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Item 7. Management’s Discussion and Analysis

2023-02-24 compared with 2022-02-18 · 91 added, 129 removed, 233 unchanged (49% of the section changed)

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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:

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.

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We generated net income of $50.7 million in fiscal 2022 compared to net income of $83.9 million in fiscal 2021 and net income of $78.5 million in fiscal 2020.

The increase in net income in fiscal 2021 compared to fiscal 2020 was primarily due to increased revenue in both of our reportable segments, partially offset by slightly lower margins driven primarily by product mix and a higher tax rate due to significant one-time tax benefits during fiscal 2020 that did not recur.

The increase in net income in fiscal 2020 compared to fiscal 2019 was primarily due to increased revenue and leverage on operating expenses, which only marginally increased on significantly higher operating levels, as well as a decrease in provision for income taxes due to a lower effective tax rate in fiscal 2020.

Impact of COVID-19

The COVID-19 pandemic continues to cause serious illness and death in many of the regions that we, our customers and our suppliers operate.

The COVID-19 pandemic has resulted in significant governmental actions designed to control the spread of the virus, including the imposition of safety requirements and other orders in locations where we have manufacturing and other activities.

We continue to operate our manufacturing sites at production levels greater than those prior to the pandemic, albeit subject to certain safety and related constraints.

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

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

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

The semiconductor industry is experiencing various supply constraints due to the pandemic.

While we are working with our global supply chain partners to mitigate this risk, the duration and extent of the supply chain disruptions remain uncertain.

For a further description of the uncertainties and business risks associated with the COVID-19 pandemic, see Part I, Item 1A, “Risk Factors” in this Annual Report on Form 10-K.

The decrease in net income in fiscal 2022 compared to fiscal 2021 was primarily due to decreased revenues, lower margins driven primarily by a less favorable product mix and lower factory utilization, and increased restructuring charges.

This was partially offset by a reduction in the amortization of intangibles and in the annual effective tax rate.

The first half of fiscal 2022 was strong, realizing net income of $60.1 million with $401.1 million in revenue at 47.0% gross margins.

In the second half of fiscal 2022, revenues declined, mainly within the Probe Cards segment, and mix became less favorable, resulting in a net loss of $9.4 million with $346.9 million in revenue at 31.0% gross margins.

Despite the decline in total revenues in the second half of fiscal 2022, the Systems segment recognized record revenue levels in the third and fourth quarters of fiscal 2022.

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 a less favorable product mix and a higher effective tax rate due to significant one-time tax benefits during fiscal 2020 that did not recur.

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 25, 2021, December 26, 2020 and December 28, 2019 each included 52 weeks.

The fiscal years ended December 31, 2022, December 25, 2021 and December 26, 2020 included 53 weeks (with 14 weeks in the fourth quarter), 52 weeks and 52 weeks, respectively.

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.

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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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.

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.

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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.

Future consumption is estimated based upon assumptions about how past consumption, recent purchases, backlog and other factors may 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.

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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.

probe cards, systems, accessories, engineering services, 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.

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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.

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.

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Installation services are routinely provided to customers purchasing our systems.

Installation services are a distinct performance obligation apart from the systems and recognized in the period they are performed.

Service contracts, which include repair and maintenance service contracts, and extended warranty contracts are also distinct performance obligations and recognized over the contractual service period, which ranges from one to three years .

For these service contracts recognized over time, we use an input measure, days elapsed, to measure progress.

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 these service contracts recognized over time, we use the input measure of 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.

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Net income 6.8 % 10.9 % 11.3 %

* Amounts insignificant and not greater than 0.1%.

Revenues by Segment

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Total revenues $ 769,674 100.0 % $ 693,616 100.0 % $ 76,058 11.0 %

The decrease in Foundry & Logic product revenue in fiscal 2021 compared to fiscal 2020 was driven by lower demand from two major customers, partially offset by increased unit sales to other large semiconductor foundries and integrated device manufacturers.

