# FORMFACTOR INC (FORM) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from FORMFACTOR INC's 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1039399/000103939924000007/form-20231230.htm
Accession: 0001039399-24-000007
Filing date: 2024-02-23
Report date: 2023-12-30
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Published MD&A gate trimmed front/tail over-capture.
Confidence: high

Company profile: /company/FORM/
All MD&A years: /company/FORM/mda/
Previous year: /company/FORM/mda/fy2022/ (FY 2022)
Next year: /company/FORM/mda/fy2024/ (FY 2024)

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

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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 essential test and measurement technologies along the full semiconductor product lifecycle - from characterization, modeling, reliability, and design de-bug, to qualification and production test. We provide a broad range of high-performance probe cards, analytical probes, probe stations, metrology systems, thermal systems, and cryogenic systems to both semiconductor companies and scientific institutions. Our products provide electrical information from a variety of semiconductor and electro-optical devices and integrated circuits from early research, through development, to high-volume production. Customers use our products and services to accelerate profitability by optimizing device performance, reducing scrap, and improving yields.

We operate in two reportable segments consisting of the Probe Cards segment and the Systems segment. Sales of our probe cards and analytical probes are included in the Probe Cards segment, while sales of our probe stations, metrology systems, thermal systems and cryogenic systems are included in the Systems segment.

We generated net income of $82.4 million in fiscal 2023 compared to net income of $50.7 million in fiscal 2022 and net income of $83.9 million in fiscal 2021. On November 1, 2023, we completed the sale of our FRT Metrology (“FRT”) business. As a result of the transaction, we received aggregate net consideration of $99.8 million and the transaction resulted in a gain of $73.0 million.

The increase in net income in fiscal 2023 compared to fiscal 2022 was primarily due to the $73.0 million gain recognized from the sale of our FRT business. Apart from this gain, the semiconductor industry weakness that began in the third quarter of fiscal 2022 continued into fiscal 2023, impacting our Probe Cards segment with a $93.5 million reduction in revenue and the associated decline in gross margins as a result of the lower operating levels. Despite the overall semiconductor industry weakness that impacted the Probe Cards segment, the Systems segment continued to show strength with revenue increasing $8.7 million, or about 5.6% in fiscal 2022, since customer spending for products in this segment is driven by research and development of next-generation innovation.

The decrease in net income in fiscal 2022 compared to fiscal 2021 was primarily due to decreased revenues, lower margins driven primarily by a less favorable product mix and lower factory utilization, and increased restructuring charges. This was partially offset by a reduction in the amortization of intangibles and in the annual effective tax rate. The first half of fiscal 2022 was strong, producing net income of $60.1 million with $401.1 million in revenue at 47.0% gross margins. In the second half of fiscal 2022, revenues declined, mainly within the Probe Cards segment, and mix became less favorable, resulting in a net loss of $9.4 million with $346.9 million in revenue at 31.0% gross margins. Despite the decline in total revenues in the second half of fiscal 2022, the Systems segment recognized record revenue levels in the third and fourth quarters of fiscal 2022.

Recent Development

On February 7, 2024, we signed an agreement with Grand Junction Semiconductor Pte. Ltd. to divest our China operations and establish an exclusive distribution and partnership agreement to continue sales and support of our products in the region (the “China Transaction”). The China Transaction is expected to close in the first half of 2024.

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 30, 2023, December 31, 2022 and December 25, 2021 included 52 weeks, 53 weeks (with 14 weeks in the fourth quarter) and 52 weeks, respectively.

Use of Estimates

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

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Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles (“GAAP”). The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of net revenue and expenses in the reporting period. Our accounting policies are fundamental to understanding our financial condition and results of operations reported in our financial statements and related disclosures. We have identified the following accounting policies as being critical because they require our management to make particularly difficult, subjective and/or complex judgments about the effect of matters that are inherently uncertain. Our management has discussed the development, selection, application and disclosure of these critical accounting policies with the Audit Committee of our Board of Directors.

