# SANMINA CORP (SANM) FY 2024 MD&A

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

SEC filing source: https://www.sec.gov/Archives/edgar/data/897723/000089772324000056/sanm-20240928.htm
Accession: 0000897723-24-000056
Filing date: 2024-11-27
Report date: 2024-09-28
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

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

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

This report on annual report Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements relate to our expectations for future events and time periods. All statements other than statements of historical fact are statements that could be deemed to be forward-looking statements, including any statements regarding trends in future revenue or results of operations, gross margin, operating margin, expenses, earnings or losses from operations, or cash flow; any statements of the plans, strategies and objectives of management for future operations and the anticipated benefits of such plans, strategies and objectives; any statements regarding future economic conditions or performance; any statements regarding litigation or pending investigations, claims or disputes; any statements regarding the timing of closing of, future cash outlays for, and benefits of acquisitions and other strategic transactions, including our Indian joint venture; any statements regarding expected restructuring costs and benefits; any statements concerning the adequacy of our current liquidity and the availability of additional sources of liquidity; any statements regarding the potential impact of any future outbreaks, including outbreaks caused by new variants of COVID-19 on our business, results of operations and financial condition; any statements regarding the potential impact of supply chain shortages and inflation on our business; any statements regarding the future impact of tariffs and export controls on our business; any statements relating to future tax rates and our expectations concerning developments in the audit by the IRS of certain tax returns filed by us, including the potential impact of the IRS revenue agent’s report received by us in November 2023; any statements relating to the expected impact of accounting pronouncements not yet adopted; any statements regarding future repurchases of our common stock; any statements of expectation or belief; and any statements of assumptions underlying any of the foregoing. Generally, the words “anticipate,” “believe,” “plan,” “expect,” “future,” “intend,” “may,” “will,” “should,” “estimate,” “predict,” “potential,” “continue” and similar expressions identify forward-looking statements. Our forward-looking statements are based on current expectations, forecasts and assumptions and are subject to risks and uncertainties, including those contained in Part I, Item 1A of this report. As a result, actual results could vary materially from those suggested by the forward-looking statements. We undertake no obligation to publicly disclose any revisions to these forward-looking statements to reflect events or circumstances occurring subsequent to filing this report with the Securities and Exchange Commission (the “SEC”). Investors and others should note that Sanmina announces material financial information to our investors using our investor relations website (http://ir.sanmina.com/investor-relations/overview/default.aspx), SEC filings, press releases, public conference calls and webcasts. We use these channels to communicate with our investors and the public about Sanmina, its products and services and other issues. It is possible that the information we post on our investor relations website could be deemed to be material information. Therefore, we encourage investors, the media, and others interested in Sanmina to review the information we post on our investor relations website. The contents of our investor relations website are not incorporated by reference into this annual report on Form 10-K or in any other report or document we file with the SEC.

Overview

We are a leading global provider of integrated manufacturing solutions, components, products and repair, logistics and after-market services. Our revenue is generated from sales of our products and services primarily to original equipment manufacturers (“OEMs”) that serve the industrial, medical, defense and aerospace, automotive, communications networks and cloud solutions industries.

Our operations are managed as two businesses:

1) Integrated Manufacturing Solutions (“IMS”). Our IMS segment consists of printed circuit board assembly and test, high-level assembly and test and direct-order-fulfillment.

2) Components, Products and Services (“CPS”). Components include advanced printed circuit boards, backplanes and backplane assemblies, cable assemblies, fabricated metal parts, precision machined parts, and plastic injected molded parts. Products include optical, radio frequency (“RF”) and microelectronic design and manufacturing services from our Advanced Microsystems Technologies division; multi-chip package memory solutions from our Viking Technology division; high-performance storage platforms for hyperscale and enterprise solutions from our Viking Enterprise Solutions division; defense and aerospace product, design, manufacturing, repair and refurbishment services from our SCI Technology Inc. (“SCI”) subsidiary; and cloud-based smart manufacturing execution software from our 42Q division. Services include design, engineering, and logistics and repair.

Our only reportable segment for financial reporting purposes is IMS, which represented approximately 80% of our total revenue in 2024. Our CPS business consists of multiple operating segments which do not individually meet the quantitative thresholds for being presented as reportable segments. Therefore, financial information for these operating segments is combined and presented in a single category entitled “CPS”.

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Our strategy is to leverage our comprehensive product and service offerings, advanced technologies and global capabilities to further penetrate diverse end markets that we believe offer significant growth opportunities and have complex products that require higher value-added services. We believe this strategy differentiates us from our competitors and will help drive more sustainable revenue growth and provide opportunities for us to achieve operating margins that exceed industry standards.

A core component of our business strategy is to establish and retain long-term customer partnerships with companies. Historically, we have had substantial recurring sales to existing customers. Sales to our ten largest customers typically represent approximately 50% of our net sales in any given year.