Our ability to significantly grow our overall revenue, despite these fluctuations, is the result of our long-term customer and market diversification initiatives.

The increase in DRAM product revenues in fiscal 2021 compared to fiscal 2020 was driven by increased sales to several customers and strong market-based demand for DRAM products through fiscal 2021.

While we expect DRAM revenues to fluctuate from period to period, we believe new-design activity will continue to sustain healthy DRAM demand from each of our customers throughout fiscal 2022.

The increase in Flash product revenue in fiscal 2021 compared to fiscal 2020 was driven by increased sales resulting from the acquisition of the probe card assets of Advantest Corporation (“Baldwin Park”), offset by decreased sales as a result of decreased customer demand for our existing products.

Our revenue in this market continues to be highly variable.

The increase in Systems product revenue in fiscal 2021 compared to fiscal 2020 was driven by increased sales of cryogenic systems due to the acquisition of High Precision Devices, Inc.

(“HPD”) and increased sales of thermal sub-systems and metrology systems.

Foundry & Logic — The decrease in Foundry & Logic product revenue in fiscal 2022 compared to fiscal 2021 was driven by the weakening demand from the slowdown in the semiconductor industry that began in the third quarter of fiscal 2022 causing decreased unit sales.

DRAM — The decrease in DRAM product revenues in fiscal 2022 compared to fiscal 2021 was driven by decreased design wins and customer demand, a result of overall DRAM market weakness in fiscal 2022.

Flash — The increase in Flash product revenue in fiscal 2022 compared to fiscal 2021 was driven by increased demand from large multi-national customers.

Systems — The increase in Systems product revenue in fiscal 2022 compared to fiscal 2021 was driven by increased sales of probe stations, metrology systems, and cryogenic systems.

Revenues by Geographic Region

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China 160,668 21.5 163,069 21.2 174,915 25.2

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

United States 127,730 17.1 122,147 15.9 127,628 18.4

Asia-Pacific (1)

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

South Korea 111,419 14.9 123,463 16.0 86,951 12.5

Malaysia 50,067 6.7 49,485 6.4 11,382 1.6

Singapore 39,388 5.3 36,197 4.7 16,707 2.4

Europe 39,246 5.2 43,705 5.7 65,572 9.5

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Total Revenues $ 747,937 100.0 % $ 769,674 100.0 % $ 693,616 100.0 %

(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.

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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 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.

Changes in revenue by geographic region in fiscal 2022 compared to fiscal 2021 were primarily attributable to changes in customer demand and product sales mix.

In October 2022, the United States government imposed new controls, including expanded export license requirements that significantly impacted trade with China for advanced U.S.

semiconductor technology sold in China.

Although the percentage of revenue to China was relatively stable when comparing fiscal 2022 to fiscal 2021, these restrictions resulted in a decline in expected revenues from shipments to China.

Within the Probe Cards segment and Systems segment, respectively, approximately $7.8 million and $1.9 million of expected revenues in the fourth quarter of fiscal 2022 were not recognized as a result of these sanctions, and primarily related to China domestic customers.

Although the current impact to our large multi-national customers with operations in China has been minimal, it remains to be seen whether these customers will be able to

sustain their licenses going forward.

We do not anticipate these expanded export license requirements to be relaxed, and expect these regulatory conditions to continue to negatively affect our revenues similarly going forward.

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.

Cost of revenues consists primarily of manufacturing materials, compensation and benefits, shipping and handling costs, manufacturing-related overhead (including equipment costs, related occupancy, and computer services), warranty adjustments, inventory adjustments (including write-downs for inventory obsolescence), and amortization of certain intangible assets.

Our manufacturing operations rely on a limited number of suppliers to provide key components and materials for our products, some of which are a sole source.

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Gross margin 45.2 % 46.3 % 41.5 %

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 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.

Probe Cards — Gross profit and gross margin in the Probe Cards segment decreased in fiscal 2022 compared to fiscal 2021, primarily due to lower revenues, greater inventory excess and obsolescence reserves, higher net manufacturing spending driven by higher labor and overhead costs, and lower standard margins related to a less favorable product mix.

