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Item 7. Management’s Discussion and Analysis

2022-02-18 compared with 2021-02-22 · 94 added, 101 removed, 268 unchanged (42% of the section changed)

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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:

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.

FormFactor, Inc., headquartered in Livermore, California, is a leading provider of test and measurement solutions.

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 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.

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.

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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 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.

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.

Impact of COVID-19

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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.

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.

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.

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.

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.

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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.

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.

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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.

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.

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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.

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:

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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.

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.

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 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.

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.

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.

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.

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Interest expense (0.1) (0.1) (0.3)

Other income (expense), net 0.1 * *

Other income, net 0.1 0.1 *

Income before income taxes 12.8 12.3 8.7

Provision (benefit) for income taxes 1.0 2.0 (13.2)

Provision for income taxes 1.9 1.0 2.0

Net income 10.9 % 11.3 % 6.7 %

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Total revenues $ 693,616 100.0 % $ 589,464 100.0 % $ 104,152 17.7 %

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.

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 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.

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.

Revenues by Geographic Region

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(In thousands, except percentages)

China $ 174,915 25.2 % $ 106,256 18.0 % $ 77,851 14.7 %

Taiwan $ 185,925 24.2 % $ 150,837 21.7 % $ 86,539 14.7 %

United States 127,628 18.4 155,202 26.3 133,648 25.2

China 163,069 21.2 174,915 25.2 106,256 18.0

South Korea 123,463 16.0 86,951 12.5 116,882 19.8

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

United States 122,147 15.9 127,628 18.4 155,202 26.3

Asia-Pacific (1)

88,550 11.5 32,991 4.8 21,468 3.7

Europe 43,705 5.7 65,572 9.5 41,473 7.0

Japan 36,504 4.7 43,605 6.3 52,584 8.9

Rest of World 6,311 0.8 11,117 1.6 9,060 1.6

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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 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.

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

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Gross margin 43.0 % 51.9 % — % 40.3 %

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.

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.

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

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.

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.

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.

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

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% of revenues 12.8 % 13.8 %

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 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):

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Employee compensation costs $ 5,697

Project material costs 1,152

Depreciation 245

General operating expenses 3,259

Stock-based compensation 1,759

Restructure 869

Depreciation 181

Project material costs 138

Stock-based compensation expense included within research and development in fiscal 2021 and 2020 was $7.6 million and $5.8 million, respectively.

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% of revenues 16.6 % 18.0 %

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.

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):

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Employee compensation $ 5,832

Consulting fees 3,580

Stock-based compensation 1,302

Amortization of intangibles (1,254)

Gain on contingent consideration 2,784

Travel related costs (3,576)

Stock-based compensation 2,546

General operating expenses 1,537

Consulting fees (4,005)

Stock-based compensation expense included within selling, general and administrative in fiscal 2021 and 2020 was $16.6 million, and $14.1 million, respectively.

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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

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

Fiscal Year Ended

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(Dollars in thousands)

Provision (benefit) for income taxes $ 6,652 $ 11,717 $ (70,109)

Provision for income taxes $ 14,576 $ 6,652 $ 11,717

Effective tax rate 14.8 % 7.8 % 22.9 %

Provision (benefit) for income taxes reflects the tax provision on our operations in foreign and U.S.

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.

On July 23, 2020, the U.S.

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 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.

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 $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.

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 and corporate bonds.

treasuries, corporate bonds and commercial paper.

We typically invest in highly-rated securities with low probabilities of default.

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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.

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.

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.

Our future capital requirements may vary materially from those now planned.

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.

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.

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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 $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.

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 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.

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 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.

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.

CMI Term Loan

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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.

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.

7 unchanged sentences

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.

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

9 unchanged sentences

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.

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.

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

12 unchanged sentences

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-K

Item 7. Management’s Discussion and Analysis