Inventory Valuation

We state our inventories at the lower of cost (principally standard cost which approximates actual cost on a first in, first out basis) or net realizable value. We regularly assess the value of our inventory and will periodically write down its value for estimated excess inventory and product obsolescence based upon an analysis of existing inventory quantities compared to estimated future consumption. Future consumption is estimated based upon assumptions about how past consumption, recent purchases, backlog and other factors may indicate future consumption. On a quarterly basis, we review existing inventory quantities in comparison to our past consumption, recent purchases, backlog and other factors to determine what inventory quantities, if any, may not be sellable. Based on this analysis, we record an adjustment to the cost basis of inventory when evidence exists that the net realizable value of inventory is lower than its cost, which occurs when we have excess and/or obsolete inventory.

At the point of loss recognition, a new, lower cost basis for that inventory is established, and subsequent changes in facts and circumstances do not result in the restoration or increase in that newly established cost basis. Market conditions are subject to change, and demand for our products can fluctuate significantly. Actual consumption of inventories could differ from forecasted demand, and this difference could have a material impact on our gross profit and inventory balances based on additional provisions for excess or obsolete inventories, or a benefit from the sale of inventories previously written down.

Revenue Recognition

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

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer. 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 over time recognition is not met. In limited circumstances, substantive acceptance by the customer exists which results in the deferral of revenue until acceptance is formally received from the customer. Judgment may be required in determining if the acceptance clause is substantive. In certain instances control of products is transferred to the customer over time based on performance and in those instances we utilize an appropriate input or output measure to determine to what extent control has transferred to the customer. Judgment may be required in determining an appropriate measure of performance.

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

A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. In determining the transaction price, we evaluate whether the price is subject to refund or adjustment to determine the net consideration to which we expect to be entitled. 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

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our customers are considered to be a form of variable consideration, which is estimated in determining the contract’s transaction price to be allocated to the performance obligations.

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

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

Results of Operations

In this section, we discuss the results of our operations for the year ended December 30, 2023 compared to the year ended December 31, 2022. For a discussion of the year ended December 31, 2022 compared to the year ended December 25, 2021, please refer to Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2022.

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

[[GREPCENT_TABLE]]
[["","Fiscal 2023","","Fiscal 2022","","Fiscal 2021"],["Revenues","100.0","%","","100.0","%","","100.0","%"],["Cost of revenues","61.0","","","60.4","","","58.1"],["Gross profit","39.0","","","39.6","","","41.9"],["Operating expenses:"],["Research and development","17.5","","","14.6","","","13.1"],["Selling, general and administrative","20.1","","","17.6","","","16.1"],["Total operating expenses","37.6","","","32.2","","","29.2"],["Gain on sale of business","11.0","","","\u2014","","","\u2014"],["Operating income","12.4","","","7.4","","","12.7"],["Interest income","1.1","","","0.3","","","0.1"],["Interest expense","(0.1)","","","(0.1)","","","(0.1)"],["Other income (expense), net","\u2014","","0.2","","0.1"],["Income before income taxes","13.4","","","7.8","","","12.8"],["Provision for income taxes","1.0","","","1.0","","","1.9"],["Net income","12.4","%","","6.8","%","","10.9","%"]]
[[/GREPCENT_TABLE]]

Revenues by Segment

[[GREPCENT_TABLE]]
[["","Fiscal 2023","","Fiscal 2022","","Fiscal 2021"],["","(In thousands)"],["Probe Cards","$","497,903","","","$","591,422","","","$","633,281"],["Systems(1)","165,199","","","156,515","","","136,393"],["Total","$","663,102","","","$","747,937","","","$","769,674"]]
[[/GREPCENT_TABLE]]

(1) During the fourth quarter of fiscal 2023, we completed the sale of our FRT business. As a result, Metrology Systems revenue will not recur in future periods. The year ended December 30, 2023 includes Metrology Systems revenue of $21.2 million. The years ended December 31, 2022 and December 25, 2021 include Metrology Systems revenue of $29.0 million and $23.7 million, respectively.

