What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2024-05-07 compared with 2023-11-07 · 121 added, 178 removed, 164 unchanged (65% of the section changed)

8 unchanged sentences

We have no obligation to update any of these statements.

These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to differ materially from those expressed or implied by these statements, including risks related to general market trends, the benefits of acquisitions and investments, our supply chain, uncertainties related to global, regional or national public health-related crises and the impact of our responses to them, the interpretation and impacts of changes in export controls and other trade barriers, military conflicts, political volatility and similar factors, our ability to execute our business strategy and other risks discussed in the section titled “Risk Factors” and elsewhere in our Annual Report on Form 10-K for the year ended December 31, 2022 and in this Quarterly Report on Form 10-Q.

December 30, 2023 and in this Quarterly Report on Form 10-Q.

You should carefully consider the numerous risks and uncertainties described under these sections.

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and its subsidiaries.

FormFactor, Inc., headquartered in Livermore, California, is a leading provider of essential test and measurement technologies along the full semiconductor product lifecycle - from metrology and inspection, 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 and physical information from a variety of semiconductor and electro-optical devices and integrated circuits from early research, through development, to high-volume production.

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, 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 and advancing yield knowledge.

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.

On September 18, 2023, we announced entry into a definitive agreement to sell our FRT Metrology (“FRT”) business for $100 million in cash, subject to customary purchase price adjustments.

See Note 4, Assets Held-For-Sale Divestiture , for further details of the divestiture.

FRT is a leading supplier of high-precision metrology solutions for the Advanced Packaging and Silicon Carbide markets, and produces metrology systems that are included in the Systems segment results.

On November 1, 2023, we closed on the sale of FRT to Camtek and received cash proceeds of $103.8 million after preliminary adjustments with respect to cash, indebtedness, and working capital.

We generated net income of $6.5 million in the first nine months of fiscal 2023 as compared to $64.5 million in the first nine months of fiscal 2022.

The decrease in net income was primarily due to a decline in revenues and the associated decline in gross margins and higher operating expenses.

The first half of fiscal 2022 was strong, realizing $60.1 million of the $64.5 million net income for the first nine months of fiscal 2022, followed by the semiconductor industry weakness that began in the third quarter of fiscal 2022 and has continued into the nine months ended September 30, 2023.

Significant Accounting Policies and the Use of Estimates

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.

We generated net income of $21.8 million in the first three months of fiscal 2024 as compared to $1.3 million in the first three months of fiscal 2023.

On February 26, 2024, we completed the sale of our China operations and established an exclusive distribution and partnership agreement to continue sales and support of our products in the region (the “China Transaction”).

As a result of the China Transaction, we received estimated net consideration of $21.1 million and the China Transaction resulted in an estimated gain of $20.0 million, subject to customary adjustments for changes in net working capital and similar items.

The increase in net income in the first three months of fiscal 2024 compared to the first three months of fiscal 2023 was primarily due to the $20.0 million estimated gain recognized from the China Transaction.

Apart from this gain, the semiconductor industry weakness that began in the third quarter of fiscal 2022 continued into fiscal 2024, impacting most markets within our Probe Cards segment.

Furthermore, due to the sale of our FRT Metrology business in the fourth quarter of fiscal 2023, our Systems segment revenues were impacted due to the decreased metrology system sales.

Critical Accounting Estimates

Management’s Discussion and Analysis and Note 2, Summary of Significant Accounting Policies , to the Consolidated Financial Statements in our 2023 Annual Report on Form 10-K describe the significant accounting estimates and significant accounting policies used in preparation of the Consolidated Financial Statements.

Actual results in these areas could differ from management’s estimates.

During the nine months ended September 30, 2023, there were no significant changes in our

significant accounting policies or estimates from those reported in our Annual Report on Form 10-K for the year ended December 31, 2022, which was filed with the Securities and Exchange Commission on February 24, 2023, except for:

Government Assistance

In January 2023, we received $18.0 million in cash from a California Competes Grant (the “Grant”) awarded from the California Governor’s Office of Business and Economic Development.

