# HARMONIC INC. (HLIT) FY 2024 MD&A

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

SEC filing source: https://www.sec.gov/Archives/edgar/data/851310/000085131025000021/hlit-20241231.htm
Accession: 0000851310-25-000021
Filing date: 2025-02-14
Report date: 2024-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/HLIT/
All MD&A years: /company/HLIT/mda/
Previous year: /company/HLIT/mda/fy2023/ (FY 2023)
Next year: /company/HLIT/mda/fy2025/ (FY 2025)

Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the consolidated financial statements and the related notes. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those discussed below and those listed under Item 1A, Risks Factors. For discussion of comparison of our results of operations and cash flows for the fiscal years ended December 31, 2023 and 2022, refer to Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, filed with the SEC on February 16, 2024.

Business Overview

We are a leading global provider of (i) broadband solutions that enable broadband operators to more efficiently and effectively deploy high-speed internet, for data, voice and video services for their customers and (ii) versatile and high performance video delivery software, products, system solutions and services that enable our customers to efficiently create, prepare, store, playout and deliver a full range of high-quality broadcast and streaming video services to consumer devices, including televisions, personal computers, laptops, tablets and smart phones.

We classify our total revenue in two categories, “Appliance and integration” and “SaaS and service.” The “Appliance and integration” revenue category includes hardware, licenses and professional services and is reflective of non-recurring revenue, while the “SaaS and service” category includes usage fees for our SaaS platform and support service revenue from our appliance-based customers and reflects our recurring revenue stream.

We conduct business in three geographic regions—the Americas, EMEA and APAC—and operate in two segments, Broadband and Video. Our Broadband business sells broadband access solutions and related services, including our cOSTM software-based broadband access solutions, to broadband operators globally. Our Video business sells video processing, production and playout solutions, and services worldwide to cable operators and satellite and telco Pay-TV service providers, which we refer to collectively as “service providers,” as well as to broadcast and media companies, including streaming media companies. Our Video business infrastructure solutions are delivered either through shipment of our products, software licenses or as SaaS subscriptions.

Historically, our revenue has been dependent upon spending in the cable, satellite, telco, broadcast and media industries, including streaming media. Our customers’ spending patterns are dependent on a variety of factors, including but not limited to: economic conditions in the United States and international markets, and impact of factors such as the Middle East and Russia-Ukraine conflicts, inflation, changes in interest rates, potential supply chain disruptions, volatility in capital markets and foreign currency fluctuations; volatility and uncertainty in the banking and financial services sector; access to financing; annual budget cycles of each of the industries we serve; impact of industry consolidations; customer end-market conditions; customers suspending or reducing spending in anticipation of new products or new standards; impact of new or proposed tariffs; and new industry trends and/or technology shifts. If our product portfolio and product development plans do not position us well to capture an increased portion of the spending in the markets in which we compete, our revenue may decline. As we attempt to further diversify our customer base in these markets, we may need to continue to build alliances with other equipment manufacturers and suppliers, cloud service providers, content providers, resellers and system integrators, managed services providers and software developers; adapt our products for new applications; take orders at prices resulting in lower margins; and build internal expertise to handle the particular operational, payment, financing and/or contractual demands of our customers, which could result in higher operating costs for us.

Our Broadband strategy is focused on continuing to develop and deliver software-based broadband access technologies, which we refer to as our cOS solutions, to our broadband operator customers. We believe our cOS software-based broadband access solutions are superior to hardware-based systems and deliver unprecedented scalability, agility and cost savings for our customers. Our cOS solutions, which can be deployed based on a centralized, distributed access architecture (DAA) or hybrid architecture, enable our customers to migrate to multi-gigabit broadband capacity and the fast deployment of DOCSIS and/or fiber-to-the-home (FTTH) data, video and voice services. We believe our cOS solutions resolve space and power constraints in broadband operator facilities, eliminate dependence on hardware upgrade cycles and significantly reduce total cost of ownership, and are helping us to be a major player in the broadband access market. In the meantime, we believe our Broadband segment will continue to experience strong long-term growth as our customers adopt and deploy our virtualized DOCSIS, CMTS and FTTH solutions and distributed access architectures.