Systems — Gross profit and gross margin in the Systems segment increased in fiscal 2022 compared to fiscal 2021, primarily as a result of higher revenues and a more favorable product mix, largely related to increased sales of 300mm and 200mm probe stations, and metrology systems.

Corporate and Other — Corporate and Other includes unallocated expenses relating to amortization of intangible assets, inventory, fixed asset, and deferred revenue 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 2022 compared to fiscal 2021, is primarily due to a reduction in the amortization of intangibles from significant intangibles becoming fully amortized and a reduction in stock-based compensation expense, partially offset by increased restructuring charges arising from a change in estimate of excess and obsolete inventories related to our third quarter of fiscal 2021 plan and the execution of a headcount reduction in the fourth quarter of fiscal 2022 targeted at aligning FormFactor's cost structure with reduced demand levels within the Probe Cards segment by streamlining and improving the efficiency and business effectiveness of our operations.

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

For fiscal 2022 compared to fiscal 2021, gross profit and gross margins have decreased on lower revenue levels, a less favorable Probe Cards segment product mix, increased labor, overhead, inventory excess and obsolescence reserves, and restructuring charges, offset by less amortization of intangible assets.

Stock-based compensation expense included in cost of revenues for fiscal 2022 and 2021 was $3.8 million and $5.2 million, respectively.

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% of revenues 13.1 % 12.8 %

The increase in research and development expenses in fiscal 2021 compared to fiscal 2020 was primarily driven by our acquisitions of Baldwin Park and HPD during the third and fourth quarters of fiscal 2020, respectively, which increased headcount and general operational costs.

Annual salary increases, higher stock-based compensation, and restructuring charges also contributed to the increase.

The increase in research and development expenses in fiscal 2022 compared to fiscal 2021 was primarily driven by an increase in headcount which is to support our continued investment in technology leadership.

Increased project material costs, general operational costs, annual salary adjustments, restructuring charges, and stock-based compensation also contributed to the increase.

These increases were partially offset by lower performance-based compensation.

The components of this increase were as follows (in thousands):

Fiscal 2022 compared to Fiscal 2021

Employee compensation costs $ 5,697

General operating expenses 3,259

General operational costs $ 3,513

Project material costs 3,252

Stock-based compensation 634

Restructure 869

Restructuring charges 629

Depreciation 166

Project material costs 138

Employee compensation costs 91

Stock-based compensation expense included within research and development in fiscal 2022 and 2021 was $8.2 million and $7.6 million, respectively.

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% of revenues 16.1 % 16.6 %

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 increase in selling, general and administrative expenses in fiscal 2022 compared to fiscal 2021 was primarily driven by higher stock-based compensation, increased travel related costs as restrictions related to COVID-19 relaxed, restructuring charges, and annual salary increases, partially offset by lower performance-based compensation.

The components of this overall increase were as follows (in thousands):

Fiscal 2022 compared to Fiscal 2021

Employee compensation $ 5,832

Gain on contingent consideration 2,784

Stock-based compensation $ 2,712

General operating expenses 2,672

Travel related costs 2,572

Restructuring charges 2,115

Employee compensation (1,412)

Consulting fees (576)

Stock-based compensation expense included within selling, general and administrative in fiscal 2022 and 2021 was $19.3 million, and $16.6 million, respectively.

The increase of stock-based compensation in fiscal 2022 compared to fiscal 2021 was primarily driven by an increase in total awards outstanding, which has increased in recent years consistent with an overall increase in headcount.

Interest Income and Interest Expense

Fiscal Year Ended

December 25, 2021 December 26, 2020 December 28, 2019

(Dollars in thousands)

Interest income $ 569 $ 1,501 $ 2,714

Weighted average balance of cash and investments 265,248 230,310 179,526

Weighted average yield on cash and investments 0.29 % 0.90 % 2.05 %

Interest expense $ 602 $ 864 $ 1,915

Average debt outstanding 16,304 37,563 56,776

Weighted average interest rate on debt 1.42 % 1.94 % 4.09 %

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

The decrease in interest income in fiscal 2021 compared to fiscal 2020 was attributable to lower investment yields due to the low interest rate environment, despite higher invested balances.