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Revenues by Market

[[GREPCENT_TABLE]]
[["","Fiscal","","% of","","Fiscal","","% of","","Change"],["","2023","","Revenues","","2022","","Revenues","","$","","%"],["","(In thousands, except percentages)"],["Probe Cards Markets:"],["Foundry & Logic","$","363,539","","","54.8","%","","$","409,196","","","54.7","%","","$","(45,657)","","","(11.2)","%"],["DRAM","113,779","","","17.2","","","133,446","","","17.8","","","(19,667)","","","(14.7)"],["Flash","20,585","","","3.1","","","48,780","","","6.5","","","(28,195)","","","(57.8)"],["Systems Market:"],["Systems(1)","165,199","","","24.9","","","156,515","","","21.0","","","8,684","","","5.5"],["Total revenues","$","663,102","","","100.0","%","","$","747,937","","","100.0","%","","$","(84,835)","","","(11.3)","%"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","Fiscal","","% of","","Fiscal","","% of","","Change"],["","2022","","Revenues","","2021","","Revenues","","$","","%"],["","(In thousands, except percentages)"],["Probe Cards Markets:"],["Foundry & Logic","$","409,196","","","54.7","%","","$","435,812","","","56.6","%","","$","(26,616)","","","(6.1)","%"],["DRAM","133,446","","","17.8","","","156,049","","","20.3","","","(22,603)","","","(14.5)"],["Flash","48,780","","","6.5","","","41,420","","","5.4","","","7,360","","","17.8"],["Systems Market:"],["Systems","156,515","","","21.0","","","136,393","","","17.7","","","20,122","","","14.8"],["Total revenues","$","747,937","","","100.0","%","","$","769,674","","","100.0","%","","$","(21,737)","","","(2.8)","%"]]
[[/GREPCENT_TABLE]]

(1) During the fourth quarter of fiscal 2023, we completed the sale of our FRT business. As a result, Metrology Systems revenue will not recur in future periods. The year ended December 30, 2023 includes Metrology Systems revenue of $21.2 million. The years ended December 31, 2022 and December 25, 2021 include Metrology Systems revenue of $29.0 million million and $23.7 million, respectively.

Foundry & Logic — The decrease in Foundry & Logic product revenue in fiscal 2023 compared to fiscal 2022 was driven by the weakening demand in the semiconductor industry, especially in the personal computer and mobile sectors, that began in the third quarter of fiscal 2022 and continued into fiscal 2023, resulting in decreased unit sales across several of our major customers for both us and our competitors.

DRAM — The decrease in DRAM product revenues in fiscal 2023 compared to fiscal 2022 was driven by lower customer production activity and demand for our products in light of worldwide excess supply of DRAM chips, along with weaker demand in the overall semiconductor industry, as discussed above. These declines were partially offset due to increased demand for HBM chips utilized in generative artificial intelligence applications.

Flash — The decrease in Flash product revenue in fiscal 2023 compared to fiscal 2022 was driven by lower customer production activity and demand for our products in light of worldwide excess supply, a result of weaker demand in the overall semiconductor industry, as discussed above, and Flash market weakness.

Systems — The increase in Systems product revenue in fiscal 2023 compared to fiscal 2022 was driven by increased sales of probe stations and thermal systems, partially offset by decreased sales of our metrology systems.

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Revenues by Geographic Region

[[GREPCENT_TABLE]]
[["","Fiscal 2023","","% of Revenues","","Fiscal 2022","","% of Revenues","","Fiscal 2021","","% of Revenues"],["","(In thousands, except percentages)"],["United States","$","171,781","","","25.9","%","","$","127,730","","","17.1","%","","$","122,147","","","15.9","%"],["Taiwan","147,842","","","22.3","","","169,789","","","22.7","","","185,925","","","24.2"],["South Korea","117,747","","","17.8","","","111,419","","","14.9","","","123,463","","","16.0"],["China","91,736","","","13.8","","","160,668","","","21.5","","","163,069","","","21.2"],["Europe","38,858","","","5.9","","","39,246","","","5.2","","","43,705","","","5.7"],["Japan","36,791","","","5.5","","","38,419","","","5.1","","","36,504","","","4.7"],["Malaysia","26,601","","","4.0","","","50,067","","","6.7","","","49,485","","","6.4"],["Singapore","18,335","","","2.8","","","39,388","","","5.3","","","36,197","","","4.7"],["Rest of World","13,411","","","2.0","","","11,211","","","1.5","","","9,179","","","1.2"],["Total Revenues","$","663,102","","","100.0","%","","$","747,937","","","100.0","%","","$","769,674","","","100.0","%"]]
[[/GREPCENT_TABLE]]