The Grant requires FormFactor to create and maintain full-time jobs and make significant infrastructure investments within California over a 5-year term.

If we do not meet the requirements of the Grant, we will be required to repay all or a portion of the Grant.

The Grant is included in our Condensed Consolidated Balance Sheets within Deferred grant and we have elected to recognize the Grant when earned as an offset to Cost of revenues and Operating expenses within our Condensed Consolidated Statements of Income.

We have presented the proceeds from the Grant as cash provided by operating activities within our Condensed Consolidated Statements of Cash Flows as the Grant is to offset operations.

During the three months ended March 30, 2024, there were no significant changes in our significant accounting policies or estimates from those reported in our Annual Report on Form 10-K for the year ended December 30, 2023.

Results of Operations

The following table sets forth our operating results as a percentage of revenues for the periods indicated:

Three Months Ended Nine Months Ended

September 30,

2023 September 24,

2022 September 30,

2023 September 24,

Three Months Ended

2024 April 1,

Revenues 100.0 % 100.0 %

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Total operating expenses 36.6 36.4

Gain on sale of business 12.0 —

Operating income 12.6 0.1

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Revenues by Segment and Market

Three Months Ended Nine Months Ended

September 30,

2023 September 24,

2022 September 30,

2023 September 24,

Three Months Ended

2024 April 1,

(In thousands)

Probe Cards $ 136,701 $ 127,328

Systems 43,236 41,504 123,969 114,894

32,024 40,120

$ 168,725 $ 167,448

(1) During the fourth quarter of fiscal 2023, we completed the sale of our FRT Metrology business.

As a result, metrology systems revenue will not recur in future periods.

We generated no metrology systems revenue during the three months ended March 30, 2024, compared to $4.1 million during the three months ended April 1, 2023.

Three Months Ended

September 30,

2023 % of Revenues September 24,

2022 % of Revenues $ Change % Change

(Dollars in thousands)

Probe Cards Markets:

Foundry & Logic $ 96,366 56.2 % $ 90,605 50.1 % $ 5,761 6.4 %

DRAM 27,478 16.0 34,922 19.3 (7,444) (21.3)

Flash 4,495 2.6 13,838 7.7 (9,343) (67.5)

Systems Market:

Systems 43,236 25.2 41,504 22.9 1,732 4.2

Total revenues $ 171,575 100.0 % $ 180,869 100.0 % $ (9,294) (5.1) %

Nine Months Ended

September 30,

2023 % of Revenues September 24,

2024 % of Revenues April 1,

2023 % of Revenues $ Change % Change

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Systems Market:

Systems 123,969 25.0 114,894 19.7 9,075 7.9

32,024 19.0 40,120 24.0 (8,096) (20.2)

Total revenues $ 168,725 100.0 % $ 167,448 100.0 % $ 1,277 0.8 %

Foundry & Logic — The decrease in Foundry & Logic product revenue for the nine months ended September 30, 2023, compared to the nine months ended September 24, 2022, was driven by the weaker demand in the semiconductor industry, especially in the personal computer and mobile sectors, that began in the third quarter of fiscal 2022, has continued into the nine months ended September 30, 2023 and has resulted in decreased unit sales across the majority of our major customers.

The increase in Foundry & Logic product revenue for the three months ended September 30, 2023, compared to the three months ended September 24, 2022, was the result of an increase in unit sales driven by stronger demand in the personal computer sector.

DRAM — The decrease in DRAM product revenue for the three and nine months ended September 30, 2023, compared to the three and nine months ended September 24, 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.

These declines for the three and nine months ended September 30, 2023 were partially offset due to increased demand for high bandwidth memory (“HBM”) chips utilized in artificial intelligence.

Flash — The decrease in Flash product revenue for the three and nine months ended September 30, 2023, compared to the three and nine months ended September 24, 2022, was driven by lower customer production activity and demand for our products in light of worldwide excess supply, a result of the semiconductor industry's overall demand weakening and Flash market weakness.