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We believe a material and growing portion of the opportunities for our Video business are linked to the industry and our customers (i) continuing to adopt streaming technologies to capture, process and deliver video content to consumers and, increasingly, utilizing public cloud solutions like our VOS SaaS platform to do so; (ii) transforming existing broadcast infrastructure workflows into more flexible, efficient and cost-effective operations running in public clouds; and (iii) for those customers maintaining on-premise video delivery infrastructure, continuing to upgrade and replace aging equipment with next-generation software-based appliances that significantly reduce operational complexity. Our Video business strategy is focused on continuing to develop and deliver products, solutions and services to enable and support these trends. In recent quarters, we have seen a slow-down in capital spending by some of our Video business customers, which has caused delays for some of our appliance-based projects. While market activity leads us to believe these near-term headwinds for our Video business may be receding, the capital spending slow-down may persist longer than expected.

CRITICAL ACCOUNTING ESTIMATES

Our consolidated financial statements and the related notes included elsewhere in this report are prepared in accordance with U.S. GAAP. The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

We believe that the following accounting estimates involve a greater degree of judgement or complexity than our other accounting estimates. Accordingly, the critical accounting estimates that we believe have the most significant impact on Harmonic’s consolidated financial statements are set forth below:

•Valuation of inventories; and

•Accounting for income taxes

Valuation of Inventories

We state inventories at the lower-of-cost (determined on a first-in, first-out basis) or net realizable value, including allowances for excess and obsolete inventory. These reserves are based on management’s assumptions about and analysis of relevant factors including current levels of orders and backlog, forecasted demand, market conditions, and expected product lifecycles. Situations that could cause changes in the level of these inventory reserves include a decline in business and economic conditions, a decline in consumer confidence caused by changes in market conditions, a sudden and significant decline in demand for our products, inventory obsolescence because of rapidly changing technology and consumer requirements, or failure to estimate end customer demand properly. If actual market conditions deteriorate from those anticipated by management, additional allowances for excess and obsolete inventory could be required and may be material to our results of operations.

The gross amount of inventory reserves charged to the cost of revenues totaled $11.0 million and $7.4 million, in 2024 and 2023, respectively.

Accounting for Income Taxes

In preparing our consolidated financial statements, we estimate our income taxes for each of the jurisdictions in which we operate. We estimate actual current tax expense together with assessing temporary differences resulting from different treatment of items, such as accruals and allowances not currently deductible for tax purposes. These differences result in deferred tax assets and liabilities, which are included in our consolidated balance sheets.

Management’s judgment is required in determining the provision for income taxes, deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. We record a valuation allowance to reflect uncertainties about whether we will be able to utilize our deferred tax assets before they expire. In evaluating the need for a full or partial valuation allowance, all positive and negative evidence must be considered, including our forecast of taxable income over the applicable carryforward periods, its current financial performance, its market environment, and other factors. We believe it is not more likely than not the California and Swiss net deferred tax assets of $32.8 million and $4.7 million, respectively, will be realizable. Accordingly, full valuation allowances of $32.8 million and $4.7 million are maintained against the California and Swiss net deferred tax assets, respectively. To the extent that we determine the deferred tax assets are realizable on a more likely than not basis and an adjustment is needed, an adjustment will be recorded in the fiscal period the determination is made.