We typically enter into supply agreements with our major OEM customers. These agreements generally have terms ranging from three to five years and cover the manufacture of a range of products. Under these agreements, a customer typically purchases its requirements for specific products in particular geographic areas from us. However, these agreements generally do not obligate the customer to purchase minimum quantities of products. In addition, some customer contracts contain cost reduction objectives, which can have the effect of reducing revenue from such customers.

We generate about 80% of our net sales from products manufactured in our foreign operations. The concentration of foreign operations has resulted primarily from a desire on the part of many of our customers to manufacture in lower-cost locations in regions such as Asia, Latin America and Eastern Europe and we plan to expand our presence as appropriate to meet the needs of our customers. We also intend to continue to invest in factory automation, process improvements, robotics and artificial intelligence, keeping up with the trends in technology to further enhance our efficiency output.

Trends and Uncertainties

We believe our end-to-end manufacturing solutions combined with our global supply chain management expertise differentiates us from our competitors and enables us to better serve the needs of OEMs. However, our business faces many challenges. For example, we compete with a number of companies in each of our key end markets. This includes companies that are much larger than we are and smaller companies that focus on a particular niche product, service or end market. Although we believe we are well-positioned in each of our key end markets and offer many advantages compared to our competitors, competition remains intense and profitably growing our revenues has been challenging. Additionally, we are impacted by macroeconomic challenges such as inflation, supply chain constraints, foreign currency fluctuations, high interest rates, market volatility, recession concerns, tariffs and other factors that have been and could be in the future exacerbated by geopolitical conflicts such as the war in Ukraine, conflict in the Middle East and results of the U.S. presidential election. Although supply chain constraints have been easing, we expect headwinds to our revenue growth that will continue in 2025 due to customers absorbing their finished goods inventory in some of our end markets.

Despite these challenges, we remain focused on improving our operations, building flexibility and efficiencies in our processes and adjusting our business models to changing circumstances. We intend to continue diversifying into mission critical markets and creating a portfolio of more complex, higher technology products with longer product life cycles. As our end markets evolve and grow, our ability to optimize our product and portfolio mix towards higher value opportunities will continue to be an important driver for our business going forward.

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Critical Accounting Policies and Estimates

Management's 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 accounting principles generally accepted in the United States (“GAAP”). We review the accounting policies used in reporting our financial results on a regular basis. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, net sales and expenses and related disclosure of contingent liabilities. On an ongoing basis, we evaluate the process used to develop estimates related to accounts receivable, inventories, income taxes, environmental matters, litigation and other contingencies, as well as estimates related to costs expected to be incurred to satisfy performance obligations under long-term contracts and variable consideration related to such contracts. We base our estimates on historical experience and on various other assumptions that we believe are reasonable for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. We have considered information available to us as of the date of issuance of these financial statements and are not aware of any specific events or circumstances that would require an update to our estimates or judgments, or a revision to the carrying value of our assets or liabilities. Our estimates may change as new events occur and additional information becomes available. Our actual results may differ materially from these estimates.

We believe the following critical accounting policies reflect the more significant judgments and estimates used by us in preparing our consolidated financial statements:

Revenue Recognition. We recognize revenue for the majority of our contracts on an over time basis. This is primarily due to the fact that we do not have an alternative use for the end products we manufacture for our customers and have an enforceable right to payment, including a reasonable profit, for work in progress upon a customer's cancellation of a contract for convenience. In certain circumstances, we recognize over time because our customer simultaneously receives and consumes the benefits provided by our services or, our customer controls the end product as we perform manufacturing services (continuous transfer of control). For these contracts, revenue is recognized on an over time basis using the cost-to-cost method (ratio of costs incurred to date to total estimated costs at completion) which we believe best depicts the transfer of control to the customer.

In our Defense and Aerospace division, we apply the cost-to-cost method for government contracts which requires the use of significant judgments with respect to estimated materials, labor and subcontractor costs included in the total estimated costs at completion. Additionally, we evaluate whether contract modifications for claims have been approved and, if so, estimate the amount, if any, of variable consideration that can be included in the transaction price of the contract.

Estimates of materials, labor and subcontractor costs expected to be incurred to satisfy a performance obligation are updated on a quarterly basis. These estimates consider costs incurred to date and estimated costs to be incurred over the remaining expected period of performance to satisfy a performance obligation. There is inherent uncertainty in estimating the amount of costs that will be required to complete a contract. Factors that contribute to the inherent uncertainty in estimates include, among others, (1) the long-term duration of contracts, (2) the highly-complex nature of the products we manufacture, (3) the readiness of our customer’s design for manufacturing, (4) the cost and availability of purchased materials, (5) labor cost, availability and productivity, (6) subcontractor performance and (7) the risk of delayed performance/completion. Therefore, such estimates are reviewed each quarter by a group of employees that includes representatives from numerous functions such as engineering, materials, contracts, manufacturing, program management, finance and senior management. If a change in estimate is deemed necessary, the impact of the change is recognized in the period of change. Additionally, contract modifications for claims are assessed each quarter to determine whether the claims have been approved. If it is determined that a claim has been approved, the amount of the claim, if any, that can be included in transaction price is estimated considering a number of factors such as the length of time expected to lapse until uncertainty about the claim has been resolved and the extent to which our experience with claims for similar contracts has predictive value.

