FORMFACTOR INC 10-K

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 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. 23 Overview FormFactor, Inc., headquartered in Livermore, California, is a leading provider of test and measurement solutions. 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 optical information from a variety of semiconductor and electro-optical devices and integrated circuits from research, through development to production. Customers use our products and services to lower production costs, improve yields, and enable development of their complex next-generation products. 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 $78.5 million in fiscal 2020 compared to net income of $39.3 million in fiscal 2019 and net income of $104.0 million in fiscal 2018. 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 2020. The decrease in net income in fiscal 2019 compared to fiscal 2018 was primarily due to a $75.8 million income tax benefit recognized in fiscal 2018 related to the release of valuation allowances against certain U.S. deferred tax assets and the increase in provision for income taxes due to the recognition of deferred tax expense. 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 have maintained social distancing, contact tracing, and various other measures to enable our manufacturing sites to continue efficient production. We believe that we operate in a critical infrastructure industry, as defined by the U.S. Department of Homeland Security. 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. 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 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. 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 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. As the COVID-19 pandemic is a widespread public health crisis, it is adversely affecting major economies and financial markets world-wide. A resulting economic downturn can be expected to eventually negatively affect the demand for our products, and contribute to volatile demand and supply conditions affecting the markets for our products. 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 have benefited and may continue to benefit from some of these measures directly or indirectly, 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. 24 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 give rise to a variety of more significant adverse impacts on our business and financial results. We consider this as a near or longer term trend, although we cannot identify or quantify the specific impacts given current levels of uncertainty and the broad variety of effects that may arise from a pandemic of this magnitude. 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 W e operate on a 52/53 week fiscal year, whereby the fiscal year ends on the last Saturday of December. The fiscal years ended December 26, 2020, December 28, 2019 and December 29, 2018 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 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 continually 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 We recognize revenue 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. Generally, the performance obligations in a contract are considered distinct within the context of the contract and are accounted for as separate units. 25 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 are 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. Installation services are routinely provided to customers purchasing our systems. Installation services are a distinct performance obligation apart from the systems and are 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 are recognized over the contractual service period, which ranges from one to three years. For service contracts recognized over time, we use a days-elapsed input 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 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 the 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 26, 2020 compared to the year ended December 28, 2019. For a discussion of the year ended December 28, 2019 compared to the year ended December 29, 2018, 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 28, 2019. 26 The following table sets forth our operating results as a percentage of revenues: Fiscal 2020 Fiscal 2019 Fiscal 2018 Revenues 100.0 % 100.0 % 100.0 % Cost of revenues 58.5 59.7 60.3 Gross profit 41.5 40.3 39.7 Operating expenses: Research and development 12.8 13.8 14.2 Selling, general and administrative 16.6 18.0 18.7 Total operating expenses 29.4 31.8 32.9 Operating income 12.1 8.5 6.8 Interest income 0.2 0.5 0.3 Interest expense (0.1) (0.3) (0.6) Other income (expense), net 0.1 * * Income before income taxes 12.3 8.7 6.5 Provision (benefit) for income taxes 1.0 2.0 (13.2) Net income 11.3 % 6.7 % 19.7 % * Amounts insignificant and not greater than 0.1%. Revenues by Segment Fiscal 2020 Fiscal 2019 Fiscal 2018 (In thousands) Probe Cards $ 581,739 $ 491,363 $ 434,269 Systems 111,877 98,101 95,406 Total $ 693,616 $ 589,464 $ 529,675 Revenues by Market Fiscal % of Fiscal % of Change 2020 Revenues 2019 Revenues $ % (In thousands, except percentages) Probe Cards Markets: Foundry & Logic $ 446,183 64.3 % $ 318,552 54.0 % $ 127,631 40.1 % DRAM 109,734 15.8 147,257 25.0 (37,523) (25.5) Flash 25,822 3.7 25,554 4.3 268 1.0 Systems Market: Systems 111,877 16.2 98,101 16.7 13,776 14.0 Total revenues $ 693,616 100.0 % $ 589,464 100.0 % $ 104,152 17.7 % Fiscal % of Fiscal % of Change 2019 Revenues 2018 Revenues $ % (In thousands, except percentages) Probe Cards Markets: Foundry & Logic $ 318,552 54.0 % $ 258,459 48.8 % $ 60,093 23.3 % DRAM 147,257 25.0 135,333 25.6 11,924 8.8 Flash 25,554 4.3 40,477 7.6 (14,923) (36.9) Systems Market: Systems 98,101 16.7 95,406 18.0 2,695 2.8 Total revenues $ 589,464 100.0 % $ 529,675 100.0 % $ 59,789 11.3 % 27 The increase in Foundry & Logic product revenue in fiscal 2020 compared to fiscal 2019 was driven principally by increased unit sales to large semiconductor foundries and integrated device manufacturers, demonstrating success in diversifying across our strategic accounts. Additionally, sales have increased due to the demand for 5G handsets and devices and infrastructure spending to support working from home and distance learning. The decrease in DRAM product revenues in fiscal 2020 compared to fiscal 2019 was driven by a decreased customer demand as a result of the absorption of large purchases in fiscal 2019. Flash product revenue stayed relatively flat in fiscal 2020 compared to fiscal 2019 driven by the acquisition of Baldwin Park. This offset what would have otherwise been a decrease in demand. Our revenue in this market continues to be highly variable. The increase in Systems product revenue in fiscal 2020 compared to fiscal 2019 was driven by additional revenue from the acquisitions of FRT and HPD and increased sales of probe stations, partially offset by lower revenue from thermal systems. Due to COVID-19, there were various impacts across our segments due to governmental mandates of social distancing. This resulted in a temporary factory shutdown in certain locations for almost two weeks during our first fiscal quarter of 2020, limiting our manufacturing capacity. We believe these shutdowns and governmental mandates negatively affected revenue and impacted our ability to maintain typical lead times throughout fiscal 2020, especially in our Probe Cards segment. Revenues by Geographic Region Fiscal 2020 % of Revenues Fiscal 2019 % of Revenues Fiscal 2018 % of Revenues (In thousands, except percentages) China $ 174,915 25.2 % $ 106,256 18.0 % $ 77,851 14.7 % Taiwan 150,837 21.7 86,539 14.7 107,476 20.3 United States 127,628 18.4 155,202 26.3 133,648 25.2 South Korea 86,951 12.5 116,882 19.8 91,247 17.2 Europe 65,572 9.5 41,473 7.0 39,671 7.5 Japan 43,605 6.3 52,584 8.9 49,814 9.4 Asia-Pacific (1) 32,991 4.8 21,468 3.7 25,980 4.9 Rest of World 11,117 1.6 9,060 1.6 3,988 0.8 Total Revenues $ 693,616 100.0 % $ 589,464 100.0 % $ 529,675 100.0 % (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 2020 compared to fiscal 2019 were primarily attributable to changes in customer demand, shifts in customer regional manufacturing strategies, particularly with our large multinational customers, for example the increase in China in fiscal 2020, 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. 28 Gross profit and gross margin by segment were as follows (dollars in thousands): Fiscal 2020 Probe Cards Systems Corporate and Other Total Gross profit $ 263,215 $ 51,835 $ (27,130) $ 287,920 Gross margin 45.2 % 46.3 % — % 41.5 % Fiscal 2019 Probe Cards Systems Corporate and Other Total Gross profit $ 211,382 $ 50,927 $ (24,813) $ 237,496 Gross margin 43.0 % 51.9 % — % 40.3 % Fiscal 2018 Probe Cards Systems Corporate and Other Total Gross profit $ 187,320 $ 47,074 $ (24,055) $ 210,339 Gross margin 43.1 % 49.3 % — % 39.7 % Probe Cards Gross profit and gross margin in the Probe Cards segment increased in fiscal 2020 compared to fiscal 2019, primarily due to increased sales, higher factory utilization, and product mix. Systems Gross profit and gross margin in the Systems segment decreased in fiscal 2020 compared to fiscal 2019, primarily as a result of less favorable product mix. 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. Overall Gross profit and gross margin fluctuate with revenue levels, product mix, selling prices, factory loading and material costs. For fiscal 2020 compared to fiscal 2019, gross profit increased due to increased sales while gross margins increased by only 1.2% with fluctuations in product mix. Stock-based compensation expense included in gross profit for fiscal 2020 and 2019 was $4.0 million and $4.1 million, respectively. Research and Development Fiscal Year Ended December 26, 2020 December 28, 2019 $ Change % Change (Dollars in thousands) Research and development $ 89,034 $ 81,499 $ 7,535 9.2 % % of revenues 12.8 % 13.8 % Fiscal Year Ended December 28, 2019 December 29, 2018 $ Change % Change (Dollars in thousands) Research and development $ 81,499 $ 74,976 $ 6,523 8.7 % % of revenues 13.8 % 14.2 % 29 The increase in research and development expenses in fiscal 2020 compared to fiscal 2019 was primarily driven by an increase in employee compensation costs caused by increases in headcount combined with higher variable performance-based compensation, a full year of expenses for FRT, which was acquired in the last quarter of fiscal 2019, as well as incremental expenses from newly acquired Baldwin Park, acquired in the third quarter of fiscal 2020, and HPD, acquired in the fourth quarter of fiscal 2020. There was also an increase in project material costs. The components of this increase were as follows (in thousands): Fiscal 2020 compared to Fiscal 2019 Employee compensation costs $ 7,128 Project material costs 1,152 