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Results of Operations

Net Revenue

The following table presents the breakdown of net revenue by category and geographical region:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["(in thousands, except percentages)","2024","","2023","","2022","","2024 vs. 2023"],["Appliance and integration","$","507,378","","","$","435,878","","","$","473,806","","","$","71,500","","16","%"],["as % of total net revenue","75","%","","72","%","","76","%"],["SaaS and service","171,344","","","172,029","","","151,151","","","(685)","","(0.4)","%"],["as % of total net revenue","25","%","","28","%","","24","%"],["Total net revenue","$","678,722","","","$","607,907","","","$","624,957","","","$","70,815","","12","%"],["Americas","$","557,255","","","$","447,700","","","$","452,869","","","$","109,555","","24","%"],["as % of total net revenue","82","%","","74","%","","73","%"],["EMEA","92,553","","","127,689","","","133,095","","","(35,136)","","(28)","%"],["as % of total net revenue","14","%","","21","%","","21","%"],["APAC","28,914","","","32,518","","","38,993","","","(3,604)","","(11)","%"],["as % of total net revenue","4","%","","5","%","","6","%"],["Total net revenue","$","678,722","","","$","607,907","","","$","624,957","","","$","70,815","","12","%"]]
[[/GREPCENT_TABLE]]

Appliance and integration net revenue increased by $71.5 million in 2024, as compared to 2023, primarily due to a $99.8 million increase in our Broadband segment revenue, partially offset by a $28.3 million decrease in our Video segment revenue. The increase in our Broadband segment revenue was mainly driven by certain customers ramping up due to technology transitions and new deployments. The decrease in our Video segment revenue was mainly attributable to lower sales across most regions due to project delays by our customers.

SaaS and service net revenue decreased by $0.7 million in 2024, as compared to 2023, primarily due to a $6.6 million decrease in Video segment support services resulting from lower contract renewals, partially offset by a $6.0 million increase in Video SaaS revenue, mainly driven by the acquisition of new customers.

Americas net revenue increased by $109.6 million in 2024, as compared to 2023, primarily driven by a $115.1 million increase in our Broadband segment revenue, partially offset by a $5.5 million decrease in our Video segment revenue. The Broadband segment revenue growth was mainly due to higher volume from our existing customers, including $83.9 million from new technology deployments with one Tier 1 customer and $26.5 million from expansion deployments with another Tier 1 customer. The decrease in our Video segment revenue was mainly attributable to lower sales across most regions due to project delays by our customers.

EMEA net revenue decreased by $35.1 million in 2024, as compared to 2023, driven by lower sales of $20.5 million in the Video segment and $14.6 million in the Broadband segment. The decline in the Video segment was primarily due to lower appliance product sales as a result of customer project delays, while in the Broadband segment, one of our large Tier 1 customers reduced spending in 2024 due to high inventory levels from prior years’ purchases.

APAC net revenue decreased by $3.6 million in 2024, as compared to 2023, primarily due to a decline in Video product sales.

Gross Profit

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["(in thousands, except percentages)","2024","","2023","","2022","","2024 vs. 2023"],["Gross profit","$","365,921","","$","312,545","","$","315,884","","$","53,376","17%"],["as % of total net revenue (\u201cgross margin\u201d)","53.9","%","","51.4","%","","50.5","%","","2.5","%"]]
[[/GREPCENT_TABLE]]

Our gross margins are dependent upon, among other factors, the proportion of software sales, product mix, supply chain impacts, customer mix, product introduction costs, price reductions granted to customers and achievement of cost reductions.

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Our gross margin improved by 250 basis points in 2024, as compared to 2023, contributed by both the Broadband and Video segments. The margin expansion was primarily contributed by Broadband segment, benefiting from a favorable product mix. Video segment margin also improved, supported by an increase in SaaS as a percentage of segment revenue and additional benefits from a favorable appliance product mix.

Research and Development Expenses

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["(in thousands, except percentages)","2024","","2023","","2022","","2024 vs. 2023"],["Research and development","$","120,975","","$","126,282","","$","120,307","","$","(5,307)","","(4)","%"],["as % of total net revenue","18","%","","21","%","","19","%"]]
[[/GREPCENT_TABLE]]

Our research and development expenses consist primarily of employee salaries and related expenses, contractors and outside consultants, supplies and materials, equipment depreciation and facilities costs, all of which are associated with the design and development of new products and enhancements of existing products. The research and development expenses are net of French Research and Development credits.