Changes in our estimates of transaction price and/or costs to complete result in a favorable or unfavorable impact to revenue and operating income. The impact of changes in estimates on revenue and operating income resulting from application of the cost-to-cost method for recognizing revenue was as follows:

[[GREPCENT_TABLE]]
[["","Year Ended"],["","September 28, 2024","","September 30, 2023","","October 1, 2022"],["Revenue:","(In thousands)"],["Favorable","$","12,220","","","$","6,023","","","$","5,403"],["Unfavorable","(2,697)","","","(2,556)","","","(162)"],["Total","$","9,523","","","$","3,467","","","$","5,241"]]
[[/GREPCENT_TABLE]]

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[[GREPCENT_TABLE]]
[["","Year Ended"],["","September 28, 2024","","September 30, 2023","","October 1, 2022"],["Operating Income:","(In thousands)"],["Favorable","$","21,229","","","$","8,657","","","$","7,025"],["Unfavorable","(16,102)","","","(44,838)","","","(20,737)"],["Total","$","5,127","","","$","(36,181)","","","$","(13,712)"]]
[[/GREPCENT_TABLE]]

For contracts for which revenue is required to be recognized at a point-in-time, we recognize revenue when we have transferred control of the related goods, which generally occurs upon shipment or delivery of the goods to the customer. Revenue streams for which revenue is recognized at a point-in-time include our proprietary products and sales of raw materials.

Inventories— We state inventories at the lower of cost (based on standard cost, which approximates first-in, first-out method) and net realizable value. Cost includes raw materials, labor and manufacturing overhead. We regularly evaluate the carrying value of our inventories and make provisions to reduce excess and obsolete inventories to their estimated net realizable values. The ultimate realization of inventory carrying amounts is affected by changes in customer demand for inventory that customers are not contractually obligated to purchase and inventory held for specific customers who are experiencing financial difficulties. Inventory write-downs are recorded based on forecasted demand, past experience with specific customers, the ability to redistribute inventory to other programs or return inventories to our suppliers, and whether customers are contractually obligated and have the ability to pay for the related inventory. Certain payments received from customers for inventories that have not been shipped to customers or otherwise disposed of are netted against inventory.

We generally procure inventory based on specific customer orders and forecasts. Customers generally have limited rights of modification (for example, rescheduling or cancellations) with respect to specific orders. Customer modifications of orders affecting inventory previously procured by us and our purchases of inventory beyond customer needs may result in excess and obsolete inventory. Although we may be able to use some excess inventory for other products we manufacture, a portion of this excess inventory may not be returnable to vendors or recoverable from customers. Write-offs or write-downs of inventory could be caused by:

•changes in customer demand for inventory, such as cancellation of orders, and our purchases of inventory beyond customer needs that result in excess quantities on hand that we are not able to return to the vendor, use to fulfill orders from other customers or charge back to the customer;

•financial difficulties experienced by specific customers for whom we hold inventory; and

•declines in the market value of inventory. 

Our raw materials inventories are generally acquired in anticipation of specific customer orders and pursuant to customer-specific design specifications. When we and our customers agree that the quantity of customer-specific inventory is in excess of anticipated demand, we may transfer control of those inventories to our customers in exchange for a cash payment. These transactions are reported as transfers of non-financial assets – i.e., reported on a net basis in the income statement.

Long-lived Assets— We review property, plant and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. An asset group is the unit of accounting that represents the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets. An asset or asset group is considered impaired if its carrying amount exceeds the undiscounted future net cash flows the asset or asset group is expected to generate. If an asset or asset group is considered impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset or asset group exceeds its fair value. For asset groups for which a building is the primary asset, we estimate fair value primarily based on data provided by commercial real estate brokers. For other assets, we estimate fair value based on projected discounted future net cash flows, which requires significant judgment.