Depreciation 245 General operating expenses (447) Stock-based compensation (543) $ 7,535 Stock-based compensation expense included within research and development in fiscal 2020 and 2019 was $5.8 million and $6.4 million, respectively. Selling, General and Administrative Fiscal Year Ended December 26, 2020 December 28, 2019 $ Change % Change (Dollars in thousands) Selling, general and administrative $ 115,098 $ 106,335 $ 8,763 8.2 % % of revenues 16.6 % 18.0 % Fiscal Year Ended December 28, 2019 December 29, 2018 $ Change % Change (Dollars in thousands) Selling, general and administrative $ 106,335 $ 99,254 $ 7,081 7.1 % % of revenues 18.0 % 18.7 % The increase in selling, general and administrative in fiscal 2020 compared to fiscal 2019 was primarily due to an increase in variable costs with the increased sales volumes, increase in headcount with recent acquisitions, higher variable performance based compensation, higher consulting fees primarily related to information technology security remediation costs, partially offset by a gain on contingent consideration related to the acquisition of FRT, decreased travel due to travel restrictions, and decreased amortization of intangibles as certain intangibles recognized in the acquisition of MicroProbe and Cascade Microtech reached the end of their useful lives, which was only partially offset by the additions of intangibles arising from the more recent acquisitions for FRT, Baldwin Park, and HPD. 30 The components of this overall increase were as follows (in thousands): Fiscal 2020 compared to Fiscal 2019 Employee compensation $ 10,417 Consulting fees 3,580 Stock-based compensation 1,302 Amortization of intangibles (1,254) Gain on contingent consideration (2,879) Travel related costs (3,576) General operating expenses 1,173 $ 8,763 Stock-based compensation expense included within selling, general and administrative in fiscal 2020 and 2019 was $14.1 million, and $12.8 million, respectively. Interest Income and Interest Expense Fiscal Year Ended December 26, 2020 December 28, 2019 December 29, 2018 (Dollars in thousands) Interest income $ 1,501 $ 2,714 $ 1,356 Weighted average balance of cash and investments $ 230,310 $ 179,526 $ 138,467 Weighted average yield on cash and investments 0.90 % 2.05 % 1.51 % Interest expense $ 864 $ 1,915 $ 3,314 Average debt outstanding $ 37,563 $ 56,776 $ 90,086 Weighted average interest rate on debt 1.94 % 4.09 % 3.98 % Interest income is earned on our cash, cash equivalents, restricted cash and marketable securities. The decrease in interest income in fiscal 2020 compared to fiscal 2019 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 2020 compared to fiscal 2019 was primarily due to lower outstanding debt balances due to the pay-off of the CMI Term Loan on June 30, 2020, partially offset by the FRT Term Loan originated in the fourth quarter of 2019 and the Building Term Loan originated in the second quarter of 2020. This activity lowers interest expense due to lower interest rates on the outstanding debt. Other Income (Expense), Net Other income (expense), net primarily includes the effects of foreign currency impact and various other gains and losses. Provision (Benefit) For Income Taxes Fiscal Year Ended December 26, 2020 December 28, 2019 December 29, 2018 (Dollars in thousands) Provision (benefit) for income taxes $ 6,652 $ 11,717 $ (70,109) Effective tax rate 7.8 % 22.9 % (206.6) % Provision (benefit) 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. On July 23, 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 31 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 is taken into account during fiscal 2020. Furthermore, the benefit derived from the FDII deduction is influenced by the relative weighting of export sales and domestic sales and when export sales are proportionally higher the expected effective tax rate is reduced due to a larger realized deduction. In addition to these impacts, the effective tax rate was impacted favorably by additional deductions for stock compensation due to increased stock prices between the grant date and vest date. Our effective tax rate may vary from period to period based on changes in estimated taxable income or loss by jurisdiction, the relative mix of export sales and domestic sales, 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. Liquidity and Capital Resources Capital Resources Our working capital increased to $332.5 million at December 26, 2020 compared to $282.5 million at December 28, 2019, primarily due to higher cash and cash equivalents resulting from cash generated from operations and higher inventories and accounts receivable on higher operating levels, partially offset by higher accounts payable and accrued liabilities on higher volumes and higher deferred revenue. Cash and cash equivalents primarily consist of deposits held at banks and money market funds. Marketable securities primarily consist of U.S. 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 $255.0 million at December 26, 2020 compared to $220.9 million at December 28, 2019. We believe that we will be able to satisfy our working capital requirements for at least the next twelve months with the liquidity provided by our existing cash, cash equivalents, marketable securities and cash provided by operations. 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. Our future capital requirements may vary materially from those now planned. 