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 2023 compared to fiscal 2022 were primarily attributable to changes in customer demand, shifts in customer regional manufacturing strategies, particularly with our large multinational customers, and product sales mix. More specifically, the increase in revenues for the United States, and decreases in revenues for China and Malaysia, were driven principally by a single large U.S.-based company with operations in these regions that shifted shipments from these regions to the United States. We expect the trade restrictions to continue to drive multinational customers to concentrate operations in regions other than China, impacting our geographical mix. The decrease in revenues for China was also impacted by lowered demand from a large Chinese DRAM integrated device manufacturer and the impact of expanded export license requirements imposed by the U.S. government beginning the fourth quarter of fiscal 2022 for exporting advanced U.S. semiconductor technology to China. These uncertain trade barriers affecting exports and imports between the United States and China contributed to the Company's decision to proceed with the China Transaction.

Cost of Revenues and Gross Margins

Cost of revenues consists primarily of manufacturing materials, compensation and benefits, shipping and handling costs, manufacturing-related overhead (including equipment costs, related occupancy, and computer services), warranty adjustments, inventory adjustments (including write-downs for inventory obsolescence), and amortization of certain intangible assets. Our manufacturing operations rely on a limited number of suppliers to provide key components and materials for our products, some of which are a sole source. 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):

[[GREPCENT_TABLE]]
[["","Fiscal 2023"],["","Probe Cards","","Systems","","Corporate and Other","","Total"],["Gross profit","$","185,392","","","$","84,735","","","$","(11,547)","","","$","258,580"],["Gross margin","37.2","%","","51.3","%","","","","39.0","%"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","Fiscal 2022"],["","Probe Cards","","Systems","","Corporate and Other","","Total"],["Gross profit","$","235,562","","","$","80,937","","","$","(20,490)","","","$","296,009"],["Gross margin","39.8","%","","51.7","%","","","","39.6","%"]]
[[/GREPCENT_TABLE]]

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[[GREPCENT_TABLE]]
[["","Fiscal 2021"],["","Probe Cards","","Systems","","Corporate and Other","","Total"],["Gross profit","$","279,873","","","$","65,834","","","$","(22,940)","","","$","322,767"],["Gross margin","44.2","%","","48.3","%","","","","41.9","%"]]
[[/GREPCENT_TABLE]]

Probe Cards—Gross profit and gross margin in the Probe Cards segment decreased in fiscal 2023 compared to fiscal 2022, primarily due to lower revenues and unfavorable absorption of costs on these lower production volumes, partially offset by lower inventory excess and obsolescence reserves.

Systems—Gross profit and gross margin in the Systems segment remained relatively flat in fiscal 2023 compared to fiscal 2022, despite the increase in revenue primarily as a result of less favorable product mix.

Corporate and Other—Corporate and Other includes unallocated expenses relating to amortization of intangible assets, inventory, fixed asset, and deferred revenue fair value adjustments due to acquisitions, stock-based compensation, and restructuring charges, net, which are not used in evaluating the results of, or in allocating resources to, our reportable segments. The reduction in Corporate and Other in fiscal 2023, compared to fiscal 2022, is primarily due to a reduction in restructuring charges, partially offset by the increase in stock-based compensation expense. In fiscal 2022, there was $11.8 million in restructuring charges arising from a change in estimate of excess and obsolete inventories and a headcount reduction targeted at aligning our cost structure with reduced demand levels within the Probe Cards segment.

Overall—Gross profit and gross margin fluctuate with revenue levels, product mix, selling prices, factory loading and material costs. For fiscal 2023 compared to fiscal 2022, gross profit and gross margins have decreased on lower revenue levels and unfavorable absorption of costs on lower production volumes, partially offset by a reduction of restructuring charges.