Consolidation— In accordance with ASC Topic 810, Consolidation (“ASC 810”), we consolidate entities in which we have a controlling financial interest. In fiscal 2023, we completed a joint venture transaction with Reliance Strategic Business Ventures Limited (“RSBVL”) to establish Sanmina SCI India Private Limited (“SIPL”), our existing Indian manufacturing entity, as a joint venture. As a result of the transaction, RSBVL holds 50.1% of the outstanding shares of SIPL and we hold the remaining 49.9% of the outstanding shares of SIPL. In connection with RSBVL’s investment, we entered into a management services contract pursuant to which we have the unilateral ability to make the significant financial and operating decisions made in the ordinary course of SIPL’s business. We determined the voting interest model was applicable under ASC 810 and

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concluded that, despite not having a majority ownership interest, we have a controlling financial interest in SIPL through the management services contract. Therefore, we have, by contract, the unilateral ability to control the significant decisions made in the ordinary course of SIPL’s business and, as such, we consolidate SIPL. However, we periodically assess whether any changes in facts and circumstances have occurred that could require us to deconsolidate SIPL.

Income Taxes— We estimate our income tax provision or benefit in each of the jurisdictions in which we operate, including estimating exposures related to examinations by taxing authorities. We believe our accruals for tax liabilities are adequate for all open years based on our assessment of many factors, including past experience and interpretations of tax law applied to the facts of each matter. Although we believe our accruals for tax liabilities are adequate, tax regulations are subject to interpretation and the tax controversy process is inherently lengthy and uncertain; therefore, our assessments can involve a series of complex judgments about future events and rely heavily on estimates and assumptions. To the extent the probable tax outcome of these matters changes, such changes in estimate will impact our income tax provision in the period in which such determination is made. We only recognize or continue to recognize tax positions that meet a “more likely than not” threshold of being upheld. Interest and penalties related to unrecognized tax benefits are recognized as a component of income tax expense.

We must also make judgments regarding the realizability of deferred tax assets. The carrying value of our net deferred tax assets is based on our belief that it is more likely than not that we will generate sufficient future taxable income in certain jurisdictions to realize these deferred tax assets. We evaluate positive and negative evidence each reporting period when assessing the need for a valuation allowance. A valuation allowance is established for deferred tax assets if we believe realization of such assets is not more likely than not. Our judgments regarding future taxable income may change due to changes in market conditions, new or modified tax laws, tax planning strategies or other factors. If our assumptions, and consequently our estimates, change in the future, the valuation allowances we have established may be increased or decreased, resulting in a respective increase or decrease in income tax expense.

Our effective tax rate is highly dependent upon the amount and geographic distribution of our worldwide income or losses, the tax regulations, rates and holidays in each geographic region, the utilization of net operating losses, the availability of tax credits and carryforwards, and the effectiveness of our tax planning strategies.

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Results of Operations

Refer to Item 7. “Management's Discussion and Analysis of Financial Condition and Results of Operations” contained in our annual report on Form 10-K for the fiscal year ended September 30, 2023 filed with the SEC on November 16, 2023 for discussion of our results of operations for the fiscal year ended September 30, 2023 compared to the fiscal year ended October 1, 2022.

The following table presents our key operating results.

[[GREPCENT_TABLE]]
[["","Year Ended"],["","September 28, 2024","","September 30, 2023","","October 1, 2022"],["","(In thousands)"],["Net sales","$","7,568,328","","","$","8,935,048","","","$","7,919,622"],["Gross profit","$","640,429","","","$","743,211","","","$","622,206"],["Gross margin","8.5","%","","8.3","%","","7.9","%"],["Operating expenses","$","304,935","","","$","287,553","","","$","272,727"],["Operating income","$","335,494","","","$","455,658","","","$","349,479"],["Operating margin","4.4","%","","5.1","%","","4.4","%"],["Net income attributable to common shareholders","$","222,536","","","$","309,970","","","$","240,384"]]
[[/GREPCENT_TABLE]]

 Net Sales

Net sales decreased from $8.9 billion for 2023 to $7.6 billion for 2024, a decrease of 15.3%. Net sales increased from $7.9 billion for 2022 to $8.9 billion for 2023, an increase of 12.8%. Sales by end market were as follows:

[[GREPCENT_TABLE]]
[["","Year Ended","","2024 vs. 2023","","2023 vs. 2022"],["","September 28, 2024","","September 30, 2023","","October 1, 2022","","Increase/(Decrease)","","Increase/(Decrease)"],["","(Dollars in thousands)"],["Industrial, Medical, Defense and Aerospace, and Automotive","$","4,915,880","","","$","5,388,877","","","$","4,744,088","","","$","(472,997)","","","(8.8)","%","","$","644,789","","","13.6","%"],["Communications Networks and Cloud Infrastructure","2,652,448","","","3,546,171","","","3,175,534","","","(893,723)","","","(25.2)","%","","370,637","","","11.7","%"],["Total","$","7,568,328","","","$","8,935,048","","","$","7,919,622","","","$","(1,366,720)","","","(15.3)","%","","$","1,015,426","","","12.8","%"]]
[[/GREPCENT_TABLE]]

Comparison of 2024 to 2023 by End Market

The decrease in sales was primarily due to reduced demand caused by customers in some end markets, particularly communications networks, making adjustments to absorb their finished goods inventory. The impact of this was partially offset by new program wins and program ramps in our automotive and communications networks end markets.