The increase in interest income in fiscal 2022 compared to fiscal 2021 was attributable to an increase in investment yields due to the higher interest rate environment.

Interest expense primarily includes interest on our term loans, interest rate swap derivative contracts, and term loan issuance costs amortization charges.

The decrease in interest expense in fiscal 2021 compared to fiscal 2020 was primarily due to lower outstanding debt balances driven primarily by the pay-off of one of our term loans on June 30, 2020.

The decrease in interest expense in fiscal 2022 compared to fiscal 2021 was primarily due to lower outstanding debt balances offset by increased average rates on the outstanding debt.

Other income, net

Other income, net primarily includes the effects of foreign currency impact and various other gains and losses.

The increase in other income, net, in fiscal 2022 compared to fiscal 2021 was attributable to a net increase in foreign exchange gains.

Foreign exchange gains for fiscal 2022 were $1.1 million.

Provision for income taxes

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

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

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

federal, state or foreign tax laws, changes in ASC 718 stock-based compensation expense/benefit, future expansion into areas with varying country, state, and local income tax rates, and deductibility of certain costs and expenses by jurisdiction.

We have utilized our previous net operating loss carryforwards in fiscal 2021, and expect the FDII deduction and corresponding benefit to be available, resulting in a decrease from the U.S.

statutory rate and included in our worldwide effective tax rate for the year ended December 25, 2021.

In fiscal 2020, the U.S.

Department of Treasury and the Internal Revenue Service finalized regulations T.D.

9902 with respect to the global intangible low-taxes income high-tax exemption, resulting in a decrease in our effective tax rate.

This adjustment was retroactive to the fiscal years 2018 and 2019 and the cumulative impact was taken into account during fiscal 2020, which provided a significant one-time tax benefit in fiscal 2020.

We have utilized our previous net operating loss carryforwards allowing us to benefit from the available FDII deduction, resulting in a decrease from the U.S.

statutory rate and, combined with higher R&D tax credits, a decrease from fiscal 2021 of our worldwide effective tax rate for the fiscal year ended December 31, 2022.

As of January 1, 2022, the Tax Cuts and Jobs Act of 2017 eliminated the option to deduct research and experimental expenditures immediately in the year incurred and requires taxpayers to amortize such expenditures attributable to domestic and foreign research over five and fifteen years, respectively.

While it is possible that Congress may defer, modify, or repeal this provision, potentially with retroactive effect, we have no assurance that this provision will be deferred, modified, or repealed.

An Advanced Manufacturing Investment credit becomes available in 2023 and is a 25% credit for qualified investments in an advanced manufacturing facility.

We expect to generate federal tax credits under this program that will both lower our effective

tax rate in the future and also help to offset the additional cash taxes arising from the change to capitalize research and experimental expenditures described earlier.

Liquidity and Capital Resources

Capital Resources

Our working capital increased to $375.3 million at December 25, 2021 compared to $332.5 million at December 26, 2020, primarily due to higher cash, cash equivalents and marketable securities, net, from cash generated from operations, higher inventories and accounts receivable on higher operating levels, and lower accounts payable and accrued liabilities from timing of payments, partially offset by higher deferred revenue and operating lease liabilities.

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

Our working capital decreased to $324.9 million at December 31, 2022 compared to $375.3 million at December 25, 2021.

Cash and cash equivalents primarily consist of deposits held at banks, money market funds, commercial paper and U.S.

agency securities.

Marketable securities primarily consist of U.S.

treasuries, corporate bonds and commercial paper.

Marketable securities primarily consist of corporate bonds, U.S.

treasuries and agency securities, and commercial paper.

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

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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.

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.

If we are unsuccessful in maintaining or growing our revenues, maintaining or reducing our cost structure, or increasing our available cash through debt or equity financings, our cash, cash equivalents and marketable securities may decline.