Systems — The increase in Systems market revenue for the nine months ended September 30, 2023, compared to the nine months ended September 24, 2022, was driven by increased sales of probe stations, thermal systems, and cryogenic systems, partially offset by decreased sales of our metrology systems.

The increase in Systems market revenue for the three months ended September 30, 2023, compared to the three months ended September 24, 2022, was driven by increased sales of metrology and thermal systems, partially offset by decreased sales of cryogenic systems.

(1) During the fourth quarter of fiscal 2023, we completed the sale of our FRT Metrology business.

As a result, metrology systems revenue will not recur in future periods.

We generated no metrology systems revenue during the three months ended March 30, 2024, compared to $4.1 million during the three months ended April 1, 2023.

Foundry & Logic — The decrease in Foundry & Logic product revenue for the three months ended March 30, 2024, compared to the three months ended April 1, 2023, was driven by continued weakness in demand in the semiconductor industry,

especially in the personal computer and mobile sectors, that has resulted in decreased unit sales across the majority of our major customers.

DRAM — The increase in DRAM product revenue for the three months ended March 30, 2024, compared to the three months ended April 1, 2023, was driven by increased demand for high bandwidth memory (“HBM”) chips utilized in generative artificial intelligence applications.

Flash — The decrease in Flash product revenue for the three months ended March 30, 2024, compared to the three months ended April 1, 2023, was driven by lower customer production activity and demand for our products.

Systems — The decrease in Systems market revenue for the three months ended March 30, 2024, compared to the three months ended April 1, 2023, was driven primarily by the absence of sales of our metrology systems from our FRT Metrology business, which was sold in the fourth quarter of fiscal 2023, and decreased sales of cryogenic systems.

The decrease in Systems revenue from sources not associated with metrology systems was $4.0 million, or 11.0%, for the three months ended March 30, 2024, driven primarily by timing of demand for our cryogenic systems.

Revenues by Geographic Region

Three Months Ended Nine Months Ended

September 30,

2023 % of Revenues September 24,

2022 % of Revenues September 30,

Revenue September 24,

Three Months Ended

2024 % of Revenues April 1,

2023 % of Revenues

(Dollars in thousands)

South Korea $ 50,717 30.1 % $ 20,775 12.4 %

United States 45,766 27.1 37,731 22.5

Taiwan 29,877 17.7 40,329 24.1

South Korea 35,075 20.4 28,937 16.0 83,713 16.9 85,193 14.6

China 15,613 9.3 27,099 16.2

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Japan 8,542 5.1 10,977 6.6

Malaysia 5,964 3.5 6,509 3.6 23,911 4.8 44,952 7.7

Singapore 4,758 2.8 5,340 3.2

Malaysia 1,863 1.1 11,270 6.7

Rest of the world 2,740 1.6 4,501 2.7

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subsidiary and requests the products to be shipped to an address in South Korea, this sale will be reflected in the revenue for South Korea rather than the U.S.

Changes in revenue by geographic region for the three and nine months ended September 30, 2023, compared to the three and nine months ended September 24, 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.

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 United States government beginning the fourth quarter of fiscal 2022 for exporting advanced U.S.

Changes in revenue by geographic region for the three months ended March 30, 2024, compared to the three months ended April 1, 2023, were primarily attributable to changes in customer demand, shifts in customer regional manufacturing strategies, particularly with our large multinational customers, and product sales mix.

Specifically, the changes in revenue by geographic region was attributable to the following:

• The increase in revenue for South Korea was driven principally by increased demand for our DRAM products, including HBM.

• The decrease in revenues for Taiwan was driven principally by decreased demand for our Foundry & Logic products.

• 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.

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.

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 costs, 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.