Gross Margin

Gross margin was 8.5%, 8.3% and 7.9% in 2024, 2023 and 2022, respectively. IMS gross margin decreased slightly to 7.5% in 2024 from 7.7% in 2023. CPS gross margin increased to 12.8% in 2024 from 11.6% in 2023, primarily due to significant losses recognized on certain fixed-price customer contracts in 2023 compared to 2024, the effect of which was partially offset by unfavorable product mix.

We have experienced fluctuations in gross margin in the past and may continue to do so in the future. Fluctuations in our gross margin may be caused by a number of factors, including:

•the impacts of supply chain constraints on our operations, the operations of our suppliers and on our customers’ businesses;

•capacity utilization which, if lower, results in lower margins due to fixed costs being absorbed by lower volumes;

•changes in the mix of high and low margin products demanded by our customers;

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•competition in the EMS industry and pricing pressures from OEMs due to greater focus on cost reduction;

•the amount of our provisions for excess and obsolete inventory, including those associated with distressed customers;

•levels of operational efficiency and production yields;

•our performance on long-term contracts, including our ability to recover claims for cost overruns; and

•our ability to transition the location of and ramp up manufacturing and assembly operations when requested by a customer in a timely and cost-effective manner.

Selling, General and Administrative

Selling, general and administrative expenses were $266 million, $255 million and $245 million in 2024, 2023 and 2022, respectively. As a percentage of net sales, selling, general and administrative expenses were 3.5%, 2.9% and 3.1% for 2024, 2023 and 2022, respectively. The increase in absolute dollars in 2024 from 2023 was primarily due to higher stock compensation expense from new equity grants, higher variable compensation and an increase in deferred compensation caused by strong stock market performance that increased the market value of participant investment accounts, partially offset by lower professional fees.

Research and Development

Research and development expenses were $29 million, $26 million and $21 million in 2024, 2023 and 2022, respectively. As a percentage of net sales, research and development expenses were 0.4% for 2024 and 0.3% for 2023 and 2022. The increase in absolute dollars in 2024 from 2023 was primarily due to higher expenses for design and engineering support for existing and new projects.

Other Expense

Other expense was $1 million in 2024, $20 million in 2023 and a $26 million in 2022. The decrease in other expense in 2024 was primarily caused by a $12 million decrease in discount of sold receivables in 2024 due to significantly lower factoring levels and an incremental gain of $5 million in the market value of participant investment accounts in our deferred compensation plan.

Provision for Income Taxes

We recorded income tax expense of $80 million, $85 million and $62 million in 2024, 2023 and 2022, respectively. Our effective tax rate was 25%, 21% and 20% for 2024, 2023 and 2022, respectively. The tax rate was lower in 2023 and 2022 primarily due to larger discrete items, including recognized tax benefits from the release of certain foreign tax reserves due to lapse of time and expiration of statutes of limitations.

As a result of an audit by the Internal Revenue Service (“IRS”) for fiscal 2008 through 2010, we received a Revenue Agent’s Report (“RAR”) on November 17, 2023 asserting an underpayment of tax of approximately $8 million for fiscal 2009. The asserted underpayment results from the IRS’s proposed disallowance of a $503 million worthless stock deduction in fiscal 2009. Such disallowance, if upheld, would reduce our available net operating loss carryforwards and result in additional tax and interest attributable to fiscal 2021 and later years, which could be material. We disagree with the IRS’s position as asserted in the RAR and are vigorously contesting this matter through the applicable IRS administrative and judicial procedures, as appropriate. We do not expect resolution of this matter within twelve months and cannot predict with any certainty the timing of such resolution. Although the final resolution of this matter remains uncertain, we continue to believe that it is more likely than not our tax position will be sustained. However, an unfavorable resolution of this matter could have a material adverse impact on our consolidated financial statements.

The Organization for Economic Co-operation and Development (“OECD”), an international association of 38 countries including the United States, has proposed changes to numerous long-standing tax principles, namely, its Pillar Two framework, which imposes a global minimum corporate tax rate of 15%. Various countries have enacted or have announced plans to enact new tax laws to implement the global minimum tax and where enacted, the rules begin to be effective for us in fiscal 2025. The Pillar Two rules are considered an alternative minimum tax and therefore deferred taxes would not be recognized or adjusted for the estimated effects of the future minimum tax. The adoption and effective dates of these rules may vary by country and could increase tax complexity and uncertainty and may adversely affect our provision for income taxes. We do not expect any material impact from these tax law changes in fiscal 2025.