Stock-based compensation expense included in cost of revenues for fiscal 2023 and 2022 was $6.9 million and $3.8 million, respectively. The increase of stock-based compensation in fiscal 2023 compared to fiscal 2022 was driven by an increase in weighted average fair value of awards outstanding and the timing of awards.

Research and Development

[[GREPCENT_TABLE]]
[["","Fiscal Year Ended"],["","December 30, 2023","","December 31, 2022","","$ Change","","% Change"],["","(Dollars in thousands)"],["Research and development","$","115,765","","","$","109,222","","","$","6,543","","","6.0","%"],["% of revenues","17.5","%","","14.6","%"],["","Fiscal Year Ended"],["","December 31, 2022","","December 25, 2021","","$ Change","","% Change"],["","(Dollars in thousands)"],["Research and development","$","109,222","","","$","100,937","","","$","8,285","","","8.2","%"],["% of revenues","14.6","%","","13.1","%"]]
[[/GREPCENT_TABLE]]

The increase in research and development expense in fiscal 2023 compared to fiscal 2022 was primarily driven by an increase in headcount designed to support our continued investment in technology leadership. Increased stock-based compensation, depreciation, and general operational costs, also contributed to the increase. These increases were partially offset by lower performance-based compensation and restructuring charges.

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

[[GREPCENT_TABLE]]
[["","","Fiscal 2023 compared to Fiscal 2022"],["Employee compensation costs","","$","3,861"],["Stock-based compensation","","2,435"],["Depreciation","","892"],["General operational costs","","562"],["Restructuring charges","","(1,207)"],["","","$","6,543"]]
[[/GREPCENT_TABLE]]

Stock-based compensation expense included within research and development in fiscal 2023 and 2022 was $10.7 million and $8.2 million, respectively. The increase of stock-based compensation expense in fiscal 2023 compared to fiscal 2022 was driven by an increase in weighted average fair value of awards outstanding and the timing of awards.

Selling, General and Administrative

[[GREPCENT_TABLE]]
[["","Fiscal Year Ended"],["","December 30, 2023","","December 31, 2022","","$ Change","","% Change"],["","(Dollars in thousands)"],["Selling, general and administrative","$","133,012","","","$","131,875","","","$","1,137","","","0.9","%"],["% of revenues","20.1","%","","17.6","%"],["","Fiscal Year Ended"],["","December 31, 2022","","December 25, 2021","","$ Change","","% Change"],["","(Dollars in thousands)"],["Selling, general and administrative","$","131,875","","","$","123,792","","","$","8,083","","","6.5","%"],["% of revenues","17.6","%","","16.1","%"]]
[[/GREPCENT_TABLE]]

The increase in selling, general and administrative expense in fiscal 2023 compared to fiscal 2022 was primarily driven by increased general operating expenses, increased costs from the sale of our FRT business, higher stock-based compensation expense, and higher consulting costs, partially offset by lower employee compensation from decreased headcount and lower performance-based compensation, lower amortization of intangibles, and lower restructuring charges.

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

[[GREPCENT_TABLE]]
[["","","Fiscal 2023 compared to Fiscal 2022"],["General operating expenses","","$","2,428"],["Sale of business","","2,407"],["Stock-based compensation","","1,797"],["Consulting fees","","1,339"],["Restructuring charges","","(1,274)"],["Amortization of intangibles","","(2,396)"],["Employee compensation","","(3,164)"],["","","$","1,137"]]
[[/GREPCENT_TABLE]]

Stock-based compensation expense included within selling, general and administrative in fiscal 2023 and 2022 was $21.1 million and $19.3 million, respectively. The increase of stock-based compensation in fiscal 2023 compared to fiscal 2022 was driven by an increase in weighted average fair value of awards outstanding and the timing of awards.

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Gain on sale of business

Gain on sale of business represents the gain on the sale of our FRT business of $73.0 million during the fourth quarter of fiscal 2023. See Note 5, Divestiture, for additional information.

Interest Income and Interest Expense

Interest income is earned on our cash, cash equivalents, restricted cash and marketable securities. The increase in interest income in fiscal 2023 compared to fiscal 2022 was attributable to an increase in investment yields due to the higher interest rate environment as well as an increased average invested balance.

Interest expense primarily includes interest on our term loan, interest rate swap derivative contract, and term loan issuance costs amortization charges. The decrease in interest expense in fiscal 2023 compared to fiscal 2022 was primarily due to lower outstanding debt balances.

Other income (expense), net

Other income (expense), net, includes the effects of foreign currency and various other gains and losses. The decrease in Other income (expense), net, in fiscal 2023 compared to fiscal 2022 was primarily attributable to an other than temporary impairment on a debt receivable for $1.1 million and a decrease in foreign exchange gains. Foreign exchange gains for fiscal 2023 were $0.6 million.

Provision for income taxes

[[GREPCENT_TABLE]]
[["","Fiscal Year Ended"],["","December 30, 2023","","December 31, 2022","","December 25, 2021"],["","(Dollars in thousands)"],["Provision for income taxes","$","6,880","","","$","7,132","","","$","14,576"],["Effective tax rate","7.7","%","","12.3","%","","14.8","%"]]
[[/GREPCENT_TABLE]]

Provision for income taxes reflects the tax provision on our operations in foreign and U.S. jurisdictions, offset by tax benefits from tax credits and the foreign-derived intangible income (“FDII”) deduction. Our effective tax rate may vary from period to period based on changes in estimated taxable income or loss by jurisdiction, changes to the valuation allowance, changes to U.S. federal, state or foreign tax laws, changes in stock-based compensation expense/benefit, future expansion into areas with varying country, state, and local income tax rates, and deductibility of certain costs and expenses by jurisdiction.

The decrease in our effective tax rate for the fiscal year ended December 30, 2023, when compared to the corresponding period in the prior year, was primarily driven by the sale of our FRT business and the related capital gain exclusion for German tax purposes. This significant benefit was offset by other items impacting the effective tax rate at a different percentage amount than the prior year due to increased income before taxes in fiscal 2023.

The Creating Helpful Incentives to Produce Semiconductors and Science Act of 2022 (the “CHIPS Act”) was signed into law on August 9, 2022. The CHIPS Act provides for various incentives and tax credits, among other items, including the Advanced Manufacturing Investment Credit (“AMIC”), which equals 25% of qualified investments in an advanced manufacturing facility that is placed in service after December 31, 2022. At least a portion of our future capital expenditures and research and development costs will qualify for this credit, which benefits us by allowing us to net the credit received against our costs. The AMIC credit is accounted for outside of ASC 740 as a reduction to the depreciable basis of the assets used in operations and will not have an impact on our effective tax rate.

Beginning in 2022, the U.S. Tax Cuts and Jobs Act of 2017 eliminated the existing option to deduct research and development expenditures and requires taxpayers to amortize such expenditures attributable to domestic and foreign research over five and fifteen years, respectively, pursuant to IRC Section 174. While the capitalization requirement has a negative impact on our cash flows, there are offsetting benefits from the enactment of this provision that we have included in our estimated annual effective tax rate. While it is possible that Congress may defer, modify, or repeal this provision, potentially with retroactive effect, we have no assurance that this provision will be deferred, modified, or repealed. Changes in our tax provisions or an increase in our tax liabilities, whether due to changes in applicable laws and regulations, the interpretation or application thereof, or a final determination of tax audits or litigation or agreements, could have a material adverse effect on our financial position, results of operations and/or cash flows.

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Liquidity and Capital Resources

Capital Resources

Our working capital increased to $442.7 million at December 30, 2023 compared to $324.9 million at December 31, 2022.

Cash and cash equivalents primarily consist of deposits held at banks, money market funds, and U.S. treasuries. Marketable securities primarily consist of corporate bonds, U.S. treasuries and agency securities, and commercial paper. We typically invest in highly-rated securities with low probabilities of default. 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 $328.3 million at December 30, 2023 compared to $238.1 million at December 31, 2022. Based on our historical results of operations, we expect that our cash, cash equivalents, and marketable securities on hand, and the cash we expect to generate from operations, will be sufficient to fund, through at least the next 12 months, our liquidity requirements including those arising from: research and development, capital expenditures, working capital, outstanding commitments, and other liquidity requirements associated with existing operations. However, we cannot be certain that our cash, cash equivalents, and marketable securities on hand, and cash generated from operations, will be available in the future to fund all of our capital and operating requirements. In addition, any future strategic investments and significant acquisitions may require additional cash and capital resources. To the extent necessary, we may consider entering into short and long-term debt obligations, raising cash through a stock issuance, or obtaining new financing facilities, which may not be available on terms favorable to us. If we are unable to obtain sufficient cash or capital to meet our needs on a timely basis and on favorable terms, our business and operations could be materially and adversely affected.

