt balances related to the acquisition of Cascade Microtech in fiscal 2016 as a result of principal payments made, partially offset by additional interest expense related to the term loan originated to finance the acquisition of FRT GmbH in the fourth quarter of 2019 and additional interest expense related to the term loan originated to finance the purchase of a building in the second quarter of 2020.

Other Expense, Net

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Provision for Income Taxes

Three Months Ended

2020 March 30,

Three Months Ended Six Months Ended

2020 June 29,

2019 June 27,

2020 June 29,

(In thousands, except percentages)

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jurisdictions, offset by tax benefits from tax credits and the foreign-derived intangible income ("FDII") deduction.

We expect the FDII deduction and corresponding benefit to be available after utilizing our previous net operating loss carryforwards, resulting in a decrease in our effective tax rate for the three months ended March 28, 2020, compared to the three months ended March 30, 2019.

We expect the FDII deduction and corresponding benefit to be available after utilizing our previous net operating loss carryforwards, resulting in a decrease in our effective tax rate for the three and six months ended June 27, 2020, compared to the three and six months ended June 29, 2019.

Our effective tax rate may vary from period to period based on changes in estimated taxable income or loss by jurisdiction, changes to the valuation allowance, changes to U.S.

federal, state or foreign tax laws, future expansion into areas with varying country, state, and local income tax rates, deductibility of certain costs and expenses by jurisdiction.

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, deductibility of certain costs and expenses by jurisdiction.

Liquidity and Capital Resources

Capital Resources

Our working capital was $308.8 million at March 28, 2020, compared to $282.5 million at December 28, 2019.

Our working capital was $332.2 million at June 27, 2020, compared to $282.5 million at December 28, 2019.

Cash and cash equivalents primarily consist of deposits held at banks and money market funds.

Marketable securities primarily consist of U.S.

treasuries, U.S.

agency securities and corporate bonds.

treasuries and corporate bonds.

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 $239.4 million at March 28, 2020, compared to $220.9 million at December 28, 2019.

We believe that we will be able to satisfy our working capital requirements and scheduled term loan repayments for at least the next twelve months with the liquidity provided by our existing cash, cash

equivalents, marketable securities and cash provided by operations.

Our cash, cash equivalents and marketable securities totaled approximately $261.1 million at June 27, 2020, compared to $220.9 million at December 28, 2019.

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.

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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.

As a result of the current and uncertain future impact of COVID-19, we have taken actions to preserve and improve our liquidity primarily by limiting our exposures to volatile markets and investments, as well as actively working to minimize counterparty risk.

Government rather than a similar investment where the counterparty is a bank.

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 in fiscal 2020.

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

Three Months Ended

2020 March 30,

Six Months Ended

2020 June 29,

(In thousands)

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Operating Activities

Net cash provided by operating activities for the three months ended March 28, 2020 was primarily attributable to net income of $15.9 million and $22.7 million of net non-cash expenses, offset by changes in operating assets and liabilities, as explained below.

Accounts receivable, net, decreased $7.8 million to $90.1 million at March 28, 2020, compared to $97.9 million at December 28, 2019, as a result of changes in customer sales mix, timing of customer shipments and timing of customer payments.

Inventories, net, decreased $4.3 million to $79.0 million at March 28, 2020, compared to $83.3 million at December 28, 2019, as a result of shipping prior quarter backlog, lower inventory production, and less inventory receipts at the end of the quarter primarily due to reduced operating levels under COVID-19 restrictions, as previously described.

Accrued liabilities decreased $7.3 million to $29.2 million at March 28, 2020, compared to $36.4 million at December 28, 2019, as a result of timing of payments including employee performance-based compensation and indirect taxes.

Net cash provided by operating activities for the six months ended June 27, 2020 was primarily attributable to net income of $36.4 million and $39.3 million of net non-cash expenses, offset by changes in operating assets and liabilities, as explained below.

Accounts receivable, net, decreased $11.3 million to $86.6 million at June 27, 2020, compared to $97.9 million at December 28, 2019, as a result of changes in customer sales mix, timing of customer shipments and timing of customer payments.

Inventories, net, increased $4.6 million to $87.8 million at June 27, 2020, compared to $83.3 million at December 28, 2019, as a result of timing of customer demand expected to ship at the beginning of next quarter, as well as smaller impact related to increased inventory purchases to mitigate the impact of COVID-19 on our supply chain.

Accounts payable increased $3.4 million to $44.3 million at June 27, 2020, compared to $40.9 million at December 28, 2019, as a result of timing of vendor payments.

Investing Activities

Net cash used in investing activities for the three months ended March 28, 2020 was primarily related to $12.1 million of cash used in the acquisition of property, plant and equipment partially offset by $6.6 million of net proceeds from sales of marketable securities.

Net cash used in investing activities for the six months ended June 27, 2020 was primarily related to $36.7 million of cash used in the acquisition of property, plant and equipment, which includes $24.0 million used in the acquisition of a building adjacent to our leased facilities in Livermore, California, partially offset by $15.7 million of net proceeds from sales of marketable securities.