Research and development expenses decreased by $5.3 million in 2024, as compared to 2023. The decrease was primarily driven by a $7.6 million decline in the Video segment due to headcount reductions from restructuring activities and a $3.7 million decrease in the Broadband segment due to resources being redeployed to support certain customer projects. These decreases were partially offset by a $6.0 million increase in investments to support the growth of our Broadband business.

Selling, General and Administrative Expenses

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["(in thousands, except percentages)","2024","","2023","","2022","","2024 vs. 2023"],["Selling, general and administrative","$","153,124","","$","163,282","","$","146,717","","$","(10,158)","","(6)","%"],["as % of total net revenue","23","%","","27","%","","23","%"]]
[[/GREPCENT_TABLE]]

Selling, general and administrative expenses decreased by $10.2 million in 2024, as compared to 2023. The decrease was primarily driven by a $5.0 million reduction in spending resulting from headcount reductions related to restructuring activities in the Video business and a $5.2 million non-recurring advisory fees incurred for the strategic review of the Video business in 2023.

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Asset Impairment and Related Charges

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["(in thousands, except percentages)","2024","","2023","","2022","","2024 vs. 2023"],["Lease-related asset impairment and other charges","$","10,889","","","$","\u2014","","","$","\u2014","","","$","10,889","","% *"],["Asset impairment charges","$","1,824","","","$","\u2014","","","$","\u2014","","","$","1,824","","% *"]]
[[/GREPCENT_TABLE]]

*Not meaningful

During the year ended December 31, 2024, we recorded an impairment charge of $1.8 million related to the total capitalized value of internally developed software with no future benefit. We also recorded total lease-related impairment and other charges of $10.9 million. These charges primarily consisted of $3.9 million in right-of-use asset impairments, $4.3 million in leasehold improvement impairments, and $2.7 million related to the fair value of other unrecoverable facility costs. Refer to Note 3, “Leases,” of the Notes to our consolidated financial statements for additional information.

Restructuring and Related Charges

We have implemented several restructuring plans in the past few years. The goal of these plans is to bring operational expenses to appropriate levels relative to our net revenues, while simultaneously implementing appropriate expense control programs. We account for our restructuring plans under the authoritative guidance for exit or disposal activities. The restructuring and related charges are primarily included in “Operating expenses-restructuring and related charges” in the Consolidated Statements of Operations.

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["(in thousands, except percentages)","","2024","","2023","","2022","","2024 vs. 2023"],["Cost of revenue","","$","460","","","$","687","","","$","533","","","$","(227)","","(33)","%"],["Operating expenses"],["Restructuring and related charges","","$","15,973","","","$","809","","","$","3,341","","","$","15,164","","1,874","%"],["Total restructuring and related charges","","$","16,433","","","$","1,496","","","$","3,874","","","$","14,937","","998","%"]]
[[/GREPCENT_TABLE]]

Restructuring and related charges increased in 2024, as compared to 2023, primarily driven by higher severance and employee benefit costs recorded in fiscal 2024, in connection with the 2024 restructuring activities. Refer to Note 9, “Restructuring and Related Charges,” of the Notes to our Consolidated Financial Statements for additional information.

Interest Expense, Net

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["(in thousands, except percentages)","","2024","","2023","","2022","","2024 vs. 2023"],["Interest expense, net","","$","(7,326)","","","$","(2,696)","","","$","(5,040)","","","$","(4,630)","","172","%"]]
[[/GREPCENT_TABLE]]

Interest expense, net increased in 2024, as compared to 2023, primarily due to higher interest rates for the borrowings under the Credit Agreement compared to the interest rate for the 2024 Notes. Refer to Note 10, “Debt,” of the Notes to our Consolidated Financial Statements for additional information regarding the interest rates applicable to our outstanding loans.

