# FORMFACTOR INC (FORM) FY 2024 MD&A

Verbatim Item 7 Management's Discussion and Analysis from FORMFACTOR INC's 10-K for fiscal year 2024.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1039399/000103939925000023/form-20241228.htm
Accession: 0001039399-25-000023
Filing date: 2025-02-21
Report date: 2024-12-28
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/fy2023/ (FY 2023)
Next year: /company/FORM/mda/fy2025/ (FY 2025)

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 electrical and optical 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, thermal systems, and cryogenic systems to both semiconductor companies and scientific institutions. Our products provide electrical and optical information from a variety of semiconductor and electro-optical devices and integrated circuits from 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, thermal systems and cryogenic systems are included in the Systems segment.

Our fiscal 2024 financial results reflected our strengthening momentum driven by increasing demand for high bandwidth memory (“HBM”) chips utilized in generative artificial intelligence applications. On February 26, 2024, we completed the sale of our China operations, resulting in net consideration received of $21.4 million and a pre-tax gain of $20.3 million. With this transaction, we established an exclusive distribution and partnership agreement to continue sales and support of our products in the region (the “China Transaction”).

We generated net income of $69.6 million in fiscal 2024 compared to net income of $82.4 million in fiscal 2023 and net income of $50.7 million in fiscal 2022. The decrease in net income in fiscal 2024 compared to fiscal 2023 was primarily due to a reduced gain on sale of business with the fiscal 2024 gain from the China Transaction being less than the fiscal 2023 gain from the sale of our FRT business further described below. Excluding the impact of gains in each period, our financial performance was driven by the strengthening of certain areas of the semiconductor industry, which increased demand in some markets within our Probe Cards segment, particularly with demand for HBM chips utilized in generative artificial intelligence applications and the ramp of new mobile application processor designs. While we experienced growth in total revenues year over year, the Systems segment was negatively impacted due to the absence of metrology system sales as a result of the sale of our FRT Metrology business in the fourth quarter of fiscal 2023.

The increase in net income in fiscal 2023 compared to fiscal 2022 was primarily due to a gain recognized from the sale of our FRT business of $73.0 million. 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 from the lower operating levels. Systems segment showed strength in fiscal 2023 with revenue increasing $8.7 million, or about 5.6%, compared to fiscal 2022, driven by our customers' spending on research and development of next-generation innovation.

Recent Development

In February 2025, we, together with MBK Partners, a private equity firm, acquired FICT Limited (“FICT”) from Advantage Partners Inc. In connection with the acquisition, we obtained a 20% equity interest in FICT, in exchange for funding $59.6 million of the purchase price. Headquartered in Nagano, Japan, FICT is a provider of semiconductor test and high-performance computing industries with complex multi-layer organic substrates, printed circuit boards, and related leading-edge technologies and services. Under the equity method, upon closing this investment, the investment will be included as a separate item in our Consolidated Balance Sheets and we will record our proportionate share of FICT’s net income or loss as a separate item in our Consolidated Statements of Operations.

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 28, 2024, December 30, 2023 and December 31, 2022 included 52 weeks, 52 weeks, and 53 weeks (with 14 weeks in the fourth quarter), respectively.

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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 U.S. 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

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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 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 28, 2024 compared to the year ended December 30, 2023. For a discussion of the year ended December 30, 2023 compared to the year ended December 31, 2022, 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 30, 2023.

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

[[GREPCENT_TABLE]]
[["","Fiscal 2024","","Fiscal 2023","","Fiscal 2022"],["Revenues","100.0","%","","100.0","%","","100.0","%"],["Cost of revenues","59.7","","","61.0","","","60.4"],["Gross profit","40.3","","","39.0","","","39.6"],["Operating expenses:"],["Research and development","16.0","","","17.5","","","14.6"],["Selling, general and administrative","18.5","","","20.1","","","17.6"],["Total operating expenses","34.5","","","37.6","","","32.2"],["Gain on sale of business","2.7","","","11.0","","","\u2014"],["Operating income","8.5","","","12.4","","","7.4"],["Interest income","1.8","","","1.1","","","0.3"],["Interest expense","\u2014","","","(0.1)","","","(0.1)"],["Other income (expense), net","0.1","","\u2014","","0.2"],["Income before income taxes","10.4","","","13.4","","","7.8"],["Provision for income taxes","1.3","","","1.0","","","1.0"],["Net income","9.1","%","","12.4","%","","6.8","%"]]
[[/GREPCENT_TABLE]]