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Liquidity and Capital Resources 

[[GREPCENT_TABLE]]
[["","Year Ended"],["","September 28, 2024","","September 30, 2023","","October 1, 2022"],["","","","(In thousands)"],["Net cash provided by (used in):"],["Operating activities","$","340,216","","","$","235,168","","","$","330,854"],["Investing activities","(114,396)","","","(192,458)","","","(132,214)"],["Financing activities","(269,707)","","","94,505","","","(314,299)"],["Effect of exchange rate changes","2,177","","","498","","","(4,510)"],["Increase (decrease) in cash and cash equivalents","$","(41,710)","","","$","137,713","","","$","(120,169)"]]
[[/GREPCENT_TABLE]]

Key Working Capital Management Measures

[[GREPCENT_TABLE]]
[["","As of"],["","September 28, 2024","","September 30, 2023"],["Days sales outstanding (1)","56","","55"],["Contract asset days (2)","18","","20"],["Inventory turns (3)","5.2","","5.1"],["Days inventory on hand (4)","70","","72"],["Accounts payable days (5)","71","","80","*"],["Cash cycle days (6)","73","","67","*"]]
[[/GREPCENT_TABLE]]

(1)Days sales outstanding (a measure of how quickly we collect our accounts receivable), or “DSO”, is calculated as the ratio of average accounts receivable, net, to average daily net sales for the quarter.

(2)Contract asset days (a measure of how quickly we transfer contract assets to accounts receivable) are calculated as the ratio of average contract assets to average daily net sales for the quarter.

(3)Inventory turns (annualized) (a measure of how quickly we sell inventory) are calculated as the ratio of four times our cost of sales for the quarter to average inventory.

(4)Days inventory on hand (a measure of how quickly we turn inventory into sales) is calculated as the ratio of average inventory for the quarter to average daily cost of sales for the quarter.

(5)Accounts payable days (a measure of how quickly we pay our suppliers), or “DPO”, is calculated as the ratio of 365 days to accounts payable turns, in which accounts payable turns is calculated as the ratio of four times our cost of sales for the quarter to average accounts payable.

(6)Cash cycle days (a measure of how quickly we convert investments in inventory to cash) is calculated as days inventory on hand plus days sales outstanding minus accounts payable days.

*    Certain prior period ratios reflect immaterial updates due to reclassifications of certain financial statement amounts to conform to the current period presentation.

Cash and cash equivalents were $626 million at September 28, 2024 and $668 million at September 30, 2023. Our cash levels vary during any given period depending on the timing of collections from customers and payments to suppliers, borrowings under credit facilities, sales of accounts receivable under numerous programs we utilize, repurchases of capital stock and other factors. Our working capital was approximately $1.9 billion and $1.8 billion as of September 28, 2024 and September 30, 2023, respectively.

Net cash provided by operating activities was $340 million, $235 million and $331 million for 2024, 2023 and 2022, respectively. Our working capital metrics tend to fluctuate from quarter-to-quarter based on factors such as the linearity of our

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shipments to customers and purchases from suppliers, customer and supplier mix, and payment terms with customers and suppliers. These fluctuations can significantly affect our cash flows from operating activities.

During 2024, we generated $447 million of cash from earnings, excluding non-cash items, and used $107 million of cash primarily because of a decrease in accounts payable of $112 million, an increase in accrued liabilities of $12 million and an increase in accounts receivable of $104 million, partially offset by a decrease in inventories of $36 million. The decrease in accounts payable was primarily attributable to an unfavorable mix of supplier payment terms and lower inventory receipts, resulting in DPO decreasing from 80 days in 2023 to 71 days in 2024. The increase in accrued liabilities was due primarily to customer payments for certain inventory partially offset by a decrease in amounts collected under our accounts receivable factoring program that had not been remitted as of the end of the period to the financial institutions that purchased the receivables. The increase in accounts receivable was primarily attributable to unfavorable customer payment terms mix. The decrease in inventories is primarily due to our ongoing efforts to reduce inventory to more appropriate levels primarily by working with customers to ensure their demand forecasts are reasonable and incorporate appropriate lead times to secure materials.

During 2023, we generated $527 million of cash from earnings, excluding non-cash items, and used $292 million of cash primarily because of a decrease in accounts payable of $418 million and an increase in accounts receivable of $89 million, partially offset by a decrease in inventories of $210 million. The decrease in accounts payable was primarily attributable to lower inventory receipts and an unfavorable mix of supplier payment terms, resulting in DPO decreasing from 90 days in 2022 to 80 days in 2023. The decrease in inventories was primarily due to lower business volume and our efforts to reduce inventory to more appropriate levels primarily by working with customers to ensure their demand forecasts are reasonable and incorporate appropriate lead times to secure materials. The increase in accounts receivable was primarily attributable to higher business volume and unfavorable customer payment terms mix.

Net cash used in investing activities was $114 million, $192 million and $132 million for 2024, 2023 and 2022, respectively. In 2024 and 2023, we used $111 million and $191 million, respectively, of cash for capital expenditures.

