UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
 
(Mark one)
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 29, 2019
March 28, 2020
Or 

☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from            to            
 
Commission file number: 000-50307
 
FormFactor, Inc.
(Exact name of registrant as specified in its charter)
Delaware13-3711155
(State or other jurisdiction of

incorporation or organization)
(I.R.S. Employer

Identification No.)
 
7005 Southfront Road,, Livermore,, California94551
(Address of principal executive offices, including zip code)
 
(925) (925) 290-4000
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common stock, $0.001 par valueFORMNasdaq Global Select Market

 ______________________________________

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes ☒  No ☐
 
Indicate by check mark whether the registrant submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of the Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ☒  No ☐
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer☒Accelerated Filer☐
Non-accelerated Filer☐Smaller Reporting Company☐
(Do not check if a smaller reporting company)
Emerging Growth Company☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐   

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ☐  No ☒ 

As of July 31, 2019, 75,185,253May 4, 2020, 76,161,842 shares of the registrant’s common stock, par value $0.001 per share, were outstanding.




FORMFACTOR, INC.
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 28, 2020
INDEX

FORMFACTOR, INC.Part I.
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 29, 2019Financial Information
INDEXItem 1.
Condensed Consolidated Balance Sheets as of March 28, 2020 and December 28, 2019
3
Part I.
Financial Information
Item 1.
Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets as of June 29, 2019 and December 29, 2018
3
Condensed Consolidated Statements of Income for the three months ended March 28, 2020and six months ended June 29, 2019 and June March30 2018, 2019
4
Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 29, 2019March 28, 2020 and June March30 2018, 2019
5
Condensed Consolidated Statement of Stockholders' Equity for the three and six months ended June 29, 2019March 28, 2020 and June March30 2018, 2019
6
Condensed Consolidated Statements of Cash Flows for the sixthree months ended June 29, 2019March 28, 2020 and June March30 2018, 2019
7
Notes to Condensed Consolidated Financial Statements
8
2120
30
30
3230
3230
32
33


2

PART I - FINANCIAL INFORMATION
 
Item 1. Financial Statements
 
FORMFACTOR, INC.
FORMFACTOR, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
(Unaudited)
 June 29,
2019		 December 29, 2018
ASSETS 
 

Current assets: 
  
Cash and cash equivalents$124,810
 $98,472
Marketable securities52,071
 50,531
Accounts receivable, net of allowance for doubtful accounts of $189 and $18571,289
 95,333
Inventories, net83,852
 77,706
Restricted cash818
 849
Refundable income taxes524
 1,260
Prepaid expenses and other current assets14,282
 13,669
Total current assets347,646
 337,820
Restricted cash1,066
 1,225
Operating lease, right-of-use-assets33,274
 —
Property, plant and equipment, net of accumulated depreciation of $270,566 and $263,10254,436
 54,054
Goodwill189,121
 189,214
Intangibles, net53,404
 67,640
Deferred tax assets77,279
 77,301
Other assets1,343
 968
Total assets$757,569
 $728,222
    
LIABILITIES AND STOCKHOLDERS’ EQUITY 
  
Current liabilities: 
  
Accounts payable$26,252
 $40,006
Accrued liabilities29,500
 27,731
Current portion of term loan, net of unamortized issuance cost of $93 and $16033,657
 29,840
Deferred revenue7,198
 4,941
Operating lease liabilities6,203
 —
Total current liabilities102,810
 102,518
Term loan, less current portion, net of unamortized issuance cost of $0 and $2912,500
 34,971
Deferred tax liabilities2,339
 2,355
Long-term operating lease liabilities31,173
 —
Other liabilities4,645
 8,214
Total liabilities153,467
 148,058

 
  
Stockholders’ equity: 
  
Preferred stock, $0.001 par value: 
  
10,000,000 shares authorized; no shares issued and outstanding—
 —
Common stock, $0.001 par value: 
  
250,000,000 shares authorized; 74,691,781 and 74,139,712 shares issued and outstanding75
 74
Additional paid-in capital875,024
 862,897
Accumulated other comprehensive income159
 780
Accumulated deficit(271,156) (283,587)
Total stockholders’ equity604,102
 580,164
Total liabilities and stockholders’ equity$757,569
 $728,222
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
(Unaudited)
 March 28,
2020		December 28,
2019
ASSETS 
Current assets:  
Cash and cash equivalents$169,607  $144,545  
Marketable securities69,759  76,327  
Accounts receivable, net of allowance for doubtful accounts of $222 and $22290,100  97,868  
Inventories, net78,983  83,258  
Restricted cash2,107  1,981  
Prepaid expenses and other current assets15,699  15,064  
Total current assets426,255  419,043  
Restricted cash1,361  1,411  
Operating lease, right-of-use-assets36,212  31,420  
Property, plant and equipment, net of accumulated depreciation of $277,017 and $273,00163,745  58,747  
Goodwill200,378  199,196  
Intangibles, net50,139  57,610  
Deferred tax assets70,273  71,252  
Other assets1,016  1,203  
Total assets$849,379  $839,882  
LIABILITIES AND STOCKHOLDERS’ EQUITY 
Current liabilities: 
Accounts payable$40,139  $40,914  
Accrued liabilities29,175  36,439  
Current portion of term loans, net of unamortized issuance costs31,535  42,846  
Deferred revenue9,830  9,810  
Operating lease liabilities6,815  6,551  
Total current liabilities117,494  136,560  
Term loan, less current portion, net of unamortized issuance costs13,642  15,639  
Deferred tax liabilities6,095  6,986  
Long-term operating lease liabilities34,028  29,088  
Other liabilities11,703  10,612  
Total liabilities182,962  198,885  
 
Stockholders’ equity: 
Preferred stock, $0.001 par value: 
10,000,000 shares authorized; no shares issued and outstanding—  —  
Common stock, $0.001 par value: 
250,000,000 shares authorized; 76,158,251 and 75,764,990 shares issued and outstanding77  76  
Additional paid-in capital895,600  885,821  
Accumulated other comprehensive loss(909) (659) 
Accumulated deficit(228,351) (244,241) 
Total stockholders’ equity666,417  640,997  
Total liabilities and stockholders’ equity$849,379  $839,882  
 
The accompanying notes are an integral part of these condensed consolidated financial statements. 

3


FORMFACTOR, INC.
 CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
 Three Months Ended Six Months Ended
 June 29,
2019		 June 30,
2018		 June 29,
2019		 June 30,
2018
Revenues$138,018
 $135,509
 $270,231
 $253,799
Cost of revenues82,666
 79,291
 162,358
 152,452
Gross profit55,352
 56,218
 107,873
 101,347
Operating expenses: 
  
  
  
Research and development20,074
 19,675
 39,797
 37,721
Selling, general and administrative26,283
 25,232
 51,467
 48,681
Total operating expenses46,357
 44,907
 91,264
 86,402
Operating income8,995
 11,311
 16,609
 14,945
Interest income684
 326
 1,264
 583
Interest expense(522) (910) (1,117) (1,877)
Other income (expense), net81
 50
 (3) (462)
Income before income taxes9,238
 10,777
 16,753
 13,189
Provision for income taxes2,290
 1,654
 4,322
 1,941
Net income$6,948
 $9,123
 $12,431
 $11,248
Net income per share: 
      
Basic$0.09
 $0.12
 $0.17
 $0.15
Diluted$0.09
 $0.12
 $0.16
 $0.15
Weighted-average number of shares used in per share calculations: 
  
    
Basic74,478
 73,157
 74,483
 72,991
Diluted76,189
 74,533
 76,061
 74,427

FORMFACTOR, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
 Three Months Ended
 March 28,
2020		March 30,
2019
Revenues$160,753  $132,213  
Cost of revenues93,363  79,692  
Gross profit67,390  52,521  
Operating expenses:  
Research and development21,267  19,723  
Selling, general and administrative27,693  25,184  
Total operating expenses48,960  44,907  
Operating income18,430  7,614  
Interest income685  580  
Interest expense(318) (595) 
Other expense, net(91) (84) 
Income before income taxes18,706  7,515  
Provision for income taxes2,816  2,032  
Net income$15,890  $5,483  
Net income per share: 
Basic$0.21  $0.07  
Diluted$0.20  $0.07  
Weighted-average number of shares used in per share calculations:  
Basic76,005  74,362  
Diluted78,510  76,009  
 
The accompanying notes are an integral part of these condensed consolidated financial statements.

4


FORMFACTOR, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
 Three Months Ended Six Months Ended
 June 29,
2019		 June 30,
2018		 June 29,
2019		 June 30,
2018
Net income$6,948
 $9,123
 $12,431
 $11,248
Other comprehensive income (loss), net of tax:       
Translation adjustments and other689
 (3,449) (228) (1,283)
Unrealized gains (losses) on available-for-sale marketable securities142
 40
 293
 (134)
Unrealized gains (losses) on derivative instruments(73) (85) (686) 87
Other comprehensive income (loss), net of tax758
 (3,494) (621) (1,330)
Comprehensive income$7,706
 $5,629
 $11,810
 $9,918

FORMFACTOR, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
Three Months Ended
March 28,
2020		March 30,
2019
Net income$15,890  $5,483  
Other comprehensive loss, net of tax:
Translation adjustments and other(399) (917) 
Unrealized gains (losses) on available-for-sale marketable securities(27) 151  
Unrealized gains (losses) on derivative instruments176  (613) 
Other comprehensive loss, net of tax(250) (1,379) 
Comprehensive income$15,640  $4,104  

The accompanying notes are an integral part of these condensed consolidated financial statements.


5

FORMFACTOR, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)thousands, except shares)
(Unaudited)
 SharesCommon StockAdditional Paid-in CapitalAccumulated Other Comprehensive LossAccumulated DeficitTotal
Three Months Ended March 28, 2020
Balances, December 28, 201975,764,990  $76  $885,821  $(659) $(244,241) $640,997  
Issuance of common stock under the Employee Stock Purchase Plan311,591  —  4,066  —  —  4,066  
Issuance of common stock pursuant to exercise of options55,769  1  446  —  —  447  
Issuance of common stock pursuant to vesting of restricted stock units, net of stock withheld for tax25,901  —  (385) —  —  (385) 
Stock-based compensation—  —  5,652  —  —  5,652  
Other comprehensive loss—  —  —  (250) —  (250) 
Net income—  —  —  —  15,890  15,890  
Balances, March 28, 202076,158,251  $77  $895,600  $(909) $(228,351) $666,417  
 Shares Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Income Accumulated Deficit Total
 Six Months Ended June 29, 2019
Balances, December 29, 201874,139,712
 $74
 $862,897
 $780
 $(283,587) $580,164
Issuance of common stock under the Employee Stock Purchase Plan301,497
 —
 3,670
 —
 —
 3,670
Issuance of common stock pursuant to exercise of options for cash19,207
 —
 90
 —
 —
 90
Issuance of common stock pursuant to vesting of restricted stock units, net of stock withheld for tax231,365
 1
 (2,157) —
 —
 (2,156)
Stock-based compensation—
 —
 10,524
 —
 —
 10,524
Other comprehensive loss—
 —
 —
 (621) —
 (621)
Net income—
 —
 —
 —
 12,431
 12,431
Balances, June 29, 201974,691,781
 $75
 $875,024
 $159
 $(271,156) $604,102
            
 Three Months Ended June 29, 2019
Balances, March 30, 201974,488,498
 $74
 $871,617
 $(599) $(278,104) $592,988
Issuance of common stock pursuant to vesting of restricted stock units, net of stock withheld for tax203,283
 1
 (1,855) —
 —
 (1,854)
Stock-based compensation—
 —
 5,262
 —
 —
 5,262
Other comprehensive income—
 —
 —
 758
 —
 758
Net income—
 —
 —
 —
 6,948
 6,948
Balances, June 29, 201974,691,781
 $75
 $875,024
 $159
 $(271,156) $604,102

SharesCommon StockAdditional Paid-in CapitalAccumulated Other Comprehensive LossAccumulated DeficitTotal
Three Months Ended March 30, 2019
Balances, December 29, 201874,139,712  $74  $862,897  $780  $(283,587) $580,164  
Issuance of common stock under the Employee Stock Purchase Plan301,497  —  3,670  —  —  3,670  
Issuance of common stock pursuant to exercise of options for cash19,207  —  90  —  —  90  
Issuance of common stock pursuant to vesting of restricted stock units, net of stock withheld for tax28,082  —  (302) —  —  (302) 
Stock-based compensation—  —  5,262  —  —  5,262  
Other comprehensive loss—  —  —  (1,379) —  (1,379) 
Net income—  —  —  —  5,483  5,483  
Balances, March 30, 201974,488,498  $74  $871,617  $(599) $(278,104) $592,988  
 Six Months Ended June 30, 2018
Balances, December 30, 201772,532,176
 $73
 $843,116
 $3,021
 $(387,573) $458,637
Issuance of common stock under the Employee Stock Purchase Plan341,670
 1
 3,704
 —
 —
 3,705
Issuance of common stock pursuant to exercise of options for cash105,610
 —
 1,049
 —
 —
 1,049
Issuance of common stock pursuant to vesting of restricted stock units, net of stock withheld for tax378,652
 —
 (2,453) —
 —
 (2,453)
Stock-based compensation—
 —
 7,862
 —
 —
 7,862
Adoption of ASU 2017-12—
 —
 —
 —
 (50) (50)
Other comprehensive loss—
 —
 —
 (1,330) —
 (1,330)
Net income—
 —
 —
 —
 11,248
 11,248
Balances, June 30, 201873,358,108
 $74
 $853,278
 $1,691
 $(376,375) $478,668
            
 Three Months Ended June 30, 2018
Balances, March 31, 201873,013,842
 $74
 $851,249
 $5,185
 $(385,498) $471,010
Issuance of common stock pursuant to vesting of restricted stock units, net of stock withheld for tax344,266
 —
 (2,096) —
 —
 (2,096)
Stock-based compensation—
 —
 4,125
 —
 —
 4,125
Other comprehensive loss—
 —
 —
 (3,494) —
 (3,494)
Net income—
 —
 —
 —
 9,123
 9,123
Balances, June 30, 201873,358,108
 $74
 $853,278
 $1,691
 $(376,375) $478,668

The accompanying notes are an integral part of these condensed consolidated financial statements.

6


FORMFACTOR, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 Six Months Ended
 June 29, 2019 June 30, 2018
Cash flows from operating activities: 
  
Net income$12,431
 $11,248
Adjustments to reconcile net income to net cash provided by operating activities:   
Depreciation8,289
 6,893
Amortization14,169
 14,364
Amortization (accretion) of discount on investments(180) 36
Amortization of operating lease, right-of-use assets2,620
 —
Stock-based compensation expense10,584
 7,884
Amortization of debt issuance costs96
 235
Deferred income tax provision38
 70
Provision for excess and obsolete inventories5,304
 4,593
Loss on disposal of long-lived assets262
 48
Loss on derivative instruments34
 —
Foreign currency transaction gains(423) (109)
Changes in assets and liabilities:   
Accounts receivable24,177
 (3,330)
Inventories(11,574) (13,687)
Prepaid expenses and other current assets(872) (4,760)
Refundable income taxes737
 925
Other assets(572) 663
Accounts payable(11,115) 6,239
Accrued liabilities(309) (3,541)
Income tax payable1,839
 (281)
Other liabilities41
 2,540
Deferred revenues2,216
 28
Operating lease liabilities(2,416) —
Net cash provided by operating activities55,376
 30,058
Cash flows from investing activities: 
  
Acquisition of property, plant and equipment(11,460) (8,545)
Proceeds from sale of a subsidiary56
 41
Purchases of marketable securities(20,776) (10,715)
Proceeds from maturities of marketable securities19,710
 12,257
Net cash used in investing activities(12,470) (6,962)
Cash flows from financing activities: 
  
Proceeds from issuances of common stock3,870
 4,754
Tax withholdings related to net share settlements of equity awards(2,157) (2,453)
Principal repayments on term loan(18,750) (21,250)
Net cash used in financing activities(17,037) (18,949)
Effect of exchange rate changes on cash, cash equivalents and restricted cash279
 (58)
Net increase in cash, cash equivalents and restricted cash26,148
 4,089
Cash, cash equivalents and restricted cash, beginning of period100,546
 92,726
Cash, cash equivalents and restricted cash, end of period$126,694
 $96,815
Non-cash investing and financing activities: 
  
Change in accounts payable and accrued liabilities related to property, plant and equipment purchases$(2,497) $982
Operating lease, right-of-use assets obtained in exchange for lease obligations35,885
 —
Supplemental disclosure of cash flow information:   
Cash paid for income taxes, net$1,700
 $1,182
Cash paid for interest778
 1,617

FORMFACTOR, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 Three Months Ended
 March 28,
2020		March 30,
2019
Cash flows from operating activities:  
Net income$15,890  $5,483  
Adjustments to reconcile net income to net cash provided by operating activities: 
Depreciation4,561  3,947  
Amortization7,263  7,090  
Accretion of discount on investments(28) (71) 
Reduction in the carrying amount of right-of-use assets1,511  1,277  
Stock-based compensation expense5,623  5,295  
Amortization of debt issuance costs19  51  
Deferred income tax benefit(198) —  
Provision for excess and obsolete inventories3,287  2,725  
Loss on disposal of long-lived assets204  118  
Loss on derivative instruments676  59  
Foreign currency transaction (losses) gains(266) 121  
Changes in assets and liabilities:
Accounts receivable7,803  13,805  
Inventories928  (8,658) 
Prepaid expenses and other current assets(240) 2,167  
Other assets194  (564) 
Accounts payable763  (7,148) 
Accrued liabilities(6,970) (6,275) 
Other liabilities33  32  
Deferred revenues(123) 1,931  
Operating lease liabilities(1,591) (1,690) 
Net cash provided by operating activities39,339  20,638  
Cash flows from investing activities:    
Acquisition of property, plant and equipment(12,050) (6,028) 
Proceeds from sale of a subsidiary40  28  
Purchases of marketable securities(16,441) (12,382) 
Proceeds from maturities and sales of marketable securities23,009  9,050  
Net cash used in investing activities(5,442) (9,332) 
Cash flows from financing activities:    
Proceeds from issuances of common stock4,513  3,870  
Tax withholdings related to net share settlements of equity awards(385) (302) 
Principal repayments on term loans(13,199) (7,500) 
Net cash used in financing activities(9,071) (3,932) 
Effect of exchange rate changes on cash, cash equivalents and restricted cash312  (207) 
Net increase in cash, cash equivalents and restricted cash25,138  7,167  
Cash, cash equivalents and restricted cash, beginning of period147,937  100,546  
Cash, cash equivalents and restricted cash, end of period$173,075  $107,713  
Non-cash investing and financing activities:  
Change in accounts payable and accrued liabilities related to property, plant and equipment purchases$2,116  $(1,253) 
Operating lease, right-of-use assets obtained in exchange for lease obligations6,307  35,713  
Supplemental disclosure of cash flow information:
Cash paid for income taxes, net$2,419  $1,082  
Cash paid for interest291  302  
The accompanying notes are an integral part of these condensed consolidated financial statements.




7

FORMFACTOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Note 1 — Basis of Presentation and New Accounting Pronouncements
 
Basis of Presentation
The accompanying condensed consolidated financial information of FormFactor, Inc. is unaudited and has been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission.Commission ("SEC"). However, such information reflects all adjustments, consisting only of normal recurring adjustments, which are, in the opinion of management, necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods. The financial information as of December 29, 201828, 2019 is derived from our 20182019 Annual Report on Form 10-K. The condensed consolidated financial statements included herein should be read in conjunction with the consolidated financial statements and the notes thereto included in our 20182019 Annual Report on Form 10-K.10-K filed with the SEC on February 21, 2020. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the full year.
 
Fiscal Year 
We operate on a 52/53 week fiscal year, whereby the fiscal year ends on the last Saturday of December. Fiscal 20192020 and 20182019 each contain 52 weeks and the sixthree months ended June 29,March 28, 2020 and March 30, 2019 and June 30, 2018 each contained 2613 weeks. Fiscal 20192020 will end on December 28, 2019.26, 2020.

Reclassifications
Certain immaterial reclassifications were made to the prior period financial statements to conform to the current period presentation.

Critical Accounting Policies
Our critical accounting policies have not changed during the sixthree months ended June 29, 2019March 28, 2020 from those disclosed in our Annual Report on Form 10-K for the year ended December 29, 2018.28, 2019.

New Accounting Pronouncements

ASU 2016-13
ASU 2018-15
In August 2018,June 2016, the Financial Accounting Standard Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-13, "Measurement of Credit Losses on Financial Instruments (Topic 326)." The provisions of this standard require financial assets measured at amortized cost to be presented at the net amount expected to be collected. An allowance account would be established to present the net carrying value at the amount expected to be collected. ASU 2016-13 also provides that credit losses relating to available-for-sale debt securities should be recorded through an allowance for credit losses. The guidance was amended through various ASU's subsequent to ASU 2016-13, all of which was effective for us beginning fiscal 2020. We adopted ASU 2016-13 on a prospective basis on December 29, 2019, the first day of fiscal 2020. The adoption did not have a material effect on our financial position, results of operations or cash flows.

ASU 2018-15
In August 2018, the FASB issued ASU 2018-15, "Intangibles-Goodwill"Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract." The new guidance clarifies the accounting for implementation costs in cloud computing arrangements. ASU 2018-15 is effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2019. We adopted ASU 2018-15 on a prospective basis on December 29, 2019, the first day of fiscal 2020. The adoption did not have a material effect on our financial position, results of operations or cash flows.

ASU 2019-12
In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740),” which simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption of the amendments is permitted. ASU 2018-15 shouldpermitted, including adoption in any interim period for which financial statements have not yet been issued. Depending on the amendment, adoption may be applied either retrospectivelyon the retrospective, modified retrospective or prospectively to all implementation costs incurred after the date of adoption.prospective basis. We have not yet determined the impact of this standard on our financial statements.position, results of operations or cash flows.


ASU 2016-02, ASU 2018-10, ASU 2018-11 and ASU 2019-01
In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)," which requires the recognition of right-of-use assets and lease liabilities for all long-term leases, including operating leases, on the balance sheet. ASU 2016-02 was amended in July 2018 by both ASU 2018-10, "Codification Improvements to Topic 842, Leases," and ASU 2018-11, "Leases (Topic 842): Targeted Improvements" and in March 2019 by ASU 2019-01, "Leases (Topic 842): Codification Improvements." ASU 2016-02 provides additional guidance on the measurement of the right-of-use assets and lease liabilities and requires enhanced disclosures about our leasing arrangements. We adopted Topic 842 and all related amendments on December 30, 2018, the first day of fiscal 2019, using the modified transition approach. The modified transition approach permits a company to use its effective date as the date of initial application to apply the standard to its leases, and, therefore, not restate comparative prior period financial information. Consequently, prior period financial information is not updated, and the disclosures required under the new standard will not be provided for dates and periods before December 30, 2018. The standard provides several optional practical expedients in transition. We elected the ‘package of practical expedients,’ which permits us to not reassess, under the new standard, our prior conclusions about lease identification, lease classification and initial direct costs. We did not elect the use-of-hindsight or the practical expedient pertaining to land easements; the latter not being applicable to us. The new standard also provides practical expedients for an entity’s ongoing accounting. We elected the short-term lease recognition exemption. This means, for those leases that qualify, we will not recognize a right-of-use asset or lease liability, and this includes not recognizing right-of-use assets or lease liabilities for existing short-term leases of those assets in transition. We also elected the practical expedient to not separate lease and non-lease components for all our leases. The adoption of the lease standard did not have any effect on our previously reported Condensed

8

Consolidated Statements of Income and did not result in a cumulative catch-up adjustment to opening equity. See Note 12 for additional information.

Note 2 — Concentration of Credit and Other Risks

Each of the following customers accounted for 10% or more of our revenues for the periods indicated:
 Three Months Ended Six Months Ended
 June 29, 2019 June 30, 2018 June 29, 2019 June 30, 2018
Intel Corporation26.1% 15.1% 23.8% 14.6%
Samsung Electronics., LTD.11.1
 *
 12.4
 *
Micron Technology, Inc.10.1
 *
 *
 *
SK Hynix Inc.*
 11.5
 *
 10.9

47.3% 26.6% 36.2% 25.5%

Three Months Ended
March 28,
2020		March 30,
2019
Intel Corporation36.2 %21.3 %
Samsung Electronics., LTD.*  13.8  
36.2 %35.1 %
*Represents less than 10% of total revenues.

At June 29, 2019,March 28, 2020, two customers accounted for 17.3%27.7% and 11.3%15.3% of gross accounts receivable, respectively. At December 29, 2018, two28, 2019, three customers accounted for 27.8%25.7%, 15.1% and 13.0%11.5% of gross accounts receivable, respectively.

Note 3 — Inventories, net

Inventories are stated at the lower of cost (principally standard cost, which approximates actual cost on a first in, first out basis) or net realizable value.
 
Inventories, net, consisted of the following (in thousands):
March 28,
2020		December 28,
2019
Raw materials$36,468  $38,528  
Work-in-progress27,927  29,720  
Finished goods14,588  15,010  
$78,983  $83,258  
 June 29,
2019		 December 29,
2018
Raw materials$43,143
 $43,380
Work-in-progress26,022
 20,431
Finished goods14,687
 13,895
 $83,852
 $77,706



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Note 4— Acquisition

On October 9, 2019, we acquired 100% of the shares of FRT GmbH ("FRT"), a German-based company, for total consideration of $26.9 million, net of cash acquired of $1.7 million. The fair value of the purchase consideration was comprised of a $22.2 million cash payment and $6.5 million of contingent consideration.

We estimated the acquisition price and the allocation of fair value to assets acquired and liabilities assumed as of the acquisition date, October 9, 2019. We subsequently made certain immaterial adjustments to the acquisition price allocation related to acquired assets and assumed liabilities, including to intangibles assets. Our purchase accounting remains open at March 28, 2020, subject to finalization of the fair value of certain acquired assets and liabilities. The estimated fair value of assets acquired, including goodwill and intangibles, and liabilities assumed is as follows (in thousands):

Amount
Cash and cash equivalents$1,683 
Accounts receivable3,057 
Inventory2,643 
Property, plant and equipment696 
Operating lease, right of use assets335 
Prepaid expenses and other current assets838 
Tangible assets acquired9,252 
Customer deposits(2,093)
Accounts payable and accrued liabilities(1,179)
Operating lease liabilities(335)
Deferred tax liabilities(5,843)
Total tangible assets acquired and liabilities assumed(198)
Intangible assets17,429 
Goodwill11,392 
Net Assets Acquired$28,623 


The intangible assets as of the closing date of the acquisition included (in thousands):

AmountWeighted Average Useful Life (in years)
Developed technologies$12,505  8.0
Customer relationships3,071  6.0
Backlog1,645  0.5
Trade names208  2.0
Total intangible assets$17,429  7.0

Indications of fair value of the intangible assets acquired in connection with the acquisition were determined using either the income, market or replacement cost methodologies. The intangible assets are being amortized over periods which reflect the pattern in which economic benefits of the assets are expected to be realized.

The contingent consideration is a cash amount equal to 1.5x Earnings Before Interest and Tax ("EBIT") as defined in the purchase agreement, from a minimum of 0 up to a maximum of €10.3 million, payable subject to the performance of the acquired business in calendar 2020. We estimated the fair value of contingent consideration using a probability weighted approach. Key assumptions in determining the fair value of contingent consideration include estimating the probability of achieving certain EBIT levels and discounting at an appropriate discount rate.

This acquisition strengthens our leadership in test and measurement by expanding our addressable market into 3D hybrid surface metrology and extending the optical applications scope of our existing Systems segment.
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Separate from the purchase agreement, on October 25, 2019, we entered into a term loan agreement with a lender for an aggregate amount of $23.4 million to finance the acquisition. The term loan agreement has not changed during the three months ended March 28, 2020 from that disclosed in our Annual Report on Form 10-K for the year ended December 28, 2019.

Identifiable Intangible Assets

Valuation of intangible assets involves multiple assumptions. The key assumptions are described below.

Developed technologies acquired primarily consists of existing technology related to hybrid 3D surface metrology measurement equipment. We valued the developed technologies using the multi-period excess earnings method under the income approach. Using this approach, the estimated fair values were calculated using expected future cash flows from specific products discounted to their net present values at an appropriate risk-adjusted rate of return.

Customer relationships represent the fair value of future projected revenues that will be derived from the sale of products to FRT's existing customers. We valued customer relationships using the incremental cash flow method. This method estimates value based on the incremental cash flow afforded by having the customers relationships in place on the acquisition date versus having no relationships in place and needing to replicate or replace those relationships. The incremental cash flows are then discounted to a present value to arrive at an estimate of fair value for this asset class.

Backlog represents business under existing contractual obligations. Expected cash flow from backlog was valued on a direct cash flow basis.

The identified trade names intangibles relate to the estimated fair value of future cash flows related to the FRT brand. We valued trade names by applying the relief-from-royalty method under the income approach. This method is based on the application of a royalty rate to forecasted revenue under the trade name.

Goodwill

The excess of purchase price over the fair value assigned to the assets acquired and liabilities assumed represents the amount of goodwill resulting from the acquisition. We believe the factors that contributed to goodwill include synergies that are specific to our consolidated business, such as cost savings and operational efficiencies, and the acquisition of a talented workforce that expands our expertise in business development and commercializing semiconductor test products, none of which qualify for recognition as a separate intangible asset. We do not expect any portion of this goodwill to be deductible for tax purposes. The goodwill attributable to the acquisition was recorded as a non-current asset and is not amortized, but is subject to an annual review for impairment.

The goodwill arising from the acquisition was allocated to the FRT reporting unit within the Systems reportable segment.

We have not presented unaudited combined pro forma financial information as the FRT acquisition was not significant to our consolidated results of operations and financial position.

Note 5 — Goodwill and Intangible Assets

Goodwill by reportable segment was as follows (in thousands):
Probe CardsSystemsTotal
Goodwill, gross, as of December 29, 2018$172,482  $16,732  $189,214  
Addition - FRT GmbH Acquisition—  10,148  10,148  
Foreign currency translation—  (166) (166) 
Goodwill, gross, as of December 28, 2019172,482  26,714  199,196  
Addition - FRT GmbH Acquisition—  1,264  1,264  
Foreign currency translation—  (82) (82) 
Goodwill, gross, as of March 28, 2020$172,482  $27,896  $200,378  
 Probe Cards Systems Total
Goodwill, gross, as of December 30, 2017$172,482
 $17,438
 $189,920
Foreign currency translation—
 (706) (706)
Goodwill, gross, as of December 29, 2018172,482
 16,732
 189,214
Foreign currency translation—
 (93) (93)
Goodwill, gross, as of June 29, 2019$172,482
 $16,639
 $189,121


We have not recorded anyNo goodwill impairments have been recorded as of June 29,March 28, 2020 and December 28, 2019.

11



Intangible assets were as follows (in thousands):
March 28, 2020December 28, 2019
Intangible AssetsGrossAccumulated AmortizationNetGrossAccumulated AmortizationNet
Developed technologies$155,792  $121,091  $34,701  $154,951  $116,138  $38,813  
Trade names7,809  7,046  763  7,816  6,976  840  
Customer relationships43,170  28,495  14,675  44,229  27,057  17,172  
Backlog1,670  1,670  —  1,676  891  785  
$208,441  $158,302  $50,139  $208,672  $151,062  $57,610  
  June 29, 2019 December 29, 2018
Other Intangible Assets Gross Accumulated Amortization Net Gross Accumulated Amortization Net
Existing developed technologies 
 $143,334
 $106,513
 $36,821
 $143,408
 $97,111
 $46,297
Trade name 12,014
 11,256
 758
 12,023
 9,173
 2,850
Customer relationships 40,123
 24,298
 15,825
 40,146
 21,653
 18,493
  $195,471
 $142,067
 $53,404
 $195,577
 $127,937
 $67,640


Amortization expense was included in our Condensed Consolidated Statements of Income as follows (in thousands):
 Three Months Ended
 March 28,
2020		March 30,
2019
Cost of revenues$5,750  $4,719  
Selling, general and administrative1,513  2,371  
$7,263  $7,090  
 Three Months Ended Six Months Ended
 June 29,
2019		 June 30,
2018		 June 29,
2019		 June 30,
2018
Cost of revenues$4,711
 $5,138
 $9,430
 $10,295
Selling, general and administrative2,368
 2,032
 4,739
 4,069
 $7,079
 $7,170
 $14,169
 $14,364


The estimated future amortization of intangible assets is as follows (in thousands):
Fiscal YearAmount
Remainder of 2020  $19,021  
2021  14,767  
2022  5,585  
2023  3,846  
20242,107  
Thereafter4,813  
$50,139  
Fiscal YearAmount
Remainder of 2019$12,189
202023,358
202112,616
20223,493
20231,748
 $53,404


Note 56 — Accrued Liabilities

Accrued liabilities consisted of the following (in thousands):
March 28,
2020		December 28,
2019
Accrued compensation and benefits$18,435  $21,329  
Accrued income and other taxes4,519  6,846  
Accrued warranty1,918  1,942  
Accrued employee stock purchase plan contributions withheld1,585  3,331  
Other accrued expenses2,718  2,991  
$29,175  $36,439  
 June 29, 2019 December 29, 2018
Accrued compensation and benefits$16,374
 $15,600
Accrued employee stock purchase plan contributions withheld3,210
 3,174
Accrued warranty1,827
 2,102
Accrued income and other taxes5,080
 4,222
Other accrued expenses3,009
 2,633
 $29,500
 $27,731




Note 6— Restructuring Charges
Restructuring charges in the first two quarters of fiscal 2019 consisted of costs related to employee termination benefits, cost of long-lived asset abandonment and inventory write downs.

Restructuring charges were included in our Consolidated Statement of Income as follows (in thousands):
 Three Months Ended Six Months Ended
 June 29, 2019 June 30, 2018 June 29, 2019 June 30, 2018
Cost of revenues$138
 $—
 $257
 $—
Selling, general and administrative88
 —
 175
 —
 $226
 $—
 $432
 $—

Changes to the restructuring accrual in the six months ended June 29, 2019 were as follows (in thousands):
 Employee Severance and Benefits Other Costs Total Accrual
December 29, 2018$20
 $—
 $20
Restructuring charges162
 270
 432
Cash payments(73) —
 (73)
Non-cash settlement—
 (270) (270)
June 29, 2019$109
 $—
 $109


Note 7 — Fair Value and Derivative Instruments

Whenever possible, the fair values of our financial assets and liabilities are determined using quoted market prices of identical securities or quoted market prices of similar securities from active markets. The three levels of inputs that may be used to measure fair value are as follows:
•Level 1 valuations are obtained from real-time quotes for transactions in active exchange markets involving identical securities;
•Level 2 valuations utilize significant observable inputs, such as quoted prices for similar assets or liabilities, quoted prices near the reporting date in markets that are less active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and
12

•Level 3 valuations utilize unobservable inputs to the valuation methodology and include our own data about assumptions market participants would use in pricing the asset or liability based on the best information available under the circumstances.

We did not have any transfers of assets or liabilities measured at fair value on a recurring basis to or from Level 1, Level 2 or Level 3 during the three and six months ended June 29, 2019March 28, 2020 or the year ended December 29, 2018.28, 2019.

The carrying values of Cash, Accounts receivable, net, Restricted cash, Prepaid expenses and other current assets, Accounts payable, Accrued liabilities, and Term loanCurrent portion of term loans, net of unamortized issuance costs approximate fair value due to their short maturities.

No changes were made to our valuation techniques during the first three and six months of fiscal 2019.2020.



Assets and Liabilities Measured at Fair Value on a Recurring Basis

Assets and liabilities measured at fair value on a recurring basis were as follows (in thousands): 
March 28, 2020Level 1Level 2Level 3Total
Assets:
Cash equivalents:
Money market funds$74,992  $—  $—  $74,992  
Marketable securities:
 U.S. treasuries30,873  —  —  30,873  
 Certificates of deposit—  3,841  —  3,841  
 U.S. agency securities—  3,751  —  3,751  
 Corporate bonds—  28,657  —  28,657  
 Commercial paper—  2,637  —  2,637  
30,873  38,886  —  69,759  
Foreign exchange derivative contracts—  4  —  4  
Total assets$105,865  $38,890  $—  $144,755  
Liabilities:
Foreign exchange derivative contracts$—  $(154) $—  $(154) 
Interest rate swap derivative contracts—  (93) —  (93) 
Contingent consideration—  —  (6,515) (6,515) 
Total liabilities$—  $(247) $(6,515) $(6,762) 

13

June 29, 2019 Level 1 Level 2 Total
December 28, 2019December 28, 2019Level 1Level 2Level 3Total
Assets:      Assets:
Cash equivalents:      Cash equivalents:
Money market funds $5,248
 $—
 $5,248
Money market funds$17,056  $—  $—  $17,056  
Commercial paper 324
 —
 324

 5,572
 —
 5,572
Marketable securities: 
 
 
Marketable securities:
U.S. treasuries 17,072
 —
 17,072
U.S. treasuries10,468  —  —  10,468  
Certificates of deposit —
 540
 540
Certificates of deposit—  3,590  —  3,590  
U.S. agency securities —
 14,299
 14,299
U.S. agency securities—  24,430  —  24,430  
Corporate bonds —
 19,667
 19,667
Corporate bonds—  33,928  —  33,928  
Commercial paper —
 493
 493
Commercial paper—  3,911  —  3,911  

 17,072
 34,999
 52,071
10,468  65,859  —  76,327  
Foreign exchange derivative contracts —
 5
 5
Foreign exchange derivative contracts—  41  —  41  
Interest rate swap derivative contracts —
 189
 189
Interest rate swap derivative contracts—  26  —  26  
Total assets $22,644
 $35,193
 $57,837
Total assets$27,524  $65,926  $—  $93,450  
Liabilities:      Liabilities:
Foreign exchange derivative contracts $—
 $216
 $216
Foreign exchange derivative contracts$—  $(240) $—  $(240) 
Contingent considerationContingent consideration—  —  (5,364) (5,364) 
Total liabilitiesTotal liabilities$—  $(240) $(5,364) $(5,604) 
December 29, 2018 Level 1 Level 2 Total
Assets:      
Cash equivalents:      
Money market funds $1,184
 $—
 $1,184
Marketable securities:      
U.S. treasuries 7,997
 —
 7,997
Certificates of deposit —
 957
 957
U.S. agency securities —
 8,608
 8,608
Corporate bonds —
 30,674
 30,674
Commercial paper —
 2,295
 2,295
  7,997
 42,534
 50,531
Interest rate swap derivative contracts —
 871
 871
Total assets $9,181
 $43,405
 $52,586

We did not have any liabilities measured at fair value on a recurring basis at December 29, 2018.

Cash Equivalents
The fair value of our cash equivalents is determined based on quoted market prices for similar or identical securities.

Marketable Securities
We classify our marketable securities as available-for-sale and value them utilizing a market approach. Our investments are priced by pricing vendors who provide observable inputs for their pricing without applying significant judgment. Broker pricing is used mainly when a quoted price is not available, the investment is not priced by our pricing vendors or when a broker price is more reflective of fair value. Our broker-priced investments are categorized as Level 2 investments because fair value is based on similar assets without applying significant judgments. In addition, all investments have a sufficient trading volume to demonstrate that the fair value is appropriate.

Unrealized gains and losses were immaterial and were recorded as a component of Accumulated other comprehensive income in our Condensed Consolidated Balance Sheets. We did not have any other-than-temporary unrealized gains or losses at either period end included in these financial statements.


Contingent Consideration
Contingent consideration, arising from the acquisition of FRT (see Note 4), is a cash amount equal to 1.5x EBIT as defined in the purchase agreement, up to a maximum of €10.3 million, payable subject to the performance of the acquired business in calendar 2020. We estimated the fair value of contingent consideration using a probability weighted approach. Key assumptions in determining the fair value of contingent consideration include estimating the probability of achieving certain EBIT levels and discounting at an appropriate discount rate. Contingent consideration as of March 28, 2020 was $6.5 million and which increased by $1.1 million from $5.4 million as of December 28, 2019 as a result of subsequent immaterial adjustments.

Interest Rate Swaps
The fair value of our interest rate swap contracts areis determined at the end of each reporting period based on valuation models that use interest rate yield curves as inputs. For accounting purposes, our interest rate swap contracts qualify for, and are designated as, cash flow hedges. The cash flows associated with the interest rate swaps are reported in Net cash provided by operating activities in our Condensed Consolidated Statements of Cash Flows and the fair value of the interest rate swap contracts are recorded within Prepaid expenses and other current assets and Other assets in our Condensed Consolidated Balance Sheets.


14

The impact of the interest rate swaps on our Condensed Consolidated Statements of Income was as follows (in thousands):
  Amount of Gain or (Loss) Recognized in Accumulated OCI on Derivative Location of Gain or (Loss) Reclassified from Accumulated OCI into Income Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income Location of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion) Amount of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion )
Three Months Ended June 29, 2019 $(62) Interest expense $175
 Interest expense $—
Three Months Ended June 30, 2018 $101
 Interest expense $186
 Interest expense $—
           
Six Months Ended June 29, 2019 $(90) Interest expense $383
 Interest expense $—
Six Months Ended June 30, 2018 $356
 Interest expense $318
 Interest expense $—

Amount of Gain or (Loss) Recognized in OCI on Derivative (Effective Portion)Location of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)Location of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion)Amount of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion)
Three Months Ended March 28, 2020$(96) Interest expense, net$22  Interest expense, net$—  
Three Months Ended March 30, 2019$(28) Interest expense, net$(208) Interest expense, net$—  
Foreign Exchange Derivative Contracts
We operate and sell our products in various global markets. As a result, we are exposed to changes in foreign currency exchange rates. We utilize foreign currency forward contracts to hedge against future movements in foreign exchange rates that affect certain existing foreign currency denominated assets and liabilities and forecasted foreign currency revenue and expense transactions. Under this program, our strategy is to have increases or decreases in our foreign currency exposures mitigated by gains or losses on the foreign currency forward contracts in order to mitigate the risks and volatility associated with foreign currency transaction gains or losses.

We do not use derivative financial instruments for speculative or trading purposes. For accounting purposes, certain of our foreign currency forward contracts are not designated as hedging instruments and, accordingly, we record the fair value of these contracts as of the end of our reporting period in our Condensed Consolidated Balance Sheets with changes in fair value recorded within Other income (expense),expense, net in our Condensed Consolidated Statement of Income for both realized and unrealized gains and losses. Certain of our foreign currency forward contracts are designated as cash flow hedges, and, accordingly, we record the fair value of these contracts as of the end of our reporting period in our Condensed Consolidated Balance Sheets with changes in fair value recorded as a component of accumulatedAccumulated other comprehensive incomeloss and reclassified into earnings in the same period in which the hedged transaction affects earnings, and in the same line item on the Condensed Consolidated Statements of Income as the impact of the hedge transaction. At June 29, 2019,March 28, 2020, we expect to reclassify $0.2 million of the amount accumulated in otherOther comprehensive income (loss)loss to earnings during the next 12 months, due to the recognition in earnings of the hedged forecasted transactions.

The fair value of our foreign exchange derivative contracts was determined based on current foreign currency exchange rates and forward points. All of our foreign exchange derivative contracts outstanding at June 29, 2019March 28, 2020 will mature inby the firstsecond quarter of fiscal 2020.2021.



The following table provides information about our foreign currency forward contracts outstanding as of June 29, 2019March 28, 2020 (in thousands):
CurrencyContract PositionContract Amount
(Local Currency)
Contract Amount
(U.S. Dollars)
Euro DollarBuy(3,061) $(3,557) 
Japanese YenSell1,346,506  12,503  
Korean WonBuy(2,526,325) (2,088) 
Total USD notional amount of outstanding foreign exchange contracts$6,858  
Currency Contract Position Contract Amount (Local Currency) Contract Amount (U.S. Dollars)
Euro Dollar Buy (1,339) $(1,262)
Japanese Yen Sell 2,279,204
 21,163
Korean Won Buy (2,531,829) (2,192)
Total USD notional amount of outstanding foreign exchange contracts     $17,709


Our foreign currency contracts are classified within Level 2 of the fair value hierarchy as they are valued using pricing models that utilize observable market inputs.

The impact of foreign exchange derivative contracts not designated as cash flow hedges on our Condensed Consolidated Statements of Income was as follows (in thousands):
Amount of Gain (Loss) Recognized on Derivatives
Three Months Ended
Derivatives Not Designated as Hedging InstrumentsLocation of Gain (Loss) Recognized on DerivativesMarch 28, 2020March 30, 2019
Foreign exchange forward contractsOther expense, net$(115) $314  
    Amount of Gain Recognized on Derivatives
    Three Months Ended Six Months Ended
Derivatives Not Designated as Hedging Instruments Location of Gain Recognized on Derivatives June 29, 2019 June 30, 2018 June 29, 2019 June 30, 2018
Foreign exchange forward contracts Other expense, net $587 $1,079 $273
 $217
15


The impact of foreign exchange derivative contracts designated as cash flow hedges on our Condensed Consolidated Statements of Income was as follows (in thousands):
Amount of Loss Recognized in Accumulated OCI on DerivativeLocation of Loss Reclassified from Accumulated OCI into IncomeAmount of Loss Reclassified from Accumulated OCI into Income
Three Months Ended March 28, 2020$(3) Cost of revenues  $(120) 
Research and development(18) 
Selling, general and administrative(43) 
$(181) 
Three Months Ended March 30, 2019$(435) Cost of revenues  $(32) 
Research and development(19) 
Selling, general and administrative(7) 
$(58) 
  Amount of Loss Recognized in Accumulated OCI on Derivative Location of Loss Reclassified from Accumulated OCI into Income Amount of Loss Reclassified from Accumulated OCI into Income
Three Months Ended June 29, 2019 $213
 Cost of revenues $139
    Research and development 12
    Selling, general and administrative 32
      $183
       
Three Months Ended June 30, 2018 $—
 
 $—
       
Six Months Ended June 29, 2019 $213
 Cost of revenues $171
    Research and development 19
    Selling, general and administrative 51
      $241
       
Six Months Ended June 30, 2018 $—
 
 $—


Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis
We measure and report goodwillour non-financial assets such as Property, plant and intangibleequipment, Goodwill and Intangible assets at fair value on a non-recurring basis if we determine these assets to be impaired or in the period when we make a business acquisition. ThereOther than as discussed in Note 4, there were no0 assets or liabilities measured at fair value on a nonrecurring basis during the three and six months ended June 29, 2019March 28, 2020 or JuneMarch 30, 2018.2019.



Note 8 — Warranty
We offer warranties on certain products and record a liability for the estimated future costs associated with warranty claims at the time revenue is recognized. The warranty liability is based upon historical experience and our estimate of the level of future costs. While we engage in product quality programs and processes, our warranty obligation is affected by product failure rates, material usage and service delivery costs. We continuously monitor product returns for warranty and maintain a reserve for the related expenses based upon our historical experience and any specifically identified failures. As we sell new products to our customers, we must exercise considerable judgment in estimating the expected failure rates. This estimating process is based on historical experience of similar products, as well as various other assumptions that we believe to be reasonable under the circumstances.

We provide for the estimated cost of product warranties at the time revenue is recognized as a component of Cost of revenues in our Condensed Consolidated Statement of Income.

Changes in our warranty liability were as follows (in thousands):
Three Months Ended
March 28,
2020		March 30,
2019
Balance at beginning of period$1,942  $2,102  
Accruals660  889  
Settlements(684) (970) 
Balance at end of period$1,918  $2,021  
 Six Months Ended
 June 29,
2019		 June 30,
2018
Balance at beginning of period$2,102
 $3,662
Accruals1,648
 2,868
Settlements(1,923) (3,681)
Balance at end of period$1,827
 $2,849


Note 9 — Stockholders’ Equity and Stock-Based Compensation
 
Common Stock Repurchase Program
In February 2017, our Board of Directors authorized a program to repurchase up to $25 million of outstanding common stock to offset potential dilution from issuances of common stock under our employee stock purchase plan and equity incentive plan. The share repurchase program will expire on February 1, 2020. Repurchased shares are retired upon the settlement of the related transactions with the excess of cost over par value charged to additional paid-in capital. All repurchases are made in compliance with Rule 10b-18 under the Securities Exchange Act of 1934, as amended.

During the six months ended June 29, 2019, we did not repurchase any shares. As of June 29, 2019, $6.0 million remained available for future repurchases.

Restricted Stock Units
Restricted stock unit ("RSU") activity under our equity incentive plan was as follows:
 Units Weighted Average Grant Date Fair Value
RSUs at December 29, 20183,102,226
 $12.79
Awards granted1,461,055
 14.98
Awards vested(355,768) 9.91
Awards forfeited(82,370) 12.91
RSUs at June 29, 20194,125,143
 13.81
16

UnitsWeighted Average Grant Date Fair Value
RSUs at December 28, 20193,069,000  $14.30  
Awards granted  16,000  26.05  
Awards vested  (43,604) 12.70  
Awards forfeited(20,291) 14.25  
RSUs at March 28, 2020  3,021,105  $14.39  

The total fair value of RSUs vested during the sixthree months ended June 29, 2019March 28, 2020 was $6.0$1.0 million.

Performance Restricted Stock Units
We may grant Performance RSUs ("PRSUs") to certain executives, which vest based upon us achieving certain market performance criteria.



On June 4, 2019, we granted a total of 273,000 PRSUs to certain senior executives for a total grant date fair value of $4.4 million, which will be recognized ratably over the requisite service period. The performance criteria are based on a metric called Total Shareholder Return ("TSR") for the period from July 1, 2019 to June 30, 2022, relative to the TSR of the companies identified as being part of the S&P Semiconductor Select Industry Index (FormFactor peer companies) as of June 29, 2019.

There were no other PRSUs granted during the sixthree months ending June 29, 2019.ended March 28, 2020. PRSUs are included as part of the RSU activity above.

Stock Options
Stock option activity under our equity incentive plan was as follows:
Options OutstandingWeighted Average Exercise PriceWeighted Average Remaining Contractual Life in YearsAggregate Intrinsic Value
Outstanding at December 28, 2019361,769  $8.35  
Options exercised(55,769) 8.01  
Outstanding at March 28, 2020306,000  $8.41  1.88$3,607,620  
Vested and expected to vest at March 28, 2020306,000  $8.41  1.88$3,607,620  
Exercisable at March 28, 2020306,000  $8.41  1.88$3,607,620  
 Options Outstanding Weighted Average Exercise Price Weighted Average Remaining Contractual Life in Years Aggregate Intrinsic Value
Outstanding at December 29, 2018524,725
 $8.00
    
Options exercised(19,207) 4.69
    
Outstanding at June 29, 2019505,518 $8.12
 2.63 $3,815,874
Vested and expected to vest at June 29, 2019505,518
 $8.12
 2.63 $3,815,874
Exercisable at June 29, 2019505,518
 $8.12
 2.63 $3,815,874


Employee Stock Purchase Plan
Information related to activity under our Employee Stock Purchase Plan ("ESPP") was as follows:
Three Months Ended
March 28, 2020
Shares issued311,591 
Weighted average per share purchase price$13.05 
Weighted average per share discount from the fair value of our common stock on the date of issuance$12.26 
 Six Months Ended
 June 29, 2019
Shares issued301,497
Weighted average per share purchase price$12.18
Weighted average per share discount from the fair value of our common stock on the date of issuance$4.85


Stock-Based Compensation
Stock-based compensation was included in our Condensed Consolidated Statements of Income as follows (in thousands):
Three Months Ended Six Months EndedThree Months Ended
June 29,
2019		 June 30,
2018		 June 29,
2019		 June 30,
2018		March 28,
2020		March 30,
2019
Cost of revenues$964
 $813
 $1,914
 $1,733
Cost of revenues$937  $950  
Research and development1,582
 1,256
 3,101
 2,558
Research and development1,439  1,519  
Selling, general and administrative2,743
 2,059
 5,569
 3,593
Selling, general and administrative3,247  2,826  
Total stock-based compensation$5,289
 $4,128
 $10,584
 $7,884
Total stock-based compensation$5,623  $5,295  
17


Unrecognized Compensation Costs
At June 29, 2019,March 28, 2020, the unrecognized stock-based compensation was as follows (dollars in thousands): 
Unrecognized ExpenseAverage Expected Recognition Period in Years
Restricted stock units$20,158  1.79
Performance restricted stock units5,544  1.79
Employee stock purchase plan662  0.85
Total unrecognized stock-based compensation expense$26,364  1.77
 Unrecognized Expense Average Expected Recognition Period in Years
Restricted stock units$32,804
 2.27
Performance restricted stock units8,623
 2.38
Employee stock purchase plan244
 0.59
Total unrecognized stock-based compensation expense$41,671
 2.29




Note 10 — Net Income per Share

The following table reconciles the shares used in calculating basic net income per share and diluted net income per share (in thousands):
Three Months Ended
March 28,
2020		March 30,
2019
Weighted-average shares used in computing basic net income per share76,005  74,362  
Add potentially dilutive securities2,505  1,647  
Weighted-average shares used in computing diluted net income per share78,510  76,009  
Securities not included as they would have been antidilutive9  38  
 Three Months Ended Six Months Ended
 June 29,
2019		 June 30,
2018		 June 29,
2019		 June 30,
2018
Weighted-average shares used in computing basic net income per share74,478
 73,157
 74,483
 72,991
Add potentially dilutive securities1,711
 1,376
 1,578
 1,436
Weighted-average shares used in computing diluted net income per share76,189
 74,533
 76,061
 74,427
        
Securities not included as they would have been antidilutive263
 76
 252
 49


Note 11 — Commitments and Contingencies

Leases
See Note 12.

Contractual CommitmentsObligations and Purchase ObligationsCommitments
Our purchasecontractual obligations and other contractual obligationscommitments have not materially changed as of June 29, 2019March 28, 2020 from those disclosed in our Annual Report on Form 10-K for the year ended December 29, 2018.28, 2019.

Legal Matters
From time to time, we may be subject to legal proceedings and claims in the ordinary course of business. As of June 29, 2019,March 28, 2020, and as of the filing of this Quarterly Report on Form 10-Q, we were not involved in any material legal proceedings.

Note 12 — Leases

We lease real estate space under non-cancelable operating lease agreements for commercial and industrial space, as well as for our corporate headquarters located in Livermore, California. Our leases have remaining terms of 1 to 915 years, and some leases include options to extend up to 20 years. We also have operating leases for automobiles with remaining lease terms of 1 to 4 years. We did not include any of our renewal options in our lease terms for calculating our lease liability as the renewal options allow us to maintain operational flexibility and we are not reasonably certain we will exercise these options at this time. The weighted-average remaining lease term for our operating leases was 8 years at June 29, 2019as of March 28, 2020 and the weighted-average discount rate was 4.7%4.40%.


18

The components of lease expense were as follows (in thousands):
Three Months Ended
March 28,
2020		March 30,
2019
Lease expense:
Operating lease expense$1,924  $1,745  
Short-term lease expense40  17  
Variable lease expense383  419  
$2,347  $2,181  
 Three Months Ended Six Months Ended
 June 29,
2019		 June 30,
2018		 June 29,
2019		 June 30,
2018
Lease expense:
 
 
 
Operating lease expense$1,734
 $—
 $3,479
 $—
Short-term lease expense31
 —
 48
 —
Variable lease expense249 —
 668
 —

$2,014
 $—
 $4,195
 $—




Future minimum payments under our non-cancelable operating leases were as follows as of June 29, 2019March 28, 2020 (in thousands):
Fiscal YearAmount
Remainder of 2020$5,692  
20216,713  
20225,546  
20234,934  
20244,769  
Thereafter22,165  
  Total minimum lease payments49,819  
Less: interest(8,976) 
  Present value of net minimum lease payments40,843  
Less: current portion(6,815) 
  Total long-term operating lease liabilities$34,028  
Fiscal Year Amount
Remainder of 2019 $3,327
2020 6,717
2021 5,902
2022 4,897
2023 4,435
Thereafter 20,407
  $45,685


Note 13 — Revenue

Transaction price allocated to the remaining performance obligations: On June 29, 2019,March 28, 2020, we had $3.8$4.0 million of remaining performance obligations, which were comprised of deferred service contracts and extended warranty contracts not yet delivered. We expect to recognize approximately 71%70% of our remaining performance obligations as revenue in the remainder of fiscal 2019,2020, approximately 19% in fiscal 2021, and approximately 29%11% in fiscal 20202022 and thereafter. The foregoing excludes the value of other remaining performance obligations as they have original durations of one year or less, and also excludes information about variable consideration allocated entirely to a wholly unsatisfied performance obligation.

Contract balances: The timing of revenue recognition may differ from the timing of invoicing to customers. Accounts receivable is recorded at the invoiced amount, net of an allowance for doubtful accounts. A receivable is recognized in the period we deliver goods or provide services or when our right to consideration is unconditional. A contract asset is recorded when we have performed under the contract but our right to consideration is conditional on something other than the passage of time. Contract assets as of June 29, 2019March 28, 2020 and December 29, 201828, 2019 were $0.9$2.6 million and $0.3$0.9 million, respectively, and are reported on the Condensed Consolidated Balance Sheets as a component of Prepaid expenses and other current assets.

Contract liabilities include payments received in advance of performance under a contract and are satisfied as the associated revenue is recognized. Contract liabilities are reported on the Condensed Consolidated Balance Sheets on a contract-by-contract basis at the end of each reporting period as a component of Deferred revenue and Other liabilities. Contract liabilities as of June 29, 2019March 28, 2020 and December 29, 201828, 2019 were $7.9$10.7 million and $5.7$10.8 million, respectively. During the three and six months ended June 29, 2019,March 28, 2020, we recognized $0.9 million and $2.9$5.8 million of revenue, respectively, that was included in contract liabilities as of December 29, 2018.28, 2019.

Costs to obtain a contract: We generally expense sales commissions when incurred as a component of Selling, general and administrative expense, as the amortization period is typically less than one year.

Revenue by Category: Refer to Note 14 of Notes to Condensed Consolidated Financial Statements for further details.


19

Note 14 — Operating Segments and Enterprise-Wide Information

Our chief operating decision maker ("CODM") is our Chief Executive Officer, who reviews operating results to make decisions about allocating resources and assessing performance for the entire company. We operate in two2 reportable segments consisting of the Probe Cards segment and the Systems segment. The following table summarizes the operating results by reportable segment (dollars in thousands):
Three Months Ended
March 28, 2020March 30, 2019
Probe CardsSystemsCorporate and OtherTotalProbe CardsSystemsCorporate and OtherTotal
Revenues$134,715  $26,038  $—  $160,753  $108,103  $24,110  $—  $132,213  
Gross profit$60,743  $13,334  $(6,687) $67,390  $45,294  $13,016  $(5,789) $52,521  
Gross margin45.1 %51.2 %— %41.9 %41.9 %54.0 %— %39.7 %
 Three Months Ended
 June 29, 2019 June 30, 2018
 Probe Cards Systems Corporate and Other Total Probe Cards Systems Corporate and Other Total
Revenues$113,637
 $24,381
 $—
 $138,018
 $111,586
 $23,923
 $—
 $135,509
Gross profit$48,492
 $12,672
 $(5,812) $55,352
 $50,543
 $11,626
 $(5,951) $56,218
Gross margin42.7% 52.0% —% 40.1% 45.3% 48.6% —% 41.5%


 Six Months Ended
 June 29, 2019 June 30, 2018
 Probe Cards Systems Corporate and Other Total Probe Cards Systems Corporate and Other Total
Revenues$221,740
 $48,491
 $—
 $270,231
 $206,514
 $47,285
 $—
 $253,799
Gross profit$93,785
 $25,688
 $(11,600) $107,873
 $90,614
 $22,761
 $(12,028) $101,347
Gross margin42.3% 53.0% —% 39.9% 43.9% 48.1% —% 39.9%


Operating results provide useful information to our management for assessment of our performance and results of operations. Certain components of our operating results are utilized to determine executive compensation along with other measures.

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

Certain revenue category information by reportable segment was as follows (in thousands):
Three Months Ended
March 28, 2020March 30, 2019
Probe CardsSystemsTotalProbe CardsSystemsTotal
Market:
Foundry & Logic$105,745  $—  $105,745  $71,580  $—  $71,580  
DRAM24,696  —  24,696  28,886  —  28,886  
Flash4,274  —  4,274  7,637  —  7,637  
Systems—  26,038  26,038  —  24,110  24,110  
Total$134,715  $26,038  $160,753  $108,103  $24,110  $132,213  
Timing of revenue recognition:
Products transferred at a point in time$134,069  $24,858  $158,927  $107,491  $23,142  $130,633  
Services transferred over time646  1,180  1,826  612  968  1,580  
Total$134,715  $26,038  $160,753  $108,103  $24,110  $132,213  
Geographical region:
China$37,280  $6,362  $43,642  $18,151  $3,692  $21,843  
United States25,611  6,305  31,916  27,655  6,608  34,263  
Taiwan30,439  1,341  31,780  21,257  1,130  22,387  
Europe16,210  4,833  21,043  5,373  4,120  9,493  
South Korea13,692  396  14,088  25,018  1,705  26,723  
Japan5,535  2,835  8,370  5,300  5,132  10,432  
Asia-Pacific1
4,455  3,408  7,863  2,790  473  3,263  
Rest of the world1,493  558  2,051  2,559  1,250  3,809  
Total$134,715  $26,038  $160,753  $108,103  $24,110  $132,213  
 Three Months Ended
 June 29, 2019 June 30, 2018
 Probe Cards Systems Total Probe Cards Systems Total
Market:           
    Foundry & Logic$73,442
 $—
 $73,442
 $62,111
 $—
 $62,111
    DRAM36,044
 —
 36,044
 38,090
 —
 38,090
    Flash4,151
 —
 4,151
 11,385
 —
 11,385
    Systems—
 24,381
 24,381
 —
 23,923
 23,923
Total$113,637
 $24,381
 $138,018
 $111,586
 $23,923
 $135,509
Timing of revenue recognition:           
    Products transferred at a point in time$113,028
 $23,339
 $136,367
 $111,041
 $22,966
 $134,007
    Services transferred over time609
 1,042
 1,651
 545
 957
 1,502
Total$113,637
 $24,381
 $138,018
 $111,586
 $23,923
 $135,509
Geographical region:           
    United States$32,072
 $6,297
 $38,369
 $28,473
 $4,757
 $33,230
    South Korea27,360
 811
 28,171
 24,187
 1,805
 25,992
    China16,304
 4,051
 20,355
 11,035
 3,578
 14,613
    Japan12,867
 3,226
 16,093
 10,833
 2,710
 13,543
    Taiwan12,826
 2,046
 14,872
 26,858
 3,152
 30,010
    Europe4,474
 6,174
 10,648
 4,109
 5,410
 9,519
    Asia-Pacific1
6,262
 1,421
 7,683
 5,666
 1,288
 6,954
    Rest of the world1,472
 355
 1,827
 425
 1,223
 1,648
Total$113,637
 $24,381
 $138,018
 $111,586
 $23,923
 $135,509



 Six Months Ended
 June 29, 2019 June 30, 2018
 Probe Cards Systems Total Probe Cards Systems Total
Market:
 
 
 
 
 
    Foundry & Logic$145,022
 $—
 $145,022
 $120,549
 $—
 $120,549
    DRAM64,930
 —
 64,930
 68,357
 —
 68,357
    Flash11,788
 —
 11,788
 17,608
 —
 17,608
    Systems—
 48,491
 48,491
 —
 47,285
 47,285
Total$221,740
 $48,491
 $270,231
 $206,514
 $47,285
 $253,799
Timing of revenue recognition:

 

 

 

 

 

    Products transferred at a point in time$220,519
 $46,481
 $267,000
 $205,475
 $45,372
 $250,847
    Services transferred over time1,221
 2,010
 3,231
 $1,039
 $1,913
 2,952
Total$221,740
 $48,491
 $270,231
 $206,514
 $47,285
 $253,799
Geographical region:

 

 

 

 

 

    United States$59,727
 $12,905
 $72,632
 $54,961
 $11,132
 $66,093
    South Korea52,378
 2,516
 54,894
 $38,103
 $2,879
 40,982
    China34,455
 7,743
 42,198
 20,062
 6,825
 26,887
    Taiwan34,083
 3,176
 37,259
 $52,829
 $4,903
 57,732
    Japan18,167
 8,358
 26,525
 $20,965
 $6,250
 27,215
    Europe9,847
 10,294
 20,141
 $9,682
 $11,339
 21,021
    Asia-Pacific1
9,052
 1,894
 10,946
 $9,156
 $2,613
 11,769
    Rest of the world4,031
 1,605
 5,636
 $756
 $1,344
 2,100
Total$221,740
 $48,491
 $270,231
 $206,514
 $47,285
 $253,799
1 Asia-Pacific includes all countries in the region except China, Japan, South Korea, and Taiwan, which are disclosed separately.separately.



20

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Cautionary Statement Regarding Forward-Looking Statements
 
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Securities Exchange Act of 1934 and the Securities Act of 1933, which are subject to risks and uncertainties. The forward-looking statements include statements concerning, among other things, our business strategy, financial and operating results, gross margins, liquidity and capital expenditure requirements and impact of accounting standards and our share repurchase plan.standards. In some cases, you can identify these statements by forward-looking words, such as "may," "might," "will," "could," "should," "expect," "plan," "anticipate," "believe," "estimate," "predict," "intend" and "continue," the negative or plural of these words and other comparable terminology.

The forward-looking statements are only predictions based on our current expectations and our projections about future events. All forward-looking statements included in this Quarterly Report on Form 10-Q are based upon information available to us as of the filing date of this Quarterly Report on Form 10-Q. You should not place undue reliance on these forward-looking statements. We have no obligation to update any of these statements. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to differ materially from those expressed or implied by these statements, including risks related to general market trends, uncertainties related to COVID-19 and the impact of our responses to it, the interpretation and impacts of changes in export controls and other trade barriers, our ability to execute our business strategy and other risks discussed in the section titled “Risk Factors” and elsewhere in our Annual Report on Form 10-K for the year ended December 29, 201828, 2019 and in this Quarterly Report on Form 10-Q. You should carefully consider the numerous risks and uncertainties described under these sections.
 
The following discussion and analysis should be read in conjunction with our condensed consolidated financial statements and the accompanying notes contained in this Quarterly Report on Form 10-Q. Unless expressly stated or the context otherwise requires, the terms “we,” “our,” “us” and “FormFactor” refer to FormFactor, Inc. and its subsidiaries.

Overview

FormFactor, Inc., headquartered in Livermore, California, is a leading provider of electrical test and measurement technologies.solutions. We provide a broad range of high-performance probe cards, analytical probes, probe stations, metrology systems, and thermal sub-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, tothrough development throughto 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 and thermal sub-systems are included in the Systems segment.

We generated net income of $12.4$15.9 million in the first sixthree months of fiscal 20192020 as compared to $11.2$5.5 million in the first sixthree months of fiscal 2018.2019. The increase in net income was primarily due to higher revenues, partially offset by higher operating expenses, both generated by higher operating levels.

Impact of COVID-19

An outbreak of an illness caused by a novel coronavirus in 2019 (“COVID-19”) has resulted in millions of infections and well over one hundred thousand deaths worldwide as of the date of filing this Quarterly Report. COVID-19 continues to spread in many of the regions that we, our customers and our suppliers operate. The COVID-19 pandemic has resulted in significant governmental measures being implemented to control the spread of the virus, including the imposition of stay-at-home and other orders in locations where we have manufacturing and other activities. We experienced a higher effective income tax rate.significant disruption to our operations as a result of the COVID-19 pandemic during the last two weeks of our first fiscal quarter of 2020 which continues, although currently to a lessening extent.

We 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. After a temporary suspension of manufacturing to implement safety measures in our California and Oregon locations, consistent with federal guidelines and state and local orders, we recommenced manufacturing. We currently continue to operate in all of our manufacturing sites
21

subject to certain safety and related constraints. Our other operations are similarly continuing with substantial work-from-home activities.

If the provisions of governmental health orders or other safety requirements continue for an extended period of time, or if we have occurrences of COVID-19 in any of our facilities, we may experience further disruptions or delays in manufacturing, product design, product development, customer support, manufacturing and sales, and an overall loss of productivity and efficiency. The progression of the COVID-19 pandemic could also negatively impact our business or results of operations through new restrictions at our operating locations or at those of our customers or suppliers.

Even with our continued operations, COVID-19 has had, and may have further, negative impacts on our supply chain, workforce and customers. As the COVID-19 pandemic is a widespread public health crisis, it is also 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 may benefit from some of these measures, although we do not believe those benefits will have a material effect upon our financial results or financial condition.

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

Critical Accounting Policies and the Use of Estimates

Management’s Discussion and Analysis and Note 2 to the Consolidated Financial Statements in our 20182019 Annual Report on Form 10-K describe the significant accounting estimates and critical accounting policies used in preparation of the Consolidated Financial Statements. Actual results in these areas could differ from management’s estimates. During the three and six months ended June 29, 2019,March 28, 2020, there were no significant changes in our critical accounting policies or estimates from those reported in our Annual Report on Form 10-K for the year ended December 29, 2018,28, 2019, which was filed with the Securities and Exchange Commission on February 26, 2019.21, 2020.



22

Results of Operations
 
The following table sets forth our operating results as a percentage of revenues for the periods indicated:
Three Months Ended Six Months Ended Three Months Ended
June 29,
2019		 June 30,
2018		 June 29,
2019		 June 30,
2018		 March 28,
2020		March 30,
2019
Revenues100.0 % 100.0 % 100.0 % 100.0 %Revenues100.0 %100.0 %
Cost of revenues59.9
 58.5
 60.1
 60.1
Cost of revenues58.1  60.3  
Gross profit40.1
 41.5
 39.9
 39.9
Gross profit41.9  39.7  
Operating expenses:       Operating expenses:      
Research and development14.6
 14.5
 14.7
 14.9
Research and development13.2  14.9  
Selling, general and administrative19.0
 18.6
 19.1
 19.2
Selling, general and administrative17.2  19.0  
Total operating expenses33.6
 33.1
 33.8
 34.1
Total operating expenses30.4  33.9  
Operating income6.5
 8.4
 6.1
 5.8
Operating income11.5  5.8  
Interest income0.5
 0.2
 0.5
 0.2
Interest income0.4  0.4  
Interest expense(0.4) (0.7) (0.4) (0.7)Interest expense(0.2) (0.5) 
Other income (expense), net0.1
 0.1
 —
 (0.3)
Other expense, netOther expense, net(0.1) (0.1) 
Income before income taxes6.7
 8.0
 6.2
 5.0
Income before income taxes11.6  5.6  
Provision for income taxes1.7
 1.3
 1.6
 0.8
Provision for income taxes1.8  1.5  
Net income5.0 % 6.7 % 4.6 % 4.2 %Net income9.8 %4.1 %

Revenues by Segment and Market
 Three Months Ended
 March 28,
2020		March 30,
2019
 (In thousands)
Probe Cards$134,715  $108,103  
Systems26,038  24,110  
$160,753  $132,213  
 Three Months Ended Six Months Ended
 June 29, 2019 June 30, 2018 June 29, 2019 June 30, 2018
 (In thousands)
Probe Cards$113,637
 $111,586
 $221,740
 $206,514
Systems24,381
 23,923
 48,491
 47,285
 $138,018
 $135,509
 $270,231
 $253,799


Three Months Ended
March 28,
2020		% of RevenuesMarch 30,
2019		% of Revenues$ Change% Change
(Dollars in thousands)
Probe Cards Markets:
Foundry & Logic$105,745  65.8 %$71,580  54.1 %$34,165  47.7 %
DRAM24,696  15.4  28,886  21.9  (4,190) (14.5) 
Flash4,274  2.7  7,637  5.8  (3,363) (44.0) 
Systems Market:
Systems26,038  16.1  24,110  18.2  1,928  8.0  
Total revenues$160,753  100.0 %$132,213  100.0 %$28,540  21.6 %


 Three Months Ended
 June 29, 2019 % of Revenues June 30, 2018 % of Revenues $ Change % Change
 (Dollars in thousands)
Probe Cards Markets:           
Foundry & Logic$73,442
 53.2% $62,111
 45.8% $11,331
 18.2 %
DRAM36,044
 26.1
 38,090
 28.1
 (2,046) (5.4)
Flash4,151
 3.0
 11,385
 8.4
 (7,234) (63.5)
Systems Market:

 

 

 

 
 
Systems24,381
 17.7
 23,923
 17.7
 458
 1.9
Total revenues$138,018
 100.0% $135,509
 100.0% $2,509
 1.9 %
            
 Six Months Ended
 June 29, 2019 % of Revenues June 30, 2018 % of Revenues $ Change % Change
 (Dollars in thousands)
Probe Cards Markets:           
Foundry & Logic$145,022
 53.7% $120,549
 47.5% $24,473
 20.3 %
DRAM64,930
 24.0
 68,357
 26.9
 (3,427) (5.0)
Flash11,788
 4.4
 17,608
 7.0
 (5,820) (33.1)
Systems Market:

 

 

 

 
 
Systems48,491
 17.9
 47,285
 18.6
 1,206
 2.6
Total revenues$270,231
 100.0% $253,799
 100.0% $16,432
 6.5 %

The increasesincrease in Foundry & Logic product revenue for the three and six months ended June 29, 2019,March 28, 2020, compared to the three and six months ended JuneMarch 30, 2018, were primarily the result2019, was driven principally by increased unit sales to large semiconductor foundries and integrated device manufacturers, as they increased manufacturing of lower demand in the prior year from one major customer as a result of delays in its node transitions. This major customer accounted for 26.1% and 23.8%, respectively, of total revenues for the three and six months ended June 29, 2019, compared to 15.1% and 14.6%, respectively, for the three and six months ended June 30, 2018.new chip designs on leading-edge nodes.

The decreasesdecrease in DRAM and Flash product revenue for the three and six months ended June 29, 2019,March 28, 2020, compared to the three and six months ended JuneMarch 30, 2018, were2019, was driven by decreased unit sales as a result of decreased customer demand.

23

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

The increase in Systems product revenue for the three and six months ended June 29, 2019,March 28, 2020, compared to the three and six months ended JuneMarch 30, 2018, were2019, was driven by increased sales of probe stations, which includes a new 200mm platform,an increase in revenue from 300mm stations, partially offset by lower revenue from thermal sub-systems.sub-systems and 200mm stations.


Due to COVID-19, there were various impacts across our segments due to governmental mandates of social distancing. This resulted in a temporary factory shut down for almost two weeks in certain locations, limiting our manufacturing capacity. These shutdowns negatively affected revenue, especially in our Probes segment.

Revenues by Geographic Region
 Three Months Ended Six Months Ended
 June 29, 2019 % of
Revenue		 June 30, 2018 % of
Revenue		 June 29, 2019 % of
Revenue		 June 30, 2018 % of
Revenue
 (Dollars in thousands)
United States$38,369
 27.8% $33,230
 24.5% $72,632
 26.9% $66,093
 26.0%
South Korea28,171
 20.4
 25,992
 19.2
 54,894
 20.3
 40,982
 16.1
China20,355
 14.7
 14,613
 10.8
 42,198
 15.6
 26,887
 10.6
Japan16,093
 11.7
 13,543
 10.0
 26,525
 9.8
 27,215
 10.7
Taiwan14,872
 10.8
 30,010
 22.1
 37,259
 13.8
 57,732
 22.7
Europe10,648
 7.7
 9,519
 7.0
 20,141
 7.5
 21,021
 8.3
Asia-Pacific1
7,683
 5.6
 6,954
 5.1
 10,946
 4.1
 11,769
 4.6
Rest of the world1,827
 1.3
 1,648
 1.2
 5,636
 2.1
 2,100
 0.8
Total revenues$138,018
 100.0% $135,509
 100.0% $270,231
 100.0% $253,799
 100.0%

Three Months Ended
March 28,
2020		% of
Revenue		March 30,
2019		% of
Revenue
 (Dollars in thousands)
China$43,642  27.1 %$21,843  16.5 %
United States31,916  19.9 %34,263  25.9 %
Taiwan31,780  19.8 %22,387  16.9 %
Europe21,043  13.1 %9,493  7.2 %
South Korea14,088  8.8 %26,723  20.2 %
Japan8,370  5.2 %10,432  7.9 %
Asia-Pacific1
7,863  4.9 %3,263  2.5 %
Rest of the world2,051  1.2 %3,809  2.9 %
Total revenues$160,753  100.0 %$132,213  100.0 %

1 Asia-Pacific includes all countries in the region except China, Japan, South Korea and Taiwan, 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 the U.S.

Changes in revenue by geographic region for the three and six months ended June 29, 2019March 28, 2020, compared to the three and six months ended JuneMarch 30, 2018 were2019, was primarily attributable to changes in customer demand, shifts in customer regional manufacturing strategies, 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.

Our gross profit and gross margin were as follows (dollars in thousands):
 Three Months Ended
 March 28,
2020		March 30,
2019		$ Change% Change
Gross profit$67,390  $52,521  $14,869  28.3 %
Gross margin41.9 %39.7 %

24
 Three Months Ended
 June 29, 2019 June 30, 2018 $ Change % Change
Gross profit$55,352
 $56,218
 $(866) (1.5)%
Gross margin40.1% 41.5% 
 
        
 Six Months Ended
 June 29, 2019 June 30, 2018 $ Change % Change
Gross profit$107,873
 $101,347
 $6,526
 6.4 %
Gross margin39.9% 39.9% 
 




Our gross profit and gross margin by segment were as follows (dollars in thousands):
Three Months Ended
March 28, 2020March 30, 2019
Probe CardsSystemsCorporate and OtherTotalProbe CardsSystemsCorporate and OtherTotal
Gross profit$60,743  $13,334  $(6,687) $67,390  $45,294  $13,016  $(5,789) $52,521  
Gross margin45.1 %51.2 %— %41.9 %41.9 %54.0 %— %39.7 %
 Three Months Ended
 June 29, 2019 June 30, 2018
 Probe Cards Systems Corporate and Other Total Probe Cards Systems Corporate and Other Total
Gross profit$48,492
 $12,672
 $(5,812) $55,352
 $50,543
 $11,626
 $(5,951) $56,218
Gross margin42.7% 52.0% —% 40.1% 45.3% 48.6% —% 41.5%
                
 Six Months Ended
 June 29, 2019 June 30, 2018
 Probe Cards Systems Corporate and Other Total Probe Cards Systems Corporate and Other Total
Gross profit$93,785 $25,688
 $(11,600) $107,873
 $90,614 $22,761
 $(12,028) $101,347
Gross margin42.3% 53.0% —% 39.9% 43.9% 48.1% —% 39.9%

Probe Cards
For the three months ended June 29,March 28, 2020, gross profit and gross margins increased compared to the three months ended March 30, 2019, primarily due to increased sales and higher factory utilization.