We utilize a variety of tax planning and financing strategies 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.

Should we require additional capital in the United States, we may elect to repatriate indefinitely-reinvested foreign funds or raise capital in the United States.

Fiscal Year Ended

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Cash provided by operating activities consists of net income for the period adjusted for certain non-cash items and changes in certain operating assets and liabilities.

The $29.9 million decrease in cash provided by operating activities for fiscal 2021, as compared to fiscal 2020, was primarily related to increased investment in working capital to support higher operating levels.

Net cash provided by operating activities in fiscal 2021 was primarily attributable to net income of $83.9 million, which included $105.2 million of net non-cash items, offset by changes in operating assets and liabilities using $49.8 million of cash as discussed in more detail below.

Accounts receivable increased $7.9 million to $115.5 million at December 25, 2021 compared to $107.6 million at December 26, 2020, as a result of higher operating levels and timing of customer payments.

Inventories, net, increased $12.3 million to $111.5 million at December 25, 2021 compared to $99.2 million at December 26, 2020, as a result of higher operating levels.

Accounts payable and accrued liabilities decreased $8.7 million to $108.7 million at December 25, 2021 compared to $117.4 million at December 26, 2020, as a result of the timing of payments and decreases in accrued warranty, partially offset by higher operating levels and increases in accrued taxes.

Operating lease liabilities increased $4.2 million to $38.9 million at December 25, 2021, compared to $34.7 million at December 26, 2020, as a result of additional right-of-use assets obtained in exchange for lease obligations of $7.2 million, offset by lease payments.

The $7.6 million decrease in cash provided by operating activities for fiscal 2022, as compared to fiscal 2021, was primarily related to decreased net income, partially offset by relatively less investment in working capital, due primarily to lower accounts receivable and higher accounts payable.

Net cash provided by operating activities in fiscal 2022 was primarily attributable to net income of $50.7 million and net non-cash expenses of $99.2 million, which includes depreciation, amortization, stock-based compensation, and the provision for excess and obsolete inventories.

This was partially offset by an increase in net working capital of $18.2 million, primarily related to cash paid for inventories of $28.8 million, decrease in accrued liabilities of $8.0 million, and a reduction in operating lease liabilities of $8.0 million, partially offset by cash provided by a decrease in accounts receivable of $26.0 million.

Investing Activities

Net cash used in investing activities in fiscal 2021 primarily related to $66.5 million of cash used in the acquisition of property, plant and equipment, and $58.2 million used for the purchase of marketable securities, net of maturities.

Net cash used in investing activities in fiscal 2022 primarily related to $65.3 million of cash used in the acquisition of property, plant and equipment, $6.1 million used for the purchase of marketable securities, net of maturities, and $3.4 million used for the acquisition of a business.

Financing Activities

Net cash used in financing activities in fiscal 2022 primarily related to $82.3 million used to purchase common stock under our stock repurchase program, $15.7 million used to pay tax withholdings for net share settlements of employee equity awards, and $8.4 million of principal payments made towards the repayment of our term loans, partially offset by $10.5 million of proceeds received from issuances of common stock under our stock incentive 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 provided us with a senior secured term loan facility of $150 million (the “CMI Term Loan”).

The proceeds of the CMI Term Loan were used to finance a portion of the purchase price paid in connection with the Cascade Microtech acquisition in fiscal 2016 and to pay related bank fees and expenses.

The CMI Term Loan bore interest at a rate equal to, at our option, (i) the applicable London Interbank Offered Rate (“LIBOR”) rate plus 2.00% per annum or (ii) Base Rate (as defined in the Credit Agreement) plus 1.00% per annum.

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

Interest payments were payable in quarterly installments over a five-year period.

The principal payments on the CMI Term Loan were scheduled to be paid in equal quarterly installments that began June 30, 2016, in an annual amount equal to 5% for year one, 10% for year two, 20% for year three, 30% for year four and 35% for year five.