Revenues by Segment

[[GREPCENT_TABLE]]
[["","Fiscal 2024","","Fiscal 2023","","Fiscal 2022"],["","(In thousands)"],["Probe Cards","$","625,960","","","$","497,903","","","$","591,422"],["Systems(1)","137,639","","","165,199","","","156,515"],["Total","$","763,599","","","$","663,102","","","$","747,937"]]
[[/GREPCENT_TABLE]]

(1) During the fourth quarter of fiscal 2023, we completed the sale of our FRT business. As a result, we generated no metrology systems revenue during fiscal 2024, compared to $21.2 million and $29.0 million, during fiscal 2023 and fiscal 2022, respectively.

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Revenues by Market

[[GREPCENT_TABLE]]
[["","Fiscal","","% of","","Fiscal","","% of","","Change"],["","2024","","Revenues","","2023","","Revenues","","$","","%"],["","(In thousands, except percentages)"],["Probe Cards Markets:"],["Foundry & Logic","$","381,182","","","49.9","%","","$","363,539","","","54.8","%","","$","17,643","","","4.9","%"],["DRAM","227,422","","","29.8","","","113,779","","","17.2","","","113,643","","","99.9"],["Flash","17,356","","","2.3","","","20,585","","","3.1","","","(3,229)","","","(15.7)"],["Systems Market:"],["Systems(1)","137,639","","","18.0","","","165,199","","","24.9","","","(27,560)","","","(16.7)"],["Total revenues","$","763,599","","","100.0","%","","$","663,102","","","100.0","%","","$","100,497","","","15.2","%"]]
[[/GREPCENT_TABLE]]

[[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]]

(1) During the fourth quarter of fiscal 2023, we completed the sale of our FRT business. As a result, we generated no metrology systems revenue during fiscal 2024, compared to $21.2 million and $29.0 million, during fiscal 2023 and fiscal 2022, respectively.

Foundry & Logic — The increase in Foundry & Logic product revenue in fiscal 2024 compared to fiscal 2023 was driven by the ramp of new mobile application processor designs.

DRAM — The increase in DRAM product revenues in fiscal 2024 compared to fiscal 2023 was driven by increased demand for HBM designs utilized in generative artificial intelligence applications as well as increased demand for other non-HBM DRAM designs, particularly DDR5.

Flash — The decrease in Flash product revenue in fiscal 2024 compared to fiscal 2023 was driven by lower customer production activity and demand for our products.

Systems — The decrease in Systems product revenue in fiscal 2024 compared to fiscal 2023 was primarily driven by the absence of metrology systems revenue due to the sale of our FRT Metrology business during the fourth quarter of fiscal 2023. Excluding the impact of the sale of our FRT Metrology business, Systems revenue decreased by $6.3 million, or 4.4%, primarily due to a decline in sales of thermal systems and probe stations.

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Revenues by Geographic Region

[[GREPCENT_TABLE]]
[["","Fiscal 2024","","% of Revenues","","Fiscal 2023","","% of Revenues","","Fiscal 2022","","% of Revenues"],["","(In thousands, except percentages)"],["South Korea","$","184,528","","","24.2","%","","$","117,747","","","17.8","%","","$","111,419","","","14.9","%"],["United States","183,716","","","24.1","","","171,781","","","25.9","","","127,730","","","17.1"],["Taiwan","173,515","","","22.7","","","147,842","","","22.3","","","169,789","","","22.7"],["China","102,982","","","13.5","","","91,736","","","13.8","","","160,668","","","21.5"],["Europe","34,803","","","4.6","","","38,858","","","5.9","","","39,246","","","5.2"],["Japan","33,946","","","4.4","","","36,791","","","5.5","","","38,419","","","5.1"],["Singapore","20,186","","","2.6","","","18,335","","","2.8","","","39,388","","","5.3"],["Malaysia","18,240","","","2.4","","","26,601","","","4.0","","","50,067","","","6.7"],["Rest of World","11,683","","","1.5","","","13,411","","","2.0","","","11,211","","","1.5"],["Total revenues","$","763,599","","","100.0","%","","$","663,102","","","100.0","%","","$","747,937","","","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 United States.

Changes in revenue by geographic region in fiscal 2024 compared to fiscal 2023 were primarily attributable to changes in customer demand, shifts in customer regional manufacturing strategies, particularly with our large multinational customers, product sales mix, and impacts from trade restrictions. Specifically, the changes in revenue by geographic region was attributable to the following:

•Increased demand for our DRAM probe card products, including those for HBM, contributed to the increase in revenue for South Korea in fiscal 2024 compared to fiscal 2023.

•A single large U.S.-based company shifted shipments from Malaysia and China to the United States that contributed to the fluctuations in revenue for those regions in fiscal 2024 compared to fiscal 2023.

•Increased demand from a large Chinese DRAM integrated device manufacturer contributed to the increase in revenue for China in fiscal 2024 compared to fiscal 2023.

•Expanded export license requirements for the export of advanced U.S. semiconductor technology to China that was imposed by the U.S. government beginning the fourth quarter of fiscal 2022 have caused volatility in the Chinese region over the last two fiscal years, negatively impacting our revenue compared to fiscal 2022. These requirements have restricted our ability to ship products to the region, decreasing demand from domestic China customers. Additionally, these requirements have caused, and continue to drive, some of our multinational customers to concentrate operations in regions other than China, lowering overall demand for those customers within the region. We anticipate a further reduction in demand in fiscal 2025 due to additional tightening of export controls, which will limit our ability to ship advanced probe cards in the region.

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 cost, 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.

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

[[GREPCENT_TABLE]]
[["","Fiscal 2024"],["","Probe Cards","","Systems","","Corporate and Other","","Total"],["Gross profit","$","259,007","","","$","59,511","","","$","(10,595)","","","$","307,923"],["Gross margin","41.4","%","","43.2","%","","","","40.3","%"]]
[[/GREPCENT_TABLE]]

[[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]]

Probe Cards—Gross profit and gross margin in the Probe Cards segment increased in fiscal 2024 compared to fiscal 2023, primarily due to greater revenues and more favorable absorption of costs on higher production volumes. These increases were partially offset by an unfavorable product mix with a higher concentration of lower-margin DRAM product sales and a lower concentration of higher-margin Foundry & Logic product sales. For fiscal 2024 compared to fiscal 2023, DRAM revenue was up from 22.9% of Probe Card sales to 36.3% of Probe Card sales, and Foundry & Logic revenue was down from 73.0% of Probe Card sales to 60.9% of Probe Card sales. In general, our DRAM products have lower margins than our Foundry & Logic products.

Systems—Gross profit and gross margin in the Systems segment decreased fiscal 2024 compared to fiscal 2023, primarily as a result of lower revenues, less favorable absorption of costs on lower production volumes, and a less favorable product mix, in part related to the divestiture of the FRT Metrology business, which was completed during the fourth quarter of fiscal 2023.

Corporate and Other—Corporate and Other includes unallocated expenses relating to stock-based compensation expense, amortization of intangible assets, inventory and fixed asset fair value adjustments due to acquisitions, and restructuring charges, net, which are not used in evaluating the results of, or in allocating resources to, our reportable segments. The Corporate and Other gross loss decreased in fiscal 2024 compared to fiscal 2023, primarily due to the absence of amortization expense associated with our FRT Metrology business, which was sold during the fourth quarter of fiscal 2023.

Overall—Gross profit and gross margin fluctuate with revenue levels, product mix, selling prices, factory loading and material costs. For fiscal 2024 compared to fiscal 2023, gross profit and gross margins have increased primarily as a result of more favorable absorption of costs on higher revenues, partially offset by an unfavorable product mix, as described above.

Stock-based compensation expense included in cost of revenues for fiscal 2024 and 2023 was $7.7 million and $6.9 million, respectively. The increase of stock-based compensation in fiscal 2024 compared to fiscal 2023 was driven by an increase in weighted average fair value of awards outstanding.

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Research and Development

[[GREPCENT_TABLE]]
[["","Fiscal Year Ended"],["","December 28, 2024","","December 30, 2023","","$ Change","","% Change"],["","(Dollars in thousands)"],["Research and development","$","121,938","","","$","115,765","","","$","6,173","","","5.3","%"],["% of revenues","16.0","%","","17.5","%"],["","Fiscal Year Ended"],["","December 30, 2023","","December 31, 2022","","$ Change","","% Change"],["","(Dollars in thousands)"],["Research and development","$","115,765","","","$","109,222","","","$","6,543","","","6.0","%"],["% of revenues","17.5","%","","14.6","%"]]
[[/GREPCENT_TABLE]]

The increase in research and development expense in fiscal 2024 compared to fiscal 2023 was primarily driven by an increase in employee compensation costs from higher performance-based compensation and general operational costs.

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

[[GREPCENT_TABLE]]
[["","","Fiscal 2024 compared to Fiscal 2023"],["Employee compensation costs","","$","3,956"],["General operational costs","","2,169"],["Depreciation","","(380)"],["Project material costs","","359"],["Stock-based compensation expense","","69"],["","","$","6,173"]]
[[/GREPCENT_TABLE]]

Stock-based compensation expense included within research and development in fiscal 2024 and 2023 was relatively flat at $10.7 million in both periods.

Selling, General and Administrative

[[GREPCENT_TABLE]]
[["","Fiscal Year Ended"],["","December 28, 2024","","December 30, 2023","","$ Change","","% Change"],["","(Dollars in thousands)"],["Selling, general and administrative","$","141,786","","","$","133,012","","","$","8,774","","","6.6","%"],["% of revenues","18.5","%","","20.1","%"],["","Fiscal Year Ended"],["","December 30, 2023","","December 31, 2022","","$ Change","","% Change"],["","(Dollars in thousands)"],["Selling, general and administrative","$","133,012","","","$","131,875","","","$","1,137","","","0.9","%"],["% of revenues","20.1","%","","17.6","%"]]
[[/GREPCENT_TABLE]]

The increase in selling, general and administrative expense in fiscal 2024 compared to fiscal 2023 was primarily driven by increased employee compensation from higher performance-based compensation and increased commissions expense from increased revenues, partially offset by lower amortization of intangibles.

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

[[GREPCENT_TABLE]]
[["","","Fiscal 2024 compared to Fiscal 2023"],["Employee compensation costs","","$","8,303"],["Amortization of intangibles","","(3,005)"],["Commission expenses","","2,431"],["Consulting fees","","753"],["Stock-based compensation expense","","194"],["General operating expenses","","98"],["","","$","8,774"]]
[[/GREPCENT_TABLE]]

Stock-based compensation expense included within selling, general and administrative in fiscal 2024 and 2023 was $21.3 million and $21.1 million, respectively.

Gain on sale of business

Gain on sale of business represents the gain on the sale of our China operations for $20.3 million during fiscal 2024 and the gain on the sale of our FRT business for $73.3 million, of which $73.0 million was recognized during fiscal 2023 and $0.3 million was recognized during fiscal 2024. See Note 5, Divestitures, for additional information.

Interest Income and Interest Expense

[[GREPCENT_TABLE]]
[["","","Fiscal Year Ended"],["","","December 28, 2024","","December 30, 2023"],["","","(Dollars in thousands)"],["Interest Income","","$","14,111","","","$","7,217"],["Weighted average balance of cash and investments","","$","353,191","","","$","248,728"],["Weighted average yield on cash and investments","","4.56","%","","3.44","%"],["Interest Expense","","$","418","","","$","421"],["Average debt outstanding","","$","13,785","","","$","14,848"],["Weighted average interest rate on debt","","2.75","%","","2.75","%"]]
[[/GREPCENT_TABLE]]

Interest income is earned on our cash, cash equivalents, restricted cash and marketable securities. The increase in interest income in fiscal 2024 compared to fiscal 2023 was attributable to higher invested balances and higher weighted average yield on cash and investments.

Interest expense primarily includes interest on our term loan, interest rate swap derivative contract, and term loan issuance costs amortization charges. The interest expense for fiscal 2024 compared to fiscal 2023 was relatively flat. This stability is due to our interest rate swap, which converted the interest rate on our long-term debt to a fixed rate.

Other income (expense), net

Other income (expense), net, includes the effects of foreign currency and various other gains and losses. The increase in Other income (expense), net, in fiscal 2024 compared to fiscal 2023 was primarily attributable to an other than temporary impairment on a debt receivable for $1.1 million in fiscal 2023 that did not recur in fiscal 2024 and an increase in foreign exchange gains. Foreign exchange gains for fiscal 2024 and fiscal 2023 were $1.0 million and $0.6 million, respectively.

Provision for income taxes

[[GREPCENT_TABLE]]
[["","Fiscal Year Ended"],["","December 28, 2024","","December 30, 2023","","December 31, 2022"],["","(Dollars in thousands)"],["Provision for income taxes","$","9,798","","","$","6,880","","","$","7,132"],["Effective tax rate","12.3","%","","7.7","%","","12.3","%"]]
[[/GREPCENT_TABLE]]

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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 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 increase in our effective tax rate for fiscal 2024, 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 that impacted fiscal year ended December 30, 2023, that did not repeat in the current year.