Other Income (Expense), Net

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["(in thousands, except percentages)","","2024","","2023","","2022","","2024 vs. 2023"],["Other income (expense), net","","$","2,123","","","$","(335)","","","$","4,006","","","$","2,458","","(734)","%"]]
[[/GREPCENT_TABLE]]

The change in other income (expense), net in 2024, as compared to 2023, was primarily due to higher unrealized foreign exchange gains resulting from the strengthening of the U.S. dollar against the Euro in 2024.

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Income Taxes

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["(in thousands, except percentages)","","2024","","2023","","2022","","2024 vs. 2023"],["Provision for (benefit from) income taxes","","$","18,716","","","$","(64,853)","","","$","16,303","","","$","83,569","","(129)","%"]]
[[/GREPCENT_TABLE]]

The change in provision for (benefit from) income taxes for 2024, as compared to 2023, was primarily due to the prior period release of the valuation allowance against U.S. Federal and certain state deferred tax assets.

Segment Financial Results

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["(in thousands, except percentages)","2024","","2023","","2022","","2024 vs. 2023"],["Broadband"],["Revenue","$","488,200","","$","388,482","","","$","350,768","","","$","99,718","26","%"],["as % of total revenue","72","%","","64","%","","56","%","","8","%"],["Operating income","118,354","","64,575","","","52,283","","","53,779","83","%"],["Operating margin %","24","%","","17","%","","15","%","","7","%"],["Video"],["Revenue","$","190,522","","$","219,425","","","$","274,189","","","$","(28,903)","(13)","%"],["as % of total revenue","28","%","","36","%","","44","%","","(8)","%"],["Operating income","2,756","","(8,741)","","","22,322","","","11,497","(132)","%"],["Operating margin %","1","%","","(4)","%","","8","%","","5","%"],["Total"],["Revenue","$","678,722","","$","607,907","","$","624,957","","$","70,815","12","%"]]
[[/GREPCENT_TABLE]]

Broadband

Our Broadband segment net revenue increased by $99.7 million in 2024, as compared to 2023, primarily driven by appliance and integration revenues, mainly attributed to certain customers ramping up due to technology transitions and new deployments. The operating margin of our Broadband segment also improved in 2024 primarily due to higher revenue and gross margin expansion.

Video

Our Video segment net revenue decreased by $28.9 million in 2024, as compared to 2023. The decrease was primarily driven by a $28.3 million reduction in product sales across most regions, mainly due to project delays by our customers, and a $6.6 million decrease in support services, resulting from lower customer support contract renewals. These decreases were partially offset by a $6.0 million increase in SaaS revenue, primarily driven by the acquisition of new customers. Video segment operating margin improved in 2024 primarily due to realized benefits from cost saving initiatives combined with an increase in SaaS and services as a percentage of segment revenue.

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Liquidity and Capital Resources

We expect to continue to manage our cash from operations effectively, together with deploying cash in working capital for growth. The cash we generate from our operations enables us to fund ongoing operations, our research and development projects for new products and technologies, and other business activities. We continually evaluate our cash needs and may decide it is best to raise additional capital or seek alternative financing sources to fund our operations and the growth of our business, to take advantage of unanticipated strategic opportunities, or to strengthen our financial position, including through drawdowns on existing or new debt facilities or new financing (debt and equity) funds. In the future, we may enter into other arrangements for potential investments in, or acquisitions of, complementary businesses, services or technologies, which could require us to seek additional equity or debt financing. Additional funds may not be available on terms favorable to us or at all. Conversely, we may also from time to time determine that it is in our best interests to voluntarily repay certain indebtedness early. We believe that our current sources of funds will provide us with adequate liquidity during the 12-month period following December 31, 2024, as well as in the long-term.

Material Cash Requirements

Our principal uses of cash will include repayments of debt and related interest, purchases of inventory, stock repurchases, payments for payroll, restructuring expenses, and other operating expenses related to the development and marketing of our products, purchases of property and equipment, facility leases, and other contractual obligations for the foreseeable future.

As of December 31, 2024, we had outstanding $128.1 million in aggregate principal amount of indebtedness, consisting of our $75.0 million Revolving Facility and our $39.5 million Term Facility loan under our Credit Agreement, and other debts, of which $7.2 million is scheduled to become due in the 12-month period following December 31, 2024. As of December 31, 2024, our total minimum lease payments are $23.5 million, of which $5.8 million is due in the 12-month period following December 31, 2024. For details regarding our indebtedness and lease obligations, refer to Note 10, “Debt”, and Note 3, “Leases”, respectively, of the Notes to our Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K.

In February 2025, the Board of Directors authorized us to repurchase, from time to time, up to $200 million of our outstanding shares of common stock through February 2028, at such time and such prices as management may decide. The program does not obligate us to repurchase any specific number of shares and may be discontinued at any time.

Sources and Conditions of Liquidity

Our sources to fund our material cash requirements are predominantly from the sales of our products and services and, when applicable, proceeds from debt facilities and debt and equity offerings.

As of December 31, 2024, our principal sources of liquidity consisted of cash and cash equivalents of $101.5 million, net accounts receivable of $178.0 million, $30.0 million from our Master Receivables Purchase Agreement (described below), and $82.0 million remaining available under the Revolving Facility of our Credit Agreement, and financing from French government agencies.

In September 2023, we entered into a Master Receivables Purchase Agreement with JPMorgan Chase Bank N.A, as purchaser. The agreement allows us, from time to time, to sell certain eligible billed receivables in an aggregate outstanding amount of up to $30 million. In September 2024, we extended the agreement termination date to September 29, 2025. As of December 31, 2024, there were no receivables sold under this agreement.

Our cash and cash equivalents of $101.5 million as of December 31, 2024 consisted of bank deposits held throughout the world and money market funds, of which $46.0 million was held outside of the United States. At present, such foreign funds are considered to be indefinitely reinvested in foreign countries to the extent of indefinitely reinvested foreign earnings. In the event funds from foreign operations are needed to fund cash needs in the United States and if U.S. taxes have not already been previously accrued, we may be required to accrue and pay additional U.S. and foreign withholding taxes in order to repatriate these funds.

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Summary of Cash Flows

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["(in thousands)","2024","","2023","","2022"],["Net cash provided by (used in)"],["Operating activities","$","61,917","","","$","7,059","","","$","5,476"],["Investing activities","(9,186)","","","(8,475)","","","(1,288)"],["Financing activities","(33,269)","","","(4,990)","","","(43,133)"],["Effect of foreign exchange rate changes on cash and cash equivalents","(1,942)","","","1,089","","","(4,900)"],["Net increase (decrease) in cash, cash equivalents and restricted cash","$","17,520","","","$","(5,317)","","","$","(43,845)"]]
[[/GREPCENT_TABLE]]

Operating Activities

Net cash provided by operating activities increased by $54.9 million in 2024, as compared to 2023, primarily due to higher income before income taxes, adjusted for non-cash asset impairment and other charges in fiscal 2024.

We expect that cash provided by or used in operating activities may fluctuate in future periods as a result of a number of factors, including but not limited to, instability and uncertainty in the financial services sector, the potential impact of the Middle East and Russia-Ukraine conflicts on our operations in those regions, fluctuations in our operating results, shipment linearity, accounts receivable collections performance, inventory and supply chain management, and the timing and amount of compensation and other payments.

Investing Activities

Net cash used in investing activities increased by $0.7 million in 2024, as compared to 2023, primarily due to higher purchases of property and equipment in fiscal 2024.

Financing Activities

Net cash used in financing activities increased by $28.3 million in 2024, as compared to 2023, primarily due to the $115.5 million repayment of the 2024 Notes and the $30.0 million of stock repurchases in fiscal 2024, partially offset by the proceeds of $75 million in loans under the Revolving Facility and $40 million in loans under the Term Facility.

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New Accounting Pronouncements

Refer to Note 2 to the accompanying Consolidated Financial Statements for a full description of recent accounting pronouncements, including the dates of adoption and estimated effects, if any, on results of operations and financial condition.

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