Net cash provided by (used in) financing activities was $(270) million, $95 million and $(314) million for 2024, 2023 and 2022, respectively. In 2024, we repurchased $254 million of common stock (including $26 million in settlement of employee tax withholding obligations), repaid an aggregate of $22 million of long-term debt and received $6 million of proceeds from issuances of common stock pursuant to stock option exercises. In 2023, we repurchased $107 million of common stock (including $23 million in settlement of employee tax withholding obligations), repaid an aggregate of $18 million of long-term debt, paid a final payment of $9 million in connection with a previous business combination, received $216 million from sale of shares of SIPL to RSBVL and received $8 million proceeds from short-term borrowing.

Revolving Credit Facility. The Fifth Amended and Restated Credit Agreement, dated as of September 27, 2022, as amended, (the “Credit Agreement”), provides for an $800 million revolving credit facility and a $350 million secured term loan (the “Term Loan Due 2027”), together with an accordion feature by which we can obtain, subject to the satisfaction of specified conditions and commitment of the lenders, additional revolving commitments in an aggregate amount of up to $200 million.

As of September 28, 2024, no borrowings and $14 million of letters of credit were outstanding under the Credit Agreement, under which $786 million was available to borrow. There were no borrowings outstanding under the Credit Agreement as of September 30, 2023.

Short-term Borrowing Facilities. We had no short-term borrowings outstanding as of September 28, 2024 and $8 million of short-term borrowings outstanding as of September 30, 2023. Additionally, certain of our foreign subsidiaries had a total of $71 million of short-term borrowing facilities available, under which no borrowings were outstanding as of September 28, 2024. Some of these facilities expire at various dates through the second quarter of 2025 and are expected to be renewed.

Other Liquidity Matters

During 2024 and 2023, we repurchased 4.0 million shares and 1.6 million shares of our common stock for $227 million and $84 million (including commissions), respectively, under stock repurchase programs authorized by the Board of Directors. These programs have no expiration dates and the timing of repurchases will depend upon capital needs to support the growth of our business, market conditions and other factors. Although stock repurchases are intended to increase stockholder value, purchases of shares reduce our liquidity. As a result, the timing of future repurchases depends upon our future capital needs, market conditions and other factors. As of September 28, 2024, an aggregate of $53 million remains available under these programs.

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We are party to a Receivables Purchase Agreement (the “RPA”) with certain third-party banking institutions for the sale of accounts receivable generated from sales to certain customers. The amount available under the RPA is uncommitted and, as such, is available at the discretion of our third-party banking institutions. Under the Credit Agreement, the percentage of our total accounts receivable that can be sold and outstanding at any time is 50%. Therefore, as of September 28, 2024, a maximum of $490 million of sold receivables could be outstanding at any point in time under this program, as amended, as required by our Credit Agreement. Accounts receivables sold pursuant to the RPA are serviced by us.

In addition to the RPA, we participate in accounts receivable sales programs that have been implemented by certain of our customers, as in effect from time to time. We do not service accounts receivable sold under these other programs.

The sale of receivables under all of these programs is subject to the approval of the banks or customers involved and there can be no assurance that we will be able to sell the maximum amount of receivables permitted by these programs when desired.

Under each of the programs noted above, we sell our entire interest in an accounts receivable for 100% of face value, less a discount. For the years ended September 28, 2024 and September 30, 2023, we sold approximately $1.1 billion and $2.6 billion, respectively, of accounts receivable under these programs. As of September 28, 2024 and September 30, 2023, $34 million and $162 million, respectively, of accounts receivable sold under the RPA and subject to servicing by us remained outstanding and had not yet been collected. Our sole risk with respect to receivables we service is with respect to commercial disputes regarding such receivables. Commercial disputes include billing errors, returns and similar matters. To date, we have not been required to repurchase any receivable we have sold due to a commercial dispute. Additionally, we are required to remit amounts collected as servicer on a weekly basis to the financial institutions that purchased the receivables. As of September 28, 2024 and September 30, 2023, $3 million and $33 million, respectively, had been collected but not yet remitted. This amount is classified in accrued liabilities on the consolidated balance sheets.

We enter into forward interest rate swap agreements with independent counterparties to partially hedge the variability in cash flows due to changes in Secured Overnight Financing Rate benchmark interest rate associated with anticipated variable rate borrowings. See Note 5 “Financial Instruments and Concentration of Credit Risk” of the notes to the Consolidated Financial Statements contained in this report for details.

In the ordinary course of business, we are or may become party to legal proceedings, claims and other contingencies, including environmental, warranty and employee matters and examinations by government agencies. As of September 28, 2024, we had accrued liabilities of $39 million related to such matters. We cannot accurately predict the outcome of these matters or the amount or timing of cash flows that may be required to defend ourselves or to settle such matters or that these reserves will be sufficient to fully satisfy our contingent liabilities.

As of September 28, 2024, we had a liability of $57 million for uncertain tax positions. Our estimate of liabilities for uncertain tax positions is based on a number of subjective assessments, including the likelihood of a tax obligation being assessed, the amount of taxes (including interest and penalties) that would ultimately be payable, and our ability to settle any such obligations on favorable terms. Therefore, the amount of future cash flows associated with uncertain tax positions may be significantly higher or lower than our recorded liability and we are unable to reliably estimate when cash settlement may occur. It is reasonably possible that the balance of gross unrecognized tax benefits could decrease in the next 12 months by approximately $8 million due to payments, the resolution of audits and expiration of statutes of limitations. In addition, there could be a corresponding decrease in accrued interest and penalties of approximately $2 million.

Our liquidity is largely dependent on changes in our working capital, including sales of accounts receivable under our receivables sales programs and the extension of trade credit by our suppliers, investments in manufacturing inventory, facilities and equipment, repayments of obligations under outstanding indebtedness and repurchases of common stock. In 2024, we generated $340 million of cash from operations. Our primary sources of liquidity as of September 28, 2024 consisted of (1) cash and cash equivalents of $626 million; (2) our Credit Agreement, under which $786 million, net of outstanding borrowings and letters of credit, was available; (3) our foreign short-term borrowing facilities of $71 million, all of which was available; (4) proceeds from the sale of accounts receivable under our receivables sales programs; and (5) cash generated from operations. Subject to satisfaction of certain conditions, including obtaining additional commitments from existing and/or new lenders, we may increase the revolver commitments under the Credit Agreement by an additional $200 million.

We believe our existing cash resources and other sources of liquidity, together with cash generated from operations, will be sufficient to meet our working capital requirements through at least the next 12 months. However, should demand for our services decrease significantly over the next 12 months, should we be unable to recover on inventory obligations owed to us

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by our customers or should we experience significant increases in delinquent or uncollectible accounts receivable for any reason, our cash provided by operations could decrease significantly and we could be required to seek additional sources of liquidity to continue our operations at their current level.

We invest our cash in numerous financial institutions that we believe to be of high quality. However, there can be no assurance that one or more of such institutions will not become insolvent in the future, in which case all or a portion of our uninsured funds on deposit with such institutions could be lost.

As of September 28, 2024, approximately 34% of our cash balance was held in the United States. Should we choose or need to remit cash to the United States from our foreign locations, we may incur tax obligations which would reduce the amount of cash ultimately available to the United States. We believe that cash held in the United States, together with liquidity available under our Credit Agreement and cash from foreign subsidiaries that could be remitted to the United States without tax consequences, will be sufficient to meet our United States liquidity needs for at least the next 12 months. SIPL’s cash and cash equivalents balance of $200 million as of September 28, 2024 is not available for general corporate purposes and must be retained in SIPL to fund its operations.

Contractual Obligations

As part of our ongoing operations, we enter into contractual arrangements that obligate us to make future cash payments. These obligations impact our liquidity and capital resource needs. Our estimated future obligations consist of leases, our Term Loan Due 2027, pension plan funding obligations and unrecognized tax benefits as of September 28, 2024.

A summary of our operating lease obligations as of September 28, 2024 can be found in Note 7 “Leases” of the notes to the Consolidated Financial Statements contained in this report.

A summary of our long-term debt obligations as of September 28, 2024 can be found in Note 6 “Debt” of the notes to the Consolidated Financial Statements contained in this report.

We have defined benefit pension plans with an underfunded amount of $39 million as of September 28, 2024. We will be required to provide additional funding to these plans in the future if our returns on plan assets are not sufficient to meet our funding obligations. See Note 15 “Employee Benefit Plans” of the notes to the Consolidated Financial Statements contained in this report.

The Company’s long-term liabilities arising from unrecognized tax benefits can be found in Note 10 “Income Tax” of the notes to the Consolidated Financial Statements contained in this report.

We also have outstanding firm purchase orders with certain suppliers for the purchase of inventory which are generally short-term in nature. Orders for standard, or catalog, items can typically be canceled with little or no financial penalty. Our policy regarding non-standard or customized items dictates that such items are only ordered specifically for customers who have contractually assumed liability for the inventory, although exceptions are made to this policy in certain situations. Accordingly, our liability from purchase obligations under these purchase orders is not expected to be significant. Lastly, pursuant to arrangements under which vendors consign inventory to us, we may be required to purchase such inventory after a certain period of time. To date, we have not been required to purchase a significant amount of inventory pursuant to these time limitations.

Off-Balance Sheet Arrangements

As of September 28, 2024, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K promulgated by the SEC, that have or are reasonably likely to have a current or future effect on our financial condition, changes in our financial condition, revenues, or expenses, results of operations, liquidity, capital expenditures, or capital resources that is material to investors.

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