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

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

Cash Flows

[[GREPCENT_TABLE]]
[["","Fiscal Year Ended"],["","December 30, 2023","","December 31, 2022","","December 25, 2021"],["","(Dollars in thousands)"],["Net cash provided by operating activities","$","64,602","","","$","131,786","","","$","139,364"],["Net cash provided by (used in) investing activities","29,049","","","(75,704)","","","(124,741)"],["Net cash used in financing activities","(22,711)","","","(95,932)","","","(47,199)"]]
[[/GREPCENT_TABLE]]

Operating Activities 

Net cash provided by operating activities consists of net income for the period adjusted for certain non-cash items and changes in certain operating assets and liabilities. The $67.2 million decrease in cash provided by operating activities for fiscal 2023, as compared to fiscal 2022, was primarily related to decreased net income, after adjusting for the impact from the $73.0 million gain recognized on the sale of our FRT business, and an investment in working capital of $14.1 million, due primarily to higher accounts receivable and lower deferred revenue that were partially offset by an increase from a deferred grant of $18.0 million and lower inventories. In January 2023, we received $18.0 million in cash from a California Competes Grant awarded from the California Governor’s Office of Business and Economic Development, subject to job creation and other commitments over a 5-year term. See Note 2, Government Assistance, of Notes to Consolidated Financial Statements for additional information.

Net cash provided by operating activities in fiscal 2023 was primarily attributable to net income of $82.4 million and net non-cash items of $14.4 million, which include depreciation, amortization, stock-based compensation, and the provision for excess and obsolete inventories, partially offset by the adjustment for the $73.0 million gain from the sale of our FRT business. Net working capital resulted in an outflow of $32.2 million, primarily related to an increase in accounts receivable of $23.3 million, a decrease in deferred revenues of $10.2 million, an increase in inventories of $9.5 million, and a reduction in operating lease liabilities of $7.6 million, partially offset by an increase from a deferred grant of $18.0 million.

35

Investing Activities

Net cash provided by investing activities in fiscal 2023 primarily related to $101.8 million cash provided by the sale of our FRT business, partially offset by $56.0 million of cash used in the acquisition of property, plant and equipment and $16.7 million used for the purchase of marketable securities, net of maturities.

Financing Activities

Net cash used in financing activities in fiscal 2023 primarily related to $19.8 million used to purchase common stock under our stock repurchase program, $10.7 million used to pay tax withholdings for net share settlements of employee equity awards, and $1.0 million of principal payments made towards the repayment of our term loan, partially offset by $8.8 million of proceeds received from issuances of common stock under our stock incentive plans.

Debt

On June 22, 2020, we entered into an $18.0 million 15-year credit facility loan agreement (the “Building Term Loan”) with MUFG Union Bank, National Association (“Union Bank”). The proceeds of the Building Term Loan were used to purchase a building adjacent to our leased facilities in Livermore, California. On May 19, 2023, we amended the Building Term Loan, replacing the benchmark reference rate LIBOR with SOFR, with no change to the amount or timing of contractual cash flows.

The Building Term Loan bears interest at a rate equal to the applicable SOFR rate, plus 0.1148%, plus 1.75% per annum. Interest payments are payable in monthly installments over a fifteen-year period. The interest rate at December 30, 2023, before consideration of the interest rate swap, was 7.20%.