We accelerated payments of these scheduled amounts and made the final payment on the CMI Term Loan on June 30, 2020, approximately one year before the original maturity.

We are no longer subject to the terms of the Credit Agreement.

FRT Term Loan

On October 25, 2019, we entered into a euro denominated $23.4 million, three-year credit facility loan agreement (the “FRT Term Loan”) with HSBC Trinkaus & Burkhardt AG, Germany, to fund the acquisition of FRT GmbH, which we acquired on October 9, 2019.

The FRT Term Loan bears interest at a rate equal to the Euro Interbank Offered Rate (“EURIBOR”) plus 1.75 % per annum and will be repaid in quarterly installments of approximately $2.0 million plus interest.

The interest rate at December 25, 2021 was 1.20%.

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

The FRT Term Loan contains negative covenants customary for financing of this type, including covenants that place limitations on the incurrence of additional indebtedness, the creation of liens, the payment of dividends;

dispositions;

fundamental changes, including mergers and acquisitions;

loans and investments;

sale leasebacks;

negative pledges;

transactions with affiliates;

changes in fiscal year;

sanctions and anti-bribery laws and regulations, and modifications to charter documents in a manner materially adverse to the Lenders.

The FRT Term Loan also contains affirmative covenants and representations and warranties customary for financing of this type.

As of December 25, 2021, the balance outstanding pursuant to the FRT term loan was $7.9 million, and we were in compliance with all covenants.

The FRT Term Loan bore interest at a rate equal to the Euro Interbank Offered Rate (“EURIBOR”) plus 1.75 % per annum and was repaid in quarterly installments of approximately $2.0 million plus interest.

We made the final payment on the FRT Term Loan on October 25, 2022.

We are no longer subject to the terms of the FRT Term Loan.

Building Term Loan

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The obligations under the Building Term Loan are guaranteed by a deed of trust covering certain real property and improvements and certain personal property used in connection therewith.

The deed of trust creates a first priority lien or encumbrance on the property with only such exceptions as may be approved by the Union Bank in writing.

The Credit Agreement contains covenants customary for financing of this type.

As of December 25, 2021, the balance outstanding pursuant to the Building Term Loan was $16.5 million, 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.

The deed of trust creates a first priority lien or encumbrance on the property with only such exceptions as may be approved by Union Bank in writing.

The Building Term Loan contains covenants customary for financing of this type.

As of December 31, 2022, the balance outstanding pursuant to the Building Term Loan was $15.5 million, and we were in compliance with all covenants under the agreement.

Stock Repurchase Programs

This repurchase program replaced the previous repurchase program that expired in February 2020 to purchase up to $25.0 million of outstanding common stock.

There was no stock repurchased in fiscal 2020.

During fiscal 2021, we repurchased 622,400 shares of common stock for $24.0 million, and, as of December 31, 2022 we had utilized the remaining funds available for repurchase under this program after repurchasing 676,408 shares of common stock for $26.0 million during fiscal 2022.

On May 20, 2022, our Board of Directors authorized an additional program to repurchase up to $75 million of outstanding common stock, also with the primary purpose of offsetting potential dilution from issuance of common stock under our stock-based compensation programs.

This share repurchase program will expire on May 20, 2024.

During fiscal 2022, we repurchased 1,700,893 shares of common stock for $56.4 million, and as of December 31, 2022 $18.6 million remained available for future repurchases.

There was no stock repurchased in fiscal 2020 or 2019.

Contractual Obligations and Commitments

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Total $ 9,982 $ 9,699 $ 9,569 $ 8,456 $ 7,542 $ 15,688 $ 60,936

(1) Represents our minimum interest payment commitments at 1.20% per annum for the FRT Term Loan and 1.85% per annum for the Building Term Loan.

(1) Represents our minimum interest payment commitments at 5.87% per annum for the Building Term Loan, excluding the interest rate swap described in Debt, above.

The table above excludes our gross liability for unrecognized tax benefits, which totaled $40.1 million as of December 31, 2022.

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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.

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 damage 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.

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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