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. 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, for example, by directly investing in securities where the counterparty is the U.S. 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. 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. 32 Cash Flows Fiscal Year Ended December 26, 2020 December 28, 2019 December 29, 2018 (Dollars in thousands) Net cash provided by operating activities $ 169,256 $ 121,048 $ 68,700 Net cash used in investing activities (98,922) (66,352) (21,295) Net cash used in financing activities (30,935) (6,578) (39,329) Operating Activities Net cash provided by operating activities in fiscal 2020 was primarily attributable to net income of $78.5 million, which included $88.9 million of net non-cash items, offset by changes in operating assets and liabilities using $1.9 million of cash as discussed in more detail below. Accounts receivable increased $9.7 million to $107.6 million at December 26, 2020 compared to $97.9 million at December 28, 2019, as a result of higher operating levels and the acquisitions of Baldwin Park and HPD, offset by timing of customer payments and diligent management of collections. Inventories, net, increased $16.0 million to $99.2 million at December 26, 2020 compared to $83.3 million at December 28, 2019, as a result of anticipated projected customer demand and the increased inventory due to the acquisitions of Baldwin Park and HPD, partially offset by a $13.1 million increase to our provision for excess and obsolete inventories. Accrued liabilities increased $18.9 million to $55.3 million at December 26, 2020 compared to $36.4 million at December 28, 2019, as a result of an increase in employee performance-based compensation and benefits, increases in the contributions withheld for employee stock purchase plan, increases to accrued warranty, and the increased liabilities due to the acquisitions of FRT, Baldwin Park, and HPD. Accounts payable increased $21.1 million to $62.0 million at December 26, 2020 compared to $40.9 million at December 28, 2019, as a result of higher volumes, timing of vendor payments and the increased accounts payable due to the acquisitions of Baldwin Park and HPD. Investing Activities Net cash used in investing activities in fiscal 2020 primarily related to $55.9 million of cash used in the acquisition of property, plant and equipment, including a new production facility in Livermore California, $51.9 million paid (net of cash acquired) as part of the consideration for the acquisition of Baldwin Park and HPD, and $8.7 million used for the purchase of marketable securities, net of maturities. Financing Activities Net cash used in financing activities in fiscal 2020 primarily related to $43.4 million of principal payments made towards the repayment of our term loans and $15.5 million related to tax withholdings associated with the net share settlements of our equity awards, offset by $18.0 million of proceeds from a term loan to fund the purchase of the building in Livermore and $10.0 million of proceeds received from issuances of common stock under our stock incentive plans. 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. 33 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 26, 2020 was 1.24%. 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 26, 2020, the balance outstanding pursuant to the FRT term loan was $17.1 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 26, 2020 was 1.90%. 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 also includes a 0% floor that is effective for one year from the date of the swap. As of December 26, 2020, the notional amount of the loan that is subject to this interest rate swap is $17.5 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. The Credit Agreement contains covenants customary for financing of this type. As of December 26, 2020, the balance outstanding pursuant to the Building Term Loan was $17.5 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 2020, 2019 and 2018, we did not repurchase any shares. 34 Contractual Obligations and Commitments The following table summarizes our significant contractual commitments to make future payments in cash under contractual obligations as of December 26, 2020 (in thousands): Payments Due In Fiscal Year 2021 2022 2023 2024 2025 2026 and thereafter Total Operating leases $ 7,349 $ 6,115 $ 5,254 $ 4,903 $ 4,863 $ 12,531 $ 41,015 Term loans - principal payments 9,521 9,549 1,050 1,080 1,111 12,258 34,569 Term loans - interest payments (1) 503 377 290 271 248 1,185 2,874 Total $ 17,373 $ 16,041 $ 6,594 $ 6,254 $ 6,222 $ 25,974 $ 78,458 (1) Represents our minimum interest payment commitments at 1.24% per annum for the FRT Term Loan and 1.90% per annum for the Building Term Loan. The table above excludes our gross liability for unrecognized tax benefits, which totaled $32.5 million as of December 26, 2020. The timing of any payments which could result from these unrecognized tax benefits will depend upon a number of factors. Accordingly, the timing of payment cannot be estimated and has been excluded from the table above. 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 December 26, 2020, we were not involved in any off-balance sheet arrangements. 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 26, 2020 or December 28, 2019. New Accounting Pronouncements See Note 16, New Accounting Pronouncements , of Notes to Consolidated Financial Statements.