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Three Months Ended

September 30,

2023 September 24,

2022 $ Change % Change

Gross profit $ 69,285 $ 62,213 $ 7,072 11.4 %

Gross margin 40.4 % 34.4 %

Nine Months Ended

September 30,

2023 September 24,

2024 April 1,

2023 $ Change % Change

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Three Months Ended

September 30, 2023 September 24, 2022

Probe Cards Systems Corporate and Other Total Probe Cards Systems Corporate and Other Total

Gross profit $ 49,383 $ 22,396 $ (2,494) $ 69,285 $ 48,252 $ 22,284 $ (8,323) $ 62,213

Gross margin 38.5 % 51.8 % 40.4 % 34.6 % 53.7 % 34.4 %

Nine Months Ended

September 30, 2023 September 24, 2022

March 30, 2024 April 1, 2023

Probe Cards Systems Corporate and Other Total Probe Cards Systems Corporate and Other Total

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Gross margin 37.2 % 45.3 % 37.2 % 34.3 % 51.7 % 36.5 %

Probe Cards — For the three months ended September 30, 2023, gross margins increased compared to the three months ended September 24, 2022, primarily due to a more favorable product mix and lower inventory excess and obsolescence reserves, partially offset by greater warranty reserves.

For the nine months ended September 30, 2023, gross margins decreased compared to the nine months ended September 24, 2022, primarily due to lower revenues and unfavorable absorption of costs on these lower production volumes.

Systems — For the three and nine months ended September 30, 2023, gross margins decreased compared to the three and nine months ended September 24, 2022, primarily as a result of a less favorable product mix.

Corporate and Other — Corporate and Other includes unallocated expenses relating to share-based compensation and amortization of intangible assets, inventory and fixed asset fair value adjustments due to acquisitions, and restructuring, which are not used in evaluating the results of, or in allocating resources to, our reportable segments.

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

For the three months ended September 30, 2023, compared to the three months ended September 24, 2022, gross profit and gross margins have increased because of a more favorable product mix and less inventory excess and obsolescence reserves, partially offset by greater warranty reserves.

For the nine months ended September 30, 2023, compared to the nine ended September 24, 2022, gross profit and gross margins have decreased because of lower revenue levels and unfavorable absorption of costs on lower production volumes.

Probe Cards — For the three months ended March 30, 2024, gross profit and gross margins increased compared to the three months ended April 1, 2023, primarily due to greater revenues and a more favorable absorption of costs on higher production volumes, as well as lower inventory excess and obsolescence reserves.

This was partially offset by an unfavorable product mix resulting from a higher concentration of sales of lower-margin DRAM products, up from 15.6% of Probe Card sales to 33.6% of Probe Card sales, and a lower concentration of Foundry & Logic sales, down from 79.8% of Probe Card sales to 63.5% of Probe Card sales, and higher warranty costs.

Systems — For the three months ended March 30, 2024, gross profit and gross margins decreased compared to the three months ended April 1, 2023, primarily as a result of a less favorable product mix.

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.

For the three months ended March 30, 2024, Corporate and Other gross profit increased compared to the three months ended April 1, 2023, primarily from 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 margins fluctuate with revenue levels, product mix, selling prices, factory loading, and material costs.

For the three months ended March 30, 2024, compared to the three months ended April 1, 2023, gross profit and gross margins have increased primarily as a result of more favorable absorption of costs and lower inventory excess and obsolescence reserves, partially offset by an unfavorable product mix, as described above.

Cost of revenues included stock-based compensation expense as follows (in thousands):

Three Months Ended Nine Months Ended

September 30,

2023 September 24,

2022 September 30,

2023 September 24,

Three Months Ended

2024 April 1,

Stock-based compensation $ 1,928 $ 1,910

1 unchanged sentence

Three Months Ended

September 30,

2023 September 24,

2022 $ Change % Change

(Dollars in thousands)

Research and development $ 31,014 $ 26,549 $ 4,465 16.8 %

% of revenues 18.1 % 14.7 %

Nine Months Ended

September 30,

2023 September 24,

2024 April 1,

2023 $ Change % Change

2 unchanged sentences

% of revenues 17.0 % 16.9 %

Research and development expenses in the three and nine months ended September 30, 2023 increased when compared to the corresponding period in the prior year primarily due to an increase in headcount to support our continued investment in technology leadership.