On March 17, 2020, we entered into an interest rate swap agreement with Union Bank to hedge the interest payments on the Building Term Loan for the notional amount of $18.0 million. As future levels of LIBOR over the life of the loan were uncertain, we entered into this interest-rate swap agreement to hedge the exposure in interest rate risks associated with movement in LIBOR rates. This agreement was amended on May 19, 2023 to replace the benchmark reference rate LIBOR with SOFR to match the Building Term Loan agreement (as amended). After the amendment, the interest rate swap continues to convert our floating-rate interest into a fixed-rate of 2.75%. As of December 30, 2023, the notional amount of the loan that is subject to this interest rate swap was $14.4 million. See Note 10, Fair Value, for additional information.

The obligations under the Building Term Loan are guaranteed by a deed of trust covering certain real property and improvements and certain personal property used in connection therewith. The deed of trust creates a first priority lien or encumbrance on the property with only such exceptions as may be approved by Union Bank in writing.

The Building Term Loan contains covenants customary for financing of this type. As of December 30, 2023, the balance outstanding pursuant to the Building Term Loan was $14.4 million, and we were in compliance with all covenants under the agreement.

Stock Repurchase Programs

On October 26, 2020, our Board of Directors authorized a two-year program to repurchase up to $50 million of outstanding common stock to offset potential dilution from issuances of common stock under our stock-based compensation programs. During fiscal 2021 and 2022, we repurchased and retired 622,400 shares of common stock for $24.0 million and 676,408 shares of common stock for $26.0 million, respectively, utilizing the remaining shares available for repurchase under the program.

On May 20, 2022, our Board of Directors authorized a two-year program to repurchase up to $75 million of outstanding common stock to offset potential dilution from issuance of common stock under our stock-based compensation programs. During fiscal 2022 and 2023, we repurchased and retired 1,700,893 shares of common stock for $56.4 million and 504,352 shares of common stock for $18.6 million, respectively, utilizing the remaining shares available for repurchase under the program.

On October 30, 2023, our Board of Directors authorized an additional program to repurchase up to $75 million of outstanding common stock, also with the primary purpose of offsetting potential dilution from issuance of common stock under our stock-based compensation programs. This share repurchase program will expire on October 30, 2025. During fiscal 2023, we repurchased and retired 32,020 shares of common stock for $1.2 million and as of December 30, 2023 $73.8 million remained available for future repurchases.

36

Contractual Obligations and Commitments

The following table summarizes our significant contractual commitments to make future payments in cash under contractual obligations as of December 30, 2023 (in thousands):

[[GREPCENT_TABLE]]
[["","Payments Due In Fiscal Year"],["","2024","","2025","","2026","","2027","","2028","","2029 and thereafter","","Total"],["Operating leases","$","9,337","","","$","9,215","","","$","7,586","","","$","7,154","","","$","3,870","","","$","1,432","","","$","38,594"],["Term loan - principal payments","1,080","","","1,111","","","1,142","","","1,175","","","1,208","","","8,732","","","14,448"],["Term loan - interest payments(1)","1,025","","","937","","","857","","","773","","","688","","","2,163","","","6,443"],["Total","$","11,442","","","$","11,263","","","$","9,585","","","$","9,102","","","$","5,766","","","$","12,327","","","$","59,485"]]
[[/GREPCENT_TABLE]]

(1) Represents our minimum interest payment commitments at 7.20% per annum, excluding the interest rate swap described in Debt, above.

The table above excludes our gross liability for unrecognized tax benefits and our deferred grant. The gross liability for unrecognized tax benefits was $45.6 million as of December 30, 2023. The timing of any payments which could result from these unrecognized tax benefits will depend upon a number of factors and, accordingly, the timing of payment cannot be estimated. The deferred grant was $18.0 million as of December 30, 2023. The timing of any potential repayments is dependent upon a number of factors, including the number of employees and capital investments. Accordingly, the timing of any repayment cannot be estimated.

Indemnification Arrangements

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 damage or other indemnities in favor of our lessors in connection with facility leasehold liabilities that we may cause. In addition, we have entered into indemnification agreements with our directors and certain of our officers, and our bylaws contain indemnification obligations in favor of our directors, officers and agents. 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 30, 2023 or December 31, 2022.

New Accounting Pronouncements

See Note 18, New Accounting Pronouncements, of Notes to Consolidated Financial Statements.