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 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.

Liquidity and Capital Resources

Capital Resources

Our working capital increased to $473.8 million at December 28, 2024 compared to $442.7 million at December 30, 2023.

Cash and cash equivalents primarily consist of deposits held at banks and money market funds. 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 $360.0 million at December 28, 2024 compared to $328.3 million at December 30, 2023. 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.

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Cash Flows

[[GREPCENT_TABLE]]
[["","Fiscal Year Ended"],["","December 28, 2024","","December 30, 2023","","December 31, 2022"],["","(Dollars in thousands)"],["Net cash provided by operating activities","$","117,534","","","$","64,602","","","$","131,786"],["Net cash provided by (used in) investing activities","(33,480)","","","29,049","","","(75,704)"],["Net cash used in financing activities","(64,612)","","","(22,711)","","","(95,932)"]]
[[/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. Net cash provided by operating activities in fiscal 2024 was primarily attributable to net income of $69.6 million and net non-cash items of $56.6 million, partially offset by the increase in net working capital of $8.7 million. The cash used in net working capital is related to an increase of inventories of $8.3 million, a decrease in accounts payable of $8.2 million, and decreased operating lease liabilities of $7.3 million, partially offset by an increase of other liabilities of $9.8 million, accrued liabilities of $3.7 million, and deferred revenue of $2.7 million. The non-cash expenses consisted of depreciation, amortization, stock-based compensation, and the provision for excess and obsolete inventories, partially offset by the $20.6 million gain on sale of business and deferred income tax benefits.

Investing Activities

Net cash used in investing activities in fiscal 2024 primarily related to $38.4 million in property, plant and equipment purchases and $15.1 million used for the purchase of marketable securities, net of maturities, partially offset by the $21.6 million cash provided by the sale of businesses.

Financing Activities

Net cash used in financing activities in fiscal 2024 primarily related to $53.3 million used to purchase common stock under our stock repurchase program, $20.0 million used to pay tax withholdings for net share settlements of employee equity awards, and $1.1 million of principal payments made towards the repayment of our term loan, partially offset by $9.7 million of proceeds received from issuances of common stock under our employee stock purchase plan.

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 0.1145%, plus 1.75% per annum. Interest payments are payable in monthly installments over a fifteen-year period. The interest rate at December 28, 2024, before consideration of the interest rate swap, was 6.42%.

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 28, 2024, the notional amount of the loan that is subject to this interest rate swap was $13.4 million. See Note 9, 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 28, 2024, the balance outstanding pursuant to the Building Term Loan was $13.4 million, and we were in compliance with all covenants under the agreement.

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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 2022, we repurchased and retired 676,408 shares of common stock for $26.0 million, 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 and 2024, we repurchased and retired 32,020 shares of common stock for $1.2 million and 1,309,635 shares of common stock for $53.3 million, respectively, and as of December 28, 2024, $20.5 million remained available for future repurchases.

Contractual Obligations and Commitments

The following table summarizes our significant contractual commitments to make future payments in cash under contractual obligations as of December 28, 2024 (in thousands):

[[GREPCENT_TABLE]]
[["","Payments Due In Fiscal Year"],["","2025","","2026","","2027","","2028","","2029","","2030 and thereafter","","Total"],["Operating leases","$","9,080","","","$","7,610","","","$","7,181","","","$","3,872","","","$","232","","","$","1,118","","","$","29,093"],["Term loan - principal payments","1,111","","","1,142","","","1,175","","","1,208","","","1,242","","","7,490","","","13,368"],["Term loan - interest payments(1)","835","","","764","","","688","","","613","","","534","","","1,393","","","4,827"],["Total","$","11,026","","","$","9,516","","","$","9,044","","","$","5,693","","","$","2,008","","","$","10,001","","","$","47,288"]]
[[/GREPCENT_TABLE]]

(1) Represents our minimum interest payment commitments at 6.42% 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 $48.4 million as of December 28, 2024. 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 28, 2024, and consists of cash received from a California Competes Grant awarded from the California Governor's Office of Business and Economic Development. The timing of any potential repayments is dependent upon a number of factors, including the number of employees and capital investments within California over the 5-year term. Accordingly, the timing of any repayment cannot be estimated.

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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 28, 2024 or December 30, 2023.

New Accounting Pronouncements

See Note 17, Recent Accounting Pronouncements, of Notes to Consolidated Financial Statements.