Increased stock-based compensation from timing of grants, salary adjustments, depreciation, and general operational costs also contributed to the increase.

Research and development expenses in the three months ended March 30, 2024 increased compared to the corresponding period in the prior year primarily due to increased project material costs and stock-based compensation expense, partially offset by lower employee compensation costs due to decreased headcount.

A detail of the changes is as follows (in thousands):

Three Months Ended September 30, 2023 compared to Three Months Ended September 24, 2022 Nine Months Ended September 30, 2023 compared to Nine Months Ended September 24, 2022

Three Months Ended March 30, 2024 compared to Three Months Ended April 1, 2023

Employee compensation costs $ (1,242)

Stock-based compensation 1,146 2,200

Project material costs 1,151

Depreciation 210 584

Other general operational costs 341

$ 4,465 $ 5,599

Stock-based compensation 241

Depreciation (109)

Research and development included stock-based compensation expense as follows (in thousands):

Three Months Ended Nine Months Ended

September 30,

2023 September 24,

2022 September 30,

2023 September 24,

Three Months Ended

2024 April 1,

Stock-based compensation $ 2,613 $ 2,372

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Three Months Ended

September 30,

2023 September 24,

2022 $ Change % Change

(Dollars in thousands)

Selling, general and administrative $ 35,564 $ 31,637 $ 3,927 12.4 %

% of revenues 20.7 % 17.5 %

Nine Months Ended

September 30,

2023 September 24,

2024 April 1,

2023 $ Change % Change

2 unchanged sentences

% of revenues 19.6 % 19.5 %

Selling, general and administrative expenses increased in the three and nine months ended September 30, 2023 when compared to the corresponding period in the prior year.

The drivers of the increase for the three month period were increased consulting fees related to the divestiture of FRT, stock-based compensation from timing of grants, performance-based compensation, and general operating expenses, partially offset by lower headcount and amortization of intangibles from significant intangibles becoming fully amortized.

The drivers of the increase for the nine month period were increased consulting fees related to the divestiture of FRT, stock-based compensation from timing of grants, and general operating expenses, partially offset by lower performance-based compensation, headcount, and amortization of intangibles from significant intangibles becoming fully amortized.

Selling, general and administrative expenses increased in the three months ended March 30, 2024 compared to the corresponding period in the prior year.

The drivers of the increase for the three month period were increased transaction expenses related to the sale of our FRT Metrology business in the fourth quarter of fiscal 2023 and the China Transaction in the first quarter of fiscal 2024, increased stock-based compensation expense from an increase in weighted average fair value of awards outstanding, and increased recruiting costs, partially offset by lower amortization expense from significant intangible assets becoming fully amortized and lower restructuring charges.

A detail of the changes is as follows (in thousands):

Three Months Ended September 30, 2023 compared to Three Months Ended September 24, 2022 Nine Months Ended September 30, 2023 compared to Nine Months Ended September 24, 2022

Three Months Ended March 30, 2024 compared to Three Months Ended April 1, 2023

Amortization of intangible assets $ (1,355)

Consulting fees 1,177

Stock-based compensation 856

Amortization of intangibles (1,090) (1,099)

General operating expenses 599 1,965

Employee compensation 535 (4,650)

Restructuring charges (826)

$ 3,927 $ 3,612

Recruiting costs 413

Employee compensation costs (376)

General operating expenses 448

Selling, general and administrative included stock-based compensation expense as follows (in thousands):

Three Months Ended Nine Months Ended

September 30,

2023 September 24,

2022 September 30,

2023 September 24,

Three Months Ended

2024 April 1,

Stock-based compensation $ 5,864 $ 5,008

Gain on sale of business

Gain on sale of business represents the gain recognized from the China Transaction of $20.0 million and an adjustment to the gain recognized from the sale of our FRT Metrology business of $0.3 million.

See Note 4, Divestitures , for additional information.

Interest Income (Expense), Net

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

The increase in interest income for the three and nine months ended September 30, 2023 compared with the corresponding period of the prior year was attributable to an increase in investment yields due to the higher interest rate environment.