Financing Activities

Net cash used in financing activities for the three months ended March 28, 2020 primarily related to $13.2 million of principal payments made towards the repayment of our term loans and $0.4 million related to tax withholding associated with the net share settlements of our equity awards, partially offset by $4.5 million of proceeds received from issuances of common stock under our employee stock purchase plan and stock option plans.

Net cash used in financing activities for the six months ended June 27, 2020 primarily related to $26.3 million of principal payments made towards the repayment of our term loans and $3.8 million related to tax withholding associated with the net share settlements of our equity awards, partially offset by $18.0 million of proceeds received from the new term loan for our building purchase, as well as $4.9 million of proceeds received from issuances of common stock under our employee stock purchase plan and stock option plans.

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 have provided us with a senior secured term loan facility of $150 million (the “CMI Term Loan”).

On June 24, 2016, we entered into a senior secured term loan facility of $150 million.

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 bears 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.

The CMI Term Loan bears 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 plus 1.00% per annum.

We have currently elected to pay interest at 2.00% over the one-month LIBOR rate.

Interest payments are payable in monthly installments over a five-year period.

The interest rate at March 28, 2020 was 3.61%.

The interest rate at June 27, 2020 was 2.41%.

The principal payments on the CMI Term Loan are 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.

The planned final payment on the CMI Term Loan is scheduled for the third quarter of fiscal 2020.

On July 25, 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 are uncertain, we entered into these interest-rate swap agreements to hedge the exposure in interest rate risks associated with movement in LIBOR rates.

By entering into the agreements, we convert a floating rate interest at one-month LIBOR plus 2% into a fixed rate interest at 2.939%.

The interest rate swap agreement ended as of March 28, 2020.

The obligations under the Term Loan are guaranteed by substantially all of our assets and the assets of our domestic subsidiaries, subject to certain customary exceptions.

The Credit Agreement contains negative covenants customary for financing of this type, as well as certain financial maintenance covenants.

As of March 28, 2020, the balance outstanding pursuant to the CMI Term Loan was $23.7 million and we were in compliance with all covenants under the Credit Agreement.

As of June 27, 2020, the balance outstanding pursuant to the CMI Term Loan was $12.5 million.

The CMI Term loan was subsequently fully paid as of June 30, 2020.

FRT Term Loan

On October 25, 2019, we entered into a $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 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 $1.9 million plus interest beginning January 25, 2020.

The obligations under the FRT Term Loan are fully and unconditionally guaranteed by FormFactor, Inc.

The Credit Facility 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 March 28, 2020, the balance outstanding pursuant to the FRT term loan was $21.4 million and we were in compliance with all covenants.

On October 25, 2019, we entered into a $23.4 million three-year credit facility loan agreement to fund the acquisition of FRT GmbH, which we acquired on October 9, 2019.

The FRT Term Loan bears interest at a rate equal to the Euro Interbank Offered Rate ("EURIBOR") plus 1.75% per annum and will be repaid in quarterly installments of approximately $1.9 million plus interest.

The interest rate at June 27, 2020 was 1.36%.

As of June 27, 2020, the balance outstanding pursuant to the FRT term loan was $19.6 million.

Building Term Loan

On June 22, 2020, we entered into an $18.0 million 15-year credit facility loan agreement.

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 June 27, 2020 was 1.92%.

As of June 27, 2020, the balance outstanding pursuant to the Building Term Loan was $18.0 million.

On March 17, 2020, we entered into an interest rate swap agreement 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 also includes a 0% floor that is effective for one year from the date of the swap.

As of June 27, 2020, the notional amount of the loan that is subject to this interest rate swap is $18.0 million.

See Note 6, Debt , of Notes to Condensed Consolidated Financial Statements.

Contractual Obligations and Commitments

Other than our operating lease commitments as disclosed in Note 12 of Notes to Condensed Consolidated Financial Statements, our contractual obligations and commitments have not materially changed as of March 28, 2020 from those disclosed in our Annual Report on Form 10-K for the year ended December 28, 2019.

The following table summarizes our significant contractual commitments to make future payments in cash under contractual obligations as of June 27, 2020:.

Payments Due In Fiscal Year

Remainder 2020 2021 2022 2023 2024 Thereafter Total

Operating leases $ 3,532 $ 6,275 $ 5,084 $ 4,446 $ 4,261 $ 16,150 $ 39,748

Term loans - principal payments 16,912 8,845 8,873 1,050 1,080 13,368 50,128

Term loans - interest payments (1)

328 537 392 293 273 1,445 3,268

Total $ 20,772 $ 15,657 $ 14,349 $ 5,789 $ 5,614 $ 30,963 $ 93,144

(1) Represents our minimum interest payment commitments at 1.92% per annum for the Building Term Loan and 1.59% per annum for the FRT Term Loan and 2.18% per annum for the CMI Term Loan.

Off-Balance Sheet Arrangements

established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

As of March 28, 2020, we were not involved in any such off-balance sheet arrangements.

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

As of June 27, 2020, we were not involved in any such off-balance sheet arrangements.

Recent Accounting Pronouncements

See Note 1 of Notes to Condensed Consolidated Financial Statements.

See Note 1, Basis of Presentation and New Accounting Pronouncements , of Notes to Condensed Consolidated Financial Statements.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis