FORMFACTOR INC - Annual Report: 2018 (Form 10-K)

Weighted Average Recognition Period (Years)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

ý ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 29, 2018

o 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)



Delaware (State or other jurisdiction of incorporation or organization)		13-3711155 (I.R.S. Employer Identification No.)

7005 Southfront Road, Livermore, California 94551

(Address of principal executive offices, including zip code)

(925) 290-4000

(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: Common Stock

Name of each exchange on which registered: NASDAQ Global Market

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No ý

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes o No ý

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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 ý No o

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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K ý

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:



Large accelerated filer ý	Accelerated filer o	Non-accelerated filer o (Do not check if a smaller reporting company)	Smaller reporting company o	Emerging growth company o

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. o

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

Aggregate market value of registrant's common stock held by non-affiliates of the registrant, based upon the closing price of a share of the registrant's common stock on June 30, 2018 (the last business day of the registrant's most recently completed second quarter) as reported by NASDAQ Global Market on that date: $498,775,456. Shares of the registrant's common stock held by each executive officer, director and person who owns 5% or more of the outstanding common stock of the registrant have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

The number of shares of the registrant's common stock, par value $0.001 per share, outstanding as of February 20, 2019 was 74,478,445 shares.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's definitive Proxy Statement for the 2019 Annual Meeting of Stockholders, which will be filed within 120 days of the end of the registrant's fiscal year ended December 29, 2018, are incorporated by reference in Part III hereof. Except with respect to information specifically incorporated by reference in this Annual Report on Form 10-K, the Proxy Statement is not deemed to be filed as a part of this Annual Report on Form 10-K.

FORMFACTOR, INC.

Form 10-K for the Fiscal Year Ended December 29, 2018

Index



		Page
Part I
Item 1:	Business	4
Item 1A:	Risk Factors	9
Item 1B:	Unresolved Staff Comments	17
Item 2:	Properties	17
Item 3:	Legal Proceedings	18
Item 4:	Mine Safety Disclosures	18
Part II
Item 5:	Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	18
Item 6:	Selected Financial Data	20
Item 7:	Management's Discussion and Analysis of Financial Condition and Results of Operations	21
Item 7A:	Quantitative and Qualitative Disclosures about Market Risk	33
Item 8:	Financial Statements and Supplementary Data	33
Item 9:	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	33
Item 9A:	Controls and Procedures	33
Item 9B:	Other Information	34
Part III
Item 10:	Directors, Executive Officers, and Corporate Governance	35
Item 11:	Executive Compensation	35
Item 12:	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	35
Item 13:	Certain Relationships and Related Transactions, and Director Independence	35
Item 14:	Principal Accounting Fees and Services	35
Part IV
Item 15:	Exhibits, Financial Statement Schedules	36
Item 16:	Form 10-K Summary	36
Signatures		37
Consolidated Financial Statements		39

______________

Throughout this Annual Report on Form 10-K, we refer to FormFactor, Inc. and its consolidated subsidiaries as "the Company," "FormFactor," "we," "us," and "our." Our fiscal year ends on the last Saturday in December. Our last three fiscal years ended on December 29, 2018, December 30, 2017 and December 31, 2016.

NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Securities Exchange Act of 1934 and the Securities Act of 1933, which are subject to known and unknown risks and uncertainties. The forward-looking statements include statements concerning, among other things, our business strategy (including the influence of anticipated trends and developments in our business and the markets in which we operate), financial results, operating results, revenues, gross margin, operating expenses, products, projected costs and capital expenditures, research and development programs, sales and marketing initiatives and competition. In some cases, you can identify these statements by our use of 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. Forward-looking statements are based on information available to us as of the filing date of this Annual Report on Form 10-K and our current expectations about future events, which are inherently subject to change and involve known and unknown risks and uncertainties. You should not place undue reliance on these forward-looking statements. We have no obligation to update any of these statements, and we assume no obligation to do so. Actual events or results may differ materially from those expressed or implied by these statements due to various factors, including but not limited to the matters discussed below in the section entitled "Item 1A: Risk Factors," and elsewhere in this Annual Report on Form 10-K.

Our operating results have fluctuated in the past and are likely to continue to fluctuate. You should not rely on period-to-period comparisons of our financial results as indicators of our future performance. Some of the important factors that could cause our revenues, operating results and outlook to fluctuate from period to period include:


•	customer demand for and adoption of our products;


•	market and competitive conditions in our industry, the semiconductor industry and the economy as a whole;


•	the timing and success of new technologies and product introductions by our competitors and by us;


•	our ability to work efficiently with our customers on their qualification of our new technologies and products;


•	our ability to deliver reliable, cost-effective products that meet our customers’ testing requirements in a timely manner;


•	our ability to transition to new product architectures to solve next-generation semiconductor test and measurement challenges, and to bring new products into volume production on time and at acceptable yields and cost;


•	our ability to implement measures for enabling efficiencies and supporting growth in our design, applications, manufacturing and other operational activities;


•	the reduction, rescheduling or cancellation of orders by our customers;


•	our ability to collect accounts receivables owed by our customers;


•	our product and customer sales mix and geographical sales mix;


•	a reduction in the price or the profitability of our products due to competitive pressures or other factors;


•	the timely availability or the cost of components and materials utilized in our products;


•	our ability to efficiently optimize manufacturing capacity and production yields as necessary to meet customer demand and ramp variable production volumes at our manufacturing facilities;


•	our ability to protect our intellectual property against infringement and continue our investment in research and development and design activities;


•	any disruption in the operation of our manufacturing facilities;


•	changes in trade, tariff or export regulations in the markets where we produce or sell our products; and


•	the timing of and return on our investments in research and development.

PART I

Item 1: Business

General

FormFactor, Inc., headquartered in Livermore, California, is a leading provider of electrical test and measurement technologies. We provide a broad range of high-performance probe cards, analytical probes, probe stations and thermal sub-systems to both semiconductor companies and scientific institutions. Our products provide electrical information from a variety of semiconductor and electro-optical devices and integrated circuits from research, to development through production. Customers use our products and services to lower production costs, improve yields, and enable development of their complex next generation products.

FormFactor, Inc. was incorporated in 1993, and we introduced our first product in 1995. In October 2012, we acquired Astria Semiconductor Holdings, Inc., including its subsidiary Micro-Probe Incorporated (together "MicroProbe"), and, in June 2016, we acquired Cascade Microtech, Inc. ("Cascade Microtech"). These acquisitions helped transform our business into a broader electrical test and measurement market leader with greater scale, diversification and market opportunities.

As of December 29, 2018, 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 and thermal sub-systems are included in the Systems Segment.

Products

We design, manufacture and sell multiple product lines, including probe cards, analytical probes, probe stations, thermal sub-systems, and related services.

Probe cards. Our probe cards utilize a variety of technologies and product architectures, including micro-electromechanical systems (MEMS) technologies. We use advanced design and automation technologies to enable our rapid and cost-effective manufacturing of resilient multi-material composite spring-like electrically-conductive contact elements with characteristic length scales of a few microns. These contact elements are designed to provide a specific range of forces on, and across, a chip’s bond pad, solder bump, or copper pillar, during the test process and maintain their shape and position over a range of compression levels. In addition, while maintaining these mechanical characteristics, the contact elements must achieve reliable and high-fidelity electrical contact through wafer surfaces that are generally oxidized or otherwise contaminated, and must maintain these attributes over hundreds of thousands, and even millions, of compression cycles. Our range of capabilities enable us to rapidly produce customer-design specific probe cards that deliver leading precision, reliability, and electro-mechanical performance.

Our probe cards are customized for our customers’ unique wafer and chip designs by modifying and adapting our standard product architectures to meet an individual customer’s design layout and electrical test requirements. We offer probe cards to test a variety of semiconductor device types, including systems on a chip, mobile application processors, microprocessors, microcontrollers, graphic processors, radio frequency, analog, mixed signal, image sensors, electro-optical, DRAM memory, NAND flash memory and NOR flash memory devices.

For many advanced applications, our products must maintain tens of thousands of simultaneous high-fidelity low-impedance electrical contacts with the corresponding chip contacts on the wafer. Our present technologies enable probe cards with over 100,000 contact elements with spacings as small as 40 microns over geometries as large as 300mm. In addition, for high signal-fidelity devices such as wireless radio frequency transceivers and automotive radar chips, our probe card technologies are capable of testing at millimeter-wave frequencies range, currently up to 81 GHz.

We have invested, and intend to continue to invest, considerable resources in proprietary probe card design tools and processes. These tools and processes are intended to enable the rapid and accurate customization of products required to meet customer requirements, including automated routing and trace length adjustment within our probe cards, to rapidly design complex structures.

In addition, some of our customers test certain chips over a large range of operating temperatures, such as for automotive applications. We design probe cards to provide for a precise match with the thermal expansion characteristics of the wafer under test across the range of test operating temperatures. For many of our products, our customers can use the same probe card for both low and high temperature testing. We also design probe cards for customers that require extreme positional accuracy at a specific temperature.

Through on-going investments in both our technology and operations, we continue to innovate and improve so that our products will meet customers’ future technical roadmap performance, quality, and commercial requirements. We also focus upon leveraging these ongoing investments across all advanced probe card markets to realize synergies and economies of scale to benefit our competitiveness, time-to-market and overall profitability.

Analytical Probes. We offer over 50 different analytical probe models for engineering and production testing. Analytical probes are used for a diverse set of applications, including device characterization, electrical simulation model development, failure analysis, and prototype design debugging. Our customers for analytical probes include universities, research institutions, semiconductor integrated device manufacturers, semiconductor foundries, and fabless semiconductor companies. We continue to add new models of analytical probes that address measurements with higher complexities and at higher frequencies.

Probe Stations. Probe stations, also referred to as probing systems, are a critical tool development of new generations of semiconductor processes and designs. Probe stations are highly configurable for the required measurements, the size and type of wafer under test, the characteristics of the device design to be tested, and the temperatures at which testing is to be performed. Process development and design complexities have continually increased with each new generation of semiconductor technology to accommodate smaller design geometries, new materials and more layers. Probing systems are a fundamental tool for characterizing and verifying electrical performance and reliability to enable new semiconductor technologies. We design our probing systems for semiconductor design engineers to capture and analyze more accurate data in a shorter amount of time.

We build upon our probe stations to create integrated measurement systems that provide complete solutions for our customers’ complex measurement requirements. These systems include test instrumentation, probe, cabling configurations, and software to enable fast, accurate, on-wafer data collection for complex application and measurement needs. We offer pre-configured and customized measurement systems for production testing, power device characterization, vacuum probing, cryogenic probing, high-pressure probing, and a variety of other specific applications.

Thermal Subsystems. Our thermal subsystems produce thermal chucks and other test systems used in probe stations. Thermal chuck systems enable the testing of devices at precise temperatures or across a range of temperatures.

Services and Support. In addition to routine installation services at the time of sale, we offer services to enable our customers to maintain and more effectively utilize our products and to enhance our customer relationships. In addition to traditional maintenance services, our applications engineers assist our customers in test methodologies to make advanced measurements during process and product development, and during mass production.

Customers

Our customers include companies that design or make semiconductor, and semiconductor related products in the Foundry & Logic, DRAM, Flash, Display and Sensor markets. Our customers use our products to test nearly all semiconductor device types, including mobile application processors, microprocessors, microcontrollers, graphic processors, radio frequency, analog, mixed signal, image sensors, opto-electrical, DRAM memory, NAND flash memory and NOR flash memory devices.

Fabless semiconductor suppliers do not manufacture their own semiconductors, but they purchase our analytical probes and probe stations for research and development, and device characterization. They also purchase, or direct their foundries or wafer test facilities to purchase, our probe cards to test wafers manufactured for them.

We believe our customers consider timely service and support to be an important aspect of our relationship. Our probe stations are installed at customer sites either by us, our manufacturers’ representatives or our distributors, depending on the complexity of the installation and the customer’s geographic location. We assist our customers in the selection, integration and use of our products through application engineering support. We also provide worldwide on-site probe card maintenance and service training, seminars and telephone support. Our manufacturers’ representatives and distributors provide additional service and support.

Information concerning revenue by geographic region and by country based upon ship-to location appears under Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations - Revenues - Revenues by Geographic Region and Note 16 of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.

Information concerning revenue concentration by customer appears under Note 2 of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K. The following customers represent 10% or more of our quarterly revenues:



	Fiscal Quarters Ended
	Dec. 29, 2018		Sep. 29, 2018		June 30, 2018		March 31, 2018		Dec. 30, 2017		Sep. 30, 2017		July 1, 2017		April 1, 2017
Intel Corporation	21.9	%	24.4	%	15.1	%	14.0	%	21.0	%	30.6	%	24.9	%	26.7	%
Samsung Electronics., LTD.	13.8	%	*		*		10.1	%	*		*		*		10.3	%
Taiwan Semiconductor Manufacturing Co.,LTD.	10.9	%	*		*		*		*		*		*		*
SK Hynix Inc.	*		*		11.5	%	*		*		*		*		*
Micron Technology, Inc.	*		12.0	%	*		*		13.1	%	*		*		*
	46.6	%	36.4	%	26.6	%	24.1	%	34.1	%	30.6	%	24.9	%	37.0	%

* Less than 10% of revenues.

Segment and Enterprise-Wide Disclosures

See Note 16 of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for certain financial information related to our segments and our enterprise-wide disclosures.

Backlog

We manufacture our products based on order backlog and customer commitments. Backlog includes only orders with written authorizations and scheduled shipment dates. Backlog also includes revenue for existing product service agreements to be earned within the next 12 to 24 months. Customers may delay delivery of products or cancel orders prior to shipment, subject to possible cancellation penalties. Due to possible changes in delivery schedules and cancellations of orders, our backlog on any particular date is not necessarily indicative of actual sales for any succeeding period. Delays in delivery schedules or a reduction in backlog during any particular period could have a material adverse effect on our business and results of operations.

Manufacturing

Our probe cards are designed for each of our customers' unique designs, by modifying and adapting our product architectures to meet an individual customer’s chip layout and test requirements. Our proprietary manufacturing processes for our probe cards include: a complex interconnection system-level design process; a front-end process, which may include wire bonding, photolithography, plating and metallurgical processes, dry and electro-deposition, pick and place assembly; and a back-end process, which includes general assembly and test. Critical steps in our manufacturing process are performed in a variety of clean room environments, including as stringent as a Class 100 environment, depending on the requirements of the specific manufacturing processes.

Our probe stations are designed to provide highly accurate electrical measurements enabled by precise and reliable mechanical components and assemblies. We prototype and test our new standard product designs and components to ensure high electrical signal integrity, mechanical accuracy and safety. We also monitor our product quality throughout the various stages of our manufacturing processes using a variety of process control methods and tests.

We depend on suppliers for materials and some critical components of our manufacturing processes, including ceramic and organic substrates and complex printed circuit boards. We also rely on suppliers to provide certain contact elements and interconnects incorporated into our products. Some of these components and materials are supplied by a single vendor, and some are subject to certain minimum order quantities. Generally, we rely on purchase orders rather than long-term contracts with our suppliers, which subjects us to risks, including price increases, manufacturing capacity constraints and component shortages. We continually assess and evaluate alternative sources of supply for all components and materials.

Our primary manufacturing facilities are located in Livermore, San Jose and Carlsbad, California, Beaverton, Oregon, United States, and in Thiendorf, Germany. We also perform manufacturing operations in our facilities in Munich, Germany; Suzhou, China; and Yokohama, Japan.

We maintain repair and service capabilities in Livermore, San Jose, and Carlsbad, California and Beaverton, Oregon, United States; Thiendorf, Dresden and Munich, Germany; Bundang, South Korea; Yokohama and Hiroshima, Japan; Suzhou and Shanghai, China; Hsinchu, Taiwan; and Singapore.

Research, Development and Engineering

The semiconductor industry is subject to rapid technological change and new product introductions and enhancements. We believe that our continued commitment to research and development and our timely introduction of new and enhanced products and technologies are integral to maintaining and enhancing our competitive position. We allocate significant resources to these efforts and prioritize those resources to prepare for our customers’ next generation electrical test and measurement challenges. We also increasingly seek to deploy our resources to solve fundamental challenges that are both common to, and provide competitive advantage across, our probe card and system product offerings and roadmaps.

Sales and Marketing

We sell our products worldwide through a global direct sales force and through a combination of manufacturers’ representatives and distributors.

Our direct sales and marketing staff is located in the United States, China, France, Germany, Italy, United Kingdom, Japan, Singapore, South Korea, and Taiwan. They work closely with customers in the effort to understand their businesses, anticipate trends and define products that will provide significant technical and economic advantages to our customers. We employ a highly skilled team of application and customer support engineers that support our customers as they integrate our products into their research, development and manufacturing processes. Through these customer relationships, we seek to develop a close understanding of customer and product requirements to align our capabilities with our customers’ roadmaps and production ramps.

We also have a network of representatives and distributors across the globe to broaden our reach. We engage sales representatives to act as independent third parties that agree to promote our products, at our prices and on terms set by us, in return for a commission based on sales. We typically use sales representatives in areas that we believe require greater levels of customer support than we can deliver from our own sales offices and where local language capabilities can offer an advantage. Our distributors purchase our products and resell them at prices and upon terms set by the particular distributor. We typically use distributors in particular geographies due to local regulations or business customs.

Environmental Matters

We are subject to U.S. federal, state, local, and foreign governmental laws and regulations relating to the protection of the environment, including those governing the discharge of pollutants into the air and water, the management and disposal of hazardous substances and wastes, the clean-up of contaminated sites and the maintenance of a safe workplace. We believe that we comply in all material respects with the environmental laws and regulations that apply to us. We did not receive any notices of violations of environmental laws and regulations in fiscal 2018, 2017 or 2016. In the future, we may receive notices of violations of environmental regulations, or otherwise learn of such violations. Environmental contamination or violations may negatively impact our business.

Competition

The markets for our products are highly competitive and we anticipate that these markets will continually evolve and be subject to rapid technological change. Our current and potential competitors are as below:

Probe Card Market. The probe card market comprises many domestic and foreign companies, and has historically been fragmented with many local suppliers servicing individual customers in often differentiated applications. Our primary competitors are Advantest Corporation, AMST Co., Ltd., Feinmetall GmbH, Japan Electronic Materials Corporation, Korea Instrument Co., Ltd., M2N Co., Ltd., Microfriend Inc., Micronics Japan Co., Ltd., MPI Corporation, Micro Square Technology Inc., NHK Spring Co., Ltd., Soulbrain Engineering, Nidec SV TCL, Synergie CAD, TechnoProbe S.p.A, TSE Co., Ltd., WinWay Technology Co., Ltd., WILL-Technology Co., Ltd., and Yokowo, among others. In addition to the ability to address probe card performance and capability requirements in differing applications, the primary competitive factors in the markets in which we compete include product quality and reliability, price, total cost of ownership, design and manufacturing lead times, service capability, geographic proximity, field applications support and timeliness of delivery.

Probe card vendors such as Japan Electronic Materials Corporation, Micronics Japan Company, Ltd. and TechnoProbe, offer probe cards built using similar types of lithographic patterning as do we. The high capital investment and other costs associated with the development of lithographically defined probe cards and the time and high cost of the customer evaluation process represent significant barriers to entry for this type of technology.

We believe that the primary competitive factors in the production probe card market depend upon the type of integrated circuit being tested, but also include customer service, knowledge of measurement techniques, delivery time, price, probe card lifetime, chip damage prevention, probe tip touch-down accuracy, speed and frequency of the probe card, number of chips contacted in parallel, number of probe tips and their layout, signal integrity, and frequency and effectiveness of any required cleaning. As a result of our relative strengths in these areas, we believe that we compete favorably in the advanced probe card market, and in

probe cards for parallel testing of chips with densely-packed bond pads, bumps or pillars, and in high signal integrity testing of wireless radio frequency devices that operate up to millimeter-wave frequencies, as needed for 5G wireless networks.

Analytical Probes. Our primary competitor in the analytical probe market is GGB Industries Inc. Regional competitors include Yokowo and TechnoProbe Co Ltd. in Japan, and MPI/Allstron in Taiwan. We believe that the primary competitive factors in this market are breadth of probe types, probe frequency and electrical signal integrity, contact integrity and the related cleaning required, knowledge of measurement techniques, calibration support, delivery time and price. We believe that we compete favorably with respect to these factors.

Probe Stations. Our primary competitors in the probe station market are HiSOL, Inc., LTD/Accretech, The Micromanipulator Company Inc., MPI Corporation, Semiprobe, Signatone Corporation, Tokyo Electron (“TEL”), Tokyo Seimitsu Co., Vector Semiconductor Co. Ltd., and Wentworth Laboratories Inc. We believe that the primary competitive factors in the probe station market are measurement accuracy and versatility, measurement speed, automation features, knowledge of measurement techniques, completeness of the measurement solutions, delivery time and price. We believe that we compete favorably with respect to these factors.

Thermal Subsystems. In the market for thermal subsystems, we compete principally against ERS Electronic GmbH, Espec Corp, and Temptronic Corporation. In addition, many of our probe station competitors develop and produce their own thermal subsystems for use in their products. We believe the primary competitive factors in this market are thermal performance, reliability, flexibility and completeness of product offerings. We believe that we compete favorably with respect to these factors.

Some of our competitors are also suppliers of other types of test equipment or other semiconductor equipment and may have greater financial and other resources than we do. Our competitors may enhance their current products and may introduce new products that will be competitive with ours. New alternatives to our products may also be introduced, by our current competitors or others, which may reduce the value of one or more of our products.

Semiconductor manufacturers may implement chip designs that include capabilities or use other methodologies that increase test throughput and reduce test content. This may reduce or eliminate some or all of our current products’ advantages. Semiconductor manufacturers may also increase their use of test strategies that include low performance semiconductor testers, less complex probe cards, or test procedures that do not involve our products. Our ability to compete favorably may also adversely affect the long-standing relationships between our competitors and certain semiconductor manufacturers.

Intellectual Property

Our success depends in part upon our ability to continue to innovate and invest in research and development to meet the testing requirements of our customers, to maintain and protect our proprietary technology, and to conduct our business without infringing on the proprietary rights of others. We rely on a combination of patents, trade secrets, trademarks and contractual restrictions on disclosure to protect our intellectual property rights. We have filed actions to enforce those rights against third parties in the past, and may pursue such actions in the future.

We have generated, and continue to generate and maintain, patents and other intellectual property rights covering innovations that are intended to create a competitive advantage, and to support the protection of our investments in research and development. We believe that we possess one of the most substantial patent portfolios relevant to our products.

Although we believe that our patents and other intellectual property rights have significant value, we do not believe that maintaining or growing our business is materially dependent on any single patent. Due to the rapid pace of innovation within the markets that we serve, it is possible that our protection through patents may be less important than factors such as our technological expertise, continuing development of new products and technologies, protection of trade secrets, market penetration, customer relationships, and our ability to provide comprehensive support and service to customers worldwide.

No assurance can be given that any patents will not be challenged, invalidated or circumvented, or that the rights granted thereunder will provide us with a sustained competitive advantage. In addition, there can be no assurance that we will be able to protect our technology, or that competitors will not be able to independently develop similar or functionally competitive technologies, design around our patents, or attempt to manufacture and sell infringing products in countries that do not strongly enforce intellectual property rights.

Employees

As of December 29, 2018, we had 1,676 regular full-time employees, including 984 in operations, 327 in research and development, 234 in sales and marketing and 131 in general and administrative functions. By region, 1,188 of our employees were in North America, 315 in Asia and 173 in Europe. No employees are currently covered by a collective bargaining agreement. However,

certain employees at our manufacturing facility in Thiendorf, Germany, are represented by a works council. We believe that, overall, our relations with our employees are good.

Available Information

We maintain a website at http://www.formfactor.com. We make available free of charge on our website our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the United State Securities and Exchange Commission, or SEC. The reference to our website does not constitute incorporation by reference of the information contained at the site.

The public may also read and copy any materials that we file with the SEC at the SEC's Public Reference Room at 100 F Street N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet website that contains reports and other information regarding issuers, such as FormFactor, that file electronically with the SEC. The SEC's Internet website is located at http://www.sec.gov.

Directors and Executive Officers

The information required by this item is incorporated by reference to the proxy statement for our 2019 Annual Meeting of Stockholders.

Item 1A: Risk Factors

In addition to the other information in this Annual Report on Form 10-K, you should carefully consider the risk factors discussed in this Annual Report on Form 10-K in evaluating FormFactor and our business. If any of the identified risks actually occur, our business, financial condition and results of operations could be materially adversely affected, 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 in this Annual Report on Form 10-K are not the only ones we face. Additional risks that we currently do not know about, or that we currently believe to be sufficiently important to describe here, may also impair our business operations or the trading price of our common stock.

Risks Relating to the Nature and Operations of Our Business

The markets in which we participate are competitive, and if we do not compete effectively, our operating results could be harmed.

We have experienced increased competition in the markets in which we operate, and we expect competition to intensify in the future. Increased competition has resulted in, and in the future is likely to result in, price reductions, reduced gross margins or loss of market share. Competitors might introduce new competitive products for the same markets that our products currently serve. These products may have better performance, lower prices, shorter delivery times or broader acceptance than our products.

In addition, it is possible that new competitors, including test equipment manufacturers, may offer new technologies that reduce the value of our products. Also, semiconductor manufacturers may implement chip designs or methodologies that increase test throughput, reduce test content, or change their test procedures, thereby eliminating some or all of our current product advantages.

Our current or potential competitors may have larger customer bases, more established customer relationships or greater financial, technical, manufacturing, marketing and other resources than we do. As a result, they might be able to respond more quickly to new or emerging technologies and changes in customer requirements, devote greater resources to the development, promotion, sale and support of their products, and reduce prices to increase market share.

If we do not innovate and keep pace with technological developments in the semiconductor industry, our products might not be competitive, and our revenues and operating results could suffer.

We must continue to innovate and to invest in research and development to improve our competitive position and to meet the testing requirements of our customers. Our future growth depends, in significant part, upon our ability to work effectively with and anticipate the testing needs of our customers and to develop and support new products and product enhancements to meet these needs on a timely and cost-effective basis. Our customers’ testing needs are becoming more challenging as the semiconductor industry continues to experience rapid technological change driven by the demand for complex circuits that are shrinking in size, are increasing in speed and functionality, and also becoming less expensive to produce.

Successful product design, development and introduction on a timely basis require that we:


•	collaborate with customers to understand their future requirements;


•	design innovative and performance-enhancing product architectures, technologies and features that differentiate our products from those of our competitors;


•	in some cases, engage with third parties who have particular expertise in order to complete one or more aspects of the design and manufacturing process;


•	qualify with the customer(s) the new product, or an existing product incorporating new technology;


•	transition our products to new manufacturing technologies;


•	offer our products for sale at competitive price levels while maintaining our gross-margins within our financial model;


•	identify emerging technological trends in our target markets;


•	maintain effective marketing strategies;


•	respond effectively to technological changes or product announcements by others; and


•	adjust to changing market conditions quickly and cost-effectively.

Not only do we need the technical expertise to implement the changes necessary to keep our technologies current, but we must also rely heavily on the judgment of our management to anticipate future market trends. If we are unable to timely predict industry changes or industry trends, or if we are unable to modify our products or design, manufacture and deliver new products on a timely basis, or if a third party with which we engage does not timely deliver a component or service for one of our product modifications or new products, we might lose customers or market share. In addition, we might not be able to recover our research and development expenditures, which could harm our operating results.

We depend upon the sale of our probe card products for the substantial majority of our revenues.

Although we have progressed in diversifying our product offerings in recent years, we derive the majority of our revenues from the sale of our probe card products, primarily to manufacturers of microprocessor, foundry & logic and memory devices. We anticipate that sales of probe cards will represent a substantial majority of our revenues for the foreseeable future. Our success depends in large part upon the continued acceptance of our products on the basis of a variety of factors including performance, quality, timely delivery and price, and depends upon our ability to continue to develop and introduce new products that meet our customers’ requirements. The degree to which we depend upon the sales of our probe card products for our revenues may increase our susceptibility to failures to satisfy the customers for such products, which may adversely affect our revenues and our ability to grow our business.

We derive a substantial portion of our revenues from a small number of customers.

A relatively small number of customers account for a significant portion of our revenues. One customer represented 19%, 26% and 30% of total revenues in fiscal 2018, 2017 and 2016, respectively. We anticipate that sales of our products to a relatively small number of customers will continue to account for a significant portion of our revenues. Consolidation in the semiconductor industry may increase this concentration. In the future, the loss of any of these customers, or cancellation, reduction or deferral of even a small number of purchases of our products by these customers could significantly reduce our revenues. Cancellations, reductions, deferrals or non-payment of invoices, could result from another downturn in the semiconductor industry, manufacturing delays, quality or reliability issues with our products, or from interruptions to our customers’ operations due to fire, natural disasters or other events, or other issues with the financial stability of our customers. Furthermore, because our probe cards are custom products designed for our customers’ unique wafer designs, any cancellations, reductions or delays can result in significant, non-recoverable costs. In some situations, our customers might be able to cancel or reduce orders without a significant penalty.

If our relationships with our customers deteriorate, our product development activities could be harmed.

The success of our product development efforts depends upon our ability to anticipate market trends and to collaborate closely with our customers. Our relationships with these customers provide us with access to valuable information regarding manufacturing and process technology trends in the semiconductor industry, which enables us to better plan our product development activities. These relationships also provide us with opportunities to understand the performance and functionality requirements of our customers, which improves our ability to customize our products to fulfill their needs. Our relationships with our customers could deteriorate as a result of a variety of factors, such as if they become concerned about our ability to deliver quality products on a timely basis or to protect their intellectual property. Many of our customers are large companies that place significant orders with us, and the consequences of deterioration in our relationship with any of these companies could be significant due to the competitiveness of our industry and the significant influence that these companies exert in our market.

Consolidation in the semiconductor industry and within the semiconductor test equipment market could adversely affect the market for our products and negatively impact our ability to compete.

Consolidation in the semiconductor industry may reduce our customer base and could adversely affect the market for our products, which could cause a decline in our revenues. With consolidation, the number of actual and potential customers for our products has decreased in recent years. Consolidation may lead to relatively fewer opportunities to sell our products if we are not chosen as a supplier by any given prospective customer, and may lead to increased pricing pressures from customers that have greater volume purchasing power.

There has also been consolidation within the semiconductor test equipment market. This consolidation trend could change our interactions and relationships with semiconductor tester and prober companies and negatively impact our revenue and operating results.

Changes in customers’ test strategies, equipment and processes could decrease customer demand for our products.

The demand for our products depends in large part upon the number of semiconductor designs, the pace of technology and architecture transitions in chip designs and overall semiconductor unit volume. The number of probe cards involved in a customer’s wafer testing can depend upon the number of devices being tested, the complexity of these devices, the test software program, the test equipment itself, and the utilization of chip designs featuring design-for-testability capabilities. Customers may demand fewer probe cards or probing systems if they use test strategies that reduce the technical requirements on test equipment, improve available data on device performance earlier in the manufacturing process, or test devices later in the manufacturing process. Changes in the effectiveness of test technologies and test strategies used by customers may cause us to lose sales and revenues.

We may also lose sales if new semiconductor technologies or designs are implemented which cannot be efficiently tested using the products that we offer, or if semiconductor manufacturers reduce the amount or degree of testing that they perform. We may also incur significant research and development expenses in order to introduce new product architectures and platforms to serve the testing needs of new semiconductor technologies.

Cyclicality in the semiconductor industry may adversely impact our sales.

The semiconductor industry has historically been cyclical and is characterized by wide fluctuations in product supply and demand. From time to time, this industry has experienced significant downturns, often in connection with, or in anticipation of, maturing product and technology cycles, excess inventories and declines in general economic conditions. The global economic and semiconductor downturns have caused and may in the future cause our operating results to decline dramatically from one period to the next. Our business depends heavily upon the development and manufacture of new semiconductors, the rate at which semiconductor manufacturers make transitions to smaller nanometer technology nodes and implement tooling cycles, the volume of production by semiconductor manufacturers and the overall financial strength of our customers, which, in turn, depend upon the current and anticipated market demand for semiconductors and products, such as servers, personal computers, automobiles and cell phones, that use semiconductors. During industry downturns, semiconductor manufacturers sharply curtail their spending, including their spending on our products, which may adversely impact our revenues, gross margins and results of operations. Further, a protracted downturn could cause one or more of our customers to become insolvent, resulting in a loss of revenue and impacting our ability to collect on accounts receivable. The timing, length and severity of these cyclical downturns are difficult to predict and our business depends on our ability to plan for and react to these cyclical changes.

Because we generally do not have a sufficient backlog of unfilled orders to meet our quarterly revenue targets, revenues in any quarter are substantially dependent upon customer orders received and fulfilled in that quarter.

Our revenues are difficult to forecast because we generally do not have sufficient backlog of unfilled orders to meet our quarterly revenue targets at the beginning of a quarter. Rather, a substantial percentage of our revenues in any quarter depend upon customer orders for our products that we receive and fulfill in that quarter. Because our expense levels are based in part on our expectations as to future revenues and to a large extent are fixed in the short term, we might be unable to adjust spending in time to compensate for any unexpected shortfall in revenues. Accordingly, any significant shortfall of revenues in relation to our expectations could hurt our operating results.

If our ability to forecast demand for our products or the predictability of our manufacturing yields deteriorates, we could incur high inventory losses.

Each semiconductor chip design requires a custom probe card. Because our products are design-specific, demand for our products is difficult to forecast. Due to our customers’ short delivery time requirements, we often design and procure materials and, at times, produce our products in anticipation of demand for our products rather than in response to an order. Our manufacturing yields and inventory requirements, particularly for new probe card products or when we are operating at high output levels, have at times been unpredictable. If we do not obtain orders as we anticipate, if we suffer manufacturing errors, or if we build additional inventory to compensate for unpredictable manufacturing yields, we could have excess or obsolete inventory that we may not be able to sell, which would likely result in inventory write-offs or material charges for scrap.

If we are unable to efficiently manufacture our existing and new products, our business may be materially adversely affected.

We must continuously improve our manufacturing processes in an effort to increase yields and product performance, lower our costs and reduce the time required for us to design, manufacture and deliver our products in volume. If we cannot do these things, both our existing products and our new products may not be commercially successful, our revenues may be adversely affected, our customer relationships and our reputation may be harmed and our business may be materially adversely affected.

To improve our manufacturing processes, we have incurred, and may incur in the future, substantial costs in an effort to optimize capacity and yields, implement new manufacturing technologies, methods and processes, purchase new equipment, upgrade existing equipment and train technical personnel. We have experienced, and may experience in the future, manufacturing delays and other inefficiencies in connection with implementation of these improvements and customer qualifications of new processes, which have caused and could cause in the future, our operating results to decline.

We have also experienced, and may experience in the future, difficulties in manufacturing our complex products in volume on time, and at acceptable yields and cost and installation issues in the field due to the complexity of customer design requirements, including integration of probe cards with varying customer test cell environments and testing of semiconductor devices over a wide temperature range.

If we are unable to continue to reduce the time it takes for us to design and produce products, our growth could be impeded.

Our customers continuously seek to reduce the time it takes them to introduce new products to market. The cyclicality of the semiconductor industry, coupled with changing demands for semiconductor products, requires our customers to be flexible and highly adaptable to changes in the design, volume and mix of products they must produce. We may be unable to design and produce our products within the short cycle times required to respond to such rapid changes. We have lost sales in the past where we were unable to meet a customer’s required delivery schedules. If we are unable to continue to reduce the time it takes for us to design, manufacture and ship our products in response to the needs of our customers, our competitive position could be harmed and we could lose sales.

Products that do not meet specifications or that contain defects could damage our reputation, decrease market acceptance of our technology, cause us to lose customers and revenues, and result in liability to us.

The complexity and ongoing development of our product designs and manufacturing processes could lead to design or manufacturing problems. Problems might result from a number of factors, including design defects, materials failure, failure of components manufactured by our suppliers to meet our specifications, contamination in the manufacturing environment, impurities in the materials used, and unknown sensitivities to process conditions such as temperature and humidity, and equipment failures. Any errors or defects could:


•	cause lower than anticipated yields and lengthen delivery schedules;


•	cause delays in product shipments;


•	cause delays in new product introductions;


•	cause us to incur warranty expenses;


•	result in increased costs and diversion of development resources;


•	cause us to incur increased charges due to unusable inventory;


•	require design modifications; or


•	decrease market acceptance or customer satisfaction with these products.

The occurrence of any one or more of these events could adversely affect our business, reputation and operating results.

As part of our sales process, we could incur substantial sales and engineering expenses that do not result in revenues.

Our customers generally expend significant efforts evaluating and qualifying our products prior to placing an order. While our customers are evaluating our products, we might incur substantial sales, marketing, and research and development expenses. For example, we typically expend significant resources educating our prospective customers regarding the uses and benefits of our probe cards and developing probe cards customized to the potential customer’s needs, for which we might not be reimbursed. Although we commit substantial resources to our sales efforts, we might never receive any revenues from a customer. For example, many semiconductor chip designs never reach production, including designs for which we may have expended design effort and expense. In addition, prospective customers might decide not to use our products or use our products for a relatively small percentage of their requirements after we have expended significant effort and expense toward product design, development, and/or manufacture.

We obtain some of the components and materials we use in our products from a sole source or a limited group of suppliers, and the partial or complete loss of one of these suppliers could cause production delays.

We obtain some of the components and materials used in our products, such as printed circuit board assemblies, plating materials and ceramic substrates, from a sole source or a limited group of suppliers, and in some cases alternative sources are not currently available. Because we rely on purchase orders rather than long-term contracts with the majority of our suppliers, we cannot guarantee our ability to obtain components and materials in the long term. A sole or limited source supplier could increase prices, which could lead to a decline in our gross profit. Our dependence upon sole or limited source suppliers exposes us to several other risks, including inability to obtain an adequate supply of materials, late deliveries, poor component quality, and business disruptions

while we seek to identify and qualify alternative suppliers. The occurrence of any of these risks could adversely impact our business, results of operations and financial condition.

The use of cash and incurrence of substantial indebtedness in connection with the financing of our acquisition of Cascade Microtech may have an adverse impact on our liquidity, limit our flexibility in responding to other business opportunities and increase our vulnerability to adverse economic and industry conditions.

Our acquisition of Cascade Microtech in 2016 was financed in part by the use of cash on hand and the incurrence of a significant amount of indebtedness. As of December 29, 2018, we had $98.5 million of cash and cash equivalents, $50.5 million of short-term investments and $64.8 million term loan debt outstanding, net of debt-related issuance costs. Our use of cash on hand and indebtedness to finance the cash portion of the transaction consideration reduced our liquidity. We must generate cash from operations to pay principal and interest on our debt, thereby reducing the availability of cash flow for working capital and capital expenditure needs or to pursue other initiatives. The senior secured term loan facility contains financial covenants requiring us to maintain a certain leverage ratio of consolidated total indebtedness to EBITDA and a fixed charge coverage ratio. In addition, it also imposes limitations on our ability to incur liens and indebtedness or to pay dividends, make certain investments, or dispose of assets (in each case, subject to customary exceptions). Our ability to comply with these financial and restrictive covenants can be affected by events beyond our control. The indebtedness and restrictive covenants will also have the effect of limiting our ability to obtain additional financing, if needed, which may limit our flexibility in the conduct of our business and makes us more vulnerable to economic downturns and adverse competitive and industry conditions. In addition, a breach of the financial or restrictive covenants, among other things, could result in an event of default with respect to the senior secured term loan facility, which, if not cured or waived, could result in the obligations under the facility becoming immediately due and payable.

Because we conduct most of our business internationally, we are subject to operational, economic, financial and political risks abroad.

Sales of our products to customers outside of the United States represent a significant part of our past and anticipated revenues. Our international sales as a percentage of our revenues were 75%, 66% and 67% for fiscal 2018, 2017 and 2016, respectively. Certain of our non-U.S. based customers also purchase through their subsidiaries in the United States. In the future, we expect international sales, to continue to account for a significant percentage of our revenues. Accordingly, we will be subject to risks and challenges that we would not otherwise face if we conducted our business solely in the United States.

These risks and challenges include:


•	compliance with a wide variety of foreign laws and regulations;


•	legal uncertainties regarding taxes, tariffs, quotas, export controls, export licenses and other trade barriers;


•	political and economic instability or foreign conflicts that involve or affect the countries of our customers;


•	difficulties in collecting accounts receivable and longer accounts receivable payment cycles;


•	difficulties in staffing and managing personnel, distributors and representatives;


•	reduced protection for intellectual property rights in some countries;


•	currency exchange rate fluctuations, which could affect the value of our assets denominated in local currency, as well as the price of our products relative to locally produced products;


•	seasonal fluctuations in purchasing patterns in other countries; and


•	fluctuations in freight rates and transportation disruptions.

Any of these factors could harm our existing international operations, impair our ability to continue expanding into international markets or materially adversely affect our operating results. Political developments in the United States and elsewhere may increase the risks and uncertainties associated with conducting international business, including the possibilities of greater tariffs and other trade barriers in the regions where we conduct business. In fiscal 2018 we observed a trend of increasing risks and challenges in the conduct of our international business activities, including with expanded tariffs and trade controls affecting the United States and China. Additionally, we are required to comply with foreign import and export requirements, customs and value added tax standards. Our failure to meet these requirements and standards could negatively impact our business operations.

Our foreign operations expose us to additional risks relating to currency fluctuations.

Our international operations are significant to our revenues and net income, and we plan to continue to grow internationally. We have significant business operations located in Germany. While we report our financial results in U.S. dollars, we incur certain costs in other currencies, and have certain foreign currency denominated assets and liabilities. We, therefore, face exposure to fluctuations in currency exchange rates. Although we may hedge a portion of our international currency exposure, significant fluctuations in exchange rates between the U.S. dollar and foreign currencies may adversely affect our revenues and earnings. Additionally, hedging programs are inherently risky and could expose us to additional costs and risks that could adversely affect our financial condition and results of operations.

If we fail to protect our proprietary rights, our competitors might gain access to our technology, which could adversely affect our ability to compete successfully in our markets.

If we choose not to protect our proprietary rights or fail in our efforts to protect our proprietary rights, our competitors might gain access to our technology. Unauthorized parties might attempt to copy aspects of our products or to obtain and use information that we regard as proprietary. Others might independently develop similar or competing technologies or methods or design around our patents. In addition, the laws of many foreign countries in which we or our customers do business do not protect our intellectual property rights to the same extent as the laws of the United States. As a result, our proprietary rights could be compromised, our competitors might offer products similar to ours and we might not be able to compete successfully. We also cannot assure that:


•	our means of protecting our proprietary rights will be adequate;


•	patents will be issued from our pending or future applications;


•	our existing or future patents will be sufficient in scope or strength to provide any meaningful protection or commercial advantage to us;


•	our patents or other intellectual property will not be invalidated, circumvented or successfully challenged in the United States or foreign countries; or


•	others will not misappropriate our proprietary technologies or independently develop similar technologies, duplicate our products or design around any of our patents or other intellectual property, or attempt to manufacture and sell infringing products in countries that do not strongly enforce intellectual property rights.

We have spent and may be required to spend in the future, significant resources to monitor and protect our intellectual property rights. Any litigation, whether or not resolved in our favor, and whether initiated by us or by a third party, could result in significant and possibly material expenses to us and divert the efforts of our management and technical personnel.

We might be subject to claims of infringement of other parties’ proprietary rights.

In the future, as we have in the past, we might receive claims that we are infringing intellectual property rights of others and inquiries about our interest in a license or assertions that we need a license to such intellectual property. The semiconductor industry is characterized by uncertain and conflicting intellectual property claims and vigorous protection and pursuit of these rights. The resolution of any claims of this nature, with or without merit, could be time consuming, result in costly litigation or cause product shipment delays. In the event of an adverse ruling or settlement, we might be required to pay substantial damages, cease the use or sale of infringing products, spend significant resources to develop non-infringing technology, discontinue the use of certain technology and/or enter into license agreements. License agreements, if required, might not be available on terms acceptable to us or at all. The loss of access to any of our intellectual property or the ability to use any of our technology could harm our business. Finally, certain of our customer contracts contain provisions that require us to defend or indemnify our customers for third party intellectual property infringement claims, which would increase the cost to us of an adverse ruling or settlement.

We have recorded significant restructuring, inventory write-offs and asset impairment charges in the past and may do so again in the future, which could have a material negative impact on our business.

We recorded restructuring charges in fiscal 2018, 2017 and 2016, and impairment charges related to our long-lived assets in fiscal 2016. We may implement restructuring plans in the future, which would require us to take additional, potentially material, restructuring charges related to employee terminations, asset disposal or exit costs. We may also be required to write off additional inventory if our product build plans or usage of inventory experience declines, and such additional write-offs could constitute material charges. In addition, significant adverse changes in market conditions could require us to take additional material impairment charges related to our long-lived assets if the changes impact the critical assumptions or estimates that we use in our assessment of the recoverability of our long-lived assets. Any such additional charges, whether related to restructuring, asset impairment or factory underutilization may have a material negative impact on our operating results and related financial statements.

We rely on the security and integrity of our electronic data systems and our business could be damaged by a disruption, security breach or other compromise of these systems.

We rely on electronic data systems to operate and manage our business and to process, maintain, and safeguard information, including information belonging to our customers, partners, and personnel. These systems may be subject to failures or disruptions as a result of, among other things, natural disasters, accidents, power disruptions, telecommunications failures, new system implementations, acts of terrorism or war, physical security breaches, computer viruses, or other cyber security attacks. Such system failures or disruptions could subject us to downtimes and delays, compromise or loss of sensitive or confidential information or intellectual property, destruction or corruption of data, financial losses from remedial actions, liabilities to customers or other third parties, or damage to our reputation or customer relationships. Any of the foregoing could have a material adverse effect on our business, operating results and financial condition.

We may not be able to recruit or retain qualified personnel.

We believe our ability to manage successfully and grow our business and to develop new products depends, in large part, on our ability to recruit and retain qualified employees, particularly highly skilled technical, sales, management, and key staff personnel. Competition for qualified resources is intense and other companies may have greater resources available to provide substantial inducements to lure key personnel away from us or to offer more competitive compensation packages to individuals we are trying to hire.

Our failure to comply with environmental laws and regulations could subject us to significant fines and liabilities, and new laws and regulations or changes in regulatory interpretation or enforcement could make compliance more difficult and costly.

We are subject to various U.S. federal, state and local, and foreign governmental laws and regulations relating to the protection of the environment, including those governing the discharge of pollutants into the air and water, the management and disposal of hazardous substances and wastes, the cleanup of contaminated sites and the maintenance of a safe workplace. We could incur substantial costs, including cleanup costs, civil or criminal fines or sanctions and third-party claims for property damage or personal injury, as a result of violations of or liabilities under environmental laws and regulations or non-compliance with the environmental permits required at our facilities.

These laws, regulations and permits also could require the installation of costly pollution control equipment or operational changes to limit pollution emissions or decrease the likelihood of accidental releases of hazardous substances. In addition, changing laws and regulations, new laws and regulations, stricter enforcement of existing laws and regulations, the discovery of previously unknown contamination at our or others’ sites or the imposition of new cleanup requirements could require us to curtail our operations, restrict our future expansion, subject us to liability and cause us to incur future costs that could harm our operations, thereby adversely impacting our operating results and cash flow.

Natural and man-made disasters may negatively impact our business.

Our business is vulnerable to the direct and indirect impact of natural and man-made disasters, such as floods, earthquakes, volcanic eruptions, nuclear accidents, and acts of terrorism. Material parts of our manufacturing and research and development operations are located in areas of California and Oregon that are prone to earthquakes and could be substantially disrupted in the event of an earthquake. It is also possible that future natural and man-made disasters could negatively impact the sales of our products as a result of impacts upon our customer’s ability to make or sell their products, or impacts upon our suppliers’ ability to supply components to us on a timely basis.

Risks Relating to Our Acquisitions

We may make additional acquisitions and investments in the future, which could put a strain on our resources, cause ownership dilution to our stockholders and adversely affect our financial results.

We may in the future make other acquisitions or investments, which may subject us to new or heightened risks. Integrating any newly acquired businesses, products or technologies into our company could put a strain on our resources, could be expensive and time consuming, could substantially reduce our cash reserves, could cause delays in product delivery and might not be successful. Future acquisitions and investments could divert management’s attention from other business concerns and expose our business to unforeseen liabilities or risks associated with entering new markets. In addition, we might lose key employees while integrating new organizations. We might not be successful in integrating any acquired businesses, products or technologies, and might not achieve anticipated revenues and cost benefits. Investments that we make may not result in a return consistent with our projections upon which such investments are made, or may require additional investment that we did not originally anticipate. In addition, future acquisitions could result in customer dissatisfaction, performance problems with an acquired company, potentially dilutive issuances of equity securities or the incurrence of debt and restrictive debt covenants, contingent liabilities, possible impairment charges related to goodwill or other intangible assets or other unanticipated events or circumstances. If any of these risks were to come about, our business, financial results and stock price could be materially and adversely affected.

If goodwill or other intangible assets that we recorded in connection with our past acquisitions become impaired, we could be required to take significant charges against earnings.

In connection with our accounting for the Cascade Microtech and MicroProbe acquisitions, we have recorded a significant amount of goodwill and other intangible assets. Under U.S. generally accepted accounting principles, or GAAP, we must assess, at least annually and potentially more frequently, whether the value of goodwill and other indefinite-lived intangible assets have been impaired. Finite-lived intangible assets will be assessed for impairment in the event of an impairment indicator. Any reduction or impairment of the value of goodwill or other intangible assets will result in a charge against earnings, which could materially adversely affect our results of operations and stockholders’ equity in future periods. Refer to Note 2 to Notes to Consolidated Financial Statements - Goodwill and Intangible Assets for further details relating to our annual goodwill impairment assessment.

Risks Relating to Owning Our Stock

If we fail to maintain an effective system of internal and disclosure controls and procedures, we may not be able to accurately report our financial results or prevent fraud.

Effective internal and disclosure controls and procedures are necessary for us to provide reliable financial reports, to prevent fraud and to operate successfully as a public company. If we cannot provide reliable financial reports or prevent fraud, our business and reputation may be harmed. We regularly review and assess our internal controls over financial reporting and our disclosure controls and procedures. As part of that process, we may discover material weaknesses in our internal controls. If we fail to maintain effective controls or timely effect any necessary improvement of our internal and disclosure controls, we may not have accurate information to make management decisions, our operating results could be harmed or we may fail to meet our reporting obligations. Ineffective internal and disclosure controls could also cause stockholders to lose confidence in our reported financial information and our ability to manage our business, which would likely have a negative effect on the trading price of our securities.

The trading price of our common stock has been and is likely to continue to be volatile, and you might not be able to sell your shares at or above the price that you paid for them.

The trading prices of the securities of technology companies have been highly volatile. During fiscal 2018, our stock price (NASDAQ Global Market close price) ranged from $11.45 per share to $16.85 per share. The trading price of our common stock is likely to continue to be subject to wide fluctuations. Factors affecting the trading price of our common stock could include:


•	variations in our operating results;


•	our forecasts and financial guidance for future periods;


•	announcements of technological innovations, new products or product enhancements, new product adoptions at semiconductor customers or significant agreements by us or by our competitors;


•	reports regarding our ability to bring new products into volume production efficiently;


•	the gain or loss of significant orders or customers;


•	changes in the estimates of our operating results or changes in recommendations by any securities analysts that elect to follow our common stock;


•	rulings on litigations and proceedings;


•	seasonality, principally due to our customers' purchasing cycles;


•	market and competitive conditions in our industry, the entire semiconductor industry and the economy as a whole;


•	recruitment or departure of key personnel; and


•	announcements of mergers and acquisition transactions and the ability to successfully integrate the business activities of the acquired/merged company.

In addition, if the market for technology stocks or the stock market in general experiences loss of investor confidence, the trading price of our common stock could decline for reasons unrelated to our business, operating results or financial condition. The trading price of our common stock also might decline in reaction to events that affect other companies in our industry even if these events do not directly affect us.

Provisions of our certificate of incorporation and bylaws or Delaware law might discourage, delay or prevent a change of control of our company or changes in our management and, therefore, depress the trading price of our common stock.

Delaware corporate law and our certificate of incorporation and bylaws contain provisions that could discourage, delay or prevent a change in control of our company or changes in our management that the stockholders of our company may deem advantageous. These provisions:


•	establish a classified board of directors so that not all members of our board are elected at one time;


•	provide that directors may only be removed “for cause” and only with the approval of 66.7% of our stockholders;


•	require super-majority voting to amend some provisions in our certificate of incorporation and bylaws;


•	authorize the issuance of “blank check” preferred stock that our board could issue to increase the number of outstanding shares and to discourage a takeover attempt;


•	limit the ability of our stockholders to call special meetings of stockholders;


•	prohibit stockholder action by written consent, which requires all stockholder actions to be taken at a meeting of our stockholders;


•	provide that the board of directors is expressly authorized to make, alter or repeal our bylaws; and


•	establish advance notice requirements for nominations for election to our board or for proposing matters that can be acted upon by stockholders at stockholder meetings.

In addition, Section 203 of the Delaware General Corporation Law may discourage, delay or prevent a change in control of our company. In addition, each of our named executive officers and certain other executives of the company have entered into change

of control severance agreements, which were approved by our Compensation Committee, which could increase the costs associated with a change of control and thus, potentially deter such a transaction.

Item 1B: Unresolved Staff Comments

None.

Item 2: Properties

Our corporate headquarters, which includes sales, marketing, administration, manufacturing, engineering, and research and development facilities, is located in Livermore, California, United States. Our corporate headquarters comprises a campus of four buildings totaling approximately 169,000 square feet. We presently lease those four buildings. In addition, we lease office, repair and service, manufacturing and/or research and development space both inside and outside of the United States. The leases expire at various times through 2028. We believe that our existing and planned facilities are suitable for our current needs.

Information concerning our properties as of December 29, 2018 is set forth below:



Location	Principal Use	Square Footage	Ownership
Livermore, California, United States	Corporate headquarters, sales, marketing, administration, product design, manufacturing, service and repair, distribution, research and development	168,636	Leased
Beaverton, Oregon, United States	Sales, marketing, administration, product design, manufacturing, service and repair, distribution, research and development	98,946	Leased
Carlsbad, California, United States	Sales, Product design, administration, manufacturing, service and repair, distribution, research and development	30,876	Leased
San Jose, California, United States	Administration, product design, manufacturing, service and repair, distribution, research and development	23,860	Leased
St. Paul, Minnesota, United States	Marketing and design	9,122	Leased
Thiendorf, Germany	Sales, marketing, administration, manufacturing, service and repair, distribution, research and development	45,790	Leased
Munich, Germany	Sales, Manufacturing, service and repair, distribution, research and development	12,809	Leased
Dresden, Germany	Sales and service	2,960	Leased
Singapore	Sales, administration, product design, service, and field service	24,413	Leased
Jubei City, Hsinchu, Taiwan	Sales, administration, product design, field service and repair center	18,568	Leased
Bundang, South Korea	Sales, administration, product design, field service, and repair center	15,310	Leased
Yokohama City, Japan	Sales, marketing, administration, product design, manufacturing, service and repair, distribution, research and development	15,210	Leased
Hiroshima, Japan	Repair center	1,007	Leased
Suzhou, China	Sales, marketing, administration, product design, manufacturing, service and repair, distribution, research and development	15,177	Leased
Shanghai, China	Sales and service	1,865	Leased
Montbonoot Saint Martin, France	Sales and service	4,736	Leased
Legnano, Italy	Sales office	215	Leased

Item 3: Legal Proceedings

From time to time, we may be subject to legal proceedings and claims in the ordinary course of business. As of December 29, 2018, and as of the filing of this Annual Report on Form 10-K, we were not involved in any material legal proceedings. In the future, we may become a party to additional legal proceedings that may require us to spend significant resources, including proceedings designed to protect our intellectual property rights. Litigation can be expensive and disruptive to normal business operations. Moreover, the results of legal proceedings are difficult to predict, and the costs incurred in litigation can be substantial, regardless of outcome.

Item 4: Mine Safety Disclosures

Not applicable.

PART II

Item 5: Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Price Range of Common Stock

Our common stock is listed on the NASDAQ Global Market under the symbol "FORM." The following table sets forth the range of high and low closing sales prices per share as reported on the Nasdaq Global Market for the periods indicated.



Fiscal 2018	High		Low
First Quarter	$	16.85	$	12.25
Second Quarter	15.05		11.45
Third Quarter	15.90		12.80
Fourth Quarter	16.49		11.51



Fiscal 2017	High		Low
First Quarter	$	12.70	$	10.65
Second Quarter	15.45		10.60
Third Quarter	16.85		11.90
Fourth Quarter	18.20		14.85

The closing sales price of our common stock on the NASDAQ Global Market was $16.20 per share on February 20, 2019. As of February 20, 2019, there were 165 registered holders of record of our common stock.

Repurchase of Common Stock

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 sales of common stock under our employee stock purchase plan and exercises of stock options. The share repurchase program will expire on February 1, 2020. During the year ended December 29, 2018, we did not repurchase any shares and, as of December 29, 2018, $6.0 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.

Dividend Policy

We have never declared or paid cash dividends on our common stock and we do not currently anticipate declaring or paying cash dividends on our common stock.

Stock Price Performance Graph

The following graph shows the total stockholder return of an investment of $100 in cash on December 28, 2013 through December 29, 2018 for (1) our common stock, (2) the S&P 500 Index and (3) the RDG Semiconductor Composite Index. All values assume reinvestment of the full amount of all dividends. No cash dividends have been declared on shares of our common stock. Stockholder returns over the indicated period are based on historical data and are not necessarily indicative of future stockholder returns.

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*

Among FormFactor, Inc., the S&P 500 Index, and the RDG Semiconductor Composite Index

*$100 invested on December 28, 2013 in stock or index, including reinvestment of dividends.



	Cumulative Total Return
	December 28, 2013		December 27, 2014		December 26, 2015		December 31, 2016		December 30, 2017		December 29, 2018
FormFactor, Inc.	$	100.00	$	140.88	$	148.37	$	182.41	$	254.89	$	228.18
S&P 500	100.00		113.69		115.26		129.05		157.22		150.33
RDG Semiconductor Composite	100.00		128.26		118.01		157.41		216.98		197.02

Item 6: Selected Financial Data

The following selected consolidated financial data is derived from our consolidated financial statements. This data should be read in conjunction with our consolidated financial statements and the related notes, and Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations contained elsewhere in this Annual Report on Form 10-K.



	Fiscal 2018 (1)(2)		Fiscal 2017 (2)		Fiscal 2016 (2)(3)(5)(6)			Fiscal 2015 (2)(4)			Fiscal 2014 (2)(3)
	(Dollars in thousands, except per share data)
Consolidated Statements of Operations Data:
Revenues	$	529,675	$	548,441	$	383,881		$	282,358		$	268,530
Gross profit	210,339		215,597		102,682			85,738			77,439
Net income (loss)	104,036		40,913		(6,557		)	(1,523		)	(19,185		)
Basic net income (loss) per share	1.42		0.57		(0.10		)	(0.03		)	(0.34		)
Diluted net income (loss) per share	1.38		0.55		(0.10		)	(0.03		)	(0.34		)

Consolidated Balance Sheets Data:
Cash, cash equivalents and marketable securities	$	149,003	$	140,172	$	108,905		$	187,589		$	163,837
Working capital	235,302		213,693		172,002			214,437			196,412
Total assets	728,222		646,574		618,982			342,723			344,243
Term loan, net of current portion	34,971		87,228		125,475			—			—
Total stockholders' equity	580,164		458,637		401,056			294,681			289,436

Number of employees	1,676		1,685		1,571			958			907


(1)	Fiscal 2018 net income includes an income tax benefit of $75.8 million from a valuation allowance release against certain U.S. deferred tax assets. See Note 14 of Notes to Consolidated Financial Statements.


(2)	Fiscal 2018, 2017, 2016, 2015 and 2014 net income (loss) includes restructuring charges, net, of $0.2 million, $0.8 million, $7.3 million, $0.6 million and $2.7 million, respectively. See Note 6 of Notes to Consolidated Financial Statements.


(3)	Fiscal 2016 and 2014 net loss includes impairment charges of $12.4 million and $1.2 million, respectively. See Note 7 of Notes to Consolidated Financial Statements.


(4)	Fiscal 2015 net loss includes the following: i) a $1.5 million gain from a business interruption insurance claim relating to a factory fire at a customer; and ii) a $1.0 million net gain from the sale of intellectual property.


(5)	Fiscal 2016 includes a $44.0 million tax benefit from the release of deferred tax asset valuation allowances due to deferred tax liabilities established on the acquired identifiable intangible assets from our acquisition of Cascade Microtech. Refer to Results of Operations in Management's Discussion and Analysis.


(6)	Fiscal 2016 includes the following as a result of the Cascade Microtech acquisition: i) $82.6 million in revenue; ii) $27.8 million of intangible amortization expense; and iii) a $7.6 million charge for inventory-related step-up amortization.

Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes included elsewhere in this Annual Report on Form 10-K. In addition to historical consolidated financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions as described under the "Note Regarding Forward-Looking Statements" that appears earlier in this Annual Report on Form 10-K. Our actual results could differ materially from those anticipated by these forward-looking statements as a result of many factors, including those discussed under "Item 1A: Risk Factors" and elsewhere in this Annual Report on Form 10-K.

Overview

FormFactor, Inc., headquartered in Livermore, California, is a leading provider of electrical test and measurement solutions. We provide a broad range of high-performance probe cards, analytical probes, probe stations and thermal sub-systems to both semiconductor companies and scientific institutions. Our products provide electrical information from a variety of semiconductor and electro-optical devices and integrated circuits from development to production. Customers use our products and services to lower production costs, improve yields, and enable development of complex next-generation devices.

On June 24, 2016, we completed the acquisition of Cascade Microtech, Inc. ("Cascade Microtech"), headquartered in Beaverton, Oregon and, accordingly, our Consolidated Statements of Operations include the results of operations of Cascade Microtech since that date. Therefore, our consolidated financial results for fiscal 2016 may not be directly comparable to our consolidated financial results for fiscal 2018 and 2017.

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 and thermal sub-systems are included in the Systems segment.

We generated net income of $104.0 million in fiscal 2018 compared to net income of $40.9 million in fiscal 2017 and a net loss of $6.6 million in fiscal 2016. The increase in net income in fiscal 2018 compared to fiscal 2017 was primarily due to a $75.8 million income tax benefit recognized in fiscal 2018 related to the release of valuation allowances against certain U.S. deferred tax assets, partially offset by lower revenues and higher operating expenses. The increase in net income in fiscal 2017 compared to fiscal 2016 was primarily due to increased revenues generated by the acquisition of Cascade Microtech at the end of the second quarter of fiscal 2016, increased demand for our legacy products, and lower restructuring and impairment charges, partially offset by increased operating expenses and a $44.0 million income tax benefit recognized in fiscal 2016 related to the release of valuation allowances on our deferred tax assets in connection with our acquisition of Cascade Microtech.

Fiscal Year

We operate on a 52/53 week fiscal year, whereby the fiscal year ends on the last Saturday of December. The fiscal years ended December 29, 2018, December 30, 2017 and December 31, 2016 included 52 weeks, 52 weeks and 53 weeks (with an extra week falling in the fourth quarter), respectively.

Use of Estimates

Preparation of our financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Management bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles ("GAAP"). The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of net revenue and expenses in the reporting period. Our accounting policies are fundamental to understanding our financial condition and results of operations reported in our financial statements and related disclosures. We have identified the following accounting policies as being critical because they require our management

to make particularly difficult, subjective and/or complex judgments about the effect of matters that are inherently uncertain. Our management has discussed the development, selection, application and disclosure of these critical accounting policies with the Audit Committee of our Board of Directors.

Revenue Recognition

We recognize revenue upon transferring control of products and services, and the amounts recognized reflect the consideration we expect to be entitled to receive in exchange for these products and services. An arrangement may include some or all of the following products and services: probe cards, systems, accessories, installation services, service contracts and extended warranty contracts.

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer. In contracts with multiple performance obligations, we identify each performance obligation and evaluate whether the performance obligation is distinct within the context of the contract at contract inception. Performance obligations that are not distinct at contract inception are combined and accounted for as one unit. Generally, the performance obligations in a contract are considered distinct within the context of the contract and are accounted for as separate units.

Our products may be customized to our customers’ specifications, however, control of our product is typically transferred to the

customer at the point in time the product is either shipped or delivered, depending on the terms of the arrangement, as the criteria for over time recognition are not met. In limited circumstances, substantive acceptance by the customer exists, which results in the deferral of revenue until acceptance is formally received from the customer. Judgment may be required in determining if the acceptance clause is substantive.

Installation services are routinely provided to customers purchasing our systems. Installation services are a distinct performance obligation apart from the systems and are recognized in the period they are performed. Service contracts, which include repair and maintenance service contracts, and extended warranty contracts are also distinct performance obligations and are recognized over the contractual service period, which ranges from one to three years. For service contracts recognized over time, we use a days-elapsed input to measure progress.

A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. In determining the transaction price, we evaluate whether the price is subject to refund or adjustment to determine the net consideration to which we expect to be entitled. We generally do not grant return privileges, except for defective products during the warranty period. Sales incentives and other programs that we may make available to customers are considered to be a form of variable consideration, which is estimated in determining the contract’s transaction price to be allocated to the performance obligations.

For contracts with multiple performance obligations, we allocate the contract’s transaction price to each performance obligation

based on its relative stand-alone selling price. The stand-alone selling prices are determined based on observable prices, which are the prices at which we separately sell the products. For items which do not have observable prices, we use our best estimate of the stand-alone selling prices.

We account for tax assessed by a governmental authority that is directly imposed on a revenue-producing transaction (i.e., sales, use, value added) on a net (excluded from revenue) basis.

Inventory Valuation

We state our inventories at the lower of cost (principally standard cost which approximates actual cost on a first in, first out basis) or net realizable value. We continually assess the value of our inventory and will periodically write down its value for estimated excess inventory and product obsolescence based upon assumptions about past consumption, recent purchases and backlog. On a quarterly basis, we review inventory quantities on hand and on order under non-cancelable purchase commitments in comparison to our past consumption, recent purchases, backlog and other factors to determine what inventory quantities, if any, may not be sellable. Based on this analysis, we write down the affected inventory value for estimated excess and obsolescence charges. At the point of loss recognition, a new, lower cost basis for that inventory is established, and subsequent changes in facts and circumstances do not result in the restoration or increase in that newly established cost basis. Market conditions are subject to change, and demand for our products can fluctuate significantly. Actual consumption of inventories could differ from forecasted demand, and this difference could have a material impact on our gross profit and inventory balances based on additional provisions for excess or obsolete inventories or a benefit from the sale of inventories previously written down.

Income Taxes

during the years in which the basis differences reverse and for operating losses and tax credit carryforwards. We estimate our provision for income taxes and amounts ultimately payable or recoverable in numerous tax jurisdictions around the world. Estimates involve interpretations of regulations and are inherently complex. Resolution of income tax treatments in individual jurisdictions may not be known for many years after completion of any fiscal year. We are required to evaluate the realizability of our deferred tax assets on an ongoing basis to determine whether there is a need for a valuation allowance with respect to such deferred tax assets. A valuation allowance is recorded when it is more likely than not that some or all of the deferred tax assets will not be realized. In evaluating the ability to recover deferred tax assets, we consider all available positive and negative evidence, giving greater weight to our recent cumulative income, our historical ability to utilize net operating losses in recent years and our forecast of future taxable income, including the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies.

Results of Operations

The following table sets forth our operating results as a percentage of revenues:



	Fiscal 2018		Fiscal 2017		Fiscal 2016
Revenues	100.0	%	100.0	%	100.0	%
Cost of revenues	60.3		60.7		73.3
Gross profit	39.7		39.3		26.7
Operating expenses:
Research and development	14.2		13.5		15.0
Selling, general and administrative	18.7		17.3		19.1
Restructuring and impairment charges, net	*		0.1		5.1
Total operating expenses	32.9		30.9		39.2
Operating income (loss)	6.8		8.4		(12.5	)
Interest income	0.3		0.1		0.1
Interest expense	(0.6	)	(0.8	)	(0.6	)
Other expense, net	*		*		(0.1	)
Income (loss) before income taxes	6.5		7.7		(13.1	)
Provision (benefit) for income taxes	(13.2	)	0.2		(11.4	)
Net income (loss)	19.7	%	7.5	%	(1.7	)%

* Less than 0.1%.

Revenues by Segment



	Fiscal 2018		Fiscal 2017		Fiscal 2016
	(In thousands)
Probe Cards	$	434,269	$	454,794	$	337,970
Systems	95,406		93,647		45,911
Total	$	529,675	$	548,441	$	383,881

Revenues by Market



	Fiscal		% of		Fiscal		% of		Change
	2018		Revenues		2017		Revenues		$			%
	(In thousands, except percentages)
Probe Cards Markets:
Foundry & Logic	$	258,459	48.8	%	$	313,714	57.2	%	$	(55,255	)	(17.6	)%
DRAM	135,333		25.6		124,685		22.7		10,648			8.5
Flash	40,477		7.6		16,395		3.0		24,082			146.9
Systems Market:
Systems	95,406		18.0		93,647		17.1		1,759			1.9
Total revenues	$	529,675	100.0	%	$	548,441	100.0	%	$	(18,766	)	(3.4	)%



	Fiscal		% of		Fiscal		% of		Change
	2017		Revenues		2016		Revenues		$		%
	(In thousands, except percentages)
Probe Cards Markets:
Foundry & Logic	$	313,714	57.2	%	$	237,591	61.9	%	$	76,123	32.0	%
DRAM	124,685		22.7		86,910		22.6		37,775		43.5
Flash	16,395		3.0		13,469		3.5		2,926		21.7
Systems Market:
Systems	93,647		17.1		45,911		12.0		47,736		104.0
Total revenues	$	548,441	100.0	%	$	383,881	100.0	%	$	164,560	42.9	%

The decrease in Foundry & Logic product revenue in fiscal 2018 compared to fiscal 2017 was primarily the result of lower demand from one major customer as a result of delays in its node transitions. This major customer accounted for 19.0% of total revenues for fiscal 2018, compared to 25.9% for fiscal 2017.

The increase in DRAM and Flash product revenue in fiscal 2018 compared to fiscal 2017 was driven by increased unit sales as a result of increased design wins and customer demand.

The increase in Systems product revenue in fiscal 2018 compared to fiscal 2017 was driven by increased unit sales of thermal sub-systems due to increased customer demand, partially offset by lower revenue from probe stations due to changes in product sales mix, which decreased the average selling price of units sold.

The increase in Foundry & Logic product revenue in fiscal 2017 compared to fiscal 2016 was primarily the result of strong customer demand across all end markets, including data center, mobile and automotive, as well as to the June 2016 acquisition of Cascade Microtech. All probe card revenues associated with former Cascade Microtech products and technologies are included in our Foundry & Logic revenues.

The increase in DRAM product revenue in fiscal 2017 compared to fiscal 2016 was the result of increased customer demand in the DRAM market driven by a combination of node transitions, customer capacity additions and new designs.

Flash product revenue increased in fiscal 2017 compared to fiscal 2016 due to an increase in the number of design wins.

The increases in Systems product revenue in fiscal 2017 compared to fiscal 2016 was driven by the June 2016 acquisition of Cascade Microtech. Prior to the acquisition, we did not operate in the Systems market.

Revenues by Geographic Region



	Fiscal 2018		% of Revenues		Fiscal 2017		% of Revenues		Fiscal 2016		% of Revenues
	(In thousands, except percentages)
United States	$	133,648	25.2	%	$	186,654	34.0	%	$	127,641	33.3	%
Taiwan	107,476		20.3		96,903		17.7		57,331		14.9
South Korea	91,247		17.2		81,727		14.9		65,508		17.1
China	77,851		14.7		61,100		11.1		28,219		7.4
Japan	49,814		9.4		44,559		8.1		38,650		10.0
Europe	39,671		7.5		45,086		8.2		49,445		12.9
Asia-Pacific⁽¹⁾	25,980		4.9		29,902		5.5		15,440		4.0
Rest of the world	3,988		0.8		2,510		0.5		1,647		0.4
Total Revenues	$	529,675	100.0	%	$	548,441	100.0	%	$	383,881	100.0	%

⁽¹⁾ Asia-Pacific includes all countries in the region except Taiwan, South Korea, China and Japan, which are disclosed separately.

Geographic revenue information is based on the location to which we ship the product. For example, if a certain South Korean customer purchases through their U.S. subsidiary and requests the products to be shipped to an address in South Korea, this sale will be reflected in the revenue for South Korea rather than U.S.

Changes in revenue by geographic region in fiscal 2018 compared to fiscal 2017 were primarily attributable to changes in customer demand, shifts in customer regional manufacturing strategies, and product sales mix.

The increases in geographical revenues across the regions in fiscal 2017 compared to fiscal 2016 were primarily attributable to additional revenues generated as a result of our acquisition of Cascade Microtech and strong demand for our legacy products across the board. The decrease in Europe was driven by decreases in legacy product revenue, partially offset by increases in sales of products related to our Cascade Microtech acquisition.

Cost of Revenues and Gross Margins

Cost of revenues consists primarily of manufacturing materials, payroll, 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.

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



	Fiscal 2018
	Probe Cards		Systems			Corporate and Other			Total
Gross profit	$187,320		$	47,074		$	(24,055	)	$210,339
Gross margin	43.1	%	49.3		%	—		%	39.7	%



	Fiscal 2017
	Probe Cards			Systems			Corporate and Other			Total
Gross profit	$	195,903		$	46,647		$	(26,953	)	$	215,597
Gross margin	43.1		%	49.8		%	—		%	39.3		%



	Fiscal 2016
	Probe Cards			Systems			Corporate and Other			Total
Gross profit	$	121,407		$	23,925		$	(42,650	)	$	102,682
Gross margin	35.9		%	52.1		%	—		%	26.7		%

Probe Cards

Gross profit in the Probe Cards segment decreased in fiscal 2018 compared to fiscal 2017 due to decreased sales. Gross margins remained relatively consistent as positive impacts from changes in product mix and improvements in operating efficiencies were offset by lower volume and factory utilization.

Gross profit and gross margin increased in fiscal 2017 compared to fiscal 2016 in the Probe Cards segment as a result of increased sales to several major customers, favorable product mix, higher factory utilization and improved manufacturing efficiency.

Systems

Gross profit and gross margin in the Systems segment remained relatively consistent in fiscal 2018 compared to fiscal 2017.

Gross margins decreased in the Systems segment in fiscal 2017 compared to fiscal 2016 primarily due to unfavorable changes in product mix and foreign currency exchange rates. Prior to the acquisition of Cascade Microtech in June 2016, we only operated in the Probe Cards segment and did not generate any Systems segment revenue.

Corporate and Other

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

Overall

Gross profit and gross margin fluctuate with revenue levels, product mix, selling prices, factory loading and material costs. For fiscal 2018 compared to fiscal 2017, gross profit decreased due to lower revenue, while gross margins increased due to product mix, partially offset by lower utilization.

The increase in overall gross margins in fiscal 2017 compared to fiscal 2016 was due to strong revenues, favorable product mix and higher factory utilization in our DRAM and Foundry & Logic products, as well as improved manufacturing efficiency. Fiscal 2016 gross margin also included the impact of higher amortization of backlog and inventory step-up, which reduced gross margin.

Stock-based compensation expense included in gross profit for fiscal 2018, 2017 and 2016 was $3.5 million, $3.5 million and $2.5 million, respectively.

Research and Development



	Fiscal Year Ended
	December 29, 2018			December 30, 2017			$ Change		% Change
	(Dollars in thousands)
Research and development	$	74,976		$	73,807		$	1,169	1.6	%
% of revenues	14.2		%	13.5		%

	Fiscal Year Ended
	December 30, 2017			December 31, 2016			$ Change		% Change
	(Dollars in thousands)
Research and development	$	73,807		$	57,453		$	16,354	28.5	%
% of revenues	13.5		%	15.0		%

The increase in research and development expenses in fiscal 2018 compared to fiscal 2017 was primarily driven by an increase in project material costs to support research and development within our Probe Cards segment, partially offset by a decrease in employee incentive compensation. The lower employee incentive compensation was primarily due to decreased profitability from lower revenues. The components of this increase were as follows (in millions):



	Fiscal 2018 compared to Fiscal 2017
Employee compensation costs	$	(0.2	)
Stock-based compensation	0.1
Project material costs	0.4
Depreciation	0.4
Other	0.5
	$	1.2

The increase in research and development expenses in fiscal 2017 compared to fiscal 2016 was primarily due to our acquisition of Cascade Microtech in June 2016, as well as an increase in incentive plan costs related to improved performance.

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



	Fiscal 2017 compared to Fiscal 2016
Employee compensation costs	$	12.5
Stock-based compensation	2.0
Project material costs	0.2
Depreciation	0.7
Other	1.0
	$	16.4

Stock-based compensation expense included within research and development in fiscal 2018, 2017 and 2016 was $5.4 million, $5.3 million and $3.3 million, respectively.

Selling, General and Administrative



	Fiscal Year Ended
	December 29, 2018			December 30, 2017			$ Change		% Change
	(Dollars in thousands)
Selling, general and administrative	$	99,094		$	94,679		$	4,415	4.7	%
% of revenues	18.7		%	17.3		%

	Fiscal Year Ended
	December 30, 2017			December 31, 2016			$ Change		% Change
	(Dollars in thousands)
Selling, general and administrative	$	94,679		$	73,444		$	21,235	28.9	%
% of revenues	17.3		%	19.1		%

The increase in fiscal 2018 compared to fiscal 2017 was primarily due to an increase in consulting fees related to information systems implementation and stock-based compensation, partially offset by a reduction in employee incentive compensation due to decreased profitability from lower revenues. The components of this increase were as follows (in millions):



	Fiscal 2018 compared to Fiscal 2017
Employee compensation costs	$	(0.2	)
Stock-based compensation	1.5
Depreciation and amortization	0.7
Consulting fees	1.5
Other	0.9
	$	4.4

The increase in selling, general and administrative expenses in fiscal 2017 compared to fiscal 2016 was primarily due to our acquisition of Cascade Microtech in June 2016, an increase in incentive plan costs related to improved performance, and amortization of intangible assets, offset by a reduction in acquisition related costs.

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



	Fiscal 2017 compared to Fiscal 2016
Employee compensation costs	$	14.0
Consulting fees	3.3
Depreciation and amortization	2.7
Travel related costs	2.0
Stock-based compensation	2.5
Acquisition related	(5.1		)
Other	1.8
	$	21.2

Stock-based compensation expense included within selling, general and administrative expenses in fiscal 2018, 2017 and 2016 was $8.9 million, $7.4 million and $4.9 million, respectively.

Restructuring and Impairment Charges, net



	Fiscal Year Ended
	December 29, 2018		December 30, 2017			December 31, 2016
	(Dollars in thousands)
Restructuring and impairment charges, net	$	160	$	810		$	19,692
% of revenues	*		0.1		%	5.1		%

* Less than 0.1%.

Restructuring and impairment charges, net are comprised of costs related to employee termination benefits, cost of long-lived assets abandoned or impaired, as well as contract termination costs.

Restructuring charges in fiscal 2018 were related to a specific product line and associated personnel within the Systems segment. Restructuring and impairment charges, net, in fiscal 2017 and 2016, were related to the integration of Cascade Microtech into our operations. The fiscal 2016 period also included costs related to the consolidation of our operations and a $12.4 million charge for the write-off of in-process research and development.

See Notes 6 and Note 7 of Notes to Consolidated Financial Statements for additional information.

Interest Income and Interest Expense



	Fiscal Year Ended
	December 29, 2018			December 30, 2017			December 31, 2016
	(Dollars in thousands)
Interest income	$	1,356		$	548		$	327
Weighted average balance of cash and investments	$	138,467		$	124,637		$	131,610
Weighted average yield on cash and investments	1.51		%	0.84		%	0.31		%

Interest expense	$	3,314		$	4,491		$	2,391
Average debt outstanding	$	90,086		$	127,598		$	76,228
Weighted average interest rate on debt	3.98		%	3.07		%	1.25		%

Interest income is earned on our cash, cash equivalents, restricted cash and marketable securities. The increase in interest income in fiscal 2018 compared to fiscal 2017 was attributable to higher investment yields, as well as higher average investment balances. The increase in interest income in fiscal 2017 compared with fiscal 2016 was attributable to higher investment yields partially offset by lower average cash and investment balances.

Interest expense primarily includes interest on our term loan, partially offset from income from our interest-rate swap derivative contracts, as well as term loan issuance costs amortization charges. The decrease in interest expense in fiscal 2018 compared to fiscal 2017 was primarily due to lower outstanding debt balances as a result of principal payments made, partially offset by higher interest rates. The increase in interest expense in fiscal 2017 compared to fiscal 2016 was attributable to the term loan entered into at the end of June 2016 in connection with our acquisition of Cascade Microtech and, accordingly, was not outstanding for the first six months of fiscal 2016.

Other Income (Expense), Net

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

Provision (Benefit) For Income Taxes



	Fiscal Year Ended
	December 29, 2018			December 30, 2017			December 31, 2016
	(Dollars in thousands)
Provision (benefit) for income taxes	$	(70,109	)	$	1,293		$	(43,638	)
Effective tax rate	(206.6		)%	3.1		%	86.9		%

Provision for income taxes reflects the tax provision on our operations in foreign and U.S. jurisdictions, offset by tax benefits from a partial release of valuation allowance against U.S. federal and state deferred tax assets and from lapsing of statute of limitations related to uncertain tax positions in foreign jurisdictions. As of December 29, 2018, we maintain a valuation allowance of $34.0 million primarily against our California deferred tax assets and foreign tax credits, due to uncertainty about the future realization of these assets.

The benefit for income taxes in fiscal 2018 includes a $75.8 million reduction to our valuation allowance on our U.S. deferred tax assets ("DTAs") as sufficient positive evidence existed to support the realization of such DTAs. The effective tax rate in fiscal 2018 also benefited from a lower statutory tax rate in the U.S., partially offset by higher profits in foreign jurisdictions.

The provision for income taxes in fiscal 2017 includes taxes on higher profits in foreign jurisdictions compared to fiscal 2016 and was reduced in fiscal 2017 for refundable AMT tax credits in the U.S. of $2.4 million. In fiscal 2017 we maintained a full valuation allowance against our U.S. federal and state DTAs.

The income tax benefit in fiscal 2016 was primarily due to the release of valuation allowance on our DTA in connection with our acquisition of Cascade Microtech in June 2016 as a result of the establishment of deferred tax liabilities ("DTLs") on the acquired identifiable intangible assets. These DTLs exceeded the acquired DTAs by $44.0 million and created additional sources of income to realize a tax benefit for our previously-existing DTAs. Accordingly, the valuation allowance on a portion of our DTAs was released and resulted in an income tax benefit of $44.0 million.

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 increased to $235.3 million at December 29, 2018 compared to $213.7 million at December 30, 2017 primarily due to cash generated from operations, partially offset by cash used for the acquisition of property, plant and equipment and payments on our term loan.

Cash and cash equivalents primarily consist of deposits held at banks and money market funds. Marketable securities primarily consist of 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 $149.0 million at December 29, 2018 compared to $140.2 million at December 30, 2017. We believe that we will be able to satisfy our working capital requirements for at least the next twelve months with the liquidity provided by our existing cash, cash equivalents, marketable securities and cash provided by operations. To the extent necessary, we may consider entering into short and long-term debt obligations, raising cash through a stock issuance, or obtaining new financing facilities, which may not be available on terms favorable to us. Our future capital requirements may vary materially from those now planned.

If we are unsuccessful in maintaining or growing our revenues, maintaining or reducing our cost structure (in response to an industry demand downturn 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.

We utilize a variety of tax planning and financing strategies in an effort to manage our worldwide cash and deploy funds to locations where they are needed. As part of these strategies, we indefinitely reinvest a portion of our foreign earnings. During fiscal 2018, we repatriated $16.5 million of foreign earnings. Should we require additional capital in the U.S., we may elect to repatriate indefinitely-reinvested foreign funds or raise capital in the U.S.

Cash Flows



	Fiscal Year Ended
	December 29, 2018			December 30, 2017			December 31, 2016
	(Dollars in thousands)
Net cash provided by operating activities	$	68,700		$	86,323		$	17,423
Net cash used in investing activities	(21,295		)	(59,425		)	(205,539		)
Net cash (used in) provided by financing activities	(39,329		)	(39,470		)	143,614

Operating Activities

Net cash provided by operating activities in fiscal 2018 was primarily attributable to net income of $104.0 million, which included $2.1 million of net non-cash income, offset by operating assets and liabilities using $33.3 million of cash as discussed in more detail below.

Accounts receivable increased $13.8 million to $95.3 million at December 29, 2018 compared to $81.5 million at December 30, 2017 as a result of increased revenues in the fourth quarter of 2018 compared to the fourth quarter of 2017, changes in the timing of customer shipments, and changes in payments terms related to customer mix.

Inventories, net, increased $9.9 million to $77.7 million at December 29, 2018 compared to $67.8 million at December 30, 2017 as a result of changes in product mix and increased inventory purchases to shorten lead times and improve vendor pricing, partially offset by a $10.5 million increase to our provision for excess and obsolete inventories.

Investing Activities

Net cash used in investing activities in fiscal 2018 primarily related to $19.9 million of cash used in the acquisition of property, plant and equipment and $1.5 million used for the purchase of marketable securities, net of maturities.

Financing Activities

Net cash used in financing activities in fiscal 2018 primarily related to $41.3 million of principal payments made towards the repayment of our term loan, and $5.8 million related to tax withholdings associated with the net share settlements of our equity awards, partially offset by $7.7 million of proceeds received from issuances of common stock under our stock incentive plans.

Debt Facility

On June 24, 2016, we entered into a credit agreement (the “Credit Agreement”) with HSBC Bank USA, National Association ("HSBC"). Pursuant to the Credit Agreement, the lenders provided us with a senior secured term loan facility of $150 million (the “Term Loan”). The proceeds of the Term Loan were used to finance a portion of the purchase price paid in connection with the acquisition of Cascade Microtech. As of December 29, 2018, the balance outstanding was $65.0 million.

The 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. As of December 29, 2018, the interest rate pursuant to the Term Loan was 4.35%.

On July 25, 2016, we entered into an interest rate swap agreement with HSBC and other lenders to hedge the interest payments on the 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 December 29, 2018, the notional amount of the loan that is subject to this interest rate swap is $60.0 million. See Note 8 of Notes to Condensed Consolidated Financial Statements for additional information.

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 December 29, 2018, we have made prepayments of $40.0 million in addition to scheduled installments per the Credit Agreement, including $15.0 million of prepayments made in fiscal 2018.

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 December 29, 2018, we were in compliance with all covenants under the Credit Agreement.

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 stock-based incentive plans. The share repurchase program will expire on February 1, 2020. During fiscal 2018, we did not repurchase any shares and, as of December 29, 2018, $6.0 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 repurchases were made in compliance with Rule 10b-18 under the Securities Exchange Act of 1934, as amended.

Contractual Obligations and Commitments

The following table summarizes our significant contractual commitments to make future payments in cash under contractual obligations as of December 29, 2018 (in thousands):



	Payments Due In Fiscal Year
	2019		2020		2021		2022		2023		After 2022		Total
Operating leases	$	6,256	$	6,522	$	5,742	$	4,786	$	4,355	$	20,382	$	48,043
Senior secured term loan facility-principal payments	30,000		35,000		—		—		—		—		65,000
Senior secured term loan facility-interest payments⁽¹⁾	2,190		556		—		—		—		—		2,746
Total	$	38,446	$	42,078	$	5,742	$	4,786	$	4,355	$	20,382	$	115,789

⁽¹⁾ Represents our minimum interest payment commitments at 4.35% per annum.

The table above excludes our gross liability for unrecognized tax benefits, which totaled $25.2 million as of December 29, 2018. The timing of any payments which could result from these unrecognized tax benefits will depend upon a number of factors. Accordingly, the timing of payment cannot be estimated and has been excluded from the table above.

Off-Balance Sheet Arrangements

Historically, we have not participated in transactions that have generated relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As of December 29, 2018, we were not involved in any off-balance sheet arrangements.

Indemnification Agreements

We have entered, and may from time to time in the ordinary course of our business enter, into contractual arrangements with third parties that include indemnification obligations. Under these contractual arrangements, we have agreed to defend, indemnify and/or hold the third party harmless from and against certain liabilities. These arrangements include indemnities in favor of customers in the event that our products or services infringe a third party's intellectual property or cause property or other indemnities in favor of our lessors in connection with facility leasehold liabilities that we may cause. In addition, we have entered into indemnification agreements with our directors and certain of our officers, and our bylaws contain indemnification obligations in favor of our directors, officers and agents. These indemnity arrangements may limit the type of the claim, the total amount that we can be required to pay in connection with the indemnification obligation and the time within which an indemnification claim can be made. The duration of the indemnification obligation may vary, and for most arrangements, survives the agreement term and is indefinite. We believe that substantially all of our indemnity arrangements provide either for limitations on the maximum potential future payments we could be obligated to make, or for limitations on the types of claims and damages we could be obligated to indemnify, or both. However, it is not possible to determine or reasonably estimate the maximum potential amount of future payments under these indemnification obligations due to the varying terms of such obligations, a lack of history of prior indemnification claims, the unique facts and circumstances involved in each particular contractual arrangement and in each potential future claim for indemnification, and the contingency of any potential liabilities upon the occurrence of events that are not reasonably determinable. We have not had any material requests for indemnification under these arrangements. We have not recorded any liabilities for these indemnification arrangements on our Consolidated Balance Sheets as of December 29, 2018 or December 30, 2017.

New Accounting Pronouncements

See Note 18 of Notes to Consolidated Financial Statements.

Item 7A: Quantitative and Qualitative Disclosures about Market Risk

Foreign Currency Exchange Risk

We conduct certain operations in foreign currencies. We enter into currency forward exchange contracts to hedge a portion, but not all, of existing foreign currency denominated amounts. Gains and losses on these contracts are generally recognized in Other income (expense), net in our Consolidated Statements of Operations. Because the effect of movements in currency exchange rates on the currency forward exchange contracts generally offsets the related effect on the underlying items being hedged, these financial instruments are not expected to subject us to risks that would otherwise result from changes in currency exchange rates. We do not use derivative financial instruments for trading or speculative purposes. We recognized a net loss from our foreign exchange of $0.3 million, $0.6 million and $0.7 million, respectively in fiscal 2018, 2017 and 2016.

Interest Rate Sensitivity

Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio. We invest in a number of securities including U.S. agency discount notes, money market funds and commercial paper. We attempt to ensure the safety and preservation of our invested principal funds by limiting default risk, market risk and reinvestment risk. We mitigate default risk by investing in high grade investment securities. By policy, we limit the amount of credit exposure to an issuer, except U.S. Treasuries and U.S. agencies.

Our exposure to interest rate risk arising from our Term Loan (See Note 5 of Notes to Consolidated Financial Statements) is insignificant as a result of the interest-rate swap agreement (See Note 8 of Notes to Consolidated Financial Statements) that we entered into with HSBC and other lenders to hedge the interest payments on our Term Loan.

We use interest rate derivative instruments to manage interest rate exposures. We do not use derivative instruments for trading or speculative purposes. The fair market value of our fixed rate securities may be adversely impacted by increases in interest rates while income earned on floating rate securities may decline as a result of decreases in interest rates. A hypothetical 100 basis-point (one percentage point) increase or decrease in interest rates compared to rates at December 29, 2018 and December 30, 2017 would have affected the fair value of our investment portfolio by $0.7 million and $1.1 million, respectively.

Item 8: Financial Statements and Supplementary Data

Consolidated Financial Statements

The consolidated financial statements and supplementary data required by this item are included in the section entitled "Consolidated Financial Statements" of this Annual Report on Form 10-K. See Item 15 for a list of our consolidated financial statements.

Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A: 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”)) were 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 quarter ended December 29, 2018, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Management's Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Internal control over financial reporting is a process designed by, or under the supervision of, our Principal Executive Officer and Principal Financial Officer, and effected by our board of directors, management and other personnel and consultants, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles, and includes those policies and procedures that:

(i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions and dispositions of assets;

(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with the authorization of our management and directors; and

(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Under the supervision and with the participation of our management, including our Principal Executive Officer and Principal Financial Officer, we conducted an assessment of the effectiveness of our internal control over financial reporting as of December 29, 2018. In making this assessment, our management used the criteria set forth in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). Based on the results of this assessment, management has concluded that our internal control over financial reporting was effective as of December 29, 2018.

The effectiveness of our internal control over financial reporting as of December 29, 2018 has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their report which appears in this Annual Report on Form 10-K.

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 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 Annual Report on Form 10-K 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 9A be read in conjunction with the certifications for a more complete understanding of the subject matter presented.

Item 9B: Other Information

None.

PART III

Item 10: Directors, Executive Officers and Corporate Governance

The information required by this item is incorporated by reference to the proxy statement for our 2019 Annual Meeting of Stockholders.

Item 11: Executive Compensation

The information required by this item is incorporated by reference to the proxy statement for our 2019 Annual Meeting of Stockholders.

Item 12: Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information required by this item is incorporated by reference to the proxy statement for our 2019 Annual Meeting of Stockholders.

Item 13: Certain Relationships and Related Transactions, and Director Independence

The information required by this item is incorporated by reference to the proxy statement for our 2019 Annual Meeting of Stockholders.

Item 14: Principal Accounting Fees and Services

The information required by this item is incorporated by reference to the proxy statement for our 2019 Annual Meeting of Stockholders.

PART IV

Item 15: Exhibits, Financial Statement Schedules

Financial Statements and Schedules

The Consolidated Financial Statements, together with the report thereon of KPMG LLP, are included on the pages indicated below:



		Page
Report of Independent Registered Public Accounting Firm		39
Consolidated Balance Sheets as of December 29, 2018 and December 30, 2017		41
Consolidated Statements of Operations for the fiscal years ended December 29, 2018, December 30, 2017 and December 31, 2016		42
Consolidated Statements of Comprehensive Income (Loss) for the fiscal years ended December 29, 2018, December 30, 2017 and December 31, 2016		43
Consolidated Statements of Stockholders' Equity for the fiscal years ended December 29, 2018, December 30, 2017 and December 31, 2016		44
Consolidated Statements of Cash Flows for the fiscal years ended December 29, 2018, December 30, 2017 and December 31, 2016		45
Notes to Consolidated Financial Statements		47

Financial statement schedules have been omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto.

Exhibits

The exhibits listed in the accompanying index to exhibits are filed or incorporated by reference as part of this Annual Report on Form 10-K.

Item 16: Form 10-K Summary

None.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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, in the City of Livermore, State of California, on February 26, 2019.



	FORMFACTOR, INC.
	By:		/s/ SHAI SHAHAR
			Shai Shahar Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)

POWER OF ATTORNEY

KNOW BY ALL PERSONS BY THESE PRESENTS, that each of the undersigned whose signature appears below constitutes and appoints Shai Shahar and Jason Cohen, and each of them, the undersigned's true and lawful attorneys in-fact and agents with full power of substitution, for the undersigned and in the undersigned's name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K and any other documents in connection therewith, and to file the same, with all exhibits thereto, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act requisite and necessary to be done with respect to this Annual Report on Form 10-K, including amendments, as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or his or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

IN WITNESS WHEREOF, each of the undersigned has executed this Power of Attorney as of the date indicated below.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.



Signature	Title	Date

Principal Executive Officer:
/s/ MICHAEL D. SLESSOR	Chief Executive Officer and Director	February 26, 2019
Michael D. Slessor	Chief Executive Officer and Director	February 26, 2019
Principal Financial Officer and Principal Accounting Officer:
/s/ SHAI SHAHAR	Chief Financial Officer	February 26, 2019
Shai Shahar	Chief Financial Officer	February 26, 2019



Signature	Title	Date

Additional Directors:

/s/ LOTHAR MAIER	Director	February 26, 2019
Lothar Maier	Director	February 26, 2019

/s/ EDWARD ROGAS, JR	Director	February 26, 2019
Edward Rogas, Jr	Director	February 26, 2019

/s/ KELLEY STEVEN-WAISS	Director	February 26, 2019
Kelley Steven-Waiss	Director	February 26, 2019

/s/ MICHAEL W. ZELLNER	Director	February 26, 2019
Michael W. Zellner	Director	February 26, 2019

/s/ RAYMOND LINK	Director	February 26, 2019
Raymond Link	Director	February 26, 2019

/s/ RICHARD DELATEUR	Director	February 26, 2019
Richard DeLateur	Director	February 26, 2019

/s/ THOMAS ST. DENNIS	Director	February 26, 2019
Thomas St. Dennis	Director	February 26, 2019

Report of Independent Registered Public Accounting Firm

To the Stockholders and Board of Directors

FormFactor, Inc.:

Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting

We have audited the accompanying consolidated balance sheets of FormFactor, Inc. and subsidiaries (the Company) as of December 29, 2018 and December 30, 2017, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the years in the three-year period ended December 29, 2018, and the related notes (collectively, the consolidated financial statements). We also have audited the Company’s internal control over financial reporting as of December 29, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 29, 2018 and December 30, 2017, and the results of its operations and its cash flows for each of the years in the three-year period ended December 29, 2018, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 29, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

Change in Accounting Principle

As discussed in Note 18 to the consolidated financial statements, the Company has changed its method of accounting for revenue from contracts with customers for the year-ended December 29, 2018 due to the adoption of Accounting Standards Codification 606, Revenue from Contracts with Customers.

Basis for Opinions

The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable

assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

/s/ KPMG LLP

We have served as the Company’s auditor since 2013.

Portland, Oregon

February 26, 2019

FORMFACTOR, INC.

CONSOLIDATED BALANCE SHEETS



	December 29, 2018			December 30, 2017
	(In thousands, except share and per share data)
ASSETS
Current assets:
Cash and cash equivalents	$	98,472		$	91,184
Marketable securities	50,531			48,988
Accounts receivable, net	95,333			81,515
Inventories, net	77,706			67,848
Restricted cash	849			372
Refundable income taxes	1,260			2,242
Prepaid expenses and other current assets	13,669			13,705
Total current assets	337,820			305,854
Restricted cash	1,225			1,170
Property, plant and equipment, net	54,054			46,754
Goodwill	189,214			189,920
Intangibles, net	67,640			97,484
Deferred tax assets	77,301			3,133
Other assets	968			2,259
Total assets	$	728,222		$	646,574
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	40,006		$	35,046
Accrued liabilities	27,731			33,694
Current portion of term loan, net of unamortized issuance cost of $160 and $307	29,840			18,443
Deferred revenue	4,941			4,978
Total current liabilities	102,518			92,161
Term loan, less current portion, net of unamortized issuance cost of $29 and $272	34,971			87,228
Deferred tax liabilities	2,355			3,379
Deferred rent and other liabilities	8,214			5,169
Total liabilities	148,058			187,937

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; 74,139,712 and 72,532,176 shares issued and outstanding	74			73
Additional paid-in capital	862,897			843,116
Accumulated other comprehensive income	780			3,021
Accumulated deficit	(283,587		)	(387,573		)
Total stockholders' equity	580,164			458,637
Total liabilities and stockholders' equity	$	728,222		$	646,574

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

FORMFACTOR, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS



	Fiscal Year Ended
	December 29, 2018			December 30, 2017			December 31, 2016
	(In thousands, except per share data)
Revenues	$	529,675		$	548,441		$	383,881
Cost of revenues	319,336			332,844			281,199
Gross profit	210,339			215,597			102,682
Operating expenses:
Research and development	74,976			73,807			57,453
Selling, general and administrative	99,094			94,679			73,444
Restructuring and impairment charges, net	160			810			19,692
Total operating expenses	174,230			169,296			150,589
Operating income (loss)	36,109			46,301			(47,907		)
Interest income	1,356			548			327
Interest expense	(3,314		)	(4,491		)	(2,391		)
Other expense, net	(224		)	(152		)	(224		)
Income (loss) before income taxes	33,927			42,206			(50,195		)
Provision (benefit) for income taxes	(70,109		)	1,293			(43,638		)
Net income (loss)	$	104,036		$	40,913		$	(6,557	)
Net income (loss) per share:
Basic	$	1.42		$	0.57		$	(0.10	)
Diluted	$	1.38		$	0.55		$	(0.10	)
Weighted-average number of shares used in per share calculations:
Basic	73,482			72,292			64,941
Diluted	75,182			74,239			64,941

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

FORMFACTOR, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)



	Fiscal Year Ended
	December 29, 2018			December 30, 2017			December 31, 2016
	(In thousands)
Net income (loss)	$	104,036		$	40,913		$	(6,557	)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments	(2,065		)	6,764			(2,042		)
Unrealized gains on the translation of deferred tax assets	163			—			—
Unrealized gains (losses) on available-for-sale marketable securities	(8		)	(206		)	29
Unrealized gains (losses) on derivative instruments	(331		)	203			495
Other comprehensive income (loss), net of tax	(2,241		)	6,761			(1,518		)
Comprehensive income (loss)	$	101,795		$	47,674		$	(8,075	)

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

FORMFACTOR, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY



	Common Stock					Additional Paid-in Capital			Accumulated Other Comprehensive Income (Loss)			Accumulated Deficit			Total
	Common Stock
	Shares		Amount
	(In thousands, except shares)
Balances, December 26, 2015	58,088,969		$	58		$	718,904		$	(2,222	)	$	(422,059	)	$	294,681
Issuance of common stock pursuant to exercise of options for cash	232,190		—			2,003			—			—			2,003
Issuance of common stock pursuant to vesting of restricted stock units	1,579,218		2			—			—			—			2
Issuance of common stock under the Employee Stock Purchase Plan	557,281		1			3,740			—			—			3,741
Issuance of common stock pursuant to Cascade Microtech acquisition	10,450,189		10			97,069			—			—			97,079
Stock-based compensation	—		—			11,625			—			—			11,625
Other comprehensive loss	—		—			—			(1,518		)	—			(1,518		)
Net loss	—		—			—			—			(6,557		)	(6,557		)
Balances, December 31, 2016	70,907,847		71			833,341			(3,740		)	(428,616		)	401,056
Issuance of common stock pursuant to exercise of options for cash	1,473,389		1			13,836			—			—			13,837
Issuance of common stock pursuant to vesting of restricted stock units	1,364,612		1			—			—			—			1
Common stock withheld from vesting of restricted stock units for tax	(502,016	)	—			(6,886		)	—			—			(6,886		)
Issuance of common stock under the Employee Stock Purchase Plan	655,961		1			5,694			—			—			5,695
Purchase and retirement of common stock	(1,367,617	)	(1		)	(18,969		)	—			—			(18,970		)
Stock-based compensation	—		—			16,230			—			—			16,230
ASU 2016-09 Adjustment	—		—			(130		)	—			130			—
Other comprehensive income	—		—			—			6,761			—			6,761
Net income	—		—			—			—			40,913			40,913
Balances, December 30, 2017	72,532,176		73			843,116			3,021			(387,573		)	458,637
Issuance of common stock under the Employee Stock Purchase Plan	610,297		1			6,661			—			—			6,662
Issuance of common stock pursuant to exercise of options for cash	134,609		—			1,158			—			—			1,158
Issuance of common stock pursuant to vesting of restricted stock units	1,287,107		1			—			—			—			1
Common stock withheld from vesting of restricted stock units for tax	(424,477	)	(1		)	(5,791		)	—			—			(5,792		)
Stock-based compensation	—		—			17,753			—			—			17,753
ASU 2017-12 Adoption	—		—			—			—			(50		)	(50		)
Other comprehensive loss	—		—			—			(2,241		)	—			(2,241		)
Net income	—		—			—			—			104,036			104,036
Balances, December 29, 2018	74,139,712		$	74		$	862,897		$	780		$	(283,587	)	$	580,164

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

FORMFACTOR, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS

	Fiscal Year Ended
	December 29, 2018			December 30, 2017			December 31, 2016
	(In thousands)
Cash flows from operating activities:
Net income (loss)	$	104,036		$	40,913		$	(6,557	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation	14,314			13,626			11,371
Amortization	29,373			30,940			35,427
Impairment of long-lived assets	—			—			12,400
Amortization (accretion) of discount on investments	(10		)	38			(31		)
Stock-based compensation expense	17,827			16,339			11,686
Amortization of debt issuance costs	390			619			307
Deferred income tax benefit	(74,908		)	(590		)	(45,022		)
Provision (benefit) for doubtful accounts receivable	—			(99		)	15
Provision for excess and obsolete inventories	10,479			9,259			6,631
Acquired inventory step-up amortization	—			569			10,022
Loss on disposal of long-lived assets	325			510			361
Foreign currency transaction losses (gains)	125			(1,717		)	(77		)
Gain on derivative instruments	—			(10		)	(51		)
Changes in assets and liabilities:
Accounts receivable	(13,830		)	(10,651		)	(6,847		)
Inventories	(21,298		)	(15,635		)	(11,733		)
Prepaid expenses and other current assets	262			870			(3,292		)
Refundable income taxes	942			(413		)	126
Other assets	707			61			(248		)
Accounts payable	3,050			741			3,433
Accrued liabilities	(5,718		)	810			786
Income taxes payable	(501		)	62			(1,127		)
Deferred rent and other liabilities	3,109			111			126
Deferred revenues	26			(30		)	(283		)
Net cash provided by operating activities	68,700			86,323			17,423
Cash flows from investing activities:
Acquisition of property, plant and equipment	(19,869		)	(17,756		)	(11,521		)
Acquisition of Cascade Microtech, net of cash acquired	—			—			(228,031		)
Proceeds from sale of subsidiary	94			68			47
Proceeds from sale of property and property, plant and equipment	23			—			53
Purchases of marketable securities	(30,566		)	(50,733		)	(10,587		)
Proceeds from maturities of marketable securities	29,023			8,996			44,500
Net cash used in investing activities	(21,295		)	(59,425		)	(205,539		)
Cash flows from financing activities:
Proceeds from issuances of common stock	7,712			19,510			5,745
Purchase and retirement of common stock	—			(18,970		)	—
Tax withholdings related to net share settlements of equity awards	(5,791		)	(6,885		)	—
Proceeds from term loan	—			—			150,000
Payments on term loan	(41,250		)	(33,125		)	(10,625		)
Payment of term loan issuance costs	—			—			(1,506		)
Net cash provided by (used in) financing activities	(39,329		)	(39,470		)	143,614
Effect of exchange rate changes on cash, cash equivalents and restricted cash	(256		)	2,702			399
Net increase (decrease) in cash, cash equivalents and restricted cash	7,820			(9,870		)	(44,103		)
Cash, cash equivalents and restricted cash, beginning of year	92,726			102,596			146,699
Cash, cash equivalents and restricted cash, end of year	$	100,546		$	92,726		$	102,596

FORMFACTOR, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS

	Fiscal Year Ended
	December 29, 2018		December 30, 2017			December 31, 2016
	(In thousands)
Non-cash investing and financing activities:
Fair value of stock issued in connection with the acquisition of Cascade Microtech	$	—	$	—		$	97,079
Fair value of stock options and restricted stock-based awards assumed in connection with the acquisition of Cascade Microtech	—		—			7,776
Fair value of vested stock options and restricted stock-based awards paid in cash in connection with the acquisition of Cascade Microtech	—		—			12,815
Change in accounts payable and accrued liabilities related to property, plant and equipment purchases	2,290		(33		)	(732		)

Supplemental disclosure of cash flow information:
Income taxes paid, net	$	4,576	$	3,172		$	2,567
Cash paid for interest	3,113		3,836			2,110

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

FORMFACTOR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1—Formation and Nature of Business

FormFactor, Inc. was incorporated in Delaware on April 15, 1993 and is headquartered in Livermore, California. We are a leading provider of electrical test and measurement technologies. We provide a broad range of high-performance probe cards, analytical probes, probe stations and thermal sub-systems to both semiconductor companies and scientific institutions. Our products provide electrical information from a variety of semiconductor and electro-optical devices and integrated circuits from research, to development through production. Customers use our products and services to lower production costs, improve yields, and enable development of complex next generation products. We believe our technology leadership enables critical roadmap advances for our customers.

On June 24, 2016, we acquired Cascade Microtech, Inc. ("Cascade Microtech") which designs, develops, manufactures and markets advanced wafer probing, thermal and reliability solutions for the electrical measurement and testing of high performance semiconductor devices. Design, development and manufacturing operations are located in Beaverton, Oregon, United States and Munich and Thiendorf, Germany, and sales, service and support operations are located in the United States, Germany, Japan, Taiwan, China, and Singapore. The acquisition of Cascade Microtech transforms our business into a broader test and measurement market leader with significant scale and increased diversification and demand for the combined company’s products and technologies.

Fiscal Year

Our fiscal year ends on the last Saturday in December. The fiscal years ended on December 29, 2018, December 30, 2017 and December 31, 2016 consisted of 52 weeks, 52 weeks and 53 weeks, respectively. The first three fiscal quarters in our fiscal year ended December 31, 2016 contained 13 weeks, and the fourth fiscal quarter contained 14 weeks.

Note 2—Summary of Significant Accounting Policies

Basis of Consolidation and Foreign Currency Translation

The consolidated financial statements include our accounts and those of our wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated.

On June 24, 2016, we completed the acquisition of Cascade Microtech and, accordingly, our Consolidated Statements of Operations include the results of operations of Cascade Microtech since that date. See Note 4.

The functional currencies of certain of our foreign subsidiaries are the local currencies and, accordingly, all assets and liabilities of these foreign operations are translated to U.S. Dollars at current period-end exchange rates, and revenues and expenses are translated to U.S. Dollars using average exchange rates in effect during the period. The gains and losses from the foreign currency translation of these subsidiaries' financial statements are included as a separate component of stockholders' equity on our Consolidated Balance Sheets under Accumulated other comprehensive income.

Certain other of our foreign subsidiaries use the U.S. Dollar as their functional currency. Accordingly, monetary assets and liabilities in non-functional currencies of these subsidiaries are remeasured using exchange rates in effect at the end of the period. Revenues and costs in local currency are remeasured using average exchange rates for the period, except for costs related to those balance sheet items that are remeasured using historical exchange rates. The resulting remeasurement gains and losses are included in the Consolidated Statements of Operations as a component of Other income (expense), net as incurred.

Use of Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Estimates may change as new information is obtained. We believe that the estimates, assumptions and judgments involved in revenue recognition, fair value of marketable securities, fair value of derivative financial instruments used to hedge both foreign currency and interest rate exposures, allowance for doubtful accounts, reserves for product warranty, valuation of obsolete and slow moving inventory, assets acquired and liabilities assumed in business combinations, legal contingencies, valuation of goodwill, the assessment of recoverability of long-lived assets, valuation and recognition of stock-based compensation, provision for income taxes and valuation of deferred tax assets have the greatest potential impact on our consolidated financial statements. Actual results could differ from those estimates.

FORMFACTOR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Business Acquisitions

Our consolidated financial statements include the operations of acquired businesses after the completion of their respective acquisitions. We account for acquired businesses using the acquisition method of accounting, which requires, among other things, that assets acquired and liabilities assumed be recognized at their estimated fair values as of the acquisition date, and that the fair value of acquired intangibles, including in-process research and development ("IPR&D"), be recorded on the balance sheet. Transaction costs are expensed as incurred. Any excess of the purchase price over the assigned fair values of the net assets acquired is recorded as goodwill.

Cash and Cash Equivalents and Marketable Securities

Cash and cash equivalents consist of deposits and financial instruments which are readily convertible into cash and have original maturities of 90 days or less at the time of acquisition. Marketable securities consist primarily of highly liquid investments with maturities of greater than 90 days when purchased. We classify our marketable securities as available-for-sale and, accordingly, report them at fair value with the related unrealized gains and losses included in Accumulated other comprehensive income in our Consolidated Balance Sheets. Any unrealized losses which are considered to be other-than-temporary are recorded in Other income (expense), net, in the Consolidated Statements of Operations. Realized gains and losses on the sale of marketable securities are determined using the specific-identification method and recorded in Other income (expense), net, in the Consolidated Statements of Operations.

All of our available-for-sale investments are subject to a periodic impairment review. We record a charge to earnings when a decline in fair value is significantly below cost basis and judged to be other-than-temporary, or have other indicators of impairments. If the fair value of an available-for-sale investment is less than its amortized cost basis, an other-than-temporary impairment is triggered in circumstances where (1) we intend to sell the instrument; (2) it is more likely than not that we will be required to sell the instrument before recovery of its amortized cost basis; or (3) a credit loss exists where we do not expect to recover the entire amortized cost basis of the instrument. If we intend to sell, or it is more likely than not that we will be required to sell, the available-for-sale investment before recovery of its amortized cost basis, we recognize an other-than-temporary impairment charge equal to the difference between the investment's amortized cost basis and its fair value. We did not record any other-than-temporary impairments during fiscal 2018, 2017 or 2016.

Foreign Exchange Management

We transact business in various foreign currencies. We enter into forward foreign exchange contracts in an effort to mitigate the risks associated with currency fluctuations on certain foreign currency balance sheet exposures and certain operational costs denominated in local currency impacting our statement of operations. Gains and losses resulting from the impact of currency exchange rate movements on forward foreign exchange contracts designated to offset certain foreign currency balance sheet exposures and certain operational exposures are recognized as Other expense, net, in the Consolidated Statements of Operations in the period in which the exchange rates change. These gains and losses are intended to partially offset the foreign currency exchange gains and losses on the underlying exposures being hedged. We record the fair value of these contracts as of the end of our reporting period in the Consolidated Balance Sheets. We do not use derivative financial instruments for trading or speculative purposes.

Accounts Receivable and Allowance for Doubtful Accounts

The majority of our accounts receivable are derived from sales to large multinational semiconductor manufacturers throughout the world, are recorded at their invoiced amount and do not bear interest.

In order to monitor potential credit losses, we perform ongoing credit evaluations of our customers' financial condition. An allowance for doubtful accounts is maintained based upon our assessment of the expected collectability of all accounts receivable. The allowance for doubtful accounts is reviewed and assessed for adequacy on a quarterly basis. We take into consideration (1) any circumstances of which we are aware of a customer's inability to meet its financial obligations and (2) our judgments as to prevailing economic conditions in the industry and their impact on our customers. If circumstances change, and the financial condition of our customers is adversely affected and they are unable to meet their financial obligations, we may need to take additional allowances, which would result in an increase in our operating expense.

FORMFACTOR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Activity related to our allowance for doubtful accounts receivable was as follows (in thousands):



	Fiscal Year Ended
	December 29, 2018			December 30, 2017			December 31, 2016
Balance at beginning of year	$	200		$	299		$	284
Charges (reversals) to costs and expenses	(15		)	(99		)	51
Write-offs	—			—			(36		)
Balance at end of year	$	185		$	200		$	299

Inventories

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.

The provision for potentially excess and obsolete inventory is made based on management's analysis of current inventory levels, and consideration primarily of past consumption, recent purchases and backlog. On a quarterly basis, we review inventory quantities on hand and on order under non-cancelable purchase commitments in comparison to our past consumption, recent purchases, backlog and other factors to determine what inventory quantities, if any, may not be sellable. Based on this analysis, we write down the affected inventory value for estimated excess and obsolescence charges. Once the value is adjusted, the original cost of our inventory, less the related inventory write-down, represents the new cost basis. Reversal of these write downs is recognized only when the related inventory has been scrapped or sold. Shipping and handling costs are classified as a component of Cost of revenues in the Consolidated Statements of Operations.

We design, manufacture and sell a custom product into a market that has been subject to cyclicality and significant demand fluctuations. Many of our products are complex, custom to a specific chip design and have to be delivered on short lead-times. Probe cards are manufactured in low volumes, but, for certain materials, the purchases are often subject to minimum order quantities in excess of the actual underlying probe card demand. It is not uncommon for us to acquire production materials and commence production activities based on estimated production yields and forecasted demand prior to, or in excess of, actual demand for our probe cards. These factors result in normal recurring inventory valuation charges to Cost of revenues.

Inventory write downs totaled $10.5 million, $9.3 million and $6.6 million for fiscal 2018, 2017 and 2016, respectively.

Restricted Cash

Restricted cash is comprised primarily of funds held by our foreign subsidiaries for employee obligations, office leases, customer deposits, and temporary customs import permits.

Property, Plant, and Equipment

Property, plant and equipment is stated at cost less accumulated depreciation and amortization. Depreciation is provided on a straight-line method over the following estimated useful lives of the assets. Machinery and equipment, computer equipment and software, and furniture and fixtures are depreciated over 1 to 5 years.

Leasehold improvements are amortized over the shorter of the lease term or the estimated useful life of the related asset. Construction-in-progress assets are not depreciated until the assets are placed in service. Upon sale or retirement of assets, the cost and related accumulated depreciation or amortization are removed from the Consolidated Balance Sheets and the resulting gain or loss is reflected in Operating income (loss) in our Consolidated Statements of Operations.

Goodwill

Goodwill represents the excess of the purchase price over the fair value of identifiable assets acquired and liabilities assumed. Goodwill is not amortized, rather assessed, at least annually, for impairment at a reporting unit level. Impairment of goodwill exists when the carrying amount of a reporting unit exceeds its fair value. A goodwill impairment loss is recognized for the amount that the carrying amount of the reporting unit, including goodwill, exceeds its fair value, limited to the total amount of goodwill allocated to that reporting unit. If the fair value of a reporting unit exceeds the carrying amount, goodwill of the reporting unit is not considered impaired.

We evaluate impairment by first assessing qualitative factors to determine whether it is necessary to perform a quantitative impairment test. If we determine, as a result of the qualitative assessment, that it is more likely than not that the fair value of a

FORMFACTOR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

reporting unit is less than its carrying amount, then the quantitative impairment test is required. Otherwise, no further testing is required.

We perform our annual goodwill impairment test in the fourth quarter of each year by assessing qualitative factors, including, but not limited to an assessment of our market capitalization, which was significantly higher than our book value. Based on these tests, we determined that the quantitative impairment test was not required and no impairment charges were recorded in fiscal 2018, 2017 or 2016.

The evaluation of goodwill for impairment requires the exercise of significant judgment. In the event of future changes in business conditions, we will be required to reassess and update our forecasts and estimates used in future impairment analysis. If the results of these analysis are lower than current estimates, a material impairment charge may result at that time.

See Note 10 for additional information.

Intangible Assets

Intangible assets consist of acquisition related intangible assets and intellectual property. The intangible assets are being amortized over periods of 1 to 10 years, which reflect the pattern in which economic benefits of the assets are expected to be realized. We perform a review of intangible assets when facts and circumstances indicate that the useful life is shorter than originally estimated or that the carrying amount of assets may not be recoverable. Such facts and circumstances include significant adverse changes in the business climate or legal factors; current period cash flow or operating losses combined with a history of losses or a forecast of continuing losses associated with the use of the intangible assets; and current expectation that the intangible assets will more likely than not be sold or disposed of before the end of their estimated useful lives. We assess the recoverability of identified intangible assets by comparing the projected undiscounted net cash flows associated with the related asset or group of assets over their remaining lives against their respective carrying amounts. Impairments, if any, are based on the excess of the carrying amount over the fair value of those assets.

See Note 10 for additional information.

Impairment of Long-Lived Assets

We test long-lived assets or asset groups, such as property, plant and equipment and intangible assets, for recoverability when events or changes in circumstances indicate that their carrying amounts may not be recoverable. Circumstances which could trigger a review include, but are not limited to: significant decreases in the market price of the asset; significant adverse changes in the business climate or legal factors; accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of the asset; current period cash flow or operating losses combined with a history of losses or a forecast of continuing losses associated with the use of the asset; and current expectation that the asset will more likely than not be sold or disposed of before the end of its estimated useful life.

Recoverability is assessed based on the carrying amounts of the asset or asset group and the sum of the undiscounted cash flows expected to result from the use and the eventual disposal of the asset. An impairment loss is recognized when the carrying amount is not recoverable and exceeds fair value.

See Note 7 for additional information.

Concentration of Credit Risk and Other Risks and Uncertainties

Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash equivalents, marketable securities and accounts receivable. Our cash equivalents and marketable securities are held in safekeeping by large, credit worthy financial institutions. We invest our excess cash primarily in U.S. banks, government and agency bonds, money market funds and corporate obligations. We have established guidelines relative to credit ratings, diversification and maturities that seek to maintain safety and liquidity. Deposits in these banks may exceed the amounts of insurance provided on such deposits. To date, we have not experienced any losses on our deposits of cash and cash equivalents. We market and sell our products to a relatively narrow base of customers and generally do not require collateral.

The following customer represented 10% or more of our revenues:



	Fiscal Year Ended
	December 29, 2018		December 30, 2017		December 31, 2016
Intel Corporation	19.0	%	25.9	%	30.1	%

FORMFACTOR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

At December 29, 2018, two customers accounted for 27.8% and 13.0% of gross accounts receivable, respectively. At December 30, 2017, one customer accounted for 24.1% of gross accounts receivable. No other customers accounted for 10% or more of gross accounts receivable for these fiscal period ends. We operate in the competitive semiconductor industry, including the Dynamic Random Access Memory, or DRAM, Flash memory, and Foundry & Logic and probe stations markets, which have been characterized by price erosion, rapid technological change, short product life cycles and heightened foreign and domestic competition. Significant technological changes in the industry could adversely affect our operating results.

We are exposed to non-performance risk by counterparties on our derivative instruments used in hedging activities. We seek to minimize risk by diversifying our hedging program across multiple financial institutions. These counterparties are large international financial institutions, and, to date, no such counterparty has failed to meet its financial obligations to us.

Certain components for our products that meet our requirements are available only from a limited number of suppliers. The rapid rate of technological change and the necessity of developing and manufacturing products with short life cycles may intensify our reliance on such suppliers. The inability to obtain components as required, or to develop alternative sources, if and as required in the future, could result in delays or reductions in product shipments, which in turn could have a material adverse effect on our business, financial condition, results of operations or cash flows.

Revenue Recognition

Revenue is recognized upon transferring control of products and services, and the amounts recognized reflect the consideration we expect to be entitled to receive in exchange for these products and services. Revenue is recognized net of any taxes collected from customers, which are subsequently remitted to governmental authorities. An arrangement may include some or all of the following products and services: probe cards, systems, accessories, installation services, service contracts and extended warranty contracts. We sell our products and services direct to customers and to partners in two distribution channels: global direct sales force and through a combination of manufacturers’ representatives and distributors.

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer. In contracts with multiple performance obligations, we identify each performance obligation and evaluate whether the performance obligation is distinct within the context of the contract at contract inception. Performance obligations that are not distinct at contract inception are combined and accounted for as one unit of account. Generally, the performance obligations in a contract are considered distinct within the context of the contract and are accounted for as separate units of account.

Our products may be customized to our customers’ specifications, however, control of our product is typically transferred to the customer at the point in time the product is either shipped or delivered, depending on the terms of the arrangement, as the criteria for overtime recognition is not met. In limited circumstances, substantive acceptance by the customer exists which results in the deferral of revenue until acceptance is formally received from the customer. Judgment may be required in determining if the acceptance clause is substantive.

Installation services are routinely provided to customers purchasing our systems. Installation services are a distinct performance obligation apart from the systems and recognized in the period they are performed. Service contracts, which include repair and maintenance service contracts, and extended warranty contracts are also distinct performance obligations and recognized over the contractual service period, which ranges from one to three years. For these service contracts recognized over time, we use an input measure, days elapsed, to measure progress.

A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. In determining the transaction price, we evaluate whether the price is subject to refund or adjustment to determine the net consideration to which we expect to be entitled. We generally do not grant return privileges, except for defective products during the warranty period. Sales incentives and other programs that we may make available to these customers are considered to be a form of variable consideration, which is estimated in determining the contract’s transaction price to be allocated to the performance obligations. We have elected the practical expedient under Accounting Standards Codification (“ASC”) 606-10-32-18 to not assess whether a contract has a significant financing component as our standard payment terms are less than one year.

For contracts with multiple performance obligations, we allocate the contract’s transaction price to each performance obligation based on its relative stand-alone selling price. The stand-alone selling prices are determined based on observable prices, which are the prices at which we separately sell these products. For items which do not have observable prices, we use our best estimate of the stand-alone selling prices.

FORMFACTOR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Transaction price allocated to the remaining performance obligations: On December 29, 2018, we had $3.4 million of remaining performance obligations, which were comprised of deferred service contracts and extended warranty contracts not yet delivered. We expect to recognize approximately 77.7% of our remaining performance obligations as revenue in fiscal 2019, and approximately 22.3% in fiscal 2020 and thereafter. The foregoing excludes the value of remaining performance obligations that 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 December 29, 2018 and December 30, 2017 were $0.3 million and $1.6 million, respectively, and are reported on the 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 Consolidated Balance Sheets on a contract-by-contract basis at the end of each reporting period as a component of Deferred revenue and Deferred rent and other liabilities. Contract liabilities totaled $5.7 million at both December 29, 2018 and December 30, 2017. During fiscal 2018, we recognized $4.8 million of revenue that was included in contract liabilities as of December 30, 2017.

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 16 of Notes to Consolidated Financial Statements for further details.

Warranty Obligations

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 incurred in correcting a product failure. We continuously monitor product returns for warranty and maintain a reserve for the related expenses based upon our historical experience and any specifically identified field 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. Warranty costs are reflected in the Consolidated Statement of Operations as a Cost of revenues.

A reconciliation of the changes in our warranty liability is as follows (in thousands):



	Fiscal Year Ended
	December 29, 2018			December 30, 2017			December 31, 2016
Balance at beginning of year	$	3,662		$	2,972		$	1,116
Warranty reserve from acquisition-Cascade Microtech	—			—			795
Accruals	3,181			8,115			5,254
Settlements	(4,741		)	(7,425		)	(4,193		)
Balance at end of year	$	2,102		$	3,662		$	2,972

Research and Development

Research and development expenses include expenses related to product development, engineering and material costs. All research and development costs are expensed as incurred.

Restructuring Charges

Restructuring charges are comprised of costs related to employee termination benefits, long-lived assets and inventory impaired or abandoned, and contract termination costs. The determination of when we accrue for employee termination benefits depends on whether the termination benefits are provided under a one-time benefit arrangement or under an on-going benefit arrangement. For restructuring charges recorded as an on-going benefit arrangement, a liability for post-employment benefits is recorded when

FORMFACTOR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

payment is probable, the amount is reasonably estimable, and the obligation relates to rights that have vested or accumulated. For restructuring charges recorded as a one-time benefit arrangement, we recognize a liability for employee termination benefits when a plan of termination, approved by management and establishing the terms of the benefit arrangement, has been communicated to employees. The timing of the recognition of one-time employee termination benefits is dependent upon the period of time the employees are required to render service after communication. If employees are not required to render service in order to receive the termination benefits or if employees will not be retained to render service beyond the minimum legal notification period, a liability for the termination benefits is recognized at the communication date. In instances where employees will be retained to render service beyond the minimum legal notification period, the liability for employee termination benefits is measured initially at the communication date based on the fair value of the liability as of the termination date and is recognized ratably over the future service period. We continually evaluate the adequacy of the remaining liabilities under our restructuring initiatives.

We record charges related to long-lived assets to be abandoned when the assets cease to be used. When we cease using a building or other asset with remaining non-cancelable lease payments continuing beyond our use period, we record a liability for remaining payments under lease arrangements, as well as for contract termination costs, that will continue to be incurred under a contract for its remaining term without economic benefit to us at the cease-use date. Given the significance of, and the timing of the execution of such activities, this process is complex and involves periodic reassessments of estimates made at the time the original decisions were made, including evaluating real estate market conditions for expected vacancy periods and sub-lease rents. Although we believe that these estimates accurately reflect the costs of our restructuring plans, actual results may differ, thereby requiring us to record additional provisions or reverse a portion of such provisions.

We recorded restructuring charges of $0.2 million, $0.8 million and $7.3 million for fiscal years 2018, 2017 and 2016, respectively.

See Note 6 for additional information.

Income Taxes

We utilize the asset and liability method of accounting for income taxes, under which deferred taxes are determined based on the temporary differences between the financial statement and tax basis of assets and liabilities using tax rates expected to be in effect during the years in which the basis differences reverse and for operating losses and tax credit carryforwards. We estimate our provision for income taxes and amounts ultimately payable or recoverable in numerous tax jurisdictions around the world. Estimates involve interpretations of regulations and are inherently complex. Resolution of income tax treatments in individual jurisdictions may not be known for many years after completion of any fiscal year. We are required to evaluate the realizability of our deferred tax assets on an ongoing basis to determine whether there is a need for a valuation allowance with respect to such deferred tax assets. A valuation allowance is recorded when it is more likely than not that some or all of the deferred tax assets will not be realized. In evaluating the ability to recover deferred tax assets, we consider all available positive and negative evidence giving greater weight to our recent cumulative income, our historical ability to utlize net operating losses in recent years and our forecast of future taxable income, including the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies.

We recognize and measure uncertain tax positions taken or expected to be taken in a tax return if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized are then measured based on the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement. We report a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return. We adjust these reserves in light of changing facts and circumstances, such as the closing of a tax audit or the refinement of an estimate. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will impact the provision for income taxes in the period in which such determination is made. The provision for income taxes includes the impact of reserve provisions and changes to reserves that are considered appropriate, as well as the related net interest. We recognize interest and penalties related to unrecognized tax benefits within the income tax provision. Accrued interest and penalties are included within the related tax liability in the Consolidated Balance Sheets.

We file annual income tax returns in multiple taxing jurisdictions around the world. A number of years may elapse before an uncertain tax position is audited and finally resolved. While it is often difficult to predict the final outcome or the timing of resolution of any particular uncertain tax position, we believe that our related liability reflects the most likely outcome. We adjust the liability, as well as the related interest, in light of changing facts and circumstances. Settlement of any particular position could require the use of cash.

See Note 14 for additional information, including the Tax Cuts and Jobs Act enacted in December 2017.

FORMFACTOR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Stock-Based Compensation

We recognize compensation expense for all stock-based awards based on the grant-date estimated fair values, net of an estimated forfeiture rate. The value of the portion of the award that is ultimately expected to vest is recognized as expense ratably over the requisite service periods in our Consolidated Statements of Operations. The fair value of stock options is measured using the Black-Scholes option pricing model, while the fair value for restricted stock units ("RSUs") is measured based on the closing market price of our common stock on the date of grant. The fair value of Performance RSUs ("PRSU") is based on certain market performance criteria is measured using the Monte Carlo simulation pricing model.

See Notes 12 and 13 for additional information.

Net Income (Loss) Per Share

Basic net income (loss) per share is computed by dividing net income (loss) by the weighted-average number of common shares outstanding for the period. Diluted net income (loss) per share is computed giving effect to all potentially dilutive common stock and common stock equivalents, including stock options, RSUs and common stock subject to repurchase.

The following table reconciles the shares used in calculating basic net income (loss) per share and diluted net income (loss) per share (in thousands):



	Fiscal Year Ended
	December 29, 2018	December 30, 2017	December 31, 2016
Weighted-average shares used in computing basic net income (loss) per share	73,482	72,292	64,941
Add potentially dilutive securities	1,700	1,947	—
Weighted-average shares used in computing basic and diluted net income (loss) per share	75,182	74,239	64,941

The following securities were excluded from the calculation of diluted net income (loss) per share because their effect would have been anti-dilutive for the periods presented (in thousands):



	Fiscal Year Ended
	December 29, 2018	December 30, 2017	December 31, 2016
Options to purchase common stock	—	—	2,198
Restricted stock units	—	1	3,113
Employee stock purchase plan	—	—	10
Total potentially dilutive securities	—	1	5,321

Accumulated Other Comprehensive Income

Accumulated other comprehensive income ("OCI") includes the following items, the impact of which has been excluded from earnings and reflected as components of stockholders' equity as shown below (in thousands):



	December 29, 2018			December 30, 2017
Unrealized losses on marketable securities	$	(668	)	$	(660	)
Cumulative translation adjustments	918			2,983
Unrealized gains on derivative instruments	367			698
Unrealized gains on the translation of deferred tax assets	163			—
Accumulated other comprehensive income	$	780		$	3,021

FORMFACTOR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 3—Balance Sheet Components

Marketable Securities

Marketable securities consisted of the following (in thousands):



December 29, 2018	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
U.S. Treasuries	$	7,997	$	1	$	(1	)	$	7,997
Commercial paper	2,296		—		(1		)	2,295
Corporate bond	30,833		1		(160		)	30,674
Certificate of deposit	960		—		(3		)	957
Agency securities	8,667		—		(59		)	8,608
	$	50,753	$	2	$	(224	)	$	50,531



December 30, 2017	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
U.S. Treasuries	$	3,968	$	—	$	(5	)	$	3,963
Commercial paper	3,000		—		—			3,000
Corporate bond	30,785		1		(150		)	30,636
Certificate of deposit	960		—		(3		)	957
Agency securities	10,489		—		(57		)	10,432
	$	49,202	$	1	$	(215	)	$	48,988

We classify our marketable securities as available-for-sale. All marketable securities represent the investment of funds available for current operations, notwithstanding their contractual maturities. Such marketable securities are recorded at fair value and unrealized gains and losses are recorded in Accumulated other comprehensive income (loss) until realized.

We typically invest in highly-rated securities with low probabilities of default. Our investment policy requires investments to be rated single A or better, limits the types of acceptable investments, concentration as to security holder and duration of the investment. The gross unrealized gains and losses in fiscal 2018 and 2017 were caused primarily by changes in interest rates.

The longer the duration of marketable securities, the more susceptible they are to changes in market interest rates and bond yields. As yields increase, those securities with a lower yield-at-cost show a mark-to-market unrealized loss. We anticipate recovering the full cost of the securities either as market conditions improve, or as the securities mature. Accordingly, we believe that the unrealized losses are not other-than-temporary. When evaluating the investments for other-than-temporary impairment, we review factors such as the length of time and extent to which fair value has been below the amortized cost basis, current market liquidity, interest rate risk, the financial condition of the issuer, and credit rating downgrades. As of December 29, 2018 and December 30, 2017, $0.1 million and none, respectively, of our investments had been in a continuous loss position for 12 months or more.

The contractual maturities of marketable securities were as follows (in thousands):



	December 29, 2018				December 30, 2017
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in one year or less	$	35,269	$	35,172	$	23,009	$	22,966
Due after one year to five years	15,484		15,359		26,193		26,022
	$	50,753	$	50,531	$	49,202	$	48,988



	December 29, 2018		December 30, 2017
Raw materials	$	43,380	$	33,101
Work-in-progress	20,431		20,134
Finished goods	13,895		14,613
	$	77,706	$	67,848



	December 29, 2018			December 30, 2017
Machinery and equipment	$	192,108		$	183,186
Computer equipment and software	32,906			32,841
Furniture and fixtures	6,478			6,478
Leasehold improvements	75,285			73,978
Sub-total	306,777			296,483
Less: Accumulated depreciation and amortization	(263,102		)	(255,755		)
Net property, plant and equipment	43,675			40,728
Construction-in-progress	10,379			6,026
Total	$	54,054		$	46,754



	December 29, 2018		December 30, 2017
Accrued compensation and benefits	$	15,600	$	18,141
Accrued employee stock purchase plan contributions withheld	3,174		3,279
Accrued warranty	2,102		3,662
Accrued income and other taxes	4,222		3,965
Other accrued expenses	2,633		4,647
	$	27,731	$	33,694



	Amount
Cash and cash equivalents	$	40,681
Accounts receivable	27,112
Inventory	38,315
Prepaid expenses and other current assets	6,249
Property, plant and equipment	19,875
Other long-term assets	818
Tangible assets acquired	133,050

Deferred revenue	(1,829		)
Accounts payable and accrued liabilities	(23,370		)
Deferred tax liabilities	(48,993		)
Other long-term liabilities	(960		)
Liabilities assumed	(75,152		)
Total tangible assets acquired and liabilities assumed	57,898
Intangible assets	149,753
Goodwill	158,141
Net assets acquired	$	365,792


•	payment of $255.9 million in cash to former shareholders of Cascade Microtech;


•	issuance of 10,450,189 shares of FormFactor's common stock to former shareholders of Cascade Microtech, which was valued at the closing market price of $8.92 per share on June 24, 2016 and amounted to $93.2 million in the aggregate;


•	payment of $12.8 million at the commencement of the third quarter of fiscal 2016, in cash, to Cascade Microtech outstanding and vested equity award holders; and


•	$3.9 million attributable to the fair value of the assumed unvested equity awards for services performed by Cascade Microtech employees for the period leading up to the effective date of the acquisition.



	Amount		Weighted Average Useful Life (in years)
Developed technologies	$	91,100	4.7
Customer relationships	23,053		6.8
Order backlog	15,600		0.5
Trade names	7,600		3.5
In-process research and development	12,400		N/A
Total intangible assets	$	149,753	4.1



	December 29, 2018			December 30, 2017
Term loan	$	65,000		$	106,250
Less unamortized issuance costs	(189		)	(579		)
Total debt less issuance costs	$	64,811		$	105,671



	Principal		Interest*
Fiscal year:
2019	$	30,000	$	2,190
2020	35,000		556
Total	$	65,000	$	2,746


•	a ratio of total debt to earnings before interest, taxes, depreciation and amortization ("EBITDA") not in excess of 2.50 to 1.00; and


•	a fixed charge coverage ratio of not less than 1.50 to 1.00, stepping down to 1.30 to 1.00 at the end of the fiscal quarter ended June 30, 2018 and to 1.20 to 1.00 at the end of the fiscal quarter ending June 30, 2019.



	Employee Severance and Benefits			Contract Termination and Other Costs			Stock-based Compensation			Total
Accrual at December 26, 2015	$	2		$	—		$	—		$	2
Restructuring charges	6,220			104			964			7,288
Cash payments	(5,892		)	—			—			(5,892		)
Non-cash settlements	—			—			(964		)	(964		)
Accrual at December 31, 2016	330			104			—			434
Restructuring charges	690			11			109			810
Cash payments	(622		)	(109		)	—			(731		)
Non-cash settlements	—			(5		)	(109		)	(114		)
Accrual at December 30, 2017	398			1			—			399
Restructuring charges	20			140			—			160
Cash payments	(398		)	(1		)	—			(399		)
Non-cash settlements	—			(140		)	—			(140		)
Accrual at December 29, 2018	$	20		$	—		$	—		$	20



Currency	Contract Position	Contract Amount (Local Currency)	Contract Amount (U.S. Dollars)
Euro	Sell	14,843	$	17,082
Japanese Yen	Sell	1,185,877	10,758
Total USD notional amount of outstanding foreign exchange contracts			$	27,840



	Location of Gain (Loss) Recognized on Derivatives	Fiscal Year Ended
Derivatives Not Designated as Hedging Instruments	Location of Gain (Loss) Recognized on Derivatives	December 29, 2018		December 30, 2017			December 31, 2016
Foreign exchange forward contracts	Other expense, net	$	906	$	(2,505	)	$	(1,490	)



	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 )
Fiscal 2018	$	340	Other expense, net	$	721		Other expense, net	$	—
Fiscal 2017	$	287	Other expense, net	$	84		Other expense, net	$	29
Fiscal 2016	$	628	Other expense, net	$	(160	)	Other expense, net	$	51


•	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


•	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.



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
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



	December 29, 2018						December 30, 2017
Other Intangible Assets	Gross		Accumulated Amortization		Net		Gross		Accumulated Amortization		Net
Existing developed technologies	$	143,408	$	97,111	$	46,297	$	143,966	$	76,826	$	67,140
Trade name	12,023		9,173		2,850		12,086		5,735		6,351
Customer relationships	40,146		21,653		18,493		40,313		16,320		23,993
Backlog	—		—		—		15,811		15,811		—
	$	195,577	$	127,937	$	67,640	$	212,176	$	114,692	$	97,484



	Fiscal Year Ended
	December 29, 2018		December 30, 2017		December 31, 2016
Cost of revenues	$	20,530	$	22,800	$	30,039
Selling, general and administrative	8,843		8,140		5,388
	$	29,373	$	30,940	$	35,427



	Outstanding Options
	Number of Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life in Years	Aggregate Intrinsic Value
Outstanding at December 30, 2017	659,334		$	8.12
Options exercised	(134,609	)	8.60
Outstanding at December 29, 2018	524,725		$	8.00	3.1	$	3,155,659
Vested and expected to vest at December 29, 2018	524,725		$	8.00	3.1	$	3,155,659
Exercisable at December 29, 2018	401,105		$	7.94	3.0	$	2,435,515



	Number of Shares		Weighted Average Grant Date Fair Value
Restricted stock units at December 30, 2017	3,148,061		$	11.22
Granted	1,551,770		13.79
Vested	(1,287,107	)	10.43
Canceled	(310,498	)	11.66
Restricted stock units at December 29, 2018	3,102,226		12.79



	As of
	December 29, 2018			December 30, 2017
Tax credits	$	39,586		$	35,484
Inventory reserve	10,850			10,763
Other reserves and accruals	5,398			5,667
Non-statutory stock options	2,722			2,642
Depreciation and amortization	1,979			3,677
Net operating loss carryforwards	61,275			70,457
Gross deferred tax assets	121,810			128,690
Valuation allowance	(34,037		)	(109,840		)
Total deferred tax assets	87,773			18,850
Acquired intangibles and fixed assets	(12,667		)	(18,921		)
Unrealized investment gains	(107		)	(109		)
Tax on undistributed earnings	(53		)	(66		)
Total deferred tax liabilities	(12,827		)	(19,096		)
Net deferred tax assets (liabilities)	$	74,946		$	(246	)



	Amount		Latest Expiration Date
Federal research and development tax credit	$	33,837	2021-2038
Federal net operating loss carryforwards	201,484		2030-2035
Foreign tax credit carryforwards	1,325		2019-2028
Alternative minimum tax credits	391		Indefinite
California research credits	32,964		Indefinite
Oregon research credits	281		2019-2022
State net operating loss carryforwards	250,873		2024-2036
Singapore net operating loss carryforwards	8,949		Indefinite



	Fiscal Quarters Ended
	Dec. 29, 2018⁽¹⁾			Sep. 29, 2018			June 30, 2018			March 31, 2018			Dec. 30, 2017⁽²⁾			Sep. 30, 2017			July 1, 2017			April 1, 2017
	(in thousands, except per share data)
Revenues	$	140,887		$	134,989		$	135,509		$	118,290		$	131,901		$	143,735		$	143,976		$	128,829
Cost of revenues	84,865			82,019			79,291			73,161			83,272			86,105			82,209			81,258
Gross profit	56,022			52,970			56,218			45,129			48,629			57,630			61,767			47,571
Operating Expenses:
Research and development	18,398			18,857			19,675			18,046			18,513			19,338			18,542			17,414
Selling, general and administrative	25,668			24,745			25,232			23,449			24,238			24,010			23,602			22,829
Restructuring	160			—			—			—			481			16			44			269
Total operating expenses	44,226			43,602			44,907			41,495			43,232			43,364			42,188			40,512
Operating income	11,796			9,368			11,311			3,634			5,397			14,266			19,579			7,059
Interest income	404			369			326			257			264			123			93			67
Interest expense	(660		)	(777		)	(910		)	(967		)	(1,045		)	(1,109		)	(1,162		)	(1,174		)
Other income (expense), net	117			121			50			(512		)	(170		)	311			107			(400		)
Income before income taxes	11,657			9,081			10,777			2,412			4,446			13,591			18,617			5,552
Provision (benefit) for income taxes	(73,443		)	1,393			1,654			287			(1,142		)	1,028			1,040			367
Net income	$	85,100		$	7,688		$	9,123		$	2,125		$	5,588		$	12,563		$	17,577		$	5,185
Net income per share:⁽³⁾
Basic	$	1.15		$	0.10		$	0.12		$	0.03		$	0.08		$	0.17		$	0.24		$	0.07
Diluted	$	1.13		$	0.10		$	0.12		$	0.03		$	0.07		$	0.17		$	0.24		$	0.07
Weighted average number of shares used in per share calculations:
Basic	74,108			73,837			73,157			72,826			72,846			72,651			72,200			71,423
Diluted	75,416			74,962			74,533			74,342			74,756			73,885			73,539			72,922


(1)	In the fourth quarter of fiscal 2018, the tax benefit included a $75.8 million benefit from a valuation allowance release against certain U.S. deferred tax assets.


(2)	In the fourth quarter of fiscal 2017, the tax benefit included a $0.7 million benefit from U.S. tax reform and a $0.8 million benefit from refundable AMT tax credits.


(3)	Quarterly net income per share amounts may not add to the yearly totals due to rounding.



	December 30, 2017		December 31, 2016
Cash and cash equivalents as previously reported in the Condensed Consolidated Statements of Cash Flows	$	91,184	$	101,408
Current assets - Restricted cash	372		106
Restricted cash	1,170		1,082
Cash, cash equivalents and restricted cash as currently reported in the Condensed Consolidated Statements of Cash Flows	$	92,726	$	102,596



10.21	Third Amendment, dated October 1, 2018, between FormFactor, Inc. and MOHR PCC, LP, to Pacific Corporate Center Lease, dated October 5, 2004, by and between Greenville Investors, L.P. and FormFactor, Inc., as amended	8-K	000-50307	10/2/2018	10.1
10.22	Fourth Amendment, dated October 1, 2018, between FormFactor, Inc. and MOHR PCC, LP, to Pacific Corporate Center Lease, dated October 5, 2004, by and between Greenville Investors, L.P. and FormFactor, Inc., as amended	8-K	000-50307	10/2/2018	10.2
10.23	Lease Agreements I and II between Amberjack, Ltd. And Cascade Microtech, Inc. dated August 20, 1997, and Amendment No. 2 to Lease Agreement I dated July 23, 1998, and Amendment No. 2 to Lease Agreement II dated April 12, 1999.	S-1	333-47100	10/2/2000	10.9
10.24	Third Amendment dated August 11, 2006 to Lease Agreement I dated August 20, 1997 between Amberjack, LTD. and Cascade Microtech, Inc.	10-Q	000-51072	11/9/2006	10.2
10.25	Third Amendment dated August 11, 2006 to Lease Agreement II dated August 20, 1997 between Amberjack, LTD. and Cascade Microtech, Inc.	10-Q	000-51072	11/9/2006	10.3
10.26	Assignment, Assumption and Amendment of Lease dated as of September 22, 2011 by and among Cascade Microtech, Inc. and R&D Sockets, Inc.	8-K	000-51072	9/26/2011	10.1
10.27	Rental Agreement by and between Cascade Microtech Dresden GmbH and Süss Grundstücksverwaltungs GbR dated as of June 17, 2011.	10-Q	000-51072	8/10/2011	10.3
10.28	Lease dated April 2, 1999 between Spieker Properties, L.P. and Cascade Microtech, Inc.	S-1	333-47100	10/2/2000	10.8
10.29	First amendment to Lease dated January 10, 2007, between Nimbus Center LLC (as successor in interest to Spieker Properties, L.P.) and Cascade Microtech, Inc.	10-Q	000-51072	5/9/2014	10.1
10.30	Second amendment to Lease dated February 25, 2013, between Nimbus Center LLC and Cascade Microtech, Inc.	10-Q	000-51072	5/8/2013	10.2
10.31	Third amendment to Lease dated January 23, 2014, between Nimbus Center LLC and Cascade Microtech, Inc.	10-Q	000-51072	5/9/2014	10.2
10.32	Fourth amendment to Lease dated March 31, 2014, between Nimbus Center LLC and Cascade Microtech, Inc.	10-Q	000-51072	5/9/2014	10.3
10.33	Fifth amendment to Lease dated September 24, 2014, between Nimbus Center LLC and Cascade Microtech, Inc.	10-K	000-51072	3/72016	10.22
10.34	Sixth amendment to Lease dated July 8, 2015, between Nimbus Center LLC and Cascade Microtech, Inc.	10-K	000-51072	3/72016	10.23
10.35+	Employment Offer Letter, dated August 29, 2012 to Mike Slessor	10-K	000-50307	3/13/2013	10.19+
10.36+	Tax withholding reimbursement letter between Mike Slessor and the Registrant dated December 30, 2013	10-K	000-50307	3/6/2015	10.20
10.37+	CEO Change of Control and Severance Agreement, dated April 28, 2016 by and between Mike Slessor and the Registrant	10-K	000-50307	3/15/2017	10.35
10.38+	Change of Control and Severance Agreement, dated April 28, 2016 by and between Michael Ludwig and the Registrant	10-K	000-50307	3/15/2017	10.36
10.39+	Employment Offer Letter, dated February 15, 2018 to Shai Shahar	10-Q	000-50307	5/8/2018	10.1
14.1	Code of Business conduct of FormFactor, Inc.	8-K	000-50307	9/13/2017	14.1
21.1	List of Registrant's subsidiaries	—	—	—	—	X
23.1	Consent of Independent Registered Public Accounting Firm - KPMG	—	—	—	—	X
24.1	Power of Attorney (included on the signature page of this Form 10-K)	—	—	—	—	X
31.1	Certification of Chief Executive Officer pursuant to 15 U.S.C. Section 7241, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	—	—	—	—	X
31.2	Certification of Chief Financial Officer pursuant to 15 U.S.C. Section 7241, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	—	—	—	—	X