Systems
For the three months ended March 28, 2020, gross profit increased while gross margin decreased compared to the three months ended JuneMarch 30, 20182019, primarily due to less favorableas a result of product mix offset by increased sales and higher factory utilization. For the six months ended June 29, 2019, gross profit increased compared to the six months ended June 30, 2018 primarily due to increased sales and factory utilization. Gross margins decreased due to less favorable product mix.additional contribution from our acquisition of FRT GmbH.

Systems
For the three and six months ended June 29, 2019, gross profit and gross margin increased compared to the three and six months ended June 30, 2018 due to increased sales and a favorable product mix.

Corporate and Other
Corporate and Other includes unallocated expenses relating to amortization of intangible assets, share-based compensation, expense, 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 the three months ended June 29, 2019,March 28, 2020, compared to the three months ended JuneMarch 30, 2018,2019, gross profit and gross margin decreased due to product mix, offset by increasedmargins have improved, primarily on higher sales. For the three and six months ended June 29, 2019, compared to the three and six months ended June 30, 2018, gross profit increased due to higher unit sales and favorable product mix, primarily within our Systems segment.

Cost of revenues included stock-based compensation expense as follows (in thousands):
Three Months Ended
March 28,
2020		March 30,
2019
Stock-based compensation$937  $950  
 Three Months Ended Six Months Ended
 June 29,
2019		 June 30,
2018		 June 29,
2019		 June 30,
2018
Stock-based compensation$964
 $813
 $1,914
 $1,733

Future gross margins may be adversely impacted by lower revenues, unfavorable product mix and lower factory utilization even though we have taken significant steps to reduce our operating cost structure.utilization. Our gross margins may also be adversely affected if we are required to record additional inventory write-downs for estimated average selling prices that are below cost.cost or because of a decrease in demand.



Research and Development
 Three Months Ended
 June 29, 2019 June 30, 2018 $ Change % Change
 (Dollars in thousands)
Research and development$20,074
 $19,675
 $399
 2.0%
% of revenues14.6% 14.5% 
 
        
 Six Months Ended
 June 29, 2019 June 30, 2018 $ Change % Change
 (Dollars in thousands)
Research and development$39,797
 $37,721
 $2,076
 5.5%
% of revenues14.7% 14.9%    

Three Months Ended
March 28,
2020		March 30,
2019		$ Change% Change
(Dollars in thousands)
Research and development$21,267  $19,723  $1,544  7.8 %
% of revenues13.2 %14.9 %
The increasesincrease in research and development expenses in the three and six months ended June 29, 2019 when compared to the corresponding periods in the prior year were primarily driven by annual compensation and benefit adjustments, partially offset by a decrease in project material costs. The increase for the three months ended June 29, 2019March 28, 2020 when compared to the corresponding period in the prior year was primarily driven by increased headcount combined with higher variable compensation, partially offset by a decrease in employee incentive compensation and benefit adjustments.project material costs.


25

A detail of the changechanges is as follows (in millions)thousands):
Three Months Ended March 28, 2020 compared to Three Months Ended March 30, 2019
Employee compensation costs$1,649 
Depreciation88 
Stock-based compensation(80)
Project material costs(65)
Other general operations(48)
$1,544 
 Three Months Ended June 29, 2019 compared to Three Months Ended June 30, 2018 Six Months Ended June 29, 2019 compared to Six Months Ended June 30, 2018
Employee compensation costs$0.2
 $1.5
Stock-based compensation0.3
 0.5
Project material costs(0.4) (0.5)
Depreciation0.1
 0.3
Other general operations0.2
 0.3

$0.4
 $2.1

Research and development included stock-based compensation expense as follows (in thousands):
Three Months Ended
March 28,
2020		March 30,
2019
Stock-based compensation$1,439  $1,519  
 Three Months Ended Six Months Ended
 June 29,
2019		 June 30,
2018		 June 29,
2019		 June 30,
2018
Stock-based compensation$1,582
 $1,256
 $3,101
 $2,558



Selling, General and Administrative
 Three Months Ended
 June 29, 2019 June 30, 2018 $ Change % Change
 (Dollars in thousands)
Selling, general and administrative$26,283
 $25,232
 $1,051
 4.2%
% of revenues19.0% 18.6% 
 
        
 Six Months Ended
 June 29, 2019 June 30, 2018 $ Change % Change
 (Dollars in thousands)
Selling, general and administrative$51,467
 $48,681
 $2,786
 5.7%
% of revenues19.1% 19.2% 
 

Three Months Ended
March 28,
2020		March 30,
2019		$ Change% Change
(Dollars in thousands)
Selling, general and administrative$27,693  $25,184  $2,509  10.0 %
% of revenues17.2 %19.0 %
The increasesincrease in selling, general and administrative in the three and six months ended June 29, 2019March 28, 2020 when compared to the corresponding periodsperiod in the prior year werewas primarily due to increased headcount combined with higher variable compensation, higher stock-based compensation related to the timing of annual grants, and annual compensation and benefit adjustments. The increase for the three months ended June 29, 2019 when compared to the corresponding periods in the prior year washigher costs from acquisition of FRT GmbH, offset partially by a decrease in employee incentive compensation and a reduction in consulting fees.the amortization of intangible assets.

A detail of the changechanges is as follows (in millions)thousands):
Three Months Ended March 28, 2020 compared to Three Months Ended March 30, 2019
Employee compensation1,942 
Amortization of intangibles(858)
Consulting fees566 
Stock-based compensation421 
General operating expenses438 
$2,509 
 Three Months Ended June 29, 2019 compared to Three Months Ended June 30, 2018 Six Months Ended June 29, 2019 compared to Six Months Ended June 30, 2018
Stock-based compensation$0.7
 $2.0
Consulting fees(0.3) (1.3)
Employee compensation—
 1.1
Amortization of intangibles0.3
 0.7
General operating expenses0.3
 0.3

$1.0
 $2.8

Selling, general and administrative included stock-based compensation expense as follows (in thousands):
Three Months Ended
March 28,
2020		March 30,
2019
Stock-based compensation$3,247  $2,826  

26
 Three Months Ended Six Months Ended
 June 29,
2019		 June 30,
2018		 June 29,
2019		 June 30,
2018
Stock-based compensation$2,743
 $2,059
 $5,569
 $3,593


Interest Income and Interest Expense
 Three Months Ended Six Months Ended
 June 29,
2019		 June 30,
2018		 June 29,
2019		 June 30,
2018
 (Dollars in thousands)
Interest Income$684
 $326
 $1,264
 $583
Weighted average balance of cash and investments$177,380
 $142,807
 $164,416
 $138,221
Weighted average yield on cash and investments2.11% 1.34% 2.07% 1.42%

       
Interest Expense$522
 $910
 $1,117
 $1,877
Average debt outstanding$57,253
 $97,225
 $61,044
 $101,641
Weighted average interest rate on debt4.49% 3.93% 4.50% 3.77%


 Three Months Ended
 March 28,
2020		March 30,
2019
 (Dollars in thousands)
Interest Income$685  $580  
Weighted average balance of cash and investments  $210,791  $151,451  
Weighted average yield on cash and investments  1.68 %2.03 %
Interest Expense$318  $595  
Average debt outstanding$42,854  $64,835  
Weighted average interest rate on debt2.50 %4.51 %
 
Interest income is earned on our cash, cash equivalents, restricted cash and marketable securities. The increasesincrease in interest income for the three and six months ended June 29, 2019March 28, 2020 compared with the corresponding periodsperiod of the prior year werewas attributable to higher invested balances and sustained investment yields, as well as higher average investment balances.related in part to longer duration investments.

Interest expense primarily includes interest on our term loan andloans, partially offset by income from our interest-rate swap derivative contracts, as well as term loan issuance costs amortization charges. The decreasesdecrease in interest expense for the three and six months ended June 29, 2019March 28, 2020 compared to the same periodsperiod of the prior year werewas primarily due to lower outstanding debt balances related to the acquisition of Cascade Microtech in fiscal 2016 as a result of principal payments made, partially offset by higheradditional interest rates.expense related to the term loan originated to finance the acquisition of FRT GmbH in the fourth quarter of 2019.

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

Provision for Income Taxes
 Three Months Ended
 March 28,
2020		March 30,
2019
 (In thousands, except percentages)
Provision for income taxes$2,816  $2,032  
Effective tax rate15.1 %27.0 %
 Three Months Ended Six Months Ended
 June 29,
2019		 June 30,
2018		 June 29,
2019		 June 30,
2018
 (In thousands, except percentages)
Provision for income taxes$2,290
 $1,654
 $4,322
 $1,941
Effective tax rate24.8% 15.3% 25.8% 14.7%

Provision for income taxes reflects the tax provision on our operations in foreign and U.S. jurisdictions, offset by tax benefits from lapsing of statute of limitations relatedtax credits and the foreign-derived intangible income ("FDII") deduction. We expect the FDII deduction and corresponding benefit to uncertain tax positions in foreign jurisdictions. In the fourth quarter of fiscal 2018, we releasedbe available after utilizing our valuation allowance against certain U.S. deferred tax assets as sufficient positive evidence existed to support the realization of such deferred tax assets,previous net operating loss carryforwards, resulting in an increasea decrease in our effective tax rate for the three and six months ended June 29, 2019March 28, 2020, compared to the three and six months ended JuneMarch 30, 2018.2019. Our effective tax rate may vary from period to period based on changes in estimated taxable income or loss by jurisdiction, changes to the valuation allowance, changes to U.S. federal, state or foreign tax laws, future expansion into areas with varying country, state, and local income tax rates, deductibility of certain costs and expenses by jurisdiction.


Liquidity and Capital Resources

Capital Resources
Our working capital was $244.8$308.8 million at June 29, 2019,March 28, 2020, compared to $235.3$282.5 million at December 29, 2018.28, 2019.

Cash and cash equivalents primarily consist of deposits held at banks and money market funds. Marketable securities primarily consist of U.S. treasuries, U.S. agency securities and corporate bonds. 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 $176.9$239.4 million at June 29, 2019,March 28, 2020, compared to $149.0$220.9 million at December 29, 2018.28, 2019. We believe that we will be able to satisfy our working capital requirements and scheduled term loan repayments for at least the next twelve months with the liquidity provided by our existing cash, cash
27

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.

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 demand downturn, COVID-19, or other event), or increasing our available cash through debt or equity financings, our cash, cash equivalents and marketable securities may decline in fiscal 2019.2020.

We utilize a variety of tax planning and financing strategies to manage our worldwide cash and deploy funds to locations where needed. As part of these strategies, we indefinitely reinvest a portion of our foreign earnings. 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.



Cash Flows
The following table sets forth our net cash flows from operating, investing and financing activities:
Three Months Ended
March 28,
2020		March 30,
2019
(In thousands)
Net cash provided by operating activities$39,339  $20,638  
Net cash used in investing activities(5,442) (9,332) 
Net cash used in financing activities$(9,071) $(3,932) 
 Six Months Ended
 June 29, 2019 June 30, 2018
 (In thousands)
Net cash provided by operating activities$55,376
 $30,058
Net cash used in investing activities(12,470) (6,962)
Net cash used in financing activities(17,037) (18,949)

Operating Activities 
Net cash provided by operating activities for the sixthree months ended June 29, 2019March 28, 2020 was primarily attributable to net income of $12.4$15.9 million and $40.8$22.7 million of net non-cash expenses, offset by changes in operating assets and liabilities, using $2.2 million of cash as discussed in more detailexplained below.

Accounts receivable, net, decreased $24.0$7.8 million to $71.3$90.1 million at June 29, 2019,March 28, 2020, compared to $95.3$97.9 million at December 29, 2018,28, 2019, as a result of changes in customer sales mix, timing of customer shipments and timing of customer payments.

Inventories, net, increased $6.1decreased $4.3 million to $83.9$79.0 million at June 29, 2019,March 28, 2020, compared to $77.7$83.3 million at December 29, 2018,28, 2019, as a result of increasedshipping prior quarter backlog, lower inventory purchasesproduction, and less inventory receipts at the end of the quarter primarily due to shorten lead time and improve pricing, and timing of customer demand.reduced operating levels under COVID-19 restrictions, as previously described.

Accounts payableAccrued liabilities decreased $13.8$7.3 million to $26.3$29.2 million at June 29, 2019,March 28, 2020, compared to $40.0$36.4 million at December 29, 2018,28, 2019, as a result of timing of vendor payments.payments including employee performance-based compensation and indirect taxes.

Investing Activities
Net cash used in investing activities for the sixthree months ended June 29, 2019March 28, 2020 was primarily related to $11.5$12.1 million of cash used in the acquisition of property, plant and equipment as well as $1.1partially offset by $6.6 million of net purchasesproceeds from sales of marketable securities.

Financing Activities
Net cash used in financing activities for the sixthree months ended June 29, 2019March 28, 2020 primarily related to $18.8$13.2 million of principal payments made towards the repayment of our term loanloans and $2.2$0.4 million related to tax withholdingswithholding associated with the net share settlements of our equity awards, partially offset by $3.9$4.5 million of proceeds received from issuances of common stock under our employee stock purchase plan and stock option plans.



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Debt Facility

CMI Term Loan
On June 24, 2016, we entered into a credit agreementCredit Agreement (the “Credit Agreement”) with HSBC Bank USA, National Association ("HSBC")., as administrative agent, co-lead arranger, sole bookrunner and syndication agent, other lenders that may from time-to-time be a party to the Credit Agreement, and certain guarantors. Pursuant to the Credit Agreement, the lenders have provided us with a senior secured term loan facility of $150 million (the “Term“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 of Cascade Microtech.in fiscal 2016 and to pay related bank fees and expenses.

The CMI Term Loan bears interest at a rate equal to, at our option, (i) the applicable London Interbank Offered Rate ("LIBOR") rate plus 2.00% per annum or (ii) Base Rate (as defined in the Credit Agreement) plus 1.00% per annum. We have currently elected to pay interest at 2.00% over the one-month LIBOR rate. Interest payments are payable in monthly installments over a five-year period. The interest rate at March 28, 2020 was 3.61%.

The principal payments on the CMI Term Loan are paid in equal quarterly installments that began June 30, 2016, in an annual amount equal to 5% for year one, 10% for year two, 20% for year three, 30% for year four and 35% for year five. The planned final payment on the CMI Term Loan is scheduled for the third quarter of fiscal 2020.

On July 25, 2016, we entered into an interest rate swap agreement with HSBC and other lenders to hedge the interest payments on the CMI Term Loan for the notional amount of $95.6 million. As future levels of LIBOR over the life of the loan are uncertain, we entered into these interest-rate swap agreements to hedge the exposure in interest rate risks associated with movement in LIBOR rates. By entering into the agreements, we convert a floating rate interest at one-month LIBOR plus 2% into a fixed rate interest at 2.939%. As of June 29, 2019, the notional amount of the loan that is subject to thisThe interest rate swap is $33.8 million. See Note 7agreement ended as of Notes to Condensed Consolidated Financial Statements for additional information.March 28, 2020.

The Term Loan amortizes in equal quarterly installments, which began June 30, 2016, in annual amounts equal to 5% for year one, 10% for year two, 20% for year three, 30% for year four and 35% for year five. The Credit Agreement allows voluntary prepayment to be made at any time to prepay the Term Loan in whole or in part without penalty or premium. As of June 29, 2019, we have made prepayments of $40.0 million in addition to scheduled installments per the Credit Agreement. For the three and six months ended June 29, 2019, we did not make any prepayments in addition to scheduled installments.



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

The Credit Agreement contains negative covenants customary for financing of this type, as well as certain financial maintenance covenants. As of June 29, 2019,March 28, 2020, the balance outstanding pursuant to the CMI Term Loan was $46.3$23.7 million at an interest rate of 4.1% and we were in compliance with all covenants under the Credit Agreement.

Stock Repurchase ProgramFRT Term Loan

In February 2017, our Board of Directors authorized a program to repurchase up to $25 million of outstanding common stock to offset potential dilution from issuances of common stock under our stock-based compensation plans. The share repurchase program will expire on February 1, 2020. During the six months ended June 29,On October 25, 2019, we did not repurchase any sharesentered into a $23.4 million three-year credit facility loan agreement (the "FRT Term Loan") with HSBC Trinkaus & Burkhardt AG, Germany, to fund the acquisition of common stock.FRT GmbH, which we acquired on October 9, 2019. See Note 4 for further details of the acquisition.

The FRT Term Loan bears interest at a rate equal to the Euro Interbank Offered Rate ("EURIBOR") plus 1.75 % per annum and will be repaid in quarterly installments of approximately $1.9 million plus interest beginning January 25, 2020.

The obligations under the FRT Term Loan are fully and unconditionally guaranteed by FormFactor, Inc. The Credit Facility contains negative covenants customary for financing of this type, including covenants that place limitations on the incurrence of additional indebtedness, the creation of liens, the payment of dividends; dispositions; fundamental changes, including mergers and acquisitions; loans and investments; sale leasebacks; negative pledges; transactions with affiliates; changes in fiscal year; sanctions and anti-bribery laws and regulations, and modifications to charter documents in a manner materially adverse to the Lenders. The FRT Term Loan also contains affirmative covenants and representations and warranties customary for financing of this type. As of June 29, 2019, $6.0March 28, 2020, the balance outstanding pursuant to the FRT term loan was $21.4 million remained available for future repurchases.

Repurchased shares are retired upon the settlement of the related trade transactions with the excess of cost over par value charged to additional paid-in capital. All repurchasesand we were made in compliance with Rule 10b-18 under the Securities Exchange Act of 1934, as amended.all covenants.

Contractual Obligations and Commitments

Other than our operating lease commitments as disclosed in Note 12 of Notes to Condensed Consolidated Financial Statements, our contractual obligations and commitments have not materially changed as of June 29, 2019March 28, 2020 from those disclosed in our Annual Report on Form 10-K for the year ended December 29, 2018.28, 2019.

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
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established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As of June 29, 2019,March 28, 2020, we were not involved in any such off-balance sheet arrangements.

Recent Accounting Pronouncements

See Note 1 of Notes to Condensed Consolidated Financial Statements.

Item 3. Quantitative and Qualitative Disclosures about Market Risk
 
For financial market risks related to changes in interest rates and foreign currency exchange rates, reference is made to Item 7A “Quantitative and Qualitative Disclosures about Market Risk” contained in Part II of our Annual Report on Form 10-K for the fiscal year ended December 29, 2018.28, 2019. Our exposure to market risk has not changed materially since December 29, 2018.28, 2019.

Item 4. Controls and Procedures
 
Evaluation of Disclosure Controls and Procedures
 
Based on our management’s evaluation (with the participation of our principal executive officer and principal financial officer), as of the end of the period covered by this report, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”)) are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting
 
There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



Limitations on the Effectiveness of Controls
 
Control systems, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control systems’ objectives are being met. Further, the design of any control systems must reflect the fact that there are resource constraints, and the benefits of all controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected. These inherent limitations include the realities that judgments in decision making can be faulty and that breakdowns can occur because of a simple error or mistake. Control systems can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based, in part, on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.

CEO and CFO Certifications
 
We have attached as exhibits to this Quarterly Report on Form 10-Q the certifications of our Chief Executive Officer and Chief Financial Officer, which are required in accordance with the Exchange Act. We recommend that this Item 4 be read in conjunction with the certifications for a more complete understanding of the subject matter presented. 



PART II - OTHER INFORMATION
 
Item 1A. Risk Factors

There have been no material changes during the sixthree months ended June 29, 2019March 28, 2020 to the risk factors discussed in our Annual Report on Form 10-K for the year ended December 29, 2018.28, 2019 apart from the risk factor described below. If any of the identified risks actually occur, our business, financial condition and results of operations could suffer. The trading price of our common stock could decline and you may lose all or part of your investment in our common stock. The risks and uncertainties described
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in our Annual Report on Form 10-K for the year ended December 29, 201828, 2019 are not the only ones we face. Additional risks that we currently do not know about or that we currently believe to be immaterial may also impair our business operations.

The COVID-19 pandemic has impacted, and is expected to continue to negatively impact, our operations, and those of our important suppliers, business partners and customers.

We are exposed to risks associated with public health crises and outbreaks of contagious diseases, such as the current outbreak of a novel strain of coronavirus ("COVID-19"). To date, COVID-19 has had, and may continue to have, an adverse impact on our operations, our supply chains and our expenses, including as a result of precautionary measures that we take in response to COVID-19.

The COVID-19 pandemic has created significant volatility, uncertainty and economic disruption, which has adversely affected, and will continue to adversely affect, our business operations and may materially and adversely affect our results of operations, cash flows and financial position.

As a result of the COVID-19 pandemic, we have experienced significant business disruptions, including temporary closures of our facilities, and the facilities of our suppliers and their supply chain partners, and restrictions on our ability to travel and service our products. For example, our corporate headquarters and many of our operations, including much of our manufacturing facilities, are located in California, which has instituted health orders applicable to our operations and employees in the region. In other regions where we operate globally, similar health orders have been issued which have had, and will continue to have, similar affects upon our business. This has significantly impacted our ability to design, produce, deliver and support our products for customers. These unprecedented measures to slow the spread of COVID-19 taken by local and regional governments have had, and will continue to have, a significant negative impact on our operations.

A significant amount of our management resources has been, and will continue to be, focused on mitigating the negative impacts of COVID-19 on our business. This has required, and will continue to require, a substantial investment of time and resources across our enterprise that has delayed, or may continue to delay other valuable activities, such as the development of new technologies, products or capabilities. In addition, many of our employees are working remotely for an extended period which can increase operational risk and cybersecurity risks. If we do not respond appropriately to the COVID-19 pandemic, or if customers do not perceive our response positively, we could suffer damage to our reputation, which could adversely affect our business.

The extent to which the COVID-19 pandemic impacts us will depend on numerous evolving factors and future developments that we are not able to predict, including: the severity of the virus; the duration of the outbreak; governmental, business and other actions (which could include restrictions on our operations); the ongoing requirements of social distancing and shelter-in-place orders; the impacts on our supply chain; the impact of the pandemic on economic activity; the extent and duration of the effect on business confidence and investments by our customers; the effects of changes to our operations that may continue indefinitely; the health of and the effect on our workforce and our ability to meet our staffing needs, particularly if members of our workforce are exposed or infected; any impairments in the value of our assets which could be recorded as a result of weaker economic conditions; and the potential impacts upon our internal controls including those over financial reporting that may result from changes in working environments and other circumstances. If the pandemic continues to create disruptions in the credit and financial markets, it could also adversely affect our ability to access capital on favorable terms to meet our business and strategic objectives. All of these circumstances are highly uncertain and cannot be predicted. In addition, the circumstances which give rise to new or existing infectious diseases becoming epidemics or pandemics with potentially similar impacts are expected to persist.

We obtain some of the components and materials used in our products from a sole source or a limited group of suppliers, and in some cases alternative sources are not readily available. Our dependence upon sole or limited source suppliers increases our exposure to the impacts of COVID-19 that might disrupt the operations of one or more of these suppliers, resulting in an inability to obtain an adequate supply of materials, late deliveries or poor component quality while we seek to identify and qualify alternative suppliers.

In addition, the COVID-19 pandemic has adversely affected, and may continue to adversely affect, regional and global economies and financial markets that can result in a period of economic slowdown or recession that could curtail or delay spending by businesses and consumers which may ultimately result in reductions in the demand for our products. As a result of the uncertain scope and duration of the COVID-19 pandemic and the uncertain timing of the regional and global recovery and economic normalization, we are unable to estimate the impacts on our operations and financial results. As a result, we may decide to limit or refrain from providing financial guidance in the manner we have done for recent reporting periods. All of these factors may negatively affect our stock price.
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Increasingly restrictive export regulations and other trade barriers may materially harm our business.

Sales of our products to customers outside of the United States represent a significant part of our past and anticipated revenues, including sales involving exports from the United States to China. In 2019, sales in China represented 18% of our revenues, and China is an area of potential growth for our business. We have observed a continuing trend of increasing tariffs and trade controls affecting exports to China. For example, the U.S. Department of Commerce, Bureau of Industry and Security, has recently published amendments to the U.S. Export Administration Regulations to expand license requirements on exports to entities in China that may support military end uses. These rules are expected to, among other things, expand export license requirements on a broader set of items from the U.S., including many of our products. There is no assurance that we will obtain any such licenses on a timely basis or at all. There also remains considerable uncertainty regarding the interpretation and implementation of these rules. These and other regulatory changes could materially and negatively affect our future sales and operating results.

Item 6. Exhibits

The following exhibits are filed herewith and this list constitutes the exhibit index.
Exhibit Incorporated by Reference Filed
NumberExhibit DescriptionFormDate Number Herewith
3.1  

S-1October 20, 20033.01
3.2  

8-KJuly 22, 20163.2
31.01       X
31.02       X
32.01       *
101.INSXBRL Instance Document     X
101.SCHXBRL Taxonomy Extension Schema Document     X
101.CALXBRL Taxonomy Extension Calculation Linkbase Document     X
101.DEFXBRL Taxonomy Extension Definition Linkbase Document     X
101.LABXBRL Taxonomy Extension Label Linkbase Document     X
101.PREXBRL Taxonomy Extension Presentation Linkbase Document     X
 ______________________________________
*
* This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the date hereof and irrespective of any general incorporation language in any filings.



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SIGNATURE
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
FormFactor, Inc.
Date:August 6, 2019May 7, 2020By:/s/ SHAI SHAHAR
Shai Shahar
Chief Financial Officer
(Duly Authorized Officer, Principal Financial Officer, and Principal Accounting Officer)


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