The increase in interest income for the three months ended March 30, 2024 compared with the corresponding period of the prior year, was attributable to an increase in weighted average yields due to the higher interest rate environment and on higher invested balances.

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

The interest expense for the three and nine months ended September 30, 2023 compared to the same period of the prior year decreased due to lower outstanding debt.

The interest expense for the three months ended March 30, 2024 decreased compared to the corresponding period of the prior year due to lower outstanding debt.

Other Income, Net

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

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

We partially mitigate our risks from currency movements by hedging certain balance sheet exposures, which minimizes the impacts during periods of foreign exchange volatility.

Provision for Income Taxes

Three Months Ended Nine Months Ended

September 30,

2023 September 24,

2022 September 30,

2023 September 24,

Three Months Ended

2024 April 1,

(In thousands, except percentages)

2 unchanged sentences

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.

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 decrease in our effective tax rate for the three months ended September 30, 2023, when compared to the corresponding period in the prior year, was primarily driven by higher than normal effective rates for the three months ended September 24, 2022 as a result of a rapid change in expected 2022 taxable income driven by the weaker demand in the semiconductor industry in the second half of fiscal year 2022, as described previously.

The decrease in our effective tax rate for the nine months ended September 30, 2023, when compared to the corresponding period in the prior year, was primarily driven by relatively higher benefits from FDII and U.S.

tax credits as compared to taxable income, resulting from higher Research and development spending and lower taxable income in the U.S.

for the nine months ended September 30, 2023.

The increase in our effective tax rate for the three months ended March 30, 2024 compared to the corresponding period in the prior year was primarily driven by higher taxable income with consistent rate impacting items.

The Creating Helpful Incentives to Produce Semiconductors and Science Act of 2022 (“CHIPS Act”) was signed into law on August 9, 2022.

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Beginning in 2022, the U.S.

Tax Cuts and Jobs Act of 2017 (“TCJA”) 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.

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.

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 was $377.1 million at September 30, 2023, compared to $324.9 million at December 31, 2022.

Our working capital increased to $457.9 million at March 30, 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.

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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 $244.4 million at September 30, 2023, compared to $238.1 million at December 31, 2022.

Our cash, cash equivalents and marketable securities totaled approximately $349.2 million at March 30, 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 our short-term and long-term liquidity requirements primarily arising from:

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The following table sets forth our net cash flows from operating, investing and financing activities:

Nine Months Ended

September 30,

2023 September 24,

Three Months Ended

2024 April 1,

(In thousands)

1 unchanged sentence

Net cash used in investing activities $ (3,820) $ (13,539)

Net cash used in financing activities $ (1,308) $ (84,964)

Net cash provided by (used in) financing activities $ (14,492) $ 4,378

Operating Activities

Net cash provided by operating activities for the nine months ended September 30, 2023 was attributable to net income of $6.5 million and net non-cash expenses of $71.5 million, which includes depreciation, amortization, stock-based compensation, and the provision for excess and obsolete inventories, partially offset by an increase in net working capital of $22.7 million.

The increase in net working capital is related to decreases in deferred revenues and accrued liabilities of $12.9 million and $5.3 million, respectively, and increases in inventory, net and accounts receivable, net of $8.9 million and $7.8 million, respectively, partially offset by an increase from a deferred grant of $18.0 million.

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 for the three months ended March 30, 2024 was attributable to net income of $21.8 million, an increase in net working capital of $9.8 million, and net non-cash income of $1.4 million.

The cash generated from net working capital is related to decreased accounts receivable, net of $6.5 million and increased accounts payable and deferred revenue of $4.9 million and $4.5 million, respectively, partially offset by increased inventories of $4.9 million.

The non-cash income consisted of the $20.3 million gain on sale of business, offset by depreciation, amortization, stock-based compensation, and the provision for excess and obsolete inventories.

Investing Activities

Net cash used in investing activities for the nine months ended September 30, 2023 primarily related to $46.1 million in property, plant and equipment purchases and $3.9 million in net purchases of marketable securities.

Net cash used in investing activities for the three months ended March 30, 2024 primarily related to $13.4 million in property, plant and equipment purchases and $11.7 million in net purchases of marketable securities, offset by $21.3 million cash provided by the sale of businesses.

Financing Activities

Net cash used in financing activities for the nine months ended September 30, 2023 primarily related to $9.3 million tax withholding payments associated with the net share settlements of our equity awards and $0.8 million principal payments made towards the repayment of our term loan, partially offset by $8.8 million received from issuances of common stock under our employee stock purchase plan.

Building Term Loan

Net cash used in financing activities for the three months ended March 30, 2024 primarily related to $17.3 million used to purchase common stock under our stock repurchase program, $1.8 million used to pay tax withholdings for net share settlements of employee stock awards, partially offset by $4.9 million received from issuances of common stock under our employee stock purchase plan.

On June 22, 2020, we entered into an $18.0 million 15-year credit facility loan agreement (the “Building Term Loan”).

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On May 19, 2023, we amended the Building Term Loan, replacing the benchmark reference rate London Interbank Offered Rate (“LIBOR“) with the term Secured Overnight Financing Rate (“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.

The Building Term Loan bears interest at a rate equal to the applicable SOFR rate, plus 1.86% per annum.

Interest payments are payable in monthly installments over a fifteen-year period.

The interest rate at September 30, 2023 was 7.19%.

As of September 30, 2023, the balance outstanding pursuant to the Building Term Loan was $14.7 million.

The interest rate at March 30, 2024, before consideration of the interest rate swap discussed in the next paragraph, was 7.19%.

As of March 30, 2024, the balance outstanding pursuant to the Building Term Loan was $14.2 million.

On March 17, 2020, we entered into an interest rate swap agreement to hedge the interest payment on the Building Term Loan for the notional amount of $18.0 million, and an amortization period that matches the debt.

As future levels of LIBOR over the life of the loan are uncertain, we entered into this interest-rate swap agreement to hedge the exposure in interest rate risks associated with movement in LIBOR rates.

By entering into the agreement, we converted a floating-rate interest at one-month LIBOR plus 1.75% into a fixed-rate interest at 2.75%.

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 at 2.75%.

As of September 30, 2023, the notional amount of the loan that is subject to this interest rate swap is $14.7 million.

As of March 30, 2024, the notional amount of the loan that is subject to this interest rate swap is $14.2 million.

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 the nine months ended September 24, 2022, we repurchased 676,408 shares of common stock for $26.0 million.

We utilized the remaining funds available for repurchase under this program during fiscal 2022.

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

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

During the nine months ended September 30, 2023, we did not repurchase any shares of common stock.

As of September 30, 2023, $18.6 million remained available for future repurchases.

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.

The share repurchase program will expire on October 30, 2025.

On May 20, 2022, our Board of Directors authorized a two-year program to repurchase up to $75.0 million of outstanding common stock to offset potential dilution from issuance of common stock under our stock-based compensation programs.

During fiscal 2022 and fiscal 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 two-year program to repurchase up to $75.0 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.

During the three months ended March 30, 2024, we repurchased and retired 411,756 shares of common stock for $17.4 million, and as of March 30, 2024, $56.4 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 September 30, 2023:

The following table summarizes our significant contractual commitments to make future payments in cash under contractual obligations as of March 30, 2024:

Payments Due In Fiscal Year

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Total $ 10,612 $ 11,130 $ 9,649 $ 9,168 $ 5,798 $ 12,293 $ 58,650

(1) Represents our minimum interest payment commitments at 7.19% per annum for the Building Term Loan.

This excludes any amounts related to our interest rate swap.

(1) Represents our minimum interest payment commitments at 7.19% 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 $50.3 million as of March 30, 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 March 30, 2024.

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.

Off-Balance Sheet Arrangements

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

As of September 30, 2023, we were not involved in any such off-balance sheet arrangements.

As of March 30, 2024, we were not involved in any such off-balance sheet arrangements.

Recent Accounting Standards

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis